t\ WWv . IS f liiiii Mill Hi ••ill jiiii;^ HUinnui •mmmt !: hi WMv AMERICAN CITIZEN SERIES EDITED BY ALBERT BUSHNELL HART, LL.D. PRINCIPLES OF ECONOMICS EDWIN R. A. SELIGMAN, LL.D. By the Same Author Owen and the Christian Socialists. 1886 Railway Tariffs and the Interstate Commerce Law. 1887. Progressive Taxation in Theory and Practice, 2d ed. 1908. French Translation, 1908; Spanish Translation, 1913. The Shifting and Incidence of Tax- ation, 4th ed. 1 92 1. Italian Translation, 1906; French Translation, 1911; Japanese Translation, 1910. The Income Tax, 2d ed. 1914. French Translation, 1913 The Economic Interpretation of History, 2d ed. 1907. Japanese Translation, 1905, Russian Translation, 1906; Spanish Trans- lation, 1907; French Translation, 1910. Essays in Taxation, 9th ed. 1921. Russian Translation, 1909; French Translation, 1914. ametican Citizen ^erie0 Principles of Economics WITH SPECIAL REFERENCE TO AMERICAN CONDITIONS BY EDWIN R. A. SELIGMAN, LL.D. MCVICKAR PROFESSOR OF POLITICAL ECONOMY, COLUMBIA UNIVERSITY. NINTH EDITION, REVISED LONGMANS, GREEN AND CO. FOURTH AVENUE & 30TH STREET, NEW YORK 39 PATERNOSTER ROW, LONDON BOMBAY, CALCUTTA, AND MADRAS I921 COPYRIGHT, 1905, BY LONGMANS, GREEN, AND CO. COPYRIGHT, 1909, BY LONGMANS, GREEN, AND CO. COPYRIGHT, I9I4, BY LONGMANS, GREEN, AND CO. First Edition, October, 1905 Second Edition, revised, September, 1906 Third Edition, revised and enlarged, September, 1907 New Impression, revised, August, 1908 Fourth Edition, revised and enlarged, 1909 Fifth Edition, revised, 191 2 Sixth Edition, revised and rewritten, 1914 Seventh Edition, revised, 191 6 New Impression, January, 19 19 Eighth Edition, revised, 1919 Ninth Edition, revised, 1921 Russian Translation, 1907 Japanese Translation, 1907 French Translation, 1921 nL6 d PRLf-ACE TO THE SIXTH EDITION IN the present edition the introductory matter has been re-written. In the body of the book chapters have been added on the Control of Trusts, Labor Legislation and Labor Insurance. This has necessitated a compression of the chapters on money and credit, but room has nevertheless been found for a treatment of the Federal Reserve Act. In other respects also the discussion and references have been brought down to date. It is my hope that in this revised form the work may continue to enjoy the favor which has hitherto been so generously accorded to it. EDWIN R. A. SELIGMAN. Columbia UNrvERSiXY, New York, July, 19 14 FROM THE PREFACE TO THE FOURTH EDITION IN the explanatory note which accompanied the first edition of this work, it was stated that "The object of the author is not only to give the salient facts of economic life, and to analyze them in the light of modern research, but also to present a point of view from which to approach the great questions of modern economic vi Preface to the Fourth Edition. policy. In the second place the author believes that the function of economics is not only to explain what actually exists, but to show how it has come to exist, .and to fore- cast both the probable and the ideal future. Throughout the entire work the author endeavors to reconcile the his- torical and the a priori methods, and to provide an analysis of existing industrial society in the light of a treatment which, while seeking to emphasize the importance of wealth, lays especial emphasis on the human side of the subject and the subordination of wealth to man." The justification of this attempt is evident from the unexpected demand for the work, which has led to a constant succession of new editions. Of the suggestions and criticisms that have been made in the various reviews of the book, only one seems to call for mention. Some surprise has been expressed that so little attention has been devoted to the problems of taxation — a field which the author has elsewhere somewhat assiduously cultivated. The intentional omission is due to the convic- tion that it is inexpedient to attempt a treatment of public finance in a short treatise on the principles of economics. The science of finance is indeed in one sense a part of eco- nomics, but in another and better sense a quasi-independent science. The attempt to treat the problems of finance in a few chapters at the end of a treatise on economics, as do most of the English works, is bound to be unsatisfactory in the extreme. There is no more reason so to include Finance than there would be to include Statistics or any other semi- independent discipline. A treatment of finance that is in any sense adequate would require a volume. It is my hope in the not far distant future to issue such a companion volume. Contents SUGGESTIONS FOR STUDENTS AND GENERAL REFERENCES Page I. General Treatises in English xix II. General Treatises in Foreign Languages xxii III. Periodicals xxiii IV. Diction.^ries and Cyclopedias xxix V. Government Documents A. Local and State Publications xxix B. National Departmental Publications xxxii C. Congressional Documents xli D. Indexes xliv E. British OlEcial Publications xliv VI. Semi-Official Publications xlvi VII. Bibliographies and Finding Lists xlvii VIII. List of Select Books 1 Parti INTRODUCTION Chapter I. Fundamental Concepts. 1. References 3 2. Economic Life 3 3. Economics or Political Economy? 6 4. The Meaning of Wealth 8 5. Wealth and Man 13 6. The Measure of Wealth — Income and Capital . ... 15 7. Wealth, Mone}', and Property iq 8. Public and Private Wealth 21 vii viii Contents Parts I., II. Chapter Pagi; II. Economic Law and Method. 9. References 24 10. Meaning of Economic Law 24 11. Methods of Economic Investigation 28 12. Relation of Economics to Other Sciences 2g 13. Relation of Economics to Politics and Other Moral Sciences 31 14. Scope of Economics 35 Part II ELEMENTS OF ECONOMIC LIFE. BOOK I. — FOUNDATIONS OF ECONOMIC LIFE. III. The Natural Environment. 15. References 37 16. Climatic and Geological Conditions 37 17. The Flora, the Fauna, and the Geographical Location 41 18. Changes in Environment 43 19. Changes in Location 46 IV. The Population. 20. References . 49 21. Density of Population 49 22. Concentration of Population 52 23. Distribution of Population 54 24. Increase of Population 56 25. Migration of Population 60 26. The Law of Population 62 BOOK II. — DEVELOPMENT OF ECONOMIC LIFE AND THOUGHT. V. The Economic Stages. 27. References 67 28. Economic Development 67 29. Primitive Technic^iie 69 30. Transition from the Lower Stages of Civilization . ... 72 31. Self-sufhcing or Isolated Economy 75 32. Trade or Commercial Economy 77 35. Capitalist or Industrial Economy 81 Part II. Contents IX Chapter Page VI. The Historical Forms of Business Enterprise. 34. References 85 35. Primitive Economic Activity — The Clan 85 36. The Family 87 37. Help or Hire System 90 38. Handicraft System 91 39. Domestic System 93 40. Factory System 95 41. Associated and Corporate Enterprise 96 VII. Economic Development of the United States. 42. References 100 43. Early Period of American Economic Life 100 44. Growth of American Industry in the Nineteenth Century 102 45. Recent Development of American Industry 104 46. Modern Problems of America 106 VIII. Development of Economic Thought. 47. References 109 48. Economic Theory in Classic Antiquity 109 49. Medieval Economic Theory 112 50. The Mercantile Doctrine 116 51. Adam Smith and the Physiocrats 118 52. Ricardo and Modern Economics 121 BOOK III. — CONDITIONS OF ECONOMIC LIFE. IX. Private Property. 53. References 125 54. Origin of Private Property 125 55. Growth of Property in Land.' 128 56. Theories of Private Propertj* 131 57. Limits of Private Property* 134 58. Content of Property Right? 136 X. Competition. 59. References 139 60. Nature of Competition 139 61. Forms of Competition 141 62. Dangers of Competition ' 145 63. Limits of Competitioi* 147 64. Substitutes for Competition 150 X Contents Parts II., III. Chapter Pagi XI. Freedom. 65. References 15 i 66. Origin and Growth of Slavery 154 67. Decay and Disappearance of Slavery 158 68. Liberty of Economic Action 163 69. Various Kinds of Economic Freedom 165 70. Individual Liberty as a Social Concept 171 Part III STRUCTURE AND PROCESS OF ECONOMIC LIFE. BOOK I. — VALUE: GENERAL PRINCIPLES. XII. The Meaning of Value. 71. References 173 72. Original Meaning of Value 173 73. Marginal Utility — Law of Diminishing Utility . . . .175 74. Individual and Social Value 179 75. Value in Exchange 182 76. Value and Price 184 77. Value and Marginal Increments of Wealth 185 XIII. The Measure of Value. 78. "References 189 79. Meaning of Cost 189 80. Individual and Social Cost 192 81. Cost and Surplus 194 82. Cost and Utihty ig8 83. Social Surplus and Progress 201 XIV. The Capitalization of Value. 84. References 204 85. Value and Rent 204 86. Law of Depreciation 206 87. Law of Future Estimates 209 88. Law of Diminishing Returns 212 89. Forms of Value ., 214 90. Value as a Differential .., 217 91. Relation of Rental and Capital Values 220 Part III. Contents XI Chapter Page XV. Determination of Market Value. 92. References 223 93. Demand and Supply 223 94. Market and Normal Price 224 95. Conditions of Exchange — Law of Comparative Utilities and Comparative Costs 226 96. Rate of Exchange — Barter 227 97. One Seller and One Buyer 229 98. Monopoly 231 99. Competition 234 100. Conclusions 235 XVI. Determination of Normal Value. loi. References 241 102. Normal Demand — Elasticity of Demand 241 103. Normal Supply — Cost of Production J44^ 104. Law of Marginal or Maximum Cost / 247 105. Law of Minimum Cost 249 106. Elasticity of Supply — Law of Varying Cost 251 107. Law of Joint Cost 253 108. Equilibrium of Normal Demand and Normal Supply . 255 109. Influence of Normal Price upon Market Price .... 256 no. Normal Monopoly Value 258 XVII. The Gen^erax Law of V.a.ll-j;. 111. References 262 112. Value and Cost of Production 262 113. Value and Efficiency 264 114. Efficiency and Capitalization 268 115. Valuation and Taxation 269 116. Valuation and Regulation 273 117. Valuation and Investment 275 BOOK II. — VALUE AND PRODUCTION. XVIII. Character ant) Factors of Production. 118. References 278 119. Production: Its Meaning and Relation to Consumption 278 120. Kinds of Production 281 121. Factors of Production 283 122. Production and the Producer 285 xii Contents Part III. Chapter Pac;!. XIX. Labor. 123. References 288 124. Meaning of Labor 28S 125. Cost of Labor 289 126. Efficiency of Labor 292 127. Division of Labor — Nature and Advantages .... 293 128. Division of Labor — Defects 298 129. Combination of Labor 299 130. Supply of Labor 301 XX. Land. 131. References 304 132. Land as a Separate Factor of Production 304 133. Fertility of Land 308 134. Situation of Land 311 135. Cultivation of Land 313 XXI. Capital. 136. References 317 f 137. Kinds of Capital . ; 317 138. Function of Capital 320 139. Creation and Growth of Capital 323 140. Nature and Influence of Capital 326 141. Investment of Capital 329 XXII. Enterprise — The Concentration of Production. 142. References 333 143. The Meaning of Concentration 333 144. Large-Scale Production 335 145. Large-Scale Agriculture 338 . I 146. Consolidation and Integration of Production 341- 147. Combination and Efficiency 345 148. Limits of Combination 349 BOOK III. — VALUE AND DISTRIBUTION. XXIII. Profits. 149. References 352 150. The Shares in Distribution 352 151. Ordinary Profits 354 152. Aleatory Profits 358 153. Speculative Profits: Nature 360 Part III. Contents xiii Chapter Page Profits {Continued). 154. Speculative Profits: Function 364 155. Monopoly Profits 368 156. Regulation and Justification of Profits 370 XXIV. Rent. 157. References 373 158. Nature of Rent 373 159. Relation of Land Rent to Other Rents 375 160. Rent and Price 378 161. Growth of Land Rent 381 162. Land Rent and Land Tenure 385 163. Justification of Land Rent 389 XXV. Interest. 164. References 394 165. Nature of Interest 394 166. Interest and Forbearance 398 167. Interest and Productivity 401 168. Course of Interest 405 169. Tendency of Interest to a Minimum 407 170. Regulation of Interest 410 XXVI. Wages. 171. References 4^3 172. Nature of Wages 413 173. W^ages and Cost 416 174. Wages and Efficiency 418 175. Rate of Wages 421 176. Course of Wages 423 177. Variations in Wages 425 178. Wages and Profits 429 XXVII. Wages. — The Labor Problem. » - 179. References 432 180. Labor Organizations 43^^ 181. Strikes 437 182. Boycotts 440 183. Profit Sharing and Co-operation 443 184. Arbitration and Conciliation 446 xiv Contents Part III. BOOK IV. — VALUE AND EXCHANGE. Chapter Paw; XXVIII. Money. — Nature and Value. 185. References 44(j 186. Origin and Functions of Money 44() 187. Value of Money 453 188. The Quantity Theory 458 189. The Price Level 461 190. Distribution and Stability of Money 464 XXIX. Money. — Practical Problems. 191. References 470 192. Coinage Problems 470 193. Choice of the Money Standard 475 194. Bimetallism 479 195. Adoption of the Gold Standard 483 196. Paper Money 488 XXX. Credit and Banking. 197. References 496 198. Nature and Forms of Credit 496 199. Development of Banking 501 200. Modern Bank Operations 506 201. Bank Reserves 511 202.' Credit and Prices 518 XXXI. Credit and Currency. 203. References 521 204. Banks of Issue 521 205. Regulation of Note Issues 525 206. The American Systems 528 207. The Money Rate 533 208. The Federal Reserve Act 538 209. Credit and Crises 543 209! The Federal Farm Loan Act 546* XXXII. International Trade. 210. References 547 211. Basis of International Trade 547 212. Rate of International Exchange 552 213. Growth of Free Trade 556 214. The .\rgument for Protection 560 215. The .\rgument for Free Trade 566 216. Conclusion 567 Parts III., IV. Contents xv Chapter Page XXXIII. Transportation. 217. References 572 218. Transmission of Intelligence — The Post-Office. . . . 572 219. Railway Development 575 220. Nature of Railway Business 577 221. Principle of Railway Charges 581 222. Classification 584 223. Discrimination 587 224. Railway Regulation 593 XXXIV. Insurance. 225. References 598 226. Nature of Insurance 598 227. Growth of Insurance 601 228. Theory of Insurance 606 229. Methods and Regulation of Insurance 609 Part IV GOVERNMENT AND WEALTH XXXW Socialism and Public Ownership. 230. References 612 231. Socialism 612 232. Development of Public Ownership 615 233. Conditions of Public Ownership 619 234. Municipal Monopolies 623 235. Government Regulation 627 236. Bounties and Subsidies 629 XXXVI. The Control of Trusts. 237. References 632 238. The Causes of Trusts 632 239. The Effects of Trusts 634 240. The Prohibition of Trusts 638 241. The Regulation of Trusts 640 XXXVII. Labor Legislation. 242. References'. 643 243. The Employment of Children and Women 643 244. The Protection of Life, Health and Comfort 646 245. Regulation of the Hours of Labor 648 246. The Minimum Wage 650 xvi Contents Part IV Chapter . Page XXXVIII. Social Insurance. 247. References 655 248. The Reasons for Social Insurance 655 249. Accident Insurance 657 250. Health Insurance 660 251. Old Age Insurance 662 252. Invalidity Insurance 664 253. Unemployment Insurance 665 XXXIX. Poverty and Progress. 254. References 669 255. Luxury 669 256. The Facts of Poverty 674 257. The Causes of Poverty 678 258. The Relief of Poverty 682 259. The Prevention of Poverty 685 260. The Future of Economic Life 688 261. The Role of Economics 692 INDEX 69s Maps and Diagrams Page Distribution of Population colored, facing 50 Number of Inhabitants to the Square Mile, by States and Territories in 1910 " 52 Population according to Age Distribution 55 Foreign Immigration to the United States, 1840-1920 Jollowing 60 Increase of Population in Principal Coun- tries of Europe, 1 800-1920 facing 61 Population: (i) Total Foreign Born, 1850-1910 1 (2) Proportion each of leading nation- [• . . . colorca , following 62 alities and foreign born J Constituents of the Population of States and Territories, 1910 colored, " 64 Annual Value of Products 1 , . > facing 104 Value of Exports of Manufactures J Production of Com \ . . , ( facing 106 Production of Wheat ) Production of Oats \ ) " 107 Production of Cotton J Capital Invested at each Census \ ,, ■ „ ( 108 Average Number of \\'age Earners ) Value of Products 1 ; ' 109 Proportion of Wage Earners to Population J Hand and Machine Labor, Selected Units (a) " 296 Hand and IMachine Labor, Selected Units {b) " 297 Wages, Hours of Work, etc colored, " 424 Results of Strikes, etc colored, " 438 Relative Wholesale and Retail Price of Fresh Beef, 1890-1903 " 462 Relative Prices of Raw and Manufactured Com- inodities, 1890-1912 463 xvii XVlll Maps and Diagrams Pace General Level of Prices in England, 1 790-1 920 .... following 464 Comparative Movement of Wholesale Prices in the United States, Great Britain and Germany, 1890-1911 . . facing 466 Movement of Wholesale and Retail Prices in the United States, 1890-1913 " 467 Wholesale Prices, 1914-1921 " 468 Production of Silver, 1 875-1919 " 476 Production of Gold and Silver, 1845-1919 " 476 Production of Gold, 1880-1919 " 477 Production of Gold and Silver since the Discovery of America " 478 The Fall in the Value of Silver since 1 873 " 479 Bank Notes, Paper Money, etc., 1878-1920 " 532 Exports and Imports of ISIerchandise, 1872-1920 " 551 Railway Consolidation, 1920 " 578 Reduction of Freight Rates, 1867-1900 ^oUoiving 580 Percent of Total Expenditure, etc.. Normal Families, colored, facing 674 Poverty Chart (reproduced by permission from Rowntree's "Poverty") 680 SUGGESTIONS FOR STUDENTS AND GENERAL REFERENCES I. General Treatises in English Of the older works the treatises of Adam Smith and of some of the so-called Classical School are still indispensable to students. The three founders are: SiOTH, .-Vdam. An hiquiry into the Nature and Causes of the Wealth of Nations. (London, 1776; recent editions, with introduction and notes by Edmn Cannan, 2 vols., 1904; and, with introduction, by Edwin R. A. Seligman in Evcrytnan's Library, 2 vols. n. d. [1910].) Malthus, Thomas Robert. An Essay on the Principle of Popula- tion, or a View of its Past and Present Effects on Human Happiness. (London, 1798; 8th ed., 1878.) RiCARDO, Da\ti). Principles of Political Economy and Taxation. (Lon- don, 181 7.) — This work, together with his other important writings, has been edited by J. R. McCulloch in one volume under the title of The Works of David Ricardo with a Notice of the Life and Writings of the Author. (1846; frequently reprinted since.) The principal modern expounders of the general system set forth by Smith, Malthus and Ricardo are: Mill, John Stuart. Principles of Political Economy with some of their Applications to Social Philosophy. (London, 1848; 5th ed., 1880.) — Tills was the most widely read work from 1850 to 1890. Senior, Nassau William. Political Economy. (London, 1850; 6th ed., 1872.) — Acute and original. Cairnes, J. E. Some Leading Principles of Political Economy newly Expounded. (London, 1S74.) — Abstract, but weight}'. SiDGWiCK, Henry. The Principles of Political Economy. (London, 1883.) — Critical and philosophical, but somewhat remote from actual life. xix XX Suggestions The reaction against the Classical School was inaugurated in England by Jevons, W. Stanley. The Theory of Political Economy. (London, 1871; 4th ed., 1911.) — A work of the first magnitude. The same author's posthumous Principles of Economics (London, 1905) is only a torso. Of modern treatises the best are as follows: Marshall, Alfred. Principles of Economics. (Vol. I, London, 1890; 8th ed., 1920.) — The fullest and most elaborate of recent works. PiERSON, N. G. Principles of Economics. (Translated by A. A. Wotzel, 2 vols., London, 1902-1912.) — Dr. Pierson was formerly Prime Minister of the Netherlands. A virile work, especially strong in the financial sections. Nicholson, J. Shield. Principles of Political Economy. (3 vols., London, 1893-1901.) — On the lines of Mill, but brought down to date and with much historical material. Pantaleoni, Maffeo. Pure Economics. (Translated by T. Boston Bruce. London, 1898.) — An acute and profound work on funda- mental principles. Bohm-Bawerk, Eugen von. The Positive Theory of Capital. (Trans- lated by W. Smart. London, 1891.) Wieser, Friedrich von. Natural Value. (Translated by C. Mal- loch, London, 1893.) — This book and the one immediately preceding are the two chief works of the Austrian School. Three recent elementary books are: C.ANNAN, Edwin. Wealth. A Brief Explanation of the Causes of Economic Welfare. (London, 1914.) Suggestive and well written. Chapman, S. J. Outlines of Political Economy. (London, 191 1; 3d ed., 1918.) A useful compendium. Clay, H. Economics, an Introduction. (London, 1916.) Emphasizes the ethical point of view. Still briefer are: CuNNisoN, J. Economics. (London, 1920.) Kirkcaldy, A. W. Wealth, Its Production and Distribution. (London, 1920.) Of American treatises the most important are: Walker, Francis A. Political Economy. (New York, 1883; 3d ed. 1888.) — Until recently, the chief American production. Treatises in English xxl Clark, John B. The Distribution of Wealth. (New York, 1899.) — Of fundamental and epoch-making importance. The same author's Essentials of Economic Theory (New York, 1907) covers a broader field. Hadley, Arthur Twining. Economics: An Account of the Relations between Private Property attd Public Welfare. (New York, 1896.) — Admirably written, but with a not entirely satisfactory arrangement. Ely, Richard T. Outlines of Economics. (New York, 1893; 3d ed., revised by the author' and T. S. Adams, M. O. Lorenz, and A. A. Young, 1916.) — In its new form, valuable and interesting. Seager, Henry Rogers. Principles of Economics. (New York, 1904; 4th ed., 1913.) — Displays a firm grasp of theory and a wide ac- quaintance with facts. In many respects the most available of e.xist- ing text-books. The same author has also published Economics. Briefer Course (New York, 1909). Fetter, Frank A. The Principles of Economics. (New York, 1904. Rewritten as Economic Principles, 2 vols., 1915.) — Novel and suggestive. Taussig, F. W. Principles of Economics. (2 vols.. New York, 191 1, 2d ed., 1914.) — Clear and sensible, but on old Unes. Fisher, Irving. Elementary Principles of Economics. (New York, 191 2.) — Lays especial stress on value and money. During the past few years a number of series for more pop- ular consumption have appeared. They are not yet completed, and the whole number of volumes is not yet definitely settled. Among these are: Appleton's Business Series, and Problems of the War and Reconstruction, Macmillan's Citizen's Library of Economics, Politics and Sociology, the Rural Text Book Series, and the American Social Progress Scries. Longman's American Citizen Series, Holt's American Public Problem Series, Shaw's .American Industry Series, Methuen's Series in Economics, and Ginn's Selections and Readings in Economics. On American Economic History attention is called especially to A Documentary History of American hulustrial Society (Cleve- land, 10 vols., 1910-1911), and The Economic History of the United States, under the auspices cf the Carnegie Institution (about 10 vols., 1914-). xxii Suggestions Convenient collateral reading will be found in: Marshall, Wright and Field. Malcriah for the Study of Elementary Economics. (Chicago, 1913.) Hamilton, W. H. Readings on Current Economic Problems. (University of Michigan, 1914.) Moulton, H. G. Principles of Money and Banking. (Chicago, 1916.) Phillips, C. A. Readings in Money and Banking. (New York, 1916.) Clark, Hamilton and Moulton. Readings in the Economics of War and Reconstruction. (Chicago, 1919.) Materials for the Study of Business. Several volumes. School of Com merce and Administration. (Chicago, 1921.) The more important works on special topics will be found in the References at the head of each chapter. II. General Treatises in Foreign Languages The leading foreign works are: Wagner, Adolf. Grundlegung der Politischen Oekonomie. (3 vols., Leipsic; 3d ed., 1892-1894.) — By the chief advocate of "Profes- sorial Socialism." Erudite, with remarkable bibliographies. A French translation appeared in 1905. The same author's Theoretische Sozialokonomik, containing his university lectures, appeared in two volumes in 190 7- 1909. RosCHER, WiLHELM. Grundlageu der Nationalokonomie. Ein Hand- und Lesebiich. (5 vols., Stuttgart, 1854-1894; with new editions of the earlier volumes almost every year until his death in 1894.) — By one of the founders of the Historical School. Con- tains an imposing array of historical notes. The first volume has appeared in English dress in 2 volumes. Cohn, Gustav. Grundlegung der Nationalokonomie. Ein Lehrbuch fur Studirende. (3 vols., Stuttgart, 1885-1898.) — By the best styhst among the German economists. Conservative and interest- ing. The second volume has been translated into English under the title The Science of Finance. Foreign Treatises xxiii ScHMOLLER, GuSTAV. Grimdriss der allgemeinen Volkswirthschaftslehre. (2 vols., Leipsic, 1900-1904; 26. ed., 1908.) — A remarkable work by the former leader of the Historical School. Brilliant and fasci- nating, but weak in the theoretical parts. Philippovich, Eugen von. Grimdriss der Politischen Oekonomie' (3 vols., Tubingen, 1893-1907; sth-gth ed., 1911-1915.) — Sane, impartial and concise. In many respects the best German work. Pesch, Heinrich. Lehrhuch der N ationalokonomie. 3 vols., Freiburg VB, 1904-1913; 2d ed., 1914.) — From the Catholic standpoint. The Grimdriss der Socialokonomik (10-12 parts, Tubingen, 1914-1921) is a comprehensive series by the younger German economists, cover- ing the whole field of economics. Lerov-Beaulieu, Paul. Traite Theorique et Pratique d' Economic Politique. {5 vols., Paris, 1895; 6th ed., 1914.) — A pellucid work by the former chief of the orthodo.x school in France. GiDE, CH.'iRLES. Principes d' Economic Politique. (Paris, 1887; iithed., 1908.) — The most widely read European text-book. American translations appeared in 1889 and 1904. The author's Coiirs d'Eco- nomie Politique (Paris, 4th ed., 1918-1919, 2 vols.) is an enlarged version of the same book. An English translation appeared in 19 r4. Landry, Adolphe. Manuel d'Economique. (Paris, 1908.) — An ex- cellent French work by a French statesman. Pareto, Vilfredo. Cotirs d' Economie Politique. (2 vols., Lausanne* 1896-1897.) — An acute work, combining the mathematical point of view with historical details. His Manuel d'Econotnie Politique (Paris, 1909) is a translation of a briefer Italian work. COLSON, C. Cours d' Economie Politique. (3 vols., Paris, 1907; 3d ed., 6 vols., 1915-1919.) — By a prominent engineer. Perreau,Camille. Cours d'Sconomie Politique. (2 vols., Paris, 1916.) Truchy, H. Cours d' Economie Politique. (Paris, 192 1.) III. Periodicals Classified by countries the chief periodicals are as follows: United States American Economic Association Publications. The publications of this Association, formed in 1886, include the Reports of the Proceedings of the Annual Meetings and a series of independent monographs. Up xxiv Suggestions to 1897 these were published at bi-monthly intervals. In 1897 a series of shorter Studies was inaugurated, and larger volumes were occasionally published under the name of New Series. In 1901 the Studies were discontinued, and a Third Series was commenced. In 1908 a quarterly periodical known as The Economic Bulletin was added. In 191 1 this was replaced by The American Economic Review. The Quarterly Journal of Economics. Published for Harvard University. (Boston, 1886-). Political Science Quarterly. Edited by the Faculty of Political Science of Columbia University. (New York, 1886-.) The Annals of the American Academy of Political and Social Science. (Bi-monthly, Philadelphia, 1890-.) The Journal of Political Economy. Published for the University of Chicago. (Quarterly to 1906, monthly thereafter, Chicago, 1892-.) The American Journal of Sociology. (Bi-monthly, Chicago, 1896-.) Quarterly Publications of the American Statistical Association. (Boston, • 1 888-.) American Labor Legislation Review. (Quarterly, New York, 191 1-.) The Child Labor Bulletin. (Quarterly, New York, 191 2-.) Municipal Research. Issued by the Bureau of Municipal Research. (Monthly, New York, 1913-1919.) Johns Hopkins University Studies in IListorlcal and Political Science. (Baltimore, 1883-. One volume a year, composed of several numbers. 39 vols, and several extra volumes to 1921.) Columbia University Studies in History, Economics cud Public Law. Edited by the Faculty of Political Science. (New York, 1891-. Several volumes a year, each consisting of from one to four mono- graphs. 100 vols. [228 monographs] to 1921.) Proceedings of the Academy of Political Science in the City of New York. Columbia University. (Bi-monthly, New York, 1910-.) Studies in Sociology, Economics, Politics and History. In Research Bulle- tins of the University of Iowa. (Iowa City, 1899-. 4 vols. t3 192 1.) University of Illinois. Studies in the Social Sciences. (Urbana, 1912-. 8 vols, to 192 1.) American Periodicals xxv University of Wisconsin Bulletin. Economics and Political Science Series . (Madison, 1904-1918. 9 vols.) Continued in Studies in the Social Sciences and History. (2 nos. to 1921.) University of Pennsylvania Series in Political Economy and Public Law. (Philadelphia, 1888-.) Harvard Economic Studies. (Boston, 1906-. 22 vols, to 192 1.) Cornell Studies in History and Political Science. (Ithaca, 1907-. 3 vols. to 1921.) University of California, Publications in Economics. (Berkeley, 1908-. 4 vols, to 1 92 1.) University of Minnesota Studies in the Social Sciences. (^Minneapolis, I9I3~- 5 nos. to 1921.) Economic articles of more or less permanent interest are also found in the monthlies like the North American Review, Review of Reviews, Atlantic Monthly, and in the weeklies like the Nation, New Republic, Outlook, Independent, Weekly Review, Annalist a.nd Survey. The special publications devoted to particular economic interests are too numerous to mention. Some of them will be found below under Section VI, Semi-Official Publications. Greater Britain The Economii Journal. (Quarterl)-, London, 1890-.) The Journal of the Britiih Economic Association, since 1903 called The Royal Economic Society. The Economic Review. (Oxford, 1891-1915.) Published quarterly for the Oxford Universitj' Branch of the Christian Social Union. Journal oj the Royal Statistical Society. (Quarterly, London, 1837-.) Economica. (Three times a year, London, 192 1-.) Edited by the London School of Economics. Studies in Economics and Political Science. (London, 1896-. 58 vols. to 192 1.) Edited by the Director of the London School of Eco- nomics and Political Science. Bulletin of the Department of History and Political and Economic Science in Queen's University (Kingston, Ontario, Canada. 38 nos. to 1921.) The monthly reviews like the Contemporary, Fortnightly, National, Nineteenth Century, Independent: and the British Quar- terly Review the Political Quarterly, the Round Table and the Edinburgh Review generally contain some articles of economic interest. The most important weeklies devoted to current economic topics are The Economist, The Statist and Common Sense. xxvi Suggestions Germany Jarbiicher fur Nationaldkonomie und Stalistik. (Monthly, Jena, 1863-. Editec^ by Conrad until 1916, thereafter by Elster. Jahrbuch filr Gesetzgehung, Verwaltung tind Volkswirtkschaft. (Quar terly, Leipsic, 1 877-.) Edited by Schmoller to 1918, then by Schu macher and Spiethoff. Zeitschrift fur die gesamle Staatswissenschaft. (Quarterly, Tubingen, 1 844-.) Edited by Biicher. Archiv fur Sociale Gesetzgehung und Statistik. (Quarterly, Berlin, 1888- 1903.) Edited by Braun. Continued as: Archiv fur Sozialwissenschafl und SodalpolUik. (Quarterly, Tubingen, 1904-.) Edited by Sombart, Weber and Jaffe. Annalen fiir Soziale Politik und Gesetzgehung. (Bi-monthly. Berlin. 191 2-.) Edited by Braun. Zeitschrift filr Sozialwissenschafl. (Quarterly, Berlin, 1898-.) Edited by Wolf, and since 19 10 by Pohle. Vierteljahrschrift fur Sozial- und Wirthschaftsgeschichle. (Quarterly, 1904-.) Edited by Bauer, Below, Hartmann and Kaser. Annalen des deutschen Reichs filr Gesetzgehung, Verwallung und Volks- wirthschafl. (Monthly, Munich, 1868-.) Edited by Eheberg and Dyraff. Finanz-Archiv. (Quarterly, Stuttgart, 1884-.) Edited by Schanz. Archiv fiir Eisenbahnwesen. (Monthly, Berlin, 1875-.) Edited by von der Leyen. Thiinen Archiv contined in 19 12 as Archiv fiir die exakte Wirlkschafts- forschung. (Jena, 1905-.) Edited by Ehrenberg. Die Neue Zeit. (Monthly, Stuttgart, 1883-.) Edited by Kautsky. Archiv fiir die Geschichte des Sozialisnius und der Arbeiterbewegung. (Quarterly, Leipsic, 1910-.) Edited by Griinberg. Marx Studien. (Vienna, 1905-.) Edited by Adler and Hilferding. Publications of the Verein fiir Sozial politik. (Several volumes a year, Leipsic, 1873-.) Staats- und sozialwissenschaftUche Forschungen. (Leipsic, 1878-.) Edited by Schmoller [and since 1905 by Sering]. Sammlung nationalokonomischcr u)id slalistischer Abhaiuilungen des U Foreign Periodicals xxvii staatswissenschaftlichen Seminars zii Halle. (Jena, 1877-.) Edited by Conrad. liinchener volkswirthschaftliche Studien. (Stuttgart, 1893-.) Edited by Brentano and Lotz. ibhandlimgen des staatswissenschaftlichen Seminars zii Jena. (Jena, 1900-.) Edited by Pierstorff. ibhandlimgen aiis dem staatswissenschaftlichen Seminar von Strassburg. (Strassburg, 1893-1918, 34 nos.) Edited by Knapp. Kolner Studien ziwt Staats- und Wirthschaftsleben (Bonn, 1912-.) Edited by A. Weber, Wygodzinski and Stier-Somlo Tiibinger staatsunssenschafiliche Ahhandlungen. (Stuttgart, 1902-.) Edited by Fuchs. Heidelberger volkswirthschaftliche Ahhandlungen. (Karlsruhe, 191 1-.) Edited by Gothein and Weber. Freiburger volksivirthschaftliche Ahhandlungen. (Karlsruhe, 191 1-.) Edited by Diehl and Schulze-Gavernitz. Socialgeschichtliche Forschungen. (Weimar, 1896-.) Edited by Bauer and Hartmann. Staatswissenschaftliche Studien. (Leipsic, 1893-.) Edited by Elster. Berner Beitrage zur Geschichte dcr Nationalokonomik. (Bern, 1886-.) Edited by Oncken. France Journal des Sconomistes. (Monthly, Paris, 1843-.) Edited until 1909 by Molinari and thereafter by Yves-Guyot. [ Revue d'Sconomie Politique. (Monthly, Paris, 1887-.) Edited by Gide. Revue d'Histoire t^conomique et Sociale. (Quarterly, Paris, 1908-.) Edited by Vouters and more recently by Aucuy and Picard. Until 1913 it was known as the Revue d'Histoire des Doctrines Economiques et Sociales. Revue de Science et de Legislation Financiercs. (Bi-monthly, V \x\s, 1903-.) Edited by Jeze. Reforme Sociale. (Paris, 18S0-.) Bulletin of the Societe d'Economie Sociale. Bulletin de Statistique et de Legislation comparee. (Monthly, Paris, 1 877-.) !ii^i^ xxviii Suggestions Annalcs des Sciences Folitiques. (Bi-monthly, Paris, 1886-.) Journal de la Sociele de Statistlque de Paris. (Monthly, Paris, 1 860-.) L'Economiste Frangais. (Weekly, Paris, 1876-.) Edited by P. Leroy| 1^' Beaulieu until 1914 and then by Pierre Liesse. Bulletin de la Sociele d'&conomie Politique. (Annual, Paris, 18: Succeeding the Annalcs of the same society published from 1841 to 1887. Italy Giornale degli Economisti e Rivisla dl Slatistica. (Monthly, Padova 1875-1878, and again Bologna and Rome, 1886-.) Edited by Pan taleoni, Beneduce and Mortara. Bulletin de I'lnstitut International dc Statistique. (Biennially, Rome.j 1886-.) Edited by Bodio. | Belgium Revue Economique Internationale. (Bi-monthly, Brussels, 1904-1914.) Edited by Hennebicq. Austria Zeitschrift jur V olkswirthschaft SocialpolitiJi und Verwaltung. (Quar- terly, Vienna, 1892-.) Edited by Philippovich, v. Plener and v. Wieser. Wiener staatswissenschaftliche Studien. (Freiburg '/B., 1898-.) Edited by Bernatzik and Philippovich. Studien zur Social-, Wirthschafts- und V erwaltungsgeschichte. (Vienna, 1905"-) Edited by Griinberg. Holland De Economist. (Monthly, The Hague, 1 852-.) Edited by Bruyn-Kops. Denmark Nationalockonomisk Tidsskrift. (Quarterly, Copenhagen, 1873-.) Edited by Jensen. India Journal of the Indian Economic Society. (Quarterly, Bombay, 191 8-.) Edited by Deole. Indian Journal of Economics. (Quarterly, Calcutta, 1919-.) Edited by Jevons. Dictionaries xxix IV. Dictionaries and Cyclopedias of Economics *ALGR.A.VE, R. H. Inglis, ed. Dictionary of Political Economy. (3 vols., London, 1894-1899, with a supplement, 1908.) — An admirable work, but not devoting special attention to American conditions. Bliss, William D. P., ed. The Encyclopedia of Social Reform, including '< Political Economy, Political ScieiKC, Sociology and Statistics. (New York, 1897; 2d ed., 1908.) — Serviceable. .iART, Albert Bushnell and McLaughlin, Andrew C, eds. Cyclo- pedia of American Government. (New York, 3 vols., 1914.) — De- votes considerable attention to economic topics. Z;oNRAD, Elster, Lexis AND LoENiNG, eds. Handworterbiich der Staatswis sense fiaf ten. (6 vols., Jena, 1 890-1 894; 3d ed., 8 vols., 1908-1911; new ed., 1921-.)- — 'The most complete and elaborate cyclopedia of economics in existence. Elster, LuDwac, ed. Worterbiich der Volkswirthschaft. (2 vols., Jena, 1898; 2d ed., 1907.) — Of more importance to continental students. ScHONBERG, GusTAV. Handbiwh der Politischen Ockonomie. (3 vols., Tubingen, 1882; 4th ed., 1896-1898.) — Comprises a series of thorough and valuable monographs by the leading .German speciahsts. Staatslcxikon. Edited by the Gorres Society. (Freiburg "/B., 1889- 1897, 5 vols.) — From the Catholic point of view. Stegmann and Hugo. Handbuch des Sozialismus. (Zurich, 1897.) — A SociaUst Cyclopedia. GuYOT, Yves and Raffalovich, A. Dictionnaire du Commerce, de V Industrie et de la Banque. (2 vols., Paris, 1898-1901.) — Useful for trade and finance. 'Say, Leon, and Chailley, Joseph, eds. Nouveau Dictionnaire d'Econo- mie Politique. (2 vols., Paris, 1891-1892; 2d ed., 1900.) — Inferior to both Palgrave and Conrad. V. Government Documents A. Local and State Publications A large amount of material on economic topics is published by the various American governments, — local, state and na- tional. The municipal governments of the chief American XXX Suggestions cities publish annually reports of their various city depart ments. Among them, of economic interest, are the reports dealing with city finances, water, gas and electricity, charities, health, housing, transportation and the like, and in a few cases like Boston and New York the reports of the Departments ox Bureaus of Municipal Statistics. New York City published for some years a good Municipal Year Book. The state governments publish a great variety of documents. Among the most important are the reports of labor bureaus Of these, the best are those of New York and Massachusetts; but New Jersey, Pennsylvania, Illinois and a few others issue fairly good reports. The annual reports of the New York De- partment of Labor appear in three volumes, containing (i) the General Report of the Commissioner and the Report of the Bureau of Mediation and Arbitration, (2) the Report of the Bureau of Labor Statistics, and (3) the Report of the Bureau of Factory Inspection. Occasionally special reports are published, as on Labor Legislation, Employers'' Liability, Welfare Institutions, Old Age Pensions, Minimum Wage, etc. The reports of the Massachusetts Bureau of Statistics of Labor comprise the Annual Report on the Statistics of Labor, the Annual Report on the Statistics of Manufactures and vari- ous Special Reports. Both New York and Massachusetts also publish periodical bulletins, the Labor Bulletin of Massachusetts appearing every two months, the Department of Labor Bulletin of New York ap- pearing quarterly. The reports of the other states are not so valuable or voluminous, but often contain matter of importance. An Analysis and Index of all Reports issued by State Bureaus of Labor Statistics was published by the National Department of Labor in 1893, and has since then been brought down to date from time to time. The separate states publish in turn the annual proceeding of the National Convention of Chiefs and Com- missioners of the various Bureaus of Statistics of Labor in the United States, as well as of the International Association of Factory Inspectors of North America. The state governments also publish regularly the State Treasurers^ and Comptrollers' Reports, Reports of Railroad or State Documents xxxi Fiiblic Service or Public Utilily Commissions, Reports of Bank and Insurance Examiners, Reports on Taxiilion, Reports of Inspectors of Food and Animals, Reports of Boards of Charities and Correction, Reports on Prison Labor, Reports on Mining Statistics, Reports of State Agricultural Experiment Stations, Reports of the Boards of Health, Reports of the Land or Public Domain Commissions, Reports of the Industrial Accident or Workmen's Compensation Commissions or Boards, Reports of the Minimum Wage or Industrial Welfare Commissions or Boards and the hke. A few also pubUsh at regular intervals a State Census: the best is that of Massachusetts. Some of the states publish occasional reports of legislative or special committees. Of these the most common are the Reports on Taxation. A list of these will be found in the chapter on "Recent State Reports on Taxation" in Essays in Taxation by the author of this volume. Deserving of mention on other topics are the Massachusetts Reports on The Unemployed (1895); Street Railway Companies (1901 and 191 8); Corporation Laws (1903); Old Age Pensions (1910); Minimum Wage Boards (191 1); and the New York Reports on Tenement Houses (1894 and 1901); Trusts (1897); Canals (2 vols., 1899); Insurance (8 vols., 1905- 1906); Stock and Produce Exchanges (1909); Employers' Liability and Unemployment (1910-1912); Factory Investigating Commis- sion (4 vols., 1913-1915); the New Jersey Report on Pension Funds (1918); the Minnesota Report on Employes'' Compensation (191 1); and the Ohio Report on Health and Old Age Insurance (1919). Until recently the only general periodical guides to the legisla- tion discussed in these reports were the Annual Comparative Summary and Index of State Legislation and the Annual Review of Legislation, both published by the New York State Library. These were discontinued in 191 2. Since 1910 the Division of Docimaents of the Library of Congress publishes a Monthly List of State Publications. A joint committee of State Li- brarians and American Law Librarians publish annually an Official Index to State Legislation. A quarterly survey of govern- ment reports will be found in the American Economic Review. For the earlier reports we may mention: xxxii Suggestions BowKER, R. K. Skilc Publicalions. A Provisional List of Ike OJJicial Pitblications of the several Stairs of the United States from their Or- ganization. 3 vols., New York, 1905. Highly to be recommended is: Hasse, Adelaide R. Index of Economic Material in the Documents of the States of the United Stales. Prepared for the Department of Eco- nomics and Sociology of the Carnegie Institute of Washington. A separate volume, ranging from 66 to 1136 pages for each state. Twelve states completed to 1918, and then discontinued. (Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, New York, California, Illinois, Kentucky, Delaware, Ohio and New Jersey.) The Legislative Reference Department of tne Wisconsin Free Library Commission published for some years after 1905 a number of valuable Comparative Legislative Bulletins containing judicial decisions as well as the legislation of the chief foreign countries and the American commonwealths on various economic questions. The practice is now followed in a considerable number of other states. B. National Departmental Publications The publications of the national government are of three kinds: departmental issues, commission or board publications, and reports of congressional committees. The Department of Commerce now publishes the largest mass of material of interest to students of economics. As origi- nally organized in 1903, in addition to numerous new duties, it took ovei much work previously devolving upon other depart- ments. For details as to the present organization see the pub- lication: Department of Commerce, Condensed History, Duties, and Practical Operation of the Department and its Several Bureaus and Offices, together with Laws relating specifically thereto (1913). Cf. the List of Publications of the Department of Commerce avail- able for Distribution. 19th ed., 1921. The Department publishes annually the Report oj the Secre- tary. The other publications are issued by the separate bureaus or divisions as follows: I. The Bureau of the Census. The Census is published every ten years. The most recent issues are The Twelfth Census National Publications xxxiii (1900, in 16 vols.), Jlie Thirteoith Census (1910), in 11 vols.. The Fourteenth Census (1920). The permanent Census Bureau publishes in addition to the annual Report of the Director, a large inumber of Bulletins (about 150 up to 1919) and Special (Jnter- censal) Reports. These are of six classes: A. Decennial: Manufactures (191 5); Agriculture (191 5); Defective, Dependent, and Delinquent Classes; Climate; Social Statistics of Cities; Wealth, Debt and Taxation (1914); Religious Bodies; Transportation by Water; Express Companies; Savings Banks; Mortgage, Loan and Similar Institutions; Fishery Industry. B. Quinquennial: Street Railways; Electric Light and Power Stations; Telephone and Telegraph Business. C. Biennial: The Official Register of the U. S. (2 vols.), trans- ferred in 1907 from the Department of the Interior. D. Annual: Mortality Statistics; Birth Statistics; Financial Statistics of Cities; Production and Distribution of Cotton; Forest Products; Quantity of Leaf Tobacco on Hand. E. Monthly: Cotton Production and Consumption. F. Occasional: Such a.s Mines and Quarries (1905); Women at Work (1907); Marriage and Divorce (2 vols. 1908-9). The Census Bureau has also published the Philippine Census (4 vols. 1905); the Cuban Census (1908); and the Proceedings of the Conference of Governors on the Conservation of Natural Resources (1909). It has reprinted in part The First Census of 1790. In 1914 it issued a Circular of Information concerning Census Publications. 2. The Bureau of Foreign and Domestic Commerce pub- lishes in addition to the annual Report of the Chief a variety of reports under separate headings. • The Editorial Division (formerly called the Division of Con- sular Reports) publishes information derived through the con- sular offices and transmitted to the Department of Commerce from the Department of State through the Bureau of Trade Relations. These reports were issued up to 1903 by the Bureau of Foreign Commerce of the State Department, from 1903- 1905 by the Bureau of Statistics, and from 1906 to 191 2 by the Bureau of Manufactures. They now comprise: (a) a daily xxxiv Suggestions jouriuil, known since r(}i5 as Commerce Reports wilh Supple- ments consisting of the annual Consular Reports; (b) mono- graphs comprising the Special Agents Series (167 numbers to 19 1 8), Special Consular Reports (80 numbers to 1918), and Miscellaneous Series (66 numbers to 191 8); (c) Commercial Handbooks on foreign countries, India, 1915; Central America, 1916; China (in prep.); ('/) Confidential Bulletins and circulars of varying kinds; (r) World Trade Directory. The Division of Foreign Tariffs publishes the Foreign Tar if Notes (18 to 1916) and the Foreign Tariff Series (38 numbers to 1918). The Division of Statistics publishes the following reports: (a) a Monthly Summary of Commerce and Finance of the U. S., often containing monographs of special topics, among which may be mentioned those on Modern Tariff Systems (1904); Great Canals of the World (1901); Commercial Alaska, 1867- 1903 (1903); Sugar Production and Consumption of the World (1909); Principal Transportation Routes of the World (1909); Trade of the U. S. with other American countries (191 5); {b) the annual Report on the Commerce and Navigation of the U. S., in two volumes, also including much detailed information on internal commerce and general economic conditions; (c) the annual octavo Statistical Abstract of the U. S., a valuable con- densed compilation; (d) occasional reports such as Statistical Abstract of Foreign Countries (3 parts, 1909) and the Statistical Record of the Progress of the United States, 1800-1912 (1913); (e) the Monthly Bulletin of Sailing Dates. The Cost of Production Division publishes reports on the cost of production, such as the Pottery Industry (1915); Women's Hosiery and Knit Goods (^1916), etc. 3. The Bureau of Fisheries publishes since 1871 Bulletins and Reports on the Fisheries. It discontinued in 1906 the volume known as the Annual Report of the Bureau, with ap- pendices, and has since then published the Annual Report of the Commissioner of Fisheries in the general annual volume of the Department of Commerce and Labor, the other special reports appearing as separate Bureau of Fisheries Documents under the head of Fish Culture, Aquatic Biology, Statistics of the Commercial Fisheries, and Special Subjects. 4. The Bureau of Navigation publishes since 1884 the National Publications xxxv Annual Report of llic Commissioner, a Lisl of Merchant Vessels, and the monthly Radio Service Bulletin. 5. The Coast and Geodetic Survey publishes since 1816 the Annual Report of the Superintendent, as well as numerous charts and maps. 6. The Bureau of Standards was set off in 1901 from the Coast and Geodetic Survey, and publishes, in addition to the Annual Report of the Director, many circulars and bulletins relating to weights, measures, photometry, thermometry, pyrometry, polarimetry, radiometry, and the like. 7. The Bureau of Light-Houses publishes since 1859 a bulky annual report and many Buoy and Light Lists. 8. The Steamboat-Inspection Service pubHshes since 1852 the Annual Report of the Supervising Inspector-General. All of the above Bureaus publish their reports in the Annual Report of the Secretary of Commerce, which appear as separate vol- umes with additional data in the case of The Bureau of Navigation, The Bureau of Light-Houses and The Steamboat Inspection Service. The Department of Labor, set off from the Department of Commerce and Labor in 1913, publishes annually the Report of the Secretary. The other publications are issued by the separate bureaus or divisions as follows: (i) The Bureau of Labor Statistics, formerly known as the Bureau of Labor, publishes annually the Report of the Com- missioner of Labor Statistics. From 1886 to 191 1 it also pub- lished an annual report, and from 1889 to 1906 it published special reports. The annual reports are as follows: (i) Industrial Depressions (1886); (2) Convict Labor (1887); (3) Strikes and Lockouts (1888); (4) Workingmen in Large Cities (1889); (5) Railroad Labor (1890); (6) Cost of Production, Iron, Steel, Coal, etc. (1891); (7) Cost of Production, Textiles and Glass (2 vols., 1892); (8) Industrial Education (1893); (9) Building and Loan Associations (1894); (10) Strikes and Lockouts (2 vols., 1894); (11) Wages of Men, Women and Children (1897); (12) The Liquor Problem (1898); (13) Hand and Machine Labor (2 vols., 1899); (14) Water, Gas and Electric Light Plants (1900); (15) Wages in Commercial Countries (2 vols., 1900); (16) Strikes and Lock- outs, 1881 to igoo (1901); (17) Trade and Technical Education xxxvi Suggestions ( 1 902) ; ( I (S) Cost of Living and Reta il Prices of Food, 1903 ( 1 904) ; (19) Wages and Hours of Labor (1905); (20) Convict Labor (1906); (21) Strikes and Lockouts, 1901 to 1905 (1907); (22) Labor Laws (1908); (23) Workingmen's Insurance in the U. S. (1909); (24) Workingmen's Insurance and Compensation Systems in Europe (2 vols., 1911); (25) Industrial Education (1911). The special reports are as follows: (i) Marriage and Divorce (1889); (2) Labor Laws of some States (1892; 2d ed., 1896); (3) Analysis and Index of all Reports issued by Bureaus of Labor Statistics in the United States (1893); (4) Compulsory Insurance in Germany (1893); (5) The Gothenburg System of Liquor Traffic (1893); (6) The Phosphate Industry of the United States (1892); (7) The Slums of Baltimore, Chicago, New York and Philadelphia (1894); (8) The Housing of the Working People (189s); (9) The Italians in Chicago (1897); (10) Labor Laws of the United States (1904); (11) Restriction of Output (1905) ; (12) Coal Mine Labor in Europe (1906). The Bureau has also published three Reports on the Laboring Classes in Hawaii (for 1901, 1902, and 1905); on Labor Disturbances in Colorado (1905); and on Hours of Work of Government Laborers (1905). Since 1905 special reports have been published as Senate docu- ments: 60th Cong., 2d Sess., Telegraph Cos. (no. 725); 6ist Cong., 2d Sess., Pension Funds (no. 427); Bethlehem Steel Strike (no. 521); Telephone Cos. (no. 380); Women and Child Wage Earners (no. 645); Fourth Report on Hawaii (no. 866); 62d Cong., 2d Sess., Wages and Hours of Labor (no. 301); 63d Cong., 2d Sess., Federal and State Laws relating to Convict Labor (no. 494). The Bureau has published a bi-monthly Bulletin of the Bureau of Labor, with valuable original articles, a survey of foreign statistical labor publications, the decisions of the courts affecting labor, and all new labor laws of the separate states. Since 191 2 the Bulletins have been published at irregular intervals in ten series: (i) Wholesale Prices; (2) Retail Prices and Cost of Living; (3) Wages and Hours of Labor; (4) Women in Industry; (5) Workingmen's Insurance and Compensation; (6) Industrial Accidents and Hygiene; (7) Conciliation and Ar- bitration; (8) Labor Laws of the United States; (9) Foreign Labor National Publications xxxvii Laws; (lo) Miscellaneous Series. These bulletins are numbered consecutively, both in each series and as a whole, beginning with no. loi. Since 191 5 the Bureau also publishes a Monthly Review. (2) The Bureau of Immigration publishes since 1892 the annual Report of the Commissioner General of Immigration. Within this bureau is the Division of Information which pub- lished the annual Report of the Chief and also occasional Bulletins. (3) The Bureau of Naturalization, set off in 191 2 from the Bureau of Immigration and Naturalization, publishes annually the Report of the Commissioner of Naturalization. (4) The Children's Bureau, estabhshed in 191 2, publishes annually the Report of the Chief and Bulletins in separate series dealing respectively with The Care of Children, Infant Mortality, The Federal Status of Children, Child Labor Laws, etc. The Treasury Department issues the Annual Report of the Secretary of the Treasury, which contains a survey of the Finances, and includes the Reports of the Treasurer, the Register of the Treasury, the Director of the Bureau of Engraving and Printing, the Surgeon General, the Supervising Architect, the Superintendent of the Life-Saving Service, the Director of the Mint, the Comptroller of the Currency, and the Commissioner of Internal Revenue. These reports are also published separately, the last three in enlarged form and with voluminous tables. Among the numerous additional publications are the follow- ing: Division of Printing: Treasury Decisions (weekly and annual); Division of Bookkeeping: Estimates of Appro- priations (annual); Division of Customs: Customs Deci- sions (annual). Conference of Local Appraisers (annual) and Appeals Pending (quarterly); Comptroller of the Cur- rency: Abstracts of Reports of National Banks and Digest of Decisions; Bureau of the Mint: Report upon Production of Precious Metals (annual) ; Commissioner of Internal Rev- enue: The Gangers^ Manual and Digest of Decisions; Comp- troller OF THE Treasury: Decisions (quarterly and annual); Division of Loans and Currency: Circulation Statement (monthly), Value of Foreign Co/n5 (quarterly); Public Health Service: Public Health Reports (weekly and annual). Public Health Bulletins. Numerous monthly, weekly and daily State- xxxviii Suggestions went Sheets are also issued on the finances. A useful compila- tion is the Laws of the United States concerning Money, Bankmg and Loans. By Huntington and Mawhinney. Washington, 191 1 (with reissues from time to time). The Federal Farm Loan Bureau, created in 1916, issues numerous reports and circulars through the Federal Farm Loan Board. The Department of Agriculture publishes the annual Re- port of the Secretary, the Yearbook of the Department, and many documents issued by the various bureaus. Of these the most important are the Bureau of Animal History; the Bureau of Plant Industry, with separate divisions publishing Vegetable Pathology and Physiology Bulletins, Botany Bulletins, Agrostology Bulletins, and Pomology Bulletins; the Forest Service; the Bureau of Chemistry; the Bureau of Soils; the Bureau OF Entomology; the Bureau of Biological Survey; the Bureau of Crop Estimates; the Bureau of Markets, which publishes daily, weekly and monthly Market Reports, daily and weekly Marketgrams, and a weekly Market Reporter; the States Relations Service (prior to 1916 termed the Office of Experiment Stations) , which publishes the monthly Experiment Station Record and Agricultural College Bulletins; the Office of Farm Management; the Office of Public Roads and Rural Engineering; and the Weather Bureau, which publishes a daily Map, a weekly National Weather and Crop Bulletin, and a monthly Weather Review. Several of the above Bureaus publish separate annual reports. Numerous reports are issued for the Bureau of Statistics by: (a) the Division of Domestic Crop Reports (which publishes the monthly Crop Report), (b) the Division of Production and Distribution which up to 1903 was known as the Division of Foreign Markets and (c) the Editorial Division, which publishes statistics on rural economics. These reports take the form of Bulletins, Circulars, and Reprints from the Yearbook. The Department also publishes the Proceedings of the Annual Meeting of the American Associa- tion of Farmers' Institute Workers, and many Special Reports, some of the most important of recent years being the Geography of the World's Agriculture by Finch and Baker (1917), and Co-operative Credit A ssociations A broad. In 1912 there were issued National Publications xxxix under the heads of Reports, Bulletins, Cirailars, and Separates, 2 no pubHcations in over thirty-four million copies, about one- third of them being Farmers' Bulletins. The Division of Publica- tions publishes a Monthly List of Publications, which forms a con- venient bibliography of the Department issues. Bulletin no. 6 contains a bibliography of the Department from 1840 to 1901. Circular no. 150(1921) contains a list of all the publications of the Bureau of Crop Estimates, 1863-1920. An index to the Farmers^ Bulletins, nos. i-iooo, by C. H. Greatham, appeared in 1920. Since 1916 the Series of Publications have been reduced to six: (i) Departmental Bulletins, containing the popular results of investigation; (2) Periodical Publications, including the Journal of Agricultural Research, Experiment Station Record, Monthly Crop Report, Market Reports and Marketgrams; and Weekly News Letter, (3) Farmers' Bulletins; (4) Administrative Circulars; (5) Separates and Unnumbered Pamphlets, including reprints; and (6) Annual Reports and other congressional publications, including the Year Book and the Soil Surveys. The Department of the Interior publishes annually the Report of the Secretary, containing, in addition to condensed reports of the Bureaus, reports of the Territories, the Ter- ritorial Possessions, the National Parks and the Elee- mosynary Institutions. The Bureaus which issue separate annual reports and other publications are the General Land Office (with Decisions in Land Cases), the Indian Office, the Bureau of Pensiofs, the Patent Office (with the Patent Office Gazette, Decisions in Patent Cases and Indexes to Patents), the Bureau of Education (with many Separates, Circulars and Bulletins, Bulletin no. 385 containing a bibhography from 1867 to 1907), the Bureau of Mines (with Bulletins, Technical Papers and Miners' Circulars), the Geological Survey (with Bulletins, Monographs, Professional Papers and a separate report in two volumes on the Mineral Resources of the United States) and the Reclamation Service (in several volumes). The Interstate Commerce Commission publishes since 1887 annually the Report of the Commission and the Report on the Statistics of Railways in the United States. The Bureau of xl Suggestions Statistics and Accounts publishes since 1909 the Monthly (and Annual) Bulletin of Revenues and Expenses of Steam Roads, since 191 2 the Accotmting Bulletins, since 191 1 the annual Report on the Statistics of Express Companies, since 1914 the Reports on Valuation and since 1920 the Reports of the Railway Labor Board. The cases themselves are published as Decisions of the Interstate Commerce Commission. The Commission also issues annually the Proceedings of the Annual Convention of the National Association of Railway Commissioners. It published in 1903 a five-volume work, entitled Railways in the United States in 1902. Since 1908 it issues Special Reports, of which the first was Intercorporate Relations of Railways. The Tariff Board, abolished in 191 2, published reports on Pulp and News-Print Paper (1911), on Wool (4 vols., 1912), and on Cotton Manufactures (2 vols., 191 2). The Tariff Commission, created in 1917, pubUshes an annual Report; a Tariff Information Scries (22 nos. to 1 921;; a Miscellaneom Series (8 nos. to 1921); and a series of reports for the Ways and Means Committee. The Post-Office Department publishes an annual Report. The War Department deals with economic topics through the Bureau of Insular Affairs. The chief of the Bureau issues his Annual Report (including the Report of the Philippine Com- mission in several volumes and the Report of the Governor of Porto Rico) and a great variety of other documents. The De- partment also issues the annual Report of the Governor of the Panama Canal, and the Panama Record. The Smithsonian Institute pubhshes many annual reports, of which the one of chJef interest to economists is the Report of the Bureau of Ethnology in one or more sumptuous quarto volumes. The Federal Reserve Board, created in 1914, publishes an annual Report and a valuable monthly Bulletin. The Federal Trade Commission, created in 1914, publishes an annual Report. It has succeeded the former Bureau of Cor- porations which has published special reports on the Beef In- dustry (1905); Transportation of Petroleum (1906); The Petroleum Industry (2 vols., 1907); Cotton Exchanges (3 vols., 1908-9); Congressional Documents xli The Tobacco Industry (3 vols., 1909-15); Taxatio)i of Corporations (6 vols., 1909-1915); Special Report on Taxation (1914); Trans- portation by Water in the U. S. (4 vols., 1909-12); The Steel In- dustry (3 vols., 1913-14); Water Power Development in the U. S. (191 2); The International Harvester Co. (1913). The Trade Commission has published reports on The Lumber Industry (1915); Pipe Line Transportation (1916); Trust Laws and Un- fair Competition (1916); Co-operation in American Export Trade (1916); Beet Sugar (1917); Anthracite and Bituminous Coal (1917); Book and News-print Paper Industry (1917); Fertilizer Industry (1917); Meat Packing Industry (1919)' Coal (7 vols., 1918-1921). The International Bureau of the American Republics, more recently known as the Pan-American Union, publishes since 1891 an annual Report of the Director, since 1893 ^ monthly Bulletin and many Reports. The Board of Mediation and Conciliation created in 1913 publishes an annual Report. The U. S. Employees Compensation Commission created in 1916 publishes an annual Report. The U. S. Shipping Board created in 191 7 publishes an annual Report. The Federal Board for Vocational Education created in 191 7 publishes an annual Report. C. Congressional Documents Among the numberless Congressional Documents of recent years may be mentioned as of special interest to the students of economics: Senate Report on the Strike of Textile Workers in Lawrence, Mass., in 1912. (1912.) House Report on the Miners' Strike in the Bituminous Coal Field in Westmoreland Co., Pa., in 1910-1911. (191 2.) (House) Committee on Ways and Means, Tariff Hearings, (g vols., 1908-1909.) Tarif Schedules. Hearings before the Senate Stib-Commlttee on Finance. (i9i3') xlii Suggestions Railroad Securities Commission Report. (191 1.) The Immigration Commission, Report on Immigration. (42 vols., 1910-1912.) Public Lands Commission, Preliminary and Second Reports. (1905.) Inland Waterways Commission, Preliminary Report. (1909.) Commission on Country Life, Preliminary Report. (1909.) This, as well as the two preceding Commissions, was created by the Execu- tive, but discontinued by Congress. National Monetary Commission, Reports on Banking and Currency, at Home and Abroad. (23 volumes, 1910-1912.) (House) Stanley Committee Report on the United States Steel Corporation. (1911-1913.) (Senate) Pujo Committee on the Money Trust Investigation. (1913.) (Senate) Investigation relative to Wages and Prices of Commodities. (4 vols., 191 1.) National Waterways Commission, Report. (Several vols., 1909-1912.) (Senate) Report on Condition of Woman and Child Wage Earners in the United States. (19 vols., 1910-1912.) President's Commission on Efficiency and Economy. (6 vols., 191 2- 1913-) Senate Committee on the Merchant Marine and Fisheries. Investiga- tion of Shipping Combinations. (4 vols., 1913-1914.) (Senate) Committee, Report on Agricultural Co-operation and on Rural Credit. (2 vols., 1913.) Senate Committee on Interstate Commerce. Report on Government Control and Operation of Railroads. (1918), and Report on Extension of Tenure of Government Control of Railroads. (3 vols., 1919.) Senate Committee on Commerce. Report on U. S. Shipping Board Emer- gency Fleet Corporation. (8 parts, 1919.) (Senate) Select Committee on Reconstruction and Production. (4 vols., 1920.) The most valuable report of recent years is the Report of the Industrial Commission (19 vols. , 1 900-1 912). The list of volumes Congressional Documents xliii is as follows: I. Trusts and Industrial Cotnb motions; II. Trust and Corporation Laws; III. Prison Labor; IV. Transportation; V. Labor Legislation; \I. Distribution of Farm Products; VII. Capital and Labor in Manufactures and in General Business; VIII. Chicago Labor Disputes; IX. Transportation; X. Agriculture and Agricultural Labor; XI. Agriculture and Taxation; XII. Capital and Labor in the Mining Industries; XIII. Trusts and Industrial Combinations; XIV. Capital and Labor in Manufac- tures and General Business; XV. Immigration and Education; XVI. Foreign Labor Legislation; XVII. Labor Organization, Labor Disputes and Arbitrations; XVIII. Industrial Combina- tions in Europe; XIX. Final Report. For the wealth of material and the ability with which the results are presented, this huge report is unique in the annals of the government publications. The final volume gives an admirable survey of the economic condition of the United States. The U. S. Commission on Industrial Relations created in IQ14 published its Report with Testimony (11 vols.) and its Final Re- port in 1915 as weU as a separate Report on the Colorado Strike. The American governments are exceedingly liberal in the distribution of documents. All local and state reports can usually be had for the asking; but as the supply is limited, it is weU not to delay. As to the documents of the national gov- ernment, the House and Senate publications can be obtained by application to one's Representative or Senator; the depart- mental publications by application to the respective depart- ments. There is now also a Superintendent of Documents, who is authorized by law to sell surplus documents in his charge at cost of printing from the plates. He publishes a monthly Price List of United States Public Documents for Sale. In a few cases, however, documents are sold by other parties. Thus the Con- gressional Record is sold by the Chief Clerk of the Government Printing Office; the Bulletins and Handbooks of the American Republics Bureau are sold by the Director of the Bureau; the Official Gazette of the Philippine Govermnent, by the Editor in Manila; etc., etc. Several private firms in Washington and elsewhere make a business of supplying government documents. xliv Suggestions D. Indexes to Government Periodicals PoORE, Ben Perley. A Dcscriplivc Catalog of the United States Govern- ment Publications, 1774-1881. (1885.) — • Not entirely satisfactory. Ames J. G. Comprehensive hidex of Publications of the United States Government, i88r-i8gj. (New ed., 1905.) LuNT, E. C. Key to the Publications of the United States Census, 1 790- 1887 (in American Statistical Association Publications, new Series, I, 1888). — A carefully classified guide. Scott, G.W., and Beaman, M. C. Index Analysis of the Federal Statutes, together ivith a table of Repeals aiui Amendments. (2 vols., 1908.) SwANTON, W. J. Guide to U. S. Government Publications. Bureau of Education Bulletin, 1918, no. 2. The Monthly Catalogue of United States Public Documents, issued by the Superintendent of Documents, contains an annual index. For lists and indexes of state publications, see p. xxxi. E. British Official Publications In Great Britain the official publications and reports, known as Blue Books, are in some respects more voluminous than in the United States. The chief periodical report is the decennial Census. That of igoi appeared in 7 volumes; the Census of igii in 13 volumes. Most of the annual ofhcial reports fall under the heads of Finance, Trade and Labor. Finance. Among these, each in a separate volume or volumes, are the Finaiwe Accounts; Finajicial Estimates; Returns showing Revenue and Expenditures; National Debt Account; National Debt during Sixty Years; Consolidated Fund Abstract Accounts; Commissioners of Inland Revenue; Income Tax Assessments; Local Taxation Returns, Mint Report; Rateable Property Returns; Savings Bank Returns; Commis- sioners of H. M.'s Customs. Trade. These reports, issued by the Statistical Department of the Board of Trade, include the Statistical Abstracts for the British Empire, for the British Colonies and for the United Kingdom; Reports on the Trade of the United Kingdom with Foreign Countries and British Possessions; Statistical Tables showing Progress of British Trade and British Documents xlv Productions; Mer$hanl Shipping Returns; Canals and Navigation Returns; Navigation and Shipping Statements; Railway Accidents; Emigration and Immigration. Also monthly Trade attd Navigation Accounts and a Board of Trade Journal. The Statistical Department of the Board of Customs issues annually the Report of the Commissioner of Customs, Colonial Import Duties and Foreign Import Duties. Labor. These reports, issued by the Labor Department of the Board of Trade, include Abstract of Labor Statistics; Abstract of Foreign Labor Statistics; Changes in Wages and Hours of Labor, Conciliation (Trade Disputes) Act; Strikes and Lockouts; Trade Unions; Directory of Industrial A ssociations; Report of Chief Inspector of Factories and Work- shops; Report of the Chief Registrar of Friendly Societies; Co-operative Con- tracts; Industrial ajui Provident Societies; MinimumW age Boards; National Insurance Commissioners; also a monthly Board of Trade Labor Gazette. Other annual reports are: Agricultural Returns; Department of Agriculture and Technical In- struction in Ireland; Registrar General; Irish Land Commission; Re- ports on Mines and Quarries; Inspector of Sea and Salmon Fisheries; Geological Survey; Returns relating to Poor Rales and Pauperism; Rail- way and Canal Commission; Street and Road Tramways; Trade and Finance of Foreign Countries; Diplomatic and Consular Reports; Post- master-General. There is also a Statistical A bslraci for British India . Among the recent special Reports of departments and Parlia- mentary committees and commissions the most important are: Royal Commission on Agricidlure (4 vols., 1896), and Reports of Assistant Commissioners (20 vols., i8g6); The Sweating System (8 vols., 1889); Labor (27 vols., 1894); Local Taxation (9 vols., 1902); Financial Relations between Great Britain and Ireland (2 vols., 1896); Standard Piece and Time Rates (1893 and 1900); Wholesale and Retail Prices (1903); Employment of Women (1894, 1898, 1899); The Unemployzd (1893 and 1904); Tar ij' Commission (8 vols., 1904-1910); Eight Hours Day in the Coal Mines (3 vols., 1906); Income Ta.x (1906); Poor Laws (3 vols., 1909); Cost of Living (5 vols., 1907-1912); Local Taxation (2 vols., 1912-1914); Natural Resources, Trade and Legislation of Certain Portions of H. M. Dominions (18 vols., 1913-1917); Administration of Natioml Heafth Insurattce (1917); and the numerous special reports on War Finance and War Legislation and Currency (1914-1919). The most important reports and i)apcrs are summarized aiid criticised in an admirable quarterly review in each number of xlvi Suggestions the Economic Review. Messrs. P. S. King & Son, of London, publish a convenient Monthly List of Parliamentary Papers issued in the preceding month. There is also a General Cata- logue of the Principal Parliamentary Reports and Papers pub- lished during the Nineteenth Century {1801 to 1900), with prices, and in many cases with an analysis of contents. For Australasia the best conspectus of the economic situation may be found in the annual Official Year Book of Australia (no. 13, 1920) and the New Zealand Official Year Book (twenty- ninth year, 1920). The separate states also publish good Year Books or annual Statistical Registers. For Canada an excellent summary will be found in the annual Canada Year Book issued by the Census and Statistics Office of Agriculture, and covering the entire economic field. For South Africa consult tne annual Official Year Book of the Union of South Africa. VI. Semi-Official Publications The publications of the American government are supple- mented by a great mass of documents, periodicals and reports, issued by private and quasi-public associations. Local trade statistics are found in the Reports of the Chambers of Commerce of the principal cities. In New York City the Chamber of Commerce frequently publishes valuable reports on economic topics of state and national significance. Almost every im- portant branch of business has its own Trade Journal, many of which are edited with great ability. The Bulletin of the National Association of Wool Manufac- turers is published quarterly since 1864. The Annual Reports of the Iron and Steel Association also deserve mention. In some cases like the Bankers^ Association, the Chamber of Commerce of the U. S., the National Foreign Trade Council, and the Manu- facturers' Association annual conventions are held and extended reports issued. The publications of the Labor Organizations and Trades Unions are voluminous. The National Federation of Labor issues a weekly BidlcTui and a Report of the Annual Convention. The annual reports of some of the great Railway Systems, Bibliographies xlvii Insurance Companies and Industrial Corporations can generally be secured without difficulty, and afford interesting side lights on economic development. Associations like the Free Trade League; the Asiatic Association; the Irrigation Congress; the River and Harbor Congress; the Farmers' Alliance; the National Child Labor Committee; the Association for Labor Legislation; the National Live Stock Association; the National Good Roads Association; the Patrons of Husbandry; the National Dairy Association; the Stock Breeders' Association; the Philadelphia Commercial Museum; the National Municipal League; the Water-Power Associations; the National Tax Association; the Association of Life Insurance Presidents, and many others of more or less permanence, issue fugitive, or periodical reports. Among the most important of such semi-official publications are those of the Merchants' Association, of the Bureau of Munici- pal Research, of the Russell Sage Foundation, of the National Civic Federation,- — all of New York. Many important social questions are treated in the annual Proceedings of the National Conference of Charities and Corrections and in the Reports of the National Industrial Conference Board. More recently several New York Banks have published regular reports such as the monthly Bulletin and the Foreign Commerce Series of the National City Bank; the Commerce Monthly of the National Bank of Commerce; the Monthly Review of the New York Federal Reserve Bank; and the Chase Economic Bulletin of the Chase National Bank. A valuable compendium is llie American Year Book (New York, 1911-1920). VII. Bibliographies and Finding Lists A series of bibhographies, prepared by the chief bibliographer of the Library of Congress (A. P. C. Griffin, since 1909 H. H. B. Meyer), has been published since 1902 by the national govern- ment. The dates and subjects are as follows: Reciprocity, (1902); Industrial Arbitration, Government Ownership of Rail- roads, Labor, Colonization, 2d ed., (1903); Chinese Immigra- tion, Banks, Budget, The Far East, Federal Control of Com- xlviii Suggestions Pierce, 2d ed., (1904); Foreign Railroads, Philippines, (1905); Child Labor, Municipal Ownership, Negro Questions, 2d ed., Employers' Liability, British Tariff Movement, 2d ed., Foreign Tariffs, Government Regulation of Insurance, Mercantile Ma- rine Subsidies, 3d ed., (1906); Federal Control of Commerce, Railroads, 2d ed., Immigration, 3d ed.. Income Tax, Iron and Steel, Reciprocity with Canada, Trusts, 3d ed., (1907); Currency and Banking, Deep Waterways, Eight Hour Day, First and Second United States Banks, Workingmen's Insurance, Labor, 2d ed.. Postal Savings Banks, (1908); Valuation and Capitali- zation of Railroads, (1909); Cost of Living, Reciprocity, Sugar, Inland Waterways of Europe, (1910); Boycotts and Injunctions, Employers' Liability, Mercantile Marine Subsidies (additional), Parcels Post, Reciprocity with Canada (additional), Taxation of Incomes (additional), Wool, (191 1); Conservation, Cost of Living and Prices, (additional) (191 2); Monetary Question, Federal Control of Commerce and Corporations, {igi;^);' Water Rights, Industrial Arbitration, new ed., Child Labor, new ed., (1914); Prison Labor, (1915); Embargoes, (1917); European War Litera- ture, (1918); Shipping, Reconstruction, Dyestuffs (1919); Income Tax (1921). Since 191 1 the Librarian of Congress prints additional lists in the Series known as Special Libraries in co-operation with state libraries and state legislative reference departments. Since 1918 the Library issues numerous typewritten lists, of which fully 6oS^ deal with economic and social questions. Other good bibliographies on special subjects are: The Social Workers' Guide to Social Publications of Representative Social Agencies. By E. M. Rushmore. Published for the Russell Sage Foundation. (New York, 192 1.) Civic Bibliography for Greater New York. Edited by James B. Reynolds for the New York Research Council (191 1.) Labor Bibliography. Published by the Mass Bureau of Labor Statistics. (1913-) Selected Bibliographies on Labor Subjects. Published by the American Association of Labor Legislation. (1911-1916.) List of Publications pertaining to Government Ownership of Railways. Publishedby the Bureau of Railway Economics. Washington, 1914. Bibliographies xli IX The Boston Public Library has pubhshed: Economics: Selected Works in the English Language (1904.) — Compiled by Ben'j. Rand. The New York Public Library publishes since 191 5 the weekly Municipal Reference Library Notes, ed. by C. C. Williamson, containing annotated bibliographies on economic topics. The London School of Economics and Political Science also issues occasional bibliographies on selected topics. The three most complete bibliographies on socio-economic topics are in German: Bernstein, Edouard. Bibliographic des Sozialismus und der Sozial- wissenschaften in each number of Dokiimente des Sozialismus. (1901- 1905.) — Annotated and valuable. Stammhammer, Josef. Bibliographic des Socialismiis und Commu- nismus. (3 vols., 1893-1909.) Stammhammer, Josef. Bibliographic der Social-Politik. (1896.) The only general bibliography in English is the short work of BowKER, R. R., and Iles, George S., The Readers^ Guide in Economics, Social and Political Science. (1891.) A comprehensive annual bibliography is published by the International Institute of Bibhography under the title Biblio- graphia Economica Universalis. It now appears as a quarterly appendix to the Revue Economique Lnternationale. The most convenient English bibliography of current works was until recently to be found in The Quarterly Journal of Economics. This was discontinued in 1908 and replaced by the excellent bibliography in the Economic Bulletin of the American Economic Association, continued since 191 1 in the American Economic Review. The best foreign bibliography is the Uebersicht iiber die neuesten Publikationcn in Conrad's Jahrbilcher fiir N ationalokonomie und Statistik. A combina- tion of bibliography and comment is found in the Kritische Blatter fiir die gesamten Sozialwissenschaften (monthly, Dresden, 1905-1912). Edited by H. Beck. The periodical was composed of critical reviews by an international staff, each number serv- ing as an introduction to a Bibilographie der Sozialwissen- schaften which since 1906 was published for the International 1 Suggestions Institute of Social Bibliography in Berlin. It was printed in several languages, the English edition having been distributed for a brief time as a supplement to the Journal of Political Economy. VIII. List of Books to -wrhich Abbreviated References are made in the Bibliographies at the Heads of Chapters Ashley, W. J. An Introduction to English Economic History and Theory. (2 vols., London, 1888-1893.) Ashley, W. J. Surveys, Historic and Economic. (London, 1900.) Bagehot, Walter. Economic Studies. (London, 1880.) Beveridge, W. H. Unemployment. A Problem of Industry. (Lon- don, 1909.) Bohm-Bawerk, Eugen von. The Positive Theory of Capital. (Trans. by Smart, London, 189 1.) BowLEY, Arthur L. Elements of Statistics. (London, 1901, 4th ed., 1920.) BtJCHER, Carl. Industrial Evolution. (Trans, from the 3d German edition by S. Morley Wickett, New York, 1901.) Cairnes, J. E. The Character and Logical Method of Political Economy. (London, 1857; 2d ed., 1875.) Cairnes, J. E. Some Leading Principles of Political Economy, newly Expounded. (London, 1874.) Cannan, Edwin. A History of the Theories of Production and Dis- tribution in English Political Economy from 1776 to 1848. (London, 1893; 3d ed., 1909.) Cannan, Edwin. Wealth. A Brief Explanation of the Causes of Economic Welfare. (London, 1914.) Carver, Thomas Nixon. The Distribution of Wealth. (New York, 1904) Carver, Thomas Nixon. Principles of Political Economy. (New York, 1919.) Clark, John Bates. The Distribution of Wealth. (New York, 1899.) Clark, John Bates. Essentials of Economic Theory. (New York, 1907.) Select Books li CoMAN, Katharine. The industrial History of the United Stales. (New York, 1905; new ed., 1911.) Commons, J. R., and Associates. History of Labour in the United Stales. (2 vols., New York, 1918.) Cunningham, W. An Essay on Western Civilizalion in its Economic Aspects. Ancient Times. (2d ed., London, 1911.) Mediaeval and Modern Times. (2d ed., London, 1910.) Cunningham, W. The Growth of English Industry and Commerce. Early and Middle Ages. (5th ed., London, 1910.) Modern Times. (sth ed., 2 vols., London, 191 2.) Davenport, Herbert Joseph. Value and Distribution. (Chicago, 1907.) D.WENPORT, Herbert Joseph. The Economics of Enterprise. (New York, 1913.) Dewey, Davis R. Financial History of the United States. (Am. Citizen Series, New York, 1903, 7th ed., 1920.) Ely, Richard T. Studies in the Evolution of Industrial .Society. (New York, 1903.) Ely, Richard T. Property and Contract in their Relations to the Distri- bution of Wealth. (New York, 1914.) Fetter, Frank A. The Principles of Economics. (New York, 1904 3d ed., 1913.) Economic Principles (1915); Modern Economic Problems (19 16). Fisher, Irving. The Nature of Capital and Income. (New York, 1906.) Fisher, Irving. The Rate of Interest. (New York, 1907.) Fisher, Irving. The Purchasing Power of Money. (New York, 1911.) Flux, A. W. Economic Principles, an Introductory Study. (London, 1904.) Giffen, Robert. Economic Inquiries and Studies. (London, 1904.) Hadley, Arthur Twining. Economics. An Account of the Rela- tions between Private Property and Public Welfare. (New York 1896.) Hearn, William Edward. Philology; or the Theory of the Ejforls to Satisfy Human Wants. (London, 1864.) HoBSON, John A. The Economics of Distribution. (New York, 1900.) lii Suggestions HoBSON, John A. The Evolution of Modern Capitalism. (London, 1894,4th ed., 1917.) HoBSON, John A. Work and Wealth. A Human Valuation. (London, 1914.) Jevons, W. Stanley. Investigations in Currency and Finance. (Lon- don, 1884.) Jevons, W. Stanley. Methods of Social Reform. (London, 1883.) Jevons, W. Stanley. Money and the Mechanism of Exchange. (Lon- don, 1879.) Jevons, W. Stanley. The Principles of Economics. (London, 1905.) Jevons, W. Stanley. The Theory of Political Economy. (London, 1871; 4th ed., 1911.) Johnson, Alvin, S. Rent in Modern Economic Theory. In American Economic Association Publications. (3d Series, Vol. Ill, New York, 1902.) Kelley, Florence. Modern Indtistry in Relation to the Family, Health, Education, Morality. (New York, 1914.) Keynes, J. The Scope and Method of Political Economy. (London, 1891; 3d ed., 1904.) Maine, Henry Sumner. Ancient Law. (London, 1861; 8th ed., 1880.) Marshall, Alfred. Principles of Economics. (Vol. I, London, 1890; 8th ed., 1920.) Marshall, Alfred. Industry and Trade. (London, 1920.) Mayo-Smith, Richmond. Science of Statistics. (New York, 2 parts, 1895-1899.) Mitchell, Wesley Clair. A History of the Greenbacks. (Chicago, 1903-) Mitchell, Wesley Clair. Gold, Prices and Wages under the Green- back Standard. (Berkeley, 1908.) Mitchell, Wesley Clair. Business Cycles. (Berkeley, 1913.) Mill, John Stuart. Principles of Political Economy, with some of their Applications to Social Philosophy. (2 vols., London, 1848; 5th ed., 1880.) Select Books liii Moore, Henry Ludwei,l. Laivs of Wages. (New York, 191 1.) Nicholson, J. Shield. Principles of Political Economy. (3 vols., London, 1893-1901.) Nicholson, J. Shield. The Effects of Machinery on Wages. (New ed., London, 1892.) Pantaleoni, M.'VFFEO. Pure Economics. (Trans, by Bruce, London, 1898.) Patten, Simon N. The Consumption of Wealth. (Philadelphia, 1889.) Patten, Simon N. The Development of English Thought; A Study in the Economic Interpretation of History. (New York, iSgg.) Patten, Simon N. The Theory of Dynamic Economics. (Philadelphia, 1892.) Pierson, N. G. Principle of Economics. (Trans, by .\. .\. Wotzel. London, Vol. I, 1902; Vol. IL, 1912.) PiGOU, A. C. Wealth and Welfare. (London, 1912.) PiGOU, A. C. Economics of Welfare. (London, 1921.) RiCARDO, David. Principles of Political Economy and Taxation. (Lon- don, 181 7.) Rowntree, B. L Poverty. A Study in Town Life. (London, 1901.) Seager, Henry Rogers. Principles of Economics. (New York, 1913.) Seager, Henry Rogers. Economics: Briefer Course. (New York, 1909.) Seligman, Edwin R. A. The Economic Interpretation of History. (New York, 1902; 2d ed., 1907.) Sidgwick, Henry". The Principles of Political Economy. (London, 1883.) Smart, William. The Distribution of Income. (London, 1899; 2d ed., 1912.) Smart, William. An Introdjiction to the Theory of Value. (London, 1891; 3d ed., 1914.) Smart, William. Studies in Economics. (London, 1895.) Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. (2 vols., London, 1776. Recent editions by Edwin Cannan, 2 vols., London, 1904, and in Everyman^ Library by Selig- man, 2 vols., London and New York, n. d. [1910].) liv Suggestions Taussig, Frank W. Principles of Economics. (2 vols., New York, 191 1 ; new ed., 1917.) Veblen, Thorsten. The Theory of Business Enterprise. (New York, 1904.) Veblen, Thorsten. The Instinct of Workmanship. (1914.) Walker, Francis A. Political Economy, Advanced Course. (New York, 1883; 3d ed., 1888.) Walker, Francis A. The Wages Question; A Treatise on Wages and the Wages Class. (New York, 1876.) W.\LSH, Correa Moylan. The Measurement of General Exchange Value. (New York, 1901.) Walsh, Correa Moylan. The Fundamental Problem in Monetary Science. (New York, 1903.) Webb, Sidney and Beatrice. The History of Trade Unionism. (Lon- don, 1894; new ed., 1920.) Webb, Sidney and Beatrice. Industrial Democracy. (2 vols., Lon- don, 1894; new ed., in i vol., 1907.) Webb, Sidney and Beatrice. Problems of Modern Imhistry. (London, 1898; new ed., 1907.) Webb, Sidney and Beatrice. The Break up of the Poor Law. (London, 1909.) Webb, Sidney and Beatrice. The Public Organisation of the Labour Market. (London, 1909.) Webb, Sidney and Beatrice. The Prevention of Destitution. (London, 1911.) Weber, Adna F. The Groivth of Cities in the Nineteenth Century — A Study in Statistics, in Columbia Studies in History, Economics and Public Law. (Vol. XI, New York, 1899.) White, Horace. Money and Banking. (New York, 1895; a new edi- tion every few years.) Wicksteed, Philip H. The Common Sense of Political Economy. (London, 19 10.) Wieser, Friedrich von. Natural Value. (Edited by W. Smart; trans, by C. Malloch, London, 1893.) Principles of Economics Principles of Economics Part I Introduction CHAPTER I FUNDAMENTAL CONCEPTS 1. References A. Marshall, Principles of Economics (igio), bk. ii; J. B. Clark, Distribu- tion of Wealth (1899), ch. ix, and Essentials of Economic Theory (1907), ch. i; W. E. Hearn, Plutology (1864), ch. i; W. Smart, Distribution of Income (1899), bk. i; A. T. Hadley, Economics (1896), ch. i; F. A. Fetter, Eco- nomic Principles (1915), parts I and II, J. S. Nicholson, Principles of Political Economy (1903), Introd.; H. Sidwick, Principles of Political Economy (1883), bk. i, ch. iii; F. A. Walker, Political Economy (3d ed., 1888), part i; A. W. Flux, Economic Principles (1904), ch. i; E. Cannan, History of the Theories of Production and Distribution (2d ed., 1904), ch. i; H. R. Seager, Principles of Economics (1913), ch. iv; M. Pantaleoni, Pure Economics (1898), part i, ch. v; W. S. Jevons, Principles of Econom- ics (1905), chs. iii, iv, viii; T. Veblen, The Instinct of Workmanship (1914), chs. i, ii; I. Fisher, Capital and Income (1906). 2. Economic Life The starting-point of all human activity is the existence of wants. To satisfy hunger and thirst, to secure shelter and to provide clothing were the chief aims of primitive man, and constitute even to-day the motor forces of all society. As man develops, his wants grow in number and refinement. However civilized he becomes, his material welfare forms the basis on which the whole larger life is erected. To secure the means of satisfying wants brings into play the economic activity of man. 3 4 Fundamental Concepts [§ 2 The process may be expressed in the words — wanls, efforts, satisfactions. We start out with the existence of wants, we desire to secure their satisfaction, we can ordinarily accomplish this only through some effort. The economic life of man is concerned with such efforts and their results. The sum of all one's possessions, including at the time slaves, wife and children, was termed by the Greeks ecos (oiKos); and the method of managing them was called eco- nomics {oUopoiJLLKr]) — the control or rule {po/jlos) of the house- hold (oLKos). We still speak of the economical man as the one who orders the affairs of his household, who manages his possessions, with prudence and success. In the wider sense, whether he achieves success or not, the economic activity of man looks to a provision of the material means to satisfy his wants and those of his household. The science which deals with these economic activities is called economics or political economy. Business means etymologically the state of being busy. The fundamental thing about which all men must ordinarily busy themselves is the satisfaction of their wants. To attain first a competence and then a surplus, to provide for one's liveli- hood and then to secure a profit, is the essence of business activity. Economics might therefore equally well be defined as the science of business activities. The motive that guides men in their economic life is some- times described as the economic motive. It may best be defined as the motive which impels every human being to satisfy his wants with the smallest possible effort, or which leads him to secure the most pleasure with the least pain. The existence of such a motive is undeniable; it is in fact of deep and abiding importance; it may even be declared the para- mount consideration in the working out of economic law. We must, however, not forget that this is not the only influence at work in economic • life. Human beings are impelled by other motives as well; and these other motives may often exert § 2] Economic Life 5 a perceptible influence in economic life. The study of eco- nomic history shows us that religious, political and ethical considerations have profoundly modified economic action itself. In the economic life of a primitive Christian community the economic motive was of very different importance from that of modern industrial life. Even in modern times the economic motive is not equally strong everywhere, or equally free from the admixture of other influences. The Indian ryot is not like the American farmer in his desire to "get ahead." The negro laborer in the South is not so amenable to the economic motive as the stock exchange broker. The salary of a govern- ment employee who hopes for official decorations cannot be explained in the same way as the wages of a carpenter. An analysis of all the motives that influence men in their economic life belongs to social psychology, and would disclose widely varying efifects at different times and places, as well as in different individuals or classes at the same time or place. In searching for the fundamental laws of economics, it is conven- ient to exclude all motives save the economic, since the latter is the one of basic significance, and since it would otherwise be impossible to formulate economic theory in general terms. In applying the law to actual life, however, we must be careful to study how its operation is modified by the other — even though minor — motives which affect economic action. If the "economic motive" is thus open to misconception as explaining the whole economic life, the so-called "eco- nomic man" is a complete abstraction. By the "economic man" is meant the human being dominated by the economic motive. Such a man, however, does not really exist. Not only do other motives affect the economic life, but side by side with the economic life itself are the aesthetic life, the religious life, the intellectual life and the multiplicity of other human activities. It is indeed the function of economics to study that aspect of human activity known as the economic life. We must, however, not forget that we are studying man in only 6 Fundamental Concepts [§ 3 one phase of his existence. Although there is both an eco- nomic and a religious life, there is no economic man, just as there is no separable religious man. The business man has his family, just as the. clergyman has an appetite. The conclusions of economic science, therefore, are provisional, not final, con- clusions with reference to the conduct of life in general. 3. Economics or Political Economy ? Civilized man cannot be thought of apart from society. In fact human beings, whether civilized or not, have from the outset lived in some form of social union. Robinson Crusoe is not a type, but an anomaly. Without society man could never have developed. There would be no such thing as speech, morals, law or order. Economic life deals with man as exist- ing in society. Economics is hence a social science. Economics, however, is not the whole of social science. There are as many divisions of social science as there are important classes of social relations. Jurisprudence deals with the legal relations of society, with certain usages and customs which have received the sanction of precedent and have been crystallized into law. Ethics, or the science of morals, deals with another important grcup of social relations, for individual standards of conduct can be understood only in their relation to social ethics. Politics treats of the social relations of man looked upon as a member of organized society or the state; it discusses the connection between the individual and the government. Sociology, or the fundamental social science, deals with society as a whole, and studies certain general prin- ciples that lie at the basis of each of the separate social sciences. Economics is one of these separate social sciences. The ethi- cal, the legal, the political and the economic relations of men are all outgrowths of social life; and what is common to them all falls within the province of sociology. Why, then do we speak of political economy? It may be frankly confessed that the term is inexact. In one sense § 3] Proper Term y politics, as we have seen, is simply a branch of social science. Politics deals with the state; but the state is organized society. It is composed of individuals and cannot be conceived as apart from individuals. Yet when we use the term political science, stress is ordinarily laid on the state; when we speak of social science, the emphasis is put on individuals as mem- bers of society. It so happens that when the term political economy was first used by the Greeks, they thought only of the " former meaning. Aristotle, after discussing domestic economy, tells us that states also, like individuals, must make both ends meet. There is, he says, a regal economy, or the art of managing the public household in monarchies; there is a provincial economy, best suited to provinces; and finally there is a political economy, best suited to the "polis," or free state. Political economy therefore is to him substantially the art of providing a revenue for the state. When the subject was again discussed at the close of the middle ages, it was seen that the revenue of the state depends upon the revenue of the people, and political economy was now conceived of as the art of making a people wealthy and powerful through national development. It was soon recognized, however, that national progress depends chiefly upon the efforts of the indi- viduals themselves. Thus in more recent times the stress !has come to be laid on the causes which condition the eco- inomic advance of the various classes of society, and since the emphasis is now put on the social rather than on the political causes, the science which deals with these problems is properly called social economics or, more briefly, economics. The world, however, is conservative; and the old term political economy, which arose in former centuries when attention was centred on the poHtical side, is still often used. Strictly speaking, we ought to employ the term political econ- omy only when we treat of the political aspect of economic relations, that is, of their direct dependence upon government action. People forget that economic activity is primarily 8 Fundamental Concepts [§ 4 social, and only in part influenced by political considerations. The force of habit makes them say political economy when they really mean social economics or economics proper. The foregoing explains the reason for dropping the first half of the old term, political economy. The change in the second half is due to another cause, — the recognition of the scientific character of the study. Many modern sciences end with the suffix "ics," as physics, politics or mathematics. When the writers of the seventeenth and eighteenth centuries first adopted the Greek phrase, they had in mind the endeavor to augment the wealth or "economy" of the state. Hence the term. The transition from the point of view of an art to that of a science has substituted for the old phrase the newer name — economics, that is, the science that deals with the economy of society and of the individuals of which it is composed. 4. The Meaning of "Wealth It is evident from what has been said that economic activity is concerned with wealth. In fact economics is often called the science of wealth. But what is wealth? To the ordinary man wealth is equivalent to money. When we look a little deeper, however, we see that what he means is not money, but money's worth. A man's wealth nowa- days consists of anything which can be obtained, or sold, for money. But this is only a secondary meaning. Money is an institution of comparatively recent date; there was wealth before there was money. Nor will it suffice to say that wealth is that for which something else can be procured through ex- change. For although there were exchanges in the shape of barter before there was any money, wealth existed even before men exchanged their possessions. The fundamental idea is something deeper. There are really four characteristics. (i) Originally wealth, as the word implies, denoted weal or well-being. Whatever a man had in abundance constituted his wealth, because it afforded him a surplus. It made him well § 4] Meaning of Wealth 9 off. The capacity of anything lo satisfy a human desire is called its utility. When wc speak of the utility of a thing, however, we do not pass any judgment upon its moral qualities. Whisky and opium may be injurious, yet so far as they satisfy existing wants they possess utility. They are called goods because they are good for the satisfaction of some want, no matter how reprehensible that want may be. In order for anything to constitute wealth, the first requisite is that it should possess utility, that is, the capacity to satisfy some desire. (2) The second characteristic of wealth is that it must be ap- propriable. The electricity in a lightning flash may be poten- tially useful, but it cannot be appropriated to man's uses. (3) The third characteristic of wealth is that it must be something external to man. Personal or internal good are a contradiction in terms. What is meant is personal or internal qualities which are bound up with the individual himself, like his physical, mental or moral characteristics. Health is not wealth, although it may be the basis of wealth. Man cannot part with these qualities; he can only embody them in some product which will be serviceable to others. His personal qualities may thus enable him to acquire wealth, but they do not themselves constitute wealth. To speak of personal wealth in any but a metaphorical sense, as a wealth of humor or good spirits, is to confuse the fundamental distinction between -man and his environment. Wealth exists for man, but man himself is not wealth (unless indeed he is a slave, and then he is wealth, not to himself, but to some one else). Wealth may be produced by man, but it is the product, not the producer, that constitutes wealth. The things that form wealth are always outside of man; they are external, not internal, phenomena. This does not mean that wealth is necessarily something tan- gible. It is indeed true that the term "goods" is sometimes preferred to "commodities," because the latter is supposed to imply something tangible. "Commodity," however, really means that which "accommodates" or is "commodious" to us, I o Fundamental Concepts [§ 4 just as goods are those things that are "good for us," — both in the economic sense. If, however, we use "commodity" to designate some tangible, visible object, wealth is not confined to commodities. Utilities may be conferred not only by in- animate objects but by human services. A concert satisfies a want; what we pay for is not a physical object but a service. A teacher receives a salary; what he gives in return is some- thing intangible. Services in almost every case bring about some change in man's environment, and in that sense even a service may be classed as something material. But if by material we mean something that has an objective existence, a service must be considered immaterial. It confers utilities, it is external to man, it is to that extent wealth; but it is not vis- ible, tangible wealth. Yet the higher the civilization, the more numerous will be these forms of impalpable wealth. In reality, however, the distinction between commodities and services is slighter than would appear at first blush. For in each case we are really dealing with services. The sole use of a commodity is the series of services which it can render. Whether the music which we hear comes from a music-box or from a human voice, whether the boat is propelled by a man or an engine, is of no consequence. What we enjoy in each case is a service. The only difference is that a service dis- appears in the rendering, while a commodity often remains, and is capable of similar services in future. The service is evanescent, the commodity is often durable. The commodity may then be regarded as the embodiment of a series of stored up services, to be conferred piecemeal. But the distinction is vague. For many commodities, like coal, ice-cream and the like, disappear in the very act of rendering a service. Dura- bility is no criterion of wealth. An ephemeral service may be of far greater importance than a durable commodity. It is the character, not the length or repetition, of the service which we prize. The real relation between a concrete commodity and a service is that the commodity is a crystallized service or a § 4] Meaning ot Wealth i i scries of services. The essence of wealth is an intlow of sat- isfactions: utilities consist of services, whether or not they are embodied in physical objects. The very idea of a ser- vice, however, implies something that flows in to one from the outside, whether the outside be a man or an object. Wealth is always something external. (4) The fourth characteristic of wealth is limitation of supply. A few goods and services exist in such plenty that the satisfac- tion of our wants is not affected by any consideration of the quantity available. The deprivation of any unit in the supply will make no difference to us. We all need air, for instance, but in ordinary circumstances air is free to all, in unlimited quan- tities. Such goods are therefore called free goods. The vast majority of commodities, however, are not the free gift of na- ture. They exist in such limited amounts that we attach im- portance to definite quantities. If we wish to utilize them, we must be economical. Hence they are called economic goods and form the subject matter of the science of economics. Putting it in another way, it may be said that while all goods that render a service possess a certain kind of utility, only economic goods, or goods limited in supply, possess that grade of utility which results in value. As we shall see later, value is an estimate of the relative importance or utility of definite quantities of goods. W^hen we speak of the value of a diamond, the word conveys no precise meaning unless we know how large and pure the diamond is. When we say a thing is useful, we do not measure its grade of utility; but when we say a thing is valuable or worth something, we at once ask: how much? In the case of free goods, by which we mean goods the amount of which is unlimited, we attach no importance to any particular quantity, that is, we set no value on it. Wealth might therefore be defined as composed of things that possess value, and economics would then be the science of value. In what has preceded we have virtually affirmed that wealth 1 2 Fundamental Concepts [§ 4 means abundance, and at the same time connotes limitation of supply. This seems absurd. The apparent absurdity, how- ever, is removed by the statement that wealth consists of an abundance of things limited in supply. If the supply is lim- ited, man will make an effort to secure them; the more scarce they are, the more valuable they will be and the more effort he will make. Economic action consists in getting the great- est results with the least effort. Anything which will afford us the same services with less effort will set free surplus energy for other purposes, and thus increase our wealth. The irrigation tracts in the West represent much effort and much wealth; if water were to become as plentiful there as in the East, the wealth of the country would be increased, because all the efforts devoted to securing water would now be devoted to something else, let us say to building railways. The water would no longer be wealth, just as the air is not wealth, but there would be more wealth than before because there would be a larger total inflow of satisfactions. Before, we had only the water; now we have the water and the railroads. This also explains the seeming opposition between wealth and value. Wealth is composed of things having value, and yet the more we have of anything, the less its value. This statement overlooks the fact that, as we shall see later (§ 76), value is an expression of the relative importance of goods, while wealth denotes an aggregate of goods possessing value. In the example above, the value of water indeed disappeared, but was replaced by that of railroads, previously not existing. The reduced value of a commodity whose quantity increases may be compensated by the new value of something which did not exist before; but the aggregate of wealth may be augmented. Thus increasing wealth does not mean decreasing value in general, for the lower value of some things is balanced by the higher value of new things. An increase of commodities can never of itself engender a decrease of wealth. To recapitulate, in order to constitute wealth, a commodity § 5] Wealth and Man i 3 must have four qualities. First, it must possess utility: if the thing is of no use, it is not a good at all. Secondly, it must be appropriable. Thirdly, it must be external: a man may be skilful, but he is not wealthy until he has transmuted his skill into some actual result. Fourthly, it must be limited in amount: if it is free to all, it may make him happy, but its possession will not differentiate him from his neighbor, and he will attach no specific value to it. Since modern society is based on the interchange of posses- sions, all this can be summed up in the statement that wealth is nowadays anything that can be exchanged. If it is not useful, no one will want it; if it is not appropriable, no one can get it; if it is not external, no one can part with it; if it is not limited in quantity, no one will give anything for it. Historically and fundamentally, however, wealth is anterior to exchange. Things do not possess value because they are exchanged; they are exchanged because they possess value. 5. Wealth and Man Wealth, then, forms the subject matter of economics. But in what sense? If a man chops down a tree for firewood, he is adding to his wealth. Yet discussion of the best axe to be used would not be an economic discussion. We all need light; yet a study of the relative merits of gas and electricity would not necessa- rily be economic in character. We may study wealth from the technical as weU as from the economic point of view. The technical study explains the qualities of the thing itself or in relation to other things: economics deals with these qualities only in their relations to man. A study of the relative merits of axes would be technical; a study of the income derived from tree-felling is economic. Economics is therefore the science of man in his business relations to wealth. The emphasis is to be put on the human rather than on the mate- rial side of the problem. Since wealth in its economic aspects 14 Fundamental Concepts [§ 5 consists of anything that has commercial value, economics may also be defined as the science of value in the sense of the science of human relations so far as they are affected by value. Wealth is at bottom a surplus of satisfactions. We may therefore approach the subject from either side, — that of satis- faction or of want. In other words, in dealing with the goods that constitute wealth we must be mindful not only of their acquisition, but also of their use; not only of their production, but also of their consumption. In order to grasp the real meaning of wealth, we must ask not only, what have you got? but, what do you do with it? If a savage were to find a watch on the seashore, he might prize it as a trinket. As a watch it would be of no use to him. For watches to have any material value presupposes a society considerably advanced in intelligence. The same commodities may be relatively valueless to one generation and exceedingly valuable to another. At bottom it is demand which sets in motion those forces which result in giving a thing value. The social demand for a thing is due to the uses to which it can be put. But the uses to which it can be put depend not only on the thing to be used but on the individuals who use it. Wealth therefore depends in the last instance on man. Wealth can be increased only through the multiplication and better utilization of commodities. The more and better the commodities, the wealthier the population as a whole. This multiplication can take place only in obedience to an increased demand. Increased demand, however, means a diversification of wants. People now want more things of different kinds than in the earlier stages of society. The things they want, however, depend in last resort upon their aesthetic, intellectual and moral conditions. The physical appetite of civilized man differs from that of the savage only in its being more refined, — that is, more aesthetic. It differs not in quantity, but in quality. His other appetites also change with the development of civiliza- tion. The economic life is therefore ultimately bound up with § 6] Measure of Wealth i 5 the whole moral and social life. There is a deeper meaning in Ruskin's statements: "There is no wealth but life," and "Nor can any noble thing be wealth except to a noble person." The economist in studying wealth must continually bear in mind those forces which make civilized human beings; for, after all, it is not the wealth itself, but the human beings who create and who use the wealth, that are of fundamental importance. What a man does with his wealth is a vital question; for upon the answer given to this question by society as a whole depends the growth of future wealth itself. This is equivalent to saying that civilization consists in the attempt to multiply wealth, and to render man more amenable to those higher forces which will lead him to employ his wealth in the true interests of progress. The goal of all economic development is to make wealth abundant and to make man more able to use wealth correctly. The real object of eco- nomics is to explain the process of making wealth cheap, and man dear. Education, science, art, ethics, — all have an eco- ngmic side. 6. The Measure of Wealth — Income and Capital Americans speak of a man as worth a million dollars; Englishmen would call an equally wealthy man at home worth ten thousand pounds a year. In the United States, land is assessed for taxation at what it will sell for; in England, at what it will rent for. In the one case we estimate wealth by the capital value of property, in the other by the income value. Capital and income are thus here two phases of the same thing. Historically the reason is simple. In the middle ages land was the chief form of wealth, but was rarely bought or sold. Under the feudal system land had no selling value, but only a rental or income value. A man was rich when he had a large rent roll. The custom of measuring wealth by periodical income finally spread to all classes of society, because of (he predominant influence of the landed interest. In the American 1 6 Fundamental Concepts [§ 6 colonies, on the other hand, land was abundant and free from feudal restrictions; it was, therefore, almost from the begin- ning bought and sold like other commodities which exchanged hands for definite sums. Thus the selling or capital value came to be the measure of wealth in general. Income and capital are therefore two aspects of wealth. In the one case we measure wealth as a flow of services or stream of satisfac- tions; in the other case as a stock of services or fund of satisfactions. The income measurement of wealth is the more fundamental psychologically as well as historically. We desire things at bottom because of their utility. They can impart this utility only in the shape of a succession of pleasurable sensations. These sensations are our true income. Income, in the eco- nomic sense, is the inflow of satisfactions from economic goods. When water is free to all, the pleasure of drinking it does not constitute an income, just as little as basking in the sun, which shines on rich and poor alike, is income. When water, how- ever, becomes so scarce that it acquires a value, its use affords in the broadest sense an income. The original conception of income is therefore pleasure or benefit income. In modern times value has come to be esti- mated in terms of money, and income is accordingly used in general to denote the inflow or revenue in money, — the money income as opposed to the pleasure or benefit income. If I rent my yacht to another, the return is called income, because the benefit comes in in the shape of money; if I use the yacht myself, the return in the form of satisfaction is not ordinarily called income. Yet they are essentiaUy analogous phenomena; for no one would pay a sum of money for anything unless it afforded him an equivalent amount of satisfa1f:tion. Just as concrete articles of wealth existed before there was any ex- change, so income existed before there was any money. Amid a society based on money transactions, however, income de- notes any inflow of satisfactions which can be parted with for § 6] Income and Capital i 7 money. It may nol be money income, but it must be capable of being transmuted into money income. As against the income, which is at bottom the service or satisfaction afforded by anything that has value, is to be put capital. When we buy anything we buy the right of securing such a satisfaction or stream of satisfactions, either from repeated services as such, or from the commodity which embodies such services. Every commodity is a store of such satisfactions. A suit furnishes a satisfaction or income every time it is worn, an axe affords an income every time it is used. We may therefore cither pay for each service as it is rendered or give a lump sum, which capitalizes this anticipated income or flow of satisfactions. One may rent the dress-suit every night or buy it outright. The process of valuation through which we assign a capital value to this complex of future income values and through which we transmute the flow of satisfactions into a fund is a subtle one, to be discussed later. The process is taking place about us every moment. Nothing would have any capital value if it had no income value; capi- tal is capitalized income. This view of capital has not always been recognized. The earliest use, indeed, of the word capitale at the close of the middle ages was to designate the caput, or principal sum of money from which a revenue was expected. Yet it has become customary among economists since Adam Smith not only to confine the term capital to wealth used for further production, in contradistinction to wealth devoted to immediate consump- tion, but also to differentiate capital from land. Capital would then be defined as that part of wealth which is the result of production devoted to further production. The consequence has been that capital has often been regarded as consisting chiefly of the tools, machinery, factories, ships, cars and finished products of all kinds used to increase production. This is, however, at variance with business usage. When a wagon builder, for instance, counts his capital he always 2 I 8 Fundamental Concepts [§ 6 includes his real estate. The factory may indeed differ in such important points from the land on which it is built as to justify the erection of a separate category for land, but in one sense they are both classes of capital. Again, he includes in his capital the stock of finished goods, irrespective of whether the wagons are to be used by farmers as tools to garner the crops or by millionaires for pleasure. Finally, he includes things that have not been produced at all, for instance, mere privileges or patent rights granted him by government. His capital thus comprises things that have never been produced, as well as things that may never be used for further production. Capital in this sense is simply wealth which yields or can yield an income. It includes everything that has a capital value. The wagon is capital to the livery-stable keeper because his business income is derived from renting its use day by day to customers; the wagon is capital to the farmer because it helps him to get an income from the crop; the wagon is capi- tal to the millionaire because it embodies a series of incomes, which he actually enjoys in kind by riding, or which he could enjoy in money if he chose to let it out piecemeal or to sell it outright. If a broker fails, his creditors will insist on including in the assets or capital not only his stock exchange seat, which is not the result of any production, but his real estate holdings as well. Both have a capital value. Capital as contrasted with income, therefore, is all wealth regarded as a store or fund. In every progressive society men seek to enlarge their flow of satisfactions. This can normally be done not only by enhancing personal efficiency, but primarily by increasing or improving the items of wealth which embody this flow of income. Economic progress thus normally rests upon the devotion of existing wealth to the further increase of wealth; and the chief function of capital may accordingly without great error be declared to be its productive use. But it must not be overlooked that the end of production is consumption and that at bottom capital is capitalized income. § 7] AVealth, Money and Property 1 9 While income is, therefore, the fundamental test of wealth, it ordinarily makes no difTerence whether we measure a man's wealth by his income or his capital. Sometimes, however, a difficulty arises. A railway president or trust manager with a salary of fifty thousand dollars a year cannot well be called poor. Yet a system of taxation based on the measurement of wealth by capital, as in the case of the property tax, would exempt him completely. The capital estimate of wealth is here clearly inadequate. On the other hand, the customary restriction of income to money income is also occasionally embarrassing. When capital is so used as not to yield a money income, as in the case of one's yacht or jewels or private park, an income tax would not reach the owner at all. The injustice would be no less than in the preceding case. Some modern tax laws indeed include in taxable income the annual value of a house inhabited by the owner. But the inclusion of benefit income in the case of a house and its exclusion in the case of a yacht or park are not easy to justify. The really safe measure of wealth, applicable in all cases, is income in the sense of pleasure or benefit income. 7. "Wealth, Money and Property Whether wealth be measured in terms of capital or of in- come, it is generally expressed in terms of money. For wealth in modern society is anything that can be exchanged, or that possesses an exchange value, and money is admittedly the universal medium of exchange. Hence wealth is sometimes identified with money. It is clear, however, that money is simply a commodity, and forms only a part of the entire stock of wealth. It is, indeed, a most important constituent of wealth, but acquires this im- portance chiefly because it is a representative of other wealth. Very little of a man's wealth consists of money, although it can all be converted into money. Money is significant not for itself but as rhe universal purchasing medium. In modern 20 Fundamental Concepts [§ 7 society the money needed to carry on the. daily business trans- actions is like the lubricating oil in a machine. Without the oil there would be difficulty in making the machine work; without the money there would be embarrassment in conducting business. But just as too much oil would be not only useless but harmful, so the existence in a country of more money than is needed for the actual transactions would represent a waste of wealth which might otherwise be employed in production. Money is wealth, but wealth is not money. Wealth is money's worth, but wealth and money are by no means identical. Finally, we sometimes confuse wealth with property. In reality they are not convertible terms. Property is primarily a legal conception. It denotes the exclusive right of owner- ship in a definite amount of wealth. A man's property is what is legally his own, whether his own consists of capital or of income, of concrete goods or of mere rights. If a man mort- gages his farm for half its value, his real wealth in land is reduced one-half; but the title to the land is still his, and in most states, Hke New York, he pays his property tax on the entire value. But this was not always so. Formerly the mort- gagee or lender entered upon the land and enjoyed its fruits; later, he still owned the land legally, but left the mortgagor or borrower in possession; now the land remains the property of the borrower, subject only to the lien of the lender. From the economic point of view the wealth is divided between them; legally the land is the property of one party, as in former centuries it used to be the property of the other. When a man borrows money on mortgage, he is creating a new form of property, but not new wealth. There is no more land than before, but there is an additional property right in the shape of a piece of paper or mortgage which represents the title to a certain income. So the real estate and rolling stock of a railroad constitute the property of the corporation, while the capital stock is the property of the stockholder. They form different kinds of property and can be sold sepa- § 8] Public and Private Wealth 2i rately; yet this duplication of property rights does not increase the amount of wealth in existence. Property is a legal right to wealth; it is not in itself wealth. 8. Public and Private Wealth While there is in most cases little difference whether we use capital or income as the measure of private wealth, to the wealth of the individual, the distinction becomes im- portant in the case of public wealth, or the wealth of the community as a whole. To compute the national wealth, as some censuses do, by adding to the government property the capital or selling value of all private property is erro- neous, because, as has just been pointed out, we should be counting many things twice. The only true measure of public wealth is income. Sometimes it is mistakenly stated that the test of commer- cial value cannot be applied to public wealth. It is claimed, for instance, that rivers, climate and situation, which are not and cannot be sold, form the essential constituents of public wealth. This involves the same confusion that was encoun- tered in discussing the so-called personal wealth of an indi- vidual (§ 4). Rivers and climate do not constitute wealth. They enable a country to acquire wealth, just as intelligence or strength enables a man to acquire wealth. They are the source of wealth, but they are not wealth. America under the Indians had the same rivers and climate as now, yet no one would speak of the America of a thousand years ago as wealthy. Until these natural advantages are converted into actual results they do not become wealth. When they are finally made to contribute to a flow of income in the shape of finished products or services, these products and services acquire a commercial value and constitute wealth. The fun- damental test of all wealth in modern times is income in the shape of benefits that can be parted with, and for which some- thing will be given. Public wealth, like private wealth, has a 22 Fundamental Concepts [§ 8 commercial value, but public wealth can be estimated only in terms of income, not of capital. The destruction of private wealth can never of itself increase public wealth, but the destruction of some forms of private wealth may bring about a far greater increase in other forms of private wealth and thus augment the public wealth. The abolition of slavery annihilated the wealth of the slaveholder; but it created the property of the former slave in himself, and led to such an increase of productive power that the total out- put of society was greater than before. The property of a gas company may be rendered valueless by the discovery of a natural gas field owned by the community, as in Toledo. Yet the destruction of the private wealth of the shareholder is far more than offset by the fact that each consumer of gas can now devote to productive purposes the sums hitherto necessary to pay the gas bills. We say, far more than offset, because the wealth of the shareholders was a capitalization of profits, while the wealth of the gas consumers is now increased by a sum equal to the total price of the gas, including both cost and profits. There is, in short, an addition to the net income of society, and therefore an increase of public wealth. Again, whether the annihilation of private wealth through a change from private to public ownership creates public wealth or not depends entirely on the success of the undertaking. If a government railway can be operated either more cheaply or with lower or more equal charges than a private railway, there will be an increase of public wealth. The test in every case is the flow of income to the individuals that constitute society; but this flow under modern conditions always has a commercial value. Since income is the only adequate test of public wealth, we can speak of a wealthy country in two senses. If we think of the aggregate income, a large country will be called wealthier than a small one; if we think of the average per capita income, a small country, like Belgium, would be wealthier than a large § 8] Public and Private Wealth 23 one like Russia. Inasmuch as the real object of our study is not wealth in itself, but man in his relation to wealth, it is clear that the second use of the term is preferable. It is the participation of an individual in the wealth of the community that makes social prosperity. The true scope of economics is therefore the study of the forces which contribute to the growth of the social income or public wealth, and which regulate the shares of classes and individuals in this flow of wealth. CHAPTER II ECONOMIC LAW AND METHOD 9. References L. Cossa, Introduction to Political Economy (1893), Theoret. Part, rhs. iii, vi; J. Keynes, Scope and Method of Political Economy (3d ed., 1904), chs. ii-iv, vii-viii; J. E. Cairnes, Character and Logical Method of Political Economy (2d ed., 1875), Lects. 3, 4; A. Marshall, Principles (6th ed., 1910), bk. i, chs v, vi; N. G. Pierson, Principles of Economics (1902), Introd.; A. W. Flux, Principles (1904), ch. i; F. A. Walker, Political Economy (3d ed., 1888), part i; E. R. A. Seligman, Economic Interpretation of History (1902), part 2, ch. iii; W. J. Ashley, Surveys (1900), Preliminaries; A. C. Bowley, Statistics (1901), ch. i; H L. Moore, Laws of Wages (1911); R. Mayo-Smith, Statistics and Economics (1899), ch. i; H. Sidgwick, Scope and Method of Economic Science (1886); J. Koren (ed.) The History of Statistics (1918); G. C. Lewis, On the Methods of Observation and Reasoning in Politics (1852), ch. iii; E. A. Ross, The Foundations of Sociology (1905), chs. i, ii. On the Mathematical Method. W. S. Jevons, Theory of Politi- cal Economy (2d ed., 1879), Preface; F. Y. Edgeworth, (i) Mathe- matical Psychics (1881); (2) On the Application of Mathematics to Political Economy (Jour. Stat. Soc, LII, 1889); (3) On the Representa- tion of Statistics by Mathetnatical Formulce {Ibid., LXI-LXII, 189S- 1899); I. Fisher, Mathematical Investigations in the Theory of Value and Prices in Conn. Acad., Transactions, IX (1892); C. Cunynghame, A Geometrical Political Economy (1904). 10. Meaning of Economic Law- It is sometimes questioned whether there are such things as economic laws. The problem has often been complicated by the failure to distinguish between the various meanings of the term law. (i) Law may denote a body of customary usages, as the common law, or primitive law. (2) Law may mean a statutory enactment, as a law of Congress. (3) Law may sig- nify a rule of action or a precept, as a moral law. (4) Law may mean the statement of relations of cause and effect be- 24 § lo] Economic Law 25 tween phenomena, as a law of physics. When we speak of economic law, we properly use the word in the last sense. Everything that happens in the universe is related either as cause or as effect to some other thing. It is the function of science to ascertain this relation, and to formulate the law which explains the relation. In this sense every scientific law is a natural law, because it deals with the phenomena of nature, because it explains the natural or necessary relations between things. A scientific law states that definite causes necessarily lead to definite results. Since economics is the science of industrial relations, an economic law is a natural law so far as it interprets the rela- tions of human nature to industrial facts. Everything that occurs in economic fife takes place in accordance with some law; it is the function of the economist to ascertain this law. Only in this sense can we speak of an immutable economic law. An economic law does not mean a precept or rule of action; there is nothing immutable about a rule of action. To speak of a law of free trade, for instance, is unmeaning. An economic law affirms that if certain causes exist, certain results are sure to follow. The facts themselves, whether of human nature or of the outward world, may differ; but given definite facts, definite consequences will ensue. The relation between these facts is capable of being expressed in a state- ment of cause and effect, which we call a scientific law. It must not be overlooked, however, that economic laws are essentially hypothetical. We must be quite sure that the premises are true to actual life before we can draw a conclusion applicable to existing facts. So far as the premises are only partially true, the conclusions are only partly valid. This does indeed not prove that there are no economic laws, but only that the law may not yet have been ascertained, or that the particular statement of the law in question is only provisional. In this respect economic law does not differ from any other scientific law. 26 Economic Law and Method [§ lo In one point, however, the laws of all the social sciences do differ from those of natural science. The social sciences deal with man, and man is himself a continually changing factor. Man is a product of history; economic institutions, like all other social facts, have their roots in the past. What is, is the outcome of what has been. With every mutation in outward conditions and social relations there comes a change in the economic facts or in the methods devised to secure adaptation of means to end. Nothing is so rare as the historical per- spective; nothing so difficult to realize as the relativity of existing institutions. At one stage of scientific inquiry, for instance, it was assumed that private property was a natural phenomenon, an outcome of the very nature of man. It is now seen that private property is not an absolute, but an his- torical category; that the conception itself was of slow growth, and that its content varies from age to age. What is true of private property is true of almost every other economic institu- tion. It has grown to be what it is; it has once been differ- ent, and will again be different. While there is life, there will be change. In outward nature, on the other hand, we operate with forces that are in one sense unchanging. For instance, in discuss- ing physical or astronomical facts we are justified in taking for granted the existence of gravitation. In discussing eco- nomic facts, however, it would not be safe to assume in every case the existence, in unimpaired activity, of the motive of self- interest. Not only may there be counteracting forces — for that is true also of physics — but the motive itself may suffer a change. We cannot appeal to the natural law of self-interest in the same sense that we speak of the natural law of gravita- tion. The one is dependent on man, the other is independent of man. In this sense there are no "natural" laws in social science. The frequent appeal in current discussion to the natural laws of society as something apart from man, and over which he has no control, is erroneous. There are no natural § lo] Economic Law 27 laws in the sense that man himself is powerless to alter the con- ditions which form the basis of the statement. The French school of Physiocrats in the eighteenth century first applied to economics the conception of natural law as a part of the order of nature, from the overwhelming necessity of which no one could escape. John Stuart Mill, although he still held fast to the old conception of natural law as applied to production, pointed out that the laws of distribution were themselves capable of being modified by human agency. Mod- ern science has shown that what is true of distribution is equally true of production, and that there is no natural law as a part of a natural order in any field of economic inquiry. The old conception of natural law has been abandoned in economics, as it has been given up in politics and jurisprudence. In its stead has been put the more modern idea of natural law, in the sense of scientific law. Modern natural law is essentially hypothetical in character and carries with it no moral implication. We must be careful, then, not to confuse the two concep- tions. An economic law is a natural law so far as it states that given conditions will lead to given results. An economic law is not a natural law so far as it implies that human effort is impotent to modify the conditions which lead to the results.. It was as a protest against the natural law of the old econo- mists that the term historical law was introduced. Some of the newer writers urged that the essential point was to study the evolution of economic law itself as embodied in the changes of economic life. To them the only economic laws were the his- torical laws which throw light upon the growth of society and trace the development of economic relations. This, however, also involved an exaggeration, in that it put more emphasis on the past than on the present, and often failed to afford an adequate analysis of existing fads. This particular controversy has now fortunately been laid to resl. Another objection to the idea of economic law may be men- tioned. We frequently hear it said that something is true in 28 Economic Law and Method [§ n theory but not in practice. The fallacy of this statement is evident when we reflect that a theory is nothing but the formu- lation of a law, a statement of the necessary relations between facts. If a thing is true in theory, it must be true in practice. The difficulty is to formulate the correct theory. When people say it is easy to "theorize," they mean that it is easy to frame an alleged theory. Nothing is harder than to construct a true theory. For a true theory must fit into every fact; otherwise it is not the correct theory. The hasty and untrue generaliza- tions of those that set themselves up as "theorists" are really responsible for the seeming antagonism. There can be as little divergence between true economic theory and actual economic life as between the theory of chemistry and chemical phenom- ena. It is the theory which must be made to fit the facts, and not the facts which must be twisted to suit the theory. 11. Methods of Economic Investigation With the broader conception of economic relations, the old contest over method has been relegated to the background. It was formerly much discussed whether economics was a de- ductive or an inductive science; whether, in other words, we should start out from certain general principles, or attempt to reach these principles through the interrogation of facts. Sometimes the contrast between them was expressed by the term abstract or analytical, as opposed to the concrete or his- torical or comparative method. There is at present a substantial agreement among econo- mists that both methods are correct, and that it would be a mistake to assert the predominance of either. It is a ques- tion not of economics in general, but of the particular prob- lems to be solved. In some the one method is more fruitful, in some the other. In such a problem as the incidence of taxa- tion the historical or inductive method would be of little avail, because of the difficulty of disentangling the fundamental cause from among the complicated facts of actual life. In such a § 12] Relation to Other Sciences 29 problem as the variation between piece wages and time wages the deductive or abstract method would probably not bring us to our goal so quickly. Each method has its advantages and its limitations. In the deductive method we can be sure of our conclusions only after checking them by the facts; in the induc- tive method we cannot formulate the law until we find that it is in harmony with well-established principles. In the one case we start from the principle and reach the facts; in the other we start from the facts and attain the principle. Neither can be successfully divorced from the other. In most cases of reasoning, indeed, we use, consciously or unconsciously, each method in turn. Each method, again, when pushed to an extreme is either dangerous or barren. The earlier advocates of the abstract or analytical school sometimes framed their generalizations hastily, and, through their failure to make allowance for the numberless counteracting tendencies, often gave an appearance of unreality to their conclusions. Such, for example, was the celebrated wages-fund theory (§ 173). The more ardent fol- lowers of the concrete or historical school have sometimes ex- aggerated the difficulty of reaching general laws at all, and have left us to wander aimlessly in the forest of facts, putting ofT to an ever-distant day their analysis and utilization. On the other hand, the more moderate advocates of each method have accomplished a real advance. The historical school has shown that we can really understand what is only through a com- prehension of what has been, and that the problems of funda- mental importance to social well-being are those of change. The analytical school has shown that the particular is of value only as illustrating the general, and that no true progress in economic reasoning can take place until we frankly recognize the need and the existence of general principles. 12. Relation ©f Eeenomies t© Other Seienees In the modern hierarchy of thought the points of contact between the various sciences are continually becoming more 3© Economic Law and Method [§ 12 numerous. We recognize ihe possibility of regarding facts from different points of view. With increasing differentiation, on the other hand, there also comes the recognition of increasing unity. With some sciences the points of contact have been empha- sized only in recent years, — as, for instance, with psychology and biology. The economist whose chief concern is with the law of value necessarily operates with the data of psychology. Value can have no existence apart from the mental conditions of man. The whole conception of demand is essentially psycho- logical. While, however, the connection between psychology and economics is real and intimate, it may be doubted whether the psychological treatment of economic relations can carry us much further than to the comprehension of the elementary principles of valuation. In the same way, it was at one time the fashion to apply biological concepts to economic life, and to speak of the economic organism, the economic structure and the economic functions. It is, however, coming more and more to be recognized that these are vague analogies rather than identities; that the laws of life in the economic world are not the same as those in the physical world; and that the only real aid which biology can give to economics is to enforce the conviction that in social as in animal life there is continual growth and perpetual change. With another class of sciences, mathematics and statistics, the relation is more intimate, but primarily from the point of view of method. Economics deals in one sense with quanti- tative relations. Market values are expressed in figures; and mathematics is of undoubted aid in enabling us to make a short cut, as it were, through the mazes of figures. Both alge- bra and geometry have frequently been employed with suc- cess; and it is remarkable that some of the greatest steps in advance in the pure theory of economics hav^e been taken by those who, like Cournot or Gossen or Jevons or Marshall, ap- proached the subject from the mathematical side. The advo- § 17,] Relation to Politics 31 cates of the mathematical method, however, are apt to overshoot the mark. They often forget that the range of questions with which they can deal is essentially limited, because social pro- cesses cannot readily be reduced to exact quantitative form. They do not always remember that the variables wdth which they operate are often precisely the important factors in social life; and that human aspirations and human needs cannot be pent up within the confines of a mathematical formula, no matter how broad it may appear. Within a narrow field the mathematical method can be used to great advantage, but it will always be of more use to the writer than to the reader. In the case of statistics the danger is of the opposite kind. In mathematics the difficulty is to get a law which will not be so all-embracing as to be inapplicable to real life. In statis- tics, even granted that we have collected the true figures, the difficulty consists in distilling from them any general principle of lasting value. In the first case we run the risk of formu- lating unrealities; in the second of stating platitudes. What was said in a preceding section of the abstract and the con- crete .methods of investigation applies with augmented force here. The mathematical method is the abstract method pushed to an extreme; the statistical method is the concrete method pushed to a like extreme. Statistics form an indispensable adjunct to economic inquiry, but they are of value principally for purposes of illustration rather than of construction. They show us that there is a reign of law in the moral as well as in the physical world; they do not always enable us to ascertain the law. 13. Relation of Economics to Politics and Other Moral Sciences When, however, we come to the moral sciences, of which economics itself is one, we notice a more intimate relation. These are politics, jurisprudence and ethics. (i) The study of politics or the science of the slate has gone 32 Economic Law and Method [§ 13 through several stages. For a long time history was domi- nated by the "great man" theory of politics; attention was cen- tered chiefly in the kings and the battles, the court intrigues and military problems. At a later period more emphasis was put on the development of institutions compared with which any individual, however eminent, was insignificant. Finally, it was recognized that political life itself is closely intertwined with the economic life, and that the forms as well as the prac- tices of government are profoundly influenced by the conditions of production as well as by those of distribution. Economic facts would then be the cause; political phenomena the result. On the other hand, since all modern economic action is car- ried on within the framework of the state, when we deal with any practical economic institution no final solution of the prob- lem can be reached until the effect of the political conditions be weighed. In discussing the economic consequences of govern- ment ownership, for instance, the status of the governmental civil service is a potent consideration. Political facts may profoundly modify the economic conditions, instead of being modified by them. While, therefore, politics deals with the relation of the individual to the government, and economics with one aspect of the relations of individuals to each other, there is almost always a distinct interaction between the two. It is a necessity for the publicist to comprehend the economic basis of political evolution; it is the business of the economist to remember the political conditions which affect economic phe- nomena. (2) What has been said of politics applies with still greater force to jurisprudence. All systems of law are in the main the crystallization of long-continued social usage. Social customs are coeval with the origin and growth of society itself; the mandatory force of the positive law comes at a later stage in the evolution. The unwritten gradually turns into the written law, until the positive enactment is invested with the sanction of a sovereign command. As society develops, the law is in § 13] Relation to Politics 33 a perpetual process of change. No code is final; it always represents a given stage of social life. The law is the outward manifestation; the social, and especially the economic, fact is the living force. The formal juristic conception may remain the same; its content must be modified by every change of economic life. Legal history is really a handmaid to economic history; legal development is inexplicable apart from economic forces. The economic fact in this sense is the cause; the legal situation is the result. . At any given moment, however,' economic phenomena take place within a legal framework. The elemental forces of eco- nomic life cannot indeed in the long run be conditioned by legal forms; but the law may for a time hold in check, or give a new direction to, economic forces. Take as an example the English law of primogeniture and of entailed estates as com- pared with the French laws which have led to the system of small farms. History is full of instances where the law has for good or for evil affected the economic environment. Just be- cause the economic life, however, is prior to the legal system, there is always, at any given moment, the danger of a lack of harmony between the two. It is in the interval between the economic changes and the readjustment of the legal facts that the influence of law upon economics is keenly felt. Life indeed consists of a perpetual adaptation of outward forms to inner forces, and thus the economic basis of a legal system is really the important fact to the social philosopher. In practical life, however, we deal with outward forms, and thus the legal shape of the economic relations must never be lost from sight. In economics and jurisprudence there is continual action and reaction. (3) Close as are the relations of economics with both poli- tics and jurisprudence, the connection between economics and ethics is closer still. This has often been denied. In the popular mind there is even an idea that there is a real conflict between them. In truth, this seeming conflict can be traced 34 Economic Law and Method [§ 13. back at least as far as Adam Smith; for he based his system of political economy on the principle of self-interest, his system of ethics on the principle of sympathy. Thus there grew up the idea that the two leading motives of human action are the purse and the conscience; that the economic man is repre- sented by the one and the ethical man by the other; that there is a hopeless conflict between them; and that economics and ethics have nothing to do with each other. The modern view, however, is different. Ethics, like juris- prudence and politics, is now recognized as essentially social, in its origin. All individual ethics are seen to be the outgrowth of social ethics. The very conception of right and wrong was originally a social conception, afterwards transferred to the individual. Since man lives in society, whatever was recog- nized as making for the general good came to be regarded as the test of morality. For individuals to persist in doing what was not for the social benefit must finally have ended in the destruction of society, and therefore of the individual himself as a member of society. Social, not individual, utility there- fore unconsciously became the criterion. When we say honesty is the best policy, we do not mean that it is always expedient for the particular individual to be honest, for we unfortunately know of cases to the contrary. What we mean is that honesty is the best policy for society, and therefore has become right for the individual as well. Ages upon ages of this experience have converted this and similar conclusions into a human instinct, and have thus made us realize the existence of the categorical imperative as the sovereign moral law. The whole ethical progress of man consists in conforming his actions to the ideal social welfare. There can therefore be no conflict between correct economic action and true ethical theory. Adam Smith's principles are indeed true, but they are complementary, not antagonistic. Sympathy or altruism pushed to an extreme involves the destruc- tion of self and therefore the death of society; self-interest or § 14] Scope of Economics 35 egoism pushed to an extreme means the destruction of others and therefore Hkewise the death of society. Social Hfe can endure only through a balancing of these two principles, each reinforced by the other. Since economics, like ethics, is pri- marily a social science, the true economic action must in the long run be an ethical action. An individual may pursue selfish economic ends, and may augment his own wealth at the cost of moral progress; but he is then subordinating public to private considerations. Broadly speaking, and regarded from the point of view of society as a whole, what is economically advantage- ous must in the long run be right; and what is correct in ethics must in the end also be profitable to the business world. The modern economist therefore has become just as mindful of the ethical aspects of every economic problem as the modern moral- ist has been forced to recognize the economic side of his ethical problem. 14. Scope of Economics From what has been said it will be seen that the scope of economics is varied. This cannot be expressed in the old way by distinguishing between pure economics and applied or practical economics. In the first place, no such sharp line can be drawn; and, secondly, even if the two parts could be distinguished, they would not cover the whole field of eco- nomic inquiry. The distinction between pure and apphed economics has been much exaggerated. If the study of economic theory has any justification at all, it must fit into the facts of actual bus- iness life. There may, indeed, be such a thing as pure mathe- matics, which discusses conclusions from premises that exist only in the mind of the investigator and find no counterpart in actual life. But if there is such a thing as pure economics in this sense, it would be of no earthly use except as a logical exercise or a play of the imagination. Economics is the sci- ence of industrial relations, — not as they might exist hypo- thetically in the mind of the investigator, but as they really 36 Economic Law and Method [§ 14 exist. Economic law must explain economic facts; the law in- heres in the facts, the facts are the embodiment and illustration of the law. The attempted distinction between pure and applied economics is a clumsy way of putting the emphasis on the two sides of the same thing, — the law in its relation to the facts. Sometimes the distinction is expressed in another way, as when economic science is opposed to economic art. This is indeed a distinction; but economic art does not deal with principles at all, it deals with precepts. Economic art is an awkward expression for the economics of statesmanship. The legislator practises economic art; he may or may not study economic principle. If, however, he runs counter to the prin- ciple, he cannot succeed in the art. In the second place, the old distinction between pure and applied economics is untenable, because the discipline, whether in its abstract form or in its application, is made to deal only with actual conditions. The preceding analysis has disclosed the inadequacy of this point of view. Economics is to teach us to understand the principles of industrial life. Its chief object, indeed, is to explain to us what is. If all society, how- ever, is the result of an evolution, we can understand what is only by knowing what has been. Moreover, if the relation of economics to ethics is such a close one, it is equally evi- dent that we can criticise the present not only in the light of the past, but in the light of the future; and that a discussion of social tendencies at once brings up the question of what ought to be. Economic inquiry is teleological as well as historical. In every phase of our study, therefore, we must endeavor first to ascertain how the particular relations have come to be what they are; secondly, to explain what are the conditions of the problem as it actually exists; and, finally, to forecast the prob- able changes in the institutions as a result of an alteration in the conditions of the problem. Economic science, in short, while it deals primarily with the present, cannot avert its glance from the past or from the future. Part II Element{^ ot Economic Life Book I Foundations of Economic Life CHAPTER III THE NATURAL ENVIRONMENT 15. References C. de Montesquieu, Spirit of the Laws (last ed., 1902); H. T. Buckle, History of Civilization in England (best ed., 3 vols., 1873); H. Spencer, Principles of Sociology, I (1882), part i, ch. iii; E. J. Payne, History of America, I (1892), 298-480; E. Huntington, Civilization and Climate (1915); E. C. Semple, American History a>id its Geographical Conditions (1903); and Influence of Geographic Environment (191 1); A. P. Brigham, Geographic Influences in American History (1903); G. G. Cliisholm, Handbook of Commercial Geography (8th ed., 1913); N. S. Shaler, The United Stales (2 vols., 1894); J. Brunhes, Human Geography (1920); R. S Tarr Etonomu Ceotogy of the United States (1900) ; R. P. Teele, Irrigation in the United States (1915); E. Mead, Irrigation Institutions (1902); Finch and Barker, Geography of the World's Agriculture (1917); R. M. Hurd, Principles of City Laiui Values (1903), chs. iii, iv; E. A. Ross, Foundations of Sociology (1905), chs. viii, x. 16. Climatic and Geological Conditions Man, like all animals, is indissolubly bound to the soil. He is in last resort dependent upon nature for what he is and what he has accomplished. This is especially true of his economic life, which, as we have seen, consists ultimately of his relation 37 38 Ndtural Environment [§ 16 to material things. The basis of economic activity is the material environment. The modern sciences of geology, of meteorology and of commercial and anthropo-geography have enabled us to comprehend phenomena whose significance was until recently but vaguely apprehended. The economic aspects of the natural environment may be subsumed under the four heads of the climate, the geological structure, the flora and fauna and the geographical location. Only a portion of the globe is habitable. The uninhabitable parts, moreover, change with the geologic ages. Large sec- tions of Northern Europe and America which are now the homes of a vast population were aeons ago in the perpetual embrace of the ice king. On the other hand, explorations in the sandy wastes of the Asiatic deserts have brought to light the ruins of numerous and populous cities. Not only economic life, but all life, is at the mercy of the elemental forces of nature. Even in the habitable portions of the globe the climatic con- ditions are of the first importance. At the very outset the influence of temperature is obvious. The vigor of the arctic regions and the bounty of the tropical zone are alike hostile to economic progress. Where the food supply is scanty and the low temperature benumbing, human resources are taxed to the utmost in securing the bare wherewithal of life, and no surplus energy is left to accumulate a store of wealth. Where, on the other hand, nature pours out her treasures with a lavish hand, and the torrid heat enervates and lulls into lethargy, scarcely any activity is needed to procure subsistence, and little is ordinarily exerted for other purposes. Although we have had civilization in hot countries, the real home of the greatest economic progress has always been in the temperate zones, where man is goaded out of his natural laziness by the prick of want, and lured on to effort by the hope of reward. In many other ways does climate affect economic life. The alternations of heat and cold, both seasonal and occasional, are of commanding importance. The character and length of § i6] Climatic Conditions ^9 the seasonal allernalions condition the size and (juahly of the harvest. The variations of intra-seasonal temperature with its sudden oscillations go far to explain the nervous, active American temperament and its economic results, as compared with the comparative stolidity of the English, due to an equable climate. Scarcely second to the influence of temperature is the significance of the rainfall and the humidity. Insufficiency of moisture and lack of sunshine are alike inimical to economic welfare. Not only will differences in rainfall affect the forestry conditions, as well as the size and therefore the economic utility of the rivers, but in addition the laborious contest with a semi- arid region will create in the individual stalwart economic and political qualities. The so-called Anglo-Saxon individualism is largely the product of climatic conditions. When the English- man leaves his moist and fertile home for the almost riverless wastes of the antipodes, he becomes, if not a socialist, at all events the next remove to one. In Australia we accordingly find government railroads, government insurance, government steamships, government frozen-meat industry and many other examples of government activity which would be viewed with dismay in the mother country. In the same way the individualist theory in America is largely the product of definite economic conditions, resting on a new climatic environment. What careful interpreter of American history does not know that the arduous struggles with a rebel- lious soil and an inhospitable climate caused the American of a century ago to turn to government whenever he thought he might secure help? State roads, state canals, state railroads, state bounties, state enterprises of all kinds suited to the needs of the settlers were the order of the day. When, however, the mountains had been crossed and the fertile valleys of the Middle West, with abundant rainfall and a genial climate, had been reached, there came a wondrous change. Conscious of their new opportunities, the citizens now desired only to be let alone in their quest for prosperity. Private initiative replaced govern- 40 Natural Environment [§ i6 mcnt assistance and the age of corporations was ushered in. Insensibly the theory of governmental functions changed, and the doctrine of laissez /aire carried all before it. The theory of individualism was a natural result of the economic, and at bottom of the climatic, conditions of a new environment. While the climate is one of the causes that influence the earth's surface, the economic life is profoundly affected by the entire geological formation. In the first place we have the fun- damental fact of altitude, including the distinction between mountain and valley, coast and plain, with their varying degrees of production. Furthermore, upon the chemical ingredients and the physical constituency of the soil rests in last analysis its original fruitfulness. The difference between the soil of the black belt and the hill lands of Alabama explains the varying aspect of the negro problem there; and in like manner the contrast between the arable and the grazing lands of the Far West enables us to comprehend the economic and political con- flicts between the farmer and the ranchman. Of still more importance than the surface of the earth is what lies beneath the surface. There are writers who interpret the entire progress of humanity in terms of the metals. While this is assuredly an exaggeration, there is no doubt that the metals have played a dominating role in the history of economic progress. In more primitive times the advance of civilization was in many places in large measure bound up with the copper and tin deposits. Even at present, with the active interchange of commodities, the mineral wealth in the shape of copper and iron fields, gold and silver mines, lead and tin deposits, goes far to explain the preponderance of the fortunate countries or sections where they are found. If we add to the metals the coal, the diamond and the oil fields, we shall readily recog- nize the enormous influence exerted, especially in modern times, by the existence of these mineral treasures in such places as Colorado, Pennsylvania, Western England, and South Africa. ly] Geographical Location 41 17. The Flora, the Fauna and the Geographical Location i The character and extent of the vegetable and animal life are a result of the cUmatic and geological conditions that have just been mentioned. Upon the union in proper proportions of rain, sun and chemical ingredients of the soil depends the possibility of raising all the staple crops like hay, wheat, cotton, rice, tobacco, sugar, coffee or tea, or of obtaining the timber, rubber, cork and other products of the forest. The American Indian civilization was buUt up to a large degree on maize, as that of the Asiatic Indian largely rested on rice. If cotton was king in the South before the war, wheat and hay were to a great extent the monarchs in the North. The control of these natural resources is responsible for many of the mutations of nations. To give only two examples: the struggle for the spice islands of the East is the key that unlocks the mysteries of the European political contests of the sixteenth and seventeenth centuries; the sugar situation in Cuba led to the revolution which brought about our recent Spanish war, and thus indirectly the expansion of the American republic into imperialism. Of at least equal importance in early economic progress is the existence of animals that can easily be domesticated. The fact that the horse, the cow and the sheep were found in Asia rendered possible the transition from the hunting to the pas- toral stage and laid the foundation of the later economic edifice of the more advanced Asiatic and European races. For these animals subserved the various ends not only of food supply and provision of clothing, but of means of locomotion and above all of beast of burden. Their absence in recent geological periods in America was perhaps the chief cause of the backward- ness of the Indians. Where a relatively advanced civilization was reached, as by the Incas in Peru, it was in great part due to the existence of the llama, although the inferiority of this animal to the horse, the cow and the sheep explains in large measure the backwardness of the South American civilization. In Aus- 42 Natural Environment [§ 17 tralia there was nol even I his resource, for the kangaroo coiilfl not be utihzed and the l)la(k.fellow remained a savage. In contrast to the tlora and fauna which are of importance from the first, favorable situation, although it also plays a role from the outset, becomes of signal importance in the later stages of economic life when commerce has developed. Irox- imity to the sea, possession of a safe and ample harbor, loca- tion on a river, — all these explain the maritime supremacy on which so much of past civilization has rested. It is no mere accident that the world's progress centred for many centuries around the Mediterranean, and that Egypt, Greece and Rome in turn controlled for thousands of years the destinies of the human race. Passing over the mediaeval Italian seaports and the German Hansa towns, it is again significant that the two greatest metropohtan centres of the world to-day, London and New York, have attained their position chiefly because of their maritime importance. Some writers have even gone so far as to maintain that all civilization can be expressed in terms of the great rivers and seas. Of tlie twenty largest cities of the United States, nine are found on the seacoast, five on the Northern lakes, and five on the Mississippi and Ohio rivers. It would, however, be a mistake to lay too much stress upon mere water communication. Trade conducted on lerra firma has played a scarcely smaller role. Many a populous city is nothing but the development of a cross-roads village, become the busy mart of transit on a great thoroughfare. The centres of the Babylonian and Assyrian civilization of old were largely of this character; and to a similar favorable inland situation must we ascribe the prosperity of numerous cities in all parts of the world to-day, such as Berlin, Manchester (England), and Denver, especially w^here the rivers are few or small. A distinguished French author, Demolins, has even ventured to explain the existence of the primary social types of humanity by the land routes which the various nations traversed in the course of the long migrations from their ancestral home to § i8] Change of Environment 43 their present abodes. However exaggerated this insistence upon a single factor may be, there is little doubt as to the car- dinal influence of location upon commercial opportunities. With the further development of economic life, commerce becomes a handmaid not only to agriculture but to industry. The industrial centres are dependent not only on the commer- cial facilities for disposing of their products, but also upon the ease with which they can secure the raw material and cheap power. Contiguity to the coal and iron fields explains the growth of the great steel industries. The presence of local water power made possible the early centres of the textile industries in New England, as well as the rapid growth of Minneapolis in milling. The grain fields of the Middle West are responsible for the breweries in the Western and the distil- leries in the Eastern States adjoining the Mississippi. The slaughtering and meat-packing centres have gradually moved west with the change in the ranching frontier, and the incipient industries of the Pacific slope are still largely determined by their propinquity to the forests, the orchards or the river fisheries. 18. Change of Environment While man is thus subservient to nature in his economic activities, the subjection is not complete. In fact the distin- guishing mark of difference between men and animals is that while the natural environment moulds all living things, man alone can to some extent modify the environment. This partial control of economic resources depends on the spread of intel- ligence, the growth of technique and the command that science gives over the forces of nature. Of all the natural conditions the climate is the most diflicult to alter. Yet even here a beginning has been made. We pass over with a mere mention such minor points as the mitigation of the effects of undue heat through the introduction of artifi- cial ice, or the creation of the proper atmospheric conditions in certain factories. More significant are the effects of forestry 44 Natural Environment [§ i8 and irrigation. It is now coming to be recognized that forests play an important role, not so much in affecting the rainfall, as in equalizing the flow of the rivers and thus obviating the sudden alternations of inundation and drouth with their devastating effects on cultivation. The afforestation of treeless lands and the reforestation of denuded hillsides are at present a part of the economic policy of every careful government. The marked increase in the American forest reservations, state as well as national, is therefore a subject for congratulation. The conditions of moisture are further affected by the drain- age and reclamation of swamps and marshes. Prominent illustrations of such effects are visible in the English fens and the once submerged, but now dyke-protected, lands of Hol- land. The history of the Italian Maremma, again, shows the alternate consequences of neglect and intelligent effort on climate and soil. Even greater results can be achieved by diminishing aridity rather than by decreasing excessive moisture. Irrigation was practised by the Babylonians, the Persians and other na- tions of antiquity, and on a somewhat larger scale by the Arabs of mediaeval Spain. The recent damming of the Nile by the British constitutes perhaps the high-water mark of modern achievement. It is in the United States, however, that the greatest conquests of irrigation are to be expected. With the gradual exhaustion of the arable area in our public domain the de- mand for a reclamation of the so-called arid lands has been urged with increasing intensity. The success of the Mormons in Utah and the efforts of a few private companies in California and elsewhere in converting the desert into a smiling and exu- berantly fertile district have shown what can be accomplished. The Newlands law of 1902 which set aside for irrigation pur- poses under national control the large sums to be derived from the sales of public lands marks the beginning of a new epoch in American history, for it will ultimately lead to the recovery of several tens of millions of acres and to the influx of corre- sponding millions of settlers. § i8] Changes in Environment 45 The nature of the soil as affected by geological conditions is, as we have seen, of momentous significance. Yet nothing is more certain than the great influence of human effort on the character of the soU. Just as the best land can become the poorest through wasteful cultivation, so the worst land can be converted into the most fruitful. The application of manures, both animal and mineral, and the replacement of an extensive by an intensive cultivation with the proper rotation of crops will soon change the chemical ingredients of the soil. The problem is not one of technical possibility, but of economic profit. Up to this time there has been in the greater part of the western world such an abundance of successively fresh tracts of land that adequate returns have been achieved by the extensive methods of cultivation involving only the most super- ficial tUlage. Even the so-called more intensive cultivation has denoted onl5^ the slightest application of capital to land. In the Oriental countries, on the other hand, the ignorance of scientific agronomy has made intensive culture depend almost wholly upon the hand and not the head. What is really meant by the possibilities of the application of science and capital to agriculture, in some such proportions as they are now uti- lized in industry, may be faintly discerned in the garden patches and truck farms in the neighborhood of great cities. In cer- tain parts of Europe, in fact, the tenant on the expiration of the lease has the right of carting away with him a certain depth of soil. The land itself is thus coming to be in a sense the product of human energy. While the existence of the flora and the fauna ultimately depends on the physical environment, there is a large margin of indift'erence within which old species may be reintroduced or new ones made to flourish. Many plants in all parts of the world are not indigenous. To mention only a few American products, rice and cotton in the South, the sugar beet and the alfalfa in the West, as well as all kinds of vegetables and fruits throughout the length and the breadth of the land, have been 46 Natural Environment [§ i^ introduced by human agency from abroad; and the experiment stations are constantly at work improving the seed. To pass from plants to animals, there is no need of pointing out the marvellous results accomplished in bettering the breed and economic efficiency of the horse, the ox and the sheep, none of which were found here in the age of Columbus. 19. Changes in Location By far the most important achievement of man in altering the natural environment is to be seen in his success in over- coming the influences of location. This has been effected through a threefold improvement in the methods of trans- portation and communication, that is, the transportation of commodities, the transmission of power and the communi- cation of ideas. (i) Upon the transportation of commodities has depended the growth of all internal trade and international commerce. The very conception of commerce involves the transfer of the superfluities of one section to the consumers of another, that is, the weakening or the annihilation of distance as an eco- nomic factor. So long as commerce was dependent upon the safl-boat or the slow-moving beast of burden, this annihilation of distance found its well-defined limits in the cost and time of transportation. With the invention of the canal and the application of steam and electricity to land and sea transport, a revolution was effected in the saving of cost and time, and perishable as well as bulky commodities were now brought within the range of both ordinary and distant trade. The railway has largely replaced natural advantages of situation by artificial ones. A town on the railway line is for all economic purposes nearer the market than another off the line, even if possessed of a better natural location. A competitive centre at the junction of several roads enjoys a superiority which will enable it to overcome a rival more advantageously situated by nature but less well served. With the increase of facilities and § iq] Changes in Location 47 lowering of cost, geographical situation is yielding to the facts of artificially created location. Changes in transportation facilities accordingly are largely responsible for the growth and decline of cities, sections and nations. With every shifting of trade routes, communities ad- vance and recede. Again to confine ourselves to recent history, the completion of the Erie canal in 1825 gave to New York, then a city of secondary importance, a position of undisputed pre- eminence; the construction of many a railroad threw into decay the villages on the old post-roads not served by the new Hnes; the piercing of the Isthmus of Panama by the interoceanic canal will have the most far-reaching consequences on the industrial efficiency of the South and the prosperity of Great Britain. (2) If transportation of this kind is so potent in affecting the distribution of commodities and thus, by providing a mar- ket, indirectly influencing their production, changes in the transmission of power are equally effective in their direct in- fluence. So far as power is the result of fuel, whether coal, wood or oil, it might be claimed that the transmission of power is tantamount to the transportation of the commodities out of which the power is generated. The recent application of elec- ]| tricity, however, bids fair to revolutionize modern industry, not only by reducing cost, but by virtually overcoming distance. Through transmission of electricity water power is no longer limited in its beneficent results to the localities in the imme- diate neighborhood. With the gradual extension of the prof- itable area of such transmission, we may expect to witness a great change in the geographical dependence of industrial centres. Moreover, if the day-dreams of certain scientists are ever realized, so that in the not distant future we shall be able to pick up electricity from the surface of the earth, the last link in the chain of the industrial advantages of natural location of power will be destroyed. It must also not be forgotten that power in industry includes not only mechanical power, but human power. The provision 48 Natural Environment [§ 19 of the labor force itself is vitally affected by changes in the facilities of transportation. In a modern metropolis it may be of comparatively little importance whether it takes a few hours more or less to transfer commodities to the home or the factory. Beyond a certain limit, however, almost every minute counts in the time required for the human worker to reach his home. The introduction of electric transportation prodigiously augmented the possible size and industrial power of modern cities, but the bringing of the suburbs within the city limits has greatly affected values, and changed the relative advan- tages, industrial as well as domestic, of outlying and inter- mediate areas. There is a well-nigh kaleidoscopic change going on in the conditions of geographical location. (3) Finally, the communication of inteUigence has played its part in reducing the significance of geographical location. The post, the telegraph and the telephone have co-operated with other economic factors in giving to the modern market an international character. The least change in the visible supply of wheat in Minnesota or of cotton in Texas is reflected in the market at Liverpool. Any alteration in the conditions of the tobacco yield in Java or of the tea crop in China is felt in the exchanges of New York. But, above all, the dependence of particular sections or countries upon mere location has been weakened in a special sense by the spread of modern science. vScience is international in its working; the utilization of dis- covery and invention is no longer the exclusive possession of a favored nation. The whole world is becoming akin in produc- tion, as in consumption. Thus it is clear that while external nature still plays its fun- damental role in explaining the economic life of man, the pro- gress of civilization is utilizing in countless ways certain natural forces to counteract and to minimize the influence of other nat- ural forces. Nature at bottom remains the mistress, but man can within certain limits emancipate himself from the bondage, and secure a mastery which will insure prosperity and progress. CHAPTER IV THE POPULATION 20. References C. D. Wright, Practical Sociology (Am. Citizen Series, 191 2), chs. ii, v, viii; R. Mayo-Smith, Statistics and Sociology (1895), part i; A. F. Weber, Growth of Cities (1899), chs. iii, v, vi; Thirteenth Census, volumes on Population; W. F. Willcox, A Discussion of the Increase of Population (Census Bulletin, No. 4, 1904); U. S. Industrial Commission, Report, XIX (1902), 1-13; Tenement House Department of New York City, First Re- port (2 vols., 1904); W. Ogle, On Marriage Rates and Marriage Ages (Jour. Stat. Soc, LIII, 1890) ; C. V. Drysdale, The Small Family System (1914) ; F. S. Crum, Marriage Rate in Massachusetts (Am. Statist. Assoc. Publica- tions, V, 1896), and Birth Rate in Massachusetts (Quart. Jour. Econ., XI, 1897); R. R. Kuczynski, The Fecundity of the Native and Foreign Born Population in Massachusetts {Ibid., XVI, 1902); J. Bonar, Malthus and his Work (1885); H. Spencer, Principles of Biology, part vi, ch. xii; G. H. Knibbs, The Mathematical Theory of Population (191 7); F, A. Fetter, Economic Principles (1915), chs. 32, 7,3', E. A. Ross, Founda- tions of Sociology (1905), ch. ii; J. B. Clark, Essentials of Economic Theory (1907), ch. .xix. 21. Density of Population While the problem of external nature is primarily physical, that of population is principally biological and sociological. Population, however, also has its economic aspects. It touches the field of production in so far as there is a relation between the size and constitution of the population and the creation of wealth; it affects the subject of distribution because with a given quantity of production, the per capita dividend will obviously be influenced by the size of the divisor. The subject falls naturally under the heads of the status Hnd the movement of the population. By the status of the 4 49 50 Population [§ 21 population are meant its density and distribution; under the movement of population we have to consider its increase and its mobility. The density of the population is conditioned by the charac- ter of the economic resources and the degree of economic de- velopment. That is, it depends not only upon the external environment, but upon the use made of it by man. The den- sity and distribution of population as dependent upon drainage, altitude, temperature and humidity, which play a considerable role in the tables of the American census, may be passed over here as referable to the influence of the natural elements. The human element, by transforming the environment, becomes the increasingly important factor in economic progress. It is manifest, for instance, that the hunting stage can support less inhabitants to the square mile than the pastoral, and that an agricultural population must be more thinly scattered than a population engaged in industry. In an agricultural com- munity, again, the density of the population will vary with the character of cultivation. Population is indeed conditioned by food supply; but food supply depends not only upon the num- ber of acres but upon the product per acre. When a community is no longer self-dependent, and carries on exchange with another, greater inequality in the density of population becomes possible. Industrial and commercial communities barter their finished products for the raw ma- terials of agricultural sections. While the total population still depends on the total food supply, the surplus food of the agricultural group is secured by the industrial and commercial group, with the result of a greater concentration of population in the latter. Density of population in any particular country or section which has outgrown primitive economic conditions thus depends not so much on the production of food as on the existence of the wealth which can procure food. England had all through the middle ages a far sparser population than France, because although they both exported wheat it was more pre- DISTRIBUTION OF THE POPUI | iRetn-euiuced from Bmfi BunUAT i CO., H-Y- I OF THE UNITED STATES, 1900. f. jelfth U. S. CeTiatisJ § 2i] Density of Population 51 dominantly agricultural; bul in the nineteenth century, with the prodigious increase in industry and commerce, England became a food importer and the density of the English popula- tion soon exceeded that of the French. The following table, which gives the number of inhabitants per square mile in 1900- 1910, will show the influence of economic condition on density: 1900 1910 1900 1910 Belgium 589 661 S\\atzerland . . 207 235 England 437 615 France .... 188 191 Netherlands .... 416 460 India .... 167 178 United Kingdom . . 344 474 Spain .... 97 100 Japan 296 344 United States . 25 30.9 Italy 294 313 Turkey .... 21 Germany 270 311 Russia .... 19 Austria 226 225 Canada .... 1.75 1.90 The striking facts here are, first, that a very intensive agri- culture combined with a moderate commerce, as in China and Japan, can support a population as dense as that of a highly developed modern industry; and secondly, that the greatest density is found in those countries, like Belgium, England and Holland, which unite very diversified industry with a fairly intensive agriculture. The relative capacity of economic stages to support population is illustrated by the conditions of the United States. The census, as appears from the map opposite page 50, divides the country into six groups with a density respectively of less than 2, 2 to 6, 6 to 18, 18 to 45, 45 to 90, and over 90 inhabitants to the square mile. The first group com- prises the hunting, trapping, fishing, lumbering and mining sections; the second includes the grazing communities; the third contains the purely agricultural areas; in the fourth group, still mainly agricultural, commerce and manufactures have commenced to make some progress; while in the fifth and sixth groups there is a continually greater influence of industry. Computed by states rather than by sections, there were in 1910 ten commonwealths with a density of over 100, namely, Illinois, Delaware, Ohio, Maryland, Pennyslvania, New York, Con- 52 Population [§ 22 neclicut, New Jersey, Massachusetts and Rhode Island. The conditions in each state are indicated in the chart opposite page 52. It thus appears that in some of the industrial com- monwealths the density of population is about equal to that of Europe. 22. Concentration of Population Slightly different from the density is the concentration of population. This refers to the distribution between city and country. A greater density generally, but not necessarily, im- plies a greater agglomeration. New Hampshire, for instance, has a greater density of population than California, but a smaller urban population. The industrial revolution during the nineteenth century and the changes in transportation and commerce by which it has been attended are chiefly responsible for the drift of popula- tion to the cities. In 1790 3.14 per cent of the American people lived in cities of 10,000 and more; a century later the seven colonies of Australasia with almost precisely the same popula- tion as the United States of a century earlier had 33.20 per cent living in such cities. In 1790 3.40 per cent of the popu- lation of the United States lived in cities of over 8,000; in 1900 this proportion had grown to 33.1 per cent. In several states it is far higher. Taking the states whose urban concen- tration largely exceeds that of the average for the entire coun- try, the percentage living in cities was in 1910 as follows: In Cities Over 25,000 10,000 5,000 2,500 Rhode Island .... 67.8 80.7 92.5 96.8 Massachusetts 64.1 77-5 87.7 92.9 Connecticut .... 48.S 67-5 79-4 89.7 New York 67.S 72-3 74.1 76.9 New Jersey .... 53-8 645 70.1 75-2 United States 3I-I 37-2 41.9 46.4 NUMBER OF INHABITANTS TO THE SQUARE MILE, BY STATES AND TERRITORIES, 1910. NOTK:This (liayram does not include the District of Columbia, whicbjiad 5,518 inhabitants to the square mile in 1910. 3 25 BO 75 100 125 150 175 200 225 250 276300 325 350375 400 425450475 500 525 560 575 RHODE ISLAND MASSACHUSETTS NEW JERSEY CONNECTICUT NEW YORK PENNSYLVANIA MARYLAND OHIO DELAWARE ILLINOIS INDIANA | \^ / ii ico *^ / ^1 1 1 1 \ ,v N / 1 yiALES FE VIALES ' V \ y ^\ AGE 100 90 80 70 60 50 40 30 20 10 Number living § §§§§°§§§oS in each «»-*COW.r-t T-ie«eO'a««a generation. ' Triangle X X represents an imaKinary population completely stationary, increasing annually by a constant number of births and decreasinR by an equal number of deaths distributed in a precisely equal degree among the various age groui)s. Figure A A represents a population about stationary, with a low birth rate, a low death rate and with little immigration or emigration. Figure B B represents a population with a high birth rate, a high death rate and much emigration. American conditions would be represented by a combination of the upper part of A and the lower part of B, making the curve look like a top. been pointed out and as is illustrated by the chart above, the distribution by age may normally be compared to a pyramid, ' From Levasseur, La Populalion Franqaisc, Vol. II (1891), pp. 257- 260. 56 Population [§24 with the infants at the bottom and the aged at the top. Where population increases rapidly, the base is broad; where it in- creases slowly, the base is narrow and the upper part of the pyramid, representing the older classes, bulges out, making it bell-shaped. Similar results are caused by migratory move- ments. In the case of a large immigration the middle-age classes expand and the curve may be compared to a top; in the case of emigration the curve sinks in the middle and looks like a spindle. It is owing chiefly to this fact that in the industrial states as well as in the urban centres, the curve is like a top, that is, with the largest proportion of productive classes. The difference between industrial and non-industrial states in 1900 is illustrated in the following table of distribution by ages arranged by percentages: Years 1-15 15-65 65- United States 31.10 27. 10 41.60 64.87 67.88 55 ■ 50 4.03 5.02 2.90 Massachusetts South Carolina Massachusetts had almost ten per cent more of the productive classes than South Dakota. A similar lesson is enforced by foreign statistics. Distribution by occupation naturally follows very closely the utilization of the economic resources. Comparative statistics of different countries would therefore be meaningless. In the United States the tables on page 57 show the great increase in the industrial classes, and throw an interesting light on the relative importance of the various industries from the point of view of distribution of the population. 24. Inqrease of Population The increase of population is normally dependent on the existence of marriage. To the children born in wedlock must §24] Increase of Population ^1 however be added the illegitimate births, which form in dif- ferent countries from 3 to 14 per cent of the whole. In some large cities like Paris the percentage is as high as 24, and where, PERCENTAGE OF DISTRIBUTION OF POPULATION IN THE UNITED STATES BY OCCUPATIONS 1880 i8qo I goo 1910 Agricultural pursuits Professional service Domestic and personal service . . . Trade and transportation Manufacturing and mechanical . . . 44-3 3-5 19.7 IO-.7 21.8 37-7 4.1 18.6 14.6 -5 35-7 4-3 19.2 16.4 24.4 32.9 4.8 14.0 199 28.3 NUMBER OF PERSONS ENGAGED IN VARIOUS OCCUPATIONS IN 1910 Carpenters 817,120 Coal miners 613,924 Railroad laborers 570,975 Laundresses (not in laundries) 520,004 Machinists, millwrights and toolmakers 488,049 Dressmakers and seamstresses 449,342 Draymen, teamsters and expressmen 408,469 Iron and steel workers 368,313 Painters, glaziers and varnishers 337^355 Stenographers and t\^pewriters 316,693 Sewers and sewing machine operators 291,209 Saw and planing mill employees 260,142 Blacksmiths, forgemen and hammermen 240,519 Stationery engineers 231,041 Tailors and tailoresses 204,608 Weavers 203,718 Tobacco and cigar operatives 151,519 as formerly in Bavaria, especially severe marriage laws exist, the percentage is even higher. The proportion of single persons over 15 years varies from 30 to 50 per cent in diflferent countries, the percentage in America being 40 for men and 31 for women. If, however, we more properly take the people between 40 and 60 years as the class that one would usually expect to see mar- 58 Population [§ 24 ried, we find that the single persons constitute only 12 to 15 per cent of the whole. In the American cities the proportion of single persons is larger, owing partly to the postponement of marriage and partly to the large immigration of young un- married persons. The normal marriage rate in most countries varies from 14 to 18 married persons annually for each thousand of the population, with considerable variations due to general economic conditions. Periods of depression, for instance, naturally diminish the pre-disposition to marriage, while on the other hand when the conditions for the employment of women are favorable, as in some of the New England towns, the mar- riage rate is exceptionally high. Of almost more importance than the frequency of marriage is its fecundity. When we compare the number of births with the population as a whole, we speak of a crude birth rate; when we compare the births with the number of women of child- bearing age (15 to 50 years), we speak of a refined or corrected birth rate. The average number of children to a family varies in different countries from 3 to 5. In the same country the fruitfulness depends not only on color and nationality, as in the United States, but also on social and economic conditions, according to the sway of prudential considerations. It is a notorious fact that the greatest fecundity is found in the poorer classes. It is now also well established that birth rates, like marriages, differ at present in cities of the same size according to the prevailing industry or occupation. The birth rate per thousand of the population as a whole ranges from the excep- tionally low figure of 21 in some of the New England states to almost 50 in Russia and India. In the United States it was about 35 in iqoo, but it is falling rapidly in the Eastern states. In 19 1 5 the birth rates in Maine and Vermont were 21.1 and 21.6 respectively, even lower than in France, where it was 22 just before the war. In New York the birth rate was only 24, and even in Minnesota it was only 24.5. The increase of population depends, as has just been inti- § 24] Increase of Population (J9 mated, not only upon the birth rate but upon the death rate It makes a great difference to social progress whether a slow increase of numbers is due to the one or to the other cause. Whatever may be the conclusion as to the desirability of a low birth rate, there can be only one opinion as to the undesira- bility of a high death rate. In modern times, at least, civili- zation endeavors in every way to arrest mortality and to pro- long human life. It is quite unnecessary to fortify by statistical data the fam- iliar fact that deaths vary according to seasons, age and sex. In hot countries the summer, and in cold countries the winter, are the most dangerous; in all places infant mortality is by far the greatest; and almost everywhere the male death rate slightly exceeds the female. In making comparisons we must again observe the distinction between the crude and the refined rate. The ordinary basis is the number of deaths per thousand of the population. Since, however, the rate varies with sex and age, the comparison is accurate only when made as be- tween the same proportions of sex and age. A rate reduced to such proportions is called the refined or corrected death rate. Otherwise a country with a relatively larger number of children would have a higher death rate. For general purposes, however, it has been found that the results of computing ac- cording to the crude or to the refined death-rate method do not differ sufficiently to change the relative standing of coun- tries. In the American statistics still further accuracy is sought by correcting the death rate for race as well as age distribution. Using the crude figures, the normal death rate in modern com- munities now varies from 14 to 21 per thousand, the former being the figure for the United States in 1916. In the cities it is considerably higher than in the country, the rural rate some- times being as low as 8 or g, and the urban rate occasionally ascending in unhealthy American cities to '35 or even 40. The death rate has been markedly reduced in recent times by the progress of science in controlling disease, by the growing infre- 6o Population [§ 25 quency of war, and by the economic changes which have vir- tually eliminated famine, except in relatively backward countries like Russia and India. The greatest improvement, however, has taken place in the urban death rate, owing to the immense strides in modern sanitation, food and milk inspection, housing improve- ment and park development. Within a century the death rate of Vienna has fallen from 60 to 16; within twenty-five years that of London from 50 to 13; and within half a century that of New York from 32 to 14. In fact, selected cities in certain countries now show a death rate even lower than in rural districts. 25. Migration of Population The final factor which affects changes in the population is migration. Internal migration from place to place as well as from occupation to occupation is the chief manifestation of the modern mobility of labor. In former times, custom, caste, settlement laws and the like interposed serious obstacles to such movement. Now, under the pressure of the economic motive, population shifts with opportunities of bettering one's condition. Migration between countries assumes the form of emigration and immigration. While immigration swells the population of new countries, emigration only rarely diminishes the population of an old country; for the gap caused by the emigrants is soon filled by the results of an increased birth rate due to the improved opportunities at home. Ireland is for special reasons a striking exception. Where people emigrate to places under the control of the mother country they form colonies. Colonies, however, are not only colonies of occupation, to afford an outlet for surplus population, but also colonies of exploitation, to furnish a vent for surplus production of commodities. In modern times we may even speak of a third kind of colonies like those of the United States, where the aim is neither emigration nor exploi- tation, but rather the political and economic elevation of the indigenous population. O i-H CI CO -f If O t^ 00 C5 O >-i n to i^ <~> r^ oi ch ^ ih ^ tX ^ ^ '^ :^ ?^ ^2 "^ '" '-^ '^ "^ ^ '^ r^ } ' 'P T*" '^ r CO -X -H i*. -« -t( -)i -(< -H -(. -H lo lo in n n in "o m in m -o o tr> -^ o 'O --s -o o -o 1 - i~ '- i- i^ i- i- oooococooooooooococococbtxcoOTcocooocccococococococoaccococ/Dcococccncococoot 1200 1100 1000 900 800 700 600 500 400 300 200 100 1 1 - FOREIGN IMMIGRATION TO THE UNITED STATES 1840-1920 NUMBER OF IMMIGRANTS. ( To year ending Dec, 31, 1 855 figures show alien passengers arrived; after year ending Dec. 31, 1855, innmigrants arrived.) NET IMMIGRATION after deducting alien Haparturpg _.^.___ (From 1899 to 1907 thp figures are official estimates; from 1 908 the figures are actual ) ; / 1 ( } t / ^ ^ J / \ / / / \ / / / \ y^ f- W / \ y / ; \ / f / \ 1 f^ ' \ A / 1 / I 1 \ 1 V / b/ / \ / f \ 1 / f A f \\ / 1 ^ '> y A / V \. / V / V / -i ^ ^ ^ 1 ii -iiM oo-^iraor~ooc50i-i(MCO-*mot^ooc:>o.-icMc»5-*ioor^ooc50i-icifO'i ^^ 00 C5 o .-^ (^^ CO -t" in o t-!- oo o o --H c^ c^ 4< LT . 00000a000C0C0a)CXDC0CiOCiOOOCT:CiOC5OOOOOOOOOO'-ii-l'-(rH^f-l,-.^^,-i :■; OQOOOOOOOtXiGOC/DOOCOCOQOCOOOCOOOOOOOOOOOOCSCiCiCsCSCSOCSwidCiriOCiCiC^OCiCi ' ^« 1 / / / « 1 1 / / / / / K n: 1 s. ■^ / j N NJ \ \ * > I 1, 1 \ \\ J / \ / w / ' 1 ; / ' ' [ ^ 1 1 l- \ \ 1 ' 1 1 1 / 1 1 / 1 \ / / / 1 1 / / 1 \ / 1 i * f 1 1 / 1 \ / 1 - J \ / \ / 1 / \ / \ ^■4 1 \ / \ / 1 . r 1 \ ' / / 1 / ^■-* f / / I 1 1 1 / \ / / / \ / / \ / \ / /' 1 \ ' \ A / t 1 / I / ' 1 y v.. 1 , 1 \ s / / r \ / / I ^ ' I F J it t \ / 1 h 1 J ^ r ' YEAR 1800 1810 1820 18:!0 1840 1850 18(i0 1870 1880 1890 1900 1910 I'lJ INCREASE OF POPULATION IN THE UNITED STATES AND THE PRINCIPAL COUNTRIES OF EUROPE FROM 1800 TO 1920 / / / / / . / / / / / ' t / / / / / / / / y / / ^ y ,# / -^ <£-, 1 # < £/ \ O^ ^ V ..e«^ \ ^^ /(^5^ ^ ^ .^c,t^^' '"" ^^ ^ ..-o J^^-}:^- '" .^^ ■i?*' *W«^ €k ^0^^ "Z^ ,-si- — • — ^'' ^^^^%^ ■^ -^j ^^^ ^- ^^. ^^" w^ ^, -a^ W^f^ , z^: -' , l^J^-"- ,. ■— -P? ,/i^ — J. v-V- ___ " J- »-J .+++■ .4-++-I SPATN"^ • + + + ■ h+++- -+++• •+-•"•" ^ ..«!+ + ^ •+++- ^^.^ SWEDEN ANDNORV^AY^^ ,-»->-J ^-^ — :^^J-^ ..D.-0 j 1800 1810 1820 18:i0 1840 1850 18G0 18r70 1880 1890 1900 1910 192 YEAR § 25] Migration of Population 61 If wc assume with the anthropologists one original habitat for the human race, practically all populations are composed of immigrants or descendants of immigrants. Formerly the migration was one of tribes or nations; now it is one of individ- uals. In the older civilizations these wholesale immigrations even of individuals have long since ceased. In countries like the United States, however, the movement is still in progress on a gigantic scale, probably for the last time in human history. Although the immigration has increased largely for the past half-century, it has not grown appreciably faster than the native population. The foreign born constituted 13.2 per cent of the total population in i860; and while the proportion rose slightly in the succeeding decade, in 1900 it was again 13.7 and in iqio 14.5 per cent. This is contrary to the current opinion, but is none the less a fact. It is clearly shown on the maps and charts following pages 60, 62 and 64, which also illustrate the great increase in recent years of immigrants from the South and East of Europe as well as the composition of the population in 1910. By combining the natural increase with that due to migra- tion we arrive at the total increase of population. Up to the civil war the population of the United States grew slightly more than a third every ten years. Since 1880 the decennial rate of increase has diminished, being about 25 per cent for the decade ending 1890, and 21 per cent for those ending 1900 and 1910. Notwithstanding this diminution in the rate of increase, it is exceeded only by Argentina, where the rate is approximately as large as that of America before i860. In Europe the rate of increase is only about one-half of that of the United States; but while it is falling in the United States it is rising in Europe. On the chait opposite page 61 will be found a statement of the comparative increase of population in some of the more important countries during recent decades. The excess of births over deaths and the rate of increase in a few typical countries for 1900 are given in the table on the following page. 62 Population [§ 26 26. The La^v of Population The chief problem in the increase of population is its rela- tion to prosperity. The so-called law of population, as framed by Malthus at the close of the eighteenth century, asserts that there is a tendency of population to increase faster than the means of subsistence, and that this pressure of population on food, unless removed by preventive agencies, will lead to the positive checks of misery, vice and crime, by which alone the United States . . . England and Wales Germany France Italy Hungary Birth Death Excess of Rate. Rate. Births. SS--!^ 17.4 17.7 30.1 18.4 II. 7 36.2 22.5 13-7 22.2 21.6 0.6 35-5 24.6 10.9 40.5 30-3 10.2 Per cent of Decennial Increase. 20.7 12. 1 16.2 1-7 7.2 10.3 Populat ion (omitting 000). 75,994 32,526 56,367 38,590 32,475 19,254 equilibrium will again be restored. Three conclusions were drawn from this doctrine, applicable respectively to socialism, to wages and to economic progress. (i) The first point is the one which originally set Malthus thinking. Some of the French idealists and their English followers had been advocating equalitarian or communistic schemes of social regeneration. Malthus contended that the pressure of population on subsistence would efTectually pre- clude any such ideal consummation. (2) Again, although this came somewhat later, it was claimed that wages depend upon demand and supply, and that it was therefore hopeless for the laborers to expect more than a bare minimum wage unless their numbers were checked. (3) Finally, it was asserted that economic progress in general was seriously menaced by the danger of over-population, and it was contended that this could be averted only by the extensive apphcation of prudence uj O O .. r- CO Q X I < Li_ CC Q. O O m o Q — Ll_ X • r r-' m. w/m w/m wm^ m. "-■-■-li ^ 1 r I uik ■ ■ D < < o <-> O it (J D D D z ■2 5 q: § 26] Law of Population 63 and self-restraint, — remedies in the efficacy of which Malthus himself had not much confidence. In the original framing of the principle, Malthus maintained that the ratio of increase was at best arithmetical in the case of food, but geometrical in the case of population. While the accuracy of these ratios has been successfully disputed, it still remains a question as to whether population really tends to increase faster than food. So far as food is concerned, there is no doubt that there are definite limits to its increase, even though these limits are more elastic than were originally thought. The area of cultivation may be extended, improve- ments of all kinds may be applied, hitherto unsuspected forces of nature may be utilized; but in the end, as we shall see, the law of diminishing returns, which was not at first thought of by Malthus, will make itself felt. With reference to population, however, two considerations have been advanced to ofTset the contentions of Malthus, — the biological and the socio-economic arguments. The bio- logical argument asserts that the power of reproduction itself diminishes with more complex and civilized beings, and points to the small families of the higher classes and to the increasing sterility of the New England women. This argument, however, is by no means indisputable; and it is above all uncertain whether the diminishing ratio is natural or artificial, — that is, whether or not it is a result of volition. The socio-economic argument claims that, as a consequence of general social as well as economic reasons, the size of families varies inversely with wealth, and thus keeps down the ratio of increase. With the poorest classes every child is regarded as a prospective bread-winner, and to that extent not only a help in the near future but an additional support for old age. This leads to early and often improvident marriages and large families. In the next stratum of society the demands of education and of the maintenance of a social position induce more deliberation in marriage, and effectively bar the i)robability of so numerous 64 Population [§ 26 a progeny. Finally, where wealth is abundant, the desire care- fully to train a few rather than to half train many children, as well as the wish to escape the nervous strain of a numerous offspring, conspire to restrict the number of children. The French peasant is not so different from the average American or European resident of a large city. The economic motive may be slightly stronger with the former, the other social motives slightly stronger with the latter; but in essence they are alike. Here again, however, the argument is not anti- Malthusian; for the phenomena just described are the results of prudential considerations, and really fall under the head of the preventive agencies mentioned by Malthus. It might seem, then, that Malthus was right in his premises; and since the preventive considerations are proverbially weak in the poorer classes, it might be claimed that he was also jus- tified in his gloomy forebodings. This conclusion, however, does not follow. The real antithesis is proximately at least not between population and food, but between population and wealth, or productive efficiency. Through a proper organiza- tion and utilization of improved methods, production of wealth in general may be so augmented as to permit an increase both in population and in prosperity. This has happened, for in- stance, all through the nineteenth century, even in the older countries of Europe; the industrial revolution has not only multiplied national wealth, but has greatly increased popula- tion, while reducing misery, vice and crime. It might be con- tended, indeed, that this is exceptional, because the increased numbers have after all been dependent ultimately upon the food supply which they have secured from the newly opened areas of North and South America; and it might be added that the population of these countries is increasing so rapidly that sooner or later they also will have no surplus food to export. Even granting this contention, however, and looking forward to the distant time when all the huge and now uncultivated areas of the earth's surface will be utilized for food production, it stUl z o 1 ii 1^ - 1 r 1 -- --U ^ _._._._. rtn 1 u ^ i|i---^^ ^ - - ^- - - — _ ff? f? _ p ; 1 I 1\ \ ^ \\ GEORGIA DIST. OF COLUMBIA LOUISIANA CALIFORNIA UTAH ILLINOIS SOUTH CAROLINA MICHIGAN NEVADA MONTANA WASHINGTON MISSISSIPPI SOUTH DAKOTA ARIZONA NEW JERSEY CONNECTICUT NEWYORK MASSACHUSETTS WISCONSIN RHODE ISLAND NORTH DAKOTA MINNESOTA I t Z £ _ cc S I § 26] Law of Population 65 remains true that the increase of wealth may for almost indef- inite periods keep ahead of population. For, as was intimated in the last chapter, a really intensive capitalistic system of agri- cultural production has never yet been attempted on a large scale. If there is enough wealth to put into the soil, it can be transmuted into food. The diminishing returns from land can be arrested by the increasing returns of a rapidly augmenting efficiency of industry in general. The food may indeed cost more, but there will be more wealth with which to buy it. Not only can wealth be made to increase faster, but, as we have seen, the increase of wealth will in itself set in motion those economic and sociological forces which tend to reduce the rate of increase of population. Thus from both sides the antithesis of wealth and population may be weakened. Under favorable conditions population may increase gradually, and wealth rapidly. It is clear, however, that these favorable conditions include those of distribution as well as production. The communists against whom Malthus wrote were mistaken, but not for the reason alleged by him. They thought that a mere change in the distribution of wealth would suffice to bring prosperity. They failed, just as the socialists of to-day still fail, to realize that even an ideal distribution is valueless without enough to divide, and that their schemes would dangerously impair pro- ductive efficiency. On the other hand, the wages-fund doc- trine of the English classical economists erred, as we shall learn, chiefly in that it overlooked the connection between wages and production, and took no account of the fact that, given a greater productive efficiency, more workmen and higher wages are perfectly compatible. The problem of population as a whole is, then, not one of mere size, but of efficient production and equitable distribution. That is, it is a problem not of numbers alone but of wealth. Since man is the chief labor force, large numbers indeed, other things being equal, mean greater national strength and power. 5 66 Population [§ 26 But the reverse may be true if other things are not equal. A small nation with greater productive efficiency, like England, will outrank a more populous country, like India. Smaller numbers with a fairly equable distribution of wealth are prefer- able to a dense population living in the extremes of misery and opulence. Mere numbers are therefore not the vital point. The world has alternated in its opinion and action. In classic antiquity, where the absence of advanced industrial methods soon set a limit to production, over-population was a real danger, tempered first by emigration and then by infanticide. In the middle ages population was sparse, and yet, because of unde- veloped production, kept down by famine and disease. With the growth of enterprise in the fifteenth and sixteenth cen- turies, increase of population was favored but not always se- cured. The conditions at the close of the eighteenth century seemed to lend color to the fears of Malthus; but for well-nigh a century the concern in the advanced industrial countries has been not of an unduly rapid but of an unduly slow increase of population, until in France to-day it has become a problem not of excessive fecundity but of race suicide. The doctrine of over-population has therefore lost its terrors for modern society. The stress has been shifted from food to wealth and efficiency. Productive efficiency, however, depends not only upon character and education, intellectual, industrial and ethical, but also upon social organization and economic methods. The problem of population, in short, is to-day a part of the broader problem of the production and distribution of wealth. In this sense it is a result rather than a cause. If we increase productive efficiency and secure an approach to dis- tributive justice, population will adjust itself to the new con- ditions either by increasing automatically up to the level of comfortable subsistence or by being voluntarily kept down to that level. Book II Development of Economic Life and Thought CHAPTER V THE ECONOMIC STAGES 27. References C. Biicher, Industrial Evolution (trans, by Wickett, 1901), chs. i-iii; R . T. Ely Studies in the Evolution of Industrial Society (1903), part I, ch- iii W J.Ashley English Economic History {2 voh., i888i8gT,);E. ]enks, History of Politics (1900), Types i, ii, W. Cunningham, Growth of English Industry (3 vols , 5th ed , 1910-1912); J. A. Hobson, Evolution of Modern Capitalism (3d ed , 1912), ch. ii, E. J. Simcox, Primitive Civilizations (1897) O F. Peschel. Races of Mankind (1876); F. 'RsiiztX' History of Mankind (3 vols., 1 896-1 898); J. Lubbock, Races of Man (1888); and Origin of Civilization (1870); L. H, jSIorgan, Ancient Society (1878); A. H. Keane. Man, Past and Present (1899); Spencer and Gillen, Native Tribes of Central Australia (1899) and Northern Tribes of Central Australia (1904) r A. W. Howitt, N live Tribes of South East A ustralia (1904) ; O. T. MsiSon,Origin of Invention (Smithsonian Institution, Publications, 1895); P. G. H. Grierson, The Silent Trade (1903); A. Loria, Econotnic Founda- tions of Society (trans, by Keasbey, 1899); G. Schmoller, The Mercantile System (trans, by Ashley, 1896) ; T. Warner, Landmarks in English Indus- trial History (1899); E. Lipson, An Introduction to the Economic History of England (1915); L. C. A. Knowles, The Industrial and Commercial Revolutions in Great Britain during the Nineteenth Century (1921). 28. Economic Development Inasmuch as economic life is many-sided, it is not easy to single out the fundamental characteristics of its development. IMost of the current explanations err in one of three ways: some mistake the accident for the essence; some are so incomplete 67 68 Economic Stages [§ 28 as to be of little real use; some are so general as to be either vague or inadequate. (i) Of the first class a good example is the division into the three periods of barter, money and credit economy. In the first period men exchanged their superfluities through the medium of barter alone; in the second period money was invented to facilitate trade; in the third, credit was devised to supplement the money supply. All this is true enough, but does not go suf- ficiently deep. It does not show which is cause and which is effect. It does not tell us why these transitions occurred, nor explain the basic changes in the industrial organization of which these transitions are only the outward forms. Of much the same character is the division of economic life into the three stages of the animal, the vegetable and the mineral economy. In the first period, we are told, men lived primarily on the results of the chase; in the second, on the fruits of the earth; while, in the third, science is continually expanding the scope of chemical substitutes for animal and vegetable food. It is obvious that even if this statement were correct, it would not make clear the fundamental facts of economic organization. (2) The second class of explanations comprises all kinds of half-truths or statements which while true in themselves are incomplete. In this category belong Maine's famous law that the world has progressed from a condition of status to one of contract, and Spencer's law of the evolution from militant to industrial society. Of a like nature is the assertion that the world has gone through the stages of slavery, serfdom and free labor; or that it has advanced from common to private property, or from bimetallism to monometallism, or from custom to com- petition. All such statements may be true and even serviceable within a limited field, but for the purpose of disclosing the real inwardness of general economic progress they are of minor importance. (3) The most conspicuous illustration of the third class of explanations is the venerable classification into the five stages, § 29] Primitive Technique 69 — the hunting, the pastoral, the agricultural, the commercial and the industrial stage. This description, however, is both inaccurate and vague. Not only is hunting not the first stage, but the sequence of the stages is not necessarily the one men- tioned. Moreover, the generalization is too broad to afford much help in the explanation of modern conditions. Rome is supposed to have gone through these stages, and yet the later Roman civilization differed in fundamental economic respects from our own. A version of economic history which would throw imperial Rome and modern England into the same cate- gory is manifestly too broad to be serviceable. Of a similar character is the division of economic life into the stone, the bronze, the iron and the steel age. The iron age covers so many heterogeneous forms of economic civilization that the classifica- tion is useful chiefly for archaeological purposes. Before proceeding, however, to give the more modern ex- planation of economic progress, it may be wise to dwell for a moment on the last two classifications which, when correctly put, still possess a certain use for the early periods of society. 29. Primitive Technique (i) At the outset and for a long time, man, like his simian ancestor, lived on wild berries, nuts, roots and herbs. He roamed about, as do some of the Australasians to-day, in small groups of twenty to fifty, in alternating periods of plenty and want, according to the season or the fortunes of the weather. Each group was for the purposes of the food supply entirely independent. Primitive man, however, as the physical con- formation of his teeth and jaws shows, was not only herbivorous but carnivorous. When geographical reasons favored, he varied his diet by fishing, and in many cases he practised cannibalism, not only on his enemies, but also on the old and useless mem- bers of his own social group. (2) The root-grubbing period was, we shall not say suc- ceeded, but rather supplemented, by the hunting stage in yo Economic Stages [§ 29 certain portions of the world where game was abundant. This, however, presupposes a certain technical development. Man is distinguished from his prey primarily by the use of weapons and tools. The history of civilization is very largely the his- tory of technique. There was at first no distinction between weapons and tools. The weapon was the only tool for both defence and offence. The earHest weapons consisted of objects ready at hand, — wooden sticks, animal bones, tusks and teeth, pieces of stone. (3) The combination of these was one of the great steps in advance. It changed the primitive club or missile into a mod- erately effective weapon. The affixing of a flint to a stick, or the fastening of jagged teeth to pieces of wood by wisps of grass or strips of hide or catgut were the first triumph of human ingenuity. The bone and the stone age lasted for countless generations. In the course of time implements were found serviceable not only for warfare but for the saving of toil; in other words, by the side of the weapon we find the tool. In this transition perhaps the mightiest factor was the utilization of fire. What was a terror to brute creation became a servant to man. Originally obtained from a chance conflagration, the spark of fire was zealously guarded, and was soon invested with sacred attributes. In some cases it even became the basis of the religion itself. Although we find savage races to-day who understand the secret of creating fire by friction, the easier method was to ignite the brand from the ever-burning flame. The chief function of the vestal virgins in Rome was to keep the perpetual fire; and in the Catholic church to-day with its never-extinguished light we have the last survival of what was once a fundamental social custom.^ ^ The testimony given before the New York gas commission in 1905 affords another curious illustration of the survival of this custom. One of the officials stated that whenever the location of the gas works is changed, the fire is transferred by a brand from the old to the new building. Under no consideration would a new fire be started. § 29] Primitive Technique yi (4) Fire was utilized not oiilj^ for purposes of warmth, buL also for the better preparation and conservation of food, thus making man less dependent on his immediate surroundings. From that time on, although environment still makes the man, man to an ever-increasing degree succeeds in changing the environment. The most signal service of fire, however, was in the improvement of tools. Its uses became most marked when metals were employed. Even the tools of wood and stone, however, were greatly improved thereby. So slow was the development that it took countless centuries for the old stone or palasolithic age to change into the new stone or neo- lithic age. We find flint weapons at least 100,000 years old. During this transition man had learned to rub, to sharpen, to bore, to cut, to plane and to polish the bones and stones so as to produce arrows, knives, javelins, hammers, millstones, daggers and saws. In all this he was simply imitating the ex- perience of parts of his own body: in the saw we have the improved tooth, in the hammer the strengthened fist, in the scoop the enlarged hollow of the hand, in the hook the crooked finger, in the javelin the lengthened arm, in the knife the sharpened nail. Hand in hand with this went the invention of the earliest utensils. From the animal's horn to the beaker, from the hoUowed wood to the osier basket, from the natural gourd to the artificial jug, does not seem so great a step. Yet the invention of pottery has been deemed by some so im- portant as to constitute a revolution in human civilization. Weapons, tools, utensils, — these typify the onward march of the human race; they are the outward technical manifesta- tion of man's intellectual progress and the physical basis of his economic development. (5) From the purely technical point of view the stone age was succeeded by that of metal. Without the use of fire for smelting this would of course have been impossible. Archaeolo- gists not so long ago thought that the copper and bronze ages everywhere preceded that of iron. This can, however, be 72 Economic Stages " [§ 30 accepted only with qualifications. It now seems probable that the rougher forms of iron were utilized before bronze was invented. In certain countries we find no bronze age at all, because of the lack of one or both of the constituent compo- nents, tin and copper. In the civilizations that grew up about the Mediterranean, however, first copper and then bronze drove out the primitive and rougher iron implements, until after several centuries the improved extractive processes assured the final victory to the finer iron tools and thus instituted the true iron age. With the advent of this, man's mastery over nature was definitely assured. 30. Transition from the Lower Stages of Civilization It is obvious that metallic weapons and implements would be of the greatest service to both hunters and fishers, and in truth we find some of the more advanced hunting civilizations acquainted with the use of rougher iron. But the continuance of the hunting stage, as well as the character of its transition to a subsequent stage, depends not so much upon the kind of weapon as upon the conditions of nature and the relations of population to the land. Under certain circumstances where game began to become scarce, it was discovered, at first by mere accident, that a less precarious food supply could be secured by preserving various animals and caring for their increase, rather than by devouring at once the entire product of the chase. The domestication of animals was a discovery of momentous import, and with their multiplication first for food, then for transport, and finally for clothing, protection and pleasure, we have the conditions for the transition to the pastoral stage. Although this is often called the nomadic stage because of the perpetual shifting of the community in quest of fresh pasture, the term is badly chosen, because there is on the whole less nomadism than in the hunting age. The chief result of the domestication of animals was the assurance of a permanent, even though an artificial, food supply, or at all events one that § 3o] Transition 73 depended on the foresight and care of man. Cannibalism disap- peared and famines became less frequent. Another consequence was the possibility of supporting a larger population on the same area. Finally, the permanent possession of cattle became an ob- ject of desire, and private property developed on a large scale, with corresponding differences of wealth and of social classes. It is, however, erroneous to assume that the hunter was nec- essarily succeeded by the hersdman. In the first place animals capable of domestication were not found everywhere. On the American continent no pastoral life was possible with the Uama alone. Secondly, whole stretches of land, both in Africa and in Asia, were unsuitable for grazing purposes. It is only where all the geographical and climatic conditions were favorable, as on the great Asiatic and North African plains, that we find the transition to the pastoral age. In the same way it is erroneous to think that the herdsman was everywhere succeeded by the farmer. A certain degree of agriculture is often found combined with the hunting or fishing stage. In fact, it is only a small step from the original root-grubbing to primitive agriculture. When, again presum- ably by accident, it was found that the seeds would multiply themselves, and that the- stick was more effective for grubbing than the finger, we have the beginning of the cultivation of the soil. Just as human foresight led men under certain con- ditions to preserve animals in order to secure an increase, the same quality led them under other conditions to preserve plants. If flock tending is a result of the domestication of wild animals, agriculture is a result of the domestication of wild plants. Be- cause of the temporary patch near the hunter's tent, some, like Morgan, call this system horticulture; because of the primitive tools, others call it hoe culture. Both terms are unfortunate, the one because horticulture (i. e. garden culture) at present signifies a very developed form of tilling the soil; the other, because the hoe has even to-day been by no means completely superseded by the plough. 74 Economic Stages [§ 30 What is reasonably sure is that the primitive tilling of the soil was carried on by the hunters' wives and daughters as a subordinate and auxiliary means of support. It was only at a much later period that agriculture acquired more importance, and it was not until the game supply had been practically ex- hausted that the chief reliance was put on agriculture, a'nd the roving life of the hunter gave way to the settled habitation of the farmer. These periods in agriculture may exist, moreover, in connection not only with the hunting stage, but also with the pastoral stage. In fact, the most careful investigators now believe that the domestication of animals was not an achieve- ment of the hunter at all, but of the primitive farmer, and that the pastoral life was an outgrowth of early agriculture. With- out a knowledge of all the details, therefore, it is impossible to assert the exact chronological sequence of the stages. Much the same may be said of the transition to the later stages of commerce and industry. The commercial stage does not necessarily follow the agricultural stage, but often precedes it. In the case of many coast peoples, the fishing and commer- cial stages appear at the same time, without the intervention of agriculture. And in more developed civilizations, like that of Venice, for instance, we find the pastoral stage develop at once into the commercial stage without reaching the industrial stage. The time-honored classification of economic progress is thus not only inexact in itself, but of comparatively little service in explaining the great changes that have supervened since the adoption of agriculture. For this purpose a somewhat different line of cleavage seems desirable. If we regard economic conditions from the standpoint of the relations of production to consumption — for these are the fundamental economic facts — we may divide the world's his- tory into three great stages, known respectively as the self- sufficing economy, the trade or commercial economy and the capitalist or industrial economy. From another point of view § 3i] Isolated Economy 75 these may also be called the isolated economy, the local or village economy and the national economy. These we shall now proceed to consider. 31. Self-sufficing or Isolated Economy By this term, is meant a form of organization where the economic unit or household produces everything that it needs and consumes all that it produces. In its typical form the household raises the raw materials for food and for clothing, provides its own shelter and works up into finished products everything necessary for its final consumption. What little division of labor exists takes place within the household, and grows only with the expansion of the household's needs. I Whether the household is small or large, however, it is always a unit by itself; it has normally no necessary relations with any other unit. Its economic characteristic is its self-sufficiency and therefore its isolation. This self-sufficing economy assumes manj^ different aspects in the course of history. The economic unit may be either a family or a larger group. It may rest either on slave labor or on free labor. It is the universal form of the beginnings of society, in the root-grubbing or hunting stages, and is always found in the early periods of the pastoral and agricultural stages. It is seen in the frontier life of more advanced communities, for the family of the backwoodsman in the United States is in this respect like the earliest groups known to history. It is found in Greece, where the landed estate was called the oikos. It is typified in the Roman familia, which is the name for the entire possessions of the Roman citizen, including his wife, his children, his slaves, his land and all his other belongings. It is represented in the manor of mediaeval Europe and in the plantation of the American slaveholder. It is found even to-day in the Russian mir, or village community, and in some of the Danubian principalities. Everywhere the distinguishing mark is the self-sufikicncy, 76 Economic Stages [§ 31 or home production and home consumption, of the economic unit. It is not a question of slavery, for we find the same economic form in the mediaeval manor resting on serfdom, and in the primitive or still surviving community of freemen. It is not a question of autocratic power, for we find it equally in the democratic Russian mir and the aristocratic American plan- tation. However different the forms, the essence is the same. The landlord, whether a single person or a group, is the property lord. The estate forms a complex whole. Production is carried on by the group, and there is no sharp line between producers and consumers. The wants of the group members are satisfied by their own labor, and not by that of some other economic unit. As consumers they are no less independent than as producers. In the course of time, indeed, the households that possess natural or acquired advantages in the production of certain commodities learn to raise a surplus, and trade it off to other groups for various purposes, — at first propitiatory in character, but later in the expectation of securing similar advantages in return. In this way barter develops. But at the outset, and for a long time, there is no barter, because in a typical, self-sufficing economy there is no need of barter. In fact, the exchange of commodities seems wrong because it is unnatural. The propensity to "truck," which Adam Smith considered nat- ural to man, is in reality the outcome of a long evolution. To truck is etymologically to trick, just as barter in its original form (old French bareter) means to cheat .^ Even when exchanges develop, the transactions are always attended by rigid formali- ties, often invested with a religious sanction. The fact of exchange between the groups does not neces- sarily alter the organization of economic life, as long as the great mass of commodities are produced and consumed at home. 1 This meaning has survived in our " barrator,'' although by a cu- rious development it is now confined to the deceitful shipmaster, or to the cheating and meddlesome instigator of litigation. § 32] Commercial Economy 77 Thus, for instance, we find in the later centuries of Greek life that many of the estates produced raw materials, and sometimes luxuries, to be sold in the cities which enjoyed an active com- mercial life. So in Rome during the period of its greatest pros- perity, the large estates devoted themselves to some one product, like wine or oil or wheat for export, which was carried on by large trading companies. So, again, in the American plantation a single commodity, like tobacco or cotton or sugar, raised for export and handled in the towns, generally constituted the very foundation of its success. It is still true, however, that even in these cases the great mass of commodities used at home was produced at home. While there was trade between the units, there was little if any trade within the units, and while exchanges in the bulk even as between the units amounted to a large sum, they played a small role in the daily life of each household. Just as the plantation and not the towns gave the imprint to the civilization of the South, so the mir and not the cities typify the Russian economic life, so the estates and not the commercial companies shaped the history of republican Rome. In its essence the economic unit was still predominantly self-sufficing. Even where there is a surplus production for the market, the consumers within the group are in an over- whelming degree dependent on the exertions of the group. With the growth of commercial intercourse both within and between those early economic groups, the self-sufficing character of the unit begins to disappear, and there is gradually ushered in the next stage of economic life. 32. Trade or Commercial Ecouomy The characteristic feature of this stage is the fact that pro- duction is no longer followed directly by consumption, but that there is interposed the process of exchange. The demand of consumers is now met primarily through the medium of trade or commerce. The significance of trade does not arise from the fact that there is trade between the units, for, as we have just 78 Economic Stages [§ 32 seen, such trade is found in the later stages of the isolated or household economy. But we now have trade within the unit. The members of the household no longer, as before, produce what they need, but primarily produce what others need. We now have separate classes of producers and separate classes of consumers. Men for the most part no longer consume their own products, but the products of others which they secure through trade. In other words, instead of the self-sufhcing economy we have the trade or commercial economy. The unit of economic life, although broader than before, still remains local in character, and the trade and industry are largely centred in the villages. Hence we also speak of it as the local or village economy. We can study this stage most clearly in medieval history. The eleventh and twelfth cen- turies witnessed an immense impetus given to commerce, due chiefly to the opening of new routes by the Crusades. The markets and fairs which had begun on a small scale in the pre- ceding centuries now became the rule, and soon assumed a more permanent form in the shape of villages and towns. The medi- aeval town was shut off from its neighbors not only by the actual wall of stone and mortar, but by the no less important economic barrier of trade monopoly; only the townsman, the burgess, might freely buy or sell; only he was admitted to the many trade privileges. On the basis of this economic separation was built up the political independence which is so marked a char- acteristic of early communal life. Although we call it the village economy, it is evident that the economic unit was not the village or town itself, but the village with the outlying territory. The lands or estates provided the raw materials which were worked up into finished products within the town. The breaking up of the older unit, moreover, enhanced the importance of industry. In the preceding stage industry was scarcely differentiated from agriculture. The farmer was his own carpenter, the farmer's wife did the haying and made the family clothes. Even where the estates became so large that § 32] Commercial Economy 79 there were separate classes of industrial workers, they were all under the control of the landowner. Now, however, the village workmen began to form an independent class, even though many of the workmen might have a little garden patch of their own. The point is that they no longer raised the raw material for industry, but bought it. The farmers grew the material, the village artisans turned out the product and each class pro- gressed by trading with the other. The new industry was based on trade in another sense. The artisan not only bought the raw material in small quantities, but sold in his shop or in his booth at the fair the products which he himself had finished. The workman was primarily a trader, and his success depended as much on his shrewdness in trade as on his skill in industry. It was only by degrees that the artisans pure and simple became a separate class and that trade was carried on by the large merchants. For a long time business w'as chiefly of a retail character conducted in the local markets and fairs, and even when the scale of transactions in a few staple articles reached the stage of wholesale trade, the modern machinery of commerce was entirely lacking. The increasing importance of the trader and the workman was the chief cause of the growing sense of liberty and equaUty; the mediaeval town was the birthplace of modern democracy. It took a long time, however, for industry and trade to attain a dominant position. After some temporary victories in Italy, the trade centres won their first lasting triumph in the Low Countries, and it is accordingly there that we find the earliest example of modern republics on a large scale. In the later development of this economic stage there were indeed great accumulations of wealth gained in commerce or wholesale trade side by side with the wealth in land. We have not only the feudal landlords but the merchant princes. If we choose to apply the modern term capital to such accumulations, we find agricultural capital and commercial capital, but with rare exceptions no industrial capital. The wealth drawn from 8o , Economic Stages [§ 32 the land was under prevailing conditions not again put into the land, but consumed by the landowners; the wealth accumulated in trade could not go on indefinitely multiplying ships and vans without increasing the commodities to be transported; but since these commodities were produced by hand, the increase was slow. In last analysis, therefore, the economic civiliza- tion of this stage rested upon the petty village industry. Com- mercial prosperity and agricultural wealth were still associated with the prevalence of the small workman and the village economy. This stage, it is true, assumes different phases. In some places agricultural prosperity predominated and the landowner was supreme; in others, like the Hansa towns, we find busy marts of wholesale trade, and the predominance of the aristo- cratic commercial families; in still others we find the centres of manufacture and the political mastery of the craft guilds. In all cases, however, we have the typical characteristics, — the small trader, the petty workman and the local economy. The large landowner . sold his produce in the neighboring village market and drew thence his articles of consumption, outside of simple food. The merchant prince may have traded with distant lands, but the great bulk of the transactions was local, and the business of the national and international fairs was restricted to comparatively few articles. Most of what the workman produced was made to order for the local market. The village or town was the unit; the foreigner was the man who came from a different town, not necessarily from a different country. This stage of economic life lasted in Europe for several cen- turies. Various causes conspired first to modify and finally to destroy it. The chief factor was undoubtedly the accumu- lation of wealth caused by the discovery of the new world and the opening up of the all-sea trade routes to the East. The discovery of immense sums of precious metal in America and the prodigious impetus given to commerce both East and West § 7,7,] Industrial Economy 8 1 produced a heaping up of riches which were now applied on a large scale to further production in industry, and which gradually- changed the character of all economic life. This accumulation of wealth, applied to industry, formed what came to be known as industrial capital, and there was thus ushered in the third stage. 33. Capitalist or Industrial Economy The characteristic feature of this stage is the appearance of capital on a large scale, applied in industry. With capital, there naturally came the capitalist, the owner of the capital, the employer of labor force and the director of industrial enter- prise. In the isolated stage we noticed a unity pervading the whole economic process; in the local and handicraft stage we saw that the unity was confined to production; in the capitalist stage production itself is split up. At first, as in seventeenth and early eighteenth-century England, the capitalist makes his appearance at the beginning or end of the productive process: he buys the raw material wholesale, or perhaps even disposes of the finished product at wholesale, leaving the remainder of the process in the hands of the independent workman. Somewhat later the capitalist acquires the working premises and finally the technical means of production. The workshop becomes the fac- tory, the tools are replaced by machines, and the workman be- comes the factory hand. In the meantime the various parts of the process become so important that each separate stage falls into the hands of distinct groups of capitalists, each of them resting on the fundamental class of factory owners. Thus the supply of raw material, the provision of plant and factory, as well as the getting of the finished product to the consumer, call into exist- ence distinct classes of capitalists for each step in the process. Finally the power of capital becomes so enormous that in some industries we find a movement toward integration, and the same capitalists, now associated into a single group, gradually acquire control of the entire process, from the extraction of the raw material to the ultimate disposition of the finished product 6 82 Economic Stages [§33 to the consumer. Thus industrial society comes to he organized on its present complicated hasis. Production is now no longer to order in small quantities, as in the previous economic stage, but large stocks are accumulated to be disposed of when the market is favorable, or large plants are erected to fill anticipated large orders. The leisurely methods of the old system, regulated more or less by custom, give way to an intense competition which makes itself felt in every nook and corner of industrial society. The last vestige of barter transaction disappears, and money everywhere forms the link between exchanges. Credit outgrows its primitive forms of mere personal assistance and becomes an integral part of production and exchange. The desire to employ capital lucratively leads to the attempt to economize labor force, and brings about the invention of new machinery. The prodigious cheapening of production converts luxuries into necessities and widens the consuming power of the people. The multi- plication of wants brings new industries into existence, and finally gives more employment at increasing wages to the laborer. At the same time the enormous power of capital and the sep- aration of society into industrial classes create new and difficult problems. An important result of the capitalist stage is the supplanting of the local unit by the nation. Production and consumption no longer take place within the local boundaries, but what is produced in one district is often consumed in another. The local economy broadens into a national economy. The larger economic interests now require protection through the forma- tion of broader and stronger political units. Thus the petty feudal principalities disappear and the modern national states are born. Town is no longer arrayed against town, the free- man or burgess gives way to the citizen of the state; the foreigner is now the man from a different nation, not from a different village. In the early stages of capitalistic develop- ment the nations oppose each other as the towns had previously ^^7,] Industrial Economy 83 done, and this keen national competition leads to much good, although not unmixed with evil. More recently still, the further application of capitalist methods, the improvements in transportation and communica- tion, coupled with the growth of modern speculation, tend to produce a world market for most products, and the perturba- tions of trade are quickly transmitted from country to country. We might thus even be tempted to speak of an international rather than a national economy. But although the signs are not wanting that the ultimate outcome will be the creation of such a world economy, it must not be overlooked that the economic unit to-day is still the nation, and that the national standpoint is being only slowly transformed by universal or international considerations. The capitaHst stage is also called the industrial stage, because industry in the narrower sense is the chief occupation. In the first stage agriculture was the well-nigh exclusive form, in the second stage prosperity rested largely on trade, in this stage agriculture and trade alike step into the background. All products of course still come ultimately from the soil; but an ever-increasing quantity of wealth consists of products several degrees removed from the soil. Production of wealth to-day means more and more the creation of finished products. Com- merce, again, is still of great importance; but commerce is now primarily the handmaid to industry rather than to agriculture. Not only has the moneyed interest appeared as a rival of the landed interest, but the moneyed interest itself has become intimately bound up with industry. The great fortunes arc gained to-day not in agriculture, nor even in commerce, but in industry. The typical rich man in the first economic stage is represented by the feudal landlord or the plantation owner; in the second stage by the merchant princes, such as the Medici and the Fugger; in the third stage by the Carnegies and the Rockefellers. Agriculture and commerce have been trans- formed by the application of capital and of machine methods. 84 Economic Stages [§ 7,7, The most prosperous condition and the widest diffusion of power, of culture and of civilization are found in industrial rather than in agricultural nations. Some countries, like China, were not touched by this move- ment, because of the policy of commercial exclusion. So that China is still in the village economy stage. Other countries, like Japan, were brought into the new movement but a few decades ago, and are now in a process of rapid transition. Still other places, like some of the backward sections of Europe and America, lag behind in the movement. In classic antiquity, as we have seen, the second stage was not reached for a long time. Even, however, where commerce developed on a large scale and the civic centres flourished, industry was still of a petty, handicraft character, and the existence of slavery coupled with the absence of any such revolution in the world's trade as occurred at the close of the middle ages prevented both Greece and Rome from entering upon the later stages of the capitalistic era. Capital in classic antiquity was primarily commercial capital; capital in modern times is predominantly industrial capital. CHAPTER VI THE HISTORICAL FORMS OF BUSINESS ENTERPRISE 34. References C. Biicher, Industrial Evolution (1901), ch. iv; Ashley and Cunningham (as in § 27); T. Veblen, Theory of Business Enterprise (1904), chs. ii, iii; J. A. Hobson, Evolution of Modern Capitalism (1917), chs. iii, iv; G. E. Howard, History of Matrimonial Institutions (3 vols., 1904), I, chs. i-iv; H. S. Maine, Ancient Laiv (1880), ch. ix; and Early History of Institu- tions (rSSo), ch. iii; C. Gross, The Gild Merchant (1890); W. R. Scott, The Constitution and Finances of English, Scottish and Irish Joint Stock Companies (3 vols., 1910-1912); A. Toynbee, The Industrial Revolution (1884); G. Unwin, Industrial Organization in the Sixteenth and Seven- teenth Centuries (1904); R. M. Tryon, Household Manufactures in the U. S., 1640-1860 (1917); S. J. Chapman, The Lancashire Cotton In- dustry (1904); A. W. Calhoun, A Social History of the American Family (3 vols., 1917-1919); H. Pirenne, Belgian Democracy (1915), 35. Primitive Economic Activity — The Clan Business originally meant the "being busy" for a mere live- lihood; it now means being busy for profit. In the same way business enterprise originally denoted any organized form of economic activity; it has now come to involve the idea of making a profit or securing a surplus. "Enterprise" is the Romanic form of the Teutonic "undertaking." When we undertake to secure any form of wealth, we have economic activity; when we undertake to secure profits through some organized activity, we have an undertaking or enterprise. With the immense growth of such activities in modern times increased importance is attached to the organizer. Not so long ago we called the head of the undertaking the "undertaker"; nowadays with the restriction of the term to a particular class of undertakings we have come to call him the head of the enter- prise, or the enterpreneur. 85 86 Historical Forms of Business [§ 35 The earliest kinds of business undertakings are outgrowths of the family. The family itself, however, is the result of a long evolution. We have seen that our savage ancestors roamed about in small hordes or packs of a few dozen individuals, the numbers being dependent chiefly on the possibihty of securing available food supplies from the berries and nuts, the chase and the waters. After the breakdown of the original monopoly of sexual relations on the part of the leader of the pack, the en- suing promiscuous methods of pairing gradually gave way to more or less permanent forms of marriage, in which kinship was counted through the mother. For amid such conditions of group, rather than individual, marriage relations it was indeed a wise child who knew its own father. These consanguine groups or collections of hordes which we meet almost everywhere at the dawn of history are known as clans (or, to use the Roman term, gentes), and, from the fact that their members usually trace their kinship through the mother, are called uterine or maternal clans. In some cases where the primitive agriculture or hoe- culture carried on by the women assumed great proportions, or where we find an increasing significance attached to the do- mestic arts, like weaving and baking, the social importance of the female was reinforced by still stronger economic reasons, and we encounter a system of society known as the matriarchate, — the government by women. While the matriarchal system, however, is occasional, the maternal society based on the uterine clan is well-nigh universal. Of the characteristics of this early gentile or clan society there is room to say only a few words. Of a family in the modern sense there was no trace, further than the temporary living together of the mother and the very young children. The only recognized relationship was kinship or membership in the clan. Owing in a large measure to the survival of the primal law of sexual monopoly of the head of the original horde, and perhaps also to a recognition of the injurious results of inbreeding, the custom arose of contracting marriage, or rather § 36] The Family 87 of entering into connubial relations, outside of the clan; and thus there developed one of the most rigid rules of primitive society, the system of exogamy, or the prohibition of marriage between members of the same clan, as constituting incest. Each clan traced its descent from, and often took the name of, some mythical ancestor, — generally an animal or plant. This to- tem, as it was called, became sacred and was soon protected by a system of "taboo" or religious prohibition. The origin of the totem worship is still shrouded in mystery, but is probably to be sought in economic reasons, — the totem being at first the chief source of food supply which afterwards became so useful for purposes of barter that its consumption by members of the clan was forbidden. Where conditions were favorable to an increase of population the clans, although always pre- serving their own integrity, developed into the wider groups of phratries and of tribes, all of them connected, however remotely, by blood relationship. The clans, and in some cases the tribal groups, were the centres for common sports, celebrations and worship, and in the clan or tribal customs we find the germ of what afterwards developed into both law and morals. 36. The Family The decay of the clan or gentile society was again due largely to economic causes. Where conditions favored the growth of the pastoral system, private property in flocks and herds arose, and the paramount position of the father as the bread- winner and the defender of the property was recognized. Where the hunting and root-grubbing stage was supplanted by a devel- oped agriculture, the labor of the man in tilling the soil, con- structing the house and maintaining the patrimony became of signal importance. The male is now the chief factor in the economic process, and we accordingly find the patriarchal family. Famulus is the Latin for servant or slave: all the members of (he new family group are the servants of the father. The family relations are primarily property relations. The 88 Historical Forms of Business [§ 36 father owns the land, the flocks, the wife or wives, the children, the slaves, and exercises scarcely less authority over the other relatives that form a part of the family group. The father gives his name to the wife and children, and the patrimony is handed down from family head to family head. We now find that marriage by capture gives way to marriage by purchase; and the group union of early gentile society is succeeded by the polygamy and finally the monogamy of the patriarchal head. The unity of this new family group is far closer and its discipline far more rigorous than that of the clan, and the recognition of these intimate economic relations leads to the growth of all those finer filial and fraternal ties which are the nursery of ethical progress. For a time the forms of the old gentile society are still preserved amid the newer and more vigorous patriarchal system, either under an agricultural regime, as in the recorded beginnings of Greek and Roman history, or under pastoral conditions, as in the story of the early biblical patriarchs. But with the undermining of the economic foundations of the clan system the whole structure of gentile society crumbled. Where- ever territorial relations based on the community of wider economic interests replaced the old ties of blood relationship within the clan, tribal society developed into political society and thus led to the origin of the state and of organized gov- ernment. In Judaea, Greece and Rome, as in all countries that had to work out their own civilization, this gradual evolution can be clearly discerned. In other cases where a lower civilization was suddenly brought into contact with a higher one, the steps are often less gradual. Thus the contact of the Teutonic tribes with Rome engendered a rapid transition from gentile to political society, but with a decided abbreviation of the patriarchal period. Much the same is true of the influence of the English on the Irish septs, which lasted well into the middle ages, and on the Scottish clans, which finally disappeared as a power only a century or two ago. § 36] The Family 89 The patriarchal family was thus primarily an economic product. The family became and remained the basis of social and political life. With the growth of industry and commerce and the opportunity for independent activity on the part of the various members, the old family group split up and was contracted into the family of modern times with its smaller and more immediate circle. Finally, the most recent devel- opment of economic life with its freedom and its system of competition has powerfully contributed to a still further loosen- ing of the family discipline; woman has emancipated herself, divorce has become frequent, the age of the effective inde- pendence of the children has been continually pushed further back. Thus there have been ushered in all the ethical and social problems of modern family life, a discussion of which transcends the scope of an economic treatise. The family thus constitutes the earliest form of business undertaking only in the original sense of an organization to secure a competence rather than a surplus. That is to say, production was carried on within the family, by the family, for the family; both producers and consumers were members of the family; each worked for all; each consumed the products of all. Yet the first attempts at business enterprise in the modern sense of an organization for gain, of producing for a market, are associated with the later developments of the family groups. The great slave plantations of the Roman Republic, for instance, were distinct business enterprises. The larger family groups which became the village communities of the early middle ages and which, when subjected to an overlord, developed into the manorial system were occasionally, at least in part, business enterprises, as in England after the period of the early enclosures. We find examples of this co-operative family or group enterprise not only in agriculture, but also in commerce, as in the trade transactions of the mediicval com- munes, and even in industry, as in the Russian ariels or co- operative groups of laborers that have survived to this day 90 Historical Forms of Business [§ 37 In its essence, however, the family was not well fitted for business, in the sense of profit-making; and with the increasing importance of the competitive life the abler individuals who cut themselves loose from the family group forged to the front. With the greater conservatism which always marks the tillers of the soil we find this process slower in agriculture than in industry and commerce. It is accordingly in these latter directions that we must first look for the more developed forms of business enterprise. 37. Help or Hire System Where industry develops beyond the capacity of the family group and where the conditions are not favorable to the growth of slavery, we find the beginnings of industrial assistance from outside sources. The independent laborer who roves from house to house and from place to place does more of the work of the household. Carpenters, cobblers, glaziers, tin- smiths, masons, seamstresses, — these represent a few of the occupations conducted in this roving fashion. The itinerant workman receives a compensation for his services and often becomes for the time being a member of the family. This custom survives even to-day, not only in the New England institution which bears the significant name of "help" (even though the service has become somewhat more permanent), but also in the temporary assistance given to our Western farmers at harvest time by the "hired man." This system can thus best be termed the help or hire system. ^ It is found in the early history of almost every society, and those familiar with the rural communities of Switzerland and Scandinavia will recognize it as the prevalent form to-day. In its essence, however, the help system is an intermediate and transitional form. The important factor is still the family group; the consumer furnishes as before the raw materials 'The term " wage- work," used by Biicher and his translator. Indus- trial Evolution, p. 162, is ill chosen, because the term wage-earner inevitably brings to mind the modern factory system. §38] Handicraft System 91 and receives in return the finished product, the workman sup- plying the labor force and sometimes the tools. Gradually the change assumes a more rapid pace. The smaller house- holds find that they need outside help more frequently but less intensively, and the larger family groups find it profitable to set some of their superliuous assistants to work for others. The cus- tom arises of the consumer going to the workman rather than the workman coming to the consumer. Thus the occupations of the village blacksmith, the miller, and even the baker and weaver become settled trades. The itinerant workman acquires greater permanence, and from assistants the laborers now evolve into a class independent of the family group. When this step is reached, we have what is known as the handicraft system. 38. Handicraft System Under this system the artisan is independent. He no longer works in the house of the consumer. He occupies his own house, he goes to market to purchase his raw mate- rials, he works up the raw material in his own home with his own tools and he sells the finished product to the consumer in his own shop. We no longer have production for the family, as in the family system; we no longer have the raw material and the finished product belonging to the consumer, as in the help system. Every phase in the process down to the sale of the final commodity is in the hands of the workman himself. The workman or craftsman, moreover, finishes every- thing by hand, and it is for this reason that we speak of the handicraft system. This does not mean that things were not previously and even subsequently made by hand, but calls attention to the fact that the distinguishing mark is the grow- ing importance of industry and the rise of an independent class of workmen, who conduct business enterprises by themselves. Since the producer makes to order for a special customer, the system is also sometimes called the custom system, — a term still surviving in the custom-tailor of to-day. 92 Historical Forms of Business [§ 38 In the middle ages the workmen gradually banded them- selves together by trades into compact organizations known as guilds or crafts. Historically the system has therefore come to be known as the guild system. The guilds, however, were a result rather than a cause; and in many parts of the world we find the handicraft system without the guilds. Under the guild system every workman might ultimately look forward to membership. Starting in as an apprentice, he spent a few additional years as journeyman, and when he had finally mastered all the details of the trade, he was admitted as master craftsman. To use modern terms, which had no meaning then, he was at once employer and workman, capital- ist and laborer. The modern differentiation of classes was unknown. At the height of their power the guilds often se- cured a political domination. In many countries they came to be virtually identical with the townsmen; the division of labor between land and town assumed a sharply defined form, and the manor became more and more the simple purveyor of raw material for the guild. Just as the family system of industry corresponds to the typical isolated household economy, so the guild or handicraft system corresponds to the typical trade or local economy. The guild system characterized the industrial life of Europe for several centuries after the Crusades. With the increase of wealth, however, a twofold process went on. The guilds grew more grasping and exclusive, until they became monopolistic bodies, proving a drag upon industry instead of a help. Membership was confined to a select few whose right to practise the trade was inherited, and the mass of the workmen could no longer look forward to participation in its benefits. Newer industries started wherever they could, in independence of the old crafts. Secondly, and more important, as the richer craftsmen amassed wealth, they as well as the larger traders desired to put it to productive uses. Thus, as we have seen, there developed a true industrial capital which could not well § 39] Domestic System g^ find employment within the limits of the old system. The guild or handicraft system slowly decayed, and there was ushered in the next stage, known as the domestic system. 39. Domestic System Here for the first time we find a line drawn between the capitalist employer and the workman. In the help system there was also an employer, but he was himself both workman and consumer. In the handicraft system the employer was no longer the consumer, but was still, in part at least, the workman. In the domestic system the employer and the workman are dif- ferentiated. The method of sale of the finished product, more- over, is another point which distinguishes the domestic system not only from the help system but also from the handicraft system. In the help system the product is not sold at all; it is consumed by the employer. In the handicraft system, where production is carried on on a small scale and to order, the commodity is sold directly by the workman to the consumer. Now, however, where capital has made production on a larger scale possible, the market is so widened that the individual workman is no longer able to control the means or to devise the machinery for placing the products on the market. The capitalist alone can do this. The essence of the domestic system consists in the fact that while the workman stiU owns his tools and conducts the work in his own home, often with the aid of his family and in con- nection with some agricultural activity, he no longer disposes of the finished product. In most cases, in fact, he no longer buys or provides the raw material; for the same capitalist who disposes of the product also finds it possible to purchase the raw material in larger quantities. The division of labor goes a step farther than in the guild system. Not only does one class produce the raw material, and another the commodity; but the production of the commodity itself is now divided between two classes, the one buying the materials and market- 94 Historical Forms of Business [§ 39 ing the goods, the other furnishing the productive power or manual labor, the tools and the work place. The term domestic system is not a happy one, for under the handicraft or guild system the laborer also worked in his own home. It is used, however, to distinguish this form of capitalistic enterprise from its successor where the laborer no longer works at home. Again, under the domestic system the laborer still works by hand, but since he is no longer in control of the entire process of production we distinguish it from the handicraft sys- tem. The term that was now applied to the domestic workman is manufacturer, the maker by hand {manus, facere) . Sometimes, instead of domestic or home work, we speak of commission work. The capitalist owner of a commodity commits it to another in- dependent individual to be worked up and returned to him. In the clothing trade to-day we still distinguish between custom work (the old handicraft system) and commission work. The domestic system, which developed during the seven- teenth century and reached its climax in England in the eighteenth, was modified with the immixture of capital into the successive stages of business. The most important change was due to the desire to economize in production and to ap- ply capital lucratively through the invention of labor-saving devices, or machines, which substituted mechanical power for human labor. In the textile industries, the period before 1770 marks the early experiments, the period 1 770-1 790 the development of the great mechanical inventions, the period 1 790-1 830 the application of steam power, and the period after 1830 the widening of the market through the railway and the steamship.^ The other industries soon followed; and there was thus inaugurated what is termed the factory system. iThe important dates are: Kay's flying shuttle, 1738; Hargreave's spinning jenny, 1764; Arkvvright's spinning frame, 1768; Crompton's mule, 1779; Cartwright's power loom, 1785; Watt and Boulton's steam- engine, 1785. § 4o] Factory System 95 40. Factory System This system is the one under which the modern world lives. Here the capitalist employer not only provides the raw mate- rial and disposes of the finished product, but also controls the intermediate process. The machinery is so costly as to be beyond the reach of the workman; and since the machines are the property of the employer the building in which production is carried on must also belong to him and is called the factory. The laborer is not his own master, as in the handicraft system, he no longer owns the tools and the workshop, as in the domestic system: all that he does is to provide the human labor force which is applied through machines and in work- places owned by the capitalist employer. The stupendous in- crease of production which is thus rendered possible reacts upon the laborer, both as producer and as consumer. Popu- lation increases enormously, and there is a continual drift from the country to the city. Industrial society receives its modern shape, and the social income is divided into the rent of the landowner, the wages of the laborer, the interest of the capi- talist and the profits of the entrepreneur. "Manufacturer" no longer means the handworker, but the individual who em- ploys others to work for him. The development of capital leads to keener competitioji and speculation, new classes of capitalist middle-men arise and the machinery of credit and exchange is transformed. The predominance of the industrial capitalist employer is so pronounced as to give to the whole form of business enterprise the name factory system. So markedly different is this from any of its predecessors that the process which brought it about is commonly termed the Industrial Revolution. If by revolution, however, we mean a sudden and complete overturning of the old, the name is ill chosen. For the process was a gradual one. It look several decades for the transition in the English textile industries to be consummated, and in the other occupations the supplanting of 96 Historical Forms of Business [§ 41 the domestic by the factory system proceeded step by step during the ninteenth century. Outside of England, the movement came later and more slowly, while even in England there are stiU a few trades, like those of the glass-workers, the cutlers and the chain-makers, in which the factory system has made only slight inroads. It must not be thought that each of these forms of enterprise is marked off from the others by sharp lines. In every stage we notice survivals. The family system is still found in the outlying regions of almost all countries where modern ideas have not completely penetrated, as, for. instance, the Southern Appalachian mountains; the help system survives in various kinds of domestic and other service; the handicraft method is typified in the cobbler or custom tailor; the domestic system plays a considerable role in the hand-loom weavers of Europe and the sweat-shops of modern cities with their commission work in the clothing trade. The economic life of a people, however, is characterized by the type forms, not by the sur- vivals of a preceding system. Modern business enterprise is based to an overwhelming degree on the factory system. 41. Associated and Corporate Enterprise We have thus far discussed the growth of business enter- prise from the point of view of the differentiation of the entre- preneur. We have now to treat it briefly from the point of view of associated production. Here we can trace four stages, — enterprises carried on by individuals, by partnerships, by corporations, by trusts. (i) We have seen that while the family was the earliest form of associated activity it was not well suited to the keen eco- nomic struggles inseparable from business life. Business enter- prise really begins with the business man, and the business man, now as then, is to a large extent born, not made. Sagacity, boldness, good judgment and administrative ability have always been the mental equipment of the successful merchant. To § 4i) Corporate Enterprise 97 the extent that the individual has possessed these qualities, he has forged ahead. As business enterprises increased, however, the individual often found himself unable to cope with the situation single-handed. He therefore associated himself with others who possessed some of the qualities which he lacked. (2) The partnership was a device to strengthen enterprise at its weak points. It meant the association of various kinds of abUity, and often of capital and ability, and multiplied to that extent the economic efficiency of the unit. The partner- ship, however, has decided limitations. The personal relation between the partners and the need of implicit confidence in each other necessarily restrict it to a few individuals. As soon as the business calls for the employment of a capital beyond the means or the desires of a few partners, a new form of enterprise is needed. This is supplied by the corporation. (3) Although according to the recent researches of Deloume and Weber the commercial corporation probably existed in the later centuries of the Roman Republic, in its modern shape it dates from the early mediaeval Italian cities. The earliest form was that of a so-called "bank," individuals associating their capital to form a joint stock, loaning it to the government on a pledge of certain revenues, and participating in the profits according to their holdings. Thus the beginnings of public credit and of corporate enterprise are found in- timately associated. The next important development of the joint-stock principle was in the trading companies of the six- teenth century, which were at first mere temporary associations for the purposes of a single voyage, but which gradually assumed a more permanent form. It was not, however, until the predominance of industrial over commercial capital in the nineteenth century that we find the immense expansion of cor- porate enterprise which marks modern life. The economic advantages of corporations are threefold, — joint stock, limited liability, perpetual life. Through the device of the corporate security, the number of the investors 98 Historical Forms of Business [§ 41 may be multiplied without limit. Every stockholder has a voice in the enterprise in proportion to his investment. He is liable for the debts or losses only to the limit of his own share. Modern states have been slow to recognize this prin- ciple of limited liability, but it now forms the very heart of the system. It removes the apprehension and distrust which lay at the basis of the overgrown partnership and the unlimited liability company. It has facilitated the marketing and trans- fer of the shares and has rendered possible the vast accumu- lation and the minute dissemination of capital. Finally, the corporation, unlike the individual, never dies until the business is liquidated; the shareholders disappear, the shares remain. It has all the advantages of permanence and stability; it can plan for the morrow as well as for to-day, and by proper choice and renewal of its board of directors it can continually command the highest ability and adjust itself to altered needs. As against these advantages there are undeniable short- comings^ The "corporation problem" touches the threefold relation of the corporation to the investors, the employees and the public. The protection of the minority stockholders and of the "innocent investors," the mutual relation of the stock- holder and the bondholder, and the enforcement of real trusteeship on the part of the directors are matters that still remain to be adjusted. The conditions of employment are often modified by what is termed the substitution of the cash- nexus for the old-time personal bonds between employer and employee. The corporation proverbially has no soul. Finally, as against the public the corporation will often do what indi- viduals as such would shrink from doing. It is not a light task to raise the plane of corporate morality to that of individ- ual business ethics. With all its shortcomings, however, the corporation is indispensable to modern business activity. Without it the world would revert to a more primitive state of economic well-being, and would virtually renounce the inesti- mable benefits of the best utilization of capital. § 4i] Corporate Enterprise 99 (4) Where ihc advantages of united capital on a gigantic scale become still more apparent, the associations of individuals into corporations are further developed into unions between corporations. These at first assume the form of more or less loose agreements, fixing prices or conditions of production. A further stage is reached when receipts are pooled, and the unions adopt the name of pools. A still closer association is effected when the enterprises are united under a common head, and known as trusts, because originally the co-operating corporations put their respective holdings of stock into the hands of trustees, who were to direct the joint enterprise. Where, as in the United States, this particular method of union has been declared illegal, the same results have been reached by forming a new and independent corporation. What are to-day popularly called trusts are simply huge corporations. The trust problem is therefore in many respects a phase of the corporate problem. From this point of view, as we shall see hereafter, the so-called trust is as much a natural development from the small corporation as the corporation itself is an out- growth of the business partnership, or the partnership an evo- lution of individual activity. The reasons and limits of this development will be studied below. It is clear, however, that with the growth and differentiation of capital, under the pro- digious development of modern industry, the forms of business enterprise are steadily becoming more intricate. CHAPTER VII ECONOMIC DEVELOPMENT OF THE UNITED STATES 42. References G. S. Callender, Selections from the Economic History of the United States (1909); E. L. Bogart, Economic History of the United States, 2d ed., 1912; K. Coman, Industrial History of the United States (new ed., 191 1); G. L. Beer, The Commercial Policy of England toward the American Colonies (1893), The Origins of the British Colonial System (1907), The Old Colonial System, 1660-17 54 (4 vols., 1912-1915), and British Colonial Policy, 1734-176 j (1908); W. E. Weeden, Economic and Social History of New England (2 vols., 1890); A. B. Hart (ed.), Social and Econofnic Forces in American History (1914); Johnson, van Metre, Huebner and Hanchett, History of Domestic and Foreign Commerce of the United States (19 15); V. S.Clark, History of Manufactures in the United Stales (1916); E. D. Fite, Social a)ul Industrial Conditions during the Civil War (1910); W. I. King, The Wealth aiui Income of the People of the United Stales (1915)- 43. Early Period of American Economic Life The United States is a particularly interesting illustration of economic development, because of its rapid pace and because of the co-existence of different phases. At the beginning the striking fact, as in all colonies, was the contact of an intellec- tually advanced population with primitive economic conditions. The white man brought with him the civilization of the old world, and was saved the necessity of the painful evolution of centuries. Possessing the use of perfected tools, the concep- tion of private property, the institutions of government and of the family, it was impossible for him to revert to the hunt- ing or nomadic stage. The impracticability of converting the savage at once into a husbandman led to the disappearance of the red man before the economic onset of the colonist. Yet § 43] Early Period i o i in the presence of a vast and unsubjugated expanse of nature the immigrant had to start afresh and to unlearn many a lesson of his former home. Coming from a trade pr local economy, he was thrown largely upon his own resources in a com- paratively isolated economy. Agriculture again became the predominant occupation: an agriculture, however, now based not upon feudalism, but, in the North at least, upon the independent farmer. The attempts to introduce into the Middle states the types of mediaeval land relations could not be permanently successful; and only in the South, for obvious reasons, was it possible to reintroduce the primitive system of slavery. The typical American was the backwoodsman, using his gun but wielding his axe, and depending primarily upon his hoe and plough. Step by step he cleared the forest and cultivated the soil, and in this continually renewed contest with nature hammered out those sturdy qualities of mind and heart which soon enabled him to add political to economic independence. The frontier is the home of democracy, because the frontier is the home of economic equality. As it was gradually pushed inland the communities which had left the frontier stage behind them developed from the family system of industry, through the help, into the handicraft and domestic system. The guilds which were fast decaying in the old world found no foothold in the new; and as the villages and towns sprang up the in- significant industry was carried on by the independent handi- craftsman. Everywhere, moreover, agriculture was the chief source of wealth. In the South the increasing accumulations of wealth were put into more land and more capital. In the Middle states, and a little later in 'the Northern states, the new wealth took the form of commercial capital; and as it was gradually pushed into industry the domestic system arose. At the time of the Revolution and down to the war of 1812 the "manufacturer" was still the manual workman, and the whole industrial devel- I02 Economic Development [§44 opinent was insignificant in the cxlrcme. The war with Eng- land and the years of unrest which preceded it brought about a shifting of capital from commercial to industrial pursuits, and the factory system was fairly inaugurated, in a few of the textile industries at least. Under the fostering care of the "American system," as the new protective policy was called, the industries throve, — although we must not exaggerate the influence of legislation upon what would at all events have been the natural, even if slow, evolution of industrial capital. For this natural growth in the North and East was due to the pushing of the frontier beyond the Alleghanies, and to the con- sequent accumulation of agricultural profits which soon took the form of industrial capital under the impetus of the demand of an increasing population for manufactured products. Nor was this growth checked by the reversal of the tariff policy and the adoption, during the thirties to the fifties, first of the Com- promise, and then of the so-called Free Trade systems, dictated by the manifest interests of the politically dominant South. The South, as the exporter of cotton and the importer of manufactured products, had clearly no interest in the develop- ment of industrial, as over against commercial or agricultural, capital. 44. Growth of American Industry in the Nineteenth Century The growth of prosperity during the middle of the nine- teenth century was due primarily to other causes, three in number: (i) the rich valleys of the Mississippi and its tribu- taries were reached by the tide of immigration; (2) the aboli- tion of the corn laws in England opened a vast and profitable outlet for the increasing yield of wheat; (3) the discovery of gold in California furnished an immense treasury of mineral wealth. There was thus repeated on a large scale what had occurred in a smaller way a generation earlier. This conver- sion of agricultural and mineral wealth* into industrial capital assumed, however, a slightly different form. Although the §44] Recent Growth lo-^ textile and iron industries now supplied a larger output for the increasing demand of a quickly growing population, the chief need and the most lucrative employment of capital was associ- ated with the development of modern transportation methods. The railroad becomes the most striking form of corporate en- terprise. Up to the middle of the century the few corpora- tions — chiefly banks, turnpikes, canals and railways — were compelled to take out separate charters. Now under general incorporation laws the railroads multiplied and soon brought in their wake all kinds of industrial enterprises. From this time on the country was fairly launched on the wide sea of corporate activity. The agitation which culminated in the civil war was at bottom the political expression of an economic antagonism between two divergent systems. The one was based on agri- culture, and heaped up its wealth in the transition forms from an isolated to a trade economy resting on slavery. The other had but just entered on the stage of the capitalist economy, and the influence of the rapidly developing factory system in providing a home market for the independent Western farmer soon united the economic interests into a compact and self- conscious whole. The phenomenal growth of the fifties, which menaced the economic preponderance of the South, brought the conflict to a head. The South possessed if anything the greater statesmen, the more gifted military leaders and the bet- ter navy; but when the outlet for its staple crop was stopped up by the civil war it died of inanition and fell a victim to the economic superiority of its industriafly diversified and therefore more enduring antagonist. It took the South a generation to repair the ravages of the desperate conflict, but with the beginning of the new genera- tion the inevitable results appear. Here and there in the South the march of industrial capitalism is under full swing, and the conversion of the handicraft and domestic stages into the factory system is proceeding apace. The transition in I04 Economic Development [§45 several of Ihe Southern stales is bringing lo the front eco- nomic and political issues which agitated New England a generation or two earlier, and which were fought out in old England before the middle of the century. In the North the post-bellum period witnessed an acceler- ation of the movement which had so auspiciously begun. Notwithstanding the great increase of industry in the East, the rapid opening up of the far West and the application of capi- talist methods to the exchange, and even in part to the produc- tion, of farm products so stupendously augmented the output that the prosperity of the country still in large measure rested on its agricultural wealth. Toward the end of the century, however, with the practical exhaustion of tTie free land which enjoyed adequate rainfall, the industrial movement, which had been gradually creeping farther west, now furnished a con- tinually more lucrative opening for the employment of the fast accumulating capital. By 19 10 over a third of the entire pop- ulation lived in the commercial and industrial centres, and almost a half of the exports consisted of manufactures. The change in the character of the national production, and the transition from agricultural to industrial conditions, are illustrated by the tables on page 105. On the table facing page 104 will be found the details of the chief products of the United States, as well as the most important exports of manufactures. On the charts opposite pages 106-107 and 108-109 will be found statistics of the growth since 1850 of certain agricultural products and general manufactures. It will surprise many to learn that there were in 1910 nine classes of manufactured products each aggregating over half a billion of dollars in value of gross product, as against four agricultural products and one mineral product. 45. Recent Development of American Industry This vast increase in capital has not only engendered the transition to the period of trusts and huge corporations, but \NNUAL VALUE OF THE MORE IMI'ORIAN T J'KODUCTS (IN MILLIONS).' Farm Crops Manufacturers Iron and Steel $i Slaughtering&Meat Packing i Foundry & Machine Shop . i Lumber and Timber . . i Mens' & Womens' Clothing Flouring and Grist Mill . Printing and PubHshing . Cotton Manufacturings . Boots and Shoes .... Woolen Manufacture . . Tobacco Manufacture . . Cars Malt Liquor Leather and Leather Goods Bread and Bakery . . . VALUE OF EXPORTS OF MANUFACTURES (IN MILLIONS) 1900 1910 Zorn . . . $828 $1524 tlay . . . . 484 ■ 748 kVheat . . ■ 369 695 Cotton . . • 323 820 3ats. . . • 217 385 Forest Prod'ts no Potatoes . . 98 188 Orchard Prod'ts 84 Tobacco . 57 91 Wool (190 1 51 72 Mineral Products Pig Iron . 260 439 Coal. . . 221 628 Copper . . . 98 145 Gold. . . 79 100 Silver . . • 76 28 Petroleum • 76 131 in ■^iH kH ^ x« yi^'- w-^ ,376 $399 .370 169 .228 688 .156 648 953 447 884 116 738 536 628 257 578 180 436 153 417 240 406 206 375 278 328 80 397 158 1890 Iron and Steel Manufactures Refined Mineral Oil . . Copper Manufactures . Leather Manufactures . Cotton Manufactures . Agricultural Implements Chemicals Wood Manufactures . . All Manufactures . . . Per cent of Total Exports $26 45 4 5 6 151 17.9 5122 68 58 27 24 16 434 31-7 5179 94 88 53 28 21 14 767 4S-0 ^ Arranged from the Tweljlh Census of the United States (Vol. VII and Abstract), the Statistical Abstract of the United Slates, and The Mineral Resources of the United States. § 45J Recent Growth PRODUCTIONS OF THE UNITED STATES (IN MILLIONS) 105 Population . . Farm Products Minerals . . Manufactures i8so 23 not given $1,019 1870 39 $1,958 219 4,232 76 $4,717 1,107 13,039 92 $8,926 1,771 20,672 PERCENTAGE OF EXPORTS OF THE UNITED STATES Foodstuffs . . Crude Materials Manufactures . . 1850 187s 20.43 62.26 17,21 37-93 41-31 20.42 35-59 23-75 32.91 11-59 3309 44-85 has emphasized the national and international significance of the modern movement. The economic unit in the United States is fast becoming a national unit. Industry is no longer confined to the old local limits. Commercial interests have averstepped the boundaries of any one state. Action by any one commonwealth inevitably reacts upon its neighbor. Eco- nomic and political methods framed on the old assumption that business is local are bound to create injustice and dis- satisfaction. Secondly, the transition to a more intensive capitalism and the growth of industrial exports mark the economic as well as the political maturity of the country. The acquisition of Porto Rico and the Philippines is more than a mere accident. The foreign market is becoming an adjunct to our industry rather than to our agriculture; it assumes such importance because our economic welfare, so far as it rests upon international trade at all, will be affected more and more, not by what the foreigner must have in the shape of food, but by what he can be persuaded into wanting in the shape of finished products. io6 Economic Development [§46 There is, however, another side of the picture. The United States has so rapidly outgrown the swaddling clothes of its infant economic surroundings, and has stepped with such giant strides from its youthful social environment to the complex conditions of a full-grown industrial society, that the development has been most uneven. America presents in some respects the most striking contrasts. It is at once the youngest and the oldest of economic societies. It is the youngest, in the sense that there are still large tracts untouched by plough or harrow, awaiting the coming of the first settler and needing only irrigation to convert the desert into a garden. It is young because there are huge sections, only one step removed from the primitive economic stage, under conditions analogous to those which the old world faced many centuries ago. In another sense, however, America is not young, but old. No- where on the face of the globe has capital been applied to productive purposes with such intensity and such energy. Nowhere has man's victorious contest with the powers of nature been waged with such intelligence and such relentless vigor. Nowhere have the captains of industry prosecuted their quest for industrial supremacy with such alertness and ability. As a consequence, nowhere have the most ad- vanced forms of a highly organized, fully differentiated, thor- oughly complex industrial organism been evolved with such startling rapidity and such complete success. In the develop- ment of these new economic institutions America is leading the world and is showing other countries what stages they have still to traverse. While the movement toward combination of capital has even in Europe made only timid beginnings, it is revolutionizing American industry. In this sense America is old, — far older than most of its industrial rivals. 46. Modern Problems of America j As a result of the forces just described, we are face to face with two sets of problems. The one set has its origin in the I CO 00 CO CO O cj »- o 2 < ) i C) u. o O u. CJ z in () z <) 1— o 1 — ) Q > O cn §4^)] Modern Problems 107 newer and less developcfl sections of llu- counlry, and may be illustrated by the currency question. This includes far more than is implied in the term itself. It involves, in large sections of the West and the South, not so much an increase of the money supply as a rearrangement of the economic forces and a readjustment of the relations of indebtedness to productive capacity. With every shifting of the frontier farther westward we have had such periodical readjustments. At the very beginning of our national life, when the frontier was located in western Massachusetts, came the economic outbreak known as Shay's Rebellion. A generation later similar causes produced on the new frontier the troubles which culminated in the stay- laws of Kentucky. When the frontier reached the Middle West almost half a century later, the same movement assumed the guise of the fiat money craze. Finally, after the lapse of another generation, when analogous economic forces worked out their result, not only in the frontier Hfe of the West, but also amid the primitive economic conditions of large sections of the regenerated but as yet undeveloped South, we reach the discussion of silver currency which began in the seventies and culminated in the nineties. With the disappearance of the frontier and the not far distant industrial awakening throughout the entire South, it is probable that the money question will assume as subordinate a role in the future of the United States as it has assumed in the advanced countries of Europe. On the other hand, the second set of problems that confront us is due to the new and complex industrial conditions of the more advanced sections. These new conditions have given us the corporation problem, the wages problem, the tax problem, the colonial problem, the city problem. It is as idle to inveigh against the policy of territorial expansion, on the ground that such a scheme was not contemplated by Washington, as it would be futile to object to the regulation of combinations because this also involves a new departure. In the one case, io8 Economic Development [§46 as in Ihe other, economic conditions have arisen which were unknown to the fathers, and which require for their solution a new analysis and a new method. What is peculiarly confusing, therefore, is the fact that on the one hand we have sections where the economic conditions are of a primitive type, while on the other hand in numerous parts of these sections themselves there have been grafted upon the still dominant and persistent primitive stock the shoots of the modern industrial type. The newer methods of transportation, as well as the modern media of exchange and distribution, have superimposed upon the simplicity of an undeveloped agricultural community the complexity of mod- ern industrial enterprise. The consequence is that eco- nomic conditions of the country are supremely heterogeneous, although tending to become homogeneous. Because of this contest of the old with the new, we are in many respects still groping in the dark, dissatisfied in the more progressive com- munities with the survivals of old conditions, and trying to discern in the dim light of the future the final expression of the newer conditions which are soon to become universal. >- o> O - ixi o in en CO cr ^ Z ID Q tr CO H ^ z LU 3 O O tS O u. < O ^ CO I- '=' q: en Q LU z cr ^ O 2 ^ «^ § — s — I OD ^ O s - O) '^> o — i 00 CO CO 00 O) ■< (/I -= UJ O O IN -1 III < u. 1- O in " _i 3 -I < > _l < 1 I^ Ul - VlAT o - - - — o (J - - -I+' O o ^ H Ol (D • O UJ O h- (Y _) UJ CD 1- o u. in 00 ID ~) CO Z 7^ Z) IxJ o z III z o LU T ll O UJ >- O tr 5 Q. UJ _I O z r) rr CE Q. a. <: UJ O Q. — « - - - 2 c 5 C H r- ^ i i f '1 CHAPTER VIII DEVELOPMENT OF ECONOMIC TH(JU(iHT 47. References J. K. Ingram, A History of Political Economy (1915); L. Cossa, An Introduction to the Study of Political Economy (tr. by L. Dyer, 1893); L. H. Haney, History of Economic Thought (191 1, 2d ed., 1920); E. Nys, Researches in the History of Economics (tr. by Dryhurst, 1899); W. J. Ashley, Surveys (1900), 263-309, and English Economic History. I (1888), ch. iii, II (1893), ch. vi; G. O'Brien, An Essay on Mediaeval Economic Teaching (1920) L L. Price, Short History of Political Eionomy in Eng- land from Adam Smith (1891); E. Cannan. History of Thories of Produc- tion (3d ed., 1910), chs. ix x S. N. Patten, Development of English Thought (1899), ch. v; C. Gide and C Rist, A History of Eronomic Doc- trines since the Physiocrats (tr. by Richards, 1914); M. Beer, History of British Socialism (2 vols, 1919-1920): H Eisenhart, Ges'-hichte der Nationalokononiie (2d ed., 1891) ; A. Oncken, C'srhichte der Nationalokon- omie, I (1902); J. Rambaud, Histoire des Doctrines Sconotniques (1899); A. Espinas, Histoire des Doctrines Sconomiques (1900). 48. Economic Theory in Classic Antiquity It has often been said that economics is a modern science. In point of fact, it is only modern economics that is a modern science. Every economic stage which has been marked by any scientific thinking at all has had its own economic theory. The stars indeed moved for aeons before man thought of as- tronomy. So economic phenomena existed for centuries be- fore any attempt was made to analyze them. Once formulated, however, the economic theory of any period is usually nothing but the reflex of its economic life. The earliest speculation on economic phenomena of which we have any knowledge is that of classic antiquity. Prior to the Greeks we find only ethical exhortations on social reform as among the Oriental nations, or practical treatises on agron- 109 iio Economic Thought [§48 omy as among the Carthaginians. But both Aristotle and Xenophon, to mention no others, wrote distinct treatises on economics. Greek and Roman economic life was not only based on slavery, but never outgrew the period of domestic industry and petty trade. This explains both the content and the omissions in Greek and Roman economics. Wealth existed, and we find the term discussed; but stress was laid primarily upon the uses to which it might be put by the indi- vidual. The idea of value was apprehended, and the distinc- tion between utiUty and value pointed out; but no further application of the distinction was made. Private property had long been known; and we thus find interesting theories as to its origin and justification as against the dreams of the com- munists, the socialists and the land nationalizers, who flour- ished then as now. Since the economic conditions were such that slave labor was highly productive, slavery was defended as a natural institution and as compatible with the highest morality. In the early system of industry the relation of master and slave was like that of husband and wife, of parent and child; the slave, the wife and the child all belonged to the household head; their labor was necessary to the family maintenance. When in later centuries the economic conditions of imperial Rome made slave labor less productive, it is significant that the writers first pointed out the moral shortcomings, and a century or two later the economic defects, of slavery. In the main, however, at the time of the chief prosperity of Greece and Rome, industrial capital did not exist as a controlling force in production: thus neither the term nor the idea is found; capital is not yet differentiated from wealth. It is a striking fact that Aristotle seems to have a premonition of a future industrial system when he says: "If the combs would make the web close, or if the keys of themselves struck the harp, masters would need no assistants nor slaves." But although capital had acquired no importance, a considerable division of § 48] Theory in Antiquity 1 1 1 labor based on handicraft industry is found in actual life and is accordingly discussed in the economic treatises. If the theory of production was simple, that of distribution was entirely absent. For it was the landowner who controlled the processes, and owned the results, of production. The land- lord was the property lord, and even where commercial capital developed, it was the large landowner who also carried on the great commerce. Even where the independent tradei developed, however, his gains seemed to be of the same nature as those of the landowner. There was thus no distinction recog- nized between land and capital, as factors in production. The landlord, again, was the slave owner; there was thus no line drawn between land and labor, and no theory of wages. The doctrines of rent, profits and wages did not emerge, because the phenomena themselves did not exist as the incomes of separate social classes. There was not even a theory of indi- vidual income; the mass of property yielded indeed a return or produce, but this entire produce simply went to swell the property, just as the expenses had been a part of the property. We have many terms for property, but no distinction between produce and income. This explains also the classical theory of interest. Funds were loaned not as capital, but as money. So far as there was any credit, it was primarily for consumption; that is, the loans were mere personal loans made to tide over temporary em- barrassment. Even when money was loaned in agriculture or in trade, the function of capital was not understood, because only when capital is used in industry is it easy to realize its productivity. Interest was thus regarded as paid for the use of money, and, as money is in itself barren, interest was deemed unjustifiable. As a matter of fact, the interest charged on such loans did often have the effect of usury and frequently resulted in the subjection of the debtor to the creditor. In the absence of industrial capital there was some justification for the theo- retic opposition to interest. In the later centuries of impe- I I 2 Economic Thought [§ 49 rial Rome, when commercial capital had developed, interest became necessary; but it was then defended in the Roman code by virtue of a legal fiction, not on economic grounds. During the later period of Greek and Roman life the origi- nal barter economy had given way to a money economy. The classic writers therefore devote some attention to the theory of money. The whole theory of price, however, was still much neglected, because trade was something outside of the ordinary activity of the slave plantation, and business en- terprise had but little scope under a system of handicraft in- dustry. It is thus easy to understand Aristotle's and Plato's condemnation of such vocMions as something "unnatural," or Cicero's characterization of them as sordid and "unbecoming a gentleman." As with the private economy, so with the public economy. The revenues of government were derived chiefly from its own lands, worked in the same way as in any private household. Direct taxes were unknown except in ex- traordinary emergencies. The amassing of treasure, not the use of public credit, served for war purposes. Hence the Greek treatises on public finance deal with subjects that are almost completely absent from modern works. Classic antiquity, in short, had an economic theory which ex- plained its economic phenomena; we must not criticise it on the ground that it does not explain our phenomena. 49. Mediaeval Economic Theory After the intervening centuries of mental darkness and indus- trial stagnation, economic theory began anew with the growth of enterprise in the twelfth century. The new theory was the outgrowth of the new economy. The typical fact of this new economy was, as we have seen, the development of trade and commerce, no longer based on slavery. The great problem of mediaeval economics thus became the problem of exchange value and how to make this new kind of values conform to the demands of justice. Since things were no longer made to § 49] Medieval Theory 1 1 3 be consumed at home, as in the earher centuries, but were now made to sell, the question arose, for what shall they sell, or what is the proper and reasonable price? The answer could not be the price as fixed by competition, because in the mediaeval economy there was no free competition. Goods were produced by the guilds, but the guildsmen could not underbid each other. Even in articles which came from out- side, to take advantage of one's neighbor by purchasing the wares before they reached market, or by buying at wholesale to sell at retail, was deemed a heinous offence. In an economy whose keynote was production to order, and where every one did just what his father had done, custom, not competition, fixed the price. With human nature as it is, however, men would always be found who attempted to overreach their neighbors. Since custom could not be relied upon, it became necessary for government to step in and to regulate the price. In point of fact, when mediaeval prices were not regulated by custom, they were fixed by statute. Economic theory thus discussed the question: what is the just or the natural price? It became in part a moral question, even though the answer must rest on economic considerations. The mediaeval economists were no longer the general philoso- phers, as in classic antiquity, but primarily the theologians. Economics became a part of theology. In framing his theory, the mediaeval economist had to take business life as he found it. The characteristic fact of mediae- val industry was the free laborer, the petty guildmaster. Slav- ery was fast disappearing, and accordingly, with the exception of a few of the early authors who were strongly influenced by the newly discovered writings of Aristotle, we find no defence of slavery. Again, since the whole economy was now based on industry and trade, the classical theory of business as an unnatural pursuit soon disappeared. Now arose the question: how should business gains be explained, — or, in other words, what fixes the price of the finished article? 8 I 1 4 Economic Thought [§ 49 There could be only one answer to this question. Industrial capital did not exist, — that is, not as an important or typical fact. Since there was no conception of capital, there could be no theory of profits. The guildmaster employed his own work, on his own tools. The labor expended was the chief consideration; and cost of production became the explanation of the reasonable price, and the guide to the legislator in fix- ing tariffs. To carry on business for the sake of making gains was therefore still deemed immoral, but to trade in order to recover the result of one's labor was justifiable. Money mak- ing as such is wrong; money making to support one's self or one's family by the proceeds of one's industry is legitimate. All through the middle ages the economic theory objected to a man charging more for a thing than it was worth, or buying a thing cheap and selling it dear, or selling a thing at a higher price for credit than for cash. For in all such cases it was presumed that gains were made without any actual labor having been expended. It was only as business enterprise developed that the other constituent elements of gain were recognized; but the theory continued to include them in the actual labor cost. The other great mediaeval theory — the usury doctrine — may likewise be put under the head of exchange. For usury was regarded as the price paid for the use of money, itself the medium of exchange. In an age where the productive em- ployment of capital was unknown, the prohibition of interest did, on the whole, more good than harm. As commercial capital developed, the force of the prohibition was weakened by the economic theory of damnum emergens and lucrum ces- sans: if the lender could show that he had suffered any loss or had been prevented from making any gains through not having the money, he might charge a return. The wedge was slowly pushed farther in; but it was not until industrial capital had developed at the close of the middle ages that a distinction was drawn between legitimate interest and illegitimate usury. § 49] Mediaeval Theory i i 5 In the guild system proper, where no capital was needed, interest was an anachronism. The only other economic topic that was discussed in addi- tion to these two fundamental points, was likewise one of exchange, — that of money. Money became of such para- mount importance that we find the treatment of money prob- lems no longer confined to the theologians, but participated in by specialists. The medieeval writers on money form almost the only class of lay economists, pure and simple. Mediaeval economic theory, therefore, centered about the problems of exchange. Production was so simple that it was not discussed. In the absence of capital, there was no ques- tion of production on a large or small scale. Since the pro- ductive process was a unit, there was not even a discussion of the division of labor. Problems of distribution there were but few. Since there was no industrial capital, there were no profits; since the workman was in the main his own employer, there were no wages, or so far as wages were paid, they were paid by the consumer, and not by any capitalist employer. Even though the conception of rent to the landlord now appeared, the land was not normally bought and sold, and the landlord's rent was regarded, not as a separate source of in- come, but as a kind of property, like that of the ordinary townsman. Finally, problems of consumption attracted little attention. In an age when custom reigned supreme, and when unusual expenditure was deprecated as ungodly, the effects of social expenditure and the connection between social demand and production were so slight that they were scarcely noticed. The mediaeval economists therefore were confronted with comparatively simple problems. These problems they attacked with ability and with some degree of success. It was not long, however, before the economic conditions changed, bringing with them new problems and fresh atlenipls at analysis. 1 1 6 Economic Thought [§ 50 50. The Mercantile Doctrine Modern economics may be said to date from the close of the sixteenth century. This century is marked by one great fact which could not have failed to arrest attention, — the revolution in prices which went hand in hand with the intel- lectual revolution due to the printing-press, with the religious revolution due to the Reformation and with the political rev- olution due to the weakening of the feudal system. The colonization of the new world led to a vast influx of the precious metals; the discovery of the trade routes to the East opened up new channels of commerce and revivified industry; the old regime of customary prices slowly gave way before the new force of competition; the guild system broke down as the power of capital made itself more apparent and as industrial conditions outgrew the narrow limits of the local economy. Thinkers like Bodin in France and Hales in England began to ponder these newer conditions of economic life and to discuss the relations of private wealth to public welfare. The economic theories from that time may be subdivided into three periods, — the mercantile theory, which first sought to crystallize the idea of the national economy; the theory of Adam Smith and Turgot, which represented the domination of the domestic system of industry, although in its cosmopol- itan ideas much influenced by the doctrines of the Physiocrats; and finally the Ricardian theory, which marks the triumph of the factory system. The ■ mediaeval thinkers had centred their attention on the money supply, and had used every endeavor to bring the pre- cious metals into the town and keep them there by controlling each individual bargain through manipulating the exchanges, and similar devices. The newer school of economists still emphasized the importance of the money supply, but owing to the changing conditions of trade were enabled to recognize the futility of the old measures. According to them, a surplus § 5oJ Mercantile Doctrine I17 of coin is indeed desirable, but it can best be secured by an excess of exports over imports resulting in a balance of trade rather than by manipulating the exchanges so as to secure a favorable balance in each particular transaction or bargain. The first great economic controversies were those between the advocates of the Balance of Bargain and Balance of Trade theories. Because of their insistence on this mere exchange of merchandise, the newer writers are usually called the Mercantilists. In truth, however, this was only an incidental result of their teachings. The breakdown of the local economy and its replacement by the larger unit led thinkers to search for the true causes of national wealth and national greatness. They saw that this could be attained only by an increase of national production; and since industrial capital was now making its appearance, they emphasized the need and the value of national industry. Just as the older theory was dis- proved at the beginning of the seventeenth century almost at the same time by an Englishman (Mun), a Frenchman (Mont- chretien) and an Italian (Serra), so the practical policy of national expansion and the abolition of the local restrictions on trade and industry were pursued by statesmen like Sully in France, Cromwell in England and later by Frederick the Great in Prussia. Judged from the present point of view, the error of the Mer- cantilists lay in confounding a balance of exports over imports with a surplus of production over consumption (see below, §211). At the time the theory was first formulated, how- ever, an increase of national exports was indeed the most obvious method of measuring the increase of national produc- tion. In the early stages of capitalist enterprise and of inter- national competition, the policy of national protection was suggested as a means of national industrial growth; but this system was itself an advance on the narrow exclusiveness of the mediaeval town. The Mercantilists all clamored for "Free I 1 8 Economic Thought [§ 51 Trade," but their free trade meant a freedom of exportation, and a liberation of internal trade from the trammels of the local economy. The enlightened Mercantilists looked upon an abundant money supply not as the cause, but as the result, and therefore as the best indication, of industrial growth and national prosperity. The problems which confronted the economists of the seven teenth and first half of the eighteenth century were thus prin- cipally problems of production and exchange, from the point of view of the relation of government to the social structure. Hence the term political economy began to be used, and considerable progress was made in analyzing the problems of trade. The problems of distribution, however, were only just beginning; the domestic system of industry was differentiating a wages class; and the growth of industrial capital was only slowly bringing into view the recipients of profits as against the recipients of the rent of land. The slight theory that we find on the subject is incomplete and often incorrect. It was difficult for the writers amid these half-developed conditions to go beyond the surface fact that low wages seemed to mean low cost and therefore successful competition with other countries. It was reserved for the great thinkers toward the close of the eighteenth century to voice the newer ideas on production and distribution alike, and to disclose the elements of public pros- perity, suited to the economic age in which they wrote. 51. Adam Smith and the Physiocrats If we were to sum up in two phrases the real contribution of Adam Smith to economics, it would be the theory of cosmo- poUtanism and the theory of distribution. Of these the one was original, the other partly borrowed; but both were shaped by his economic environment. The statesmen of the eighteenth century had been pushing the Mercantilist doctrines to an extreme. While the system of national economic expansion had marked an advance as com- § 5i] Adam Smith i 19 pared with the mediaeval system, the time soon came when the centre of economic interest was shifted from internal to exter- nal considerations; and when what had seemed liberty from the one point of view now from the other appeared to be restriction. In certain countries at least the disadvantages of the system came to outweigh its benefits. Just as the guild system had originally been a spur to industry, but had ulti- mately become a drag upon it, so the mercantile system of regulation changed from a boon to a drawback. The advance had consisted in emphasizing the national idea; the retrogres- sion consisted in accentuating the exclusive idea. In the well- meant effort of the legislator to further industry, he often throttled it. The government now interfered with everything, and often accomplished less than nothing. The colonies, instead of strengthening the mother country, broke loose entirely or weakened her. Trade was conducted on the principle that what one nation gained the other necessarily lost. The very expansion of international relations, however, and the immense growth of the foreign market induced the eigh- teenth-century thinkers to take a broader view. Adam Smith and the Physiocrats, each influenced by the doctrine of Natural Law, endeavored to show that economic phenomena, like all others, were reducible to principle. The most important cor- ollaries of natural law were to them private property qnd individual liberty. The hberty whose economic aspect they emphasized consisted of complete freedom in internal industry and in external trade. The demand for freedom of industry no longer meant freedom from the action of local government, but freedom from the action of national government as well; the demand for freedom of trade no longer meant liberty of export, but liberty of import as well. Just as it was recognized that the various provinces of a nation benefited from freedom of exchange among each other, so it was claimed that the various nations of the world would equally benefit. Instead of national I 20 Economic Thought [§ 51 exclusiveness, economists demanded cosmopolitan freedom. Under the influence of the natural hiw each nation would then derive its maximum advantage. This importance of the natural law of freedom in economics was emphasized by both Adam Smith and the Physiocrats. Although the Physiocrats were first in the field with the pub- lished system — the word Physiocracy denotes "the rule of nature" — Adam Smith taught the identical ideas at about the same time in his lectures at Glasgow. The doctrine of cosmo- politanism was in the air. The other great theory — • that of distribution — we owe primarily to the Frenchmen; not so much indeed to the Physi- ocrats as to the great statesman, economist and philosopher, who was only a half-Physiocrat himself, — Turgot. The leader of the Physiocrats — Quesnay, the court physician — struck by the abyss between the luxurious noble and the squalid peasant, concluded that agriculture was the only source of wealth, and the peasant the only productive member of society. In an age of periodical famine the food supply seemed to him of transcendent importance. Turgot only half accepted this idea; but taking his cue from the Physiocrats with their idea of natural law and their effort to trace the final distribution of the wealth created by the farmer, he analyzed industrial society as he found it, and saw that the product of industry was divided into separate shares. We now for the first time have a theory of capital, a theory of rent, a theory of interest and profits, a theory of wages. This theory was adopted and developed by Adam Smith. He rejected, indeed, the doctrine of the Physiocrats that agriculture alone yields a net product. On the contrary, he generalized the conception, and maintained that all industry might yield a product. Thus we often speak of Smith as the founder of the industrial system of economic theory as against the agricultural system of the Physiocrats. But the funda- mental doctrines of Smith in respect to the laws of distribu- § 52] Ricardo 1 21 tion were similar to those of Turgot. Both Turgot and Smith lived in the midst of the domestic system of industry. This was more developed in England than in France, where the abuses of the guild system still lingered and where agricul- ture was more important than industry. Thus we find Turgot sharing in some points the views of the Physiocrats, while Adam Smith was able in part to cut himself loose. Turgot and Smith, however, attempted to explain the laws of rent, profits and wages, because now for the first time the capitalist employer was dififerentiated from the landlord, and because the wages class had assumed a new importance. The laborer, however, still controlled the process of production; the "manufacturer" with Adam Smith is still the manual worker. Adam Smith, as also to a less extent Turgot, may therefore be called the theorist of the domestic system. He differs from the Physiocrats in accentuating the industrial rather than the agri- cultural element in wealth and production; but he agrees with them in emphasizing the cosmopolitan rather than the national elements in public wealth. Because of this broader view they both attempt for the first time to study the whole range of relations between private property and public wealth, between liberty and industry. 52. Ricardo and Modern Ecouomics Adam Smith wrote on the eve of the industrial revolution. It has often been observed that the year 1776 marked the publication of the Wealth of Nations and the Declaration of Independence, thus voicing the demand for liberty in industry as well as in politics. But it is equally worthy of note that the same year witnessed Watt's great discovery of the steam-engine. It took several decades for this and other great inventions to change the aspect of the industrial world; but in less than half a century the transition had been accomplished in the leading industries of England, and was making rapid strides in the others. In France the process had scarcely begun; in the 122 Economic Thought [§52 other continental countries the domestic system itself was still contesting the guild system. Hence the thinker who could analyze the new system of industry could be sought for only in England, for in no other country did that system exist. Ricardo was the first theorist of the factory system. It is no mere coincidence that Ricardo should have been a stockbroker. This man of genius, whose daily life trained him to observe the almost perfect sway of competition and the well- nigh complete fluidity of capital on the exchange, was well calculated to apply these considerations to a wider industrial world, whose characteristics were coming to be those of free, competition and the supremacy of capital. Starting with a study of the money question, Ricardo ended with an analysis of industrial society. The theories of cosmopolitanism and liberty he took from Adam Smith, but he developed them further, because this theory of free competition seemed to be even more applicable to the factory system than to the domestic system. The former theory of distribution, however, no longer quite sufficed. The manufacturer was now not the manual worker, but the employer who did no manual work. The "money interest," which in Smith's time was only slowly forging to the front, was now becoming the dominant factor in English life. The antagonism between land and capital led to a new analysis of rent in contrast to profits. The mass of the working population had become wage-earners, but England's growing prosperity seemed to rest on the development of capital. Hence the law of wages was re-analyzed, in terms of profit, and the acme of truth seemed to be realized in the statement that wages and profits vary inversely to each other. Moreover, since capital had now assumed a new importance in the shape of machinery, the study of capital became largely a study of the economic effects of machinery. Everywhere in the civilized world of to-day the study of the theory of indus- trial phenomena goes back to the analysis of Ricardo. The Ricardian doctrines themselves, however, have been §52] Modern Economics 123 modified in some points by recent investigation. It would be surprising if the century that has elapsed since Ricardo wrote should not have brought about changes in conditions which were soon reflected in theory. In some respects the theories have been amplified rather than altered. The economic life of the last half-century has been marked by three great facts, — the increased consumption of the masses, the revolution in the means of transportation and the tendency of capital toward concentration. The changes in consumption have led to a deeper analysis of the central problem of value, especially through the efiforts of Jevons and the Austrian school. The revolution in the means of transportation has given free scope to the force of speculation, and has led to its more careful study. The growth of capital has produced not only large scale industry, but integrated industry, and has brought about a closer scrutiny of the monopoly problem. In other respects, however, the theory has been modified rather than amplified. The Ricardian doctrine of free compe- tition and natural liberty had two important practical corolla- ries: the one as applied to internal affairs meant laissez-faire or non-interference by government; the other as applied to foreign affairs meant free trade. The experience of the nine- teenth century has conclusively shown that both these demands are of relative rather than absolute validity, and that under certain conditions they may prove detrimental rather than beneficent. This has led to a fresh analysis of the theories of liberty and competition, more suited to the modern changes. Above all, however, the complete triumph of industrialism, which was in its infancy when Ricardo wrote, has brought into clear relief many tendencies which were then scarcely discern- ible. Ricardo had elucidated the law of rent, but his theory of profits was incomplete, the connection between interest and profits dimly appreciated, and the relation of both to rent not clearly apprehended. Above all, the position of the laborer and the relation of wages to profits were not thoroughly grasped. I 24 Economic Thought [§ 52 in the first flush of the new regime the function of the capitalist was naturally overestimated, and an undue emphasis put on production. So far as social reform was deemed at all practi- cable, it was thought to depend on the prosperity of the capi- talist and on the care taken by the laborers to marry late and have small families. It was the social discontent of the middle of the century which was responsible for a change. Karl Marx did an admi- rable work in showing the essential relativity of economic institutions and in pointing out the influence of economic facts upon social and political life; and his keen criticism of existing theory and actual society did much to bring about a revision of the laws of distribution. While the socialist criticism, however, was fruitful, its constructive analysis was erelong seen to be as one-sided as the one which it had endeavored to replace. It has been reserved for recent economic theory, especially in the works of Marshall, Walker, Clark and their followers, to take the saner view and to show how and why social progress and the growth of capital are intimately bound up with the advance of the mass of the workers. Thus the modern theory of eco- nomic life fits in not only with the facts of the business world but with the demands of social reform. The economics of to-day has finally reached the stage where it seeks to retain the cold impassivity of science and yet to reflect the warm glow of human interests and living ideals. Book III Conditions of Economic Life CHAPTER IX PRIVATE PROPERTY 53. References C. Letourneau, Property, its Origin and Development (1901); E. de Laveleye, Primitive Property (trans, by Marriott, 1878); F. de Coulanges, Origin of Property in Land (trans, by Ashley, 1891); E. Jenks, History of Politics (1900), ch. x; H. S. Maine, Ancient Law (1880), ch. viii, and Village Comtnunities (i88r), Lects. 3, 6; E. Kelly, Government or Human Evolution, II (1901), bk. i, ch. iii; J. S. Nicholson, Principles of Political Economy (1893), bk. ii, ch. ii; F. W. Maitland, Domesday Book and Be- yotid (1897); J. H. Lewinski, The Origin of Property (1913); R. T. Ely, Property and Contract (1914); T. Veblen, The Instinct of Workmanship (1914), ch. v; E. Demolins, Comment la Route cree le Type Social (2 vols., 1900-1903); V. G. Simkhovitch, "Hay and History" in Political Science Quarterly, vol. xxviii.(i9i3). 54. Origin of Private Property The institution of private property lies at the basis of modern economic life. It has become so ingrained into our modes of thought that we commonly regard it as a natural right. Never- theless private property, like every other economic institution, is the result of a long evolution. It is a relative rather than an absolute category. In the early stages of society the conception of private prop- erty is absent. Primitive man, like his brute ancestor, seized, but soon consumed, his articles of food. Even when he learned to provide for the morrow, and like some animals to accumu- I 26 Private Property [§ 54 late a store of provisions, he was able to retain control of them only so long as no stronger savage came his way. There may have been temporary possession, there was no recognized ownership. The earliest idea of property as distinct from possession was communal, not private. As the human hordes roamed about from place to place in the quest of food, they came to regard certain sections as their particular preserves, into which no other savages were admitted. Appropriation and user thus became the germs of property; but it was social and not individual user. As concerted action was generally necessary in order to secure subsistence, the food was distrib- uted according to definite rules by the representatives of the group. Even religious objects, like sacred stones and feathers, were preserved by the group as a whole. The first type of private property is found in the ornaments and the scanty articles of clothing. These were almost from the outset regarded as an integral part of the personality of the individual. The next step was reached when certain weapons were taken out of the general stock and associated with the exceptional prowess of some member of the group. The weapons, like the ornaments, were supposed in some way to reflect the personality of the individual, and when he died they were usually burned or interred with his remains. As civilization reached a higher stage, the movable shelters or wigwams and the scanty stock of tools and utensils were re- tained in the ownership of individuals. We can, however, scarcely yet speak of any differentiation of private property. Its social importance was insignificant in the extreme, and there was no motive for accumulation. After a narrow limit had been reached, additional ornaments became a burden, more weapons and tools were valueless. The group, not the individual, efforts were still the controlling factors in the economic life. The decisive step was taken with the domestication of ani- mals. As soon as it was discovered how to preserve flocks and herds, it was possible for the individual to dissociate his §54] Origin 127 economic life, to a small extent at least, from that of the group, and by giving freer rein to his own powers to start on the path of independence and prosperity for himself and his own imme- diate circle. Private property now assumed a position of increasing importance: it created, as we have seen, the patri- archal family, and it engendered the distinction of rich and poor. Wealth now consisted of flocks and herds; personal be- longings in the shape of jewelry and treasure were prized not only for themselves but because they could be bartered for live stock. The original "chattels" are the "cattle." Human dependents, moreover, were needed to care for this increasing wealth: the wives and the children of the patriarchal head were regarded as his private property, and where even these did not suffice, we find the beginnings of slavery. The slave (famel) soon became the most important element in the family. On the other hand, there was no private appropriation of land, because it was unnecessary. The herdsmen wandered, accord- ing to seasonal or climatic conditions, in search of fresh pastures, and the tribal customs were still sufficiently strong to prevent individuals from appropriating particularly favored spots in the general area. Two points thus stand out clearly. First, private property consisted for a long time only of movables, animate or inani- mate, that is, of animals, human beings, and personal chattels. A community which is continually on the march cannot de- velop property in immovables. Secondly, the origin of private property is to be sought in user and seizure. Compulsion and even rapine are frequently the starting-points of the accumula- tion of wealth. Yet this selfish accumulation is the means of attaining a higher stage of welfare for the community as a whole. It increases not only production but civilization. The ethical stage of a pastoral tribe is superior to that of a group of hunters. The institution of private property, while intensi- fying many of the unlovely characteristics of human nature, is also responsible for those qualities, like thrift, foresight, fru- 128 Private Property [§55 gality, energy, sobriety and sanity, without which no enduring progress was possible. Property was becoming private, but since the individual was still in large measure controlled by the group, the sanction of private property remained social in character. The individual was permitted to enjoy private property because it was recognized to be conducive on the whole to the interests of the group. From the very beginning, therefore, out of evil there came good; out of the violence inseparable from early private property there evolved the orderliness of a stable society. 55. Growth of Property in Land The next step was taken when the developed agricultural stage was ushered in. This had two important results: it greatly extended slavery, and it created private property in immovables. It extended slavery, because profitable cultiva- tion of the soil was contingent upon an adequate labor force. Compulsory and gratuitous labor would naturally swell the gains of the owner. Increasing agriculture involved, under certain conditions at least, increasing private property in slaves. It also involved the creation of private property in im- movables. As fixed settlements replaced the early temporary abodes, the need and utility of more durable habitations be- came evident. Private property in houses, however, rendered possible on a much larger scale the accumulation of personal belongings within the house, and this accumulation of wealth was brought about by the increased earnings of agriculture as contrasted with flock tending. The evolution of private prop- erty in land, however, was far slower than in the case of houses. In a few instances, where geographical and climatic reasons made it difficult for the pastoral group to eke out a living in common from the soil, as in Norway, and where there was less fear of attack from organized bands of marauders, the indi- viduals started out as farmers, each for himself and each appro- priating as much of the land as he needed. User soon hardened § 55] Property in Land i 29 into ownership. So also when new colonies were planted by the offshoots of communities long acquainted with agriculture, the colonists, as in America, naturally brought with them the practice of individual land ownership and separate holdings. In most places, however, where the grazier slowly turned into a farmer, the communal practices disappeared only by slow degrees. Just as the nomad group had pitched its tents together and had allowed the flocks to graze in common, so now the village houses were grouped and separate plots of land in the surrounding area were temporarily assigned to the cultivators. These temporary assignments of different grades soon become permanent, although the method of using them was strictly subject to communal needs. For as population increased and the holdings were subdivided, the different grades of land were carved up into strips, the same individual often possess- ing sections in different parts of the arable area. This system of intermixed strips necessitated a whole body of communal rules in order to insure a proper cultivation. The strips were too small to be fenced off. In the open-field system, as it was therefore called, not only was it clearly inadmissible for one man to use his strip as pasture with the risk that his animals might stray on the cultivated plot of his neighbor, but in addi- tion far better results were obtained by planting large areas in the same way. Thus the mediaeval village community or mark was based on the idea of common cultivation, and the original community of property was long preserved not only in the forests, the free use of which under certain restrictions belonged to every member of the group, but also in the pasture land, where every one had the right to graze his cattle, and even in the arable land which, after the crops were taken of?, reverted to communal use. While private property in land within the group was thus developing, there was another element at work, proceeding from above rather than from below. As the conquering tribes seized upon fresh tracts, it became of signal importance to 9 130 Private Property [§55 defend the settled agricultural possessions. This duty was assigned to the military chieftains, who in many cases were the wealthiest flock-owners. With the transition to agricul- ture, the old personal and tribal relations gave way to territorial and political relations. In other words, the state developed and the local divisions and counties were put under the pro- tection of the over-lords. The tenants, or vassals, whether individuals or groups, now paid a portion of their agricultural earnings as the price of protection, and the military occupa- tion of the district by the chieftain before long hardened into the institution of private property. The war lord became the landlord. The marquis was originally the defender of the "March." The property rights of the cultivator were held to be subordinate to those of the lord. Thus was ushered in the system of feudalism, based on the pteponderance of the manorial lord and the hierarchy of social relations. In some cases the cultivators lost their original prerogatives and dwindled into mere tenants without any property rights at all. In other cases they contrived gradually to free them- selves from their rents and other feudal payments, while at the same time the common cultivation gave way, under the impulse of more modern methods, to individual tillage. In this manner was formed the peasant proprietorship of many European countries. The land became thus the private prop- erty of either the lord or the peasant, until finally with the development of industrial capitalism real estate was put on an equality with personal property. In America and many parts of Europe land is now bought and sold almost • as readily as any kind of chattels. Here again we notice the social sanction of private property. The origin of property in land as of that in flocks was often connected with force and fraud, but in this case as in the other the community as a whole was benefited. The private prop- erty of the feudal chieftain meant the growth of security and social order, which formed the foundations of increased pro- § 56] Theories i 3 i duction. The development of landed property within the communal group of cultivators was the result of the recogni- tion of the social importance of individual action. As long as common cultivation brought about the best utilization of the fields, it remained the prevalent system; but when in more recent periods the opportunity of raising hay made a more inten- sive cultivation possible, the advantages of a more individual method were soon manifest. The old common or open fields were now enclosed, and each landowner, freed from what had become the shackles of a common cultivation, turned his own plot to the best use. Private property in land thus reached its climax, because it carried with it individual freedom for use. The augmented agricultural profits were due to increased production, so that private property here again redounded in the main to the advantage of the community. Real estate like personalty, immovables like movables, have become pri- vate property because of the recognition by society of the social advantages of individual ownership. 56. Theories of Private Property Two important corollaries follow from what has just 'been said: first, the justification of private property is its social utility, and second, the extent of private property rights must always be limited by their social consequences. The earliest theory of private property as found in some of the Roman writers is the occupation theory. The doctrine that property belongs of right to him who first seizes it is, how- ever, one that can apply, if at all, only to the earliest stages of development. Where no one has any interest in the property, no one will object to the assertion of a claim by a new-comer. When property is without any discoverable owner, we still to- day assign it to the lucky finder. But when the property is already utilized by others, whether as groups or as individuals, or when the property is newly created by human effort, the assertion of the right of occupation involves a theory of force 132 Private Property [§56 ralher than of juslitc. The occupalioii theory may cxphiin how the present legal title to certain lorms of property origi- nated; it cannot serve as a justification of private property, except in the rare case of previously unoccupied or unutilized wealth. The mere fact that a person has seized a thing is no reason why he should retain it. The next doctrine was the natural rights theory. Private property, so we were told by the philosophers of antiquity and the publicists of the later middle ages, is a natural right, a part of the law of nature. It will at once be asked, however, what is denoted by nature? If by nature we mean the physical and animal world outside of man, it is clear that the only laws of nature are the laws of the necessary relations of phenomena and that the only natural right is that which flows from the law of might 'or of the power which explains these phenomena. In this sense all civilization is an endeavor to escape from the original reign of natural law among brutes. Nature is here opposed to human progress. Private property, then, is un- natural because it is not found in a state of nature. If, on the other hand, by nature we mean the constitution of the entire universe, including man, and if it is contended that private property is natural in the sense that it is necessary to the full self-realization of the individual as the bearer of the world idea, the obvious rejoinder is that we are applying the term natural right to our temporary idea of what ought to be right, and that history unmistakably shows a continual change in our ideas of what ought to be. The great philosophers of antiquity upheld private property in slaves as a natural right. Much of what we to-day consider natural, our descendants will deem un- natural. Our conception of nature in this sense is essentially ephemeral and mutable. Driven from this position, the natural rights school took refuge in the labor theory, and maintained that the real title to private property is derived from the toil and trouble experi- enced in creating it. Surely, it will be said, a thing belongs of § 56] Theories i 3 3 right to him who produces it. But at once comes the reply: no one has created the land. As a consequence, we find thinkers of all ages, from Phaleas of antiquity to the disciples of Henry George to-day, who contend that private property in land is unjust, while maintaining that private property in everything else is defensible. These critics, however, overlook the fact that the difference between land and so-called labor products is in this respect, at all events, one only of degree, because nothing is the result of individual labor alone. The carpenter, it is said, rightfully owns the table which he has made. But to what extent has he made it? The tree which affords him the raw material was not created by him; the axe with which the tree is felled is the accumulated result of centuries of inven- tion expended by his ancestors; the stream along which the log is floated is not of his making. To pass over all the other intermediate processes, how long would he be secure in the possession of the tools he has used or of the product he has finished, were it not for the protection afforded to him by the law? And finally, of what use would the tables be unless there were a demand for them on the part of the community? The value of the table is as little the result of individual labor as is the value of the land. Society holds a mortgage over every- thing that is produced or exchanged. Since therefore neither occupation, natural law nor labor gives an indefeasible title to private property, some philoso- phers were led to frame the so-called legal theory of private ownership which is in essence that whatever is recognized as such by the law is rightfully private property. Obviously, how- ever, this is not an economic doctrine. Good law may be bad economics. The law generally follows at a respectful distance behind the economic conditions, and adjusts itself gradually to them. The legal theory tells us what property is, not why it is, I nor what it should be. Thus we are finally driven to the social utility theory. This is really implied in the preceding theories and supplies the link I 34 Private Property [§ 57 that binds them all together. In ancient as in modern com- munities, the individual is helpless as against society, however much under modern democracy society may see fit to extend the bounds of individual freedom. If we allow the individual to seize upon unoccupied wealth, if we recognize the existence of certain rights in what are deemed to be the products of labor, if we throw the mantle of the law around the elements of private property, — in every case society is speaking in no uncertain voice and permits these things because it is dimly conscious of the fact that they redound to the social welfare. Private property is an unmistakable index of social progress. It originated because of social reasons, it has grown under con- tinual subjection to the social sanction. It is a natural right only in the broad sense that all social growth is natural. 57. Limits of Private Property If then social utility is the real justification of private prop- erty, it is clear that the extent of private property rights must find its limit in social considerations. Take, for example, the modern problem of irrigation. The English common-law conception of private property — the property that reaches, as has been picturesquely said, from heaven to hell — is a product of a moist climate, of conditions where there is an abundance or superabundance of water, and where private interest could be safely depended upon to give the best results. But in the arid and semi-arid regions of our western empire neither occupation nor labor is deemed to give an equitable title to the river or the adjacent riparian lands. The new code of private property which is springing up in the West is one in which individual rights are clearly and forcibly held subservient to those of the community. What is true of irrigable land in the West is true in varying degree of many forms of private property in the East. "May I not do as it listeth me with my own?" is a cry far less fre- quently heard than of old. Private property as a concept §57] Limits 135 will no doubt always remain; but the content of the concept is continually changing. Property in human beings was at one time considered economically advantageous and morally defensi- ble. Private ownership of the highways was not so long ago usual and justifiable. In the city of New York to-day the proc- ess of extinction of private property in docks is fast going on. On the other hand, the stealing of electricity or the tapping of a telegraph or telephone wire is at present punishable as theft. If, as Carlyle tells us, no one believes what his grandfather believed, we may almost say that no one owns what his grandfather owned. The right of private property is a privilege conferred upon individuals by society. It is recognized as beneficial in general because of the consensus of opinion that in the main better economic results can be secured by the application of the prin- ciple of self-interest. In the present stage of the evolution of human nature, private property constitutes the chief incentive to better and greater production. The test therefore is always the social test. Where, however, the reason of the rule fails, the rule itself must fail. That is, w'here in certain cases the results of private property are clearly opposed to the social interests, society is justified in restricting the extent of the property right. Thus the private ownership of patents and copyrights is everywhere granted only for a term of years, the right of the owner thereafter lapsing in favor of society at large. Again, while property in land is in general beneficial, immense private holdings may sometimes check, rather than further, social progress; and may lead to weU-considered move- ments either to restrict their size, as in New Zealand, or to alter the form of the property right, as in the recent Irish legislation intended to convert the tenant into a peasant proprietor. Interference with the existing rights of private property must always depend upon a convincing and irrefragable evi- dence of its necessity. For in the main private properly and individual liberty have been the correlative products of human civilization. The limits of economic freedom and economic 136 Private Property [§58 competition which we shall discuss in the following chapters will throw light upon the bounds of private property. We shall see that the maintenance of property rights depends on the existence and the beneficence of competition. Where competition has given way to monopoly, the automatic control of property rights must be replaced by a more positive social control. Again, when the condition of equality, which under- lies the theory of competition, is absent, competition may lose its beneficent force and the economic interests of society may demand the fixing of a limit to the exercise of private property rights. Certain idealists would go much further and advocate communism or socialism. The communist demands the complete abolition of all private property; the socialist asks for the abolition of private property in the means of pro- duction while retaining it in articles of consumption. Both are so extreme that in their well-meant endeavor to rectify undoubted abuses, they would forego the chief advantages and concomitants of modern civilization itself. 58. Content of Property Rights Property rights may be classified under five heads: the right of gift, the right of disposition by contract, the right of use, the right of bequest, the right of unlimited acquisition. Of these the first and second are well-nigh unquestioned. A man may not only give away his property as he chooses, but he may sell, lease, loan or pawn it. It is only where rem- nants of the old feudal law of real estate survive that we find any limitation put upon such rights. The third right is some- what less absolute. As against the doctrine of "vested rights" of private property, the theory of "eminent domain" forms the entering wedge of social control which is being continually pushed further in by the principle of public policy. Again, a man may commonly use his property as he likes. But he may not use it in such a way as to create a nuisance to his neigh- bor. The individual right is subject to social restrictions. § 58] Content 137 II is, however, around the fourth and fifth heads that the chief controversy has taken place. The right of bequest or inheritance is one of late growth. Long after private property was instituted its existence lapsed with the death of the original owner and the property itself reverted to the social group. Long after the right of bequeathing chattels developed, there was no such privilege connected with real estate. Wills and intestate succession are everywhere the outgrowth of the family, — the immediate kinship which, as we know, was the product of eco- nomic forces. To insure the perpetuation of the property beyond the life of the testator became one of the most potent factors in the desire of acquisition and in the economy of pro- duction. Where the economic and social importance of the family is great, we even find that the right of bequest becomes a duty, with the correlative right of inheritance on the part of the surviving members of the family. Such, for instance, is the portion legitime or legal right of the children in France and Ger- many, or the dower right of the widow in Anglo-Saxon countries. With the weakening of the family sentiment in modern times and its restriction to a continually smaller group, the movement for a limitation of inheritance has begun to make some headway. The great development of modern progressive inheritance taxes and more especially of collateral inheritance taxes is an illustration of this tendency. When the rate of such taxation reaches 15% as in the United States a few years ago, 18% as in England, and 20% or even 25% as in some of the states of Switzerland and Australasia, we are on the high- road to a considerable limitation of the right of bequest. There is every reason to believe, however, that just as the kernel of the intimate family will continue to subsist, the movement will be arrested at that point where it might imperil the tendency to acquisition. On the other hand, the right of unlimited accumulation of wealth has scarcely been affected. Even though it may be conceded that the heaping up of enormous fortunes may seri- 138 Private Property [§58 ously strain the machinery of democratic government, there is an insuperable difficulty in fixing any point beyond which the further accumulation of wealth may be declared economi- cally or politically dangerous. We refer here to wealth in general, honestly acquired. Private property in certain things indeed is considered wrong, irrespective of amount; dishonesty is as reprehensible and as frequent (or as infrequent) in a small as in a large business. Great fortunes in general can be hon- estly acquired only by conferring great advantages on society; he who serves the community best will reap the greatest profits. The successful and upright business man retains the market only so long as he undersells his competitors, and to that extent benefits the consumers. To check profits would mean to check enterprise; to check enterprise would mean higher prices and greater sacrifice. The limitation of wealth as such is imprac- ticable and economically perilous. No one, however, would gainsay the essential reasonable- ness of the general feeling that prodigious inequalities of for- tune are in the long run a menace to the stability of democratic virtues. But the solution of the problem cannot be found by opposing private property as such, or by erecting a barrier to the accumulation of wealth. It is futile to deny or to minimize the basic importance of private property on which the entire civilization of modern times is built. The economic ideal may best be expressed in the words of Aristotle of old, — that prop- erty should be private, but its use common. What he meant was to inculcate the idea of the public trusteeship of wealth, or the principle of the social responsibility of the wealth-getter. Economic progress is indeed intimately bound up with the in- stitution of private property, and yet society is asserting a claim to be heard in its control and disposition. We are beginning to realize the duties as well as the rights of wealth. This moral obligation is based on the sound economic conception of social utility as at once the justification and the limitation of private property. CHAPTER X COMPETITION 59. References A. T. Hadley, Freedom and Responsibility (1903), ch. v ; R. T. Ely, Evolution of Industrial Society (1903), part 2, ch. i; J. S. Nicholson, Principles of Political Economy (1893), bk. ii, ch. v; E. Kelly, Govern- ment, or Hutnan Evolution, I (1898); P. Kropotkin, Mutual Aid a Factor of Evolution (1902); W. W. Willoughby, Social Justice (1900), ch. ix; C. H. Cooley, Personal Competition (Am. Econ. Assoc, Economic Studies, IV, 1899); A. R. Wallace, Studies, Scientific and Social (2 vols., 1900), chs. xiv — xvii, xxiii, xxviii; A. Marshall, Sotne Aspects of Competition Qour. Stat. Soc, LIII, 1890); Clark and Giddings, The Modern Dis- tributive Process (1888). 60. Nature of Competition Competition is in a certain sense the law of all life. Biology has made us familiar with the animal struggle for existence and has disclosed the process of natural selection, as resulting in the survival of the fittest. The chief form of this conflict is between the living being and the forces of nature, the struggle of the individual to accommodate himself to the environment, and the evolution under favorable conditions of those who survive by learning so to accommodate themselves. When nature is niggardly and her resources do not suflice for all, the struggle with nature is reinforced by a contest between the various groups or units to secure their share. It is here that competition emerges, — not a struggle against nature, but a conflict of one unit with another in order to enjoy the bounty of nature. It is a striking fact that the earliest form of competition is a group competition rather than an individual competition. 139 140 Competition [§60 Al all events, without going back to the beginnings of life, it is reasonably certain that the first competition found among human beings, as indeed is still the case with most animals, is the competition of one horde or pack with another in the endeavor to secure the means of subsistence. Thus from the very outset the principle of mutual aid emerges, and competi- tion between the groups is possible only because of co-opera- tion within the group. These early forms of co-operation are seen in the American frontier life when the neighbors come in to the "log-rolling," the "raising" of the building, the "husk- ing bee" or the "sugaring off" of the maple trees. With the development and differentiation within the group, the prin- ciple of natural selection, that is, of competition, makes itself felt as between the members of the group; but the process is slow because the welfare of the individual is deemed to be subordinate to that of the whole. As the groups become larger and more powerful, we notice continually higher forms of mu- tual aid, but we find at the same time more play given to the activity, or, in other words, to the competition, of the individual. Finally, in historic times the competition between nations is decided not only by the character of the state, as the most de- veloped form of human co-operation, but still more by the results of the competitive struggle within the nation in develop- ing those qualities of body and mind on which political power ultimately rests. Competition in one form or another is co- terminous with life itself. If competition, as a biological conception, is thus an ex- planation, in part at least, of progress, it becomes of even more importance when applied to the economic domain. The sub- ject matter of economics is human relations to wealth. The difference between man and animals is not that man econo- mizes wealth (for some animals do the same), but that he pro- duces wealth. Competition therefore in human economics is not simply a contest to divide an existing sum, but a struggle to share in an increasing stock. The first requisite of secur- § 6i] Forms of Competition 141 ing an additional share is to produce more. In this struggle to dispose of the increased product to the whole body of consumers, the victory will lie with those that can create better or cheaper products. The surest method of capturing the market is to undersell one's competitor. Thus competition, as a business principle, means a struggle to augment wealth through a lower- ing of cost. If competition in biology leads only indirectly to progress, competition in economics is the very secret of progress. Under normal conditions competition is indeed the hfe of trade. The individual competitor may incidentally amass a fortune, but if he does so honestly (and dishonesty is not an attribute of wealth, but of individuals, whether rich or poor), it can only be by conferring upon the community still greater benefits. He conquers who does best for society. Competition in economic life, therefore, is a potent factor in the growth of capital. Working hand in hand with the prin- ciple of private property, it is the chief incentive to progress. Through it we secure the extension of the margin of utilization, the accumulation of the surplus available for human wants. Competition, moreover, is the great safeguard of society. It is the protection of the consumer against the high price which accompanies exorbitant profits; for it is the automatic force which reduces the gains of the inefficient and makes profits depend on low, rather than on high, price. It evokes in individuals the fundamental characteristics of energy, thrift and power; and it harmonizes to a large extent the interests of the individual and of society, by making the success of one depend primarily on what he can accomplish for the other. 61. Forms of Competition The chief forms of competition are five in number, — com- modity competition, individual competition, market competi- tion, class competition and race competition. (i) By commodit}' competition is meant the competition due to the existence of social choices. Every individual is 142 Competition [§ 61 continually debating with himself whether to purchase one commodity in preference to another. Where he is on the margin of doubt or of indifference the slightest alteration in the price will cause him to substitute something else. The principle involved is hence called the principle of substitution. The vendor must constantly be on the watch lest any increase of price cause the disappearance of his sales. We substitute, however, not only one thing for another, but also one agency of production for another: in the crucible of economic wants everything is finally tested by its capacity to afford the greatest satisfaction. Not only will the consumer choose now this and now that commodity, but the employer will increase now his labor force, now his stock of machinery, so as to secure the best results. The least change in the rate of wages or of in- terest may lead him to substitute the one for the other. It is only by replacing the less efficient by the more efficient factor that the producer is able to induce the consumer to select one commodity in preference to another. Competition of factors of production is thus really an adjunct to commod- ity competition. Competition through substitution is hence important in that it fixes a maximum limit beyond which prices cannot go. Every economic factor, like every economic good, may be in either actual or potential competition with another. The existence of competition, however, implies the mobility or free interchange of the factors of production from enterprise to enterprise and from commodity to commodity. When the fluidity of capital and the transferability of labor are complete, the competition is absolutely free. When there are hindrances to this mobility, we speak of economic friction. The substitu- tion of one commodity for another may be hindered by legal, social or economic causes. Under normal conditions, however, the competition is real and effective. (2) The competition .of individuals with each other de- notes a rivalry, not between the producers of different com- modities or between the different factors of production, but § 6i] Forms of Competition 143 between the producers of the same commodity or the same factors of production. Under normal conditions competition here puts every one on his mettle, and success is a measure of the contribution to the social fund. The more a laborer produces, the higher his wages will be; the larger the output of a particular cotton mill and the lower the cost at which it can market its goods, the greater will be the benefit to the consumer as well as the advantage to the particular producer. Competition between individuals is in its results a struggle to enhance efficiency, to increase faculty, to multiply productive power, to augment ingenuity, in short, to develop economic personality. The more potent the personality, the greater will be the command over the powers of nature, the more rapid will be the development of the wealth which, although owned by individuals, yet inevitably ministers to the welfare of society. (3) By market competitioa^/e mean, not the competition of individuals in the market, Tsut the competition of markets with each other. Market competition includes, indeed, both commodity competition and individual competition in the sense that in every market individuals as well as commodities compete with each otl^^^But it is something over and above these. Every great cit^K continually striving to develop as a centre of distribution and exchange, in the well-founded hope that the wealth thus amassed will lead to productive efficiency in other lines. New York is competing with Baltimore for the grain trade; New Orleans with Galveston for the cotton trade. Competition between markets seeks to overcome the factor of distance, and lies at the root of the problem of modern methods of transportation. Here again market competition leads to reduced cost, and the struggle for market supremacy can be fought to a successful issue only through more effective service. (4) Clag^ cmjmtition is the result of the differentiation of modern socien^Bo groups of producers. We have not only the great division into laborers and capitalists, but the further separation of the latter into the owners of agricultural, com- 144 Competition [§ 6i mercial and industrial capital — that is, landowners, mer- chants and factory owners — and the still further subdivision of each class into minor groups. It pleases some writers, like the socialists, to erect this principle under the name of class conflict into the fundamental explanation of all economic change, and to regard it as involving not only the expropriation of the victim, but the ultimate downfall of society as well. In reality class competition, while as inevitable as the other forms of competition, is within proper bounds just as beneficial. Under a system of free competition capital will flow into in- dustry in preference to agriculture only when industrial pur- suits are more productive, that is, when the community as a whole sets more store by the products of industry. Whether the moneyed interest or the landed interest is more prosperous depends at bottom upon their success in making converts among the consumers, and Ih^extent of conversion depends on what they can offer in th^way of lower prices or better products. The laborers and the capitalists again represent competing interests, but the share of each in wages and profits depends ultimately, as we shall see, on their relative contribu- tion to the common product. ^Ib (5) Race or national competition^^ its economic aspects is the final form of the modern struggle. The most marked characteristic of recent progress is the gradual substitution of peaceful rivalry of commerce for the sanguinary clash of arms. The modern weapon is not the javelin or the rifle, but the enterprise of the domestic producer aided by the exporter. Every nation that has reached commercial or industrial matu- rity endeavors to seek in the foreign market a profitable outlet for its own surplus productions. This attempt to secure a market is indeed responsible for an occasional war. In the main, however, the struggle to-day is one kj^heapness, and in the end it is not the large army or nav>^^^the most effi- cient producer that permanent I3' retains the neutral market. It is not to be denied that both a large army and a large navy §62] Dangers of Competition 145 may be needed to protect the commercial or other national interests; but the foundation of military greatness in modern times is primarily economic, and when economic efficiency has disappeared, military strength must also disintegrate. Great nations are now judged, not by the numbers of their battalions or ships, but by the volume of domestic production and foreign trade. Economic power represents potential mili- tary capacity. Here, again, national competition is salutary. The fundamental error of the old mercantilistic doctrine was the belief that what one nation gains in trade, the other neces- sarily loses. The modern doctrine is that every nation is helped by the prosperity of its neighbor, on the principle that the more wealthy the customer the greater will be his pur- chases. Both nations may gain, although one may gain more than the other. The foreign markets can be retained only by underselling; the profits of one country can be secured only by conferring these advantages on the consumers of the others. National competition, like personal and class competition, can benefit the individual country only by benefiting the group; it enriches one nation, but incidentally develops the others. * t 62. Dangers of Competitiou In describing the essential beneficence of competition in its various forms, we must not blind ourselves to its shortcomings. Some of these evils are inevitable. Where there are a contest and a victor, there must be a victim. There can be no strug-. gle without some pang to the conquered. Suffering is an accompaniment of progress, just as sacrifice, at least in the sense of effort, is a prerequisite to enjoyment. In the animal world, where the sway of competition is relentless, the evil is pronounced. Progress there is purchased by the death of the victim. The fightJs one of bestial instincts and brute powers, — the victory, n^cvcr beneficial to the race, is secured at a tremendous sacrifice. Human competition, on the other hand, has in its economic form, as we have seen, something in com- 146 Competition [§62 mon with, but also much in contradistinction to, brute compe- tition. Economic competition may indeed involve the economic death of the unsuccessful competitor. The producer who is undersold by his rival will ultimately be compelled to abandon the field. His adversary's success, which means progress for the consumer, spells his ruin. There are, however, two points in which brute and human competition are unlike. In the first place the economic de- feat may be only temporary. The producer who has failed in one business, often succeeds in another for which he is better fitted. His original failure may be the means of redoubled efforts and final victory elsewhere. His downfall is not nec- essarily his end, but may be his real beginning. In the second place, in economic competition there may be no death at all, but only a relative defeat in the sense that the progress of both competitors is unequal. Laborers compete with capitalists, one country vies with another; both may continually gain, even though in dififerent proportions. In brute competition the struggle is only for consumption; in human competition the contest takes the form of production. In the end, indeed, the goal of both is enjoyment; but thQ means of reaching the end are different. This difference renders possible a participation by both contestants in the gains of production that are caused by economic competition. Even with these qualifications, however, competition is often a painful process, none the less painful because the struggle has been transferred from the arena of bodily strength to that of mental capacity. The competition, moreover, may some- times become so fierce that for a time at least it exhausts the powers of both competitors. This is the "cut-throat competi- tion" of which we have heard so much in recent years, when, in the effort to capture the market, prices are reduced below the cost of production. The temporary advantages to the con- sumer are dearly purchased through the ruin of all the pro- ducers. Here we see competition at its worst, because all §63] Limits of Competition 147 competitors are pulled down to the level of the most unscrupu- lous. In the same way there may be excessive competition between laborers, as when the necessities of the laborers com- pel them to accept the standard of the worst-paid or hardest- worked laborer. In the one case as in the other this unfair competition endangers the perpetuity of a successful business or of a prosperous working class. The question then arises as to whether it is not possible to conserve the chief advantages of competition and at the same time to lop off some of its ex- crescences; to maintain the social benefits while minimizing the individual costs. In other words the question is: what are the real limits of competition? 63. Limits of Competition The problem may be approached from three points of view, ■ — the level of competition, the maintenance of equality and the existence of quasi-public enterprises. (i) The fundamental distinction between brute and human competition, underlying all the others that have been men- tioned, is the point with which we have become familiar, namely, that while animals are governed by their environment, man, to a certain extent at least, can alter his environment. This is true not alone of the physical, but to a much greater extent of the socio-economic environment. The function of society is to raise the general plane of competition. Even in that extreme form of competition known as war, international agree- ments have succeeded in preventing a certain amount at least of wanton injury and needless suffering, without in any degree impairing the real intensity of the conflict. It is no longer true that "all is fair in love and war." In economic life, simi- larly, we often hear of unfair or cut-throat competition, with the implication that unworthy and reprehensible measures are being employed. With the development of business life there has been a continual movement away from the early brute-like struggle. The community to-day is frequently con- 148 Competition [§63 trasting "fair" with "unfair" competilion. Not only does the idea of what constitutes a "fair" competition change from age to age, but it differs at the same age in different occupations. The practices of our railways are very different from what they were a generation ago. The professional ethics governing the competitive charges of a lawyer or a physician scarcely resemble those of a tradesman. The code of business morals is not the same in Wall Street as in Worth Street; the competition of farmers is often conducted on a different level from that of factory owners. Each group has its own standard, and the average man is satisfied if he conforms to it. The object of all progress is to elevate this standard and to give a continu- ally broader interpretation of what is economically "fair." Conformity to the standard, however, involves some interfer- ence with individual liberty. Through the force of public opinion, reflected in business usage or legislative enactment, competition is being made to assume a higher form. Dishon- esty is frowned down, factory laws are enacted, the scab and strike-breaker are reprobated, unscrupulous financiering is pun- ished. Competition is not destroyed, but its level is raised. (2) The second consideration is that of equality. Perfect equality indeed does not exist, since variety is the law of life. Competition does its work, in the economic as in every other field, precisely by giving the victory to the better equipped. When the disparity between the competitors, however, is enor- mous, the community often fails to reap the essential benefits of competition. If one individual, can produce a commodity for ten cents, and if it costs his sole competitor fifty cents, a sell- ing price of forty-five cents will give him the command of the market; whereas with a more capable group of competitors he might be compelled to reduce the price to fifteen cents. The greater the equality between the competitors, the more sub- stantial are the gains to the consumers. If the producer can in some way be rendered more efficient, so that the disparity will diminish, to that extent the community will gain. This §63] Limits of Competition 149 is also, as we shall see, the principal argument in favor of the regulation of international competition through a protective tariff. In the same way the demand for a minimum wage and some of the other legitimate practices of trade-unions are intended to bring the weakest nearer the standard of the strongest. In its best aspects it is a levelling up, rather than a levelling down. The point to be emphasized is that the strengthening of a weak competitor may redound to the advantage not only of the competitor himself, but to that of the whole group, and ultimately to that of the community. Competition remains, but is rendered less unequal. Here, as elsewhere, indeed, there is always the danger that the community may suffer more from the restriction on the strong than it gains from the advantage to the weak. This, however, is the danger of all democracy, which must be guarded against in other ways. (3) The third point is the existence of quasi-public enter- prises. Shortly after the so-called "merger decision" of the Supreme Court in 1904, in which the Northern Securities Company was declared illegal, a noted lawyer stated publicly by way of criticism that no one any longer believed in the old adage that "competition is the life of trade."* This remark rested upon a confusion of thought. Competition of a certain kind between railways is certainly not the life of trade. But why? Railways, like some other media of transportation and transmission of commodities, intelligence and power, differ from ordinary commercial enterprises in that they are quasi- public in nature. They carry on enterprises in which the public interest is so commanding that it must not be subordi- nated to private profit. In ordinary private business buyers and sellers mak^ their individual bargains with each other; and while, as we shall see, open competitive prices tend to uniformity, there is nothing to prevent the more powerful or the more favored purchaser from secretly securing a lower price. Much of the profit of the business man, indeed, con- 150 Competition [§64 sists in this skill in purchasing on favorable Icrms; the very essence of usual business practice is this system of different prices to different customers. It is precisely the attempt on the part of railways to pursue this same policy which has cre- ated the "railway problem" in the United States. It is now recognized that the railway has no more right to make per- sonal discriminations between its customers than has the government post-office. The wealthy merchant cannot buy postage stamps cheaper than his smallest competitor; he ought not to be able to secure more favorable freight facilities. Com- petition in ordinary business means the different treatment of individuals, and is beneficial; competition in railway rates means discrimination between shippers, and is reprehensible. Competition in ordinary prices is the soul of trade; competi- tion in railway rates is the death of legitimate trade. The only kind of competition that is desirable in quasi-public enter- prises is the competition of service and of facilities. Competition therefore is a force that must not be abused. It is applicable only in a slight degree to certain kinds of busi- ness, it works most beneficially in the presence of comparative equality, and its level of action stands in need of a continual elevation. Within these limits, and with these conditions, it is a vital and salutary force. 64. Substitutes for Competition As opposed to competition there are three possible regula- tors of economic phenomena, — custom, co-operation and monopoly. (i) Custom at one time played a far greater role than it does to-day. In the more immobile communities of the Orient, as well as in the early middle ages of Europe, jociety was largely governed by status rather than by contract. People were born into certain conditions and occupations, and to emerge from these was difficult or impossible. In the rigidity of the Indian caste system we see the highest development of custom. §64] Substitutes for Competition 151 Prices also were largely customary prices; ihe entire mediaeval conception of justuni prctlum centred in the attempt to enforce the customary price. Capital was to a great extent fixed in land, and thus immobile; labor was not permitted to shift at will from place to place or from trade to trade. Nevertheless, even in the stage of the customary economy competition was not entirely absent. At bottom values were far more depend- ent upon the working out of subtle and masked competitive forces than is usually conceded. To-day custom still plays a perceptible although fast-dwindling role in the determination of some economic phenomena. Even in the backward and primi- tive sections of our country the storm and stress of modern com- petitive life are making rapid inroads. The economic theory of industrial society now rests on competition, not on custom. (2) Co-operation is in sc/me aspects the opposite, but in others the corollary, of competition. We have seen that from the very beginning there was mutual aid within the group, in order the better to carry on the competition between the groups. There is even to-day no competition within the family, although a very lively competition between families. So in the same way the stockholders of a corporation co-operate, in order the more effectively to compete with another corporation. There are in fact all kinds of associations, voluntary and compulsory, including church and state, which fill out modern social life and which have more or less economic influence, working in perfect harmony with the struggles of the market. This kind of co-operation is compatible with competition. Co-operation in its technical sense, however, means the abandonment of competition in distribution and in production. In distributive co-operation, the customers who arc members of the co-operative societies select one of themselves as man- ager of the store and share any resulting profits. As they are expected to make no purchases elsewhere, there is no compe- tition. Such co-operative stores are found principally in Great Britain. They have never flourished in America because they 152 ' Competition [§64 have' been unable lo supply the commodilies as cheaply as the great department stores. In productive co-operation the ob- ject is to eliminate the capitalist and to remove competition between the workmen. The laborers elect one or more of their number to control the enterprise, and divide among themselves the gains. Co-operative production has achieved some notable triumphs in both Europe and America, but as we shall see (§ 183), its scope is exceedingly restricted, and there are great obstacles to its general adoption as a substitute for competition. (3) While co-operation implies an abandonment of compe- tition either between consumers or between laborers, there is a third form of co-operation which implies abandonment of com- petition among capitalists or managers of business. This is usually called combination. If the combination is incomplete, however, it is still subject to the force of competition; if it is complete, it has become a monopoly. Monopoly therefore is the ultimate outcome of the cessation of business competition. Monopoly has existed in many forms, and there are accord- ingly several categories of classification. Monopolies are either private or public, and public monopolies are either fiscal or social. Fiscal monopolies are enterprises conducted by gov- ernment for fiscal reasons, like the salt or tobacco monopoly abroad. Social monopolies are enterprises conducted by gov- ernment primarily for social reasons, like the federal post- office, or the South Carolina dispensary system. Private monopolies, on the other hand, are of three classes, — per- sonal, labor and capital monopolies. Personal monopolies rest upon natural talent; a great actor or musician is in a class by himself. Labor monopolies rest upon labor organization and afifect chiefly the employer, although indirectly the public. Capital monopolies are the ones with which the consumer in general usually comes into contact. Capital monopolies, finally, are of four kinds, — legal, natural, franchise and ordinary business monopolies, (i) Legal mo- nopolies were at one time common, through grant of the mon- arch to favorites. They are to-day found only in the restricted §64] Substitutes for Competition 153 form of patents and copyrights. (2) Natural monopolies are those which depend on natural location, as in the case of certain specially favored lands, mines or waters. (3) Franchise monop- olies take the form of quasi-public enterprises like railways, telegraph and telephone companies, gas, water and electric light companies, whose profitable operation depends on the grant of a franchise to use the public highways, on, above or below the surface. Strictly speaking, they might be classed as a sub- division of natural monopolies. Here experience shows that competition is in the long run impossible and undesirable, either because, as in the case of railways, it leads to discrimination, or because, as in the case of the so-called municipal monopolies, it leads to an unendurable interference with the streets or an unnecessary duplication of plant. (4) Ordinary business mo- nopolies, finally, cover the great mass of modern enterprises known as trusts, and as to the essential monopolistic character of which there is room for doubt, as will be explained later (§ 148). It is clear that private monopoly is a satisfactory regulator of price only in personal monopolies, where the consumer is glad to recognize and to foster exceptional talent, as well as in patents and copyrights where society is willing for a time to forego the advantage of competition for the sake of stimulat- ing invention, and thus ultimately reaping the benefits. In all other cases of private monopoly, the consumer is to a cer- tain extent at least left defenceless. Where there is no reliance upon competition, recourse must be had to some form of legis- lative control. Unregulated monopoly can therefore only in most exceptional cases be a substitute for competition. Competition hence remains the permanent and controlling force of economic society. It is not all pervasive or uniformly advantageous. But in its fundamental aspect it lies at the root of progress, and when stripped of its excrescences and applied under proper limitations it is as beneficent as it is widespread. In the complex society of the present day, however, the limi- tations on the principle often assume almost as much impor- tance as the principle itself. CHAPTER XI FREEDOM 65. References H. J. Nieboer, Slavery as an Industrial System, 2d ed., (1910); J. K. Ingram, History of Slavery and Serfdom (1895); J- E. Cairnes, The Slave Power (1862); T. H. Green, Liberal Legislation and Freedom of Contract in Works (Nettleship's ed., 1888), III; J. F. Stephens, Liberty, Equality and Fraternity (1873); H. C. Adams, Economics and Jurisprudence (Am. Econ. Assoc, Economic Studies, II, 1897); R. T. Ely, Property and Con- tract (1914), pt. ii, ch. viii, ix; A. T. Hadle}', Freedom (1903), chs. iii, iv, vi; E. Kelly, Government (1901), II, bk. i, ch. v; J. S. Nicholson, Principles, bk. v., chs. ii, iii, and Strikes and Social Problems (1896), chs. iv, vii; J. S. Mill, Principles (1880), bk. v, ch. x; S. and B. Webb, Lndustrial Democ- racy (1904), part 3, ch. iv, and Problems of Modern Industry (1907), ch. x; D. G. Ritchie, The Principles of State Interference (1896); G. G. Groat, Attitude of American Courts in Labor Cases (1911), ch. xi; Commons and Andrews, Principles of Labor Legislation (1916). Immigration: J. R. Commons, Immigration and its Economic Effects (Indust. Commiss. Report, XV, 1902); J. W. Jenks and W. J. Laucks, The Immigration Problem {igif); Report of the Immigration Commission (42 vols., 1910-1912); H. J. Fairchild, Greek Immigration to the U. S. (1911) and Immigration (1913); P. R. Hall, Immigration (1912); I. A. Hourwich, Immigration and Labor (191 2); Mary R. Coolidge, Chinese Immigration (1913); F. J. Warne, The Immigrant Invasion (1913). 66. Origin and Growth of Slavery Industrial liberty, like private property, is the result of a slow evolution. The ordinary picture of the freedom of the un- tutored savage is as fanciful as the rest of the fairy tales of our youth. Primitive man lacked freedom in three ways: he was in abject dread of nature, of his stronger comrades, and of the social group. In his ignorance of natural phenomena he was a prey to all kinds of fear and superstition and an easy victim of the sorcerer or medicine man. Living in a society based on 154 § 66] Growth of Slavery 1 5 5 brute strength, he was at the mercy of the more stalwart savage. Dependent, as we have seen, on the horde or clan for existence, he was hemmed in by social customs that could not be in- fringed and by group prohibitions which it would be folly to evade. Civilization, and not primitive nature, is the creator of liberty. Knowledge has emancipated man from superstition, law and order have protected him from the oppressor, social progress has evolved in every phase of life a sphere of liberty, ever more secure from the encroachments of absolutism. Eco- nomic liberty like political liberty, freedom of thought like freedom of speech, are the product of the most advanced stages of society. The freedom which is of special concern to the economist is of two kinds: bodily freedom as the basis of all labor, and freedom of economic action apart from control of one's own labor. The first involves personal liberty in the narrower sense and leads to a study of slavery. The second comprises a num- ber of phenomena to be discussed in § 69. We take up first the subject of slavery. The origin of slavery has until recently been much mis- understood. It is commonly stated that there are four causes of slavery: conquest, debt, crime and birth. Slaves, we are told, were recruited from the victims of war; from the ranks of those that voluntarily sold themselves or were unable to dis- charge their debts; from the criminals who earned a punish- ment only short of death; and from the offspring of existing bondmen. This statement is accurate enough, but it sheds no light on the real problem of the origin, the spread and the decline of slavery. Slavery is obviously an institution designed to secure the services of others by force. It presupposes the need of labor on a moderately large scale. In the earliest stages of society well-nigh the only work done by man consists of hunting and fishing, each in itself to a great extent a pleasurable activity. Every member of the community concerns himself with such 156 Freedom [§ 66 work, and there is neither need nor room for compulsory labor. It is only when private property develops that we find the beginnings of slavery. In exceptional cases we can trace pri- vate property and intertribal barter among fishing groups, as in some of the Indian tribes on the North Pacific coast. Here the slave is utilized to a certain extent in work connected with fishing and in domestic labor. In general, it may be said that slavery can exist in the primitive economic stage only when subsistence is easy to procure without the aid of capital. When this condition is lacking, as among the Australians as well as among the great mass (although not all) of the American Indians and the Eskimos, slavery is unknown. As we have seen, however, private property acquires social importance only with the pastoral stage. The slave can now be employed as the cowherd, the swineherd, the shepherd. The patriarchal family develops, and the slave becomes an in- tegral part of the family group. Slavery, however, is still rela- tively insignificant. Even large flocks and herds can be tended by a few herdsmen, and the existence of a great mass of poverty- stricken freemen renders recourse to slaves unnecessary. The accumulation of large numbers of domestic slaves, moreover, is prevented by the exigencies of a roving existence. When we come to the agricultural stage, the conditions change. Cultivation of the soil is arduous, and yet with an adequate force of laborers it is profitable. On a given plot of land every additional laborer means up to a certain point an increased yield; the existence of settled habitations renders possible the employment of domestic servants in various capaci- ties. The more slaves, the more wealth and the more ease for the slave owner. In the early stage of the agricultural period slavery is still relatively inconspicuous. After the immediate needs of the master and his family have been met there is little use for additional laborers. It is only with the growth of barter and the increasing possibility of surplus products that it becomes § 66] Growth of Slavery 157 profitable to augment l)olh one's land and one's slaves. In other words, a market for agricultural production must develop, and the landed estates must be managed as business enter- prises. Slavery becomes highly lucrative, and on the great estates there is now such a diversified activity that large num- bers of slaves are employed not onJy as domestics but in all kinds of industrial work. Thus in Rome the development of slaverj' on an extended scale did not take place until the later centuries of the republic, when slavery on the latifundia became the dominant form of great business enterprise. In the same way slavery became an important factor in America only when the cultivation of tobacco and later of cotton on a considerable scale for the foreign market made the labor of slave gangs profitable. It will be observed, however, that in addition to the exist- ence of a market one other factor is necessary to the spread of slavery. This is a supply of free land. It is only when there are large tracts of virgin and unoccupied soU that slavery be- comes at once lucrative and, from the point of view of the landowner, necessary. It is obvious that if any one can occupy and till on his own account a plot of land he will not volun- tarily work for others, except for a remuneration so large that it will exceed what he himself can raise from the soil. The landowner who cannot secure voluntary assistance except on what he regards as ruinous terms resorts to forced labor. As long as there is a boundless expanse of good land available, slave labor, which implies a superficial cultivation, is still eco- nomical. It pays better to bring fresh land under the plough than to put more effort into old land; it is more profitable to increase acreage than to redouble effort. Even when the land becomes poorer through an exhaustive culture, slavery is still profitable in the older sections, not so much for the raising of produce as for the raising of slaves to be sold to the newer and more distant lands. To the landowner it is immaterial whether he secures his wealth from the produce of land or of slaves: as 158 Freedom [§67 long as the supply of fresh land maintains the value of slaves, their increasing numbers will count erVjalance the decreasing fertility of his land. Finally, when slavery has become the dominant factor in production, it is profitably employed not only in agriculture, but also in industry. Thus in classic Greece slavery developed with the growth of intermunicipal markets, and grew strong with the expansion of the colonies on all sides of the Mediterranean. The great city-states became not only the chief marts but also the chief breeders of slaves, and slavery finally dominated industry as well. With the advent of Roman sovereignty slavery received a new lease of life, and became lucrative not only on the Italian mainland but. in the great stretches of subjugated states. As long as the career of conquest and fresh accessions of territory continued, slavery flourished. In the same way the European immigrants into the new world, whose ancestors had just seen the last vestiges of forced labor disappear at home, no sooner reached American soil than they introduced in all its rigor the ancient system of slavery. If the system dominated only agriculture and not industry, it is to be ascribed to the fact that a controlling industrial civilization had, for reasons to be noted in a moment, evolved from the stage of slavery to that of freedom, first in Europe as against the colonies in general, and then in the North as against the South. It was cheaper for the South to buy its industrial products in the free North or in Europe than to make them herself. 67. Decay and Disappearance of Slavery To the same cause, the conditions of supply of fresh land, must we ascribe the decay and the final disappearance of slavery. When the supply of new land diminishes, the eco- nomic disadvantages of slavery make themselves apparent. As Cairnes pointed out, there are three defects in slave labor: it is given reluctantly, it is unskilful, it is wanting in versatility. As long as there is an ample supply of exuberantly fertile soU, § 67] Decay of Slavery 159 superficial cultivation suiSces. But with every decade's culti- vation of the same plot the productivity suffers and the need of more unremitting labor appears. The landowner now finds it to his interest to mitigate the rigors of slavery and by per- mitting the cultivator to do some work on his own account to induce him to labor somewhat more strenuously for his master. The slave in Rome gradually turns into the coloniis, just as several centuries later the Anglo-Saxon thegn is replaced by the villein, — the slave by the serf. Serfdom differs from slavery chiefly in that the individual acquires certain personal rights and is attached to the soil. He goes with the land, but cannot be divorced from it. The serf is still bound to work a certain part of his time for the landlord. With the final ex- haustion of free land, however, the landlord finds that he can derive more profit by freeing the serf completely and by letting him occupy the land on a fixed rental, in produce or in money. This process is gradual, differing according to the general economic conditions of each country. Ultimately, however, the last trace of serfdom disappears, and the cultivator be- comes the hired man or the free tenant farmer. There are generally five steps in this transition from slavery to liberty: (i) the acknowledgment by the master of certain personal rights on the part of the slave; (2) the grant to the slave of certain property rights, as the privilege of the Roman slave in later times to acquire a pecidium or independent fund by working in his leisure moments for himself; (3) the confer- ring of the privilege of marriage, whereby the master abdicates the right of breeding human beings like animals; (4) the manu- mission of the slave, while reserving certain partial rights to his services; (5) complete emancipation and commutation of all services into a fixed money rental. The transition from slavery to serfdom and from serfdom to freedom can be traced in Western Europe, where the increase of population and the resulting diminution of fresh land forced the adoption of better methods of cultivation. The process . 1 60 Freedom [§ 67 was accelerated by the growth of a free industry and com- merce in the towns; and although temporary mutations caused the landowners here and there to resist emancipation, serfdom was finally abolished, either because it was no longer really prof- itable, or because the community now recognized the greater need and value of the free industrial workman. In the first case, as in England, serfdom died a comparatively quiet death; in the second case, as on the Continent, where the landowners were more tenacious of their rights, it needed a revolution to bring about the disappearance of the last traces of serfdom. In America, where at first only the fringe of the arable area was occupied, the resulting inability to secure an adequate labor force through free workmen, apprentices or redemp- tioners soon led to the adoption of slavery, first of Indians, then of negroes. In the Northern states, where the land was poor and a better cultivation necessary, slavery never took a deep hold except on the plantations of Narragansett Bay and of the Hudson valley. In the South both climate and soil made slavery profitable. As the seaboard lands became poorer, the continuance of slavery depended on the continual acquisi- tion of fresh lands, — a fact that led to the Mexican war and the attempts to secure Cuba. The opening of the lower Miss- issippi valley so augmented the price of slaves that not only the older seaboard states, but even many of the hill sections of the interior commonwealths where slavery would never have developed of its own accord, now found it to their inter- est to raise slaves for the market; and from that time the entire South was practically a unit in favor of the "peculiar institution." The South was forced into the conflict because it well realized that without fresh supplies of land slavery was doomed. Emancipation came as a war measure; but even without emancipation at that time slavery would soon have disappeared. Left to itself, without any chance of territorial expansion in the presence of a more vigorous and free industrial system, 67] Decay of Slavery 161 slavery would slowly have become unprofitable, and would have changed into some form of serfdom to be ultimately merged into the more remunerative system of freedom. Lincoln's proclamation, like the Czar's ukase of the same decade, accom- plished by a stroke of a pen what it had taken Western Europe centuries to attain. In America the transition was an economic revolution, in Russia a reform, because in the one country slavery, and in the other serfdom, was abolished. In both cases the change in the law only slightly anticipated the in- evitable result of a fast-approaching change in the economic facts. The disappearance of slavery is therefore not due primarily to moral teachings. The greatest moral philosophers of Greece defended slavery because they could not conceive of a social system without it; the clergymen of the South honestly ap- pealed to the Bible because in their opinion it was necessary to social stability. The ethical defects of slavery were men- tioned by many Roman writers, but it was not until its eco- nomic shortcomings were realized by teachers and public alike that slavery disappeared. The civil war was indeed borne on the waves of a great moral uprising, but human nature in the North was no different from that in the South, and had the climatic and economic conditions of the North been like those :of the South, there would have been no such moral uprising. ■A higher morality, it is true, continually transforms social life, :but in order to accomplish lasting results it must be in intimate touch with the great underlying economic facts. With the virtual exhaustion of free land, slavery in modern society has gone, never to return. It is only in a few of the tropical colonies where land is still abundant that there is any possibility of its continuance; and if the colonies did not form iso relatively insignificant an appendage of modern industrial states, the possibility might become a probability. It is un- likely that we shall see anything more severe than the carefully regulated contract labor of some of the English possessions. 1 62 Freedom [§ 67 Even here, however, as well as in ihe case of the "culture" system of Java and the peonage of Spanish America, care must be taken not to permit a relapse into a state of virtual serfdom. Slavery and serfdom have been defended on five grounds, (i) It is claimed that slavery is preferable to cannibalism; that it is a great advance to spare the victim rather than to eat him. It is forgotten, however, that when the great development of slavery came, the enslaving part of mankind had long passed out of the cannibal stage. (2) It is contended that slavery protects labor, and that in the middle ages, for instance, pro- tection was more important than freedom. This is, however, an assumption which from the point of view of the workman cannot be proven. (3) It is said that slavery inculcates the habit of work. There is no doubt that some of the negroes were drilled into comparative thrift and orderliness in the South. But this assumes that nothing else would effect the same result, — an assumption belied in all countries where free labor has developed independently. It also forgets that some of the negroes came from tribes where work was by no means unknown. (4) It is asserted that slavery permits the evolution of a leisure class. This, again, is based on aristocratic postulates. It completely ignores the possibility of a demo- cratic development where leisure and culture will no longer be the possessions of a favored few. (5) Finally, it is claimed that compulsory labor is necessary for the economic progress of countries where the natives will not work. This argument overlooks the fact that the ultimate end of economic progress is man rather than wealth, and that every resource of modern civilization in the line of industrial and technical education must first be exhausted before the claim can be admitted. Labor is indeed necessary for economic progress, but a so- called progress which rests on the perpetual exploitation of the laborer is not worth having. Slavery, whether total or partial, exerts its pernicious and insidious influence on slave and slaveholder alike. The modern conscience refuses to §68] Economic Liberty 163 permit it, and fortunately the economic facts are almost everywhere in harmony with the modern conscience. These economic facts rest on the disappearance of free land. 68. Liberty of Economic Action While bodily freedom is thus the result of a slow develop- ment, the liberty of economic action in general is also a recent product. Economic liberty of both kinds has been evolved because it has been recognized as conducive to wealth and general progress under modern conditions. As opposed to the theories of ancient and mediaeval absolutism, with its con- tinual interference in the economic life of the individual, the modern doctrine is that a man may commonly be depended upon for utilizing his opportunities and turning his energies to the best account; that an adult of sound mind usually knows what is most advantageous for him, and that in making the most effective use of his own abilities he will ordinarily do the best for the community. It involves the substantial identity of private interest and public welfare, and it is to-day almost everywhere in the civilized world either an accomplished fact or a cherished ideal. If we look more closely, however, we shall find that free- dom is more than the mere absence of restraint or interference. In contrast to this mere negative conception of liberty, as advanced by Spencer and adopted by the average man, we must put the positive conception as framed by Green and elaborated by recent thinkers. Economic freedom, like all liberty, is not an attribute of primitive man, but has been ham- mered out by centuries of toilsome effort. Individual liberty is the product of social effort. If it is to be a constructive rather than a destructive force, if it is to minister to social progress rather than to social dissolution, it must be accompanied by two other conditions. Of these the first is equality. By equality we do not mean absolute equality. A certain degree of inequality inheres in 164 Freedom [§68 the nature of things. Men are born with an inequality of physical, mental and moral attributes which no amount of care can eradicate; and as soon as private property develops, these natural inequalities inevitably produce their results in inequality of possessions. The real equality that is important for economic purposes is threefold: first, legal equality, or the certainty that one man is as good as another before the law, and that his economic rights will be equally protected; sec- ondly, equality of opportunity, in the sense that no man is shut out by legislation or social prejudice from free access to any vocation or employment for which he deems himself fitted; thirdly, such a relative equality, at least in the conditions of bargaining, as not to put one party to the contract at the vir- tual mercy of the other. Without such a threefold equality freedom becomes illusory; for liberty based on gross inequality means the liberty of the stronger and more unscrupulous to impose his will on the weak. Liberty without equality is the power of the one, but the subjection of the other. The liberty to invest one's capital in slaves was stoutly defended by the ante-bellum Southerner, but his liberty involved the other's slavery. In addition to equality the growth of competition and the complexity of modern economic life have brought into promi- nence a second condition of liberty. The enormous power exerted to-day by the accumulations of capital as well as by the combinations of labor is in the present state of human devel- opment peculiarly susceptible of abuse. These abuses may be within the margin of the law, and yet none the less socially reprehensible. Unless great power is tempered by responsi- bility, it is apt to run wild. We are beginning to hear of the responsibilities of wealth, but the adage noblesse oblige applies to all forms of economic power, whether represented by wealth or not. What is needed, and what is gradually being devel- oped, is the sense of social solidarity; in other words, the con- viction that no one can really dissociate himself from the wel- § 69] Kinds of Economic Freedom 165 fare of his neighbors, and that his every action must be judged by its influence on society at large. It was this idea that found vague expression in the "fraternity" of the French revolution; it is the same idea that is again more forcibly advanced to-day under other names. The application in the economic sphere is no less valid than in others. Liberty without responsibility is license. Real economic liberty, therefore, is constructive in that it implies not simply an absence of restraint, but such a positive complex of conditions, resting on law and custom, as to insure to the greatest possible number the opportunity of a free de- velopment of their faculties. Liberty, when based on equality and responsibility, means wealth for the individual and prog- ress for society; liberty without equality and responsibility may mean advance for the few and retrogression for the many. Liberty as a negative concept is disruptive; liberty as a posi- tive concept harmonizes society and the individual; the one is a menace, the other an aid, to lasting economic progress. 69. Various Kinds of Economic Freedom (i) The first and most obvious form of freedom is that of marriage and divorce. Marriage indeed is far more than an economic contrivance, even though the historical forms of marriage have been influenced by economic forces .to a greater extent than is commonly recognized. Freedom of marriage especially is a product of the modern economic life. Restric- tions on the right of marriage were in the middle ages an attri- bute of personal subjection, and were utilized as fiscal resources by the lord. Even with the advent of physical freedom, how- ever, we find the right of marriage dependent on certain prop- erty qualifications, as in Southern Germany at the beginning of the nineteenth century. This also was merely a survival of aristocratic traditions, — like the still existing property qualifications for marriage in the case of army officers in con- tinental Europe. Freedom of divorce, on the other hand, 1 66 Freedom [§69 existed in early society, but was at first based on inequality. After the patriarchal and modern family had been constituted the husband could divorce the wife, but not vice versa. The newer right of divorce which rests on equality is in large meas- ure the result of the economic emancipation of woman. Into the wider ethical and religious aspects of this great problem the present is not the place to enter. (2) Next we have freedom of movement. In the middle ages the right of internal migration was often restricted. Under the settlement laws in England, for instance, it was virtually impossible for a workman to leave his native parish. In mod- ern times the growth of freedom has brought the right not only of internal but of international migration. The restric- tions on emigration still existing in Russia, for instance, are a relic of mediasvalism. On the other hand, the prohibition of immigration which is sometimes found in modern countries must be judged in the light of liberty in the positive sense, as explained in the preceding section. Chinese immigration into the United States, for instance, is forbidden. Cheap Chinese labor would undoubtedly help in developing the resources of the Pacific slope; but the vital objection to it is the permanent inequality between the Chinese and the American workman. Immigration in general is to be welcomed in a young country like America with relative underpopulation, because even though the standard of hfe of the immigrant may be lower than that of the native, he or his children will soon reach the American level. The Chinaman, however, refuses to assimilate, and will not adopt American methods. He retains and per- petuates his lower standard, and thus, if present in sufficient numbers, would inevitably drag the American standard down to his own level. Freedom of immigration, which in this case means prosperity for the employer and comparative comfort for the immigrant, implies permanent degeneration for the American workman and thus ultimate economic decay. It is a specious liberty, because based on inequality. §69] Kinds of Economic Freedom 167 When, however, there is any prospect of speedy equality and the immigration is not artificially fostered by foreign govern- ments or interested transportation agencies, interference with the freedom of immigration is uneconomic. This was the error of the Know-nothings in the fifties, as it is of the anti- immigrationists at present in the United States. That the low- class immigrant is the chief source of supply of the sweat-shops and in many respects complicates the labor problem is un- doubtedly true and ominous. The remedy, however, consists not in abolishing immigration, or even in restricting it ma- terially, but in raising the standard of pay and conditions of work through labor organization, public opinion and legal en- actment, and in making this possible by increased production and successful enterprise. In a period, indeed, where the labor market is already overstocked, the force of this argu- ment will be much impaired. As a consequence the law of 192 1 limited immigration into the United States to three per cent of each nationality now in the country. (3) We come next to the freedom of occupation. The right of choosing one's profession was in former times hedged in by all manner of barriers. At its worst the system of caste and custom prevented progress because it put men into voca- tions for which they were not fitted. Freedom of occupation insures as far as possible the right man for the right place, and this leads to enhanced production and better distribution. The only restriction which modern society permits is the evidence of fitness, in those occupations where incompetence would imply irresponsibility and involve injury to others as well as to oneself. The certificates required from doctors, dentists, engineers, plumbers, pilots and the like are not a hindrance, but an aid, to true liberty. The apprenticeship regulations of the trade unions, however, are sometimes good, sometimes bad. Where they are designed to insure good work, or even to pre- vent the degradation of wages and the workman's standard of life through the irruption of large numbers of underpaid ap- J 68 Freedom [§69 prentices, there is much to be said for the practice. But when the object is simply to keep out competent workmen and to erect a monopoHstic closed corporation, as in the late stages of the guild system, the limitation is clearly indefensible. (4) Another kind of freedom is the freedom of association. The chief forms of association for economic purposes are com- binations of labor and combinations of capital. In classic Rome, as in modern Russia, where both political and economic aims were sought we find a stern repression of labor associa- tions. Even after the right of political and religious asso- ciation had been won, however, combinations of labor were prohibited. Under the modern factory system such combina- tions have assumed the form of trade unions. It was not untU 1824 in England, and considerably later in America and con- tinental Europe, that the prohibition was removed. The legiti- macy of union, as such, is now accepted because it is recognized that it tends to secure the real freedom of the laborer. The individual workman in a large factory is at a clear disadvantage in dealing with the employer; the union, as we shall see (§ i8o), restores the equality by securing the right of collective bar- gaining. In the same way the right of free association of capi- tal in the form of corporations and other combinations has been acquired chiefly in the past half-century. Here again, however, when the nominal liberty of association results in a "restraint of trade" or virtual monopoly inimical to the general interests, the community is justified in curbing its excesses whenever the contest involves a crass inequality or is con- ducted without any sense of social responsibility. The greatest care, however, must be observed in the analysis before the in- fringement of the right of association can be conceded. To abandon liberty because of a mere apprehended but imaginary inequality would be to sacrifice both liberty and equality. A clear case must be made out before the law should be invoked against the combinations of either labor or capital. (5) The fifth category, freedom of consumption, needs only §69] Kinds of Economic Freedom 169 a word in this place. The sumptuary laws of old which pre- scribed in detail what should be eaten or worn were sometimes well intentioned, but always mistaken. By restricting the ex- pansion of wants, they really checked economic progress. Modern society has abandoned such a system completely, and where it becomes desirable in the interests of the public health or safety to prohibit the use of certain commodities, like over- ripe fruit, or infected meat, or opium, the end is attained far better by a prohibition of sale, under the police power of the state, than by a restriction of consumption. (6) We come, sixthly, to freedom of production, including freedom of contract and enterprise. Here, again, the emphasis has been shifted in modern times. The world has outgrown the time-worn conception of the citizens as the children of an all-wise and benevolent paternal government. It has been realized that governments are not always benevolent and never all-wise, and that with the growth of capital and competition better results can be secured by the repeal of the complicated and often contradictory provisions which throttle production and check individual initiative. It was this that the French manufacturers meant when they told Colbert " laissez-nous faire" and thus introduced a celebrated phrase. That was indeed the necessary destructive process of pulling down the barriers which impeded progress because they checked equal opportunity. It has been found requisite, however, in recent times to modify both the theory and the practice of laissez- faire in order to safeguard the interests of various classes of society. The complex requirements of modern life have ne- cessitated a governmental regulation of many business enter- prises in behalf of producers, of consumers, of investors or of the general public. The difference between mediaeval and modern interference is to be found chiefly in the fact that the one sought to prevent competition while the other endeavors to enlarge its domain and to raise its level. The only excep- tion to the rule that rational modern interference is not de- 1 70 Freedom [§ 69 signed to prevent competition is found in those few cases where competition itself becomes wasteful and inefificient. The modern aim, however, is always to increase liberty through the attainment of equality and responsibility. Factory laws give the operatives a fair chance; railway regulation attempts to secure equal treatment of shippers; supervision of banks, insurance companies and other corporations is designed to en- force financial responsibility. In all these cases interference is justified only as leading to a surer and greater general liberty. We have to deal with the positive, not the negative, conception. (7) Finally, we have freedom of trade. This is virtually included under the last head, since trade is a species of pro- duction. It forms, however, so important a part of the subject that it has generally been treated separately. The modern age has seen the emancipation of internal commerce from mediaeval restrictions of all kinds. The great controversy to-day centres about international trade. Here, again, the general hypothesis must be in favor of freedom. Free trade, however, is not necessarily and always beneficent. If the relative inequality of two countries in the production of a certain commodity is great, free trade may hinder in the weaker country the growth of an industry which might become relatively profitable or even highly necessary. Under such conditions protection, by building up the industry to the point where there will be a domestic competition, may help in creating that relative equal- ity between the domestic and the foreign producer which will ultimately redound to the interests of the consumer as well. As we shall see later, however (§ 214), such a policy is defensible only when protection actually increases real productive effi- ciency, and when the undoubted intermediate economic loss does not outweigh the ultimate advantage. Only in such a case is interference with freedom legitimate, because only then is it in the interests of a more real and beneficent ultimate freedom. § 7o] Individual Liberty 171 70. Individual Liberty as a Social Concept We see, then, that in modern life liberty is a result rather than a cause. It does not mean simply the absence of restraint; for that is license, not liberty. All social progress is the result of a certain restriction of the liberty of some in the interest of all. These restrictions are imposed by custom, by voluntary association, by law. Good manners and social usages which prevent men from doing what they like are a mark of civiliza- tion. Associations like the church, the clubs and business unions lay down rules to which each member must conform. Government enacts many laws whose wisdom is unquestioned and obedience to which is compulsory. In every case there is necessarily an infraction of liberty in the crude sense. More- over, especially in industrial matters, the cry of individual liberty often becomes a mere shibboleth invoked by the indi- viduals against others instead of themselves. The railway magnate restricts his own liberty by pooling arrangements, but objects to interference by the shipper. The slave owner wanted freedom of trade, but scouted freedom of man. The manufacturer demands protection against his foreign competi- tor, but objects to factory laws. The cotton grower acclaims the rise of prices brought about by manipulation on the ex- change, while the spinner decries the liberty of speculation. The factory owner joins the selling bureau which restricts out- put or fixes prices, but objects to the "tyranny" of the labor union. The labor union adopts provisions relating to appren- ticeship, the open shop and the boycott, but opposes lockouts and trusts. The lawyer refuses to consort with the "shyster" and the doctor with the quack, because they desire to main- tain the standard of their professions; but they sternly repro- bate the effort of the trade unionist to prevent the "scab" from reducing the level of his occupation. Liberty, then, must be looked at from the social as well as from the individual point of view. The individual has become 172 Freedom [§ 70 what he is hirgely through associated effort. This, however, inevitably implies a certain subjection of the individual to the group. The liberty which is compatible with social progress involves the readiness of the individual to work for a common end. . If this readiness is not voluntary, it must be developed by persuasion or by force. All liberty is a balancing between the powers of anarchy and of tyranny. Individual freedom that is oblivious of the rights of others or of the best interests of the majority leads to an anarchy that is destructive of real liberty; group restrictions that are forgetful of the possibilities of the individual lead to a tyranny that is equally destructive of real liberty. From the economic point of view only that is real freedom which is calculated to reconcile the greatest possi- ble production in the group with the greatest possible con- sumption of every individual within and without the group. The liberty of one, therefore, must not endanger the economic progress of others. Just as the political interpretation of liberty is democracy in government, so the economic liberty which is conducive to progress can exist only with a relative economic democracy. It implies at least economic opportunity, and opportunity depends on a certain degree of equality and responsibility. In this sense the best government is not that which governs least, but the one which secures the surest conditions of a wider ultimate freedom. Economic liberty in the last analysis is the result of action, not of inaction. Part III Structure and Process of Economic Life Book I Value: General Principles CHAPTER XII THE MEANING OF VALUE 71. References W. Smart, Introduction to the Theory of Value (1911), chs. ii-viii; J. B. Clark, Philosophy of Wealth (1886), ch. v., and Distribution of Wealth (1899), chs. xv-xvii; M. Pantaleoni, Pure Economics (1899), part i, ch. iv; A. Marshall, Principles (1910), bk. iii; N. G. Pierson, Principles (1902), part I, ch. i, § 3; W. S. Jevons, Theory (1911), ch. iii; F. A. Fetter, Economic Principles (191 5), part i; E. v. Bohm-Bawerk, Positive Theory of Capital (1891), bk. iii, chs. i-ix; F. v. Wieser, Natural Value (1893), bk. i; C. M. Walsh, Measurement of General Exchange Value (1901), ch. i; H. J. Davenport, Value and Distribution (1908), ch. xvii; P. H. Wicksteed, The Commonsense of Political Economy (1910), chs. i, ii; B. M. Anderson, Jr., Social Value (191 1). 72. Original Meaning of Value Value is the Latin term corresponding to the Saxon "worth." The fundamental idea which underlies worth is capacity to satisfy a want. If we need a nail, but hnd a broken one, we say that it is worth nothing, — that it is valueless, or not avail- able, for our purpose. Value or worth thus implies usefulness or utility. The nail is valueless for us; if it "avails" nothing, 173 174 Meaning of Value [§72 it is of no use. Since value implies capacity to satisfy wants, there are as many kinds of value as there are classes of wants. Things have a scientific value, an aesthetic value, a religious value, a philosophic value, a political value and so on. The value with which economics has to deal is economic value — a small subdivision of the whole. As this is a treatise on economics, we shall hereafter use the term value in the sense of economic value, that is, the value of anything for economic purposes. But just as we know (§ 2) that the economic life is not the whole life, so we must not confound economic value with value in general. When we defined economics at the close of section 4 as the science of value, it must be remem- bered that what is meant is the science not of all value, but only of economic value. Incidentally we may point out the original dependence of moral considerations on economic facts. A thing was at first "good" in the economic sense, as we still employ the phrase a stock of goods and commodities. The ethical use of good came much later. In popular parlance we still speak of the broken nail as "no good," without desiring to pass any moral judgment on it. In the same way the original concept of "dear" was not ethical, but economic. A commodity may still be dear even if we do not love it. So also what is ethically pre- cious to us was originally of economic importance; we still speak of precious stones in this economic sense. To-day we esteem somebody, when originally we put a money value on him (aestimarc, from aes, money). In modern times we appre- ciate a quality, but at first we set a price on it {ad-pretium) . In fact, so fierce was the struggle for existence among the early Romans, so important for their very stability was the quality of bravery, that the thing of chief value to them, the charac- teristic which "availed" the most, was "valor," a term which has now become with us of exclusively ethical import. This close connection of ethics and economics must, how- ever, as we have seen, not blind us to the fact that the real § 73] Marginal Utility 17^ subject of our discipline is economic. The utility with which we have to deal is the economic utility, the capacity of a thing which we must economize in order to satisfy a want. The use of whisky may be ethically reprehensible, but as long as men desire it, and as long as they must be economical with it, that is, as long as it is not a free good, but an economic good, whisky will have an economic usefulness, — it will be used to satisfy the craving for drink; and it will have a value in the market. The ethical judgment of the community may indeed affect the economic situation. The practice of drinking to excess may be visited with such severe social reprobation that the appetite for drink may be held in check, and the utility of whisky will then diminish because the desire for it will have decreased. The study of human wants is largely a matter of social psy- chology, and the character of human wants is continually being modified by moral considerations; but when we are dealing with the serviceableness of a commodity for satisfying want, we are operating with economic quantities. The economist must continually bear in mind the moral aspects of the situation as modifying the conditions; but, the conditions once given, the economic problem is a thing by itself. As a preliminary definition, then, we may say that the value of anything is the expression of our estimate of its utility, meaning by utility its capacity to satisfy human wants. 73. Marginal Utility — The Law of Diminishing Utility It is obvious that this definition is incomplete. Iron is more useful than diamonds, yet diamonds are incontrovertibly more valuable. In what sense is value an expression of utility? If a starving wayfarer suddenly spies an apple, it will have a supreme utility for him because it stands between him and death. If he finds a second apple, it will still be welcome, but will fill a somewhat less intense want. With every additional apple his appetite will be more appeased, until with let us say the tenth apple he will reach the point where he will be on the 176 Meaning of Value [§73 margin of doubt whether to consume any more. The utility of each apple — its capacity to satisfy his desire — has di- minished until the tenth apple is the last which affords any utility at the moment. The utility of this tenth apple is called final because it is the final apple, or marginal because on the margin of desire. It is plain that the marginal utility of any apple depends on the quantity at one's disposal. The greater the quantity, the less keenly will he feel the particular want. If he had only five apples, the utility of the fifth, that is, the marginal utility, would be considerable because his last want satisfied would still be urgent. The degree of marginal utility depends on the strength of the want last satisfied, or, it might be said, on the need we have of more. The second point is that at any given time the utility of each apple is equal to that of the last and therefore to that of any other (of the same size and quality). If the available supply is five apples, any one of the five may be considered the marginal unit, that is, the last unit in point of time. The wayfarer will lay his hands on any one of the five without par- ticular choice; whether he begins with one or with another is immaterial, because he knows that one is as good as another. Thirdly, in estimating the utility of the entire supply of apples, we must distinguish between the total utility and the effective utility of the stock, that is, the utility which is of any effect when we compare given quantities of different goods. The total utility of a stock is obtained by adding the utility of each apple to that of its predecessor. It will accordingly grow until the point of satiety has been reached. Ten apples possess more total utility than five. The effective utility of the stock, however, is equal to the marginal utility of the final unit mul- tiplied by the number of units. The effective utility of four apples is four times the marginal utility of the fourth. The effective utility of the stock grows, but not up to the point of satiety; after a limit has been reached, it begins to decline. §73] Marginal Utility 177 The effective utility of eight apples may be less than that of five, even though the total utility is undoubtedly more. This can be made clear when we remember that we have many wants and that the degree in which things satisfy our wants depends on their relative importance. In addition to apples, the wayfarer needs other kinds of food, clothing and shelter. If he has only five apples, his desire for them may be so strong that he thinks of nothing else; but if he has eight apples, his desire for the apples may be overtaken by his desire for let us say three articles of clothing. If there were a hun- dred apples at his disposal, knowing that he had sufficient for many future meals, he would turn his attention almost entirely to still other needs. Air, for instance, is indispensable to life, but it is so abundant that it has no marginal utility at all and hence no effective utility, although its total utility is limitless. If the supply of air was shut off, however, he would abandon one by one his other needs, until finally his only desire would be for air. In other words, as long as he thinks chiefly of apples, which he will do as long as he can get only five, he wants all five; but as soon as he thinks of other things (which he will do when there are say eight apples) the less will be the impor- tance which he will attach to the eight. The smaller the number of units, the more rapid will be the rise in their margi- nal utility. If in the case of five apples the marginal utility of each is five units of satisfaction, the effective utility of the stock will be five times five, or twenty-five; but if in the case of eight apples the marginal utility falls to three, the effective utility of the stock will be eight times three, or twenty-four. Yet the total utility of eight apples is certainly more than that of five. It is important to note, moreover, that the word margin is used in two senses, or, rather, that there are two different kinds of margins. When we speak of the marginal use of a commodity to any one, we think of him as on the brink of not wanting any more. He may reach the margin because, with the diminishing utility of each increment, he will, if the supply 178 Meaning of Value [§ 73 is large enough, come to the point where there will be no consciousness of any economic usefulness at all. The margin becomes a margin between the economic world and the non- economic world, a margin between the sphere of economizing and that of unconcern or waste. On the other hand, when the supply is limited, the diminishing utility of each increment will be arrested at a point below which the consumer will prefer to abandon the use of an increment for something else. The margin here is a margin of indifference between an increment of one commodity and an increment of another commodity. Since these increments are not necessarily the same, the mar- gin of indifiference may be reached at a point where the tenth increment of one commodity balances the twentieth of another, where, in other words, the marginal utility of the one commod- ity is twice that of the other. Both marginal increments will still possess a positive utility. This second kind of. margin is an economic margin, that is, a margin or border between two or more economic goods, not as in the first case a margin be- tween economic and non-economic goods. The first kind of margin, where we compare different increments of the same thing, may be called the non-economic margin, because at the margin the utility is zero and the commodity is no longer an economic good. The second kind of margin, where we com- pare the same or different increments of different things, may be called the economic margin, because at the margin the utility of each thing is still measurable and appreciable. We shall have repeated occasion to call attention to the errors that result from confusing these two kinds of margins. To recapitulate: the utility of a commodity is called mar- ginal because the desire for additional quantities must some- time reach a limit or margin as compared with the desire for other commodities. There is always one unit in the supply which marks the margin of this desire; and with every change in the supply or the desire, the margin will move up or down. This unit is called the marginal unit or increment. With a § 74] Individual and Social 1 79 fixed quantity the utility of each unit or increment is for prac- tical purposes equal to that of the marginal unit, because if any unit were withdrawn the final unit would naturally be put in its place. The real loss would be the loss of the marginal unit. Value, then, is not simply the expression of utility in general, but of marginal utility. When we speak of the value of a com- modity, we think not of its usefulness in general, but of the utility of a definite quantity as compared with other goods; and in so doing, we think not of the total utility of this quan- tity in itself, but of its effective utility, that is of the utility of the marginal unit multiplied by the number of units. 74. Individual and Social Value Value as a universal conception would be true of the indi- vidual living apart from society, if there were any such beings. The estimate put by the individual on one commodity as com- pared with another is the foundation of all value. Robinson Crusoe would assign a value to apples as compared to nuts, the value of each being in agreement with their marginal utility to him. As a matter of fact, however, we live in society, not on a desert island. Economics, as a social science, treats of the relation of man to man, of class to class. The value with which we deal is therefore the result of social forces. It is society as a whole which sets a value on things. Society is indeed composed of individuals, but it is the aggregate of in- dividual wants that shapes value. The want of the individual alTects value only as it influences this aggregate. If a rich maniac, for instance, should offer a thousand dollars for a com- mon spoon for which every other person would give only five cents, his subjective estimate would have no appreciable in- fluence on the value of the spoon, and if he actually paid a thousand dollars, society would be justified in locking him up and in punishing the seller. Of course, when the supply of an article is limited and the desire of the individual such that the article possesses a peculiar utility for him, not shared by the I 80 Meaning of Value [§ 74 rest of the community, his subjective estimate may seriously influence its value. This is true, however, only for the reason that because of the limitation of supply the subjective estimate of the single individual forms so large a part of the collective desire. To get my ancestor's watch out of pawn, I may pay if necessary far more than its value to any one else. The border between an enthusiastic collector and one with a "screw loose" is sometimes a narrow one. Ordinarily, however, the desire of any one individual forms only an insignificant part of the collective desire. \^alue, therefore, depends upon the fact not only that each individual measures the relative urgency of his own various wants, but that he compares them consciously or unconsciously with those of his neighbors. I not only measure the relative satisfaction that I can get from apples or nuts, but the quan- tity of apples I can get for the nuts depends on the relative estimate put upon both by the rest of society. If an apple is worth twice as much as a nut, it is only because the group that uses both apples and nuts finds, after comparing individual preferences, that the desire unsatisfied by the lack of an apple is twice as keen as that unsatisfied by the lack of a nut. Value, therefore, is not merely the expression of marginal utility; it is the expression of social marginal utility. This serves to explain how a thing which has no direct utility to the individual may yet possess a value for him. If by chance I secure a locomotive, it is in itself useless to me. If, how- ever, I can dispose of it to a railroad company, it acquires a value, because in other hands it will serve a social purpose. The locomotive now has an indirect utility for me because through it I can secure things of direct utility. Its indirect in- dividual marginal utility to me is the result of its direct marginal utility to the community, that is, to that part of the community where marginal comparisons are made between locomotives and other goods. Of all the valuable things in existence only an infinitesimal fraction possesses any direct utility for any one § 74] Individual and Social 1 8 1 man; yet the more of them any one has, the richer he is, pro- vided he can dispose of them to others. Thus, while social utility is made up of a combination of individual utilities — that is, while a thing cannot be useful to society unless it is useful to the individuals that compose society — the indirect margi- nal utility of a thing to any individual is the result of its social marginal utility. To a member of society the indirect mar- ginal utilities form the chief element in value. Hence in society the individual marginal utility which controls value may be said to be the reflection of social marginal utility. Our readiness to part with nuts or apples will depend not so much on the degree in which we as isolated individuals prize nuts as compared with apples, but chiefly on the degree in which other people prize apples as compared to nuts. This estimate is the controlling consideration. Value is a result of the community of wants. The problem with which we set out in the last section is thus solved. There are, in fact, two solutions, — one depending on the distinction between total utility and marginal utility, the other depending on the distinction between individual utility and social utility. As to the first, iron in the abstract is indeed more useful than diamond; but a pound of iron does not satisfy as many or as urgent wants as a pound of diamonds, and it is therefore not so valuable, even to an isolated indi- vidual. When we say that iron is more useful than diamonds, we refer to iron in the abstract. When we say that iron is less valuable than diamonds, we refer to a definite quantity. It is therefore true that a commodity may possess more utility and at the same time less value than another; but the utility to which we then refer is not the marginal utility. The total utility of eight apples is greater than the total utility of five, but the effective utility may be less. When the Dutch mo- nopolists destroyed a portion of the pepper crop to increase the price, the total utility of the supply fell, but the marginal utility, and hence the effective utility, and the value rose. I 82 Meaning of Value [§ 75 Al the same time iL may conceivably happen IhaL to any one individual a pound of iron may in and of itself be more useful than a pound of diamonds. Yet this fact will not con- trol value. P'or the indirect utility of iron is far greater than its direct utility, in precisely the same way that the wants of a community are more important than the wants of any indi- vidual. Even though a pound of iron may at a given moment be more directly useful to an individual, it is always true that a pound of iron does not satisfy as many or as urgent social wants as a pound of diamonds. When we speak of the value of iron or of diamonds, we refer to their social utility, not to their individual utility. Or, to put it in another way, the mar- ginal utility of iron or diamonds to a man living in society is a reflex of their social utility. Therefore iron is always less valu-' able than diamonds, because the social marginal utility of a pound of iron is always less than the social marginal utility of a pound of diamonds. Value in society is the expression of social marginal utility. Social economics deals only with this kind of value. 75. Value in Exchange Since value is a social conception depending on a compari- son of divers goods, and since this comparison is ordinarily made in society by their transfer from man to man, it is clear that the value with which economics has to deal is exchange value, or value in e.xchange. Speaking roughly, we may say that the value of anything is what it will exchange for. Speak- ing strictly, we mean that the value of an article may be ex- pressed in terms of any other article for which it will exchange. Earlier writers made a distinction between value in use and value in exchange, but they confused value in use with total or absolute utility. As soon as we grasp the fact that the utility with which economics deals is marginal utility, the old distinction between value in use and value in exchange dis- appears. Other writers sometimes use the terms subjective and objective value when referring to individual and social § 75] Value in Exchange 183 valualion respectively. The terms are awkward, because they obscure the fact that at bottom value is not an external characteristic of a thing, but an expression of its relation to an individual. Value is the result of an estimate of a quality, not the quality itself. In this sense there is no objective value. It can be called objective only in the sense that when society attaches a value to a commodity it is something to which the individual or subjective valuation must conform in making an exchange. The study of Robinson Crusoe is important as reminding us that the foundation of value is independent of exchange. Strictly speaking, it is independent of exchange only as be- tween man and man, not as between commodity and com- modity or between want and want. Crusoe exchanges or weighs off in his mind apples and nuts, and thus gets an esti- mate for their value to him. "Value in use" is thus really only one kind of "value in exchange," although it is a pe- culiar kind of exchange. As soon, however, as we deal not with Crusoe, but with men in society, we find that not only does the individual as before measure one want against an- other, but that the satisfaction of that want depends upon the estimate put by other individuals on their respective wants. Value in individual economy always presupposes at least two things; value in society presupposes in addition at least two men. In other words, value in society — that is, in actual life — is value in exchange; and this value in exchange is nothing but the expression of its true value in use to the mem- bers of the social group, that is, of its marginal utility. Strictly speaking, the value of a thing exists only at the moment when it is exchanged for or compared to something else, just as the utility of a thing exists only at the moment when it satisfies, or is conceived of as satisfying, a want. Since, however, men learn by experience to attribute utility to things which can gratify a want, so they attribute value to things which they know can be exchanged for other things. Thus 1 84 Meaning of Value [§ 76 value comes to mean exchange power, or the estimate of ex- change power. It is accordingly plain that when we define the value of a thing as the expression of its social marginal utility, we mean that value is an expression of its exchange power; for ex- change power is based on the comparative estimate of direct social utility, which gives to every owner of the commodity the indirect individual utility that fixes value in society. As we can estimate this exchange power only by comparing one thing with another, value is sometimes, but less accurately, spoken of as a ratio, or a ratio of exchange. Value is indeed relative, but it is not a relation or a ratio; it is an expression of our estimate of the relative exchange power of anything. 76. Value aud Price Since value is an expression of our estimate of relative ex- change or purchasing power, the value of anything can be ascertained only by comparing it with other things. When we measure a commodity in terms of some one other commodity, we speak of price. If the value of a cow is equal to that of five sheep, we say that the price of a cow is five sheep. In civilized society we have become accustomed to measure all values in terms of a single commodity called money; so that by price we now mean the money value of anything, — the amount of money for which it will exchange. Value and price have thus come to be interchangeable terms. Sometimes, however, value is used in a special sense. Thus we speak of a thing as selling for less than its real value, or of a shopkeeper charging more than it is worth, when we mean that the price to others in the long run will be higher or lower. So the department stores advertise "great values" when they mean that the goods are sold at exceptionally low prices com- pared to the seller's estimate of their utility to the pubHc. Ordinarily, however, when we say a thing is worth five cents, we mean that the price is five cents. § 77] Increments of Wealth 185 While the value of anything is thus virtually equivalent to its price, we must not confuse values in general with prices in general. When we conceive of a single commodity, like money, as a standard, we consider it as a fixed point, not subject to fluctuation.^ Prices hence may rise or fall with reference to this standard. But we cannot speak of a general rise or fall in values, because there is no fixed point. Cows may rise in value as compared with sheep, but sheep themselves may fall as compared with poultry, and poultry may vary as compared with something else. Value expresses a relation; hence, if the value of some articles diminishes, it means that the value of others must increase. But if the price of certain articles falls, it does not follow that the price of other articles will rise. There may be a general rise or fall of prices, because we measure prices in one commodity, money; there cannot be a general rise or fall of values, because money also has a value.^ 77. Value and Marginal Increments of Wealth We have thus far spoken of value as the expression of social marginal utility. To be more exact, it should be stated that marginal utility (and hence value) depends not upon the com- modity as a whole, but upon the marginal increments of wealth in the commodity. This might be called Clark's law, from its first formulator. Professor John B. Clark. To prepare the way for grasping this principle, we must call attention to several points. In the first place, the rapidity with which the utility of successive increments of a commodity diminishes depends largely on its combination with others. One scarf-pin is all a man needs, the utility of a second would be doubtful, a tenth would be useless. But with many cravats, we can use more scarf-pins. Put before the same man a finely ' As to the difficulties that arise from fluctuations in the money stan- dard, see below, § 197. *When Wall Street speaks of a " general slump of values," it means only a fall in the prices of securities traded in on the stock exchange. 1 86 • Meaning of Value [§77 cooked dinner or a loaf of bread, and not only will he enjoy the first more, but he will be willing to pay a higher price for the bread as a part of the dinner. Secondly, in all commodities except the simplest of a class there is always to be found a combination of various utilities. A plain deal table suffices to hold books; one of polished rose- wood satisfies a more refined want and possesses an additional utility. I may have an ample supply of boots, yet a new pair with golf rubbers in the sole may be desired for that reason alone. Each new utility in an object practically makes it a new object. All commodities are virtually made up of such combinations or bundles of utilities. Thirdly, the marginal increment of a man's wealth is made up of varying proportions of such separate utilities. Every one purchases first necessaries, then comforts, then luxuries. But what is luxury to one man may be almost necessity to another. What is bought with one's last dollar is the marginal increment of enjoyment; but the more dollars we have, the less the utility of each. To a man with a very small income the final dollar may afford the luxury of a few pints of beer; to the rich man the dollar spent in beer is not marginal. His marginal increment of wealth may take the form of luxuries like champagne or pictures, but they will generally consist of particular attributes of commodities. It may be the fashion- able cut of his garments, the last touch given to the delicious dinner by a cordon bleu, the sumptuousness of his books, the elegance of his carriage, the artistic quality of his china or silver- ware. The garments, the dinner, the books, the carriage, the china, — ^ each possesses various kinds of utihty; but what makes the particular objects desirable to him is not the pri- mary, elementary utility in each, but the final marginal utility. Fourthly, since each of the separate utilities of an article becomes at a certain point marginal to different classes of men, its value depends not upon its marginal utility as a whole, but upon that of the increments of utihty each estimated §77] Increments of Wealth 187 separately. If value were the measure of marginal utility as a whole, all but the simplest commodities would be worth far more than they are. Take, for instance, a fine automobile. There are at least five different qualities which give it a value. These are, in the order of importance, (i) power to afford locomotion; an old two-wheeled cart would do as well: (2) freedom from jolting and protection from sun and rain; a top- buggy would do this: (3) size; a plain coach would possess this: (4) elegance of finish; a fine equipage would have this: (5) speed and exhilaration; only a motor car will give that. In such a vehicle there would be, so to speak, at the same time a cart, a buggy, a coach, an equipage, a self-propeller. The most important or primary utility is the power to afford locomotion. Without this it would be of no use at all. The next quality in importance is comfort; if it has no springs, the vehicle will not be used for pleasure driving. And so on with the other quali- ties; each has a diminishing importance. Yet the value of the vehicle is not the reflex of its marginal utility as a whole. For the primary quality of locomotion alone the rich man would, if necessary, pay an immense sum. The mere fact of riding, which might be a luxury to a poor man, may be a neces- sity to him. The second utility — comfort ^ — -would be less important than the first, but might still be prized immeasur- ably by him. And so on with the other qualities. So that, if need be, he would pay a fabulous amount for the vehicle. As a matter of fact, however, what he values in the partic- ular automobile is the fifth or final utility, that of self-pro- pulsion. He probably has buggies, coaches and equipages galore. The fourth, third and preceding utilities represent less value because each utility is marginal in turn to a class of smaller spending power. If automobiles rose in price, there would be fewer of them, but more equipages, because the particular quality which differentiates an equipage from an ordinary coach would be a marginal utility within the reach of a larger but less wealthy class. If equipages advanced in 1 88 Meaning of Value [§77 price, more plain coaches would be built; if the price of coaches rose, more buggies would be built. In each case the vehicle is desired by a particular class for a new utility, which is to that class marginal. Each successive class, however, is poorer than its predecessor, and the gradations themselves become less. There is more divergence between a multi-millionaire and a man of moderate wealth than between the latter and a man of simply comfortable means. Thus there will be a greater dif- ference in price between automobiles and equipages than be- tween these and coaches, more between a coach and a buggy than between a buggy and a cart. In each case the special utility for which the vehicle is bought is a marginal utility to a poorer class. When a rich man buys an automobile, he does not pay the immense sum which he would, if necessary, give for the mere privilege of locomotion. He pays the small price which a poor man would pay for a cart, plus the somewhat larger addition that a slightly less poor man would pay for the difference between a cart and a buggy (comfort), plus the still greater increment that a man of moderate means would pay for the difference between a buggy and a coach (size), plus the yet larger increment that a fairly wealthy man would pay for the difference between a coach and an equipage (elegance), plus the final and largest increment that he and his class are willing to give for the marginal utility to them of the automatic attach- ment. All these increments added together are far less than what he would, if necessary, pay for the privilege of locomo- tion, — the cart element in the automobile. When, therefore, we say that value or purchasing power is the expression of social marginal utility, it is clear that what we mean is that value is the expression of the social marginal increments of utility which are bundled together or united in anything, and each of which is marginal to a different class. CHAPTER XIII THE MEASURE OF VALUE 78. References W. Smart, Introduction to the Theory of Value (1891), chs. Lx-xiv; J. B. Clark, Philosophy of Wealth (1886), ch. xxiv; A. JNIarshall, Principles (1910), bk. V, ch. xiv; N. G. Pierson, Principles (1902), part i, ch. i, § 4; W. S. Jevons, Theory (1911), ch. iv; E. v. Bohm-Bawerk, Po^/ZzVe Theory of Capital (1891), bk. iii, ch. x; F. v. Wieser, Natural Value (1903), bk. v; A. W. Flux, Economic Principles (1904), ch. iv; C. M. Walsh, Measurement of Exchange Value (1901), ch. i; J. A. Hobson, Economics of Distribution (1900), ch. ii; H. J. Davenport, The Economics of F^nter prise (1913), ch. vi-viii; D. I. Green, Pain Cost and Opportunity Cost (Quart. Jour. Econ., VIII, 1895); A. C. Whitaker, History and Crit- icism of the Labor Theory of Value in English Political Economy (Co- lumbia Studies, XIX, 1904); J. B. Clark, Essentials of Economic Theory (1907), chs. iii and vi. 79. Meaning of Cost Value, as we have seen, has a meaning only when attached to a definite quantity of an article. The value of iron means nothing; the value of a ton of iron means something. In order to ascertain why anything has value, we must therefore inquire not only why we attach any importance to it as com- pared with other things in general, but also why a definite quantity of that article satisfies more or less of our wants than an equal quantity of something else. We must regard not only our desire in the abstract, but our desire for a particu- lar amount. That is, in analyzing value we must take into consideration not only the demand, but the supply; for the effective demand for an article which lies at the root of value is itself influenced by the supply. Of two equally useful articles we shall be more concerned in securing the one the 189 1 90 Measure of Value [§ 70 supply of which is limited than ihc one ihc supply of which is abundant. What regulates supply? In the last resort it is the forces of nature as utilized by the energy of man. In some cases nature gives so abundantly that man need do nothing; in other cases nature is so niggardly that his utmost effort fails to augment the scanty stock. Between these two extremes lie the great mass of commodities the supply of which can be increased through human action. The more readily nature discloses her secrets to man, the less is the difficulty of secur- ing a supply. The greater the stubbornness of nature, the more determined do our efforts become. It is in this sense that value may be considered to be the measure of the difficulty of attainment, — that is, of the cost involved in securing a supply. Value, then, would be the expression of costliness. What, more precisely, is cost? The word is used in a variety of senses. To the consumer cost means price; if a thing costs a dollar, he means that the price is a dollar. To the employer cost means total cash outlay expended in production. Here the cost usually is less than the price, the difference between cost and price being the profit : a machine may cost the builder ten dollars; he may sell it for twelve. To the workman cost means irksomeness of labor; the harder the work, the more does his labor "cost" him. Underlying all these meanings is the idea of sacrifice, the giving up of some- thing in return for the object to be attained. All sacrifice involves a pain, — a pain of doing something distasteful or of refraining from doing something pleasurable. The one is present physical sacrifice, the other present mental sacrifice depending upon a future physical sacrifice. Just as the word utility brings to our mind the pleasure we get from a thing, so the term disutility is used to signify its ability to inflict pain. We know that the marginal utility of a commodity diminishes with the increase of the amount at our disposal, and under certain conditions shrinks to zero. § 79] Meaning of Cost 191 We have so much of it that it becomes indifferent to us. It possesses what Jevons calls "inutility," that is, no (marginal) utility. Its value, as in the ordinary case of air and water, is nothing. Under other conditions of supply a commodity which usually possesses utility may actually inflict a pain.^ Wood ordi- narily satisfies a want ; but when the prospective farmer tries to make a clearing, the wood is something to be got rid of. Its presence is a discomfort. It possesses not a positive, but a negative, utility. It has gone through the stages of utility and inutility, and has reached that of disutility. Instead of being a commodity it might now be called a "discommodity." So, in the same way, water in parts of England is something to be removed by draining the fens; water in arid America is so necessary for irrigation purposes that it attains a high value. Not only things external to a man run through this scale from utility to disutility. Physical activity itself is subject to the same law. When a man begins to work, the exercise of his muscles is a pleasure. A certain amount of it is even a necessity. With the increase in the amount beyond a certain point, the pleasure diminishes, until further activity becomes a matter of indifference. A still further increase means dis- comfort, until, finally, any more work involves positive agony. Labor or toil, therefore, means painful exertion. But just as the same commodity may, according to circumstances, possess utility or disutility, so the same activity may or may not in- volve toil. Singing is generally a pleasure; to the chorus girl it is toil. Golf playing is a diversion; to the golf teacher it is labor. Cost, therefore, is at bottom equivalent to pain. W'e un- dergo pain in order to secure utility or to remove disutility. Cost is always the antithesis of remuneration. We give up something in order to get something in return. The ordinary ' Some commodities which seem to give us pain really afford a surplus of pleasure. A distasteful medicine is none the less prized by us. 192 Measure of Value [§80 man tries to secure the greatest result with the least effort. He will toil only up to that point where the cost, or pain, begins to exceed the pleasure of what he gets in return. There are grades in disutility or pain, just as there are grades in utility or pleasure. As the marginal utility of a commodity depends on the supply, so the marginal disutility or pain of labor depends on the amount. The more fish I have, the less the utility of each; the more hours I must work to catch them, the greater the disutility of each hour's work. Up to a certain point the pain of the work does not equal or exceed the pleasure I get from the fish. Beyond that point I shall not work, because the result will be a surplus of pain. At that marginal point the utility of the fish equals the pain or cost of the labor. There will be a balance between the pleasure and the pain; or, in other words, the pleasure and the pain will be in equilibrium. In the case of the individual economy — that is, of man living apart from society — the marginal degrees of utility and of pain, or cost, therefore tend to be equal. Marginal cost equals marginal utility. The value of the fish may be estimated in either the one or the other. 80. Individual and Social Cost In dealing with the problems of actual life, however, we treat not of a Crusoe living on fish, but of men living in soci- ety and making exchanges with each other. The individual economy is profoundly modified by the social economy. This is the point that has often been overlooked. Our study is social economics. We have seen that the marginal utility to an individual is, in effect, a reflex of the social marginal utility. In the same way the marginal "disutihty" to an individual may be con- verted through social causes into a utility. What gives one man pleasure may give another pain. I may enjoy a horse; but if you do not ride or drive, the horse will put you to the use- less expense of keeping him. Yet, since there is a social § 8o] Individual and Social Cost 193 demand for horses, you can get rid of him to advantage; and you will therefore not give him away, but keep him until you can sell him with profit. Although the horse had a positive disutility for you, he now acquires an indirect utility because of social reasons. So if the farmer, mentioned above, who wanted to make a clearing, lived by chance near a large com- munity, he would not burn the wood, but sell it, because it would now have a social utility. Its disutility to him would be converted into a utility. It is only when anything produces a surplus of pain to the community as a whole — as a plague of grasshoppers, or an inundation, or the sewage of a city of which there is no intelligent disposition — that it possesses social disutility. In such a case it can have no indirect utility for the individual. Not only may cost thus change into utility, but the real cost of importance in affecting value is social cost, not individual cost. We stated above that value is the measure of sacrifice. In what sense, however, is value the measure of sacrifice? Evidently, not of individual sacrifice. A street-sweeper may work harder than a skilled factory hand, and yet the value of his services will be less. Value is a social conception; society puts its appraisal upon commodities. • If value is a measure of sacrifice and if value is a social estimate, value must be the measure of social sacrifice or cost. Social sacrifice means the sacrifice which members of society as a whole are willing to make. The exertion of one man is estimated in relation to the exertion of another, and the sacrifice of each is compared with the need of society as a whole. The standard is social, not individual. It is far easier to be a street-sweeper than a skilled factory hand. Society is more willing to spare the former than the latter; for, to replace the one, society must give up more of its energy than to replace the other. Con- sequently, although the street-sweeper may work the harder, the sacrifice or cost to society is less than in the case of the factory hand. The latter saves society more effort. When 13 1 94 Measure of Value [§ 8i one commodity is exchanged for another, or when both cost the same, it means that the additional sacrifice that would be imposed upon society to replace either of them is the same. The marginal social cost is identical. 81. Cost and Surplus Since economic activity consists in securing as much enjoy- ment as possible with the least effort or cost, it follows that under conditions of progress the individual will endeavor to secure a surplus utility. If game is plentiful in one section and so scarce in« another that the hunter must work to the point of exhaustion, his needs will be satisfied by far less ex- ertion in the first case than in the second. The extra utility which he enjoys is called residual utility, or surplus utility, or, in short, surplus. Looked at from the point of view of produc- tion, it is a producer's surplus: the labor of hunting is the cost of securing or producing the game. From the point of view of consumption, it is a consumer's surplus: the pleasure of eating the game is its utility. The excess of the utility over the cost is the surplus. Whether we call it consumer's surplus or producer's surplus is immaterial. The conception of surplus, however, is sometimes used in a second way. In the case of the surplus just referred to we compare enjoyment with exertions, and we call it either pro- ducer's or consumer's surplus according as we look at it from the point of view of cost or of enjoyment. This conception of surplus is universal: it applies to every man who is at once a producer and a consumer, to the man living in society as well as to the solitary huntsman. The term "surplus" may, however, be used in another sense, which leaves out of account the idea of exertion, and which regards every man only as a consumer. It assumes that there has been no cost of acquir- ing the articles, or that the subjective cost or toil of ac- quisition is precisely the same to all. Here the surplus satisfaction that an individual secures is entirely a consumer's § Si] Cost and Surplus 195 surplus,' depending on the relative urgency of his different wants. If I agree to give up a book for my neighbor's knife, I do so because I expect his knife to afford me more satisfac- tion than my book. The utility to me of the knife is greater than the pain of parting with the book. As a consumer, I consider the pain of parting with the book as the exact equiva- lent of the utility I lose; but since the utility to be afforded to me by the knife is greater than the utility I lose through the book, there will be a balance to my credit. As a consumer, I expect a surplus enjoyment. This specific consumer's surplus, however, is of no prac- tical significance. For in actual life we cannot enjoy anything without procuring it, — that is, without its costing us something. But just as enjoyments or utilities differ from individual to individual, so do costs or sacrifices differ. Both the knives and the books can be obtained only on the condition of some exertion. The cost, or pain, of parting with the book depends on the cost, or pain, of acquiring the knife. Hence the only real surplus which is of importance is the surplus of enjoyment over cost, whether we call it producer's surplus or consumer's surplus. If we take the possession of knives or books for granted, we can indeed speak of consumer's surplus; but if we reflect that knives and books must be procured before they can be parted with, the surplus becomes a real surplus, which can equally well be called a producer's surplus. It is a sur- plus of utility over cost. Individual surplus, however, is essentially subjective, and never affects prices. For value is a social conception. This statement is true of surplus in general, as well as of the abstract consumer's surplus just referred to. I secured a surplus utility from my comrade's knife, but he secures a surplus utility from my book. He would otherwise not have given up the knife. The exchange is therefore mutually beneficial. The old belief 1 The term " consumer's rent," first suggested by Marshall, is not so good because of the equivocal meaning of " rent." 196 Measure of Value [§ f.i that what one man (or one country) gains in an exchanj^' another necessarily loses, is incorrect. Each may get a surplu utility. But while there is a surplus utility to each, the vaku does not necessarily change. The value of the book and the value of the knife remain the same. The marginal utility of one- book would still be equal to that of one knife. If for some reason the book-owners found that knives were twice as useful to them as before, and if for a similar reason the knife-owners thought that books were twice as useful to them as before, the surplus utility of the exchange to each owner would be double what it was before; but the book would still exchange for the knife: their value would be unaltered. Value may thus remain the same, even when the benefits of exchange to both parties grow. The more varied the wants of a community, the greater the benefits of exchange. On the other hand, values may change and the surplu > utility remain the same. If the book-owners prized knive^ twice as much as before, while the importance of books to knife-owners was unaltered, this very fact would increase the aggregate social demand for knives, and therefore the sacrifice that the book-owners must make to get a knife. The knife- owners would make the book-owners give two books for a knife. The price of books would fall, and that of knives rise. The marginal utility of one knife would equal the marginal utility of two books. The surplus utility to the book-owners would remain the same, because, although the utility would | increase, the cost would increase in the same proportion. In I every exchange the cost, or sacrifice, depends on the reciprocal demand for the commodities. The surplus utility that any one individual gets from an eco- < nomic action, therefore, has no influence on value, however I much it may affect his own happiness. It ^s a result, not a cause. Surplus is the excess of total utility over total cost. Value is an expression of marginal utility or marginal cost. Surplus in the case of any one person is the result of an indi- § 8i] Cost and Surplus 197 vidual subjective estimate which differs from man to man; value is the result of a social estimate in which the individual preferences lose their significance. We must therefore be careful to interpret correctly the statement above, that marginal utility equals marginal disutil- ity, or cost. In an isolated economy, where there is only one person battling with nature, this tends to be true of the individual. In society, on the other hand, whatever the rate of exchange, it is only the social utility and social cost of which the marginal degrees are equal. If the knife exchanges for a book, it is because the demand in the community as a whole is such that the marginal sacrifice to a social group in parting with a book tends to equal its marginal pleasure in getting a knife. To put it more accurately, a knife will exchange for a book only because the sacrifice to society in making the knife, for which it receives in turn the pleasure of books, tends to equal the sacrifice of making the book, for which it receives in return the pleasure of knives. To any individual the sacri- fice may be less than the pleasure, but there will always be a marginal individual to whom pleasure and sacrifice are equal. The marginal pleasure in the aggregate tends to equal the marginal pain in the aggregate. The balance or equilibrium is between the pains and the pleasures of the sum of individuals. Where an exchange economy exists, the real equilibrium is a social equilibrium. This shows clearly that the real cost to any member of society which influences value is not the subjective cost to him. The sacrifice imposed upon society to secure anything is, as we have seen, the exertion needed to replace it. To replace an article, however, from the social point of view, is to produce it. For, although an individual may replace an article by pur- chasing it from the {)ro(iucer, society as a whole can replace an article only by producing it. Thus, when we speak of social cost, we really mean cost of production; and when we say that value is influenced by cost, we mean that value is influ- 198 Measure of Value enced by cost of production. What may be to the individual a subjective cost becomes, when translated into terms of society — that is, of value — an objective cost to him. We think no longer of the sacrifice imposed upon any one indi- vidual, but only of the social sacrifice, or cost, embodied in the commodity; or, rather, the sacrifice, or cost, to th( individual is the result and reflex of the sacrifice to the com munity. Just as we saw above that the individual utility which affects value is the reflex of the social utflity, so the individual cost which affects value is, as we shall see more fully in a moment, the reflex of the social cost. If an individual desire.^ to sell a commodity, he will normally get for it not what ht chooses, but what society as a whole fixes as the proper figure. He may personally be able to raise a particular horse for less than a particular cow; but that will not enable him to sell a cow for more than the usual price of a horse. His own indi- vidual estimate is of importance only as affecting the aggre- gate social estimate. Every individual gauges his economic well-being from the point of view of surplus, — of getting as much satisfaction as possible above the cost; but the cost, or sacrifice, which he must incur is fixed not by himself, but by society as a whole. A farmer will not permanently raise cows if his cost exceeds the social level as reflected in the price. 82. Cost and Utility The failure to realize that value is a social conception has led to much pointless controversy. Thus Ricardo and his followers maintain that the value of a commodity is fixed by its cost of production; while Jevons and those that agree with him contend that value is fixed by its marginal utility. Both are right, but neither is right in the sense in which he under- stood the terms. Cost of production is the measure of value; but it is not, as Ricardo thought, individual cost. Marginal utility determines value; but it is not, as Jevons thought, indi- vidual utflity. Both cost and utflity measure value, because, § 82j Cost and Utility 1 99 as we have seen, marginal social cost is always equal to mar- ginal social utility. In the way they frame the statement, the followers of both Ricardo and Jevons are correct in denying the other's statement, and yet err in their own. Rightly inter- preted, they are correct, in their own statement, and yet err in denying the truth of the others'. Let us make this clear. Utility, as we know, is the fundamental quality of everything used by man. But utility is not sufhcient to give value. For anything to have value its supply must be limited. The utility which gives it value is the marginal utility. If the supply is unlimited, the marginal utility is zero. Positive marginal utility, therefore, depends upon limitation of supply. But if the sup- ply is limited, it will cost some sacrifice to secure or to repro- duce it. Therefore, when we measure the marginal utility of a commodity, we measure the cost of securing it. Hence either utility or cost may be declared the measure of value. Thus, while marginal utility is the fundamental cause of value in the sense that nothing could have any value if it had no utility, cost may be declared to be not indeed the cause, but an equally good measure, of value. Regarded from this point of view, the discussion as to which is the real measure of value is as futile as to ask how to measure the sound or quality of a hammer's blow on a bell. Without that particular kind of bell there would be a different quality of sound; without that par- ticular kind of hammer there would likewise be a different quality of sound. So in economic life we deal with the de- mand for anything as compared with its supply. When we speak of utility, we think of the person who wants it, — that is, of the demand. When we speak of cost, we think of the per- son who parts with it, — that is, of the supply. But these interact mutually; for the demand, although reflecting the utility, would change if the cost were different; and the supply, although conditioned by the cost, would change if the utility were altered. To allirni that either utility or cost exclusively measures value is as incomplete as to say thai cither demand 200 Measure of Value [§ 82 or supply exclusively fixes value. Value is the expression of the relation between demand and supply. We cannot speak of marginal utility without implying cost; we cannot speak of marginal cost without implying utility. All this is true, however, as we have seen, only of social cost and of social utility. The utility of anything to an indi- vidual figures in the determination of value only to the extent (in most cases infinitesimal) that the individual choice goes to determine or change the choice of the community. If I have a potato field at home, that will not obviate the necessity of my paying the market price for potatoes. If I am directed by my physician to live on potatoes exclusively, that will not lead the dealer to charge more than the market price. The demand that tells is the aggregate social demand, depending on the social utility. Conversely, the cost that influences value is not the cost of production of that particular commodity to the individual pro- ducer. It may take me two days to make with old tools a table which fully equipped carpenters can turn out in a few hours. I can get for my table no more than the carpenters for theirs. The carpenters can get this price for their table, not because it has cost them so much work, but because they save the members of society as a whole the sacrifice, or cost, of making the table for themselves. If there were no carpen- ters, society would have to set to work, abandon some of the things it does now, and give up some of its time to make tables. Instead of each member of society devoting a part of his day to making a part of a table, society as a whole sets aside a certain class to make nothing but tables. But what society is willing to pay for the table is always the marginal cost to it, and this marginal cost is the final sacrifice which society is willing to incur for tables as compared with other things. What the carpenter can get for the table will adjust ttself to this amount of social sacrifice, and thus the value of a commodity gets to be the equivalent of the (individual) cost § S;^] Surplus and Progress 201 of producing it. \Vc may thus roughly say that individual labor or cost of production fixes value; but what it really does is not to fix value, but to express the value that is fixed by social forces as a whole. The value is due not to the labor of the individual who has made it, but to the social service which it is going to render, — that is, to the social sacrifice which it is going to save. If it does not render that service, it will not possess that value, no matter how much individual labor has been spent on it. On the other hand, if less individual labor be spent on it, it wiU have less value, not because less indi- vidual labor has been spent, but because the marginal sacrifice of society is now less. Utility, and not cost, is the ultimate cause of value. We see, then, that value may be defined either as the ex- pression of marginal social utility or as the expression of the marginal social sacrifice incurred to secure utility. Value may be estimated in terms of either social utility or social cost, be- cause the marginal degree of the one is equal to that of the other. Individual cost, however, affects value only in the sense that it adjusts itself to the social utility, which is the supreme test. Utility is the positive factor, cost is a result. The exact relation of individual cost of production to value, however, still remains to be studied, and will be discussed later. 83. Social Surplus and Progress Since all progress consists in getting more results with less efforts, the problem of social cost and social surplus becomes one of basic importance. AU surplus or residual utility is the balance of satisfaction over sacrifice. It may therefore be augmented in two ways: the sacrifice may remain the same, while the satisfaction increases; or the satisfaction may remain the same, while the sacrifice decreases. In the one case we deal with problems of consumption, in the other with problems of production. In the one case we approach the subject from the point of view of utility, in the other from that of cost. 20 2 Measure of Value [§ 83 The social surplus may be enlarged by changes in consump- tion. The sacrifice incurred by the individuals that compose society may remain the same, and yet they may use so much in- telligence in the rearrangement of their choices of satisfaction that they may procure a greater net result. It need not cost more effort to cook a good dinner than an unpalatable one, and yet the surplus of satisfaction over sacrifice is greater. When the social choices are improved on a large scale, there will be a great increase in the social surplus. While it is possible to have in this way a larger satisfaction with the same effort, it happens just as frequently, however, that we can procure the same satisfaction with a smaller effort. The emphasis is here laid not upon consumption, but upon production. Whatever diminishes the cost of production en- larges to that extent the surplus of society. If the dinner which originally cost one dollar can now be supplied for fifty cents, we shall have to work less to get that dinner; or if we work as hard, we shall have the remaining half-dollar to spend on something new. All civilization depends on the increase of our wants. In most cases, however, the appearance of a new want requires additional effort on the part of individuals for its satisfaction. If the additional sacrifice keeps pace with the additional want, we are no better off than before, — there is no increase of the social surplus. But as soon as we can satisfy the old want with a smaller total effort, the surplus is increased because some of the efforts previously devoted to the satisfac- tion of the old want are now set free for the attainment of the new object. With the same output of energy we secure greater results. Diminution of social cost is the great creator of social surplus. While changes in consumption are of significance in them- selves, they become of great importance chiefly as engendering changes in production. Whether we call the social surplus, however, a consumer's surplus or a producer's surplus, is, as we know, immaterial. It is equally immaterial whether we say § 83] Surplus and Progress 203 thai the progress is due to lower cost or to greater utility. So- cial surplus is the result of man's struggle with nature. It is the margin between result and effort. The way to increase the surplus is to maximize the results and to minimize the efforts, — that is, to increase utilities and to decrease costs. The mere increase of the social surplus is, however, not all that is necessary to progress. Without such a surplus, indeed, there can be no highly developed civilization; for where the energy of society is entirely occupied with procuring the bare means of subsistence, there can be no opportunity for the higher life. A frontier community differs from a developed one chiefly in the fact that in the former there is little social surplus available. But the mere production of wealth and prosperity does not suffice. Unless attention be paid to the problem of distribution as well, the social surplus may remain in the hands of a favored few — the "remnant" of whom Matthew Arnold sings — while the mass of the community may be largely shut out from participation in its benefits. The real democracy of industry, like the true democracy of politics, does not mean that every man is the equal of every one else, but that all should have an equal opportunity to de- velop what is in them for good. The problem of social progress is to reconcile the greatest possible social production with the best possible social distribution; to create a continually grow- ing social surplus and to provide for its equable division. Without the latter we are apt to have plutocracy; without the former we can scarcely rise above savagery. CHAPTER XIV THE CAPITALIZATION OF VALUE 84. References J. B. Clark, Distribution of Wealth (1899), ch. ix; F. A. Fetter, Economic Principles (1915), part i; T. Veblen, Theory of Business Enterprise (1904), chs. v-vi; M. Pantaleoni, Pure Economics (1898), part 3, ch. iii, § 5; E. V. Bohm-Bawerk, Positive Theory of Capital (1891), bk. V, chs. i, ii; F. v. Wieser, Natural Value (1893), bk. iv, ch. vii; H. Sidgwick, Principles (1883), II, ch. vi; J. A. Hobson, Economics of Dis- tribution (1900), ch. iv; Irving Fisher, Capital and Lncome (1906); H. J. Davenport, The Economics of Enterprise, (1913), ch. 14-15; W. Z. Ripley, Capitalization of Public Service Corporations (Quart. Jour. Econ., XV, 1901); E. S. Meade, Trust Finance (1903), ch. xvi; R. M. Hurd, Principles of City Land Values (1903), ch. ix. 85. Value and Rent We have learned that the value of anything is derived ulti- mately from the satisfactions or uses which it afifords, and that the price is the money equivalent of its uses. Some things afford only a single use; the use of an ordinary article of food consists in its consumption. Other things are somewhat more durable; a suit of clothes can be used for a season or two be- fore it is worn out; a machine will last for years; a house for decades. Finally, some things permit of perpetual use. A city lot will serve as a building site as long as the city exists; the privilege granted to a street railway to occupy the public highways remains the same from decade to decade, although the recipient of the privilege may change. Things can be sold either by parting with their uses one by one or by disposing of all their uses for a lump sum. When I ask, what is the price of a carriage? the owner will answer, ten dollars a day if he means the price of the use for that period, or 204 § 85] Value and Rent 205 a thousand dollars if he refers to its use as long as it lasts. when we part with the use of a thing for a limited period, the payment is called a rent. We may rent a horse for an hour, or a dress-suit for an evening, or a typewriter for a month, or a house for a term of years. Strictly speaking, the word rent regards the transaction from the standpoint of one who lends the use and secures a periodic return (rcddiliis) ; while the word hire designates the transaction from the point of view of the one who enjoys the temporary use. Commonly, however, this distinction is disregarded, and we speak indiscriminately of a man hiring or renting a yacht or a house for his own use. The fundamental conception is the income, in the sense of pleasure or benefit income, to the user. Through the opera- tion of the social forces which bring about exchanges based on money, the income value of anything becomes its money rent, — the amount of money received by the owner or paid by the hirer. The income of anything is the rent paid or received for its use. Sometimes the word rent is limited to particular kinds of rents. In England, for example, where land formed the chief form of investment even as late as the eighteenth century, rents came to be synonymous with land rents, and when a man spoke of his rent roll, he meant the rentals which he received from his estate. As a consequence, the theory of rent elabo- rated by the English economists came to have a peculiar meaning. On the other hand, France, in the century before the revolution, had made greater progress in general financial enterprise, and rentes came to mean the income of the fund- holder. A rentier to-day still denotes one who is living on the income of his capital. As a general economic conception, then, rent is the periodic return (nowadays calculated in money) from the use of a thing for a definite period, whether that thing consists of land, or public funds, or anything else. Rent has a threefold aspect, (i) From the point of view of the economic good, rent is the product: the use that a thing 2o6 Capitalization of Value [§ 86 affords is its product or rent. (2) From the point of view of the owner, rent is the income from the use or prodilct. (3) From the point of view of the hirer, rent is the cost or payment for the use. People pay rents because they receive in return an income in the shape of the use afforded by the things for which they pay. Rent therefore is at once product, income and cost. When we part with anything permanently, instead of with some of its uses for a time, we often speak of its selling or market or cash value, as opposed to its rental value. Strictly speaking, this contrast is inaccurate. When we rent anything, we are also dealing with selling value; but what we sell is a single use, or several uses, rather than all its uses. Sometimes again we speak of property value as opposed to rental value. The advantage of this nomenclature is that as long as we con- trol the property we control all' possible present and future uses; the disadvantage is that property is a legal conception, while rent is an economic conception. A man also has prop- erty in his rents. The real contrast, as was pointed out above (§ 6), is between rental value, in its strict meaning of income value, and capital value. When a man sells one or more uses of a thing, he estimates its capital value. Roughly speaking, he rents in one case and sells in another; strictly speaking, he sells in both cases, but the price represents a limited use in one case and an unlimited use in the other. The question now arises, what is the relation of rental value to capital value, and how do we come to estimate capital values? 86. The Law of Depreciation The durability of economic goods is essentially relative. At the one end, as we have seen, are the merely ephemeral acts or the things which are consumed by a single use, like a paper napkin or an apple. At the other end is a building site, which can support a structure to the end of time. Between these extremes lie the great mass of commodities. They all wear out § 86] Law of Depreciation 20*7 sooner or later, and as they wear out they become incapable of affording as many or as effective uses. Sometimes the de- preciation is rapid, as with a flimsy silk dress; sometimes the commodity lasts longer, as in the case of an ordinary machine; sometimes it is very substantial, as in the case of a modern sky- scraper. In every instance, however, if it is intended to be used permanently, repairs are needed. Nothing is indestruc- tible except land, and even that is so, as we shall see later (§ 132), only in the peculiar sense that its extension remains. It is obvious that the capital value of anything depends in the first instance on the number of rental values, allowance being made for wear and tear. Where the good is ephemeral in the sense that it affords only a single use, the rental value and the capital value coalesce. The rental value is the capital value. We cannot buy the privilege of using the coal or ice even once, without buying the coal or ice itself. The wear and tear here equal the entire value, the single use is the consumption. When, however, we may expect a moderate succession of uses, there is a difference between the rental value and the capital value. Where the depreciation is rapid the difference is not great. A row-boat is quickly worn out, and even a single use may injure it severely. A boat which sells for sixty dollars will often rent for half that amount for a single summer, and the capital value is then only double the annual rental value. The boat may last for several years, but the older it grows, the greater the need of repairs and the smaller the net uses which it is capable of yielding, until finally the expense of repair exceeds the income, and the boat is thrown aside as worthless, possessing no capital value because it no longer has a single rental value. Where a larger number of uses can be enjoyed with comparatively little depreciation, as in a well-built house, the selling value is frequently ten or twenty times the annual rental value. It may be four or five years before any repairs are needed, but with each ensuing year the decay progresses and the cost of repairs augments, until here also the time ar- 2o8 Capitalization of Value [§86 rives when there is no longer any surplus of income over outgo, of enjoyment over exertion. In practical life business men guard against the results of depreciation by instituting a sinking fund. Instead of spending all the earnings, they set aside an annual sum which wUl counterbalance the depreciation, so that at the end of a period the accumulated fund will sink or offset the outlay incurred to replace the commodity. The repairs, in other words, may be made from year to year, or may be allowed to accumulate, and made aU at once at a subsequent period. Where no repairs are possible, as in a mine, the an- nual rent must stUl exceed that of ordinary land which osten- sibly yields the same annual returns, because the mine will ultimately be exhausted and a part of the rent must be put to the sinking fund or depreciation account, or goes to satisfy the expectation that the rental value will cease. The fundamental explanation, therefore, of the relation of capital value to rental value is durability, or the degree of succession of rental values. Capital value depends on net rent, not on gross rent; that is, it depends on the succession of gross returns, less repairs. Capital value is reached by adding together the gross rentals and deducting the sinking fund. The ratio of capital to rental value depends in the first instance on the number of rental values. This does not mean that more permanent commodities have a greater capital value than less durable goods. Iron has less value than sUk, although it is far more durable. The statement means that when the gross rental of two commodities is the same — that is, when the price paid for the use of each for a definite period is identical — the difference in their capital values is to be explained by the relative number of such uses which each can afford. The rent of a house, as well as that of a horse, may be twenty dollars a month, yet the house will sell for far more than the horse. Neither would have any capital value if it had no rental value. The rental value of both is the same, because the marginal utility -of a month's use of each is § 87] Law of Future Estimates 209 identical; that is, the individuals forming that economic group get on the whole as much satisfaction out of a horse as they do out of a house. The capital value of the horse, however, is less than that of the house, because he will be more quickly- worn out, — that is, because he cannot furnish an equally long succession of uses. Capital is capitalized income. Capital value is a stock or fund of rental values; the larger the number of such rental values which flow in from a commodity, the greater will be its capital value in proportion to its rental value. The relation of capital to rental value depends in first instance upon durability. 87. The Law of Future Estimates The uncivilized individual lives only in the present. His wants are spasmodic, and as soon as he has gratified these pressing needs he has no thought for the morrow. With every advance in culture he displays more prudence and foresight. Even some of the more highly developed animals, like ants, bees and squirrels, have an eye to the future, and in the time of plenty lay in a stock for the days to come. The philoso- phers teU us that the real pleasures of life are those of antici- pation and retrospection. But this is true only of the most highly organized natures, and true only in part even of them. To the mass of individuals present needs and present satisfac- tions are the all-engrossing ones. The result of this psychological fact is that we lay more stress on present enjoyments than on future enjoyments. To the average man a bird in the hand is worth two in the bush, even though he thinks that he will secure the two. Our estimate of the future is more or less uncertain, because we can never be absolutely sure of anything but the actual. The future may have in store for us either some change in the intensity of our wants or in the capacity of the particular ser- vice to satisfy our wants. Present wants and satisfactions are definitely measurable, because the degree of the one and the 14 2IO Capitalization of Value [§ 87 quantity of the other are fixed. Future wants and satisfactions are less definitely measurable, because of the concurrent or opposite changes that may take place before the future ripens into the present. Hence the underestimate of the future as compared to the present. That is what we mean when we speak of discounting the future; we "count off" a part of the enjoyment to come. The law of lower future estimates is a part of a larger law. with one aspect of which we have already become familiar. All sense impressions may be reduced to those of space and of time. When we deal with space impressions and apply them to economic life, we are in presence of the law of dimin- ishing space utility; every additional increment in the supply of an actual commodity existing in space has, as we know (§ 73) J ^ decreasing importance. When we deal with time im- pressions, we are in presence of the law of diminishing time utility; every additional postponement in the enjoyment of a commodity causes it to have a decreasing importance for us. Nothing has utihty unless it exists in space and time. In- crease the space relation, that is, augment the supply, and you decrease the marginal utility; increase the time relation, that is, postpone the gratification, and you again decrease the mar- ginal utility. In one case we deal with a margin of space; in the other with a margin of time. The etTect is the same. Increase the supply to a certain point, and the marginal utility or value will disappear; augment the postponement of the sat- isfaction to a certain point, and the marginal utility or value will likewise disappear. The present estimate of a future satisfaction is therefore ordinarily less than that of a present satisfaction; the present value of a future enjoyment is less than that of an immediate enjoyment. The present estimate of future uses becomes fainter as the use recedes into the future, until the value of a very distant use vanishes. Therefore, while a commodity with a present rental value may hold out the prospect of § 87] Law of Future Estimates 2 1 1 many successive rental values, the present worth of each of those future rental values becomes progressively smaller. Since the capital value of anything is the present worth of all the successive future rental values, it is clear that the dispro- portion between the rental and the capital value will not grow simply with the durability of the commodity; for the more durable the commodity, the fainter will be the present estimate of the distant use, until finally a further increase in durability will add nothing to the value. A building site may rent for a fixed sum, and may reasonably be expected to yield that rent for an indefinite period. Yet when it is sold it will bring as capital value a sum equivalent to only about twenty or twenty- five times the rental value. There is no depreciation of the land, there is no wear and tear, and no necessity for a sinking fund, and yet the land is worth, as it is called, only twenty years' purchase; that is, it can be purchased for a sum twenty times the annual rent, even though in all human probability it will go on yielding an annual rent for an indefinite future. The relation between rental and capital value, therefore, is a resultant of two forces, — the law of depreciation and the law of future estimates. From one point of view, the more durable the commodity and the larger the number of successive uses, the greater will be the disproportion between rental and capital value; from another point of view, the more durable the commodity and the more remote the succession of future uses, the less will the disproportion be. Both of these state- ments may be summed up in the assertion that the capital value of anything is the result of adding together the present worth of each of the successive rental values. If the com- modity lasts long enough to furnish two equal annual rental values, the capital value will be slightly less than twice the first rental value; if we may expect three rental values, the capital value will be somewhat less than three times the first rental value. Each increment which goes to form the capital value decreases, until finally there is no further increment at all. 2 1 2 Capitalization of Value [§ 88 88. The Law of Diminishing Returns We have thus far dealt with consumers' goods — that is, articles of immediate consumption — and have seen that their value is derived from the uses or enjoyments which they afford. Some goods, however, do not afford a direct enjoyment, but are used as instruments to produce things that afTord enjoy- ments. These are hence called indirect, or instrumental, or production goods. It is obvious, however, that just as the capital value of consumption goods is derived from their rental values or uses, so the value of production goods is derived from the value of their products, — the consumption goods. The value of the raw material is due to the value of the finished commodity. The value of pig iron depends upon the value of the nails, billets and other iron products into which it enters. The value of labor depends on the value of what tKe labor produces. Value starts with direct human satisfactions, and is reflected back and back until it attaches to the original agent, act or thing which is ultimately responsible for the immediate income or inflow of satisfaction. The fundamental law of value is the law of diminishing utility. The satisfaction derived from successive increments of a consumption good diminishes as the supply increases. When, in the same way, we compare the utility of different increments of production goods or productive agents with one another, we are in the presence of the law of diminishing returns. Instead of the diminishing utility of direct services afforded by something consumed, we think of the diminishing return or service afforded by something in producing the economic good which we consume. If a man tends one loom, he will turn out a certain quantity of cloth. Double the looms and he will do double, or perhaps more than double, the work; give him four looms and the output will be fourfold. After a certain limit is reached, hov/ever, the care of each additional loom will dissipate his energy and cause more mistakes. The § 88] Law of Diminishing Returns 2 1 3 total output may be larger, but the output of each loom will be less, until finally new looms will not augment the output at all. If we enlarge the supply of labor instead of tools, the same holds good. More effort means, after a given point, relatively smaller results. A rower may increase his speed by putting forth more exertion, but after a certain point more efforts do not mean greater speed. An increase of rowers will not change the law. Two men will not row a boat twice as fast as one, four men will not row it twice as fast as two. A large omnibus will hold more people than a small one, but when a certain size has been reached, it will pay better to buy another omnibus than, to enlarge the old one. On a piece of land it may be profitable to employ more men. as well as to use more manure and better machinery; but after a given point, additional "doses" of labor and capital will begin to give relatively smaller results. The law of diminishing returns is universal. It is another aspect of the law of diminishing utility. The latter springs from the finite nature of man, the former from the finite nature in the elements of his environ- ment. The income or return from a production good or productive agent is like the income or utility of a consumption good. The test of each is its relative contribution to the satisfaction of wants. Just as the law of decreasing utility results in the conception of marginal utility — the foundation of all value — so the law of diminishing returns results in the conception of marginal utilization. This margin is the point beyond which an addi- tional effort will not give a sufficient return. The margin may be either intensive or extensive. If we crowd more people into the same omnibus, or run more trains over the same track, or make the laborer tend more looms, or put more manure into the same field, we have a more intensive utiliza- tion, until finally the intensive margin is reached where the additional returns will not compensate the additional effort or outlay. On the other hand, the crowding of the omnibus 2 14 Capitalization of Value [§89 may drive passengers to another line, the multiplication of trains may cause accidents, the added looms may mean more breakage, the increase of manure may be unduly costly. In such cases the owner will find it profitable to purchase new vehicles, build a double track, hire more workmen, or secure additional plots of fresher land. This would be an extensive utilization, carried on until the extensive margin is reached, when it will not pay to add another vehicle, track, laborer or plot. The margin, whether intensive or extensive, is reached through the operation of the law of diminishing returns. Just as the value of every consumption good depends upon its marginal utility, so the value of every production good or productive agent (which is derived from the consumption goods which it produces) depends upon its marginal product, that is, its product at the margin of utilization. 89. Forms of Value If we analyze the things that are bought and sold in the market we find that they may be divided into four classes: first, human services, from those of the day laborer to those of the highest professions; second, concrete goods, or com- modities, whether production goods or consumption goods; third, relations and privileges of all kinds; fourth, a fund of capital. In the first class obviously only the single use can be sold. A service is a use, it is not a fund of stored up uses. Here, then, the selling price of the economic good (the service) is the rental price. We speak of hiring a man, just as of hiring a piano. When we hire him for a definite task, we rent his service; if we engage him by the day or month or year, we rent a limited succession of services. The only way in which all the services of the man can be sold at once is when he is a slave, and thus acquires a definite money value as a piece of property. In a state of freedom a man never parts with all his future services for a lump sum. The price § Sg] Forms of Value 215 paid for human services is not commonly called rent, although we do speak of an Italian padrone in America renting out his immigrant compatriots, or of the Southern prison officials renting out their convicts. Ordinarily the income derived from human service is called wages (or, in the case of the professional classes, salaries or fees). Wages, then, are always income; they are never capital, nor can they be capitalized except in the case of slavery. It is only then that we can properly speak of human capital, or of capital invested in human beings. The next two categories, which, as we shall see later, differ in important ways, may be classed together in this respect, that they both possess a rental or income value as well as a capital value. A piece of land, a ship and a patent right may either be rented out from year to year or parted with entirely for a lump sum. Their product is always a rent, although the rent may be capitalized. Finally, as opposed to individual economic goods which have a capital value, there is the general fund of capital. Just as we speak of wealth in general as consisting of pieces of wealth, or of labor in general as composed of the individual laborers, so we speak of capital in general as the assemblage of individual pieces of capital. Capital as a general concep- tion stands in the same relation to the individual pieces of capital as a flock does to the sheep or a forest to the trees; the sheep and trees are constantly disappearing and being replaced by new accessions; the flock or forest persists, although the constituent elements are perpetually changing. Capital as a fund of wealth is the embodiment of value or I)urchasing power, and money is everywhere the measure of general purchasing power. Capital, therefore, as a fund of value can be estimated or transferred in the shape of the money which represents this value. We cannot buy the flock of sheep without buying the individual sheep, but through the interposition of money and credit we can acquire capital 21 6 Capitalization of Value [§89 in the shape of general purchasing power, and ihen devote it Lo ;iny use we desire. We can use it in production and build a factory, or we can use it for consumption and buy a yacht. We can put the fund of capital into concrete goods like machines or land, or into privileges like franchises or patents. When we buy capital in general, therefore, we buy the right of enjoying any future uses that we may elect; we are not restricted to the particular uses afforded by the individual good in which our capital is temporarily embodied. The use of the sheep is limited; the use of the capital invested in the sheep is poten- tially unlimited, because it can be changed at will to any other form. When we purchase the temporary use of an individual economic good, therefore, we pay a rent; but when we pur- chase the temporary use of a fund of capital in general, the payment is called interest. Interest, hence, is nothing but commuted rent, just as 'capital is nothing but capitalized income. Instead of hiring a particular piece of capital and paying rent, we hire a fund of capital in general and pay interest. Interest, then, is not paid for money, but for the capital which the money represents. It is really not paid for the capital, but for the uses afforded by the capital when transmuted into the individual things which afford services. Interest of capital is based upon the rents of individual pieces of capital. The single thing yields a rent because it affords a return or product. If we add together all the net rents of existing goods or pieces of capital, we get the entire amount of interest'. Total net rent at any given time is equal to total interest. Each consists of the whole of the product or income from all existing wealth which is or can be capitalized, — that is, of the aggregate of J:he return from all existing pieces of capital. The only difference is that interest is the calculation form of rent. Rent is figured in dollars and cents; interest as commuted rent is figured as a part of the whole or as a percentage of a principal. The rent of a house is so many § 9o] Value as a Differential 2 1 7 dollars a year, the interest of the capital invested in the house is so much per cent a year. Wages, rent and interest, therefore, are analogous phenom- ena. They are all prices, even though prices in the language of the street are ordinarily restricted to the selling values of concrete objects. When we contrast wages and prices, we really contrast prices of human services with prices of things; when we contrast rents and prices, we really contrast rental values of things with capital values of things. Wages are the price of the services of man; rent is the price of the services of particular things and relations, that is, particular pieces of capital; interest is the price of services of the general fund of capital. At the one end is labor, which can never be capital- ized; at the other end is the fund of capital, which is always capitalized; in between are the individual economic goods, whose services may or may not be capitalized, and for which people will pay either rents or so-called prices. 90. Value as a Differential All value may be considered as a differential. In each variety of goods there will be different grades corresponding to different uses. A good boat will rent for more than a poor one; and if it is "no good" at all, it will not rent for any- thing. Rent therefore may be measured as a differential from a margin or base line of no-rent, and the rent of anything may equally well be defined to be the differential return or surplus over the no-rent or marginal articles of the class. It must, however, not be forgotten that almost everything is susceptible either of more than a single kind of use or of different uses to different people. The boat may be useless for sailing, but good for rowing; it may be useless for rowing, but excellent for firewood. A piece of land may be of no use for wheat-raising, but good for alfalfa; it may be useless for alfalfa, but admirably adapted to pasture. The margin or base, there- fore, from which rents arc calculated may i)c only a relative 2 1 8 Capitalization of Value [§ go and not an absolute no-rent margin. The rent of a particular plot of good wheat land may be calculated as the surplus produce over the worst plot at the margin; but that no-wheat - rent plot may yield a substantial rent as perhaps the best of pasture plots. It is only when a given object is of no use for any purpose that we can speak of an absolute no-rent margin. Since therefore the uses of things shade into each other, wc can take any use as a margin or base from which to measure a higher use. The rent of anything may be regarded as a differ- ential surplus over a lower use, or as a margin from which to measure a higher use. All value is the expression of marginal utility; each margin is relative as compared to some other margin. Rent as the quantitative expression of this marginal utility may be estimated either as a whole or as a surplus over something else. In precisely the same way capitalized rent, or selling value, may be regarded as a surplus. If a fine sail-boat sells for one hundred dollars, we can regard twenty dollars as a surplus value of a fine boat over a poorer one; another twenty dollars as a surplus of a poor sail-boat over a good row-boat; and so on until finally the last of the hundred dollars will represent a surplus of the worst boat over a boat which is not even good enough to use as firewood. Again, what is true of rent is true of wages. Rent is the income from things, wages the income from acts; both are the income from services. The wages of a particular man or class may be regarded as a surplus over the wages of a lower grade class, until finally we get to the individual who receives no wages at all because he is of no use, and who, if he survives, must be supported by the com- munity. The law of wages must be the same as the law of rent, because wages are really rents of a certain kind, rents of acts instead of rents of things. When therefore the traditional discourses of economics speak of the rent principle, or of "quasi-rents," in the sense of temporary instead of permanent § gol Value as a Differential 2 1 9 or normal surpluses, they are correct as far as they go, but do not go far enough. What they really mean is the differential principle, which is true of all incomes, whether land rents or other rents, whether rents in general or other selling values, whether the income of things or that of services. When we deal with the fund of value known as capital in- stead of with individual pieces of capital, we are also in the presence of a differential, but in another sense. Individual commodities differ in grade of utility, and therefore their rents (and capital values) differ. Capital as a fund, on the other hand, is the money value of all existing commodities lumped together. Individual commodities are heterogeneous; the fund of capital is homogeneous. There is no general rate of rents; there is- a general rate of interest. Hence interest cannot be a differential in the same sense as rent. Yet the word "interest" itself means difference. Interesse in Latin was the sum that lay between (inter) the original loan and its return. Although the mediaeval writers confused money and capital, thinking that interest was paid for the use of the money itself, they nevertheless justified interest, so far as it was a recompense for the delay in repayment. We who now know that interest is a method of calculating rent realize that it is not simply a question of delaying repayment, but of postpon- ing enjoyment, and that interest may be measured not only positively, but as a differential or surplus of present over future values. Interest, in other words, is a discount, or difference between the present and future. When a banker discounts a bill, he deducts from the face value a sum equivalent to the interest for the period the bill has to run. Both rent and interest, therefore, as forms of value, express an estimate of marginal uses. Rent regarded as a differential deals with the marginal uses in space; interest regarded as a differential deals with the marginal uses in time. Rent is the difference in the value of one present enjoyment over another; interest is the difference 2 20 Capitalization of Value [§91 in the value of a present over a future enjoyment. How the estimate of this difference, or the rate of interest, is arrived at in actual life is a matter for later consideration (§ 167). 91. Relation of Rental and Capital Values Since interest is commuted rent and capital is capitalized rent, it might be assumed that rental values and capital values of the same things would always vary together. If a house rents for the same amount in New York as in Yukon, or if a house to-day rents for as much as it did ten years ago, ought not the capital value to be the same? In point of fact, how- ever, there is no such exact correspondence between rental and capital values. This is due to several causes. In the first place, the rate of capitalization is only another way of describing the rate of interest. The rate of interest, however, or the degree of discounting of the future, differs from place to place and from age to age. The rental value, that is, the income, of a given railway bond not so long ago was six dollars a year, and its capital value one hundred dollars. In 1905, with no changes of importance in the character or the earnings of the railroad itself, the same bond, with the same income, was worth half as much again. This increase of fifty per cent in the proportion of capital value to rental value was due to the fall in the general rate of interest on all similar capital from six to three or four per cent. The discount on future en- joyments had appreciably diminished. What is true of the part of a fund of capital represented by bonds, is true of the indi- vidual pieces of capital like a house. Two houses that rent for the same amount in New York and Yukon will sell for very dif- ferent sums, because the rate of interest is low in New York and high in Yukon. The cause of changes in interest will be studied later. Secondly, since capital value depends on an estimate of the future, it is often much more uncertain than rental value. It is affected by all sorts of hopes and fears. It is subject § 9i] Rental and Capital V^alues 221 to the play of speculation. Rental value deals with the present moment or the immediate future; we are reasonably- certain, so far as anything mundane is certain, of the exact quantum of enjoyment. Capital value as a summation of more or less distant enjoyments is exposed to all the muta- tions of human experience. The same rental values may mean now relatively high, and now relatively low, capital values. A comparison in 1901 of 47 industrial corporations with 37 railroads showed earnings of 13.6 per cent on the market value of the industrial stocks, and 4.85 on that of railroad stock. The same income or rental value, in other words, represented a difference of almost 300 per cent in capital value. Rental values; no matter how they fluctuate, are more stable than capital values. That this is true of the fund of capital is obvious to any one who watches the transac- tions on the stock exchange. That it is equally true of indi- vidual pieces of capital can be seen when we remember that in the ante-bellum days of the South, when negroes were simply a part of capital, the rental price of slaves in 1820 and i860 remained at about the same figure, $110, while the capital value of slaves increased from a few hundred dollars to $1500 or $2000. This growing disproportion between capital and rental value was indeed due in part to the fall in the rate of interest, but in far greater measure to the over-capitalization of slaves resulting from the peculiar economic conditions of the time. Finally, in the third place, where there are special advan- tages in the permanent as opposed to the temporary possession of certain things, capital values will be relatively higher than the rental values. In England a country estate is prized for the social and political advantages it brings, — and these ad- vantages accrue not to the annual tenant but to the owner. It is not surprising, therefore, to find that at the end of the eighteenth century land in England was worth from twenty- eight to thirty years' purchase, while funded property was worth 222 Ciipitalization of Value [§91 only from sixtceu lo eighteen years' i)urchase. 'i"he disjjro- portion is less to-day, but still appreciable. Capital value is therefore always based on rental value, but their relation is not constant. It becomes necessary, there- fore, to go a step further and to study the causes which fix values in general and which, in explaining relative variations, will throw more light on the relation itself. CHAPTER XV DETERMINATION OF MARKET \'ALUE 92. References M. Pantaleoni, Pure Economics (1898), part 2, chs, i-iii; A. Marshall, Principles (1910), bk. v, chs. i-ii; J. S. Nicholson, Principles (1901), bk. iii, chs. iii, iv; E. v. Bohm-Bawerk, Positive Theory (1891), bk. iv, chs. i-vi; F. V. Wieser, Natural Value (1893), bk. ii; A. T. Hadley, Eco- nomics (1896), ch. iii; H. Sidgwick, Principles (1893), bk. ii, ch. ii; A. W. Flux, Principles (1904), ch. iii; H. R. Seager, Principles (1913), ch. vii; J. E. Cairnes, Leading Principles (1874), part i, chs. ii, iv; J. A. Hobson, Economics of Distribution (1900), ch. i; F. A. Walker, Political Economy (1888), part 3, ch. i; F. W. Taussig, Principles (1911), ch. x; P. H. Wicksteed, The Common Sense of Political Economy (19 10), chs. vi-viii. 93. Demand and Supply . 'AH value, as we know, is the reflex of social marginal utility. We have now to study the nature of the social forces which operate to translate into actual prices on the market the feel- ings of the individuals that comprise the group. For the purposes of our immediate study it makes no differ- ence whether we are dealing with rental or capital values, or again with values of services or values of things. The general principle of value must be true of all kinds of value. It will sufi&ce in this chapter to take as a type the capital or selling value of ordinary consumption goods, remembering that every- thing here said is equally applicable to all other forms of value. It is a truism to affirm that value depends on demand and supply. Strictly speaking, demand denotes desire. Since one's desire for anything diminishes with additional incre- ments, demand is, strictly speaking, the scale of the degree of utility. A given scale affords the law of demand. If one's 223 2 24 Market Value 94 desire for anything for some reason increases, so that he is willing to give more for the same amount, we might in this sense speak of a rise in the demand, that is, a change in the scale of demand. On the other hand, if there are several people who prize the commodity differently, a fall in the price would enable more individuals to satisfy their desire, even though the scale of demand of each remained unaltered. There would really be an extension of the consumption, but not of the demand. Yet in the ordinary language of economic life demand means not simply desire, but effective desire, — a desire which will have some effect in the transactions of the market. Demand has therefore come to mean elliptically the quantity demanded at a given price; and when we speak of a change in the demand, we refer not to any alteration in the subjective scale of desire, but to a change in the amount asked for. In the same way supply has come to mean the quantity offered at a given price in the market. It no longer denotes the total amount in existence. That part of the total stock which is not offered for sale at a definite price is not an effective supply. The grain or cotton that is allowed to rot in the barn or on the fields has no influence on the price. 94. Market and Normal Price By a market was originally meant a place in which individuals met for the exchange of commodities and services. Nowa- days a market means a coming together of offers and demand for economic goods, irrespective of the physical presence of the contracting parties. The market may be local, national or in- ternational; wherever definite quantities of goods are bought and sold, there is a market, and the price at which the exchange is effected is the market price. From the nature of the case this price is subject to tempo- rary variations, — the higgling of the market, as Adam Smith called it. The point about which the market price oscillates § 94] Market and Normal Price 225 is called the normal price, and sometimes, although less hap- pily, the natural price, as being the point to which the price would naturally gravitate if there were no oscillations. Mar- ket price is like the surface of the water agitated by the winds, — the waves are now above, now below the surface; yet as long as the winds persist we never see the glassy surface. The alternate activity of buyers and sellers is the wind of commerce, which prevents the normal price from becoming visible. Normal price itself may be regarded from two points of view. If the conditions of production and consumption are perfectly stationary — that is, if there are no changes in population, amount of capital, methods of production or social demand — we speak of static conditions. Such a state is largely hypotheti- cal, because in all progressive society conditions are continually changing or dynamic. The law is one of movement, not of rest. Yet the study of static conditions is important. Static normal value is like the level of a pond; we can study it only on the assumption that there is no motion of any kind. Dy- namic normal value is like the level of an ocean bay, where the tide ebbs and flows and the level is slowly changing; mar- ket value is like the surface when agitated by the wind. To ascertain the laws of value we must not only study the forces that produce the higgling of the market, — that is, the winds that disturb the surface; we must also study the forces which change the level of prices, — that is, the strength of the tidal current and the conformation of the shores; we must finally study the causes of the original level itself, — that is, the source of the supply, the volume of the water and the depth of the bed. For instance, wages in America oscillate from season to season, they have changed from century to century, and at all times they have been on a different level from European wages. We begin, therefore, with the study of market value. We must, however, first understand the conditions that make ex- change itself possible. IS 226 Market Value [§ 95 95. The Conditions of Exchange — The Lavr of Compara- tive Utilities and Comparative Costs Let us suppose that A possesses salt and B tea, and that each is willing to trade. All that is necessary to an exchange is that A's liking for tea as compared to salt should be different from B's. It is not necessary that A's preference should be the opposite of B's. Both A and B may like tea more than salt, but if A likes a pound of tea four times as much as a pound of salt, and B only twice as much, they will be willing to exchange. If three pounds of salt are given for one of tea, A will be satis- fied, for he would have been willing, if necessary, to give another pound of salt for the tea; and B will be satisfied because in- stead of the two pounds of salt, which he considers the equiva- lent of a pound of tea, he gets three pounds. Nor does the fact of an exchange tell us anything about the absolute prefer- ences of the two parties. If A and B are willing to trade tea and salt, pound for pound, it does not follow that A likes tea more than B, or that B likes salt more than A. A may like salt more than B and yet give it up, provided he likes the tea much more than salt, and at the same time likes both tea and salt much more than B does. Suppose A gets ten units of satis- faction from a pound of tea and five from a pound of salt, while B gets one unit of satisfaction from a pound of tea and two from a pound of salt. B will then give up the tea because he saves one unit, and A, although he likes salt more than B does, will give it up because he saves five units. The fact of exchange thus tells us only that A's liking for salt as compared with tea is different from B's; it tells us nothing as to whether A likes salt more than tea, or whether A likes either salt or tea more than B. In technical language, an exchange tells us only that there is a disparity in the mar- ginal utilities of the articles for the two parties, or that there is a difference in the reciprocal demand; it teUs us nothing as to the marginal utility of either commodity for either party. The § g6l Rate of Exchange 227 rate of exchange depends on the degree of this disparity, and the law of exchange may be stated as the law of comparative marginal utilities, or the law of reciprocal demand. A and B, however, had to secure their salt and tea. It cost them something. A difference in reciprocal demand means a difference in the demand as compared to the supply. This is the same as saying that it is a difference in the supply as com- pared to the demand. When we speak of supply we think of marginal cost, just as when we speak of demand we think of marginal utility. Exchange may therefore be explained in terms of cost as well as in terms of utility; and the law of exchange may equally well be stated as the law of comparative costs. I may be so much more intelligent than my furnace man that I could save much coal by tending the furnace my- self; yet I prefer to look after my business, and let him tend the furnace, because it pays each of us better to do so. The law of comparative costs and of reciprocal demand is the founda- tion, not only of international trade as the older economists explained, but of all exchanges, that is, of all economic trans- actions. 96. The Rate of Exchange — Barter Having ascertained the fundamental condition of exchange, let us now turn to the rate of exchange. Suppose that A and B both like tea more than salt. A begins by offering ten pounds of salt for one of tea, but really wants it so badly that he would if necessary go as high as sixty for one. B, on the other hand, is willing to give up some tea, but only at the rate of one pound of tea for twenty of salt. At the same time he thinks that A needs tea for more than he (B) cares for the salt, and there- fore begins by saying that he will take not less than seventy pounds of salt for one of tea. It is plain that an exchange can take place only between the limits of twenty and sixty pounds of salt for one of tea. At anything under twenty, B will not exchange; at anything over sixty, A will not exchange. The lower and higher offers 2 28 Market Value [§ 96 originally made by each are excluded by the desire of each^ to come to terms. Only between the limits of twenty and sixty will an exchange be profitable to both. The question still remains: what will be the exact rate be- tween these limits? In pure theory there must be a point between twenty and sixty where the gain of both in surplus enjoyment is at a maximum. The location of that point de- pends on the comparative desire of each for both commodities. If A prefers tea to salt much more than B does, the exchange will be made at a figure close to sixty; for even though A offers only twenty or thirty for one, his anxiety to get more tea will be greater than B's desire to get the salt at that rate, and will lead him to increase the offer. With every increase in the rate, A's desire for more tea wiU fall, and B's desire for more salt will rise; but as A's original desire is much greater than B's, the point at which the relative desires become equal must be one comparatively favorable to B, that is, near sixty. If, on the other hand, A prefers tea to salt only slightly more than B does, the rate will be nearer twenty. Whatever the relative preference, there is a point which gives both a total maximum benefit. This is strictly true, however, only of divisible commodities or articles sold in stocks, where any unit possesses a propor- tionate value of the whole. Where there is no stock, or where the commodity cannot be divided without some loss of value, such an exact point between the limits may not be found. The relative desires of A and B changed because of the minute alterations in the supply of each commodity. But if the tea and salt were in ten-pound bags, or if A and B were exchanging hens and pigs, the units could not be divided, and it might happen that at least one party would get either a little more or a little less than he anticipated. Even with divisible commodities, however, the theory as- sumes that equal knowledge, equal opportunity and equal capacity are found on both sides. When these conditions are § 97] One Seller and One Buyer 229 lacking, as is usually the case in such an isolated transaction, the actual rate of exchange will depend largely on the superior shrewdness or good fortune of the one party in gauging the strength of the other. If A can conceal his intentions better, the rate will be favorable to him; if B can "bluff" better, it will be the reverse. The keener and more adroit trader will make the greater gain. In practice, therefore, the rate of exchange will usually be at almost any point between twenty and sixty. 97. One Seller and One Buyer Let us now go a step further and suppose that both parties are acquainted with the use of money, and that A has money instead of salt, while B is willing to give up his tea for cash instead of salt. In other words, A wants to buy tea and B to sell it. Instead of barter we now have purchase and sale. Substituting a cent of money for a pound of salt, A offers as before ten cents (instead of ten pounds of salt) for a pound of tea, and B says that he will take not less than seventy cents. If the desire of A and B for money is as different as was their desire in the preceding case for salt, the problem will be pre- cisely the same. This is sometimes true in actual life. A dollar is worth more to a poor man than to a rich man, — its marginal utility is greater. A physician will charge a wealthy patient for an operation far more than a man in modest circumstances. The price of an old master or a mediaeval missal will often depend largely on the wealth of the purchaser. But in the ordinary transactions of life, where we deal in masses of com- modities, and where the sum devoted to the purchase is only a fraction of the purchaser's wealth, this difference in the worth of money may be neglected. Prices on the produce exchanges for cotton or wheat are rarely affected by the fact that some of the dealers are richer than others. The great advantage of the use of money is that in ordinary transactions its mar- ginal utility to both parties may be deemed the same. 230 Market Value [§ 97 The problem is therefore simplified. The rate of exchange was so arbitrary, because as A and B got more or less of salt as compared with tea, the marginal utilities of each commod- ity varied. But now since A and B desire to buy or to sell tea only, and as we assume that the value of money remains constant, the price that each is willing to pay depends only on their relative demand for tea. In technical language, the rate of exchange is, as before, conditioned by the disparity in the marginal utilities of the two commodities; but since the disparity due to the changes in the utility of money to each is now negligible, the total disparity is less than before. If, as is possible, this relative demand of A and B for salt in the original illustration was responsible for a variation of ten points in each case, the limits within which a pound of tea will now change hands are reduced from the original figures of twenty and sixty (pounds of salt) for one of tea, to thirty and fifty (cents) for one pound of tea. That is, if we neglect the varia- tions due to difference in the marginal utility of money, the price of a pound of tea will be somewhere between thirty and fifty cents. Within these limits it will still be arbitrary, where A and B are the only buyer and seller. The cases thus far discussed are not typical of ordinary busi- ness transactions. People no longer barter with each other, nor does it often happen that there is only a single buyer and a single seller. An example would be the agent of a collector of curios meeting a farmer who is persuaded into selling an old piece of furniture. Ordinarily, however, there will be either a number of buyers or a number of sellers, — and often of both buyers and sellers. In such cases we speak of compe- tition, because sellers and buyers compete with each other to secure the most favorable terms for themselves. When we use the term competition we usually mean mutual competition, i. e., competition on both sides. In the case of one seller and several buyers, we speak of monopoly; we neglect the com- petition because it is only one-sided, — between the buyers. § 98] One Seller and Several Buyers 231 There may also be the reverse kind of one-sided competition, as when several sellers deal with only one buyer. This is some- times called "buyer's monopoly," — an expression which is clear enough, although etymologically not quite exact, as the term monopoly literally implies "one-seller" and not "one- buyer." 98. One Seller and Several Buyers, or One Buyer and Several Sellers — Monopoly Let us now take the case where several A's desire to pur- chase tea from the monopolist tea-dealer. A, as we have seen, will not give at the outside more than 50 cents; suppose that the limit of A' is 48 cents, of A^ 45 cents, and of A^ 38 cents. If A^ were the only buyer, the price could not rise above 38 cents, and might be much below it. But now appears A-, who is willing to go as high as 45 cents. If each buyer is ready to take B's whole stock, it is plain that competition between A^ and A^ will drive the price above 38 cents, whereupon A' will fall out. The rate of exchange can therefore fluctuate only between 38 cents and 45 cents. If A^ now steps in and is ready to buy the whole stock, A'^ will be shut out and the price will fluctuate between 45 cents and 48 cents. Finally, if A appears, A^ will be excluded and the price will fluctuate between 48 cents and 50 cents. In other words, when we have competition between the buyers, the rate of exchange is limited above by the highest offer made by the buyer to whom the rate is most unfavorable (the 50-cent rate of A), and below by the highest offer of the buyer next on the scale (the 48-cent rate of A'). Thus the arbitrariness of the rate of exchange is limited. There are two methods by which this result can be reached. In an ordinary auction sale, the monopolist seller asks for the lowest offer for the whole supply; but even here there is often an upset price, that is, a price below which the seller will en- tertain no bids at all. That represents the 30-cent linit of B. 232 Market Value [§98 With each increase in the bid, some of the would-be buyers fall out, until finally A^ stops at 48 cents. At an auction A will then get the tea at just about 48 cents; if it were an open sale, and if B were not willing to sell at that figure, A might go as high as 50 cents. On the other hand, when a municipal government offers to sell bonds, each of the would-be purchasers, all of whom must submit their bids at the same time in writing, naturally offers the highest price at which he thinks he can distance his competitors and yet make a profit for himself. Here buyers who offer to take the entire issue are often given the preference, and each is driven to his maximum limit, not by the actual rising bids of his predecessors, but by his fear of their competition. This is sometimes called the Dutch-auction sys- tem, but it occurs in certain transactions in the United States and other countries as well. What has been said is equally true, mutatis mutandis, of the case of one buyer and several sellers. Suppose that several tea-planters, B's, desired to sell their crop to a wholesale mer- chant, A, who has in some way monopolized the business of supplying the retail dealers. A, as before, wUl not pay more than 50 cents, but B' is willing to sell at 38 cents. Now comes B^, who says he will accept an offer of 34 cents; B^ is evidently shut out and the price will fluctuate between 34 and 38 cents. If B^ is ready to sell at 31 cents, B^ will be shut out and the rate will fluctuate between 34 and 31 cents; if B finally enters the market, B^ is excluded, and the limits of sale will be between 30 and 31 cents. Such cases are much rarer than the preceding. For it is more difficult in practice to monopolize the demand for an article than it is to monopolize the supply. Yet instances rill readily occur, as where tenders are invited from several p'irsons to supply a definite demand, either of a government office for articles like clothing or armor-plates, or of a private individual for the construction of a house or the making of re- oairs of any kind. The person inviting the tender is in this [§ 98 One Seller and Several Buyers 233 transaction a monopolist buyer, and each of the rival bidders now hastens to malie his lowest offer at the very beginning in order to forestall his competitor. The contract goes to the lowest bidder for the whole amount. In what has preceded we have assumed, for the sake of sim- plicity, that each of the buyers is ready to take the whole amount ofTered, or vice versa, that each of the sellers is in a position to offer the whole amount demanded. Oftentimes, however, this is not true. In the ordinary case of monopoly sales, competing buyers are usually ready to take only a part of the stock. It is instructive to study what the results are under such conditions. Suppose that the four A's desire different quantities of tea. A, let us say, desires 400 lbs. and is willing to pay up to 50 cents a pound for the first hundred pounds if he cannot get any more, 48 cents for the second hundred, 45 cents for the third and 38 cents for the fourth; A^ desires 300 lbs. and is ready to pay not more than 48 cents for the first hundred, 45 cents for the second and 38 for the third; A^ wishes 200 lbs. and will go to 45 cents for the first hundred and 2>^ cents for the second; fi- nally, A^ wants 100 lbs. and will give 38 cents a pound. Now, if B has only 100 lbs., /. e., if each of the buyers bids for the whole stock, we have seen that A will force the price up to 48 cents, and may even go up to 50 cents. A will thus secure the entire supply. If, however, B has more than 100 lbs. to sell, some of the buyers (A^) will not bid for the total amount. As a consequence both the price and the quantities which each purchaser secures will vary. Suppose that B has 300 lbs. A and A^ between them will bid the price up to 45 cents in order to exclude A^, and the price will vary from 45 cents to 48 cents. At any such price A will not get more than 200 lbs., for although he is willing to pay up to 48 cents for his second hundred, he finds that A^ is ready to pay just as much for what is his first hundred; and while A is willing to give up to 45 cents for his third hundred, A^ is ready to pay as much for his second hun- 2 34 Market Value [§ 99 dred. A cannot escape the competition of A^ except as to loo lbs. The result is that the price for the whole 300 lbs. must be the same to both, that is, at some point between 45 cents and 48 cents, and that A will get 200 lbs. and A^ 100 lbs. at that price. If B has 600 lbs., it can be shown by the same reasoning that the price must be between 38 cents and 45 cents, and that A will get 300, A\ 200, and A^ 100 lbs. The price cannot fall below 38 cents, for otherwise A^ would get some tea, — a condition which all the others are interested in preventing, as they know that there is not enough to go around. But although A^ is shut out. A- cannot get more than 100 lbs., be- cause if there were any danger of his doing so, A^ and A would fear to lose some of their share and bid the price up above 45 cents, which A- cannot afford. For the same reason A^ cannot get more than 200 lbs., for A would then bid the price above 45 cents, which A^ cannot afford for his second hundred; and, finally, A cannot get more than 300 lbs., for he would have to exclude A^ by offering more than 45 cents, which A cannot afford for his third hundred. Thus in all such cases the rate of exchange will vary between 38 cents and 50 cents, according to the relative demand of each of the buyers. By the same reasoning it might be shown that where we have one buyer and several sellers the rate would vary from 30 cents to 38 cents. In each case of such one-sided competition the arbitrariness of the rate will be less than where there is no competition at all. 99. Several Sellers and Several Buyers — Competition We now come to the final case, so generally found in actual life, where there are at the same time several buyers and several sellers, that is, where there is competition on both sides. They all meet, either in person or through agents, on the tea ex- change. Each buyer desires to purchase a certain quantity of tea, but all the buyers together are ready to take more than § loo] Conclusions 235 is offered, provided they can get a satisfactory price; each seller wishes to dispose of a certain quantity, but all the sellers together would be ready to sell more than there is a demand for, provided they can get a satisfactory price. In other words, each desires to do as much business as he possibly can with profit. Under such conditions the market price of the tea must be 38 cents, not more and not less. There will be no variation at all. For if the price fell to 37 cents some of the sellers (repre- sented by B^) could not afford to sell, and with the shortage in the suppl}' all the buyers together could not get as much as they want; they would therefore bid against each other, in the fear of not getting enough, and the price would rise. It could, however, not go above 38 cents, for if it were driven say to 39 cents, some of the buyers (those represented by A^) could not afford to buy. With the falling off in the demand, each of the sellers would fear to be the unlucky one who failed to dispose of his stock; the sellers (B's) would therefore vie with each other in reducing the price until it fell to 38 cents. Thus we see that while in the case of one buyer and one seller the rate of exchange is arbitrary (between 30 cents and 50 cents), in the case of competition on either side the limits of variation are reduced (between 30 cents and 38 cents, or 38 cents and 50 cents respectively), and in the case of com- petition on both sides, the limits meet, that is, the arbitrari- ness disappears and the rate of exchange is fixed (at 38 cents). 100. Conclusions From the above analysis follow certain important conclusions: (i) Under free competition there can be at a given time and place only a single price for the same commodity. The price of tea must be 38 cents to all; if it were less or more, the pressure of the competing buyers or sellers would at once operate to bring it back to that point. The exceptions to the rule are only seeming. It may happen, for example, that on 236 Market Value [§ 100 an exciting day on the stock exchange, when there are violent fluctuations in the market, the same securities may be sold at the same time in two different groups at different prices. Here, however, there is no perfect competition; there are really two separate markets, the members of which have no direct con- nection with each other. As soon as the excitement dies away and the groups of buyers and sellers coalesce, the market be- comes a unit, competition is again perfect and the price is the same throughout. In the same way a firm may do both a retail and a wholesale business, and sell the same article for different prices; but plainly there are two separate markets. Again, some purchasers have to pay more because their credit is not good; but there is no perfect competition, because the buyers are really offering different things in exchange. Finally, some sellers may ask less because they are ignorant of the market conditions, or may grant lower rates to large purchasers be- cause the transactions are secret. In no instance where there is a perfect competition can there be more than one price for the same thing at the same time. When competition is absent on one side, that is, in the case of monopoly, this principle does not apply. Since the object of the monopolist is to make the greatest possible net profits, it is to his interest to sell each increment of his supply at the highest possible price. If we refer to the example above (p. 231), it will always be to the interest of the monopolist tea-dealer who has a stock of 300 lbs. to sell 100 lbs. to A at a price over 48 cents, and the other 200 lbs. to A and A^ at a price between 45 cents and 48 cents, rather than to sell the 300 lbs. at the lower price. The monopolist will not generally be able to do this, for he may be selling in a market where he must seek to dispose of his whole stock without perfect knowledge as to the conditions of the consumers. Wherever he can, however, he will make different prices to different persons, and if possible will even sell different increments of the supply at different prices to the same person. Thus not only does the Standard § lool Conclusions 237 Oil Company find it profitable to charge different prices for its oil, but the makers of particular brands of soap or choco- late, which give them to that extent a monopoly, are in the habit of putting the same soap or chocolate into different pack- ages and selling them at different prices, in the expectation that different grades of purchasers will be attracted. Under competition this would be impossible. (2) In the case of competition the market price is always the one at which the greatest number of exchanges can be effected. If the price fell below 38 cents, some of the sellers could not dispose of their tea; if the price rose above 38 cents, some of the buyers would be unable to secure tea. In either case some would go unsatisfied. When the determination of the market price is left to a superior authority, as on the Berlin stock exchange, we have a good illustration of the principle. There the bids and offers, in writing, are so adjusted by a com- mittee that although no one pays more or receives less than he intended, some may pay less or receive a higher price for such quantities as are needed to balance the transaction, with the result that some bids or offers which would otherwise have been excluded are finally accepted. In the case of monopoly the principle does not apply. Since the monopolist controls the supply, he may secure a greater net return by selling a smaller quantity at higher prices rather than a larger quantity at lower prices. The exact point at which he can sell the largest quantity at the greatest profit depends on the rapidity with which the scale of demand in- creases as the supply falls off. If the monopolist is in posses- sion of 600 lbs. of tea, the entire stock in the market, whether he sells 600 lbs. for 50 cents or 500 lbs. for 60 cents, will be immaterial to him. But if he finds that by his offering only 500 lbs. the price will rise to 65 cents, he will naturally offer only this quantity, and destroy the other 100 lbs. In the case of competition he would not dare to do this, because his com- petitors would continue to suppjy the market at approximately 238 Market Value [§ loo the old price; and he would be compelled to accept this price for his reduced quantity. Had the Dutch East India Com- pany not possessed a monopoly, it would not have destroyed a part of its stock of spices in order to secure greater profits from the sale of what remained. When some of the misguided Alabama planters burned a part of the cotton crop in 1904 in order to raise the price of the remainder, it was on the assumption that every other planter would burn his proportionate share, — an assumption as rash as it proved to be unfounded. (3) If by demand price we denote the price offered by the buyers, and by supply price the price asked by the sellers, the marginal demand price is the lowest, as the marginal supply price is the highest, price that is actually accepted. The mar- ket price must always be the price where the marginal demand and marginal supply prices meet. The market price is there- fore in cases of competition always the marginal price. In the example given above, the marginal purchaser is A^; the marginal seller is B^. A^'s marginal offer to purchase, i. e., his demand price, is 38 cents; B^'s marginal offer to sell, i. e., his supply price, is 38 cents. If A^ was originally willing to go as high as 39 cents, while B^ was ready to sell at 38 cents, these would not be final marginal figures; for either there would be an A^ not willing to go quite so high and a B'' de- manding a little higher price; or A^ would not give as much as 39 cents for a further increment, and B^ would not be willing to let a further increment go for as little as 38 cents. There would inevitably be some point between ^d> cents and 39 cents where the mutual competition of the A's and B's would meet, and which would mark the marginal offers of A^ and B^ respectively. The difference between the actual marlcet price and the non- marginal offers represents the surplus. In the case of the sellers who get the money, the surplus is called a profit; in the case of the buyers who get the tea, the surplus is a consumer's sur- § loo] Conclusions 239 plus if they drink the tea, or a profit if they sell the tea. B^, who sells the tea for 38 cents, makes no profit. His offer to sell for 38 cents is the marginal offer, because at that point he ceases to have any inducement to exchange. But B'^ would have been willing to take 34 cents, and therefore makes 4 cents a pound profit; B^, whose limit was 31 cents, gains 7 cents; and B with a limit of 30 cents gains 8 cents. On the other hand, A, who buys the tea for 38 cents, would have been willing to go to 50 cents. If he drinks the tea, this difference of 12 cents represents a surplus satisfaction to him; if he was willing to give 50 cents because he knew he could sell it for that, the 12 cents represent his profit. A\ whose limit was 48 cents, secures 10 cents surplus. A- with a limit of 45 cents gets 7 cents surplus, while A•^ whose limit, 38 cents, is equal to the price, enjoys no surplus at all. The marginal buyers and sellers (those who fix the price) thus neither make nor lose; there will be nobody beyond the margin because he would lose; while all those within the mar- gin — the intramarginal buyers and sellers — make a gain, measured either in money or in enjoyment. The gain — whether profit or consumer's surplus — - has, however, no effect on the price. In the case of monopoly there is generally no marginal price, because there is only one seller or one buyer respectively. In the ordinary case of one seller there are indeed many buyers, one of whom makes a marginal offer or demand .price, while the intramarginal buyers gain. But as the seller has control of the supply, there is only one supply price, — no higher or lower supply prices, and therefore no marginal supply price. It is barely conceivable that the relative state of demand and supply is such that the seller is compelled, in order to dispose of anything at all, to reduce his price to a figure so low that even the least anxious purchaser can get what he wants at his own valuation. In such a case the monopolist makes no gain; his supply price would be the marginal demand price. But, 240 Market Value [§ 100 except in this almost impossible case, the monopolist will be able to charge more, and the market price will not be the marginal price. Market price is always the price at which the demand price and the supply price meet each other; in all but the most exceptional cases monopoly market price is not a marginal price. CHAPTER XVI DETERMINATION OF NORMAL VALUE 101. References N. G. Pierson, Principles (1902), part i, chs. i, vii; A. Marshall, Prin- ciples (1910), bk. iv, ch. iii, and bk. v. chs. iv-vii; E. v. Bohm-Bawerk, Positive Theory (189 1), bk. iv, ch. vii, and Karl Marx and the Close of his System (trans, bj^ MacDonald, 1898); J. B. Clark, Essentials of Economic Theory (1907), ch. \ii; F. v. Wieser, Natural Value (1893), bk. v; M. Pantaleoni, Pure Economics (1898), part 2, ch. iii; J. S. Nicholson, Prin- ciples (1901), bk. iii, ch. v; J. E. Cairnes, Leading Principles (1874), part I, ch. iii; T. N. Carver, Distribution (1904), ch. ii; F. A. Fetter, Principles (1915), ch. vii; A. W. Flux, Principles (1904), chs. iv, v; A. T. Hadley,. Economics (1896), ch. iii; H. Sidgwick, Principles (1883), bk. ii, ch. ii; F. W. Taussig, Principles (191 1), chs. xii-xvi; H. G. Kittredge, Utilization of Wastes and By-Products in Twelfth Census, X, 725-748; A. C. Whitaker, History atid Criticism of the Labor Theory of Value in English Political Economy (1904). 102. Normal Demand — Elasticity of Demand In the discussion of market value we studied the process by which the temporary demand and supply balance each other. In the discussion of normal value we must consider the influ- ences which affect the more permanent demand and supply. In our example it was assumed that the temporary demand and supply were such that tea sold for 38 cents. The question now arises, why did tea sell for 38 cents rather than for 3 cents? The study of normal value is the study of normal, demand and of normal supply. Since the demand for a commodity means the quantity desired at a given price, a change in the demand may take place without being caused by any change in the price. When ostrich feathers went out of fashion a few years ago, the de- 16 241 242 Normal Value [§ 102 mand fell off to such an extent that prices went down and pro- duction was curtailed. The supply adjusted itself to the smaller demand at the lower price. The change in demand was, in last analysis, the cause of the change in price. Ordinarily, however, demand is affected by the price. We speak of demand being elastic when a change of price pro- duces a marked alteration of demand, demand falling or ris- ing as the price goes up or down. Every commodity has its own law of demand. There are as many degrees of elasticity of demand as there are variations in human wants and the abihty of men to satisfy these wants. Demand may be relatively inelastic or stiff, either in the sense of being constant or in the sense that it will be completely destroyed by any increase of price. (i) The best example of inelastic demand in the first sense is salt. A fall in price will not induce us to eat more; an in- crease of price will result in almost no falling off in demand. Nevertheless the demand is not completely inelastic, because if the price rises enough the poor may be compelled to curtail its use, even if it involves disease and decimation. Somewhat analogous in this respect to necessities are high-priced luxu- ries. The purchasers of pearls are not quite so likely to be held back by a moderate increase of price as would be the less well-to-do consumers of cheaper commodities. Yet the demand for pearls is relatively inelastic only at one end of the scale; even a slight decrease of price might augment the demand considerably. (2) The other case of inelastic demand may be illustrated by oleomargarine. If the price were to rise beyond a certain point, the demand would be completely destroyed, and it would be replaced by butter. Even here, however, the demand is inelastic only beyond that limit; within it, a decrease of price means an increase of demand. With well-nigh every commodity the demand will be annihilated if the price is forced high enough. § I02] Elasticity of Demand 243 The proper statement, then, is not that demand is quite inelastic, but that every commodity has its own relative degree of elasticity of demand. The demand for some things is far more expansible than for others; a fall in the price of cotton will mean a greater increase in demand than a proportionate fall in the price of books. While utility lies at the foundation of value, some commod- ities can be utilized only in combination with others. A bow is of no use without an arrow; a pen is worthless without ink. The demand for such complementary goods is a composite or joint demand: we want the pen and the ink together, we want neither of them separately; but when we know that we can get the one, we want the other. The demand for either of two complementary goods is thus an indirect or derived de- mand, and the elasticity of a derived demand often differs from that of a direct demand. If the price of both complementary goods rises, the demand for each will normally fall. But if the price of only one of the complementary goods rises, the demand for it will not fall to the same extent. If both ink and pens rise in price, more people will use pencils. But if the price of ink remains the same, the price of pens must rise far higher before the pur- chaser w^ill be driven to accept a substitute. The demand for one of two complementary goods is more inelastic than the demand for a commodity which possesses independent utility. Direct demand is more elastic than the derived demand which flows from the existence of joint demand. In modern life the sphere of joint demand is continually growing. Production is becoming more complex, and the demand for most goods used in production depends more and more on the possibility of combining them with others. Con- sider the numberless things that go to make up a steamship. Some of them possess a direct utiHty for other purposes; but to the extent that their value largely depends on the demand of shipbuilders, most of them may be considered complemen- 244 Normal Value [§ 105 tary goods. The more complex our productive processes and the more refined our methods of consumption, the greater is the sphere of joint demand. The more striking also are the effects which changes in demand for one commodity produce on the demand for others. The demand for bicycles affected the demand for horses; the introduction of the railway revolu- tionized the demand for coaches and for country inns. The demand for any commodity is in one sense dependent upon, or derived from, the demand for other commodities. Whatever the nature of the demand, however, whether direct or complementary, whether stiff or inelastic, as long as there is any permanent demand at all, there will be an effort on the part of society to fill the demand. Inasmuch as all value depends on the relations between demand and supply, it becomes necessary to study the forces which influence the permanent supply. 103. Normal Supply — Cost of Production We have learned above (§ 89), that valuable things may be divided into four classes, namely, human services, con- crete commodities, relations and privileges, and a fund of capital in general. It must be noted, furthermore, that economic goods are also divisible into goods of which the supply cannot be increased, like favored sites of land, waterfalls, old pictures and coins, or unique examples of anything; and, secondly, into reproducible goods. The discussion of market value and the preceding remarks on normal demand apply to all the above classes. In treating of normal supply, however, it is advisable to study first those concrete things which can be dupUcated. The great mass of commodities can be increased in quantity, and the progress of society depends ultima'tely on this increase. We shall there- fore restrict the discussion in this chapter to those reprodu- cible commodities, and reserve for the next chapter the study not only of those concrete goods whose quantity is fixed, but also of the other embodiments of value. § 103] Cost of Production 245 Sometimes a commodity is picked up by chance, as when we stumble across a gem or an unexpected deposit of gold. Clearly, however, we cannot depend on such accidental finds for a permanent supply; as soon as we search for them we are purposely spending time and labor on their acquisition. Since therefore all goods whose quantity is susceptible of increase are acquired (or, in technical language, produced) by efforts, they cost something to produce. In a society which uses money this subjective pain cost is translated into a money cost, or what is ordinarily called the expenses of production. Hence it is usually stated that the normal supply price of commodities — that is, the price at which producers in the long run are willing to sell their supply — depends on cost of production. In making this statement, however, we must be careful to define both branches of the term cost of production. By pro- duction we do not mean particular production; by cost we do not mean individual cost. (i) Cost of production does not necessarily mean the cost of producing the particular commodity in question. The labor expended on a commodity has no necessary influence on its price. A yard of cotton cloth may have cost twenty cents to produce; if through some new invention the same cloth can now be produced for ten cents, the price of the old supply wiE no longer be twenty cents. It is evident, then, that when we speak of cost of production we mean the cost of continuous production or cost of reproduction. If cotton cloth can be duplicated or continuously produced (/. e., reproduced) for ten cents a yard, the supply price will remain ten cents. It is only where the cost is a constant cost, that is, where cost of pro- duction is equivalent to cost of continuous production or re- production, that the supply price depends on the cost of production. When cost of production and cost of reproduction diverge, it is only the latter that affects value. (2) Secondly, cost of production does not mean individual 246 Normal Value [§ 103 cost. Value, as we know, is a social conceplion; the real cost of production which affects value is the socially necessary cost. The important point is not that a commodity costs the producer something, but that it saves the consumer something. It may save one consumer more than another, but its value depends on what it saves the social group as a whole. This saving of social cost is what is meant by socially necessary cost. I may spend much time on something which will have no sale because it does not suit the social demand. The commodity will then of course not be duplicated; there will be no cost of repro- duction. The markets are full of such examples of misdirected labor, which involve the producer in loss. A new shirting, for instance, fails to strike the popular fancy; a new brand of tobacco attracts no notice. If, on the other hand, the product fiUs a social demand, the producers wiU adjust their output and their exertions to this demand. The cost to the individual producer will adjust itself to the socially necessary cost, that is, the amount which the purchasers as a group are willing to give rather than make the article themselves. If the indi- viduals cannot reduce their cost, they will stop producing; if they reduce their cost below this point, the point itself will move. Society will not be willing to give more, because what the producers can do, the rest of society can, if necessary, do. It is in this way that an equivalence is brought about between individual and social cost; and it is only because of this equiv- alence that cost of production may be said to influence value. When therefore we affirm that the normal supply price depends on cost of production, we must remember that we are speaking only of reproducible goods, and that the state- ment is true only in the sense, first, that production means re- production, and, secondly, that cost means socially necessary cost, — not pains (or their money equivalent) taken, but pains saved. When individual and social cost diverge, value does not depend on individual cost of production; when they meet, value may be expressed in terms of either. It is only because § I04] Law of Marginal Cost 247 individual cost tends to adjust itself to the socially necessary cost that we can roughly speak of the price of anything de- pending on its cost of production. 104. Law of Marginal or Maximum Cost The term cost of production must be further defined. When- ever there is more than one producer, there will be different costs of production. Producers differ in ability or in oppor- tunity. While all similar units in the supply sell under com- petitive conditions at the same price, the superior skill of some employers or the more fortuitous combination of other causes enables some to produce more cheaply than others. If the cheaper producer could supply the whole market, he would secure a monopoly. But while all producers seek to sell as much as they can, it only rarely happens that any one can furnish the entire supply. Whenever there is competition, there are different costs of production. It may conceivably happen, indeed, that all the producers at a particular moment are men of precisely the same abilities and subject to the same conditions. In this possible case — ■ which is apt to be true only of newly started industries — there would indeed be only one identical cost for all units of the supply. There could then, however, not be any permanent profits to all the producers, because prices could not permanently re- main above the mere cost of production. If there were profits to all the producers, competition would surely induce one of them to lower the price in the hope of securing larger profits through greater sales; or if he did not do this, some new producer would enter the field and cut prices. The only way in which prices could be permanently kept at the old level would be through some control of the supply. We should, however, then no longer have free competition, but should be in the presence of some form of monopoly. Permanent production at the same cost for all units of the supply almost always involves some form of monopoly. 248 Normal Value [§ 104 since, therefore, there is in case of competition no uniform cost, the question arises, when we speak of prices depending on cost of production, which cost? It can manifestly not be the lowest cost. If at any moment there are live firms supplying the entire market for cotton goods, at a cost to each of six seven, eight, nine and ten cents a yard respectively, it is clear that the price will not be six cents, for all except the six-cent producer would then lose money and stop. Nor can the price be fixed by the average cost of production, as is often carelessly stated. For if the price were the average cost, that is, eight cents, the nine and ten cent producers would lose and withdraw their capital. As long as the demand is large enough to keep all the producers in business, the price must be ten cents, — corresponding to the greatest or maximum cost. It cannot be lower than ten cents, for otherwise the ten-cent producer would step out; it cannot be higher than ten cents, because in their mutual endeavor to capture more of the market the price will be kept down to the lowest point consistent with continuous production. This maximum cost may also be called the marginal cost of production, because the ten-cent producer is just on the margin of withdrawing. He neither makes nor loses. AU the other producers — the intramarginal producers — earn a profit rep- resented by the difJerence between the cost to them and the selling price. The six-cent producer makes four cents on each yard, the seven-cent producer three cents, and so on. But the ten-cent producer only covers expenses. If we could conceive of society at a given moment, with no changes in population or fashion or supply of capital or tech- nique, this condition would be permanent. The marginal producer would just barely make both ends meet, but would earn nothing above his cost. But although society is never permanently in such a state, the condition may at any given period be said to be realized. At every season when goods are thrown on the market the seasonal supply may be deemed § 105] Law of Minimum Cost 249 fixed. The cotton prints that are sold this year were made months ago. According to variations of demand from day to day the market price will change, but the oscillations during this particular season wUl move about a central point of normal price which, so far as the supply for this season is concerned, depends upon the maxinium cost, that is, the cost of producing the most expensive increment in the actual supply. Whatever the daily fluctuations of market price may be, the normal price for this season will be ten cents a yard. At any given period, cost of production means maximum or most expensive cost. 105. Law of Minimum Cost The normal supply price just discussed is, however, not the permanent price for longer periods. Actual business condi- tions are dynamic. There is a continual movement going on in the forces that affect supply. The cotton prints may sell one season at ten cents, but next season the more efficient producer, or perhaps some new-comer with more capital or with better machines or with the chance of securing cheaper labor or with improved facilities for marketing the product, wiU endeavor to put out an increased supply at a lower cost. This increase of supply will tend to depress the price, and although the manufacturer's percentage of profit may be smaller than it would have been at the old price, his aggregate profits will be enhanced through the greater volume of sales. On the other hand, his gains will be at the expense of the less efficient producer at the margin. In every business there are always some who are able just to make both ends meet. Their machinery is antiquated, their capital has been depleted, their business activity and knowledge are no longer what they should be, and their former profits, if there ever were any, have now vanished. They may continue for a time to struggle along, hoping against hope, and may Hve on their capital, being content to bridge over the next few years without profit; or if they have invested heavily in unsalable buildings and machin- 250 Normal Value [§ 105 ery, they may deceive themselves by a fallacious system of bookkeeping, and through a neglect to charge up the item of depreciation of stock or machinery, may figure out a nomi- nal profit. In any case, however, the day of reckoning is sure to come. Sooner or later the producer will find that he is not making money. He will cease producing that particular com- modity, and his place will be taken by some more efficient producer. AU industrial progress consists of a perpetual change at the top and at the bottom of the line of producers. Fresh capital is continually coming in, the discouraged are continually step- ping out. It is plain, then, that if by normal value we mean the value to which prices tend in the long run to conform, normal value under conditions of progress moves in the direction of cost of production under the most favorable, not vuider the least favor- able, conditions. It tends toward lowest cost, not highest cost. In the cotton industry, for instance, a new man enters the field who can produce prints somewhat more cheaply. While not able to supply the entire market, he can turn out such large quantities that the price will fall, let us say, to nine cents. He is willing to sell at that figure, because he expects to dispose not only of his share of the greater sales due to lower prices, but also of a proportion of the goods previously sold by the ten-cent producer, who now drops out. Even if he could sup- ply the whole demand, he will not reduce the price to eight cents, because, although this would again increase his sales, his competitors — the six- and seven-cent producers — will also sell more, and he will not be able to seU enough more to compensate him for the lower price. Under such conditions the price will be nine cents, and, the ten-cent producer having fallen out, the nine-cent producer becomes the marginal man. On the other hand, if the new producer finds that he can produce his goods at a lower price and market them more successfully than his competitors, the price will gradually fall. § io6] Law of Varying Cost 251 With every decrease in price the old marginal producer dis- appears, and he who formerly made a profit now becomes the marginal producer. When a five-cent or a four-cent producer makes his appearance, the price may fall to six cents, and the nine-cent, eight-cent and seven-cent producers successively abandon the struggle, until the six-cent producer now becomes the marginal producer. Thus it is that while the cost of production on which sea- sonal or short-time normal supply price depends is greatest or maximum cost, the cost of production which influences permanent normal value is lowest or minimum cost. In con- ditions of change the marginal or maximum cost does not fix the price, but is fixed by the price; the price does not fall to nine cents because the nine-cent man becomes the marginal producer, but the nine-cent man becomes the marginal pro- ducer because the price falls to nine cents. Hence, while normal value is at any given moment at the point of maximum cost, it is under conditions of progress continually moving in the direction of minimum cost. 106. Elasticity of Supply — The Law of Varying Cost Corresponding to the elasticity of demand, there is an elas- ticity of supply. In some cases where no additional quantity ^ can be secured on any terms the supply may be said to be I completely inelastic. But in most cases the supply is suscep- tible of increase. According to the difficulties involved in procuring this new supply we speak of the relative elasticity of the supply. When an additional amount of exertion will result in a proportionate increase of output, that is, when double the labor will double the supply, we speak of the cost being constant. Constant cost, then, is not the same as uniform cost. When we say that a commodity is produced at uniform cost, we mean that all parts of the supply produced at a given time cost the same. This implies that there is only one producer. For, 252 Normal Value [§ ic6 as we have seen, as soon as there are different producers we have a maximum and a minimum cost. Uniform cost impHes monopoly. On the other hand, when we say that a commod- ity is produced at constant cost, we mean that additional quan- tities will cost the same. This applies to competition and to monopoly alike. If it costs the monopohst ten cents to pro- duce every yard of cotton, no matter how large the output, the cost is both uniform and constant. If the ten-cent producer competes with the six and eight cent producers, and if each can double his output by the apjilication of double the amount of capital, the cost is not uniform, but it is constant. In many cases the cost of production is not constant, be- cause the supply is less expansible or elastic. When each additional increment of the supply costs more than the pre- ceding, we speak of increasing cost or, since the returns from each additional application of energy grow smaller, we can equally well speak of diminishing returns. In one sense everything, as we know (§ 88), is subject to the law of diminishing returns. While, however, the law of dimin- ishing returns or increasing cost is universal in the sense that it applies to all economic goods after a certain point, it does not necessarily apply before that point has been reached. The "certain point" is the point of full utilization. It frequently happens that this point has not been reached. If we recur to the examples on page 213, the omnibus may run only half full; there may be only two trains a day when there might equally well be a dozen; a farmer with a twenty-five-acre tract may have a family so large that he would more than double his produce if he had a fifty-acre farm. In the case of the omnibus an increase of business will not increase the expense at all; in the case of the railroad more rolling stock and employees may be needed, but new bridges, new roadbed, new stations and new general offices may not be required; in the case of the farmer more seed and perhaps more implements will be used, but these may constitute only a minor element of cost. In all these § loyj Law of Joint Cost 253 cases a doubling of receipts may not be attended by a doubling of expense; the expenses will increase, but not so fast as the income. Whenever the supply is more elastic, that is, whenever double the amount of exertion yields more than double the output, we are in the presence of the law of increasing returns or de- creasing cost. When double the exertion just doubles the output, we have the law of constant returns or constant cost. Up to the point of full utilization the returns may at first grow faster than the cost or exertion, and may then keep pace with it. In every business enterprise some expenses grow with every increase of business, but others remain the same up to a given point. Such expenses are called constant as opposed to varia- ble expenses. Whenever the investment of capital is consider- able, the proportion of constant to variable expenses is apt for a time to be large. But the time wUl ultimately expire. When the railroad traffic becomes very dense, new tracks, heavier bridges, larger stations must be provided, and the law of in- creasing returns loses its efficacy. Sooner or later the law of increasing returns will be supplanted by that of constant re- turns, only itself finally to give way to the fundamental law of diminishing returns. At any given period, however, an industry may be subject to any one of the three laws. The question whether a business follows the law of diminishing, constant or increasing cost is a question of fact depending upon the possibility of profitably employing more labor or capital, that is, of successfully extend- ing the point of intensive or extensive utilization. J 07. Law of Joint Cost Just as we have seen that there is a joint demand, so there is a joint supply. To the extent that supply depends on cost, we have the law of joint cost. In many cases different parts of the same commodity serve different uses and therefore sell at different prices: the staterooms in a steamer, the seats in a 2 54 Normal Value [§ 107 theatre, the various portions of an animal used for food, appeal to different classes, and thus sell at varying prices. The nor- mal price does not adjust itself to the cost of the particular part, because there is no such separate cost. It is the 'whole, not the parts, to which we can assign a cost; and this cost is the joint cost. The normal price of all the parts together adjusts itself to the joint cost, but the price of any particular part may be above or below this level. A more important class of cases is represented by industries devoted primarily to the production of some one commodity, but which have as an incidental result the creation of a by- product. Sometimes this by-product is only the refuse, as in the case of the mash sold by the whisky distillers or the coke sold by the gas companies. Occasionally the by-product even develops into the chief product. The refuse of to-day becomes the principal source of profit of to-morrow. There is nothing more fascinating in the annals of science or more im- portant in the progress of wealth than the story of the modern utilization of wastes and by-products. This story, in its appli- cation to the United States during the decade 1890-1900, has been told by Mr. Kittredge in the twelfth census. Whenever a business produces more than one kind of com- modity, we have something analogous to by-products. One of the greatest difiiculties in modern enterprise is for the pro- ducer to assign to each unit or class of his output its propor- tionate share in the joint cost. In the case of railway charges this difficulty is at its maximum. In such cases the price of the individual product may bear little relation to its own cost, although the price of all the products together is fixed by joint cost. The railway charges more for the transport of a given value of silk than for that of an equal value of coal, although the cost is far less. Price here is fixed not by cost of produc- tion or cost of service, but by value of service. The silk is so much more expensive than coal that it can afford to pay a higher charge. If the same price were charged for coal as for § io8] Normal Demand and Supply 255 silk, coal could not be transported at all, as the price would be prohibitive; and as long as the charge for coal is higher than the mere hauUng expenses, the charge for silk is lower than it would otherwise be (see § 237). The principle of value of service is only another way of stating the law of marginal utihty, and it shows clearly that cost of production in itself is not the ultimate regulator of value. In the same way, when domestic manufacturers regularly dispose of a portion of their surplus output by "dumping" it abroad at prices far lower than at home, it does not always follow that the lower foreign prices make the domestic price exorbitant. For the continu- ous foreign sales at the lower price may be the chief means of keeping the factory going, and may thus make the domestic price lower than it would be if the producer had to charge up to his domestic goods the total expenses of a production which would otherwise be unremunerative. Cost of production is coming more and more to mean joint cost; the price of a given product may bear only a remote relation to its individual cost of production. 108. Equilibrium of Normal Demand and Normal Supply In the preceding sections we have several times spoken of normal value depending on cost of production. In reality it is only normal supply price that is directly related to cost of production, while normal demand price depends on the strength of the eflfective demand. It remains, then, to consider the mutual influence of normal demand and normal supply. While the existence of a demand is the fundamental cause of value, the influence of supply shows itself in the fact that the tendency of normal value is to adjust itself to the cost of production, as we have explained the term. A change in the normal demand for reproducible goods means a change in the normal supply; but whether it means a change in normal value depends on the law of cost. If the demand for a com- 256 Normal Value [§ 109 modity increases greatly, the permanent output will be larger. If the industry is subject to the law of constant return, the price will not change, because the larger supply and the larger de- mand will still balance each other at the old price. But if the industry is subject to the law of increasing return, where a larger output involves a relatively smaller cost, the result will be that the producers will be able to throw on the market more than is needed, and the influence of this augmented supply will reduce the price, until there is now a new and permanent equi- librium of demand and supply at the lower price. Since diminution of cost of production is attended by lower prices and larger output, the influence which seems to affect normal value is the change in cost of production. In truth, however, demand is a factor of at least equal im- portance in fixing normal as well as market value. Unless the producers can dispose of their enlarged output, they will have no inducement to continue. If the defnand cannot be changed, the price cannot. But if the demand can be stim- lated by the lower price, the supply wiU be increased until there is a permanent supply at a fixed cost to satisfy the per- manent demand. If the supply changes owing to an altera- tion in cost, there can be a permanent supply at this new cost only if there is a new permanent demand. In every case there can be a normal price only if there is an equilibrium between the normal demand and the normal supply. So that when we say that normal price is fixed by the cost of production, we reaUy mean that it is fixed at the cost of pro- duction. Only in this sense can we speak of normal value de- pending at any given moment on maximum cost, or tending in the long run toward minimum cost, or being influenced in parti- cular cases by joint cost. 109. Influence of Normal Price upon Market Price It is therefore inexact to say that market price depends on demand and supply, while normal price depends on cost of § 109) Normal and Market Price 257 production, if we mean by this that the two statements are opposites. All price depends on demand and supply, but in the case of reproducible goods the permanent equilibrium between demand and supply tends to adjust itself to the cost of production. The rapidity with which this adjust- ment takes place depends on the relative changes that oc- cur in demand and supply. If the stock of cotton prints produced at a cost of twenty cents a yard is large, and if the introduction of the newer ten-cent prints of the same quality is slow, the price will not at once fall to ten cents. 4 There will be a tendency for the price to adjust itself to the new cost, and the greater the relative supply of the new cloth, the more quickly will the price faU. As soon as purchasers know that they can get the same goods cheaper by waiting a short time, only those who cannot aflford to wait will be willing to pay more; and it is their demand which for the time prevents the subsidence of the price to the new cost level. When the new level is reached no further change takes place, the conditions will be static and the normal price permanent. If, on the other hand, the cost of cloth continuously falls owing to the introduction of successive improvements, the normal price wiU itself be changing. The market price will move in the direction of the new cost or normal price, but the fall in cost may be so rapid, and the influence of the old stocks so great, that the actual market price may not at any moment quite reach the normal price. There will be a per- petual chase, but no reaching of the goal of equivalence between the market and the normal price. There will be no permanent equilibrium, because there will be a continual change in the forces affecting the supply and the demand. Under dynamic conditions the normal price of commodi- ties may never emerge, but its influence is none the less marked. 17 258 Normal Value [§ no 110. Normal Monopoly Value The foregoing discussion has proceeded on the assumption of competitive conditions. If by monopoly we mean the usual case of sellers' monopoly, the difference between monopoly and competition lies entirely on the side of supply. Unless there is a change in price, permanent demand will not ordi- narily change simply because competitors are supplanted by a monopolist. But the conditions affecting permanent supply are at once altered by such a transition. In the first place, monopoly supply price is not necessarily a unitary or single price. The monopolist may make great profits by selling different parts of the supply of the same commodity at different prices. The principle here, however, is precisely the same as in the case of monopoly market price, which has been mentioned above (p. 239). There may not be one normal price, but several. Secondly, marginal cost has no influence on price. It may indeed happen that the monopolist controls several factories which work under different advantages so that technically there may be differences in their expense of production. The point, however, is that no force exists tending to fix the price at the point of greatest cost. One cotton factory in the trust may produce prints at five cents, another at ten; in the absence of competition there is no reason why the trust should sell all the goods at ten cents. If monopoly price is not influenced by marginal cost, is it affected by cost at all? Assuredly, but in a more indirect way than competitive price. Monopoly price is always at the point of maximum monopoly revenue. The monopoUst, like every one else, wants to sell the greatest amount at the highest price; the monopolist, however, controls the supply. Since increased supply ordinarily means lower price, he will experiment until he finds the point of greatest net returns. The influence of demand over which he has no control is as no] Normal Monopoly Value 259 potent as in. competition; the law of substitution works liere as there. If by reducing prices one-half he doubles his sales, the gross receipts will be the same as before; if he cannot double his sales, the gross receipts will fall off; if he more than doubles them, his gross receipts will increase. Thus the elasticity of demand is of paramount importance. Since the supply, however, costs something to produce, his net profits will depend on the surplus of gross receipts over cost. This surplus will vary not only with the elasticity of de- mand, but also with the elasticity of supply. In other words, if the industry is subject to the law of constant cost, the maximum monopoly revenue will be reached at an easily ascer- tained price. If he charges less, he would sell more, but not enough more, to compensate him at the lower price for the total cost of the increased output; his gross receipts would not rise as fast as his aggregate cost. On the other hand, if he charged more, the sales would fall off so quickly that the decrease in his gross receipts would not be offset by the lower aggregate cost of the entire output. If, however, the industry is subject to the law of increasing cost (diminishing returns), the maximum monopoly revenue wiU be reached at a higher price; if it is subject to the law of decreasing cost (increasing returns), it will be reached at a lower price. Suppose that the demand is such that the price falls off regularly with the increase of output. Then according to the law of constant cost we should have a table like this: Units Sold A Price per * Unit Grrss Receipts Cost per Unit Total Cost Net Receipts Cents. Cents. - 500 30 $150 10 $50 $100 1000 -5 250 10 100 150 20CO 20 4CO 10 200 200 3000 15 450 ID 300 150 4000 10 4CO ID 400 ~ 26o Normal Value [§ no Thus the monopohst will make the largest profits by putting the price at 20 cents and by selling 2,000 units. But if the law of increasing cost applies, according to the figures in the fourth column, it will pay him to put the price at 25 cents and to sell only 1,000 units. For: Units Sold Price per Unit Gross Receipts Cost per Unit Total Cost Net Receipts 500 1000 2000 3000 4000 Cents. 30 20 IS 10 $150 250 400 450 400 Cents. 10 12 14 16 iS $50 120 2S0 480 720 $100 120 -30 -320 1 On the other hand, if the law of decreasing cost applies, he will find it to his interest to charge only 15 cents and to sell 3,000 units. For: Units Sold Price per Unit Gross Receipts Cost per Unit Total Cost Net Receipts 500 1000 2000 3000 4000 Cents. 30 25 20 15 ID ^150 250 400 400 Cents. 10 8 6 4 2 $50 80 120 120 So ^ICO 170 280 320 In every case, as we see, there is a definite maximum mo- nopoly revenue. Monopoly price is therefore influenced by cost* of produc- tion, but in a different way from competitive price. Whether it is higher than competitive price depends again on cost. Ordinarily it will be higher, because competitive price is cost price (i. e. marginal cost price), while monopoly price is above cost price. Where a monopoly, however, is created by former competitors to avoid some of the wastes of competition, the § no] Normal Monopoly Value 261 cost may be reduced so materially that it will be profitable for the monopolist to sell a largely increased supply at a lower price. In such a case monopoly price may be lower than competitive price. In some cases, again, monopoly price may be only very slightly above competitive price. It frequently happens that what seems to be monopoly is really subject to potential com- petition. As long as the monopolist is content to charge a price low enough to give only moderate profits, he may retain control of the output. But if he raises the price to an exces- sive point he may either tempt other producers into the field or lead the consumer to choose some substitute. This latent or potential competition is a factor to be reckoned with in all cases where the monopohst is not safely intrenched by some legal or permanent economic advantage. Since monopoly profits depend partly on cost, the intelligent monopolist will strive to avail himself of the newest processes to reduce cost. Provided that demand is expansible he will seek to reduce price as long as gross receipts increase faster than aggregate cost; the greater the reduction of cost per unit, the more probable will this result be. Thus under favor- able conditions monopoly price tends to fall, even though at any time it may be above competitive price. The price of oil charged by the Standard Oil Company, for instance, has on the whole fallen, even though the fall in price has not kept pace with the still greater fall in the price of the crude petro- leum. But where the demand is not so expansible as in the case of municipal street railways or the gas supply, or where the monopolist pursues a short-sighted policy, the gap between monopoly and competitive price widens. CHAPTER XVII THE GENERAL LAW OF VALUE 111. References J. B. Clark, Distribution of Wealth (1899), chs. xvii, xxv, xxvi; F. A. Fetter, Principles (i9i5),ch.xxxix; A. Mdishall, Principles (i9io),bk.v, ch. xiv; F. v. Wieser, Natural Value (1893), bk. iii, ch. viii; H. R. Seager, Principles (1913), chs. xvii, xviii; E. S. Meade, Trust Finance (1903), chs. xvi, xvii; E. R. A. SeUgman, Social Aspects of Economic Law, Presidential Address in Am. Econ. Assoc. Publications, 3d series, no. I (1904); H. J. Davenport, Value and Distribution (1908), ch. xxvii; H. Floy, Valuation of Public Utility Properties (1912). 112. Value and Cost of Production In the preceding chapter -wq have dealt with the value of reproducible goods. Value, however, attaches also to non- reproducible concrete goods as well as to relations and privi- leges, to human services and to a fund of capital. How far is the value of these related to the cost of production? It is clear that in the case of concrete non-reproducible goods value stands in no assignable relation to cost of produc- tion. The most prominent example is land. Land is not the result of production. To be sure, if a piece of virgin land lies idle and a town springs up around it, it will soon acquire an increased value; yet neither the land not any of its qualities has been produced by human agency. Efforts may indeed be expended on the soil, and in that sense some of its qualities might be deemed to be in part the result of production, but even here its value stands in no relation to the efforts of the individual. Again, take a piece of old sculpture or furniture. It cannot be reproduced; it may sell for a thousand times the original cost. Finally, consider two equally good pictures by a great painter but finished, the one before and the other after 262 § 112] Cost of Production 263 his attainment of renown. The difference in their value can- not be explained by any difference in cost of production. In short, the value of concrete non-reproducible goods is neither fixed nor measured by cost of production, either because they have never been produced at aU by human agency, or because they cannot be reproduced, or because there is no assignable relation between the effort of the producer and the present price of the product. Whether these goods be rented or sold, their rental as well as their capital value does not depend on cost of production. The value of that class of economic goods known as rela- tions and privileges likewise stands in no direct relation to cost of production. Privileges and relations vary as much in character and value as any other kind of economic goods. They may represent only a single use, like a put or call on the stock exchange, or a continuous series of uses, like a per- petual franchise of a corporation. When they are capitalized, their value, like that of all other goods, is affected by the dura- bility and certainty of enjoyment. A permanent franchise of a railway differs from the limited privilege of a patent; but in the one case as in the other the durability and certainty of the use are independent. of the personality of the possessor. With the good-will of a business, however, the continuance of profit- able relations is often so largely conditioned by the business capacity of the temporary possessor that there is less difference between capital and rental value than in the case of a more permanent or a perpetual privilege. In some instances the trade-mark is the chief asset of a business. The president of the American Chicle Company recently testified that the con- sumers of chewing gum had become so accustomed to certain weU-advertised brands that the company was able to pay divi- dends on a capitalization nine times the amount of tangible assets. Over eighty-eight per cent of the value of the property was due to the trade-mark.^ ^ U. S. Industrial Commission, Final Report, § 612. 264 General Law of Value [§ 113 Whether privileges are durable or ephemeral, it is clear that their value — whether rental or capital value — does not de- pend upon any cost of production. The good-will of a business may indeed in one sense be deemed the result of laborious exertion, but the value of the good-will does not stand in any assignable relation to the exertion. It may exist to-day and disappear to-morrow, without any visible change in the proprietor. Most franchises and privileges, moreover, are not the result of any one's exertion; they are the conse- quences of intricate social relations, and consist of the opportu- nity of turning these relations to profit. Take even so simple a case as that of a news-stand in a city. The owner often rents out the privilege of serving newspapers to a list of customers, and when the stand is sold outright the chief constituent in the price is the value of the "route," — the capitalization of the income from the privilege of serving customers. Yet this route may have cost the original owner nothing to acquire; as the street was built up, the route increased in value, as it were automatically. So also the franchise of a railway, the circulation of a country newspaper, the selling value of a gas or water company grows with the mere process of time and the increase of population. The social relations which form the basis of their activity are not produced by any individual; the privileges of utilizing these relations have no cost of pro- duction. Yet they have a very decided value. It is not necessary to illustrate further. All these things — relations, privileges and non-reproducible concrete goods — are daily bought and sold in the market-place, and yet their valu§ does not directly depend on their cost of production and cannot be measured by it. Since cost of production cannot be the general law of value, what is that ultimate law? 113. Value and Efficiency. We have learned that value is at bottom the expression of marginal utility. It follows that all prices must be studied § 113] Value and Efficiency 265 from the point of view of marginal utility, that is, of the power of marginal increments of supply to satisfy the marginal in- crements of demand. This is only another way of stating that the fundamental explanation of value is marginal effi- ciency, or the capacity of marginal units to satisfy marginal wants. (i) In the case of concrete non-reproducible goods this is patent. When a farmer hires a piece of land, the rent which he pays depends on the produce of that special grade of land as compared with others. When a speculative builder secures a site, the price of the lot is fixed by its capacity, from the point of view of eligibility, to satisfy the wants of a particular class of tenants. Whether he pays a capitalized purchase price or an annual rent, as in England and some parts of America, is immaterial. Again, the value of a painting, old or new, is regulated by its capacity to appeal to the taste of a particular class of amateurs, that is, by its marginal efficiency in contributing to the satisfaction of certain wants. Cost of production, as we have learned, plays no direct role in the determination of value of this entire class of cases. Not cost, but efficiency, is the explanation. (2) With that class of economic goods that we have called relations or privileges the situation is analogous. The rental of the news-stand, the franchise of the gas company, a patent or copyright, a new brand of goods or a trade-mark, — the value of all such intangible relations depends on the extent to which they contribute to the earnings of the business. Their value is conditioned by the marginal efficiency of the services which they render. The cost may have been zero; — not cost, but efficiency, affords the clue. (3) The great mass of concrete reproducible goods has been discussed in the preceding chapter. Here indeed cost of production seems to be of commanding importance. As we have learned, however, it is not so much that prices of such goods are fi.xed by the cost of production as that they 266 General Law of Value [§ 113 are fixed at the cost of production. The value of all produc- tion goods is derived from the value of their products, — the consumption goods; the value of the raw material is derived from the value of the finished product. The price of pig iron depends on the price of the nails, billets and all other iron products into which pig iron enters as a constituent. If the demand for these products should diminish, the price of pig iron would fall, those who produced at a higher cost would stop producing, and the new (marginal) cost of production would adjust itself to the new price. There is an abundance of silver below the surface that is not mined because it will not pay; if the marginal efficiency or value of silver should rise, these more expensive grades would at once be marketed and the new marginal cost of production would adjust itself to the price. The price would not rise because the cost increased; but the higher price would be fixed at the higher cost because that would now be the new point of marginal efficiency. (4) We come, finally, to the value of human services and of the fund of capital. Wages and interest are of such signal importance in the distribution of the social income that their fuller discussion will be reserved until later. It may, however, be said provisionally that they, like everything else, derive their value from the marginal increments of the services which they render, that is, from their marginal efficiency. To the extent that labor is productively employed the rate of wages in each grade of labor must in general tend to equal the mar- ginal efficiency of the labor, that is, its contribution to the product at the margin' of employment. In the same way the rate of interest will tend to equal the marginal efficiency of capital, that is, the actual contribution of the marginal incre- ment of capital employed. How these marginal contributions of both labor and capital are to be measured, and how the changes of actual life move the margin of this efficiency up or down, remain to be considered later. Labor and capital, however, are susceptible of increase. § 113] Value and Efficiency 267 Will they then not increase up to the point of continuous cost of reproduction, and can it not be said that their value is fixed by the cost of production? In the case of labor, if by cost of production we mean the cost of the physical reproduction of the laborers, we encounter the ditificulty that human beings are not reproduced for economic reasons. But even if we restrict our attention to the economic causes of the growth of popula- tion, and aver that the future supply of laborers depends on the cost of reproduction, that is, of bringing them into the world and nourishing them until they become self-supporting, the obvious rejoinder is that this expense is a result rather than a cause, and that what the laborer can afford to spend on his family will depend upon the wages which he receives. It is as in the case of reproducible commodities, where value is fixed at the cost of production, but not by the cost of produc- tion. The contribution or efficiency is the positive cause; the cost of production adjusts itself to this. In the same way, to speak of the cost of production of the mass of capital is ambiguous. Capital as a fund or embodi- ment of value has in one sense no assignable cost. To ask what is the cost of production of a thousand dollars is un- meaning. The thousand dollars may represent the present value of no longer fashionable dress-goods which originally cost fifty thousand dollars, or it may represent the value of a newly discovered petroleum well which cost the finder nothing. In another sense, however, capital has a cost. The mass of capital consists of individual pieces of capital, and the increase of capital depends ultimately, as we shall see, on the readiness to forego present gratifications for future satisfactions. This readiness involves a delay and generally therefore a cost; and interest, as we shall learn, may be explained in terms of this marginal cost. But here again the cost would not be under- gone if it were not for the services to be enjoyed. So that in the end it is the efficiency of the service which is the positive factor. The cost adjusts itself to the service. 268 General Law of Value [§ 114 Thus the great law of value is marginal efficiency. When the economic good is used for productive purposes, marginal efficiency becomes marginal productivity; but when it is used for purposes of consumption, we cannot well speak of pro- ductivity. Not only in the case of wages and interest, but in the case of economic relations and of concrete commodities, reproducible as well as non-reproducible, prices depend on marginal efficiency. In all economic goods except labor, we have to deal with capital values; in all economic goods except the fund of capital we have to deal with rental values: the rental as well as the capital values of all classes of goods de- pend on their marginal efficiency. In some cases marginal efficiency means marginal productivity; within this class again marginal productivity is in some cases equivalent to the cost of production. Cost of production is thus only a partial, and even then a proximate, explanation of value; marginal effi- ciency is the universal and the ultimate explanation. 114. Efficiency and Capitalization Because of this frequent lack of correspondence between value and cost, the problem of the valuation of complex goods often becomes one of extreme difficulty. Where such a good regularly changes hands on the competitive market, the diffi- culty is obviated by the automatic action of the forces of demand and supply; its earning capacity or marginal service- ableness can be gauged with almost unerring accuracy, and there will be a fixed rate of capitalization depending, as we have learned, on the durabihty and certainty of income. A good ex- ample of this equilibration between income and capital value is seen on the stock exchange, where the slightest alteration in present or prospective earnings is at once reflected in a fluctua- tion of the quotations. Even here, however, we must remember that the stock exchange quotes only market values; and that these market values are liable to be affected by all kinds of specu- lative influences not connected with real earning capacity. § 115] Valuation and Taxation 269 In actual life we have to deal with all possible combinations of economic goods. The value of a simple reproducible com- modity may indeed be explained by or referred to the cost of production, because at any given time this cost is adjusted to the price; but the value of a complex product or business may bear only a slight relation to cost. The value of a livery stable differs somewhat from the value of reproducing the horses, carriages, harnesses and buildings; the value of a huge steel plant differs considerably from the cost of the land, the buildings and the machinery; the value of a railroad has still less relation to its cost of production or of reproduction. In such cases we have to do not only with reproducible products, like the concrete articles of steel or the acts of transportation, but with non-reproducible commodities and relations, like the good-will of the firm, the favorable location of the railroad, the ability of the managers, and all the other factors which cannot be duplicated, but which enhance the profitableness and therefore the value of the business. Their selling value is a capitalization of their estimated future uses. The problem of capitalization in its relation to efficiency has become important in three fields, — that of taxation, that of regulation and that of investment. To each of these we must now turn our attention. 115. Valuation and Taxation In taxation the problem presents itself in two forms. The first arises in those countries which still retain the property tax. The difficulty can be illustrated by the taxation of cor- porations. In Europe corporations are assessed on their income, which is ascertained according to fixed rules. In America corporations are, for reasons already mentioned (p. 15), usually assessed on their capital value. How, now, is this to be measured? The corpojate securities are often not dealt in on the stock exchange, and even when there are such dealings, the daily prices may be affected by speculative causes. 270 General Law of Value [§115 The cost of production is of slight assistance, because it can manifestly apply only to the concrete tangible property, and is even there inadequate. It is for this reason that the valuation of the corporate franchise, as the chief intangible element, has become such a burning question in the United States. It is plain, however, from the foregoing discussion, that no final solution of the problem is possible until property assessments are brought into a definite relation with earning capacity. When commodities frequently change hands, as is the case to-day with the mass of concrete goods, real or personal, property is a simpler basis of assessment than income, because the market influences automatically capitalize the income. But when sales are infrequent, as with so many modern cor- porations, income or rental value is the better basis, and the so-called property assessments must ultimately adjust them- selves to the earning capacity. The practical difficulty con- nected with the ascertainment of net earnings has led many States to adopt the system of gross earnings taxation. This is, however, a rough device, which fails to secure justice as among the members of each class; corporate gross earnings tell us as little about relative net earnings as the mere size of a man's business about his profits. It is significant that in the newest attempts to fix the property valuations of railroads, as in Michi- gan, the assessors after computing the selling value of the tangible property estimate the value of the intangible property by capitalizing a certain portion of the income at a given rate. Taxable value is made to depend ultimately on earning capacity, — that is, on marginal efficiency. The other phase of the problem is of broader application. The well-nigh universal source of state and local revenue in America is the general property tax. Ability to pay is deemed to be the fundamental canon of taxation, and a man's ability is measured by his property.- Owing, however, to the growing difficulty of ascertaining all the items of property, certain classes are reached with less accuracy than others, and the tax be- § 115] Valuation and Taxation 271 comes virtually a partial property tax. From this inequality of taxation flow two important consequences. In the first place we have the phenomenon of diffusion of taxation. Where a particular class of property is singled out, the tax will often be shifted from the producer to the consumer, or from the vendor to the purchaser. If a special tax, for instance, is levied on leather, and the conditions of the trade are such that the marginal leather dealer can still remain in business, the tax will be added to the price that the shoemaker has to pay; and under similar conditions the shoemaker will increase the price of shoes to the consumer. The tax is shifted from one class to another until it is diffused throughout the community. If a special tax is levied on houses, and population nevertheless continues to increase, the tax will be shifted from the owner to the tenant, and if the tenant happen to employ the premises for business purposes, the tax will be added to the price of the goods displayed for sale. Furthermore, if these goods are utilized as the materials of some new production, the pro- cess will repeat itself, until the final consumer is reached. If a tax is levied on real estate mortgages, the rate of interest wiU rise by at least the amount of the tax, and the burden will be borne, not, as is often assumed, by the one who lends, but by the one who borrows; and if the borrower happens to be a housebuilder, it wiU be further shifted to the purchaser and again to the tenant, with ulterior consequences analogous to those just described. Through the process of shifting, taxation of the property often turns out to be different from taxation of the property owner. On the other hand, when, instead of dealing with perish- able things like leather or houses, or with a mere right to a sum of money like a mortgage, we deal with more permanent things, like a piece of land or the fund of capital itself, the influence of capitalization makes itself apparent. If a tax of one per cent is imposed on a five per cent hundred-dollar bond selling at par, the net proceeds to the new purchaser will 272 General Law of Value [§ 115 be only four dollars, and the price of the bond will fall to eighty dollars, — four dollars bearing the same proportion to eighty dollars as five to a hundred dollars. There is no reason why people should content themselves with four per cent earnings when the general rate of interest in the untaxed field is five per cent. In the same way, when a special tax is levied on land, its value will be reduced by the capitalization of the tax. The important consideration in each case is the net income, or net rental; and when this is curtailed by the imposition of a tax, the selling value will be reduced in pro- portion. Since the selling value is the capitalization of the rental value, the diminution in the selling price is equivalent to a capitalization of the tax. When a new purchaser buys the bond or the land, he discounts future taxes of the same rate by paying so much less for the property; in other words, he buys himself free of the tax. Just as the tax in the pre- ceding case was shifted, so now the tax is absorbed, — absorbed into a lower selling price. The far-reaching consequence is this: when classes of prop- erty are taxed, the processes of diffusion and of absorption often result in what may be termed the elision or final disap- pearance of the tax. Under the conditions of modern busi- ness enterprise, when people part with their property the tax tends finally to disappear as a permanent burden on the class upon which it is sought to be imposed. It is not necessary, therefore, in order to secure justice in taxation, that all individ- uals or every item of property be taxed. Within each class of property holders every one indeed must be assessed; but as between the classes of property economic forces will bring about a readjustment. The process is often a painful one, and in order to injure the present owners as little as possible great care must be observed in altering existing methods. But the ideal of imposing taxes on property, rather than upon individual property owners, must be constantly kept in mind. The attempt in the United States to assess every person upon § ii6] Valuation and Regulation 273 all his property creates gross injustice, because by our hit-or- miss system some individuals in a given class are assessed and some escape. Those that escape are generally the wealthy; those that are reached are for the most part the ones who cannot afford to pay. The general property tax practically results in a travesty of justice. When we abandon the imprac- ticable attempt to tax all property owners alike, and when, realizing that taxation like value itself is a social phenomenon, we learn to tax some kinds of property rather than aU kinds of individuals, we shall have made a' great stride forward in practical as well as theoretical justice. It is a process which is now slowly going on' in the more advanced industrial com- munities of America. Consciously or unconsciously, it rests upon the conviction that capital or property values depend in last instance on maiginal efficiency or net earnings. 116. Valuation and Regulation Another phase of the problem is seen in the difficulty con- nected with the official regulation of rates charged by railroad, gas or water companies. Where such businesses tend to be- come monopolies the legislator seeks to protect the consumer from exorbitant charges by fixing maximum rates. In justice, however, the criterion of what is fair to the consumer must be affected by what is fair to the producer, for the producer is also entitled to a fair return on his capital. The whole prob- lem thus hinges on the question: what is the relation of the actual capital value of the business to the invested capital? Is the actual value the par value of the securities? Manifestly not, because the stock may have been watered to such an ex- tent that its actual value is only a fraction of the par value. Is it the market value of the securities? Not always. For the market value of the bonds depends not only on the rate of interest, but also on the period for which they have to run. If a four per cent bond sells at par, a six per cent bond of the same corporation and of the same security would normally sell 18 274 General Law of Value [§ ii6 around 150. But if the four per cent security is a long-time bond, and the six per cent a short-time bond, the difference will be far less. Furthermore, even if they are both fifty year bonds but emitted at different periods, and if the six per cent bond matures in a few years, the premium will rapidly de- cline with each ensuing year until it finally disappears. The market value of the bonds hence depends largely upon the conditions of repayment, and is to this extent divorced from the value of the corporate property as such. Moreover, if we take stocks instead of bonds, we find that the value of the cor- porate property cannot be strictly measured by the market value of the shares, because this market value is subject to violent oscillations on the stock exchange. The market value of the shares of the Third Avenue Street Railway Company in New York fluctuated a few years ago over one hundred per cent in the same year. On what basis could the real value have been computed? Finally it may be asked: is the actual capital value of the corporations to be measured by the cost of production or of re- production (or, as it is sometimes termed, the cost of replace- ment)? Here, again, the answer is, not entirely. For this method would take no account of the franchises, acquired re- lations and general business conditions which have developed, and for the creation of which the corporation may or may not be responsible. A railway running through a frontier com- munity may cost in stretches as little as fifteen thousand dol- lars a mile to build; after the lapse of twenty years, the cost of reproduction as measured by double tracking, better road- bed, new stations, bridges, equipment and increased value of the land may be perhaps thirty thousand dollars a mile. Yet a capitalization of the actual earning capacity might result in at least double that sum. To declare the entire difference to be "water," and to adjust rates so that the old stockholder should not profit by the building up of the country, or so that the new purchaser who has invested in good faith should have his § 117] Valuation and Investment 275 income cut in half would manifestly be unjust. A corporation, like an individual, is entitled to participate in the advantages of general prosperity. The Supreme Court of the United States has recognized the truth that not one, but all of these factors must be taken into consideration.^ The ultimate test of fair capital value depends on a comparison of the earnings of the enterprise in question with those of well-managed and reputedly not overcapitalized undertakings of a similar character. 117. Valuation and Investment The third difficulty connected with valuation and capitaliza- tion is seen in the flotation of securities at the time of the organi- zation or reorganization of great business enterprises. In former years the chief example was that of railroads. While the early, small railroads were largely built on the proceeds of money actually invested by the shareholders, it was not long before the doubtful success of the more elaborate enterprises in newer sections led to the issue of mortgage bonds, often below par, while the stock was sold at an insignificant price or even pre- sented to the shareholders, in order to make a better market for the bonds. In the same way, when railways were amalga- mated or reorganized, the issue of new stock often exceeded the aggregate of the old, the excess representing the capitalization of the increased earnings which it was expected would result from the combination. In these two cases the issue of stock might be economically justifiable either as the sole practicable method of securing capital for a new and doubtful enterprise, or as the best means of reducing prospective earnings to a ^ Smyth V. Ames, 169 U. S. 466 (1898). " In estimating the value of a railroad, the following points must be considered : The original cost of construction, the amount expended in permanent improvement, the amount and market value of the bonds and stock, the present as com- pared with the original cost of construction, the probable earning capacity of the property, and the. sum required to meet operating expenses." 276 General Law of Value [§ 117 present basis. In the one case the stock presented or sold at a discount represents the present worth of an insecure and speculative future; in the other case the stock is the capitaliza- tion of a future income, just as the issue of securities for doub- ling the track is legitimate only when the traffic is expected to be so heavy as to increase the income at least to the point of earning a return on the new capital. In all such cases we cannot properly speak of overcapitalization or stock-watering. Unfortunately, however, there is always the danger that the anticipations may be mistaken, or that the calculations may be designedly falsified in order to enable the manipulators to dispose of stock whose worthlessness they suspect or know. Finally, when it seems desirable, for the purpose of evading legislative restrictions or of placating public opinion, to keep down the dividend rate, the amount of stock may be augmented by the device of scrip dividends or an increase of the nominal amount of the securities in the hands of the shareholders. In all such cases we have to deal with stock-watering pure and simple, — that is, the creation of additional securities which do not represent additional earning capacity. Since the formation of the modern industrial combinations known as trusts, this aspect of capitalization has assumed still greater importance. The chief danger of the situation con- sists in the facility afforded to unscrupulous promoters to finance the organization of the combination in such a way as to deceive the investors and to reserve the greatest profit for themselves, by selling the inflated securities at prices wholly unjustified by prospective earnings. The mere fact that the united capital of a combination exceeds the aggregate capital of the constituent companies does not prove the existence of overcapitalization; for if the new enterprise is honestly financed and well managed, the very fact of union may so enhance the earning capacity of the whole as to justify this capitalized antici- pation of estimated profits. The distinction between economic and uneconomic finance or between actual value and water in § 117] Valuation and Investment 277 the investment of capital is the distinction not only between honesty and dishonesty but between intelligence and stupidity. While stupidity will always avenge itself on the stupid, the burden of dishonesty is likely to be borne by the innocent victim. When the loophole of competition is left open, the victim is not the consumer but the unwary investor; when competition is stifled, the loss may fall on either or both. The modern demand that government should at least insure publicity of accounts and a reasonable correspondence between the prospectus and the actual facts in organizing vast enter- prises is a natural result of the dangers of overcapitalization. Book II A \ Value and Production CHAPTER XVIII CHARACTER AND FACTORS OF PRODUCTION 118. References A. Marshall, Principles (1910), bk. iv, ch. i; W. Smart, Distribution of Income (1899), bk. i, ch. v; F. A. Fetter, Principles (1915), chs. ix, x; J. S. Nicholson, Principles (1893-1901), bk. i. ch. ii; J. A. Hobson, Economics of Distribution (1900), ch. vi; H. Sidgwick, Principles (1883), bk. i, chs. i, iv; F. A. Walker, Political Economy (1888), part 2, ch. iv. 119. Production: Its Meaning and Relation to Consumption All wealth may be regarded from the point of view of the producer or of the consumer. Commodities in the hands of the consumer and destined to immediate consumption are sometimes called consumers' goods, while those forms of wealth reserved for the purpose of increasing the stock of consumable commodities are called producers' goods. Be- cause the latter serve as instruments of production, they are sometimes called instrumental goods. Production and consumption clearly refer only to utilities. Man can create nothing material; he can only impart motion to particles of matter and so rearrange them that in their new form they will gratify some desire. So also he can destroy nothing material, for matter is indestructible; he can only so rearrange the position of the particles as to put an end to their utility in that particular form. Production and consump- 278 § iig] Relation to Consumption 279 tion thus mean the creation and destruction, not of matter, but of utiUties through the movement of matter. From a certain point of view production and consumption are two sides of the same thing. All wealth is sooner or later destroyed in the sense that the utilities embodied in the particular commodity finally come to an end. Every new arrangement of matter by man ultimately involves an act of consumption, partial or complete. We cannot produce any- thing without consuming something, — either commodities or energy, which is itself in last resort maintained by commodi- ties. We can make steam only by using coal; we can produce goods only by wearing out the tool or machine. Not only does production involve consumption, but consumption might be said to involve production. Production is the creation of utilities. Commodities are consumed because they satisfy some want, and in satisfying this want they impart utility. So that all consumption short of wanton or accidental destruction would seem to imply production, because it indirectly yields utilities. Consumption would then involve production, just as production involves consumption. The distinction, however, is none the less real, even though difl&cult to draw in special cases. The criterion of production is nvot the imparting of a utility, but the creation of a new utiUty. It is only when an action brings about an addition to the existing sum of utilities, when, in other words, there is a resulting surplus of utility, that we have an act of production. When a railroad company buys coal and converts it into loco- motive power, there is an act of production, because, notwith- standing the consumption of the coal, the utilities afforded by the steam replace those afforded by the coal together with an addition. There is more wealth than before. On t)ie other hand, the food which a man consumes, although it serves to keep up his strength, imparts to him certain personal quali- ties which, as we know, are not wealth. They may help him to produce wealth in the future, but do not in themselves 28o Production [§ 119 constitute wealth. The consumption of coal by an engine and of food by a laborer are therefore not on a par; the one is an act of production, the other an act of consumption. In the one man produces wealth; in the other wealth produces man. Production and consumption are as opposed as wealth and man. Since wealth and man are mutually interdependent, produc- tion and consumption are closely related. In a well-ordered community the object of consurnption is more production of wealth and ultimate welfare. Consumption, however, does not necessarily lead to this result. A glutton who wastes his life in riotous living decreases his power of serving others. Thus, while consumption may be productive in the sense that it creates the conditions of a future production, consumption differs from production. Wise consumption indeed leads to more production: only in this sense are they two aspects of the same thing. The whole economic process is a flow of utilities from nature to man, and back from man to nature. It is important to remember, moreover, that the utihties which constitute wealth are not necessarily embodied in tan- gible objects. Production is not limited to the creation of physical commodities. The older economists maintained that the labor of servants, actors and the professional classes in general was unproductive, because not incorporated in visible objects. So other writers, like Carey, have urged that the trader is unproductive; and still others, like the Physiocrats, have contended that only the farmer is really productive. To those who understand that human wants are satisfied by utili- ties, irrespective of the source whence they flow, it is clear -iliai_ all labor which engenders such utilities is productive. Labor is unproductive only when its efforts are wasted. If I write a book which is read, or make a table which is used, my labor is productive; if the book is a failure, or the table use- less, my labor is unproductive. The trader, the lawyer, the doctor, the artist, are no less productive than the workman, § i2o] Kinds of Production 281 the farmer or the manufacturer, provided they accomplish something that society wants. The test is the creation of new utiUties or values. The utilities of which we speak are, again, not necessarily direct utiHties. The making of electric lights is the creation of direct utilities; the erection of a successful school devoted to the study of electricity is the creation of indirect utilities, because it will ultimately result in better and cheaper lights. In the one case we are producing commodities, in the other productive forces; in both cases we are contributing to the production of wealth. In the same way the sums expended by a government for its army and navy may be productive in the highest sense if, as sometimes happens, they really contribute toward the protection or furtherance of the national industry or of the^ national existence which makes industry possible. If they do not do this, they are unproductive, but only in the sense that any unnecessary or wasted effort is unproductive. Intangible products, like culture and taste, are often extremely important to individual and state alike, and when they rest on a broad basis of tangible wealth they are the distinguishing mark of a high civilization. 120. Kinds of Production Production of wealth thus means the creation of new utili- ties. The utilities that can be added to things are of three kinds, — material, place and time utilities. A material utility '• can be created by an alteration in any property of matter; a change in the form, shape, weight, color, taste, smell or any other quality of a thing which increases its capacity to satisfy human wants is the creation of a new material utility. Utility can, however, also be enhanced by a change of place. A thing in one place may be worth more than in another. If the wheat were allowed to remain on the Western plains, its utility would * Some writers speak of this as a form utility. It is dear, ho\ve\er, that form is not the only quality susceptible of change. 282 Production [§ 120 be greatly circumscribed; instead of satisfying the wants of millions, it would be consumed only by thousands. Finally, utilities can be augmented by a mere change in time. The alteration may take place in the supply: old coins, fine statues, rare prints and the like improve in desirability through the mere lapse of time; forests, flocks and the like increase in quantity. More frequently, however, the alteration occurs in the demand: things may be more useful at one period than at another. The efforts expended in holding the commodity until it can be of the most effective service involve the creation of time utilities. All wants are satisfied, if at all, at a given time and place. The creation of time and place utilities is as truly productive of wealth as the creation of elementary material utilities. In each case we enhance the capacity to gratify desires. Trade and transportation, which deal with place utilities, as well as specula- tion and insurance, which deals with time utilities, are no less pro- ductive than the activity expended in creating material utilities. It is for this reason that the subject of exchange is properly to be regarded as a part of production. It is for the same reason that it is impossible to classify different kinds of activity as in themselves more or less productive or non-productive. The causes which condition the law of comparative costs vary from time to time and from place to place. Where land is cheap, agriculture may be more productive than industry; where geographical conditions are favorable, commerce may be more productive than either. To raise oranges in the Arizona desert would be as unproductive as to put a steel plant in the wheat- fields of Kansas; yet when the Arizona desert is made to bloom by irrigation, or when Kansas becomes the home of a teeming population, oranges and steel may become the most productive of enterprises. The same considerations apply to the productivity of efforts embodied in immaterial wealth. For Oklahoma to build a magnificent art gallery would be clearly wasteful; for New York to spend large sums on music and art may be highly productive, even regarded from the narrow point i2i] Factors of Production 283 of view of increasing the capacity of the artisan to create more artistic and therefore more valuable products. A high-priced ichool-teacher would be as unproductive at the country cross- roads as a piano factory in Alaska. Productivity depends on the ratio of efforts to needs; with changing needs the same efforts wiU mean an altered productivity. 121. Factors of Production Since the foundations of economic life are nature and man, the primary factors of production must be natural forces and human effort. Sometimes natural forces alone suffice, — as in the case of the spontaneous increase of a herd of cattle; sometimes human effort sufi&ces, as in the case of the rendering of a personal service; ordinarily production involves the co- operation of the two. This is sometimes expressed by the statement that the factors of production are labor and land, — a not entirely accurate statement, because land is only one of the natural elements that come into consideration. Water, light, heat, electricity, moisture and the like also play a role in production, and frequently constitute economic goods with a definite exchange value. Again, since the apphcation of labor to natural elements results in material objects, which are then further utilized in production, these are often spoken of as capital, and the factors of production are declared to be land, labor and capital. Capital would then be differentiated from land in that capital is itself an artificial product, while land in the wider sense is a gift of nature. The question whether land should be sharply separated from capital may be left for later consideration (§132). It may, however, be stated here that the controversy is largely one of words, depending on the sense in which capital is used. If by capital we mean a concrete commodity, the joint product of labor and nature, land is to be differentiated from capital. If, on the other hand, by capital we mean wealth as a fund, land is a part of capital, since it has a capital value. Even, 284 Production [§ 121 however, if we consider land as a part of capital, it is so im- portant a part that it may for many purposes be put in a category by itself. Again, since the labor of directing or managing enterprises has become so significant, we might distinguish between laboi in general and the skill or ability to conduct a business. The factors of production would then be land, labor, capital and management or enterprise. This classification, however, is not entirely free from objection. If a shoemaker works for another, his activity would be called labor; if he works for himself, it would be called enterprise. If a factory owner manages his own plant, it would be enterprise; if he sells it to a trust and assumes the management as a paid official, the same activity is called labor. Manifestly this overlooks the fact that there are all kinds or gradations of labor, from ordinary unskilled work to the exercise of the highest business talent. It is clear, from the examples just given, that the distinction is impor- tant rather from the point of view of distribution than from that of production. If the income from labor is a stipu- lated one, it is wages, whether it applies to a day laborer or to a railway president; if the income is a contingent one it is profits. If a man uses his own unaided labor, he can earn wages; if he combines his labor with capital in a business en- terprise or if he employs other people's labor, he undergoes risks and his income is uncertain. The hired or salaried man always gets a part of the product, the independent entrepreneur; may lose money instead of making it. The law of profits is different, as we shall see, from the law of wages. From the point of view of production, however, enterprise is a species of labor. Finally, it must not be forgotten that in civilized society production is carried on amid an environment moulded by legal, political and social relations. All these may in a sense be declared necessary to production; but as they are in theory at least applicable to all alike, they are not to be included § 122] Production and the Producer 285 among the economic factors of production any more than is the air which is free to all. Even where these relations in the shape of special laws or privileges favor some producers or classes, they are properly to be put under the head of oppor- tunity to utilize labor and capital rather than under that of the primary factors of production. Summing up, we may say that the factors of production are In one sense labor and capital; in another sense land, labor and capital, and in still a third sense land, labor, capital and enterprise. In any sense the factors of production are human pnergy and natural forces, together with their joint product, capital, which may again be embodied in land or other ele- ments of nature. 122. Production and the Producer Whatever classification of the agents of production may be adopted, one vital distinction must be observed. In the case of the non-human factors of production, whether they consist of natural forces or the results of the application of labor to nature, we have to deal with inanimate objects and phenomena. The laws of their increase can be considered without refer- ence to any but the technical consequences to the things themselves. Where changes, for instance, take place in the productivity of concrete things, the social results — that is, the influence on classes of human beings — ■ may indeed be pro- found, but the objects in themselves still remain inert masses, and the laws which control their earnings are irrespective of the particular individuals, that happen to own them. When the machine is useless, we throw it aside; when the land is worn out, we leave it. On the other hand, when we deal with human energy, we cannot dissociate it from the individual who e.xerts the energy. This does not mean that the laws of production are less verifiable here than in the case of inanimate objects. For the personal equation or difference between individuals presents no more 286 Production [§ 122 diflSculties in analj^sis ihan do the differences between things. The distinction is to be sought rather in the fact that in the one case we deal only with the means and in the other with both the means and the end. Human energy, like in- animate objects and forces, forms the tools by which wealth is secured; man alone represents the end for which wealth is secured. Hence in dealing with the problems of production through human agencies we cannot eliminate the consideration of the producer as at the same time a consumer. This has a; double aspect. In the first place it admonishes us that the process of pro- duction is social, and that all production ultimately involves consumption. Any system of production, therefore, which i systematically neglects the consuming powers of the producer must in the end defeat itself. The methods of production may conform to all the approved technical rules, and each industry may seem to be flourishing from the point of view of output, yet none the less the general condition of business may be far from satisfactory owing to the lack of an adequate demand. In former times, where production was relatively slight, as in the middle ages, or where it was largely based upon unpaid human labor, as in antiquity, it was the luxuries of the few rather than the wants of the many that constituted the bulk of the demand. In modern times, on the other hand, where human energy is untrammelled and the play of competition tends to become ever more free, the effective demand comes from the wants of the many. If we stunt this demand, we withdraw the chief stimulus to wealth creation. The human beings may be mag- nificent productive instruments, but if there is no market for their products their potential energy is not converted into actual results. The more democratic the people, the more intimate is the dependence of the productive power of the community upon the consuming capacity of the masses. Secondly, we must be careful to take the broad view of the economic process. As we have seen, the real concern of 5 122] Production and Producer 287 jconomic inquiry is not wealth in itself, but wealth in its rela- :ion to man, or, still better, man in relation to wealth. A system of production which, however successful in other re- spects, relegates the human factor to the same level as the external object, is uneconomic in the broad sense, because, nstead of subordinating wealth to man, it sacrifices man to i^realth. A production of wealth which is based upon disre- gard of the human rights of the producer is no more truly conomic than is the defrauding of one party to a bargain 3y the other. There are certain kinds of so-called produc- ;ion which in the highest economic sense no civilized country :an afford to retain. Slavery at one time nominally enriched intiquity, but it brutalized the slave and enervated the slave- lolder, until it dried up the sources of production itself. 3hild labor at the beginning of the nineteenth century helped ;o swell the profits of the English factory owner, but was fast ncapacitating the population, physically as well as mentally md morally. If the Devil must be a partner in our cotton actories, said Carlyle, we cannot afford to have the cotton iactories. And in saying this he uttered a truth which was 10 less important in its economic than in its moral aspects. CHAPTER XIX LABOR 123. References F. A. Walker, The Wages Question {iS-jdi), chs. ii-iv, and Political Econ- omy (1888), part 2, ch. ii; A. Philip, The Function of Labor in the Pro- duction of Wealth (iSgo); A. Marshall, Principles (1910), bk. iv, chs. v, vi; J. S. Nicholson, Principles (1893), bk. i, chs. v, vii; F. A. Fetter, Principles (191 5), part 3; R. Mayo-Smith, Statistics and Economics (1899), ch. iii; K. Marx, Capital (trans, by Aveling, 1887), chs. xiii-xiv; W. S. Jevons, Theory (191 1), ch. v; J. A. Hobson, Evolution of Modern Capitalism (191 2), ch. x; Lord Leverhulme, The Six Hours Day (1919); S. and B. Webb, Industrial Democracy (1904), part 2, ch. vi; L. Brentano (trans, by Arnold), Hours and Wages in Relation to Pro- duction (1894); J. Schoenhof, The Economy of High Wages (1892); E. S. Meade, Trust Finance (1903), ch. iv; Thirteenth Annual Report of the Commissioner of Labor on Hand and Machine Labor (1899); U. S. Twelfth Census, VII, Manufactures, part i; F. W. Taussig, Principles (1911), ch. iii. 124. Meaning of Labor By labor is meant the putting forth of human exertion. The attempt to divide it into the categories of physical and mental labor is not strictly accurate. The labor of even the most uhm skilled workman calls for the exercise of certain mental quali-i ties, like attention, memory and prudence; while on the other hand the intellectual effort of the great captain of industry is associated with the expenditure of a certain amount of waste i of tissue. From the lowest to the highest is a difference in de- gree. Ordinary day laborers disclose almost endless varieties oli ability, skill and technical efficiency, the result of the education of hand and brain; among the employers the differences iri capacity and energy are no less marked. Labor runs through the whole gamut, from worthlessness to highest efficiency, frorr the mere mechanical repetition of the simplest act to the 288 ' § 125] Cost of Labor 289 planning of the most subtle and elaborate business scheme or intellectual result. Under present social conditions we distinguish between laborers and capitalists, between workmen and employers. As a rough classification available for many practical purposes, this is defensible. From the point of view of production, how- ever, it is not wholly adequate. Labor is undoubtedly different from capital, but the owner of capital may also labor. The employer is not the same as the employee, but he may work as hard and his contribution to the value of the product may be even more important. It is hence a fateful error to con- fine the term labor, as virtually do the socialists, to manual labor, and to maintain that all wealth is created by labor, with the implication that all other shares in distribution are a de- falcation from wages and therefore a robbery of the workman. Entirely apart from the fact that there are other factors of pro- duction, the contention overlooks the labor of organization and enterprise, of correlating the scattered elements of produc- tion and of adjusting the supply to the varied demands of a complex market. Such labor has become under prevalent conditions of even greater value to society than the mere manipulation of the tools. A modern railway president or head of a great industrial trust often receives a salary equal to that of several hundred of his workmen, and larger than that of the President of the United States. The work may not be so irksome as that of the day laborer, but it may be worth far more to society, because its contribution to the product is so much greater. The real value of labor depends not upon the conditions of employment but upon the results of activity. 125. Cost of Labor Economic production implies the turning out of the greatest product with the least cost. So far as the wages of labor form an element of cost, it would seem to follow that low wages or cheap labor is a necessary condition of low cost. Before ac- 19 290 Labor [§ 125 cepting this ostensibly self-evident proposition, however, it is necessary to pursue the analysis further. In the first place, we must draw a distinction between the individual and the social point of view. Even if it were true that in a particular industry low wages denoted low cost, it would not follow that it is also true from the point of view of society. Since production is conditioned by consumption, there can be no permanent increase in output without an in- crease in demand. The effective demand, however, depends upon the income of the consumers. In any community the great mass of the consumers consists of the laborers. The lower the level of wages, therefore, the more restricted will be the total demand for the national products in general and the slighter the chance of reducing cost by expanding the market. Low wages which mean low cost in some industries may thus indirectly prevent a reduction of cost in other industries. Where a particular set of industries is manufacturing almost wholly for the foreign market, the effect may not be so obvious; but since, as in all international trade, imports must ultimately pay for exports, the volume of the foreign trade finally depends on the capacity of the domestic consumer to utilize what is brought in. Thus even the prosperity of the export industries may be purchased at the expense of the other branches of pro- duction. Irrespective of the general question of the social desirability of high wages for the laborer himself, it is clear therefore that when we regard public wealth in general, low wages do not necessarily mean low cost. The low cost in some industries may be outweighed by the higher cost due to the lack of consumption or restricted market in other industries. In the second place, in any single industry low wages do not necessarily mean low cost. The real cost of labor is to be measured by its productive efficiency. Just as the hundred- thousand-dollar railway president is cheap because an inferior and low-priced substitute would botch matters and increase ^ 125] Cost of Labor 291 expenses, so in the case of the ordinary wage-earner the real lost is to be measured by the ratio of wages to the product of labor. In the Phihppines the contractors iind it in the end cheaper to hire the Chinamen in preference to the natives, al- though the former command larger wages; in the Southern cotton factories the white laborer is found more advantageous than the negro factory hand, who can be hired at a materially lower wage. Furthermore, in the same industry and with the same workmen neither an increase of wages nor a curtailment uf labor time necessarily augments cost. Where a reduction of ' hours or an increase of wages succeeds in enhancing energy, care and sobriety, the output may be greater than before. Es- pecially where fine machinery is used and a high grade of iateUigence is required to secure the best results, we often find a true economy in high wages and a lower cost in shorter hours. The relatively cheapest goods which are produced in the United States and which successfully compete in foreign markets with the products of low-priced labor are certain iron and steel manu- factures, boots and shoes, clocks and the like, where the wage- scale is notoriously the highest. Of course it does not follow that every increase of wages or reduction of hours will lower cost. There is at every period and in every industry a limit beyond which the increase of efiiciency will be overtaken by the greater outlay, and it ic quite possible that there may be no increased efficiency at all. In such cases higher wages do indeed mean greater cost. The mere fact, however, that goods sell at low prices tells us noth- ing as to the comparative rate of wages in that industry. The cheapness of so-called white goods in a department store may be due to the low-priced labor in the sweat-shops; the cheapness of a Waltham watch may be compatible with the very highest wage-scale. So far as labor is a factor of production, cost de- pends not merely upon wages, but upon wages as compared with output. Under certain conditions there is a true economy in high wages; the more a workman is paid, the less he may cost. 292 Labor [§ 126 126. Efficiency of Labor Since the ultimate factor in the relation between labor and cost is productive efficiency, the problem of increasing the efficiency of labor is of paramount importance. The older economists were fond of emphasizing the dependence of the demand for labor upon capital. While their analysis was in many respects valuable, they overlooked the independent power of labor to contribute to its own uplifting through an increase of efficiency. It is precisely here that the economic effects of education and leisure as well as of social and political progress mean so much to the community. In the commercial warfare that is being waged between nations to-day, education is recog- nized as a potent weapon. In the United States the old-time prejudice against the college-trained business man has given way to the recognition of his superiority; technical and com- mercial schools of all grades are being multiplied, and even the primary and secondary institutions are adapting their curricula more successfully to the needs of the ordinary man. The gist of the negro problem in the South is seen by all care- ful thinkers to consist in the increase of productive efficiency through an appropriate education of the negro. The hope for the Filipino is to be found in the possibility of training him to habits of orderly and consecutive work. With him, as with the laborer at home, the significance of a higher standard of life — which is only another way of stating the basis of greater productivity — is to be found not only in the domain of dis- tribution and consumption but in that of production. The finer the tool, the greater will be the product; when the tool consists of human energy, we have not only a greater product, but a greater capacity in the human being to utilize the product. The short-sighted employer to-day is concerned only in secur- ing the ostensibly cheapest workman and in driving him to the utmost; the long-sighted employer finds it profitable not only to pay fair wages for moderate hours, but to surround his workmen § 127] Advantages of Division 293 by an environment of cleanliness, comfort and attractiveness, with provision for rest, recreation and education. No one who attended the St. Louis Exposition in 1904 could have failed to be struck by the exhibits of the Westinghouse Company of Pittsburg and of the National Cash Register Company of Day- ton, with the remarkable arrangements for the welfare of their workpeople. Yet it can scarcely be doubted that it is "good business" on the part of the employers, and that all these seem- ingly needless and sentimental expenditures really involve a lowering of cost of production through enhanced efi&ciency of labor. We thus see the close interrelation between production and civilization. Not only is a lowering of cost the basic condition of increasing wealth and progress, but the physical, moral and intellectual advance of society inevitably reacts upon the indi- vidual and renders him a more capable and efl&cient agent of production. State and church, science and art, have their deep economic significance. Progress is at once a result and a cause. The true reduction of labor cost of permanent im- portance is that caused by increased efficiency. The more of a man a laborer is, the better tool he becomes. Whatever society does to improve the individual will be more than re- paid by an augmented production of wealth. 127. Nature and Advantages of Division of Labor In the progress of efficiency perhaps the greatest factor has been the principle of specialization or division of labor. In its deepest aspects it is one side of the biological law discovered by von Baer and elaborated by Herbert Spencer, — Athc growth of all life from uniformity to multiformity, from an incoherent homogeneity to a coherent heterogeneity. \ From the economic point of view division of labor may be put into four categories, — the social, the industrial, the technical and the territorial division of labor. (i) The earliest illustration of the social division of labor 294 Labor [§ 127 is the differentiation of economic function between man and woman. In aboriginal society certain kinds of work were assigned exclusively to the female. We have seen the influ- ence of women's work upon the evolution of the later economic stages. Even to-day, when all careers are open to women, there is. a natural tendency for female labor to concentrate itself in those groups where women possess a peculiar efficiency and where there is the least possible competition with men. Apart from sex cleavage the earliest example of differentiation of function was through the formation of social classes. At first every one had to fight to secure his food and fight to retain what he had secured. The separation of a permanent mili- tary class from the industrial group was a great step in the efficiency of each; it is not yet found in even so comparatively developed a society as that of the American Indian. The development of a priestly class, again, although of chief impor- tance from the social and religious point of view, had a note- worthy economic effect in that it permitted the industrial class to devote itself more unremittingly to the daily tasks of produc- tion without giving so much of its time to the independent propitiation of the malevolent spirits. The priests were in truth a labor-saving device. It took ages for the originally homogeneous industrial group to split up into great classes. Even after centuries of prog- ress the husbandman's family not only worked up the raw material into roughly finished products, but exchanged super- fluities with their neighbors. The cultivator was a handicrafts- man and a trader, as he is still in part to-day on the American frontier. An independent class of traders was slowly differ- entiated, and with the originaUy greater importance of extra- tribal commerce the traders were usually the aristocrats. It is only where economic conditions were inimical to commerce and engendered the predominance of a land-owning aristoc- racy as in some of the feudal states of mediaeval Europe and Japan, that we find a contemptuous attitude toward trade, and § 127] Advantages of Division 295 especially toward the small trader, who was often at the same time a petty craftsman. Finally, the artisans are separated from both farmers and traders, and we notice the development of the industrial class in the narrower sense of the term, as distinguished from the agricultural and commercial classes. With every step in the progress of society we have a further division of labor within each class until we reach the modern bewildering complexity of occupations and professions. (2) Just as the social division of labor has denoted increased efficiency of each group, so within the sub-groups we find the second form of division of labor, which may be called industrial specialization. In the textile industry, for instance, certain mills manufacture only yarns; others do nothing but weave yarns into cloth; and still others merely dye and finish the product of yarn-spinning and weaving mills. In New England there are. shoe factories which make only uppers" and others which produce nothing but "findings" (counters, shanks and heel-stiff eners). In the glass industry large establishments turn out only one kind of bottle. Some branches have even become so completely specialized that there are factories, as in the bicycle and electrical supply industries, where nothing is done but assemble the parts of a machine or instrument that are made in other establishments. The advantages of this kind of specialization are numerous and obvious. (3) Thirdly, we find within each particular business enter- prise an increasing separation of industrial functions known as the technical division of labor. This is a specialization of process within the same establishment rather than a specializa- tion in diS'erent establishments. It may also be declared to be a specialization among workmen in contrast to the indus- trial division of labor which is a specialization among employ- ers. It is clear that specialization of the workman saves time both in preparation for the trade and in execution of the task, while the greater familiarit)' with a single process vastly aug- ments his dexterity. It is no less obvious that the greater the 296 Labor [§ 127 specialization the greater will be the chance of the right man falling into the right place, thus facilitating the adaptation of means to end. A trip through any modern factory will disclose tens — nay, even hundreds — of separate processes designed to turn out a product which in former times was en- tirely made by a single individual. A good example of such a subdivision of labor, resting still upon human labor force alone, is to be found in the manufacture of ready-made coats, which is now in New York divided into no less than thirty- nine distinct processes.^ It is, however, in cases where ample technical auxiliaries are used that we find the most minute subdivision of labor. Hu- man energy can then be reduced to the repetition of a single act like a thrust, a pull, a stroke or some other simple manipu- lation of a machine. The reduction of cost often progresses in a far greater ratio than the increase in the number of pro- cesses, for we have here to deal not only with the enhanced dexterity of the workman but with the almost endless suc- cession of labor-saving devices. To make a shoe in some New England factories requires 173 different operations, each con- ducted by a class of laborers with a special name. The manu- facture of a fine watch calls for no less than 1,088 different sets of workmen (not including the operations of furnishing the power), each using a different kind of machine. The saving in 1 These thirty-nine classes of workmen are: i. Fitter; 2. Pocket- maker; 3. Canvas-baster; 4. Lapel-padder; 5. Bar-tacker; 6. Seam- presser; 7. Lining-maker; 8. Lining-operator; 9. Sleeve-maker; 10. Lining-presser; 11. Sleeve-presser; 12. Collar-padder; 13. Shaper; 14. Tape-fuller; 15. Lining-baster; 16. Operator; 17. Pressor; 18. Edge-cutter; 19. Edge-baster; 20. Shoulder-lining baster; 21 Shoul- der operator; 22. Edge sleeve-baster; 23. Collar-baster; 24. Sleeve- presser; 25. Joiner of collar to lapel; 26. Armhole-baster; 27. Sleeve- sewing operator; 28. Garment-examiner; 29 Collar-finisher; 30. Arm- hole-lining finisher; 31. Basting-puller; 32. Edge-presser; 33. Button- hole-cutter; 34. Buttonhole-maker; 35. Hanger-sewer; 36. Presser of entire coat; 37. Button-marker; 38. Button-sewer; 39. Busheller. HAND AND MACHINE LABOR. NUMBER OF HOURS WORKED UNDER EACH METHOD IN PRODUCING SELECTED UNITS. DESCRIPTION OF UNIT. YEAR PRODUCED. NUMBER OF HOURS WORKED. AGRICULTURE. BARLEY 100 BUSHELS. CARROTS 10 TONS LONG ORANGE. rOQN 50 BUSHELS, shelled; STALKS, HUSKS, ■ ^\jn\\ ^f^p BLADES CUT INTO FODDER. CORN 50 BUSHELS, husked; STALKS LEFT IN FIELD. COTTON SEED COTTON, 1,000 POUNDS. HAY HARVESTING AND BALING 8 TONS TIMOTHY. OATS 160 BUSHELS. PEASE 50 BUSHELS. POTATOES 500 BUSHELS. RICE 10.000 POUNDS ROUGH. RYE 100 BUSHELS. STRAWBERRIES 500 quarts. SWEET POTATOES 50 bushels. TOMATOES 100 bushels. VVHEAT 60 BUSHELS. MINING. COAL 50 TONS BITUMINOUS. QUARRYING. DRILLING GRANITE ^i^^Z^^ki^'"^ DRILLING ROCK 1,--^^?,^ ^Jc'k"" '"'"' GRANITE QUARRYING 50 CUBIC FEET. LIMESTONE quarrying loo tons. MARBLE quarrying 72 cubic feet. RED ROCK QUARRYING 40 TONS. TRANSPORTATION, Etc. , „ _ TRANSFERRING 6.000 BUSHELS LOADING GRAIN WHEAT FROM STORAGE BINS OR ELAVATORS TO VESSEL. LOADING ORE loading 100 tons iron ore on cars. TRANSFERRING 200 TONS FROM UNLOADING COAL canal boats to bins 400 FEET DISTANT. UNLOADING COTTON transferring 200 bales FROM VESSEL TO DOCK. 1829-30 1895-91; 1805 1891 1855 1894 1811 1895 1860 1891 1830 1893 1856 1895 1866 1895 1870 1895 1847-48 1894-95 1871 -72 1894-95 1868 1895 1870 1895 1829-30 1895-96 1897 1897 1896 1896 1890 1896 1866 1897 1876 1896 1896 1896 1853 1890 1891 18U6 1859 189G 1800 1896 md, Tv::iV I ^l^g^^^^^ 28191 TSITT =^j^i!ii«;«;;j»^^!?-:^;^jj;^fe^.-^ ;iL' .•.;', • TSOO" ^ "&>:,; I -^SXP^ 251. 9J 21li.51 :. >S??»si$f :^ I! 1122^^^^ air Tinoa-. - <-^^yyj IKSt^fi- I^S^ 'l78..yi"'^N^^^^^ SHo" ^I^ [3S3:^^^^^ n..-'.s. I 'I'SS-o?:: ^"■, • 1 W).OI) 1 .^,- -^ ^J^jJ^i^iJ^-ilOo.^^^ -* K^i*j*SJ*) .'.S.(,o 1 200 (Ml ! IL/h -iUlOO -iW-OO c*J*SJ*5*iJ5Jja ' . -0 I From U.S. Labor Bulletin 54 HAND AND MACHINE LABOR. NUMBER OF HOURS WORKED UNDER EACH METHOD IN PRODUCING SELECTED UNITS OF MANUFACTURE. DESCRIPTION OF UNIT. NUMBER OF HOURS WORKED. I I """'' I Zl MACHINI PITCHFORKS 50 PITCHFORKS. 12 INCH TINES PLOW 1 LANDSIDE PLOW, OAK BEAMS AND HANDLES. BAGS 6,000 COTTON FLOUR SACKS. Dl AMl/nrir,LCC 12 CROWN LEDGERS, 8 '^X uJ^ INCHES, BLANKBOOKS 400 pAQES, FULL SHEEP. CHDFC; '"' PAIRS MEN'S FINE GRADE, CALF, WELT, anuta ^^g^ SHOES, SINGLE SOLES, SOFT BOX TOES. RDXF'^ 1.000 STRAWBOARD, PAPER-COVERED, DUAC3 SHOE BOXES, ll/i^ 6 X J/glNCHES. CRACKERS 1,000 POUNDS GRAHAM CRACKERS, PACKED. _ „„,-_ 200 YARDS INGRAIN CARPET, COTTON WARP, CARPET WOOL FILLING, 1038 ENDS, 26 PICKS PER INCH 1 ELLIPTIC SPRING, LEATHER TOP BUGGY, ^AnniA/-~rT PIANO BODY, DROPPED AXLES, l^AKKIAIjt BANDED HUBS, CLOTH TRIMMINGS. 10 GOLD HUNTING WATCH vA/AX(~u i^ACcrc CASES, 18 SIZE, ENGINE TURNED, VVAIV^n l-A5tS BARLEYCORN SHEIlD PATTERN. 1 KEY-WIND, BRASS WATCH MOVEMENTS hunting watch movement, 13 SIZE, FULL PLATE. rriMRt; ' gross horn dressing combs, 7 x 1,'^ inches, OUWItSb COARSE AND FINE TEETH 1,', INCHES. BARRELS 100 flour barrels, patent hoops. ROPE 300 POUNDS 3/INCH HEMP BALING ROPE Pl->pcpyc 1 DOZEN MEDIUM SATEEN CORSETS, V.,UK3C I i ,^ EYELETS IN BLACK. HATCHETS P . _-p- PRINTING AND BINDING 4.000 PAMPHLETS, PAMPHLt I b 32 PAGES, 3-8 X 5^4 INCHES. . „ _. __ FOLDING, STITCHING, AND COVERING 2,000 MAGAZINES copies 96-page magazine, e^^a x gJ^ inches NEWSPAPERS printing.and folding 36,ooo .pages. I ITWOrUiPHV PRINTING 1,000 sheets ART work, LI I MUUKAri-lY 19 X 23 INCHES, 6 COLORS. TYPESETTING 100,000 ems, newspaper work. 100 electrotype plates, ELECTROTYPING 8,^x7)4 INCHES. _ M^D.wiM^ 1 WOODCUT. 7V X 9 INCHES, SAME tN(jKAVINL> PATTERN UNDER EACH METHOD. ENVELOPES 50,000 NO. 6^ plmn white envelopes. BUTTER 500 pounds, in tubs. 1 DOZEN WHITE muslin SHIRTS, PLAITED LINEN SHIRTS BOSOMS, LINEN COVERED COLLARS AND CUFFS ATTACHED. I /~,l iMr-cc '2 O*!^ FRAME, ROUND END. PLUSH COVERED LOLINUtb LOUNGES, 69 X 23 INCHES, ANTIQUE FINISH. ijAOMi-c-c- 'SET DOUBLE COACH HARNESS, HAKNtbb TRACES 10 STITCHES PER INCH. GRANITE DRESSING 150 SQUARE FEET. 1896 1870 18'JG ISCO isui; IS'Ji isa.i 18«7 ISUJ 1858 1S'J5 1800 1895 1865 18'J3 1800 1897 1862 1896 1815 1895 1895 1895 1875 1896 1856 1896 1&55 18U5 1889 1895 1867 1896 1895 1895 1865 1895 1883 1895 1855 1896 1866 1897 1853 1895 1860 1891 1800 1895 1895 1891 _4sj!3 . . i'"-^'^ ' ' Brrr -KK-.niK- : <;i*i45*S*»S*a .-.'1 QK 1 1-Ii .ill ! auiU '!>;>«■ on I 34.511 1 J19UU 35. .^5 1 Wn4:t|»ijj:tj:^jijy^j^ 12148 ISCair ,, ., i3t a-.: \' -1 ;iio .w ) , , . ^-^f^^ 3}OiE USET ri.u.s i^ L-.ti oo ■ ■ -k^^\^^^;j^?^ ZMMl 36.111)1 Ui). 5l) ,,. '1 lil78 la-v.o" I H68 333321^3 .^i.M)_ m:!)ommimim-u From U.S. Labor BuJJttoxi^ § 127] Advantages of Division 297 cost due to the introduction of machinery can be illustrated in the jewelry and iron business; under the machine method 1,020 gold filigree shells for cuff buttons can be completed in the same time as one by the hand method; in the production of screws where one man can operate from six to twelve machines the ratio of machine to hand product is 4,491 to i. In the historic example of pin-making, where a single workman unaided could originally turn out only a few pins a day, but where in Adam Smith's time his product was five thousand pins a day, the daily product per workman is now about fifteen millions of pins, complete and stuck in the paper. The tables opposite pages 296 and 297 will illustrate the contrast between hand and machine labor in various occupations in the United States. It is obvious that the technical division of labor is dependent on the existence of a vast market. The mass production, which results from the improvement of technique through division of labor, and the substitution of machine for hand methods, is profitable only when the demand for a cheap product is so elas- tic as to be susceptible of great increase. Division of labor and increase of output are thus correlated. Each is in turn the result of the other. (4) Fourthly, the principle may assume the form of local- ization or territorial division of labor. In large cities we find the most important wholesale houses in any line of business assembled in districts by themselves. In nations we find various industries congregated to a large extent in localities which possess some peculiar advantages, such as proximity to raw materials, water power or markets, favorable climate, cheap labor, and supply of capital or credit facilities. In the world at large the principle of the territorial or geographical division of labor is the chief foundation for the free trade argument. By allowing each section to produce that for which it is best fitted, we shall manifestly secure the greatest and the cheapest, production. In all cases, whether we have social, industrial, technical or territorial division of labor, the result is an en- 298 Labor [§ 128 hanced efficiency of labor and a proportionate increase of wealth. 128. Defects of Division of Labor While the principle of the division of labor is undoubtedly- salutary, there are certain dangers which must not be over- looked. These are the risks involved in specialization of any kind. A great scientist has been described as one who knows something about everything and everything about something. Specialization in such cases is illuminating. Many specialists, however, know a great deal about some one thing and nothing about anything else. Specialization here is narrowing and even dangerous, because it tends to prevent a broad power of successful generalization. In the economic domain the risk is the same. In the social division of labor a particular sub- group may pursue its own interests so closely as to subordinate to them the public interest, thus preventing an even and well- rounded economic development. In the territorial division of labor the dependence of a section or country upon one par- ticular product may be perilous in time of some suddenly en- forced cessation of production, as in the case of the potato famine in Ireland in the forties, or it may check progress, as in the case of the one-crop system or the sole reliance of a country upon agriculture. In the technical division of labor the confining of the individual workman to the mechanical repe- tition of a simple act may tend to make him a machine rather than a man, and to stifle and repress all the powers of initia- tive. This is in fact the one great indictment brought against the modern industrial system. The danger, however, can be averted. In the social division of labor a developed sense of social solidarity, of business ethics and of political responsibility will insure a continually growing adaptation of the parts to the whole. In the geographical division of labor a sound industrial and commercial programme will, as we shall see, strive for a diversification of industry by supplementing, and within certain limits altering, nature. In I § 129] Combination of Labor 299 the technical division of labor the qualities which lie dormant during the hours of work may be awakened by a judicious ad- mixture of leisure, and by a different attitude toward the work itself, which can be brought about in large measure by techni- cal and industrial education. If machine industry and division of labor simply brought to the workman greater intensity of work, as the socialists contend, the result would be disastrous. But if, as is often the case, the increased productivity brings with it higher wages and shorter hours, the workman's Whole standard of life may be elevated, and his daily task need no longer engross the whole of his physical and mental energy. Under proper leadership within his own ranks and in those of the employers, he may be a part of the machine, and yet not only remain a man but become more of a man than before. The highest grade of American labor to-day is not the cobbler who makes the whole shoe, but the specialist heel-finisher in the New England shoe factory. Under such conditions, as they are disclosed by progress in the most advanced nations, division of labor may be a blessing instead of a curse, and remain an aid to production without becoming a menace to individuality. This result, however, cannot be reached without a struggle to retain the use, while overcoming the misuse, of what is an essentially beneficent principle. 129. Combination of Labor Division of labor does not describe the whole of the process. To be effective it must be supplemented by the combination of labor. This also assumed several forms. (i) First, we have the combination or co-operation of labor with another agent of production, like capital. We have seen that the advantages of the technical division of labor are most signal when machinery is employed. Obviously the larger the quantity of labor that is saved through the aid of capital, the higher will be the productivity of each remaining unit of labor; the more complex the entire process, the simpler will be each 300 Labor [§ 129 single portion. Without the co-operation of the two factors, the division would be less minute and the output less abundant. Modern division of labor is largely the result of the applica- tion of capital. (2) Secondly, we have the technical combination of units of labor with each other. This combination may be successive or simultaneous. In the so-called team system in the clothing industry, for example, although each set of workmen does its allotted share, it is most important that they all proceed in unison, so that no set completes more or less than can be han- dled by the next. Here we have successive combination. In a great steel foundry or rolling mill, on the other hand, each detail of the work may be apportioned to a separate class, but unless they all co-operate exactly at the critical moment the product will be worthless. Here we have simultaneous com- bination. In both cases the combination is effective because of the division of labor; or, better stated, the result is due to the joint influence of combination and division. (3) Thirdly, we have the combination due to the fullest utiHzation, from the outside, of the result of each contribution to the product. In social division of labor this is brought about by the principle of competition or of societary control; in territorial division of labor it is produced by the natural forces of location; in technical division of labor it is effected by the organization of industry. Herein lies the great role of the manager and employer of labor, — the entrepreneur in the technical sense. The head of a great department store or of a vast factory is akin to a general. He must be at once bold and prudent, and must look with one eye to the ranks and with the other to the enemy, his competitor. He must be full of resources and of foresight. Above all, he must not only have an army well disciplined down to the smallest detail, but must possess the capacity to take a large view, massing his forces at just the time and in just the manner to be most effective. In short, thorough organization and co-operation § 130] Supply of Labor 301 are the secrets of industrial as of military success. The great leader is as indispensable in the one career as in the other. Combination of labor is thus the complement of division of labor. The most efficient use of the one involves the employ- ment of the other. Specialization and co-operation are the obverse and the reverse of the same medal; they are as neces- sary to a developed economic life as are the individual and social elements to human life, or the centripetal and centrifugal forces to all life. 130. Supply of Labor Since labor is a productive agent that is susceptible of in- crease, it might seem that the supply of labor will in the long run respond to the demand, so that there will never be a de- ficiency or a surplus. The situation, however, is by no means so simple, even if we confine our attention to ordinary labor, and abstract from that for which special education or remark- able natural gifts are required. In the first place, there may be climatic or racial reasons which restrict the supply. In the tropics it is sometimes diffi- cult to induce the natives to work for any consideration. Again, under conditions of forced labor, the source of supply may dry up; the downfall of the Roman empire and the decline of prosperity in the South before the war were due to the fact that cessation of conquests in the one case and the stoppage of the African trade in the other finally made the slave too expensive, by limiting the supply. Even under the modern system of free labor there may be both artificial and natural obstacles. We prohibit Chinese immigration, although by so doing we retard the exploitation of the natural resources of the Pacific slope. We prefer a more equable, even if slow, development to the rapid tempo associated with diminished opportunities to the American workman. A less defensible restriction of supply is seen in the short-sighted policy of some 302 Labor [§ 130 trade-unions which, following the example of the mediaeval guilds, seek to secure monopoly returns by interposing all manner of obstacles to membership. Such methods, however, involve a restriction in the supply of special kinds of labor rather than of the general labor force, and invariably react upon the workmen outside of the particular unions. Finally, a natural obstacle to the free adjustment of the supply is seen in the case of the so-called seasonal demand. There are occu- pations where labor is needed only at stated intervals, as for instance in farming at harvest or vintage time. Yet the laborer must live during the whole year. Whenever economic con- ditions do not permit a scale of wages sufficiently high to sup- port the workman during the intervals of non-employment, we find these periodical complaints of scarcity of labor. On the other hand, a striking example of the relative over- supply of labor is afforded by the substitution of machine for hand labor. The introduction of machinery, however, does not mean a diminution in ultimate demand. For the decrease in cost and price due to machine methods leads to such an enhancement of output that even with a relative falling off in the number of laborers there will ultimately be an increase in the total aggregate of laborers employed. The replacing of the stage-coach by the railway finally led to a vast increase of laborers at higher wages, coupled with a service at lower cost. This result will of course ensue only when the increased profits due to the new machinery are saved and invested in new cap- ital which gives employment to more laborers. If the profits are wasted instead of being saved, a new machinery will be of no advantage to the laborer. In point of fact, however, the profits are normally saved. The immediate result is often a temporary oversupply in the particular trade and the discharge of workmen who for the time being, and until they finally drift to the new openings, swell the ranks of the unemployed. One of the most serious problems of the modern industrial system is how to mitigate the evUs of this transition period. § 130] Supply of Labor 303 In the long run, however, under modern conditions of the free play of economic forces the supply of labor will adjust itself to the demand through changes in the growth of popu- lation. The fundamental point here, however, is the rate of remuneration or scale of wages, — a discussion of which must be left to the next book. CHAPTER XX LAND 131. References J. B. Clark, Distribulion (1899), ch. xiii, and Essentials of Economic Theory (1907), ch. xi; Finch and Baker, Geography of the World's Agri- culture (1917); A. Marshall, Principles (1910), bk. iv, chs. ii, iii; H. R. Sea-ger, Principles (1913), ch. viii; A. S. Johnson, Rent in Modern Economic Theory (1902), ch. ii; R. M. Hurd, Principles of City Land Values (1903) ; M. B. Hammond, The Cotton Industry, part i. The Cotton Culture (1897); E. J. Payne, History of America, I (1892), 342, 366-384; U. S. Industrial Commission, Report (1902), X, and XIX, 46-123; T. N. Carver, Prin- ciples of Rural Economics (1911); C. R. van Hise, The Conservation of Natural Resources in the U. S. (1910); V. G. Simkhovitch, "Hay and History" in Political Science Quarterly, vol. xxviii (1913). 132. Land as a Separate Factor of Production Land is generally distinguished from capital as a separate factor of production. The distinction, however, is sometimes made on insufficient grounds. (i) It is claimed, for instance, that land is a gift of nature, while capital is a product of labor. It must be remembered, however, that economics has to deal with value, and that from the point of view of value it is difficidt to draw so sharp a line. Into many tracts of land there has been put as much labor as into equally valuable concrete products. Without the dykes of Holland and the irrigation works of arid America the land would be worthless. In some garden plots on the European continent the tenant on leaving is permitted to take with him several inches of soil, — the value of the land is as much or as little a product of labor as in the case of other things. It may be coriu^iided, however, that the value of urban land at least is not a product of labor. But how about the value of a newspaper, or a banking business? As the country town be- 304 § 132] Land and Production 305 comes a prosperous city, the newspaper, like the corner plot, becomes more valuable, even though the editor works no harder than before. The circulation increases through the operation of the same social forces which raise the value of the land. There may indeed be more newspapers, but there will also be more corner plots. Even if we attempt to reduce values to the quantities of labor, it is hazardous to distinguish between land and capital on this ground: in a diamond drill, which is as- suredly a piece of capital, the overwhelming share of the value may be ascribable to the raw material or gift of nature, and only a small part to labor; in a truck-farm, three-quarters of the value of the land may be found in labor and only a quar- ter in the gift of nature. In other words, in the value of some land, labor plays a large role; and in the value of some capital, nature plays a large role. This distinction is hence inadequate. (2) Again, it is contended that land is indestructible, while capital is perishable. Here, again, the rejoinder may be made that the qualities which give value to the land are not inde- structible. It is a commonplace that the chemical ingredients of the soil need to be constantly renewed. The best agricul- tural land may become the worst, and the worst the best, after a few generations of exploitation or thrift, as the case may be. But surely, it will be said, the qualities of extension or location are indestructible. Even here, however, it must be observed that the two things are not identical. The mere extension of land is indeed indestructible, but it gives no value. All land is alike in extension, — the worthless and the valuable. Location is extension plus situation, just as fertility is extension plus chemical ingredients. Location gives value to land, but loca- tion is not indestructible as an economic factor. The land may remain, but the value may change because of an alteration in its contiguity to a market. The land is still there, but the market may disappear, and thus to all intents the economic location of the land suffers a change. Any falling off in demand, such as a decrease or shifting of population, a change in com- 20 306 Land [§ 132 merce, an alteration in the conditions of transportation, may reduce or wipe out land values. In the deserted mining towns of the West the value of the land has vanished, perhaps never to return. Value is a product of human relations: nothing human is indestructible. (3) It is often said that land is fixed in quantity and not reproducible. To this the double answer may be made: some other things are non-reproducible as well, and in the true eco- nomic sense land itself is really not fixed in quantity. Reprodu- cibility is a relative term: some things can be easily reproduced ; some with difficulty; some, like old coins or works of art, not at all. Furthermore the supply of land can be increased both actually and relatively. There have always been, and still are, vast stretches of unused and worthless land in every coun- try and of comparatively worthless land near every city; when- ever it becomes profitable, new areas are put under cultivation or covered with residences. The striking fact of the past cen- tury has been the increase in the supply of arable land and the growth of urban areas. Even, however, if all the land in a given country or city is occupied, its economic utilization can be increased, and that is equivalent to a relative growth of supply. More intensive farming in the country or better or higher structures in the city have the s^me effects as an in- crease in supply. The limit here, as in all economic goods, is the margin of utilization. While the differences between land and other things that constitute capital are thus differences in degree rather than in kind, it remains none the less true that land may usefully be put into a separate category. This is due to the fact that an increased supply of other things in general involves a dupli- cation of the thing itself, while the increased supply of land involves a difTerence in location or fertility. To call this the law of diminishing returns is in one sense inexact, since the law of diminishing returns is applicable to everything that possesses value. The law of diminishing returns, however, has § 132] Land and Production 307 peculiar consequences when applied to land. If an employer needs more laborers, he can ordinarily secure an increased supply at the same wages, even though there is a certain point beyond which it does not pay him to employ more. If a manu- facturer needs additional machines, he can ordinarily buy them at the same price, even though he will buy only up to a cer- tain limit. In fact the progress of society means more ma- chines or more capital and lower cost. But if more land is needed, recourse must be had to less fertile or less well-situ- ated land, which normally means a higher cost. The more intensive farming or the higher structures referred to in the last paragraph amount indeed to an increase in the supply of land, but they also involve an increase of cost. Economic progress, then, may have different effects on land as compared, not indeed with all other things, but with the great mass of other production goods. The advance of inven- tion and civilization is apt gradually to reduce the prices of manufactured articles, but the increase of output and of civi- lization may lead to a greater demand for given tracts of land, and therefore to an increase in their price. A moderate tax on ordinary commodities, reproducible at pleasure, tends to de- crease their number and thus to increase their price; a similar tax on the value of land is apt to exert no influence on its exist- ence, and therefore none in increasing its price. While land thus is a part of capital from the point of view of the laws which explain the nature of rental value in general, and the relation of rental to capital value, land is usefully contrasted with capital if we compare changes in land rents and values with changes in the great mass of other things, the increased production and accumulation of which constitute progress. Because of the social significance of such relative changes, it is legitimate to put land into a separate category. 3o8 Land [§ 133 133. Fertility of Land Land has value as a factor in production either because it yields some concrete produce or because it affords a service as the physical support of man. The productivity of land, that is, the value of its contribution to wealth, depends in either case on two facts, — its fertility and its situation. The fertility is a result of the constituents of the soil combined with its extension; situation is not simply extension, but geographical location. According to the uses to which land is put, we divide it into the categories of pasture, agricultural, forests, mineral and urban land. Each of these is again divisible: pasture land, for instance, into sheep, goat, hog and cattle pasture; agricultural land into meadow and plough Cor arable) land with as many sub-classes as there are varieties of crops; forest and mineral lands according to the character of the timber or mineral (including under this designation such nonmetallic products as coal and oil) ; urban land into business, residential, apartment or tenement land. So far as the element of fertility is concerned, land, like all other forms of wealth, is subject to the law of diminishing returns. In agricultural land there is at every moment a max- imum return from the application of a given amount of labor or capital. As we have seen above (§ 88), the margin beyond which the returns begin to diminish may be an intensive or an extensive margin. When this margin has been passed, we must, in order to secure the same yield, either renew the fer- tility of the old plot or select a fresh plot. But the marginal point is always definitely ascertainable. In a small and lonely New England farm the best results may come from employing a laborer for every few acres and not utilizing expensive imple- ments; in the far West it may be more profitable to use the costliest machines and to economize in human labor; in a truck farm the application of rich manures may yield the great- est profits. In all cases there is a point beyond which any § 133] Fertility 309 additional "dose" of capital or labor will give proportionally- smaller returns. Under normal conditions of progress the self-interest of the individual farmer may be relied upon to ascertain this point. Under a system of free competition each farmer will seek to secure the largest produce from his land, and the greater the output, the lower will be the price. The private interest of the producer will thus tend to coincide with the general interest of the community. This is at once the basis and the justification of private property in agricultural land. In the case of timber land this coincidence between private and public interests is by no means so unquahfied. In grazing 4and the pasture replenishes itself from season to season; in agricultural land the crop follows within a few months, or, as in the case of fruit lands, wuthin a few years of the application of labor or capital. But in forest land the reproduction of the giove takes decades or even centuries. A wise forest policy which endeavors to insure a continuous supply to the public will therefore content itself wath felling only the ripe timber. Private interest, on the other hand, which looks to immediate gains may derive more profit from the complete clearing of the forest. When the woods are practically inexhaustible, as in the early period of American civilization, it makes but little differ- ence. But when the forests are destroyed to such an extent as not only to cut off the supply of useful woods but seriously to endanger the equable flow of the streams and to threaten, as in Spain, an alternation of complete drought with devastating inundations, the situation becomes serious. Timber land here can best accomplish the social ends of production through a policy which combines the cutting of the mature trees w'ith the preservation of the forest itself. It is partly for this reason that governments are everywhere retaining or adding to their forest lands, as in the United States with its num- erous national forest reserves and occasional state parks; while some countries even seek to control the action of pri- 3IO Land [§ 133 vate forest owners, in the effort to prevent denudation or to secure reforestation. In mineral lands the possibility of reproduction is excluded by the very nature of the case. The law of diminishing returns, however, is equally operative, even though its working is apt to be obscured. In some mines it becomes necessary to go deeper for an increased supply, with a resulting rise of cost which finally becomes prohibitive and leads to a complete cessation of operations. Even where, as in the oil or diamond fields or in some coal or iron mines, the returns seem to be constant from year to year, we are in the presence of diminishing re- turns, for the source of the returns is itself being slowly con- sumed. At the end of a given period, be it short or long, no^ only will the returns abruptly stop, but the possibility of secur- ing any further yield in the future will also have disappeared. As was explained above, we must therefore abstract from each recurring return a sum which when capitalized at the rate of production will ultimately amount to the total original capital and replace the value of the initial stock. Translated into ordinary business language, we must allow for depreciation, — a depreciation which, when continued long enough, will entirely absorb the original capital. The life of the anthra- cite coal fields in Pennsylvania, for instance, is estimated, on the basis of the present rate of production, at between one and two hundred years; and of the English coal fields at some- what less. In the case of agricultural land, then, additional doses of capital or labor will yield a relatively smaller produce; in the case of mines or badly managed forests the ostensible produce may be the same, but the real net return on the original unimpaired investment becomes constantly smaller. Even in the case of urban land the same law applies. The fertility, that is, the productive service, of certain lands con- sists in yielding support to buildings. It may indeed be profit- able to replace a tent by a wooden shanty, a shanty by a stone house, and perhaps even a stone house by a steel skyscraper. § 134] Location 3 1 1 Obviously, however, at a given moment there will be a point beyond which a more expensive structure will not yield propor- tionate returns. 134. Situation or Geographical Location of Land The value of all production goods is derived, as we know, from that of the products or consumption goods. Oranges do not sell at higher prices than potatoes because the owner must pay more for orange lands than for potato lands; on the contrary, orange lands cost more than potato lands because the oranges that can be grown on an acre sell for a larger sum than the pota- toes that can be raised on the same area. Whether the land can be used for oranges rather than potatoes often depends as much on location as on fertility. The most fertile land may be so far removed from the market that, notwithstanding the great potential supply of the produce, the land will be value- less because there is no effective demand for its product. The mutations in value due to changes in situation are in modern times far greater than those due to changes in fertility. The fruitfulness of land is subject to the alternations of weather or chances of nature, but it may on the whole be kept fairly unim- paired with reasonable care, and may be increased up to a certain point by unremitting attention. The economic changes in situation, on the other hand, are often sudden, long-continued and unpredictable. The orange lands in Southern Italy have recently been ruined by the rapid introduction of California fruit into the Eastern market; the wheat lands of England have suffered greatly during the last half-century by the open- ing up of vast stretches in the New World. Per contra, when the Erie Canal was completed the sections near the terminals appreciated enormously, and we have daily examples of the sudden rise of value in districts newly served by a railroad. These considerations apply to urban land as well. In the main, and especially when long periods are taken, the value of urban lands grows with the development of the city. Mere 3 1 2 Land [§ 134 agglomeralion of population does not involve an increase of land values, if, as in Naples to-day, the growth of population is accompanied by a lessening of business prosperity and there- fore by a diminution in the income of the consumer and tenant. But where numbers increase with prosperity, land values nat- urally rise. The mutations of situation, howev'er, do not al- ways result in an advance. Certain sections in Greater New York are to-day worth less than a few decades ago, because the tide of business or fashion has ebbed rather than flowed. The introduction of new trolleys or subways has advanced some sites but depreciated others. It is largely due to the element of situation that different classes of land are within certain limits capable of being trans- formed into each other. A diamond field can of course not yield a good rice crop, nor can rubber forest land ever be profit- ably utilized for oats. But pasture land may become wheat land, wheat may be supplanted by garden produce, and truck farms in turn may change into cheap suburban sections and finally into expensive business sites. From this point of view land possesses great mobility. In a certain physical sense land is fixed, while everything else is movable, • — and this is the basis of the legal distinction between movables and immova- bles. But in the economic sense land is mobile, and capital as opposed to land is immobile. A machine can best be used for a particular purpose, and is only rarely serviceable for anything else; a piece of land can often serve any one of a large number of different uses. Any economic fact which brings about a relative change in situation confers mobility upon land. Since situation is such an important element in productivity, all changes which tend to diminish distance by bringing the producer and consumer together are a mark of progress. The previously existing sources of supply may fall in value, as in the case of the New England farms or the Italian orange groves, but the existing stock of wealth as a whole is increased by the § 135] Cultivation 313 reduction of cost. It is, however, important to remember that so far as the productivity of land is ascribable to situation, its rise in value is more and more due to its increasing contribu- tion to the production of other things than the mere agricul- tural produce. An industrial enterprise is located in a city for the same reason as a workman or a lawyer: the greater expense of the land for the factory or the home is more than ofTset by the lower costs in other respects or by the expectation of higher returns. With the growth of industry and population the productivity of land depends more and more on situation and relatively less on mere fertility. 135. Cultivation of Land So far as situation is concerned, the increase of productivity is solely a result of the progressive elimination of the costs of transportation. So far as fertility is concerned, a far larger field of activity is open to human ingenuity. The application of labor to land is its cultivation. Agricultural products are commonly divided into fruits, roots, cereals and leguminous plants. Food-roots and cereal grasses are found in a state of nature, and their cultivation and improvement play somewhat the same role in progress as does the domestication of w^ild animals. There have been several important stages in agri- cultural development. (i) The first is the system of migratory agriculture or the shifting of the arable area. This is found at the outset in all countries where land is abundant and where the community is on the point of abandoning the hunting or the pastoral life. A particular plot is tilled for a season or two in the roughest manner, and when the soil begins to show evidences of de- terioration the cultivators abandon the land and pass on to a fresh tract, perhaps to return to the first after a long time has intervened and restored its primitive fertility. Where the land is covered with forests, a clearing is made by fire, the ashes fertilizing the ground and the stumps being allowed to 314 Land [§135 remain and rot. Because of this burning process, the system is also called essartage. Where the land is near the seashore seaweed, as in the American colonies, is frequently employed as fertilizer. Migratory agriculture was applied to both roots and cereals. Root culture generally precedes that of cereals, and no real civilization was ever based on root culture alone. In America, for instance, before the advent of the white man, the potato and the manioc gave way to maize, and where, as in Hayti, this was not the case, there was but slight progress. As Payne has pointed out, cereal agriculture alone, among the forms of food-production, taxes, recompenses and stimulates labor and ingenuity in an equal degree. (2) The second stage is that of surface tillage or stationary agriculture. As the forests disappear or the supply of free land diminishes, the essartage or migratory system gives way to the more permanent occupation of a given area, and its periodical reduction to a state of tilth. Much of course depends on conditions of climate. In the Old World were found wild culminiferous grasses which made possible the cultivation of wheat, barley, oats, rye, millet and rice. In the New World, although other indigenous grains existed, the wild corn or maize soon became practically the only cultivated cereal. This, together with the fact that no important beasts of burden like the ox or the horse are found in historic times, goes far, as was remarked above, to explain the lower level of civilization reached by the Indians in Mexico or Peru, compared with the natives of Asia and Europe. Where the soil is composed of alluvial deposits or possesses great fertility for other reasons, the natural surface affords so abundant a yield that only very slight manur- ing is needed to furnish a practically continuous crop. Sur- face tillage may therefore also be called the one-crop system. When the land retains its fertility with little labor, and where there is a constant demand for the particular product, this one- crop system may persist for a long time. § 135] Cultivation 315 (3) Usually, however, some form of rest is found to im- prove the fertility of the land. We thus reach the third stage of what is best called alternating agriculture. That is, there is an alternation of crop and fallow, the same piece of land being cultivated one year, serving as a rough pasture the follow- ing year. At any given time, therefore, there are two fields, — one for the crop, one lying fallovw. This is hence also called the two-field system. It was soon ascertained, however, that still better results could be attained by extending the alterna- tion to the crops as well, and we thus reach the three-field system, the same field being devoted the first year to wheat, the second to oats, and lying fallow the third year. This system, which is found throughout mediaeval Europe is also called the open- field or intermixed system, because the land was cultivated in narrow strips, each cultivator possessing one or more strips in different parts of the field, separated from the other strips not by any fence or hedge but only by small ridges or balks. (4) The fourth stage is reached when a substitute is found for the recurrent fallow or waste. This consists in so increasing the number and variety of the crops, and in such a skilful use of animal and mineral manures, that the fertility of the soil is kept practically constant without any fallow at all. This system is known as that of convertible husbandry, or in its still more developed stages as that of the rotation of crops or diversi- fied farming. It involves the use in turn of cereal and root crops, and especially the application of hay and of grasses like clover. In England, where the transition took place in the eighteenth century, it was also called the system of enclosures, .because the method of separate strips was abolished, and the whole field was now cultivated in the same way, separated from the adjoining fields by a hedge or fence. The earlier systems of agriculture involve the use of much land and of comparatively little i.ibor. They are hence called extensive systems. The greater the effort made to secure larger crops by economizing land rather than labor, the nearer 3 1 6 Land [§ 135 we approach the system of intensive farming. When it is found profitable to economize in labor rather than in land through the use of capital in the shape of farm machinery, we reach the most modern form of large-scale agriculture, which is usually termed capitalistic farming, and which will be dis- cussed later. At any given period, however, extensive farming may be more economical than intensive farming. In the United States we find most of these phases. The period of essartage or forest clearing was soon followed by the surface tillage or one-crop system, which still prevails over a large part of the South. The open-field system, however, flourished only in very small sections of the East, because the rapid increase in wealth in the North and West rendered prof- itable the transition on the one hand to large-scale farming and on the other to the more intensive system of crop rota- tion. W^ith the advance of prosperity the most effective use of the land leads to continual changes. In large sections of the East, for instance, the cultivation of cereals, with the possible exception of corn, has become unprofitable. The less fertile lands have been converted into permanent pasture, and the increase in the average fertility of plough and meadow lands coupled with the growth of forage crops and the use of the silo tends to diminish the relative amount of cultivated land. The process of transition culminates in the dairies and market- gardening farms of the thickly populated communities. Given liberty and intelligence, the farmer may be relied on to choose that form of tillage which is most profitable to him and most productive to the community. CHAPTER XXI CAPITAL 136. References J. B. Clark, Distribidion (1899), chs. ix-xii, and Essentials of Economic Theory (1907), chs. xviii, xx; F. A. Fetter, Principles (1915), ch. xxii; E. V. Bohm-Bawerk, Positive Theory of Capital (1891), bk. ii, ch. ii; W. S. Jevons, Theory (1888), ch. vii; T. N. Carver, Distribution (1904), ch. vi; R. Mayo-Smith, Statistics and Economics (1895), ch. v; F. A. Walker, Political Economy (1888), part 2, ch. iii; T. Veblen, Theory of Business Enterprise (1904), chs. ii, ix; A. Marshall, Principles (1910), bk. iv, ch. vii; A. T. Hadley, Economics (1896), ch. v; J. S. Nicholson, Principles (1893), bk. i, ch. vi, and Machinery and Wages (1892), chs. iv, v; F. W. Taussig, Principles (1911), ch. v; H. R. Seager, Principles (1913), ch. ■■' ix; R. GilTen, Economic Inquiries (1904), part 2; W. P. Trowbridge, Report on Poiver and Machinery Employed in Manufactures {U. S. Tenth Census, Extra Volume, 1888), U. S. Twelfth Census, VII; United States , Industrial Commission, Report, XIX (1902), 514-544. I 137. Kinds of Capital ! We have seen that capital in its broadest sense includes ' everything that has a capital value. The totality of capital i is equivalent to the totality of wealth. Capital would then I comprise three great categories: (i) consumption capital, or f wealth which affords a benefit income, like food, jewels, books in the hand of the consumer; (2) lucrative or acquisitive capi- tal, that is, any form of wealth including relations like the franchise of a corporation or the good-will of a business which gives a money income; (3) production capital, or concrete goods which are utilized to produce more goods. In treating of capital as an agent of production it is with this third aspect that we have to deal. From the point of view of progress, moreover, this is the important aspect, since the first condition 317 3 1 8 Capital [§ 137 of progress is the increase of the concrete goods that consti- tute wealth. Capital in this sense can be further classified into land and other capital. If capital be regarded as either consumption or lucrative capital, there is no need for such a distinction. Whether a man enjoys an estate or a painting is immaterial, — neither can perhaps be duplicated as consumption capital. Whether he applies a fund of a given amount to the purchase of a farm or a share of stock is again immaterial, so far as each represents so much lucrative capital. But as an agent of pro- duction, land, as we have seen, stands in a relation socially so peculiar to the producer, and is moreover of such paramount importance when compared to any other single category of concrete goods, that it is best discussed by itself. Capital as an agent of production is sometimes classified as fixed and circulating capital. The original distinction of Adam Smith was that circulating capital comprised goods from, which profits could be derived only by their circulating from hand to hand, like finished products, while fixed capital was that which, like a house, yielded a revenue without changing hands or circulating any further. As a matter of fact, however, the only kind of capital which circulates indefinitely is money; in other cases, as when a product goes direct to the consumer, there may be only one change of hands. The great aim of modern enterprise, in fact, is to reduce the circulation to the narrow- est limits. Another way of explaining the distinction is to say that fixed capital comprises such things as can be used repeatedly for productive purposes without suffering much change; and that circulating capital consists of things the single use of which would convert them from the category of production goods into that of consumption goods. A machine would be fixed capital; the leather just before being converted into the shoe would be circulating capital. This is virtually the distinction between durable and perishable wealth. It is also sometimes § 137] Kinds of Capital 319 expressed as a distinction between active and passive forms of capital, the active capital being the fixed capital which, like the machine, makes the impression, the passive capital being the circulating capital, which, like the leather, receives the impression. This nomenclature is less happy in that it ob- scures the fact that all forms of productive capital co-operate with each other, and in this sense are really active. Another classification of capital is that according to the uses to which it can be put, as agricidtural, commercial, in- dustrial and financial capital. (i) By agricultural capital, strictly speaking, is meant some- thing different from land or landed capital. Agricultural cap- ital is not land, but the things applied to the land; land or landed capital is the ground itself. When we speak of a man putting his capital into land, we mean that he invests in a piece of land; when we say that he applies capital to land, we mean that he spends his money on better farming tools or machines, manures, drains or beasts of burden. In the former case we would have land or landed capital; in the latter we have agricultural capital. This distinction, however, is fre- quently not observed. (2) When the concrete pieces of capital take the form of ships, docks, warehouses or media of internal commerce, we speak of commercial capital. When capital is applied to the processes of industry in the narrower sense, we speak of in- dustrial capital. From one point of view the same object may be regarded in turn as industrial, commercial or agricultural capital. A cart may be constructed in a factory and then used in the industrial operations of another factory; it may be em- ployed by a merchant, and may finally be sold to a farmer for use on the farm, serving in turn as industrial, commercial and agricultural capital. The characteristic feature of modern fife is the increasing importance of industrial capital. (3) By financial capital is meant not so much the concrete objects as the fund or money embodiment of the agent used 320 Capital • [§ 138 in financing or rendering possible economic enterprises. The surplus from any economic activity may be stored up in the shape of jewelry or of coins; and this surplus wealth is the financial capital which may at any moment be devoted to pro- ductive enterprise. In modern times the surplus is put not only into money, but into all kinds of paper and credit repre- sentatives. Financial capital on a large scale has been in turn a handmaid to each form of economic activity. In the later days of classic Rome financial capital was closely connected with land, the slaves being the important form of capital. In the developed economy of the Orient, as well as in the later middle ages, financial capital was intimately related to com- merce; the bankers were the merchant princes. In modern times financial capital is more and more associated with in- dustry: the "industrials" are fast gaining even on the rail- way or banking securities. Modern capital is predominantly industrial capital. 138. Function of Capital The aim of all economic activity is to secure a surplus by augmenting utilities and diminishing costs. Production affects surplus in both ways, — it increases the stock of economic goods, or decreases the cost. Sometimes it accomplishes both results. Capital as an agent of production is an efficient help in this process. The productivity of capital consists in the aid which it ren- ders in securing the same results with less effort. It is an adjunct to human labor, and to that extent lessens labor by interposing something between labor and its result. The function of capital might therefore be called the roundabout method of production. If we need water, we can go to the stream each time and bring the water in our hand, or w^e can devote some of our labor to constructing a pump. WhUe we are making the pump we are losing time and energy, but when it is finished there will soon be an appreciable net saving or § 138] Function of Capital 321 surplus of utility over cost. Instead of applying our labor directly to the stream we interpose the piece of capital known as a pump. The pump not only pays for itself, but leaves a surplus, which can now be transmuted into further wealth. Capital, then, is productive in the same sense as labor. It is not indeed the cause of value any more than labor is the cause of value. But when labor brings about an increased net sur- plus of utility, we call it productive; and when capital does the same, it also is productive. If the pump does not work, that is, does not increase the surplus, it will have no value, neither rental value nor capital; and since it has no capital value it will not form a part of the aggregate of things which are represented by the fund of capital. But if it does work, that is, if it is really capital, it is productive because it pro- duces a net surplus over and above what would have been produced by unaided labor. The statement that capital works through the roundabout method of production is, however, liable to misunderstanding. In one sense indeed the interposition of capital lengthens the period of production. In former days the cobbler made the shoe or the blacksmith the chain, and turned it over almost at once to the consumer; nowadays a long period intervenes be- tween starting the manufacture of a particular shoe or chain and its final delivery to the consumer. The process of the suc- cessive combination and division of labor has been brought to its highest efficiency by the employment of capital. Capi- tal is needed for securing the raw material in large quantities, or providing the factory or mill and the machinery, for the pay- ment of the various classes of laborers, for the warehousing of the product and for its distribution to the retailer. The greater the participation of capital, the more roundabout is the process. On the other hand, a single process or a definite part of a process can obviously be finished far more rapidly by a ma- chine. The substitution of capital for labor, that is, the re- placement of a hand by a machine, means the cutting down 322 Capital [§ 13c of the time of technical production. We thus seem to face the dilemma that capital saves time and loses time, and that il shortens the period of the particular process and yet lengthens the period of the entire process. The reconciliation is simple. The individual machine saves time, but to create the machine takes time, so that the whole process, counting from the beginning, is lengthened. The ma- chine is productive because it turns out so much more in quan- tity that the value of the entire product soon yields a surplus over the expenditure of energy put into the machine. That is, from the point of view of aggregate mass production there is a saving of time, measured in terms of cost; from the point of view of the single product there is a sacrifice of time, which is more than offset by the fact that the single product is now only an insignificant unit in the mass. The value of the unit is a proportionate part of the mass. In another sense, finally, the ascription of the roundabout process to capital may be reversed. If we regard not the particular piece of capital, but the fund of capital in general, we may, on the contrary, say that capital brings labor and con- sumption together. In a large shoe factory, for instance, it takes time to make each shoe; but at any given moment the raw material is coming in at one end and the shoe is finished at the other end. Formerly the cobbler made one shoe and then began on another; now at the same instant shoes are begun and shoes are finished. The function of capital as a productive fund is therefore really to synchronize labor and consumption. The individual pieces of capital separate labor and consumption; the fund of capital brings them together. They are two aspects of the same thing, just as division of labor and combination of labor, seemingly the opposites, are, as we know, really two sides of the same process. To give a familiar illustration, it is like the reservoir of water used to run a mill; the individual drops come in at one end and go out at the other, but the water remains at the same level and ex- § 139] Creation and Growth of Capital 323 erts its force as a mass of united drops. The individual pieces of capital form the final enjoyment; capital as a whole per- manently invested units them. In one sense capital involves a roundabout or individual process; in another sense it im- plies the most direct of processes. 139. Creation and Grow^th of Capital The root idea in the conception of capital is that of a sur- plus. In order for anything to have a capital value there must be a surplus of inchoate uses. If the fibre in an electric light bulb wears out, the bulb possesses no further reserve uses and loses its capital value. Again, if we labor simply to provide for our fleeting wants and consume all that we produce, there remains at the close of each production period no surplus. The surplus energy which is transmuted into pieces of capital therefore comes ultimately from the decision of the individual to postpone present gratifications. If instead of taking the water directly from the stream we elect to spend our time in constructing a pump, we are creating a piece of capital. The only way in which capital can be formed is at bottom by saving, by waiting, by forbearing. The creation of new capital is therefore the result of pru- dence and forethought. The habit of saving, that is, of subor- dinating the present to the future, is an essential characteristic of progress. Primitive peoples are spendthrift, — they have no thought of the morrow and lay by nothing. There is no accumulation of capital. Where the provision of immediate needs occupies the whole of one's time, there is no opportunity of developing those higher qualities that make for civilization. The formation of a continually growing surplus involves the saving of energy and the liberation of human efforts from the pressing needs of mere material existence. The growth of capital means the advance of civilization, because it implies more efficient labor, the growth of leisure and the freedom to turn attention to the scientific, esthetic and ethical aims of life. 324 ^ Capital [§139 The destruction of capital, as in the later days of the Roman empire, spells a decay of civilization, because with the weaken- ing of the economic foundation the whole superstructure is bound to fall. The growth of capital is in itself indeed not suflicient to engender the highest form of civilization, but it is a fundamental prerequisite. Not all wealthy communities have been civilized in the best sense, but there has never been great art, great literature, or great science except when there has been an abundance of capital. To say that capital is the result of saving or forbearance does not necessarily imply any moral approbation of the owner of capital. It is for this reason that it is unwise to speak, as many do, of abstinence or sacrifice as the cause of capital growth. A man who already possesses an income large enough to satisfy his daily wants, be they great or small, cannot do anything else with his surplus except to save it, and thus lead to the for- mation of fresh capital. If he is a maniac, he can of course physically destroy it or the money represented by it; and if he is a fool, he can put the capital to such stupid and unproductive uses that it will soon become worthless and disappear as an embodiment of value. But unless he wastes capital in these crude ways, he cannot help saving. He does not abstain from any present gratification, because this capital is a surplus above all present gratifications. Abstinence here means abstinence from senseless waste; it is a negative, not a positive, merit. Nor does he sacrifice anything. As we shall see later in dis- cussing the question of interest, the problem is one of marginal forbearance, that is, of sacrifice at the margin where he must choose between consumption and saving. The richer a man is, the more remote is the margin where he will have to decide. The saving of one dollar means something very different to a millionaire and to a day laborer. The essential point to re- member is that capital is a surplus, and that the stock of capital can be augmented only by an excess of production over con- sumption. The excess can be formed only by forbearance § 139] Creation and Growth of Capital 325 or postponement, but the forbearance is based on the expecta- tion of increased income. There is no ethical merit attach- ing to the individual, although the social consequences are advantageous. It might be objected, finally, that if we buy a railway share or a piece of land which doubles in value during the year, there is an increase of capital without any waiting. In reality, how- ever, the share rises in value because it represents an increased earning capacity, owing to the fact that the railway is now doing more business, that is, adding more value to the com- modities it transports, or, in other words, creating surplus wealth. If the corporation elected to waste the surplus by squandering it in extravagant salaries or palatial private cars there would be no excess available for dividends, and no rise in the price of the security. In the same way the in- crease in the value of the land means that there are more individuals who have accumulated capital and who either need the land themselves or employ the other human beings that are thus enabled to pay for the use of the land. In every case the increase of capital, that is, the creation of fresh capital or capital value, implies an increased productivity, or a sur- plus somewhere. Whether the individual owner of capital is always entitled to the particular surplus is quite another question. Capital, then, is the available stock of existing wealth. If a part of this stock is consumed and not replaced, capital is diminished; if it is not only replaced, hut so used as to bring about an increase, this surplus is the new capital. The only way to increase capital is to refram from the waste or immedi- ate consumption of product. The greater the existing stock of capital, the easier is it for the individual or the community to make this election. The increase of capital is therefore in last resort due to the growth of intelligence. Where science gives an increasing mastery over nature, the problem of production through the growth of capital resolves itself into the intelligent 326 Capital [§ 140 selection of such things as are wanted by society, that is, to the formation of a constantly growing surplus of wealth. 140. Nature and Influence of Capital Capital, as a socially important factor, is to-day, as we have seen, industrial capital. Ours is called the capitalist age, not because capital was unknown before, but because industry is permeated through and through with capitalist qualities. Capi- tal on a small scale, consisting of a Httle surplus, was devoted to production almost from the beginning of civilization. Cap- ital on a large scale was amassed in the agricultural and com- mercial enterprises of antiquity. Under the economic conditions which made for slavery and handicrafts, however, there was no opportunity to employ capital on a large scale in industry; and Vi^ith the decreasing profitableness of slavery and the gradual restriction of the commercial frontier, as in later Rome, capital itself began to dwindle until the whole economic and political structure collapsed. After many centuries, capital was again accumulated, first out of the surplus of mediaeval agriculture, and then at a more rapid rate out of the profits of the new commerce. The open- ing up of the world market in the eighteenth century made possible the application of this surplus to industry. From that time begins the prodigious increase of capital which charac- terizes modern life. Now for the first time the real productive force of capital is realized. The surface of the earth is a fixed quantity; a commerce based on agriculture and the products of hand labor can never transcend certain well-defined bounds. But the multiplication of commodities into the value of which the raw materials enter as a minor factor is limited only by our failure to unlock the mysteries of nature. Modern science, modern technique, modern capital, are enabling us to explore the innermost recesses of this unknown world and to convert it to industrial uses. Modern capital is therefore primarily industrial capital, and § i4o] Nature and Influence 327 since the factory is the type of modern industry, the capitaHst system may be called the factory system. There is indeed also a capitalist agriculture, but the characteristic features of this are borrowed from capitalist industry. Industrial capital may be taken as the type. The factory system is sometimes called the machine system. This is not strictly correct. In a modern chemical factory, for instance, there may be few or no machines at all. What must always be present, however, in a factory is some form of auto- malic action, replacing hand labor, whether that action is due to forces of nature operating directly upon raw materials, or indirectly through the medium of a machine. For aU practi- cal purposes, however, the machine may be regarded as the type. Industrial capital in this sense discloses three characteris- tics, — mass production, uniformity and interchangeability. (i) Capital becomes profitable only when there is a mass production. The supersession of hand by machine labor involves such an enormous multiplication of output that the product must now be sold en masse. The cotton print will ultimately go to the individual consumer, but the factory owner must count upon the wholesaler taking his entire prod- uct of a day, a week or a season. Even if the factory owner retails the goods, as for instance with the Tobacco Trust or certain shoe-dealers, he must control enough shops to take his whole output. (2) Industrial capital implies uniformity of production. Hand labor gives free rein to the individuality of the pro- ducer; each pair of shoes the cobbler turns out may differ in some respect from its predecessor, and may be prized on that account. A machine turns out the same thing day after day, and the advantages of specialization and co-operation are de- rived chiefly from this continual repetition. Things are made according to fixed types, forms or standards. Hence there is sometimes used the term standardization of industry. What is 328 . Capital [§ 140 meant is the uniformity, — the uniform repetition and pro- duction of the same type. Great as has been the ingenuity expended in differentiating machinery, the result has been only a moderate multipUcation of types, but Httle differentiation of the individual products within each type. There are indeed different kinds of hats and keys, but one Knox hat is almost like another, and one Yale key almost like its thousands of fellows. (3) Industrial capital also denotes interchangeability. Capi- talist division of labor means that all complex products are made in minute portions. Through the very fact of uniformity, one unit is as good as another of the same class, and may be used interchangeably. If some particular thing breaks in a bicycle or a locomotive, it can be duplicated at once and at a minimum cost. The system of interchangeable parts is applied to-day even to such products as vast bridges and co- lossal steamers. Interchangeability is a corollary of uniformity and of mass production.^ The deeper social influence of capital is visible in these characteristics. Modern life means greater uniformity. We dress alike, we eat alike, we speak alike, we think alike. Through capital we are becoming citizens of the world. Old prejudices are destroyed at every turn, religious and racial antipathies diminish, local and even national boundaries are overstepped. Side by side with these advantages appear the dangers. The levelling is undoubted, but if not carefully guarded against it may become a levelling down instead of up. Uniformity is preferable to eccentricity and vagaries, but a uniformity of mediocrity is to be deprecated. The real hope and strength of the factory system are that industrial capital will so reduce cost and increase the surplus of the in- ^This is explained in all its details in the Tenth Census Report on Power and Machinery by Professor Trowbridge, who classifies machine tools into those acting by compression, shearing, paring, milling, abrad- ing, grinding and sawing. § i4i] Investment of Capital 329 dividual as to enable him to devote it to the higher ends which make for progress. > 141. Investment of Capital When we speak of the investment or application of capital, we mean in last resort the utilization of the concrete things that constitute capital. These concrete things will be used by the alert entrepreneur only as long as they yield the maximum returns; whenever something new promises better results, it will be forthwith substituted. Perhaps the most striking fact in the incipient lawsuit of a few years ago between the great iron- masters, Carnegie and Frick, was the revelation of the readi- ness with which the former threw into the scrap heap machinery almost new, costing millions, as soon as a notable improvement had been perfected. This seeming destruction of capital on an immense scale was in reality an increase, profitable alike to the producer and the public. All physical investment of capital is the application of new commodities to replace the old. The old need not be actually worn out; it is sufficient that it should have lost its relative productivity. Under modern business conditions the investment of capital is put back a stage, and becomes the financial investment, which renders possible the ultimate physical utilization. Cap- ital is invested as a fund, to be later transmuted into concrete things. Herein lies the significance of the modern corpora- tion. Through the medium of corporate securities a fund of capital is made mobile and active. The purchase by the public of a new industrial security means, if the enterprise is honestly and ably financed, that the proceeds will ultimately take the shape of plant or working capital, that is, of realized earning capacity. The function of the promoter, the banker and the underwriting syndicate is at bottom legitimate and productive. If the physical investment of capital is desirable, the financial machinery through which this end is attained is similarly productive. It often requires far more ability to raise 330 Capital [§141 the necessary funds at the lowest rate than to turn out the finished product at rtie lowest cost. Both investor and con- sumer may in the end derive more benefit from the successful financial "deal" than from the best technical operation of the industry. The control of modern finance over vast masses of capital indeed makes possible its manipulation for illegitimate ends on a gigantic scale. But these abuses must not blind us to the essentially productive character of the services of the financiers as the intermediaries between financial and indus- trial capital. Since the ownership of the concrete pieces of capital is coming more and more to be represented by these corporate securities, their character becomes of considerable importance. Technically they are divisible into stocks and bonds. The share of stock represents legally the proportionate part of the corporation which owns the corporate assets. When there are no bonds, the stock is entitled to all the profits. Fre- quently the stock is divided into preferred and common shares, the former sometimes being a cumulative stock, so called because if dividends are passed they accumulate and must be paid subsequently before the common stock receives anything. Opposed to the stock is the bond; the property of the corpora- tion is mortgaged to the bondholders, who receive interest on the bond until the expiration of the mortgage. If there is any default in the interest, the property covered by the mortgage can be sold to satisfy the debt; In England, where mortgage bonds are unknown, their place is taken by the debenture stock, the difference being that the holder has the right, in case of default, to reimburse himself by levying upon some item of the company's property. Bonds are first, second, third or further mortgage bonds according to the priority of the lien. Where a rate of interest is contingent upon earnings, the bond is an income bond. Sometimes the bonds are con- vertible into stock, and hence called convertible bonds. When smaller corporations are merged into a larger one or when a § i4i] Investment of Capital 331 corporation seeks to avoid mortgaging its own property, the original bonds are put in trust as collateral, and a new issue is made under the name of collateral trust bonds or simply trust bonds. Although such an issue is not technically a mortgage on the real estate, it is so practically, since a recourse can always be had through foreclosure to the underlying mortgage securities. In legal theory the stock represents the ownership, and the bond a Hmited interest in the enterprise. In actual fact, under recent financial development, where the original cost or outlay is often defrayed out of the proceeds of the mortgage indebt- edness, the stock has come to represent the speculative interest in the venture, while the bond represents the actual proprietor- ship. This economic reversal of the legal situation is most clearly marked in the railways, but is also visible in ordinary industrial enterprises. As a consequence there has frequently developed an antagonism of interest, not only between bond- holder and stockholder, but also between the main body of investors and the directorate. In some states the issue of bonds is restricted to a proportion of the stock or of the prop- erty, or otherwise limited; in other cases the bondholders are given voting power; in still other instances the principle of minority representation is introduced to safeguard the interests of the stockholders. The English law of 1900 and the recent Massachusetts law are perhaps the most advanced examples of Anglo-Saxon legislation to protect the varying interests of different classes of investors. The proper method of managing the investment in vast cor- porate enterprises has assumed such importance that it has well- nigh become a separate discipline under the name of corporate finance. It included such topics as accounting, the issue and marketing of securities, the funding policy, the accumulation of surplus and reserves, and many more. In a comprehensive treatise on economics these would all need explanation. They must here be passed over with a mere mention. The influence of the proper investment of capital is by no means confined to 332 Capital [§ 141 the investor. Primarily indeed he seems to be affected. He must, however, be regarded as the channel through which society as a whole increases its fund of capital and its resulting control of nature. The investor, as opposed to the reckless speculator, is as effectively an agent of society as any individual producer. The one, like the other, may think that he is pursuing his own interest, but he will generally also be subserving the common interest. If the producer turns out something that the community really wants, he will benefit society as well as himself; if the investor exercises sagacity in the application and control of his investment, he will tend to save the community the risk of misdirected energy and the wastes of failure. The proper financial control of the fund of capital is no less important than the proper apphcation of the concrete pieces of capital to industry, trade or agriculture. Upon the eco- nomic investment of capital, in the broadest sense, depends in large measure the prosperity of all classes. L CHAPTER XXII ENTERPRISE — THE CONCENTRATION OF PRODUCTION 142. References W. S. Stevens, Industrial Combinations and Trusts (1913); W. Z. Ripley (ed.), Trusts, Pools and Corporations (1916); J. W. Jenks, The Trust Problem (191 7); R. T. Ely, Monopolies and Trusts (191 2); H. W. Macrosty, The Trust Movement in British Industry (1907); J. Moody, The Truth about the Trusts (1904); J. E. Le Rossignol, Monopolies, Past and Present (1901); A. Marshall, Principles of Economics (1910), bk. iv, chs. X, xi; E. S. Meade, Trust Finance, (1903) ch. iii; E. D. Durand, The Trust Problem (1915); D. H. MacGregor, Industrial Combinations (1906); H. Levy, Monopoly and Competition (1911); United States Industrial Commission, Report, I, II, XVIII, XIX, 595-722; Ida Tarbell, History of the Standard Oil Company (2 vols., 1904); H. R. Mussey, Combination in the Mining Ituiuslry (Columbia 5/z<(//c5, XXIII, 1905); M. Jacobstein, The Tobacco Industry in the United Stales {Ibid., XXVI, 1907); A. Berglund, The United States Steel Corporation {Ibid., XXVII, 1907); G. H. Montague, The Rise and Progress of the Standard Oil Cotnpany, (1903); W. J. Brown, The Prevention and Control of Monopolies (1914); H. W. Quaintance, Influence of Farm Machinery on Production and Labor (1904); Bureau of Corporation Reports on the Beef, Petroleum, Toba-cco and Steel Irulustrics (1905-1915); S. S. Huebner, Report [of the Committee on the Merchant Marine and Fisheries] on Steamship Agreements and Affiliations in the American Foreign and Domestic Trade (1914). 143. The Meaning of Concentration Enterprise is in one sense, as we have seen (§ 121), a spe- cies of labor. In reality, however, it has come to mean that kind of labor which is carried on independently, instead of for a stipulated reward. Strictly speaking, it is not identical with management, for the manager of a business may be hired at a definite salary. Enterprise is management plus risk; that is, it involves the independent conduct of a business, with all the chances of profit or loss. We have already discussed the his- 2,32, 334 ■ Enterprise [§ 144 torical forms of enterprise (chap. vi). In modern times the pre-eminent fact of business enterprise is the tendency to con- centration. A study of modern business enterprise thus becomes virtually a study of concentration. In approaching the problem of concentration, we must distinguish between the concentration of wealth, the concen- tration of production and the monopoly of production. Con- centration of wealth is essentially an individual phenomenon in the sense that any one may acquire wealth from independ- ent and relatively insignificant sources. A rich landlord may own a large number of small tracts; a wealthy capitalist may secure his returns from many investments in minor enterprises. Concentration of production, on the other hand, means either that the units themselves are increasing in size, as in the case of larger farms or factories, or that they are combined with other units under more or less centralized management, as in the case of enterprises technically separate, but subject to the same financial control. Where an individual owns the produc- tive factors, concentrated production involves concentrated wealth; where the business enterprise assumes a corporate form, concentrated production is compatible with a diffusion of wealth among the security holders. Concentration of production, again, is not necessarily a mo- nopoly of production. The size of the units may increase, but there may still be rivalry between them. Bonanza farms, department stores and great corporations, each representing an undoubted concentration of production, may yet suffer keen competition from their rivals. It is only when concentration has reached the stage where a single business enterprise per- manently supplies so large a percentage of the entire output as to control the price that we can speak of a virtual monopoly. In such a case indeed there may be technical competitors, but the competition is practically inoperative. Concentration of production may be predicated of each of the three factors, — labor, land and capital. § 144] Large-Scale Production 335 (i) The concentration of labor as an independent phe- nomenon is not important. After a certain low limit of co- operation has been reached the profitableness of an increased force of laborers depends on the acquisition of more land or the utilization of more capital. Not only must wages be ad- vanced, but the output must be disposed of. For these and similar purposes capital is required. Concentration of labor is thus dependent upon concentration of land or of capital. (2) Concentration of land varies with the kind of land. In grazing and agricultural land, modern economic forces, as we shall see (§ 145) are opposed to concentration; so far as it exists, it rests upon the application of capital to land. In mineral and forest lands, when we observe a tendency toward concentration it will often be found that, as in the case of iron, coal and cop- per, the product forms an important raw material for closely related industries, and that the land concentration is a result of the industrial concentration. Finally, in urban lands, whether the sites are owned in large or in small plots has no bearing on the price. Thus, while the concentration of land may be important in distribution, it is as a factor in production either non-existent, insignificant or dependent on that of capital. (3) Concentration of production hence resolves itself into concentration of capital as the dominating force. Of this again, there are two categories, — large-scale production in the narrower sense and capitalist consolidation and integration in the wider sense. Large-scale production is the result of the change in the normal business unit brought about directly by modern machinery. Capitalist consolidation and integration are the result of the more important changes effected by the application of great masses of financial capital to industry and commerce in general. Each of these must be considered in turn. 144. Large-Scale Production Large-scale production might also be called the concentra- tion of employment. It means that the business unit, whether a 33^ Enterprise 144 manufacturing establishment, a commercial enterprise or a farm, employs a large amount of capital, and as a consequence in some cases also a large amount of labor or of land. The ordinary ex- ample is that of the modern factory contrasted with the shop or handicraft system of former times. We find isolated instances of large-scale industrial production in earlier ages, but with the advent of machinery it has become the type instead of the exception. Beginning in the textile industries in England at the close of the eighteenth century, it soon spread to the most important trades, although there still exist to-day industries in which an unequal contest is being waged between the domes- tic and the factory systems. On the European continent the transition came somewhat later, and in Germany to-day the so-called petty industry (Kleinbetrieb) still makes a respectable showing. In the United States, although we find a beginning of large-scale industry in the textiles after the war of 181 2, it was not until after 1850 that the transition from the hand trades assumed any importance, and not until after the civil war that the tendency toward concentration into large estab- lishments became very marked. The distinction between small-scale and large-scale produc- tion is not precisely equivalent to that between hand trades and manufactures. The building trades are generally put in the former category, and yet they are often conducted on a large scale. On the other hand the factory may be a small one. Out of 512,254 establishments reported in the Twelfth Census, 215,814 represented hand trades. In 32,382 of these from 5 to 20 persons and in 7,773 over 20 persons were em- ployed. On the other hand, out of 296,440 establishments, in about one-seventh (41,687) the proprietor was the only workman, and in about one-half of the remainder (125,890) the number of employes was under 5. Nevertheless large- scale production may be declared to be virtually the result of the factory system with its use of machinery, its mass produc- tion and its standardization. In most of the hand trades, like I § 144] Large-Scale Production 337 carpentry, plumbing, custom tailoring and custom boot-making, we have a small-scale production; while the building trades which form the chief exception are nowadays, through the use of machinery, the purchase en masse of raw materials, and the employment of large capitals and great numbers of workmen, in reality more akin to the factory system. While many small factories are still being continually started, the tide is setting strongly toward an increase in the size of the unit. In the United States the maximum number of manufactur- ing establishments in many branches was reached in 1870; since that time the number has been in some cases actually diminished, while in all cases the average capital invested, the number of employes and the value of the product per unit have steadily risen. The following table illustrates the great ; increase of large-scale production: Industries. Number of Establish- Average per Establishment. ments. Capital. Number of Workmen. Value of Product. 1870. 1900. 1870. 1900. 1870. 103 12 56 28 5 1900. 1870. I goo. Iron and Steel . , AKricultural Im- plements . . . Carpets and Rugs Woollen Goods . Leather 726 2,076 215 2,891 7,569 668 715 133 1,035 1,306 $161,523 16,780 58,329 34,184 8,076 $858,371 220,571 334,205 120,180 131,214 133 6s 214 67 40 $274,878 25,080 101,217 53,755 20,774 $1,203,545 141.54c 362.349 114,425 156,231 This method of presentation of averages fails to show the real significance of the change, as it includes the small as well as the large factories. If, however, the number of workmen is taken as an evidence of concentration, it appears that a little over eight per cent of all the factories reporting employ about seventy-five per cent of the total number of workmen. In a single iron and steel mill in Ohio there were 7,477 employees; in a cotton mill in New Hampshire, 7,268; in an agricultural implement factory in Illinois, 6,728; in an electrical supply factory in Pennsylvania, 6,318 workmen. Moreover, as ap- pears from the preceding table, the investment of capital and 22 338 Enterprise [§145^ the value of the output increase far more rapidly than the number of workmen. According to the census of 1910 a little over one per cent of the number of manufacturing establish- ments were responsible for 43.8 per cent of the total value of products and for 30.5 per cent of all wage earners. 145. Large-Scale Agriculture Where agriculture depends chiefly on the labor of the farmer, aided by comparatively primitive implements, the size limit of profitable farming is soon reached. In the middle ages, even with co-operative or communal farming, the prevalence of the three-field system restricted the size of individual strips. In more modern times we find either the small plots of the European peasant proprietor or the somewhat larger tracts of fresher land of the early American farmer. Farming on a large scale becomes possible only when capi- talist methods are employed. In former times these methods were supplied by slavery, as in the latifimdia of later repub- lican Rome and in the ante-bellum plantations in the South. The slave, however, was to all intents and purposes a species of capital or machinery — even though a human machine. When slavery disappeared, a new era of small farms was ushered in, and whatever tendency to large-scale farming is . found to-day is due in great measure to the application of industrial capital in the shape of farm machinery and capital- ist methods of transportation. The home of farm machinery is in the United States. Its ; coming was somewhat later than in the case of the other more important productive enterprises. Whitney's cotton gin and Newbold's cast-iron plough were invented at the close of the eighteenth century, but it is only since the civil war that farm machinery has been used on a large scale. The increase in the production of agricultural implements in the United States ' is illustrated by the following figures: 1850, $6,842,611; i860, $20,831,904; 1890, $81,271,651; 1910, $146,329,000. § 145] Large-Scale Agriculture 339 In the large farms of the far West fifty-horse-power traction engines are now used to pull at one season a train of great ploughs, harrows and press drills for planting, and at another immense harvesting-machines, automatic rakers and threshers. In the Central states we find check-row planters, riding-ploughs, steam corn-huskers and shellers, mowing-machines, potato planters and diggers, manure-spreaders, feed-choppers and grinders and ditch-digging machines — to mention only a few of the newer implements. The saving of labor, the prodigious increase of output and the lessening of cost go far to explain the competition of American farm products in the European markets, despite the great obstacle of distance. The influence of machinery in increasing wages, shortening hours of work, lightening the tasks of women and children and raising the general standard of life of the farmer as well as of his hands is so universally recognized that it needs no statis- tical proof or explanation. What interests us here is its effect upon the size of farms. It is obvious that considered by itself expensive machinery becomes profitable only when applied to large stretches of land. This is evident from the following table giving the average number of acres of improved land per farm: 1850 i860 1S70 18S0 iSgo igoo 1910 United States .... 78.0 79.8 71.0 71.0 78.3 72.2 75-2 New England .... 66.5 66.4 66.4 63-4 56..^ 42.4 38.4 Middle Adantic . . 70.8 70.3 69.2 68.0 67.4 63-4 62.6 E. North Central 62.2 70.2 72.1 76.7 78.1 71-3 79.2 W. North Central 54-3 60. 64.7 85-9 II5-3 127.9 148. South Atlantic . . . 120.9 115.6 80.7 56.1 .15-6 47-9 43-6 E. South Central . 85.1 95-5 65.1 54-1 54-5 44-5 42.2 W. South Central. 69-5 74.0 49.4 59-9 70.9 52-7 61.8 Mountain 39-0 27-3 41.8 88.4 110.5 82.9 86.8 Pacific 81.2 ^33-3 218.6 227.6 227.6 132.S 116. 1 In the North Central division, the chief home of farm machinery, the increase is marked. The average for the whole 340 Enterprise [§ 145 country, however, is kept down by the fact that as a general rule land values tend to rise with growing prosperity. A given capital thus represents a constantly diminishing acreage, and it becomes increasingly profitable to apply more labor and minor machines to small areas rather than large capital and vast machines to great areas. That is, we have a tendency to intensive, rather than large-scale, farming. The final con- sequence is a resultant between the two forces of growing productivity of machinery and increase of land values. The table below gives the average acreage of the entire farm: Division. 1850. 1870. 1880. 1890. 1900. 1910. United States . . . 202.6 153-3 133-7 136-5 146.2 1 38. 1 New England | Middle Atlantic ) 1 1 2.6 104.3 97-7 ( 104.0 1 91-7 107. 1 92.4 104.4 92.4 South Atlantic . . . 376-4 241. 1 157-4 133-6 108.4 93-3 East North Central | ( 104.8 ) 164.8 102.4 105.0 West North Central ( 143-3 123.7 121.9 189.5 209.6 East South Central ^ 150.6 \ 1205 89.Q 78.2 West South Central J 291.0 194.4 ( 179-7 233-8 179-3 Mountain ) Pacific ^ • • • ■ 694.9 3364 312.9 ( 298.9 ( 337-0 457-9 334-8 324-5 270.3 It will be observed that up to 1880 there was a movement toward smaller farms. Since 1880, the era of the introduction of machinery on a large scale, the forces have about balanced each other in the New England, Middle Atlantic and East North Central divisions, while in the South Atlantic division machines outside of the cotton gin have been found well nigh inapplicable, and the old slave plantations have been gradu- ally broken up into small farms. In the West North Central division not only has the use of machinery increased, but the opening up of vast stretches of grazing land contributed to increase the average size of the farms. With the growing importance of land values the trend in the West has now begun to conform to that in the East. In 1910 over 82 per cent of § 146] Consolidation and Integration 341 all the farms were under 175 acres. The tendency for the small farms to increase is shown by the following table of per- centage in acres: Under 10. 10-20. 20-50. So-ioo. 100-500. 500-1000. 1 000 and over. 1880 1890 1900 I9I0 3-5 3-3 47 13 .1 195 19.8 21.9 22.3 246 23.8 22.6 42.3 44.0 39-9 39-3 1.9 1-9 1.8 2.0 0.7 0.7 0.8 o.S The same movement is discernible even in the Western and North Central divisions, where, notwithstanding a slight increase in the largest farms, there has been a considerably greater increase in the smaller farms. The conclusion is that large- scale production is, even in the United States, far less appli- cable to agriculture, than to industry, chiefly because the lower cost resulting everywhere from machinery is, in the case of agriculture, partly counterbalanced by the increase in land values and the consequent changes in cultivation. 146. Consolidation and Integration of Production Side by side with the immediate effects of machinery in enlarging the size of the individual business unit, we have the broader phenomenon of the capitalistic combination of produc- tion. This is of two kinds: first, the consolidation of like units into a larger whole, as in the union of separate shipping lines into the International Marine Company; and second, the inte- gration of unlike units, as the union of such originally dilTerent enterprises as mines, transportation companies, factories and mills into the United States Steel Corporation. Combinations of capital have gone through several phases known respectively as agreements, pools and trusts, each being further divisible into two or more classes. (i) The earliest form is the agreement of independent concerns to fix prices. This is the first natural effort to in- 342 Enterprise [§ 146 crease profits by restricting competition. It is found almost from the beginning of business enterprise. Its obvious weak- nesses are the lack of any adequate penalty to prevent under- cutting by any one of the parties to the agreement; and the inducement which the ensuing high profits hold out to new com- petitors. In the American railway business this plan, whether in the form of the earlier traffic arrangements or in that of the later presidents' agreements, never proved effectual. In gen- eral industry its efficacy has proved to be limited and doubtful. (2) The next step is the agreement to divide the field, each enterprise contracting to limit its activity to a particular section. This plan also is subject to difficulties, except in cases where the first comer possesses undoubted advantages through the mere fact of priority. The most familiar examples are the American express companies and the French railways, although even here there is some competition on the fringe of each field. Division of the field, however, is in most cases only a stage in the formation of a closer union, as in the so-called rival gas or electric light companies. (3) The third phase is the pool, or the attempt to restrict the output, rather than the price or the field. The pool is so named because the receipts are put into a common fund or pool, each member of the combination having an allotted per- centage of production.! Ordinarily this takes the form of a money pool, the excess or deficiency in each case being paid in cash. Occasionally, as in some of the railway trafiic-pools, the output itself is diverted from one member to another. When this apportionment is accomplished by secret favors to individuals, like the cattle, hog and oil "eveners," the abuses become notorious. Frequently the equilibrium is brought about by a fine on the excess production, instead of a technical pooling of the output or the proceeds. Here, again, the temptations covertly or openly to exceed the allotment in 1 The industrial pool must not be confused with the financial pool, used for speculative purposes in the stock exchange. I § 146] Consolidation and Integration 343 order to secure greater immediate profits or to furnish an argu- ment for a larger percentage at the next distribution is fre- quently too strong to be resisted. To this danger the whisky pool, the beam pool and many others succumbed. (4) Sometimes the pool combines both features, the fix- ing of price as well as of output. Occasionally it goes still further and under the name of selling bureau or agency constitutes a fourth phase. The selling bureau not only fixes prices and output, but often manages the entire business of selling, taking all orders and distributing the respective allot- ments to each member. Many of the German Cartcllcn are of this nature, although in some cases they are nothing but ordi- nary pools. Of the same character are the Michigan Salt Association, originally formed in 1876, and many of the French comptoirs or syndicals. The weakness of the pooling arrange- ments is not only their instability, but also the fact that, in Anglo-Saxon countries at least, their provisions are unen- forceable because repugnant to the common law. (5) The fifth stage was reached in 1882 by the formation of the Standard Oil Trust, so called because the constituent enterprises turned over their business to a board of central trustees, receiving in return trust certificates for the shares of stock turned over and abandoning to the "trust" the entire operation of the business.^ Although the Whisky (1887), the Sugar and other trusts rapidly followed, the scheme was soon found to conflict with the law. In 1890 the Sugar Trust was held to be illegal in New York, and the same fate befell the Standard Oil Trust in 1892 in Ohio. As a consequence the original trusts were dissolved, and the constituent enterprises were now combined in a new and still more effective way. (6) The sixth form is called the holding corporation. The original members of the combination are first organized as corporations, each maintaining its separate existence. A ' The industrial trust must not be confused with the trust company, any more than the industrial pool with the stock exchange pool. 344 Enterprise [§ 146 new central corporation is then formed to buy up or hold the stock, or at least a majority interest, of the individual corpora- tions. On the basis of the income received from the constit- uent companies, the parent corporation issues its securities, and while each plant or business is operated as a separate unit, its capacity is virtually controlled by the directory of the parent company. It is the trust in a new and more effective form, preserving the unity of the old, but adding a certain flexibility and responsibility. In its original form, something like the holding corporation is found in isolated instances in an earlier period, as in the case of the Pennsylvania Company in 1870, the Bell Telephone Company in 1880, and the Southern Pacific Company in 1884. In the early nineties the United States Rubber Company and the reconstructed Sugar Trust assumed this form. All these, however, were organized under special laws in the various states; the general legality of one corpora- tion holding the stock of another was first made possible by the New Jersey corporation act of 1899. This led to a sudden ac- tivity in the formation of new corporations as holding companies. Among the first to take advantage of the law were the Amal- gamated Copper Company and the Standard Oil Company, which in the interval since 1892, after the alleged trust had been declared illegal, had continued in a somewhat formless ■ but none the less effective consolidation through a division of i the shares of the various constituent companies among a few. individuals, who had been trustees of the old trust. In 1901 1 the United States Steel Corporation was formed, followed in 1902 by the Mercantile Marine Company and the International I Harvester Company, and in 1904 by the American Tobacco Company. The attempt to apply the same method to still | larger combinations of railways, as in the case of the Northern Securities Company in 1901, failed because of special prohibitive legislation to which attention will be directed hereafter. During the past few decades the progress of consolidation has overleaped national boundaries and we are now well within \ 147] Combination and Efficiency 345 he period of international industrial and mercantile combina- ions. Owing, however, to the obvious limitations of the ituation, international consolidations are still in the earlier itages of development and have assumed the forms primarily )f price agreements and of pools. These international pools ire found not only in the various branches of industry but also md more especially in the shipping business. 147. Coinbiiiation and Efficiency Combination of capital, as is obvious from the illustrations jf the last section, has made itself manifest in four business groups: (i) the railroads; (2) the franchise or public-service enterprises, including the telegraph, the telephone and the so-called municipal monopolies like water, gas and electric light, street-railway, heating and conduit companies; (3) the itrust companies in the narrower sense, the banks and the insur- imce companies; (4) the industrial combinations. The first three groups are so important in themselves and so clearly marked off from the others that they will be more appropri- ately discussed hereafter. We shall confine our attention here to the industrial combinations. The advantages of such combinations from the point of view of the producer are obvious. Considerable savings are possible through the ability to buy cheaply in large quantities. The avoidance of cross freights by locating the establishments at diflferent places is often important, especially in the case of heavy or bulky articles. The possibility of handling large orders by concentrating production at certain points has fre- I'quently turned the scale. The ability to sell in considerable quantities, and therefore at a smaller percentage of profit, is an added advantage. Great combinations moreover afford ' opportunities for experiments on a large scale which are difll- cult for the small producers. Decided savings are possible in reducing advertising and in dispensing with traveling agents ■I or salesmen to procure business. Where the combination is a I 34^ Enterprise [§ 147 large one dealing wilh various branches of production, the ability to utilize waste is a pronounced advantage. The benefits of division of labor and large-scale production may be multiplied by concentrating departments and facihtating standardization by devoting each factory or mill to one particular product. The larger the concentration, the better are Ukely to be the knowledge and control of credit relations, so as to reduce the loss from bad debts. Again, more ample means are afforded to secure capacity of the highest order in the management of the enterprise. Finally, the wider view which comes from an interchange of ideas and a comparison of experimental methods in the separate plants is frequently of value. The president of the American Tobacco Company a few years ago declared, this to be the chief benefit of combination. The advantages to which we allude, however, must be dis- tinctly understood to mean the advantages of production As to how far the benefits of combination are passed over to th( consuming public in general is a different problem, to be taker up later (§ 239). What we are considering here is the relatioi of combination to efficiency of production. We must be careful, moreover, not to push the doctrine intc the ground. There are limits to the advantages of great size The Germans have a proverb that the trees do not grow int( the sky; so in industry; when a certain point has been reachet 1 the added efficiency of more units becomes subject to the lav 1 of diminishing returns. It has been seriously questioned b; careful railway operators whether this limit of efficiency ha not been overstepped, or at least approached, when we hav separate units of twenty or thirty thousand miles in length Even with perfect organization in industry, fundamental prob lems of policy bear some relation to the amount of details; ani when the size of the organization passes a certain point - which of course differs in every case — • the machinery of cor trol tends to become unwieldy and cumbrous. All this is t say that at a certain point of growth the new efficiency is cor verted into irefficie''!rv. 147] Growth of Combination 347 The concentration of production, however, is so general and /orld-wide a tendency that the increased efficiency of production i a quite sufficient explanation of its existence. That there are ther contributing causes is more than probable, as we shall ee more fully hereafter (§ 238); but that these other causes uflice to explain the facts of combination is unlikely. The ex- lianation of a world-wide movement must in itself be general nd such a general explanation is clearly the economy of con- cntrated production. It is only in recent years that industrial apital has become so abundant as to disclose the real advantages if concentration. According to the census of 1900 there were 185 combina- ions, representing 2,040 plants and turning out products to he value of $1,667,350,000 a little over 14 per cent of the otal industrial output of the United States. But since 1900 he movement has progressed rapidly. In 1900 there were 16 ombinations each with a capital of over $50,000,000 and with m aggregate capital of $1,231,000,000. In 1909, as appears rom the table on page 348, not only were there 30 such combina- ions with an aggregate capital three times as great ($4,020,000,- )oo), but a single combination now had a larger capital than he 16 combinations, and about one-half as large as all the 85 combinations in 1900. The United States Steel Corporation is such a striking ex- imple not only of the consolidation, but of the integration ' )f production, that the following figures are appended. The issets of this corporation in 1902 were, according to the testi- nony of its president in a recent lawsuit,^ as follows: T Iron and Bessemer ore properties $700,000,000 "B Plants, mills, machinery, etc 300,000,000 Coal and coke fields 100,000,000 Railroads, ships, etc 80,000,000 Blast furnaces 48,000,000 Natural gas fields 20,000,000 lj Limestone properties 4,000,000 )\ Cash and cash assets 148,281,000 $1,400,281,000 ' Hodge el al. vs. U. S. Steel Corporation. 348 Enterprise §147 By 1908, the assets had grown to 1,746 millions and on Dec. 31, 1918 to 1,871 millions. Contrasted with this integration of unlike industries, we have the consolidation of like industries shown below. The ten (in 1918 twenty) subsidiary corn- Name. United States Steel Corporation . . American Tobacco Company . . . American Smelting & Refining Co. International Mercantile Marine Co. Amalgamated Copper Co International Harvester Co. . . . Central Leather Co Lackawanna Steel Co Pullman Co Standard Oil Co United States Rubber Co Mackay Companies . American Sugar Refining Co. . . . Corn Products Refining Co. . . . American Can Co Colorado Fuel and Iron Co. . . . Pittsburgh Coal Co Westinghouse Electric Co American Woolen Co Swift & Co Commonwealth Edison Co. ... American Car & Foundry Co. . . Virginia-Carolina Chemical Co. . . Republic Iron and Steel Co. . . . Distillers Securities Corporation . . Dupont de Nemours Powder Co. . International Paper Co National Biscuit Co American Locomotive Co United Copper Co Founded Outstanding or Reor- Stock and ganized. Bonds, igog. I901 $i>393.i 72,000 1904 230,569,500 1905 177,000,000 1902 175,961,200 1899 153,880,000 1902 120,000,000 1905 108,328,002 1892 103,901,400 1867 100,000,000 1899 98,338,300 1892 92,198,000 1903 91,380,400 1891 90,000,000 1906 87,118,100 1901 82,466,000 1903 79>325,Soo 1899 78,880,400 1902 73,504,477 1899 70,501,100 1885 65,000,000 1907 60,483,000 1899 60,000,000 1895 57,984,400 1899 57,876,900 1906 57,709,941 1903 57,281,966 1898 54,770,000 1898 54,040,500 190I 53,000,000 1902 50,000,000 panies (the Carnegie, the Illinois, and the Lorain Steel Com panics, the American Steel and Wire Company, the Nationa and the Shelby Steel Tube Companies, the American Shee |l Steel, American Tin Plate, American Bridge and Union Stee Companies), themselves the results of many consolidations ^ 148] Limits of Combination 340 -epresented in 1903 86 blast furnaces, 31 Bessemer and open- :!oarth steel works, 57 blooming, slabbing, billet and sheet .^ar mills, 20 rail and plate mills, 251 puddling furnaces, 39 ikelp mills, 59 bar, hoop and cotton tie mills, 11 structural jhape works, 24 rod mills, 22 wire mills, 447 sheet, black plate ind tin plate mills, 5 tube mills, 26 bridge and structural plants, 24 foundries and 16 miscellaneous works. 148. Limits of Combination It is clear that if there were no limit to combination the ogical result in every industry would be a monopoly of produc- ion. As a matter of fact, however, there are two classes of imits, artificial and natural. The artificial limits are those due to the interference of gov- ;rnment. The entire problem of legislative restrictions on ;ombinations will be discussed hereafter (chapter xxxvi). scarcely less important, however, are the natural limits of com- )ination. Comparatively slight significance indeed is to be at- ached to the point discussed in the last paragraph, namely, the liminution of efficiency and economy after the reaching of a cer- ain point. For under certain conditions the industry may have ittained a monopoly long before this limit has been reached. The far more effective limit of combination is the persistence )f competition. In certain branches this limit does not exist, lud ought not to exist. In the railroad business the objection competition is that it leads to discrimination. In the other :>ubhc-service corporations competition might do more harm han good. Competing telephones would be a source of lasting :onfusion to the patrons, competing gas and water companies 1 continual annoyance to the users of the streets. In some )ther branches of industry, monopolistic combination is un- Icsirable but none the less possible. Where the industry is oncerned with, or based upon, masses of raw material found n a state of nature but in limited quantities and in specially avored locations, the control of the natural monopoly is apt to 350 Enterprise [§ 148 lead to a monopolistic combination of the business. In ordinary business, however, where the raw material is itself either a manufactured product or procurable under competitive condi- tions, the natural limits to combination are more obvious. Ir the absence of legal or natural monopoly, whenever profits are high enough to tempt competition, new-comers are likelj to appear. The combination may swallow up the new com- petitor, but as long as science remains free, as long as unfaii competition (§ 238) is prevented and as long as the combinatior does not control the government or the general media of trans portation, the process will repeat itself. The so-called "eco nomic wastes" of competition are a cheap price to pay for it many advantages. Thus, while the United States Steel Cor poration is constantly expanding, new competing corporation have been growing equally fast or even faster. Instead of ; single combination, we have in each branch the looser con centration known as the pool, which has to be readjusted when ever a new competitor appears. At the close of 1904, afte the Lackawanna Steel Corporation decided to make steel va'Ai the percentages of the Steel Rail Association were at one changed, and the arbitrator apportioned the output amon the five members, — the United States, the Lackawanna, th Pennsylvania, the Cambria and the Maryland Steel companie; So in another domain of business, like the great departmer stores in our cities, there is no way of keeping out not only th large competitors, but the small competitors as well. Indee the erection of these mammoth stores has not appreciabl diminished the number of little shops. Again, there are whole fields of industry where combinatic is only slightly applicable. In the woollen trades, in the she factories, in the cotton and silk mills, as well as in numberle other industries, the combinations are apt to be short-lived ( partial. Finally, in the immense domain of agricultural pr duction the possibility of combination is almost entire eliminated. j i48i Limits of Combination 351 It is clear therefore that combination must not be confused with monopoly and that every combination is not necessarily 1)11 the highroad to monopoly. With the methods designed to [)revent monopoly we shall deal later (§ 241). What we desire lo emphasize here is the truth that if factitious advantages are removed and no favors or unfair practices are permitted, we ncfd have no fear about the growth of combination. For with a free and a fair field, the natural limits of combination will dis- t lose themselves, and up to these limits combination will mani- fest all those advantages of concentrated production to which rtltention has in this chapter been directed. Book III Value and Distribution CHAPTER XXIII PROFITS 149. References J. B. Clark, Distribution (1899), ch. xiii; N. G. Pierson, Principles (1902), part I, ch. v; F. W. Taussig, Principles (1911), chs. xlviii-1: A. T. Hadley, Economics (1896), chs. iv, ix; A. Marshall, Principles (1910), bk. vi, chs. vi, vii; T. N. Carver, Distribution (1904), ch. vii; F. A. Fetter, Principles (1915), part 5; J. S. Nicholson, Principles (1893-1901), bk. ii, ch. xiii, and bk. iv, ch. vi; A. W. Flux, Principles (1904), ch. x; Veblen, Theory of Business Enterprise (1904), chs. vi, x; H. R. Seager, Principles (1913), chs. xii, xiii; F. B. Hawley, Enterprise and the Productive Process (1907); H. C. Emery, Speculation in the Stock and Produce Exchange of the United States (1896); E. G. Nourse, The Chicago Produce Market (1918); W. Parker, The Paris Bourse and French Finance (Columbia Studies, 1920) ; H. Withers, Stocks and Shares (4 imp., 1917); A. C. Stevens, Futures in the Wheat Market (Quarterly Journal of Economics, II, 1888), and The Utility of Speculation (Political Science Quarterly, VII, 1892); S. J. Chapman and D. Knoop, Anticipations in the Cotton Market (Econ. Jour., XIV, 1904); R. Giffen, Stock Exchange Securities (1877); A. Crump, Theory of Stock Exchange Speculation (2d ed., 1874) ; Report of the Commissioner of Corporations on Cotton Exchanges (3 vols., 1908-1909); H. H. Brace, The Value of Organized Speculation (1913) ; H. B. Drury, Scientific Management (1918) : R. F. Hoxie, Scientific Management and Labor (191 5). 150. The Shares in Distribution All wealth that is created in society finds its way to the final disposition of the individual through certain channels or sources of income. This process is called distribution, and 352 § 150] scares in Distribution 353 tlic sliarcs in dislribulioii differ not only in uniounl bill in kind. Distribution, like production, is a social phenomenon. If every one consumed what he individually produced, there would be no exchange, no price, no distribution. In production we study the creation of the social income; in distribution we study its division. In the one case we regard it as the na- tional output, in the other as the national dividend. In pro- duction w^e deal with the cost or expense of the factors which co-operate to create wealth; in distribution we deal with their remuneration. It is clear that the shares in distribution differ according to the character of production and the structure of economic life. Where, for instance, slavery exists, we cannot speak of wages; where the same individuals own the capital and do the manual work, we cannot well distinguish between profits and wages; where capital is not loaned, interest does not emerge. The modern science of economics is, as we have learned, due to the efforts to analyze the modern shares in distribution. The study of distribution is primarily a study of the remu- neration of the factors of production. Since each factor con- tributes to the common result known as the social income, there must be a certain part of the product traceable to each factor. There are hence as many shares in distribution as there are factors in production. The remuneration of labor is called wages. The remuneration of the fund of capital is called interest. The remuneration of the concrete things that possess a capital value is caUed rent. Rent is usually limited to the return from land; but since other things as well as land are rented, it is better, as we shall see, to call the re- muneration of land land-rent or ground-rent in contradis- tinction to other rents. Finally, the remuneration of the entrepreneur, or the man who carries on the enterprise, is called profits. Among them, wages, interest or rent, and profits exhaust the entire social income. 23 354 Profits . [§151 In modern society differentiation of function has proceeded to the extent that different classes control different agents of production. This separation, however, is not rigid. The same man may own land and factories; he may be a workman and a stockholder in the same plant, as in the United States Steel Corporation; he may be a farm-laborer and a tenant or a land- owner; he may be a money-lender and yet actively engaged in industry, commerce or agriculture. In the great mass of cases, however, the social class corresponds to a distinct kind of income, and in its broadest aspect the social shares in dis- tribution correspond to the factors of production. 151. Ordinary Profits Profits are the income from business enterprise. They are not necessarily limited to capital. An employment agency or an Italian padrone may make profits from directing labor into the right channel. A real-estate operator may make profits out of selling land. Profits are a result of business enterprise, and the entrepreneur may deal in labor, in land, in capital or in all three. It is hence inexact to speak only of the profits of capital. The best method of gaining an insight into the nature of profits is to consider, first, ordinary profits. By ordinary profits are meant the profits of a regular business that deals in a repe- tition of analogous transactions in competition with others. The term normal profits that is sometimes employed is less satisfactory, because it incorrectly implies that there is such a thing as a normal or general rate of profits, as well as because it brings to mind the conception of normal value; whereas profits are a result of fluctuations in market value and would not exist in a state of normal equilibrium. Profits are always a surplus. They are the difference between the cost of production or acquisition and the selling price. They form a differential, however, in a second sense. Profits are the surplus of the intramarginal over the marginal pro- § i5i] Ordinary Profits 355 ducer. At any given time, under competitive conditions, market price is the same (p. 235), but cost varies. The ex- penses of production are manifold, but may ordinarily be classified into cost of raw material, wages, rent, interest on the capital borrowed or invested, taxes and miscellaneous out- lays like insurance, advertisements and transportation expenses. All of these obviously vary from individual to individual. Some will display more care in the selection and arrangement of their labor force; some will choose a more advantageous situa- tion, with a saving in both rent and transportation; some will accomplish better results with less capital and economize in interest as well as taxes; some will exercise more ingenuity in purchasing the raw material or securing a market. At the bottom of the scale is the marginal producer, working under the least favorable circumstances, and who can nevertheless get no more for his goods. With him price equals cost; with the others price exceeds cost. The excess of price over cost con- stitutes profits. It is evident that in the long run profits could not exist in a state of normal equilibrium. If there were no change in the general conditions affecting value — if, in other words, economic forces were in equilibrium and society quiescent in all respects save the existence of such a complete mobility, of capital and labor as is implied in the idea of frictionless competition, — there could be no permanent profit to any producer. The gross earnings or gross profits would indeed include interest on capital invested; for if the business man did not earn interest on his capital, he would go out of business and loan his capital at the normal rate to some one else. So also the gross earnings would suffice to give him a bare compensation for his services, for if not he would enter some other employment or become a wage-earner. Gross profits must include interest and wages. But there would be no net profits, or surplus profits, or profits in the real sense of the word. For as soon as a profit appeared the entrepreneurs in other fields who were just making ex- 356 Profits [§151 penses would at once bid against each other in their effort to secure capital and labor, until they would capture their share of the market, and the profits would dissipate themselves on the one hand in the higher rate paid for the factors of pro- duction, and on the other hand in the lower price of the product due to the greater supply. What was added in one industry would be subtracted from another. In actual life, however, there is a continual change, — population varies, wants are modified, capital increases, the processes of industry and methods of enterprise alter. Competitive profits are due wholly to such changes. He who can take advantage of the market secures the gain. Profits, again are necessarily unstable. They last only as long as the economic fluctuation or variation from the normal condition continues. A new invention is the source of profit because it reduces cost; but when the patent expires and competition sets in, the influx of new producers will reduce the price to the new cost level and the profit will disappear. The profits may accrue for a time to individual producers or to the whole class of producers. When general demand aug- ments or, as in common parlance, when times are good and sales brisk, every one may make money. The increased profits, however, will lead to greater production, and the rela- tion between consumption and production will soon change, so as to usher in the "bad times" and a disappearance of profits. This rhythmic succession of inflation and depression will, be studied later. Here it is desired to call attention to the fact that profits can last only as long as the economic dis- harmony or perturbation lasts, that is, as long as the forces are not in equilibrium. If the manufacturer continually introduces new inventions, he may retain his superiority over his compet- itors. If the demand of the community grows by leaps and bounds, it may keep ahead of the new production and for a long period afford profits to all producers. This may be true of a particular commodity or of a whole group of enterprises. § i5i] Ordinary Profits 357 At one period in the United States the shipping trade was particularly remunerative, at another the railroad industry, and so on. In a new section the supply of capital and labor may be so scarce that all business is lucrative; and the increase in population may cause agricultural profits to grow and land values hence to rise. In an old country the general political and commercial relations may be such as to afford a growing foreign market, with the possibility of large and long-continued profits to the domestic producer. In every case, however, as soon as the original force has spent itself and competition has set in, the profit tends to vanish. In this sense, and in this sense only, is it true that profits tend either to an equality or to a minimum. The older writers confused interest with profit. Interest is the return from the fund of capital; profits are the return from the conduct of business enterprise, irrespective of whether the enterprise deals with capital or labor or both. Interest is a part of cost; profit is a surplus above cost. Interest, as we shall see, has a normal rate; profits may have an average rate but no normal rate. The marginal producer earns no profits; the intra- marginal producers make profits which vary with the discrep- ancy of their cost from the market price. If in any businesses indeed profits are particularly high, the more efiicient pro- ducers in other lines will transfer their capital to these occupa- tions; but in these occupations, as in the others, the competitive profits will range from zero to large figures. If there is any equality, it is an equality of an average between much and nothing. On the other hand, while the tendency to an equal- ity is true of average profits — which is of importance only as between occupations — the tendency of profits to a minimum is true of each particular occupation. There is under normal conditions of progress a tendency in the rate of interest to fall, but, as we shall see, never to vanish; there is under competi- tive conditions always a tendency for the rate of profits in each individual business to disappear. 358 Profits [§ 152 Thus in ordinary enterprises profit is the great lure of energy, and competition the great destroyer of profit. Com- petitive profits, the union of both, are hence the symptom of progress. They can exist only by being continually renewed; they are not a tax on the community, but a draft on nature. Profits are a result of price, not a cause of price. Production at a lower cost creates profits; competition forces price down to lower cost and eliminates profits. Profits can be main- tained only by the creation of a continually newer cost level lower than the new price. 152. Aleatory Profits Profits are sometimes described as the wages of superin- tendence. There are indeed certain occupations where the income partakes of the nature of wages. The commissions of a broker, like the fees of a professional man, are really wages, even though they are popularly called profits. Wages, how- ever, differ from profits in that wages are a stipulated income and profits a residual income. There is a normal rate of wages, there is no normal rate of profits. Wages are a part of cost, profits a surplus over cost. The entrepreneur may think that he deserves a return for his services, but whether he secures one depends on his competitors. There is always a certain level below which wages cannot fall, because no work would otherwise be done; but the very continuance of com- petitive profits depends on the abler producer cutting down cost to the point where the marginal producer earns no profits. The reduction of some wages to zero implies the starvation of. the laborer and the crippling of the productive force of the community; the reduction of some profits to zero means the elimination of the inefficient and the continuance of progress. Above all, profits differ from wages in that profits are the direct result of price fluctuations. The question thus arises as to the dependence of profits upon chance. Aleatory or chance profits exist in varying degree. Some § 152] Aleatory Profits 359 are essentially unique or sporadic. If I iind a pocket-book on the street or receive a bequest, the income is wholly aleatory. The law of chance governing all such pure windfalls may be of interest to the mathematician, but is of little importance to the economist. The line between aleatory and ordinary profits is, however, not so easy to draw. In the first place, we have the great field of speculative profits, to be discussed in a moment. Secondly, there is an element of luck in all business. The oscillations of demand and supply are infrequently influ- enced by accident. A flood, an invention, a war, a new whim in fashion, a chance occurrence of any kind, may affect the individual or the group, the producer or the consumer, and by influencing either cost or price modify business profits. In one sense all price fluctuations are accidental. A distinction is sometimes drawn between industrial and pecuniary profits. By industrial^ profits in the broad sense are meant profits derived from the production and sale of repro- ducible goods, such as compose the great mass of the annual output of wealth. "Industrial" in this sense would include agricultural and commercial profits. Pecuniary profits, on the other hand, comprise the results of such transactions as have to deal only secondarily with production and primarily with sale, not from producer to consumer, but from one owner to another. The chief example of such pecuniary profits nowa- days is the dealing in vast masses of vendible capital, irrespec- tive of its industrial uses. Many of the large fortunes of recent times have been derived from such sporadic or fortui- tous profits. When financiers trade in railway securities or "industrial" stocks, their profits on each isolated transaction may be independent of, or even opposed to, the best manage- ment of the corporation as reflected in higher quotations; for their profits may come from buying at lower, rather than sell- ing at higher, prices. But even here, with all the abuses of which the practices are susceptible, the permanence of pecu- niary profits as a whole is ultimately connected with industrial 360 Profits [§ 15;, progress. If stocks go down, the profits of some must Ije counterbalanced by the losses of others; but if stocks go up, every one may participate in the gain, and even if there are some losses they may be more than compensated by the profits of others. Stocks, however, can rise permanently only if the enterprise earns more, that is, if it is industrially more efficient. Thus, while pecuniary profits may in individual cases be the result of a change in ownership, with no assignable relation to the production or utilization of the commodities which the securities represent, pecuniary profits as a whole have, in last instance, a real connection with the industrial profits on which they finally rest. Chance or luck, therefore, may often be the cause of sporadic profits, but cannot explain their persistence either for the in- dividual or for society. The individual who attempts to secure pecuniary profits can in the long run succeed only if he uses good judgment, foresight and practical sagacity, thus elimi- nating more and more the influence of blind chance. The financier, like the manufacturer or merchant, is really a servant of society; like some servants, he may be refractory, unfaith- ful or treacherous,' but in the main he will fare best when he best subserves the interests of society. The aleatory element is inseparable from profits, since profits are derived from fluctuations; but the ultimate cause of persistent profits is the ability of tlie individual to take advantage of the fluctuation, — and in the long run this ability plays into the hands of society at large. 153. Speculative Profits — Nature By speculation is meant the purchase or sale of an3^thing in the hope of profit from an anticipated change in its price. It differs from ordinary trade only in degree, for all profit, as we have seen, has an aleatory element. The difference, however, consists in the fact that speculation concentrates and intensi- fies the forces which affect demand and supply. Speculation was in former times chiefly place speculation. § 153] speculative Profits 361 The practice of buying in one market and selling at almost the same time in another has been lessened by the modern means of transportation and communication, whereby price fluctuations between places have been minimized. It exists to-day chiefly in the form of "arbitrage" of stock or com- mission brokers, and its success depends on the rapidity with which their telegraphic facilities may enable them to anticipate the pubhshed quotations on the exchanges. The more im- portant form at present is time speculation based on price fluctuations after the lapse of an interval of time. Speculation, again, may be sporadic or regular. Sporadic speculation is almost as old as business itself. It is the result either of a popular frenzy or of a deliberate scheme to take advantage of a temporary occurrence. An example of the first kind is the tulip mania in seventeenth-century Holland, when the most fabulous profits were made by those who had anticipated the short-lived demand for bulbs. So also the occasional speculative "booms" in real estate at present are the cause of enormous profits, followed by corresponding losses when the bubble is pricked. In such cases speculation is due to changes in demand, which it is almost impossible for individuals to foresee or to control. Supply, on the other hand, lends itself more readily to manipulation, and deliberate attempts are not infrequently made to accomplish this end. From the eft'orts of Joseph to buy up the corn crop in Egypt, and from the decision of the Greek philosopher to show his practical wisdom by purchasing in advance of the vintage all the winepresses, down to the modern pools and rings, attempts to corner the market are occasionally found. While sometimes successful in minor cases, they commonly fail when on a large scale. The failure is due (a) to the immensity of the capi- tal required, (b) to the difficulty of procuring and retaining trusty confederates whose selfish interests may often be best subserved by selling when their principal is buying, (c) to the fact that rising prices vv'ill bring to the market all the 362 Profits [§ 153 reserved stock, and (d) to the danger of the substitution by the consumer of some cheaper commodity. Thus, while the successful corner in Harlem stock in 1863 laid the foundation of the Vanderbilt fortunes, the three most picturesque and gigantic attempts of the last two decades -^ the Chicago Leiter corner in wheat, the Paris Secretan corner in copper and the New York Sully corner in cotton — have all been failures, resulting in the ruin of the speculators. Both classes of sporadic speculation are in the end socially disadvantageous, because the speculative price is driven far above or below the true value, with resulting losses in the process of restoring the equilibrium. The inordinately high cotton prices, due to the speculative attempts of 1904, well- nigh produced a crisis in the cotton industry in England and New England, and while the Southern planters temporarily benefited, the high profits led to such an increased acreage during the next season that the price fell below the cost of production. A moderately remunerative price would have been preferable to these sudden alternations of large profits and extreme losses. It would, however, be a mistake to assume that all speculation is of this character. Speculation could never have become a part of the normal business life of modern times if it had sim- ply these defects and anti-social characteristics. The modern stock and produce exchanges have a definite economic function to perform. Speculation occurs in securities or commodities. The qual- ities which render a commodity peculiarly fit for regular specu- lative dealings are three in number: («) it must be a staple, with a large and regular production; (b) it must be homo- geneous in quality, so that any unit will be as acceptable as another; (c) it must be capable of ready definition and measure- ment. Accordingly we find exchanges devoted to cereals, like W^heat, rye, barley, corn and oats, to coffee and sugar, to cotton and tobacco, to iron and tin. In the case of securities all those § 153] Speculative Profits 363 qualities are obviously present. The chief transactions on both the stock and produce exchanges may be summarized as follows: If the prices in the estimation of the speculator are high but tend downward, he will "sell short," that is, engage to deliver at a future time goods not yet in his possession. If, when the time arrives, he can purchase at the anticipated lower price, the difference constitutes his profits. Or the same result can be reached by a "covering" contract, so called because he covers the short sale by making a purchase at a somewhat lower price deliverable at the same time. On the other hand, if prices are low but in his estimation tend upward, he will "buy long," that is, buy more than he would care to take at present; and when the goods are finally delivered he can sell at a profit. Or, as in the preceding case, he can at once make a "realizing" or "liquidating" sale at a higher price, deliverable at the same time. Because the "shorts" speculate for a fall, they arc called bears (who pull down); while the "longs," who specu- late for a rise, are called bulls (who toss up). When a sub- stantial interval of time elapses between the two parts of the transaction, it is called a "future." Cotton futures, for in- stance, are dealt in months before the transaction is closed. June deliveries may be sold in January. Where the delivery is to take place at once, that is, on the spot or in the imme- diate future, we speak of "spot" cotton or wheat. On the stock exchange most of the deliveries take place on the following day, although, as in New York, the option of deliv- ery, is sometimes three, sometimes thirty or sixty days. Apart from the mere gains in daily speculation through "scalping," the profits on the stock exchange are realized chiefly through loans. If the "short," for instance, is not ready to buy in the stocks when delivery is due, he arranges to borrow them, expecting to liquidate his loan by a future purchase at lower prices. Vice versa, the "long" purchaser who is not ready to sell arranges with a broker to "carry" the stocks for him until 364 Profits [§ 154 such time as he can sell at a profit. The broker protects himself against any possible fall in price by requiring the cus- tomer to put up a margin in cash, which differs with the price fluctuations. In the produce exchange it is the practice to deposit with some constituted authority the margin or sum sufficient to secure the other party from loss in case of failure to fulfil the contract for future delivery. Such transactions are therefore called speculating on a margin. In practice it is impossible to distinguish between margin dealings where there is no delivery and those where actual delivery is made or contemplated, since the difference depends on the shifting in- tention of the speculator, and since in every contract actual delivery of the stock or produce can legally be called for. Finally, speculation takes the form of privileges. A "put" is the privilege to put or deliver to the other party at a definite time the security or commodity at a fixed price. A "call" is the privilege to call or demand from the other party at a defi- nite time the security or commodity at a fixed price. Puts and calls may be bought or sold; when a speculator acquires the right of electing whether to put or call the stock the privilege is called a "spread" or "straddle." Prices of such privileges depend on the nature of the market, the nature of the security, the length of time the privilege has to run and the difference of the stipulated from the present market price. 154. Speculative Profits — Function The chief economic function of regular speculation consists in the assumption of risk and results in the equalization of price. First, as to the assumption of risk. When, under the stress of modern capitalism, dealings in commodities became national and even international, the perturbations affecting market values grew to be so vast and so numerous that ordinary business was seriously compromised by the violent fluctuations in the price of the raw materials of industry. The manufacturer who bought his materials in the international market expected § 154] Speculative Profits 365 indeed a profit on the production of the finished article, but was unwilling to have this profit turned into loss by sudden changes in the price of the raw material. It was to secure an escape from the risks of such oscillations that a special class arose which assumed this risk and by concentrated attention derived a profit from the price fluctuations. The first way in which risk is minimized for the ordinary business man and assumed by a regular speculative class is through the provision of a continuous open market. A cotton- spinner, for instance, accepts an order for goods to be delivered in a year, and expects to begin spinning in six months. Unless he is able to buy now the cotton to be delivered then, he will be at the mercy of the chance variations in the cotton market, and although he may be the most capable of business men his entire profit may be wiped out by a rise in the price of cotton. The cotton future enables him to eliminate this risk. The same is true of futures in wheat or other commodities. It applies equally to the stock exchange. If a railway or other industry, in launching a new enterprise, had to depend on the chance investors at the time of the issue of the securi- ties, it would be seriously hampered. The mere knowledge that at any moment there will be a ready sale on the exchange greatly increases the circle of purchasers, many of whom may not intend to be permanent investors. The stock exchange aids the investment of capital, as the produce exchange aids the production of finished commodities. Business orders and corporate needs are intermittent, because they depend on temporary exigencies; the risks at one end, at all events, arc eliminated by the unintermittent, continuous market which regular speculation affords. The cotton exchange was the result of the disorganization of the cotton trade after the civil war; speculation in all the other staples has in the same way been the consequence of the efforts of the manufacturer to avert the risks of intermittent and spasmodic fluctuations in the raw material. 366 Profits [§ 154 A natural and more recent outcome of this attempt to avoid risk is the practice of "hedging" or "covering" transactions. An English miller, for instance, needs wheat in February and buys his supply in California, let us say, at a price of 90 cents a bushel. By the time the wheat reaches his mill and the flour has been finally disposed of, it may be September, and the price of wheat may have fallen to 75 cents, with a corresponding fall in the price of flour. To protect himself against such a loss the miller sells in February at Chicago for September delivery the same quantity of wheat for the same price as that at which he bought, 90 cents. When September arrives, he again enters the Chicago market and makes good his delivery contract by buying the wheat at the market price of 75 cents. His profits in this deal equal his losses in the other, and by this process of "hedging" contracts he eliminates all risk in price fluctuations due to the raw material. He is content to derive his gains from the profits of his legitimate milling business. Through the use of such wheat and cotton futures we thus have the paradoxical result that the business man often resorts to specu- lation in order to free his business from speculative influences. The result of regular speculation, again, is to steady prices. If with wheat prices at 80 cents a bushel there is a prospect of a large crop, the intelligent speculator will sell short (a future) say at 70 cents, expecting to buy in at 65 cents. All this selling on the part of the bears, however, tends to reduce present prices and thus to increase consumption, which again tends to keep the future price from falUng so low or so suddenly as it would otherwise have done. Vice versa, if a crop short- age is in prospect, prices tend to rise, the commodity becomes a "good buy" and the bulls are active. The increased pur- chases tend to raise present prices and to check consumption, while the owners in a rising market hold on for the prospec- tive profit. This combination of a somewhat smaller demand and a larger supply will prevent such a sharp rise in prices as would ordinarily follow a bad crop. Speculation thus tends § 154] Speculative Profits 367 to equalize demand and supply, and by concentrating in the present the influences of the future it intensifies the normal factors and minimizes the market fluctuation. Speculation hence exerts a directive influence on price. A good example of this is afforded by the Gold Law during the civil war. The discount on greenbacks was mistakenly ascribed to the specu- lation on the gold exchange, and a law was enacted to prohibit all such transactions. As a result, the premium on gold jumped at once from 195 to 285, with wild fluctuations day by day, to be followed, after the hasty repeal of the law fifteen days later, by just as sudden a recession of the price. Speculation is hence so perplexing a phenomenon because of its Janus-like aspect. So far as it has become the regular occupation of a class, differentiated from other business men for this particular purpose, it subserves a useful and in modern times an indispensable function. The expert dealer on the exchanges, who studies and prejudges the market, will in the long run secure profits by reducing risks and steadying prices. In this wider sense speculative profits are earned like other profits. On the other hand, numbers of individuals without experience or ability are constantly taking "flyers" on the exchanges, and gamble in securities or commodities as they would in cards. Speculation here is as demoralizing to earnest effort and thrift as is the lottery. Moreover, even the profes- sional dealer will often indulge in what we have termed spo- radic speculation, and by an extensive manipulation of the market bring about the unsteadying of prices usuaUy connected with a "squeeze" or a "corner." Diftlcult as it is to draw the line in practice, the distinction between economic and uneconomic speculation is faintly recognized in the ordinary attitude toward the bucket-shop as compared to the stock exchange. It will be more clearly appreciated in the future when the exchanges themselves exercise a more rigid scrutiny over the actions of their members, and when business ethics will be lifted to a higher plane of social responsibility. At 368 Profits [§ 155 present speculation has its economic abuses as well as its eco- nomic function. 155. Monopoly Profits In the preceding discussion profits, whether ordinary, alea- tory or speculative, have been assumed to be subject to competitive influences. The free play of competition, how- ever, is often obstructed by natural or artificial barriers. When these obstacles are only partial, we speak of economic friction; when they are complete, we are in the presence of monopoly. In the case of friction, the fortunate possessor of the tempo- rary advantages secures an extra gain, which, as we know, will ultimately disappear. In the case of monopoly the extra gain seems to be permanent. In a deeper sense, however, even monopoly profits are not permanent. This is due to the principle of capitalization, discussed above (ch. xiv). As soon as the monopoly producer disposes of his business, the profits are capitalized into the higher selling price, and the new purchaser will secure only the interest on the capital outlay. While monopolies are often sold, the same result is reached through the modern corporate form of business. For here the securities, which entitle each holder to a share of the monopoly profits, are so influenced by the forces of the market that large dividends are at once capitalized into higher market prices, with the result that the net returns to the new purchaser will be only the current market rate of interest. Thus, under modern economic conditions, even monopoly profits tend to dissipate themselves. They are essentially transitory, except in the hands of the original owners. With the continual shifting of ownership, so characteristic of mod- ern life, the original possessors soon disappear. Since, how- ever, the original owners at any given time are an appreciable body, monopoly profits often assume a great importance. Monopoly incomes, like competitive incomes, are not limited to profits. A class of workmen may be able to restrict entrance >^ 155] Monopoly Profits 369 to their Irade or to prevent competition with it. In that case they would secure monopoly wages. Where the investments hy banks, savings institutions or trust estates are confined by law to a specific kind of bond, there is virtually an element of monopoly in the price of that security. Where a particu- lar city plot is wanted for specific purposes, the element of superiority in the site approaches so close to monopoly that we can without gross error speak of a monopoly rent. Monopoly profits, however, like all profits, are a result of price. As we have already discussed the diflferences between monopoly price and competitive price, we may pass these by in this place with the mere reminder that monopoly profits are by no means without bounds. The two natural limitations on monopoly price, and hence on monopoly profits, are the existence of substitution and of potential competition. In the first place, as we have learned (p. 258), even where the monopolist is securely intrenched, there is always a point of maximum mo- nopoly revenue depending on the price at which the greatest sales can be eflfected. Any increase of price above that point will lead to the falling off of sales through the substitution of some analogous commodity, and thus to a decrease of profits. The failure of the Secretan corner in copper was largely due to the unexpected use of substitutes, caused by the forcing up of the price. Secondly, when, as in many cases, the monopolist is subject to the potential competition not of similar com- modities but of other possible producers of the same commod- ity, his tendency to raise prices will be limited by the danger not only of a falling off in the general demand, but of the cap- ture of a part of this existing market by some new-comer w-ho is tempted by the prospect of similar profits. Within these limits, however, there is still a large field for the extra gains known as monopoly profits. Where the monopoly is based upon the existence of patents or copyrights the extra gains are deemed legitimate; but only because their continuance is supposed to be strictly limited. 370 Profits [§ 156 156. Regulation and Justification of Profits The demand for governmental control of profits comes from three sources, — those who object to ordinary profits because they oppose private property; those who decry aleatory and especially speculative profits; and thirdly, those who desire to eliminate monopoly profits. Let us discuss these in inverse order. (i) Unrestricted monopoly profits, are of course, socially un- desirable. Even where monopoly is not in itself objectionable, as in special fields like transportation and certain municipal en- terprises, some substitute for the automatic regulative action of competition must be secured. Experience, however, has re- peatedly shown that this cannot take the form of a regulation of profits. The most recent attempt, as that of Massachusetts with the gas companies, has, like all its predecessors, been frus- trated by the ease with which profits can be adroitly diverted into the income of subsidiary enterprises. Efforts to regulate profits always result in profits nominally within the limit. The only two effectual ways to deflect monopoly profits to the pub- lic are either to regulate prices, which will prevent the profits, or to tax the enterprise, which will reduce the profits. The surest method, however, of eliminating monopoly profits is to eliminate the monopoly by keeping open the door of opportunity. (2) Speculative profits, on the other hand, cannot be reached in this way. Monopoly can be distinguished from competition, but regular speculation cannot be sharply set off from ordinary business. The recent anti-option laws of Germany have either been ineffectual or have done harm in preventing the legiti- mate and economic benefits of speculation. To prohibit spec- ulation is to prevent the good as well as the evil. Taxation, again, is applicable only to certain aleatory profits. The effort to tax speculative profits encounters the well-nigh insuperable difficulty of causing the tax to be actually borne by the recip- § 156] Regulation and Justification 371 ient of the profits. Finally, the prohibition of speculative prices is virtually equivalent to the futile prohibition of spec- ulation itself. (3) The opposition to ordinary profits emanates from those who deprecate the entire constitution of modern industrial society. According to Marx, for instance, profits are a defal- cation from wages. Since all value, according to him, is the product of labor, the surplus value which is called profits is a surplus filched from wages. The socialist theory of surplus value, however, is defective in four points: {a) It identifies labor with manual work and neglects the wages of superintend- ence; (6) it ascribes value to labor, whereas labor is not the cause of value; (c) it reduces the factors of production to one, whereas in actual Ufe there are almost always more than one; (d) above all, it overlooks the fact of marginal value. Even if we roughly state that prices vary according to cost of pro- duction, and even if for purposes of argument we concede that cost of production is reducible to wages, all this would apply only to marginal cost. The marginal producer, however, normally earns no profits, and the surplus which is secured by the intramarginal producer may come from a dozen other sources than wages. In point of fact it is most unlikely to come from wages, since wages under competitive conditions are apt to be the same for the identical work in all the Enter- prises, whether marginal or intramarginal. Profits are indeed a surplus, but they are not a surplus of the kind imagined by the socialists. The only way to get rid of profits is, as the socialists correctly state, to abolish private property in tlie fac- tors of production. The abolition of private property, how- ever, would be the abolition of progress. This, of course, does not imply that all existing profits are defensible. Fraud and chicanery still stalk abroad; illegitimate privileges are seized or extorted; unfair advantage is taken of weakness or ignorance; public franchises are dishonestly ac- quired or inadequately compensated. All this is to say that 372 Profits [§ 156 many individuals are slill on a low plane, and that the level of commercial morality is not so high as it ought to be and as it some day will be. This, however, does not touch the legiti- macy of profits as an institution. Profits honestly acquired are in the main an inevitable concomitant of private property. With monopolies reduced to a minimum, with special privi- leges abolished or adequately compensated, with speculation restored to its true economic function and with competition conducted on the high plane of honesty and fair dealing, profits will be purged of their alloy and will stand forth in their true light as the legitimate fruit of energy and foresight. CHAPTER XXIV RENT 157. References J. B. Clark, Distribution (1899), ch. xxiii; F. A. Fetter, Principles (1915). part 2; A. S. Johnson, Rent in Modern Economic Theory (1902), chs. iii, iv; A. Marshall, Principles (1910), bk. v, chs. viii-x, and bk. vi, ch. ix; N. G. Pierson, Principles (1902), part i, ch. ii; W. S. Jevons, Theory (1888), ch. vi; H. Sidgwick, Principles (1883), bk. ii, ch. vii; F. V. Wieser, Natural Value (1893), bk. iii, part 2; T. N. Carver, Dis- tribution (1904), ch. v; A. W. Flux, Principles (1904), ch. vii; H. R Seager, Principles (1913), ch. xiv; The Relation between Rent and Interest (A. Discussion in Am. Econ. Assoc. Publications, New Series, V, 1904); M. Pantaleoni, Pure Economics (1898), part 3, ch. iv; J. S. Nicholson Principles (1893-1901), bk. ii, ch. xiv, and bk. iv, ch. v; W. Smart, Dis- tribution (1899), ch. xx\4; R. M. Hurd, Principles of City Land Values (1903); F. W. Taussig, Principles (191 1), chs. xl-xliv; W. H. Dawson, The Unearned Increment (1890) ; H. George, Progress and Poverty (1879); E. R. A. Seligman, Essays in Taxation (1913), ch. iii; J. B. Clark, Essen- tials (1907), ch. x; H L. Butterworth, The Farmer and the New Day (1919); W. B. Bizzell, Farm Tenantry in the U. S., Texas Agric. Station Bulletm278 (i92i);H. C.Tdiylor, Agricultural Economics, newed. (1919). 158. Nature of Rent Rent, as we have learned, is the product of, or income from, the single use or succession of limited uses of a thing, and rental value is to be contrasted with capital value. In ordinary parlance, however, rent signifies the money payment to the owner for such a limited use. According as we regard it from the point of view of making or of receiving the payment, to rent anything is to dispose of or to pay for its use. When the social conditions are such that some one commodity is commonly rented instead of sold, its income in general is apt to be called rent. This was true of land during the middle ages in Europe, and is still true in those countries where mediaeval 373 374 Rent [§ 158 customs survive or where modern conditions have brought about a relation of hmdlord and tenant. Since most of the land is rented, rent has come to mean the income from land, whether rented or not; and since the chief thing that is usually rented is land, rent is often made synonymous with the income from land alone. It is obvious, however, that this is doubly confusing. In the first place, in some countries land is more commonly sold than rented. This is the case with agricultural land in a community of peasant proprietors or of individual farmers; and with urban land in all those districts where the inhabitants, rich or poor, own their homes. When land is sold instead of rented, the pro- ceeds certainly do not constitute a rent. They should rather be called a capitalization of the rent, because they involve a payment for all future uses. Secondly, other things are often more commonly rented than is land. Apart from the fact that the rental of real estate frequently included the rent of a house, which is economically distinct from the land, men may live in their own houses and yet rent telephones by the year, carriages by the month, plants by the week, and awnings or table fur- nishings by the day. Land rent is qualitatively only an in- significant part of all rent. Nevertheless, land is quantitatively so important as compared with any other single commodity, and possesses so unique a social significance, that the income from land merits a separate study. It must be remembered, however, that the utility of such an independent discussion emerges only when we regard society from the point of view of change, — that is, when we consider rent historically, or compare the growth of land rent with that of other rents. If we take a cross section of society at any moment, and analyze the distribution of the social income, the rent of land is to be explained in no different way from that of other things. The rent of land is its economic product, that is, the contributioia of land over and above that of the labor and the capital employed on the land. The law § 159] Land Rent 375 which at any given moment governs the relation of the land to its product is the same as that which governs the relation of any economic good or factor of production to its product. Much confusion has resulted from the failure to observe this warning. The traditional law of rent, for instance, includes three state- ments: rent is the result of the law of diminishing returns; rent is a differential or surplus over marginal or no-rent land; rent is not a part of cost of production. So far as these statements are true, however, they are not peculiar to land rent. 159. Relation of Land Rent to Other Rents The law of diminishing returns is indeed the foundation of the law of rent. A farmer will sometime reach a point where it will not pay to add another laborer or another machine to his land, because beyond the margin of profitable expendi- ture every additional "dose" of capital or labor wiU mean a return insufllcient to cover cost. In every case he will reach the extensive or intensive margin of the utilization of land. This, however, is not peculiar to the landowner. The capitalist will also reach a point where it will not pay him to buy more machines of a certain kind, or to build another factory devoted to some particular product; and the laborer will reach the point where he cannot profitably work any longer. The law of diminishing returns is universal, and applies to everything thivl possesses value (§ 88). If it explains the rent of land, it will equally explain, as we shall see, the interest of capital and the wages of labor. Secondly, it is said that land rent is a differential or surplus. So, however, is every other kind of rental value. The value of everything is a differential or surplus as compared with the value of something else lower down in the scale. It may be claimed that land rent differs from other rents in that the land at the margin is no-rent land, and that land rent is therefore 37^ Re'^t [§ 159 due to the differences in the productivity of good land over no-rent land. To this the obvious rejoinder may be made that we can equally well speak of the no-rent machine or the no- rent factory. The reason that we do not commonly use such terms is because machines and factories are not so frequently rented as is land. The principle, however, is identical. The land at the margin may be so poor that no rent will be paid for its use; but the machine at the margin may also be worth- less in just the same sense. In fact, as we have seen in the last chapter, the existence of profits depends upon the surplus earnings of the intramarginal producers. It makes no differ- ence whether the marginal producer uses poor land or poorly situated land or poor machinery or poor buildings or poor workmen, he will earn no surplus. From this point of view rent is analogous to profit: profit is the surplus over income of the no-profit producer; rent may be said to be the surplus over the income from the no-rent commodity. This has led some writers like Walker to maintain that the laws of profit and rent are identical. It would be an error, however, to press too closely this analogy between rent and profit. In the first place, rent is a surplus only in the sense that everything positive is a surplus over zero, — a statement which is of little help. The rent of a boat is a surplus over that of a no-rent boat; the wages of a laborer is a surplus over that of the convict or no-wage laborer; frhe interest of capital is a surplus over the capital so invested as to earn no interest. But secondly, if we regard rent as a surplus, it differs from profit in that rent is a permanent, and profit aAransitory, surplus. If a machine is used in a factory, a certain part of the product will be traceable to it; that is, it will earn a certain return or rent for its owner. Under free competition the price of that machine will be, as we know, the capitalization of its rent, due regard being had to the number of machines. In a state of normal equilibrium the conditions of supply and demand will so adjust themselves that the mar- § 159] Land Rent 377 ginal producer will in the long run give for a commodity only ^\hat he can get out of it, and others will not give more. If all the machines are precise duplicates and are worked under tlie same conditions, their earnings or rent will in the long run he equivalent to the interest on the capital invested in them. 1 1 will be a permanent return as long as the machines work in unimpaired efficiency. If the machines did not earn the rent, no one would buy them at that capitalized price. On the other hand, the only way in which profits can be secured is by the owner working his machine under different conditions, that is, by giving it more care and combining it with different propor- tions of labor or land, taking advantage of variations in the market, and so on. These profits, as w-e kno\v, are under com- petitive conditions essentially transitory, and w'ill disappear un- less renewed by the use of new machines or a new shifting of the productive factors. If better machines, however, are used, the surplus gains secured by the producer are really the difference in the rent or product of the good machine over that of the poorer machines of his competitors. To the extent that his profits are a differential derived solely from the use of the better machine, he can enjoy them only as long as he guards the secret, that is, as long as he retains a monopolistic advan- tage. Even in the case of monopoly, however, the profit, as we know, w^ill disappear through the process of capitalization as soon as the machine or the business changes hands. Thus, while the rent is permanent, the profit is transitory. Precisely the same is true of land rent. If in a certain section of a city, where for a long time there has been no change, there are a hundred equally desirable contiguous lots, each of them will rent for the same amount. The rent is a differential only as compared with less eligible sites yielding a lower rent, and finally with land on the outskirts, which, like the Hoboken flats near New York, is worthless for residential, business, farming or other purposes, and which therefore has no capital value because it yields no rent and no product. 3/8 Rent [§ i6o Competition among the hundred lots will inevitably keep the rent of all at a point corresponding to the interest on their capital value. The landowner can earn no surplus on this investment as long as conditions do not change. If, however, a new street is opened, or for some reason one of the lots acquires' a higher rent, the landowner will secure a surplus over the interest on the original purchase price. Whether this sur- plus is called profit or rent is often thought to be immaterial: in point of fact, when a man sells his land he calls it profit; but until he sells he calls it rent. Strictly speaking, however, the annual rent is the total periodic return of the land, the profit only the surplus of this periodic return over the cost, or in this case over the interest on the invested capital. As soon as the plot is again sold, the price which yields the old owner the profit is necessarily the price at which the rent will yield the new owner only interest on the capital. Profits are thus automatically extinguished by transfers. Rent is perma- nent as long as the rent-bearing investment lasts; profit disap- pears each time that it is capitalized into a new selling price. The difference between rent and profit is applicable to land just 'as to other things. 160. Rent and Price Thirdly, it is stated that land rent is not a part of cost, and that high rents are therefore a result, not a cause, of high prices. It is no doubt true that if wheat is raised on land which differs in fertility or situation, competition will force the price of all the wheat of the same grade up to the cost of the marginal producer, that is, the farmer on the poorest land. The intramarginal farmer wiU secure a surplus; and if we call this differential surplus rent, it may be said that this differential does not enter into the price. Precisely the same, however, is true of every other share in distribution. Substitute for the plots of land sewing-machines rented out by the month or year. Some of the machines will turn out, let us say, more § i6o] Rent and Price 379 vests of the same quality than others. All the vests will sell at the same price, namely, the cost of the marginal f)roducer with the poorest machine, and the difference between the marginal product and the output of the better machine will under competitive conditions go as a surplus rent to the owner of the better machine. The surplus seems to be not a part of the price. Again, different employers may utilize different grades of workmen to fell trees or to build railways. One uses a three-dollar American, another a two-dollar French Canadian, another a dollar Italian. Yet, as Lord Brassey discovered in railway construction, the high-price workman is not really more expensive, because his output is greater. If he did not earn the higher wage, he would not in the long run get it. Since all the trees sell at the same price, namely that of the marginal producer who is using the least efficient workmen, the higher wage of the American represents a surplus product or labor rent over the low wage of the Italian. If we say that the higher rent of the good land does not enter into the price of wheat, we can equally well say that the higher wage which represents the surplus product of the American does not enter into the price of trees. The good land rents or sells for more because it pro- duces more, — the rent is the product : the high-grade laborer secures higher wages because he produces more, — the wage is the product. The wages of every different grade of workman are a differential in the same sense as the rent of different grades of land or capital is a differential. It will be said, however, that there is a distinction, because even the lowest wages are beyond peradventure a part of the cost. So, however, is the rental paid for the worst wheat land. The confusion arises from supposing that the worst wheat land is no-rent land. It is indeed no-wheat-rent land; but this may still be worth a considerable sum per acre, because it can be used for other purposes. If the farmer cannot permanently earn an income from wheat, he will raise other less valuable cereals, or vegetables, or hay, or use the land for pasture. Every 38o Rent [§ t6o I)iccc of marginal land — that is, the poorest laiiILI •-^ '^ :: 2i ^ ?i n Vi r, ?, "P, ?, ^x "?, ?, zi sr;^ss§S8g§§3 < D -JO ^c '^ o 1 ^ s \ i o - S s s iO S s \ ^^ 1 _^ \ o \ ^ \ CO \ c^ UJ 1- < K V (/) \ '^ Q ■"? s . s V s ID Ov > 1 go \ i- 1- 1 s og 1- CO \ o "" V C3 S £^ \ (O s 2o . u. 1 < UJ LU \ Ul a o \ >- § D < \ u. > 1 . < Ul ,_, 1 1 s < UJ i o en ( ^ U.O U-Otr / CO Oa:D- / f^ '/5,^UJ_| ^03UJ Si zoc 5» i \ ^ "^ ^ - s UJ lO > UJ 1- DC |^^5§^S?l|SS?. ^^^^S^ri^JST-g-ggSSS -J (5 i-H rtrHlH T-ir-l rt r-(>-l,-i,-,r-lr-.rH r-'>-l Lu i; a i^ ^ ^ i (/) q: q: EC .9 §177] Variations in Wages 425 ing the relation of wages to hours of work in the United States, as compared with prices of food, from 1890 to 1907. 177. Variations in "Wages Actual wages differ from normal wages thus far considered in three respects. The variation may be due to market in- fluences, to the nature of the occupation, or to the conditions of equality as between the giver and the recipient of wages in the same occupation. (i) Market variations need not detain us long. Like all market prices, wages in every-day life are the result of ephem- eral changes. While of the utmost importance to the prac- tical business man, the market oscillations do not lend themselves to any detailed analysis. In brisk times, when the temporary demand increases faster than the supply, wages advance and vice versa. Farm hands secure higher pay at harvest time; factory operatives must choose between lower wages or less work during a period of great temporary depres- sion. These facts are so obvious as to need no elaborate explanation. (2) The inequalities may be due to the occupations them- selves. We do not here indeed deal with market wages, but the wages are normal only within each occupation. They are particular normal wages, not general normal wages. Some- times the inequahty is more ostensible than real. The sea- sonal demand may differ. In the wholesale clothing trade the two busy seasons are followed by the slack months; the brick- layer can ply his vocation only in favorable weather. The rate of wages for permanent workmen must be such as to equal- ize these differences. The high nominal day wages of the bricklayer may be far lower real monthly wages; the high weekly or monthly wages of the clothing "operator" during the busy season may be only moderate real yearly wages. Adam Smith attempted to reduce the inequalities in wages to five causes: the agreeableness of the occupation, the con- 426 Wages [§ 177 MOVEMENT OF NOMINAL AND REAL WAGES, 1866-1903 (1890 AS THE STANDARD YEAR). 'rt 'Tr ta ui-5 ^^ ^ „ W'H as ^^ ^1 . 'si.f ^'l^ rt ^1 " &■ c « "sl? rt »l "Sa oca > s;^ (2 3 n Pi F-^ >i 4)^-- ^■s ^^1 1^ ^1 « a 1 "1 Falkner's Index Nos.i 1884 98.5 90.0 1885 97.8 98.2 99.1 99-5 1866 68. 5 47-9 lOO.O^ 70.0 1886 97.8 98. 1 1867 73 7 56.0 1887 98.6 97.8 1868 72-3 53-9 1 888 99.2 96.6 99-3 96.7 1S69 75.2 ■ 52.7 9S.0 81.8 1889 99.6 948 25 Occupations.^ Bureau of Labor,* City Wages. 519 Occupations. 1870 873 68.7 l8qO 1 00.0 100.0 100. 1 00.0 .871 94-7 72.2 I89I 99-7 98.4 1872 97.0 74-9 1892 100.3 100.8 100.7 loi 2 '873 93-2 76.3 1893 100.2 98.3 106.7 104.7 1874 91. 1 73-2 1894 96.7 99.4 97-7 100.3 •875 88.7 72.5 90.8 74-3 1895 97-4 102.0 96.5 lOI.O 1876 86.3 74-4 1896 98.5 105.7 .877 88.8 77.8 1897 98.2 104.5 1878 91-3 82 9 1898 99.0 102.7 107.9 III. 9 1879 91.8 90s 83. 8 82.6 1899 100.2 103. 1 113-0 116.3 1880 92.6 82.8 1900 103.1 104.5 i88i 9S-3 82.4 1 901 104.8 102. 1 1882 96.9 833 99-7 85-7 1902 108.2 1 00.0 131 7 121. 6 1883 97-7 85.9 ■903 III. 2 103.2 * Unweighted averages of wages in 21 industries, from Senate (Aldrich) Report on Wholesale Prices, Wages and Transportation, p. 180. All wages in this table are on the gold basis, and all real wages, down to 1889 are based upon Falkner's weighted inde.x numbers of prices, from the same report, p. 100. The meaning of the terms weighted and un- weighted are explained below (§ 189). ^ Unweighted averages covering 12 important cities, from Bulletin of the Department of Labor, No. 18, p. 669. * Weighted averages of monthly wages, reduced to gold basis, com- piled from Bulletin No. 26, miscellaneous series, United States Depart- ment of Agriculture, p. 15. * Weighted averages of weekly earnings from Bulletin of the Bureau of Labor, No. 53, pp. 721-723. All real wages from 1890 to 1903 based upon index numbers of retail prices given in this bulletin. This table is taken from Adams and Sumner, Labor Problems (1905), 514. It is selected as, on the whole, the most accurate and conservative § 177] Variations in Wages 427 stancy of employment, the ease of learning the trade, the degree of trust to be reposed in the workman, and the probability of success. In a more general way, however, it may be said that inequality of pay is due to inequality of work. A watch- maker gets more than a street-sweeper because his contribu- tion to the product is greater. If all units of labor were at least potentially equal, and if there was complete mobility, the street-sweepers would all become watch-makers and wages would stand at a level. Obviously, however, the higher the degree of required skill, the greater the relative scarcity of workmen. This scarcity may be due to four causes: a defi- ciency of natural talent, a lack of opportunity, the cost of mastering the trade, and the obstacles in the way of move- ment from employment to employment. The differences between occupations may thus be either natural or artificial; in either case the labor force is at any given time divided into what are in some respects at least non-competing industrial groups. (3) Finally, the discrepancy between normal and actual wages may be due to conditions of inequality. This may be ascribable to the fact that there is only one-sided competition, or that the conditions of the mutual competition are different. There may be a monopoly on the labor side. If any group of workmen can secure such a complete control of the trade that presentation of the facts. The authors give several warnings as to the use of the table: (i) In the industrial group, the figures are the results of three distinct investigations. The averages are not absolutely com- parable. But the probable error is slight. (2) Up to 1889 the compar- ison is with wholesale prices, after 1890 with retail prices. The effect of this is probably to exaggerate the relative advance of real wages for the earUer period. (3) Statistics of real wages are really trustworthy onlj' in periods of normal prosperity. In time of depression, prices fall more quickly than wages, so that real wages seem to be increasing when in reality there is much more unemployment and a decline in the welfare of the laborers as a whole. Thus in 1896 the real wages seem to be higher than in 1892 or 1902. 428 Wages [§ 177 it need fear no entrance of undesired members, it can raise the rate of wages considerably above the normal point. In rare cases only is this possible on a large scale in modern times. When the workmen are not securely intrenched by legal priv- ilege, as in the later stages of the mediaeval guilds, a rise of wages far above the normal level in any one occupation will set in motion forces which will ultimately be strong enough to break down the artificial barriers. If the group is unduly re- strictive in its membership, the pressure from the outside will result in the formation of analogous groups, anxious to partici- pate in the extra gains, and ready to take over a share of these gains. Minor instances, however, of this temporary monopo- listic excess of wages are by no means infrequent. On the other hand, competition may be absent on the side of the employers. Capital monopolies, however, have even less opportunity of driving wages down below the normal level than labor monopolies have of raising them above the level. For even though there may be no competition within the par- ticular industry, there will always be the competition between different industries for a supply of workmen. The laborers are not compelled to enter the employ of the monopoly, and will not do so w-hen the wages offered are lower than in similar occupations. In point of fact, capital monopolies do not pay lower wages. The American v/orkmen in their official unions, as we have seen, are not opposed to the monopolies and trusts on the score of low wages. The really perilous effects of capi- tal monopoly on wages is of a more insidious kind. All mo- nopoly means a relative restriction of production, for the point of maximum monopoly revenue does not necessarily correspond to that of maximum competitive output and marginal competi- tive cost. Since wages stand in such a close relation to pro- ductivity, a diminution of product must finally diminish the amount available for the payment of wages. Monopoly of in- dustry is at bottom as prejudicial to the wage-earner as to the consumer. § 178] Wages and Profits 429 Of more importance in practical life is the divergence of actual from normal wages ascribable to inequality in the con- ditions of competition. As we learned at the outset of our discussion, the ability to drive a bargain varies, and a unitary market price can emerge only when theje are complete com- petition and mobility on the side of both buyer and seller. In the labor contract the individual seller of labor is in ordinary cases the weaker party. The workman is both more ignorant and more necessitous. He is more ignorant because, while the employer knows both the cost of labor and the price of the product, the workman is unacquainted with the details of the business and can only guess at his real contribution to the product. He is more necessitous because he cannot afford to wait. The machine may lie idle, and profits may cease for a time; but running expenses also cease, at least in part, and when the machine starts up, profits will follow. The laborer may remain idle, but running expenses, that is, cost of living, do not cease. If the machine stops, it still endures; if the workman stops, he starves. When therefore the individual laborer is left to his own de- vices, he may fail to secure his due share of the joint product. Advantage may be taken of his ignorance or of his necessity; and the example that is set by the less scrupulous employer is not only contagious, but also often imposes itself as a competi- tive condition upon others who might naturally possess more scruples. The result is a struggle between wages and profits which transfers itself to the arena of both economic and politi- cal life, and which creates what is known as the labor problem. 178. Wages and Profits The relation of wages to profits is thus complementary as well as antagonistic. They are complementary in the sense that prosperity may mean both high profits and high wages. Profits, as we have seen, are the chief inducement to enterprise. The anticipated gains to be derived from fluctuations in value 430 Wages [§ 178 constitute the real incentive to business activity and hence to modern production. The hope of profits leads to the invest- ment and increase of capital, and to a better co-ordination of the factors of production, and thus under normal conditions to an increase of output. The increase of product is apt indeed to be followed by a growth of population. When the product increases at a faster rate than the available supply of workmen, that is, as long as the product keeps ahead of the population, wages will tend to rise. Profits are constantly exhausting themselves, only to be renewed in a fresh attempt to conquer nature. High profits are hence the best hope of high wages, because it is chiefly through the existence of high profits that mankind has any assurance of that augmented output which is the chief factor in raising the marginal contribution of labor. Profits and wages are in this sense complementary. On the other hand, the immediate division of the product in each individual case and at any given moment is largely one of relative power. The more that is taken as profits by any single employer or group of employers, the less will be available as wages; the more that is paid as wages, the less will be re- ceived as profits. In this sense wages and profits are antago- nistic. In good times wages and profits both go up, in bad times wages and profits both go down; but at all times both employer and employees will strive to secure the greatest pos- sible share of the joint product for themselves. Under condi- tions of frictionless competition, complete mobility and effective equality in bargaining, the share of each will adjust itself to the point of relative contribution to the product; under conditions of actual life each side may secure an excess at the expense of the other, and with incidental injury to the public. In the great majority of cases the excess goes to the employer. How this excess may be obviated, and this injury reduced to the lowest proportions, becomes therefore a matter of urgent concern. The struggle of the laborer to improve his condition has §178] Wages and Profits 431 assumed four principal forms. He has sought to invoke the protection of the law; he has endeavored to strengthen him- self and his fellows by organization; he has attempted to sub- stitute a new principle of remuneration; he has striven on the basis of existing methods to effect a working agreement with the employers. In other words, the four phases of the struggle are labor legislation, labor organization, profit sharing or co- operation, and arbitration or conciliation. Reserving the first and most important phase for later consideration (chapters xxxvii and xxxviii) the last three will now engage our attention. CHAPTER XXVII THE LABOR PROBLEM 179. References In General: Adams & Sumner, Labor Problems (1905); J. R. Co:r.- mons, Labor and Adminislration (1913); Commons and Andrews, Prin- ciples of Labor Legislation (1916); G. Drage, Labour Problems (1896); G. D. H. Cole, The World of Labour (2d ed., 1915); C. L Goodrich, The Frontier of Control (1920). Labor Organization: S. and B. Webb, History of Trade Unionism (191 1), and Industrial Democracy (1907); F. K. Carlton, The History and Problems of Organized Labor (191 1); Hollander and Barnett, Studies in American Trade Unionism (1906); R. F. Hoxie, Trade Unionism in the U. S. (1917); J. R. Commons and others, History of Labor in the U. S. (1918); G. G. Groat, Organized Labor in America (1916); F. T. Stockton, The Closed Shop in American Trade Unions (191 1); D. A. McCabe, The Standard Rate in American Trade Unions (191 2); T. \V. Glocker, The Govcrtiment of American Trade Unions (1914); F. S. Hall, Sympathetic Strikes and Sympathetic Lockouts (1898); H. W. Laidler, Boycotts and the Labor Struggle (1913); L. Wolman, The Boycott in the Trade Unions (19 16). Profit Sharing and Co-operation: D. F. Schloss, Methods of In- dustrial Remuneration (3d ed., 1898) ; N. P. Oilman, Profit Sharing (1889) and A Dividend to Labor (1899); Beatrice Potter [IMrs. Webb], The Co- operative Movement in Great Britain (1895); B. C. R. Fay, Co-operation at Hojne and Abroad (1908); C. Webb, Industrial Co-operation (1904); J. G, Holyoake, History of Co-operation (2 vols., 2d ed., 1906); A. W. Burrett. Profit Sharing (1918). Arbitration and Conciliation: H. Crompton, Industrial Concilia- tion (1876) ; L L. Price, Industrial Peace (1887) ; A. M. Bing, War Time Strikes and Their Adjttslmcnt (1921); V. S. Clark, The Labor Movement in Australia (1906); H. Broadhead, State Regulation of Labor in New Zealand (1908); M. T. Rankin, Arbitration and Conciliation in Australia (1916). 180. Labor Organizations The first step in the struggle of the laborers to secure a reason- able equity was their endeavor to help themselves through associated action. The organizations, starting within each trade 432 § i8o] Labor Organizations 433 in England during the early decades of the nineteenth century, became known as trade-unions and gradually assumed a national, and in some cases even an international, form. Where action involving the general interest of all unions becomes desirable, we find them, as in the United States, combining to form coun- cils or central labor unions in the cities, state federations, and finally national bodies like the American Federation of Labor. The justification of trade-unions was long disputed. Under the early law they were illegal as conspiracies. It was not until 1824 that they were legitimized in England, and not until much later that the free right of association was conceded else- where. The recognition that is to-day almost universally ac- corded them rests on the economic principle that in the modern labor contract the conditions of work have become collective or group conditions and that the bargaining, to be equal, must be collective or group bargaining. The individual workman is nowadays helpless against the typical employer. In a rail- way or a large factory, work is carried on under broad general rules. The laborer who forms one of a group of tens, of hun- dreds or of thousands of workmen cannot expect to bargain successfully as an individual. His only hope lies in associa- tion. Freedom of contract is illusory because of the self-evident inequality. The trade-union is an attempt to restore to the individual as a member of the group the equality which has been lost through the transition from small-scale to large-scale industry. The trade-union is as inevitable a product of modern economic life as the corporation. The one is an association of labor, the other an association of capital; both are attempts to attain individual prosperity through concerted efforts. There are two aspects to every trade-union, — the militant and the fraternal. As a fraternal organization the union seeks to accomplish some of the ends of the old-time guild. It insures the members against accident or death, it supports them when ill or out of work, it helps to educate them by meetings and lectures. More important, however, are the militant func- 28 434 Labor Problem [§ i8o tions, through which the union seeks to promote its industrial power and to increase the earnings of its members. From this point of view its activities may be reduced to two general cate- gories, — the attempt to standardize conditions of employment and the endeavor to restrict work. Under the first head must be put the effort to secure a stand- ard rate of pay and a normal working day. Sad experience has taught the laborer that if the average employer is free to make individual bargains with each workman he will tend to select the exceptional man to set the pace, and by paying him only ordinary wages, scale down the remuneration or overtax the energies of the average man, thus leading to premature decay and a real exploitation. To prevent this progressive deterioration the unions seek to secure a standard rate of wages. It is sometimes objected that this implies uniformity of pay- ment. This is not quite accurate. Wages are paid either by the piece or by time. In the case of piece work the more skilful workman will manifestly earn more. In certain trades piece work is preferred because, when new machinery is constantly being introduced or old machinery speeded up, it enables the workman to share in the advantage of the increased output. In England the unions advocate piece work in many trades; in America the preference is less marked, but is found in occu- pations like those of the shoe-workers, the weavers and some others. Even in the case of time work, however, which is advo- cated by the great mass of American unions, the uniformity that is sought is that of equal pay for equal work. There is little objection to putting the more skilful men into classes higher than the standard; but the standard itself must not be lowered. The effort is to make the standard a minimum, not a maximum. Even when the uniformity of pay seems to be that of a so- called dead level, it must not be forgotten that the unions are here following the tendency of all modern life. The essence of modern capitalism is, as we have seen, the standardization § i8o] Labor Organizations 435 of industry. If business enterprise depends on mass output and uniform production in order to improve the type, the laborer must not be blamed for pursuing the same end. At bottom the method is that of all democracy. Democracy is the most difficult form of government because its success de- pends on the high level of the mass. The path of progress consists in pulling the mass up to the plane of the better man, not in developing the aristocrat at the expense of the mass. Trade-unionism, like democracy, seeks here to level up, not to level down. The fixing of a normal working day seems to be in contrast to the standard rate of pay, because the former prescribes a maximum, the latter a minimum. In reality, however, there is no difference. In a factory all must begin and stop work at the same time, because all are dependent on the machine. If overtime is permitted, it will not be long before the employ- ment will be limited to those that are willing to work overtime; and when that occurs, the pay per hour will inevitably be reduced. The attempt to curtail the hours of work is really an attempt to raise the standard of pay. Experience has shown that with the introduction of machinery concerted action of the men will be able to extort higher pay with shorter hours. Ac- cording to the varying conditions in different industries, the normal working day is now in large parts of the United States as low as ten, nine and even eight hours. The maximum work- ing day as well as the minimum rate of pay is the result of an effort to standardize conditions of employment, so that the standard may move up instead of down. The success of the unions in standardizing employment is always beneficial to the workmen. Where the conditions are such that there is a real economy in high wages, it may go hand in hand with the ultimate interests of the employer and the public as well. When, however, we come to the other phase of trade-union activity — the attempt to restrict work — the matter is somewhat more complicated. 436 Labor Problem [§ 180 This effort assumes three forms, — • the claim of the right to a trade, the limitation of apprenticeship, the restriction of out- put. In the first place, not a few of the labor troubles of the present have their origin in trivial and unseemly quarrels be- tween the unions themselves as to who should do the work. These jurisdictional disputes are either (a) territorial disputes, due to the entrance of a new union into a given territory; (b) demarcation disputes, where each union claims that a particular kind of work on the fringe belongs to it; (c) organization dis- putes, where the increasing specialization of industry calls into being a new union which separates itself from the old, and (d) trade-autonomy disputes, due to the fact that some organiza- tions are industrial unions, comprising all the workmen in a given industry, while others are trade-unions including only the work- men in particular sections or trades within a great industry. All these jurisdictional disputes represent an attempt to transfer the old doctrine of vested interests from the domain of capital to that of labor. Secondly, the unions often insist on an unduly long period of apprenticeship, and seek to limit the number of apprentices, or to admit new-comers to membership only on the payment of high fees. Thirdly, they frequently object to the introduction of new machinery or new methods, and when this objection is overruled they seek to limit the amount of work to be done through the "go easy" or "ca-canny" system. That all these methods are in one sense indefensible is clear. If wages ultimately depend upon product, any effort to restrict product must finally act as a boomerang. Many unionists believe that there is a fixed amount of labor which has to be done; that if their union does not secure it, another will; and that if there are fewer members of the union, or if they all work less, or if there are less machines, the pay of each man will be higher. This "lump-of-labor " doctrine of the workman is just as fallacious as the old "wages-fund" theory of the capi- talist and leads to equally erroneous conclusions. From another point of view, however, these practices do not § i8i] . Strikes 437 appear so utterly reprehensible. The jurisdictional disputes of the unions are sometimes the result of an effort to prevent the standard rate in the trade from being whittled down through the abandonment of a substantial part of the work to those accustomed to a lower remuneration. The effort to restrict apprentices is occasionally due to the endeavor to insure ade- quate preparation for the trade, or to frustrate the scaling down of all wages to the level of the apprentices. The attempt to fix a maximum output may be due to the same reason which led to the maximum working-day, — the desire to prevent the "bell-wether," or "pace-maker," or "rusher," or "leader" from subtly reducing the standard of the average workman. In short, while restriction of work is in itself indefensible and un- economic, it may in certain cases turn out to be a form of stand- ardization and thus not without justification. Whether it is the one or the other can be determined only after a careful scrutiny of each individual case. The most progressive unions are now uncompromising foes of restriction, welcoming the in- troduction of new and better methods and discouraging careless and inefficient work. 181. Strikes Such being the objects of labor organization, a word must be added as to the means utilized to secure these ends. As militant organizations the unions employ two chief methods, — the strike and the boycott. The strike or concerted stop- page of work depends for its success upon the ability of the strikers to prevent others from taking their place. This has brought them into conflict with the law. The right to strike has been only grudgingly conceded. At first the courts held all strikes illegal as conspiracies, then they assumed the exist- ence of malicious intent, next they endeavoured to distinguish between various kinds of motives, especially in the case of "sympathetic" strikes, and finally they are now tending to discard altogether the question of motive and to uphold the 438 Labor Problem [§ 181 right to strike as such. This, however, carries with it the right of picketing. When picketing assumes the form of peaceable persuasion to induce others to refrain from working, it is justi- fiable; when it degenerates into forcible opposition, disorder and wanton injury to body or property, it is clearly indefensible and is to be sternly repressed. The history of strikes during the past half-century has accen- tuated four facts, (i) The losses to the strikers have been much exaggerated. The permanent gain from a successful strike often outweighs the temporary loss of all strikes, includ- ing the failures. The real injury is the disarrangement of industry and its effect on the consumer. (2) With the growth of unionism there has been a distinct amelioration in the con- duct of strikes. Violence and bloodshed are now less common than formerly. (3) The oldest unions approve of strikes only as a last resort; but when once entered upon, the strike is deemed to be distinctly more advantageous to the laborers than was the case in former decades. Strikes authorized by the central bodies are now both more infrequent and more successful than unauthorized strikes. Unionism has been, on the whole, a conservative force. (4) The outcome of a strike is largely dependent on the state of public opinion, and the strike itself is no longer held to be a matter of private concern as between the employer and the workmen. The coal strike of 1902 was won, and the New York Subway strike of 1905 was lost, almost entirely because the issues were so clear that the general sentiment favored the strikers in the one case and op- posed them in the other. The table opposite page 438 shows some results of strikes in the United States from 1880 to 1900. The lawlessness that has often attended labor disputes has led to the use by the courts of injunctions or orders to specific persons to refrain from doing specific things. The peculiarity of the injunction consists in the fact that a violation of the writ exposes the guilty party to any punishment that the court itself may choose to impose, without the usual protection of RESULTS OF STRIKES ORDERED BY LABOR ORGANIZATIONS, AND NOT SO ORDERED, 1881 TO 1900. BY YEARS. YEARS PER CENT OF ESTABLISHMENTS IN WHICH STRIKES SUCCEEDED, SUCCEEDED PARTLY, AND FAILED. 10 20 30 40 50 GO 70 80 90 100 ( ORDERED °°^ ( NOT ORDERED ( ORDERED 882 ( NOT ORDERED ( ORDERED ( NOT ORDERED 1 ORDERED / NOT ORDERED ( ORDERED ( NOT ORDERED ( ORDERED ^. 1 i ^^z !■ !■ 1 ^^ ^ • 1 1 LM \ nM ' 1 ^i—\ — H 1 . ^7 - 388 NOT ORDERED ORDERED NOT ORDERED ORDERED NOT ORDERED ^■■B m m m ORDERED NOT ORDERED ORDERED NOT ORDERED ORDERED NOT ORDERED ORDERED ^^^"■■^™ 1: 23!!! J5I; 1. "" ^51^ \- 1 1 NOT ORDERED ( ORDERED "* "( NOT ORDERED HH ■^■■H m^gHHjig ■^ — ^' 1 m ORDERED NOT ORDERED ORDERED ^ l! 1 NOT ORDERED ( ORDERED '/ NOT ORDERED ■ 1 97 ORDERED NOT ORDERED ORDERED ^■1 1 1 1 ^^ 1 1 NOT ORDERED ( ORDERED '^ "( NOT ORDERED t ORDERED ( NOT ORDERED ^n ■— ^^ \ 1 1 ^^J ^ — \ — \ — \ — — M i"rom Bl ■ succ lletin of U.S. Bur EEDEC eau of -abor, SUCCt Mo. 54 ( :eded 1 904;. PART -Y, [ ZlFAIL ED. § iSi] Strikes 439 trial by jury. Of recent years tne injunctions issued by the courts have sometimes been so sweeping as to expose them to the charge of subordinating the personal rights of the workmen to the property rights of the employer. Several efforts conse- quently have been made to remove all suspicion of abuse of what is properly a justifiable process by restricting the indiscrim- inate use of such injunctions on the part of the federal judges. The better remedy, however, seems to lie in a broader economic training of the judges and a fuller appreciation on their part of all the different aspects of labor disputes. The most recent activity of American unionism cuimmates m the question of the open shop. Originally a closed shop meant one against which the union objected and perhaps also struck. When the strike was called off, the shop was declared open. Now, however, the closed shop means the union shop, that is, the shop which is closed to non-union men; the open shop is open in the sense that the employer may engage non-unionists. Practically, however, the open shop has become a shop that is open only to non-union men. There is, however, still much confusion because of the failure to distinguish between a closed shop and a closed union. An open union is one which will admit any competent man into its ranks; a closed union is an indefensible monopoly. No one can uphold a closed shop with a closed union; the real controversy turns on the question of the closed shop with an open union. That is the true problem of the union shop. In many cases the open-shop question plays no role at all, especially (i) where the agreements are made not with the individual employer, but with an association of employers, whereby it becomes the interest of each to prevent any infraction of the compact by his competitor; (2) where the agreement is made not only for the union men, but for all the workmen, so that the employer can secure no advantage by hiring non-union men at lower wages; (3) where all grievances of whatsoever nature are left to a board of arbitration. When any of these conditions is absent, as in the building trades or the clothing 440 Labor Problem [§ 182 industry, it is difficult for an open-shop union to survive, and the institution of the closed shop often becomes a sine qua noil of the existence of the union. It is the same consideration which explains the fact that in some cases the non-union man is regarded with indifference and that in others he becomes a "scab" or "strike breaker" and is considered a traitor or ren- egade. In such cases the appeal of the employer to the sacred rights of individual liberty falls on deaf ears, because the work- man feels that the real liberty of his class is a result of associated action and that association here depends on the closed shop. Whether it is defensible or not can therefore be decided only after a careful consideration of the particular conditions. That the unions sometimes go too far is indubitable; that the em- ployers' association recently formed with the slogan of "liberty and the open shop " is equally extreme is no less indisputable. The real test in both cases is this: is the union standardizing rather than restricting work, and is the closed shop necessary to the perpetuation of the union? 182. Boycotts The second practice of modern unionism is the boycott or the attempt on the part of the workmen to cease all dealings with the employer or to induce third parties to abandon business dealings with him. This form of ostracism is of a hoary anti- quity, although its modern name dates from the ostracised Irish land agent of 1880. In its negative aspect the boycott takes the form of the union label, which guarantees to the public that the goods have been produced under conditions approved by the union, or of the white list, which contains the names of those firms especially recommended because they adhere to union conditions. In its positive aspect it assumes the form of the black list and of the boycott proper. The name "black list," however, is gen- erally applied to the action of the employer in denouncing som.e obnoxious workman; while the analogous method on the part § i82] Bo)^cotts 441 of the workmen is termed the "unfair" or "we don't patronize" list, usually confined to the publication of the names of certain firms. The boycott proper, which includes the unfair list, is either primary, secondary, or compound. The primary boycott is a combination of persons to stop business dealings with any one. The secondary boycott is a combination to induce or to persuade third parties so to abandon business dealings. A compound boycott is a combination to coerce or to intimidate rather than simply to induce or to persuade, the efforts in ques- tion involving either technical injury or actual physical force. Finally, we sometimes hear of a tertiary boycott, which may be declared against those who continue to purchase at stores sell- ing "unfair" supplies. Most of the important boycotts of recent years have been the secondary boycotts. American boycotts were at one tirnie of considerable signifi- cance. We are told that for some years in New York State two- thirds of the boycotts were successful. During the end of the nineteenth and the first decade of the twentieth century, however, the general tendency of x^merican legislation and court de- cisions has been against the legitimacy of the secondary boycott, for two reasons. On the one hand, it is claimed that the object is illegal, the boycott endeavoring either (a) to injure others in their business or profession, (b) to restrict trade, or (c) to induce others to break their contract. An ancillary argument, often found, is that the injury is accompanied by malice or is with- out justifiable cause. In the second place, it is claimed that even if the object is legal, the means employed, such as threats, coercion, intimidation, violence, extortion, or misrepresenta- tion, are illegal. More recently these arguments have been seriously weakened by the criticism of economists and have been met by counter arguments by some of the courts themselves. These criticisms point out that most of the decisions rest on the old doctrine of conspiracy, which has long since been abandoned in England in the case of labor disputes. In the United States also the doc- ^42 Labor Problem [§ 182 trine has disappeared so far as strikes are concerned, and there seems no good reason for the further maintenance of a distinc- tion in this respect between strikes and boycotts. Attention is also called to the fact that many of the practices proclaimed to be illegal are very generally employed in business and that the mere concerted refusal to deal with others violates no legal property right. The doctrine of malice, moreover, is objected to as liable to abuse and that of threat and coercion is declared to have been seriously exaggerated. The consequence is that the courts in states like New York, California, Montana, and Missouri, now uphold the secondary boycott, in the three former states even the compound boycott being declared legal. In positive legislation, however, the United States is only just beginning to follow the English precedent. In 1906 the Trade Disputes Act passed as a result of the famous Taff-Vale case, virtually legalized boycotting by providing that "an act done in pursuance of an agreement or combination by two or more persons shall, if done in contemplation or furtherance of a trade dispute, not be actionable, unless the act, done without any such agreement or combination, would be actionable." This position is strengthened by the provision that no suit for damages against a trade union or its members for an injury committed in behalf of the union shall be entertained by court. The consequence is that a boycott, so long as it does not involve the committing of certain specifically prohibited acts, is not actionable, either civilly or criminally. All the legal points which still play such a role in the majority of the American courts were thus virtually eliminated from the problem. The only commonwealths in the United States which up to 1914 had followed the new English law were California and Maryland. There is every reason to believe, however, that the old doctrine of conspiracy will soon become as inapplicable to boycotts as it has now become to strikes. The most serious obstacle to the use of boycotts in recent years came from the attempt in the famous Danbury Hatters § iS3 ] Profit Sharing and Co-operation 443 case to apply to labor unions the federal anti-trust law of 1890. In 1914, however, the Clayton anti-trust law specifically exempted trade unions frotn the operation of the act, so that the illegahty of boycotts, if maintained, will hereafter probably depend upon the appHcation of the common law or of state statute. An interesting problem is raised by the question as to what the result will be if the boycott comes to be generally legalized as the strike now is. That there is danger of abuse in the one case as in the other, is undoubted; but the dangers of abuse are overbalanced by the social dangers of prohibition. The same arguments that are now made against boycotts were formerly made against strikes. Nor does the experience, on the one hand, of England, or on the other hand of New York and the other states where boycotts have been virtually legaHzed, disclose any great risk of tyrannical use of the boycott. It is not un- reasonable to believe that when once the boycotts are legalized, as is now the case with strikes, the history will be largely the same, and that the unions will feel the increased responsibility which comes with greater power. The use of boycotts will then probably become more and more sparing, and if serious abuses disclose themselves, there will be ample time to remove them by proper legislation. 183. Profit Sharing and Co-operation While wages constitute the ordinary method of recompense to the laborer, there are two other possible systems of industrial remuneration. The one known as co-operation rests on the ehmination of the capitalist as distinct from the laborer; the other, which retains the capitalist but involves the participation of the laborer in the outcome of the enterprise, is popularly, although inaccurately, called profit sharing. We say inaccurately, because the method of participation is found in three forms, — as a substitute for the wages system, as an adjunct to the wages system and as a modification of the wages system. The first is technically called product sharing, 444 Labor Problem [§ 183 the second is known as gain sharing, while the third is the real profit sharing or industrial partnership. (i) The principal example of product sharing is seen in farming and is known as the metayer method or share system. The one party supplies the land and occasionally additional cap- ital, the other furnishes the labor; and the product is divided. We call it a substitute for the wages system, because the remu- neration of the tenant is not a stipulated wage but is contingent on the produce. Outside of agriculture, the chief instance is that of the fishing industry. In the Gloucester fisheries, for instance, when the capitalist provides the vessel, food and gear- ing, the "catch" after deducting the "trip charges" (i.e. the cost of the ice, barrels and water) is divided equally between the ship-owner and the crew. This is "sharing on halves" or the "half lay." When the crew furnishes the gear and provisions as well, they get three quarters of the catch, and the system is called "sharing on the quarter," or the "quarter lay." Some- times the "fifth lay" is found. In seine fishing all of the crew share equally; in other cases the share of each is apportioned according to his catch. The fishermen prefer this to fixed wages, because of the intimate relation of reward and effort. When the fish are sighted, the most unremitting energy is neces- sary, and the men are unwilling to expose their rate of pay to the hazard of the lazy or inefficient wage-earner. The capi- tahst also favors the system, because it augments his profits. Another example of product sharing is the system of. tribute " still found in the Cornish mines, where each pitch " is let out to that group of miners who agree to work the ground for the lowest sums per pound on the agreed values of the ore. In all such cases of product sharing the earnings of the laborers depend entirely on the results of their own efforts, not on the profits of the capitalist. Where the value of the product is dependent on the skill of the entrepreneur, as in ordinary in- dustry, product sharing is inapplicable. (2) The next form of participation recognizes the perma- § 183] Profit Sharing and Co-operation 445 nence of the wage-earner, but awards him an added compen- sation as an incentive to better work. This also is really not profit sharing, because the extra sum is independent of actual profits and must be paid whether profits accrue or not. It is called gain sharing " because both employer and wage-earner share in the increased gains that are presumed to ensue. Some- times it is called the system of the " progressive wage," or the " premium payment," or the " bonus plan," or, as in England, the reference rate "or ' good-fellowship " system. While a few such experiments have met with success, they have not on the whole commended themselves to the American workman. For since the bonus plan is based upon a minimum wage with a premium in certain cases, the average unionist fears that what may be gained by some as a bonus will be more than lost by a reduction of the minimum. He prefers to raise the standard rate for all, rather than to increase the premium for some. (3) The final plan of participation leaves untouched the rate of wages, but modifies the labor contract by granting to the work- man some participation in the actual profits of the business. The laborer here receives not only wages but profits, and the sys- tem is hence properly called profit sharing. The division can be accomplished either by an annual cash dividend, or by a de- ferred participation in some provident fund or annuity, or by the distribution of shares in the stock of the corporation. The objects of such a system are in the highest degree commend- able, both as leading to increased efficiency and as conducing to industrial peace. But here again experience, especially in America, has shown that the system possesses only a limited efficacy. The difficulties are fourfold: (a) it requires a pecul- iarly broad-minded employer; (b) it presupposes a set of work- men who are at once so shiftless that they are not doing their whole duty, and so intelligent that they realize the advantages of the inducement to more strenuous work; (c) it assumes the existence of profits, whereas the majority of business enterprises incur losses; (d) it complicates the wage contract by introdu- 446 Labor Problem [§ 184 cing another possible element of dispute in the ascertainment and adjustment of profits. While all these forms of participation rest on the continued existence of the capitalist, the system of industrial co-operation attempts to eliminate the capitalist by uniting in the same in- dividual the functions of laborer, capitalist and entrepreneur. In communities where large department stores are infrequent, distributive co-operation or so-called co-operative stores may be of some advantage to the consumer. In countries or sections, where credit facilities are backward, co-operative banks or credit associations, especially in agricultural districts, like the Schulze-Delitsch or Raiffeisen banks in Germany and elsewhere, may achieve some measure of success. In special cases a system of co-operative credit, like our Building and Loan Associations, may subserve a useful purpose. But as an attempt to replace the wages system or as a general scheme of social regeneration, productive co-operation has been attended with insignificant results elsewhere and with almost complete failure in the United States. The reasons that usually militate against success are fivefold: (i) the lack of adequate initial capital; (2) the scarcity of organizing ability; (3) the unreadiness of the average member to pay a salary sufficient to retain the exceptional manager; (4) the mutual distrust and the absence of the true co-opera- tive spirit; (5) the danger, in case of success, of conversion into the customary profit-making corporation. With human nature as it still is found in the ordinary man, co-operation is even less than profit sharing a social panacea or an immediately practi- cable means of escape from modern industrial evils. 184. Arbitration and Conciliation The economist who is to be of any service to the statesman must therefore recognize human nature as he finds it. The avenue to industrial peace must be sought on the basis of exist- ing industrial methods. While the enthusiastic idealists have been pursuing the will-of-the-wisp of socialism and co-operation, § 184] Arbitration and Conciliation 447 the long-headed practical men have elaborated working schemes of slow and steady progress. These rest on the frank recog- nition by both parties of the utility of collective or group bargaining. Labor disputes may be adjusted before or after the differ- ences have reached a climax. If a strike or lockout has been declared, it is difficult to allay the feelings of excitement or resentment. In industry as in politics it is harder to restore peace than to preserve it. This is, however, a lesson that is learned with difiiculty. In early communities peace {pax) is the short-lived compact to cease from normal hostility; in civilized nations the normal state of peace rests on mutual regard and readiness to make mutual concessions. In the early stages of the factory system the employer re- fused to recognize any but the individual workman; in the next stage he was willing to deal with representatives of his own work- ing force; at present he generally concedes the wisdom of trans- acting business with the union as a whole. At first the work- man granted the employer short shrift and strikes were bitter and violent; as the unions became more powerful they were sobered by responsibility; and now in many cases their chief function consists in averting strikes and adjusting disputes. In industry as in politics war is stiU a last resort, but in those occupations where strikes have become the exception rather than the rule, the result is due chiefly to the elaboration of the so-called trade agreement. The' system of conciliation is one of joint conference; and it succeeds best where not only the employees but the employers are organized. The employers' associations, like the trade unions, are, especially in their early years, often intolerant, vindictive and short-sighted. But experience happily shows that the mere habit of conference between representatives of both parties tends to dispel distrust, to allay animosity and to engender those feelings of mutual respect which are the surest guarantee of peace. In the United States, which began to tread the path of trade agreements at 44^ Labor Problem [§184 a somewhat later date than England, recent years have witnessed a great strengthening of the movement toward shop councils and a greater participation of the laborers in the management of the enterprise, thus paving the way for a real democracy of industry. If the dispute has come to a head, the attempt at adjudi- cation is commonly called arbitration. The usage, however, is not uniform, for in many cases the arbiter or the board of arbi- tration succeeds in compounding the difi&culties before they reach an acute stage. In the absence of an effective machinery within the trade, government often steps in. When it simply tenders its -good offices through a system of voluntary arbitra- tion, as in many of the American states, its success is not conspicuous. When it endeavors to force the contestants to come to terms, as in the Australian systems of compulsory arbitration, the danger is that an authoritative arbitrament may rob the one or the other party of the freedom to develop a cherished ideal that may be necessary to its own successful growth. Yet here again the interests of the part must be subordinated to those of the whole, and the final test must be the welfare of the community. Where labor disputes and strikes result in a wanton and widespread social injury, as in the Chicago strike of 1894, the coal strikes of 1902 in Penn- sylvania and of 191 2 in Great Britain, and the Colorado strike of 1914, the public will sooner or later insist on some form of settle- ment. Voluntary conciliation through trade agreement is the method best suited to the temper and tradition of the American people, and is fortunately making rapid progress. But no amount of reliance on the "sacred right of free contract" will in the long run prevent society from asserting its paramount claims to the maintenance of industrial peace. No community will perma- nently brook opposition to these plain dictates of self-preserva- tion and social progress. Book IV Value and Exchange '^ CHAPTER XXVHI MONEY, NATURE AND VALUE 185. References "W. S. Jevons, Money (1879), chs. i-xvi, xxv-xxvi; J. F. Johnson' Money and Currency (n. d., 1905), chs. i-viii; J. S. Mill, Principles, bk. iii, chs. vii-x; C. ]SI. Walsh, Measurement of Exchange Value (1901), chs. iii, vi-xii; E. W. Kemmerer, Money and Credit Instruments in their Relation to General Prices (1907) ; D. Kinlej-, Moi:ry (1904), chs. v-x; W Ridgeway, The Origin of Metallic Currency (1892); J. L. Laughlin, The Principles of Money (1903); I. Fisher, The Purchasing Poicer of Money (19 n); Hartley "Withers, The Meaning of Money (1909); C. A Corant, The Principles of Money cud Banking (1905), vol. i; W. C Mitchell, Cold, Prices and Wages under the Grccnbark Standard (1908) W. T. Lay ton, An Introduction to the Study of Prices (1920); Sir D Barbour, The Influence of the Cold Supply on Price^ and Profits (1913) E. Cannan, Money, Its Connection with Rising and Falling Prices (191 8). Index Numbers. The London Economist, March, 1864, with Annual Supplements; A. Sauerbeck, in Journal Stalisticai Society (xlix, 1886, Ivi, 1893, and following years, continued after 1913 by Sir G. Paish); R. P. Falkner, in Senate (Aldrich) Report on Wholesale Prices. I (1893); Bulletin of the Dcparl>iient [now Bureau] of Labor, no. 39 (1902), no. 45 (1903), and in two separate Bulletins (for wholesale and for retail prices) annually thereafter to the present; British Report on M'holesale and Retail Prices, with charts from 1801 tol903, continued to date in the Board of Trade Labour Gazette,' F. Y. Edgeworth, Memoranda on the Best Methods of Ascertaining and Measuring Variations in the Value of the Monetary Standard (British Association Report 1887-1889); C. M. Walsh, The Fundamental Problem in Monetary Science (1903) and The Problem of Estimation (1921); W. C. Mitchell, Business Cycles (1913), ch. iv.; and Index Numbers of Wholesale Prices in the Bulletin of the Bureau of Labor Statistics, no. 173 (1915); I. Fisher, Stabilizing the Dollar (1920). 186. Origin and Functions of Money The fundamental uses of money are to serve as a medium of exchange and to act as a measure of value. Which of these 449 45° Money, Nature and Value [§ i86 was the earlier is uncertain as well as unimportant. As soon as the difficulties of an extensive barter disclosed themselves, the employment of a commodity for the one purpose implied its use for the other. Value in business life is exchange value; when we express exchange values of all other commodities in terms of one, we do so with the implication that they are con- tinually being exchanged for it, and when they are so exchanged, their relative value is necessarily measured by it. The fundamental utility of money, therefore, is its accepta- bility or exchangeability. Every commodity indeed will be accepted by those who want it, but not by those w-ho have no present use for it, and who are uncertain as to their ability to dispose of it on advantageous terms. All, however, are willing to take money, because they know that there is no doubt of their being able to pass it on. Ordinary commodities have a more or less limited acceptability; money is the one thing that possesses general acceptability. The secondary functions of money are three in number: (i) Money is a standard of deferred payments. When we speak of money as a measure of value we refer to values of commod- ities at a given moment. If, however, we lend something for a term of years, it is important that what is repaid by the borrower should leave us as far as possible in the same relative position as before. (2) INIoney is a store of value. If we wish to lay by a fund of wealth, it is important that when we want it again we shall be able to find it intact. Nowadays, however, this function of money is quite subsidiary: instead of putting the coin into our stockings, we place it in the bank; instead of hanging our gold and silver about our wives or children, we invest it and receive interest. (3) Money is used nowadays as a reserve for credit operations. Considerable sums must be kept seemingly idle when they really serve a most important function as a basis for credit transactions. Historically almost every imaginable commodity has been used for money. Whatever happened to be common and at § i86] Functions of Money 451 the same time widely wanted, served as money. Articles of food like rice, dried fish, olive oil, nuts, wheat, maize, tea, salt, dates, tobacco, and whiskey; weapons like knives, fire-arms, sword-hilts, powder and shot; implements like hoes, shovels, and common utensils; clothing made of wood, cotton, leather, skins, pelts, and furs; animals such as sheep, horses, and oxen; ornaments like beads, shells, ivory tusks, fish teeth, and feathers; and metals like iron, lead, tin, copper, and bronze have been employed at one time or another. Beginning in Lydia and ^gina in classic antiquity, silver and gold were finally selected in every developed community to receive the government stamp as minted or coined money, because they possess in a peculiar degree the attributes of transportability, divisibility, homo- geneity, great value in small bulk, durability, recognizability, stability, and adaptability to coinage through fusibility, ductil- ity, and malleability. Money may be classified in three ways, — as actual and ideal money, as metallic and paper money, as standard and token money. (i) Actual money is that which actually circulates. Ideal money or money of account is that in which accounts are kept. Its use may be due to necessity or to habit. In the middle ages, when actual money was continually tampered with, the con- tinental merchants were compelled to keep accounts in scudi, which were not coined. Guineas are to-day unknown in Eng- land and shillings in America; yet sales are often effected in Great Britain in guineas instead of pounds, and in the rural districts of the Atlantic seaboard transactions frequently take place in shillings in lieu of dollars. (2) Paper money as opposed to metallic money may be sub- divided into three classes, — representative, fiat, and fiduci- ary money. Representative money consists of paper which certifies that an equivalent amount of coin or bullion is depos- ited in the government treasury, like the American gold and silver certificates. Fiat money consists of paper whose value 452 Money, Nature and Wlue [§ i86 rests on the fiat or declaration of the government, like the American greenbacks. Fiduciary or credit money consists of promises issued by private or semi-private institutions to pay coin, like the national bank notes. (3) Standard money is money which is legal tender for all debts and used as the standard to which the value of all other money is referable. Token or subsidiary money, on the other hand, consists of coin whose legal or mint value exceeds that of the bullion, and whose coinage is not free, in the sense that no private individual is at liberty to demand that the government exchange his bullion for coins. In the United States the standard is the gold dollar of 25.8 grains standard and 23.22 fine, although it is no longer coined.^ An ounce of standard gold is coined into $18. 6c^; of fine gold into $20,675. On May i, 1919, there were in the United States $3,092,430,916 of gold coin and bullion. Originally the silver dollar was also standard money, and was in fact the only coin issued under the name of "dollar," a corruption of the German Thaler, abbreviated from Joa- chimsthaler or silver coin issued in the sixteenth century by a petty Bohemian potentate in Joachimsthal {i.e. St. James' dale). In 1792 the silver dollar was fixed at 3715 grains pure, or 416 grains standard silver. In 1837 the weight of the dollar was reduced to 41 2^ grains. This was henceforth known as the standard dollar, the previous coin being later on colloquially termed the "dollar of the fathers." The coinage of the "stand- ard dollar" was discontinued in 1873, but again authorized in 1878, although now without free coinage and only in exchange for a limited quantity of bullion purchased by the government. In 1890 it was provided that the silver dollar should be coined only when necessary to redeem the treasury notes issued under that law. The further issue of treasury notes, however, was suspended in 1893, and with their gradual retirement the need ^ Souvenir gold dollars were coined for the St. Louis and Portland expositions. § iSy] Value of Money 453 of more silver dollars diminished, until with their disappearance the coinage of the silver dollars came to an end in 1904. The outstanding silver dollars are hence now in fact, although not in name, subsidiary or token money, because since the fall in the price of silver their face value is far superior to their bullion value, because since 1873 there is no free coinage of silver, and because since 1878 the silver dollars are legal tender only if not otherwise stipulated, and not legal tender at all for the redemption of the gold certificates. On May i, 1919, there were in the United States 311,018,930 "standard" silver dollars.^ The other coins of the United States are what in official language are designated as "subsidiary silver" and "minor" or "token" coins. On May i, 1919, there was in the United States a stock of $243,896,606 of "subsidiary" silver. The "minor" or "token" coins were originally of copper. They are at present a five-cent nickel and a one-cent bronze coin, each legal tender up to 25 cents. 187. Value of Money The value of money is its purchasing power, and can be learned only from the general level of prices. Prices of single commodities may rise or fall because of relative variations in the forces which affect particular demand and supply. But there can be no change in the prices of all commodities unless there is a corresponding change in the value of money. The value of money, like that of everything else, is an ex- pression of its marginal utility. The important point, then, is the location of the margin. The marginal increment is obvi- ously affected not only by the number of increments — the 1 For a few years we also had a "trade dollar." The law of 1873 authorized the coinage of a heavy silver dollar (420 grains), which it was supposed might be used in the Orient. It was legal tender only to $5. In 1876 the legal tender quality was abrogated and the coinage was lim- ited. In 1878 the further coinage was prohibited except for "proof pieces," and in 1887 pro\'ision was made for retiring the outstanding issue. The total issue was $35,965,924. 454 Money, Nature and Value [§ 187 supply — but by the amount of the work to be done — the demand. Taking up first the demand for money, it is clear that we must not confuse this with the demand for the commodity used as money. Gold and silver, for instance, are used also as ornaments and in the arts and manufactures. The value of the precious metals is therefore afTected by the non-monetary demand, or as it is sometimes called, the industrial consump- tion. Confining ourselves, however, to the monetary demand proper, we must call attention to a widespread fallacy. It is sometimes said that money differs from other things in that the more of anything else we have, the less we want, while the more money we have, the more we want. This confuses money with general purchasing power or wealth. Everything salable has purchasing power. If we say that the more money a man has, the more he wants, we can equally well say that the more wheat he has, the more he wants. Yet no one would claim that the demand for wheat is for this reason unlimited. The demand for money is in fact even more limited and definite than that of most commodities. Wheat can be used for either consumption or exchange; but while gold can be em- ployed in industry, its use as money is primarily for exchange. The chief use of an ordinary commodity is to consume it; the chief use of money is to part with it. What the owner really wants is wealth, not money. Since the fundamental function of money is to serve as a medium of exchange, the demand for money can be recognized primarily in the volume of business. Here we meet another common error. It is often said that the value of money is measured by the total amount of commodities in existence. The real or effective demand for money is measured by the commodities actually sold. To ascertain this demand it would be necessary to compute the exact volume of all cash trans- actions at a given moment. Money, however, is needed also, as we have seen, as a reserve and as a store of value. We should, § iSy] Value of Money 455 therefore, have to add to the amount required for making actual exchanges the sums needed as reserves by the banks or govern- ments and the amount deemed necessary to be kept as cash in the pockets of the people and in the tills of the merchants. If it were possible to arrive at any accurate computation of these three facts we should know the entire demand for money. There is one other point in which the demand for money differs from that for other things. In ordinary commodities the demand is composed of three parts: the demand for im- mediate consumption, the demand for a reserve stock to be utilized in the near future, and the demand for more distant wants or for a stock "held for a rise." In the case of money, however, there is no potential or visible supply of money, and no stock that is held for a rise. People do not speculate in money because there are no changes in the price of money; because in fact money has no price. Changes in the value, or. purchasing power, of money express themselves, not in any visible change in money itself, but in the prices of commodities. We have thus far spoken only of cash transactions. In con- sidering the use of money as a medium of exchange, however, we must not overlook the fact that many exchanges are made through the medium of credit. The study of credit must be postponed to a later chapter; but we may anticipate the con- clusions by stating that credit tends to lessen the demand for money, and thus to raise prices. The strength of the ten- dency depends on the degree of the actual economy in the use of cash. Changes in the monetary demand, and therefore to that ex- tent in the level of prices, consist of changes in the four points just mentioned: in the volume of business, in the amount of the bank reserves, in the quantity of hand-to-hand or till money, and in the use of credit devices. Of these the second and fourth will be discussed later, while the third is commonly of slight importance. The demand for money as a medium of exchange, how- 45^ Money, Nature and Value [§ 187 ever, which is the most important constituent in the demand, obviously fluctuates with the extent of business transactions. With the warning that we must be careful not to confuse the volume of exchanges with the volume of production, it might be affirmed that, as an increase of business means a greater volume of transactions, the tendency will be toward a greater monetary demand, a rise in the value of money and a fall in general prices. In actual life, however, this tendency may be completely out- weighed by countervailing tendencies. For in the first place, the increasing monetary demand will, as we shall see, ordinarily lead to an increasing supply, so that the price level may be only temporarily aft'ected. Secondly, the augmented volume of busi- ness will probably be attended by an extension of credit, so that the result may be for quite a protracted period a rise, instead of a fall, in prices. Since credit, however, always bears some relation to the supply of money, more business will in the long run require more money, if the price level is to be maintained. In short, the demand for money, like the demand for most things, is subject to all manner of subtle and unforeseen fluctu- ations. But however changeable and unpredictable the de- mand, it is obviously one of the two factors which fix the value of money or the general level of prices. Coming now to the monetary supply and assuming that the quantity of money at a given time is known, it may be asked: what effect do changes in the supply produce on the value of money or the level of prices? This question cannot be answered without taking account of the rapidity of circulation. By rapidity of circulation is meant the average number of times that the pieces of money change hands within a given period — say a year — in efTecting sales. If, therefore, we centre our attention upon the chief function of money, — that of a medium of exchange, — and if we use the term "volume of transactions" to signify the product of the number of commodities sold, the number of times that they are sold in a given period, and the price at which the sales take place, the general law of money § iSy] Value of Money 457 might be expressed in the equation: the quantity of money multiplied by the rapidity of circulation is equal to the volume of transactions in cash that are effected at a given price level. According to this law, if the volume of business and the price level remain the same, an increase in the rapidity of circula- tion means that a smaller quantity of money is needed; and per contra an increase in the supply of money means a diminu- tion in the rapidity of circulation. The rapidity of circula- tion is affected not only by the quantity of money, but by the other factors in the equation, — the volume of business and the price level. So far as the independent action of rapidity of circulation on prices is concerned, the influence is comparatively slight. For while communities differ greatly from one another, the rapidity of circulation in the same community is normally the result of long-continued business usages, which alter but slowly. It is only in sudden emergencies like panics, when business comes almost to a standstill, that the rapidity of circulation abruptly declines, with a resulting fall in prices. But even here it is difficult to say how much of the fall of prices is due to a lessening of the rapidity of circulation, how much to a dimin- ished supply of money (which the banks will now hoard) in actual circulation, and how much to a contraction of credit which always accompanies a crisis. • Disregarding, then, the rapidity of circulation, it might be claimed that an increase in the supply of money will lower its value or raise the price level. In one sense it is a truism to state that an augmented supply of anything will lower its value. If, however, by this is meant that the price of anything varies in a precisely inverse ratio to the supply, the statement is in- exact, for the obvious reason that every change in supply nor- mally affects the demand. As Gregory King pointed out in the seventeenth century, wheat will rise in price considerably faster than the supply falls. He estimated from the crop statistics of a series of years that a deficiency in the harvest of 458 Money, Nature and Value [§ 188 one, two, three, four and five tenths would raise the price three, eight, sixteen, twenty-eight and forty-five tenths respectively. In the same way, doubling the supply of wheat will not halve the price. In no two commodities does a change in the supply exert the same influence on the price, because in no two com- modities is the "demand curve," which represents the elas- ticity of the demand, the same. A distinction may even be drawn in this respect between metallic and paper money. In the case of paper or fiat money, where the value is due almost entirely to its use as money, an increase in the supply beyond a certain point is more directly reflected in a fall of value than in the case of gold or silver, which possesses in addition a value as a commodity, and the demand for which is non-monetary as well as monetary in character. 188. The Quantity Theory and the Cost Theory It is obvious, therefore, that the famous "quantity theory" of money — the theory that the value of money depends on its quantity — is indefensible in this bald form. For the value of anything does not depend, as we know, upon supply alone nor upon demand alone, but is a result of the equilibrium be- tween supply and demand. So that in the law of money given above, the level of prices may be affected not only by changes in the rapidity of circulatioa as well as in the quantity of money, but also by changes in the volume of transactions. More- over, the law of money there stated, although accurate so far as it goes, is not exhaustive, for two reasons. In the first place, when we speak of "the volume of transactions in cash," we disregard the credit operations which also vitally affect the demand. Secondly, in using the same phrase, the "volume of transactions" does not include the functions of money as a re- serve and as a store of value. These were discussed under the head of demand for money, and properly so, because the needs of the community for money to serve these ends is distinct from its need for money in making actual exchanges. But they § iS8] Quantity and Cost Theory 459 might also have been discussed under the head of supply of money in so far as the amount of money resting in the pockets of the people in between actual sales or stored in the reserves of banks and governments must be added to the quantity em- ployed in making actual exchanges in order to arrive at the entire supply of money in existence. From this point of view, therefore, the quantity of money which directly influences prices is primarily the quantity employed in making actual exchanges, that is, the entire amount of money in existence less the sums utilized as a reserve or as a store of value. The more comprehensive law of money, then, may be summed up in the equation: the supply of money (less the sums used as a reserve and a store of value) multiplied by the rapidity of cir- culation is equal to the volume of exchanges in cash (as modi- fied by the credit transactions) effected at a given price level. While the quantity theory of money is therefore untenable in its crude form, it may nevertheless be employed to mean that, in the absence of relative changes in the other factors, a variation in the quantity of money will produce a change in the price level. In this sense the "quantity theory" is only an elliptical way of stating the ordinary law of demand and supply. There is an additional defence for the "quantity theory" in this sense, because when we come to examine the really controlling factors over long periods of time, we find that the emphasis can well be laid on the supply side, and especially on the quantity of money. Thus the revolution of prices in the sixteenth century was due to the discovery of the Ameri- can silver mines; the fall of prices from 1873 to 1896 is ascrib- able to the fact that the output of gold did not keep pace with the increase of population and business; and the great rise of prices from 1896 to the year 19 14 is due to the immensely augmented production of gold. But on the other hand the gold discoveries of 1849-50 in California and Australia, as we shall see in § 193, did not lead to a proportionate rise of prices because, in part at least, of the somewhat fortuitous concur- 460 Money, Nature and Value [§ 188 rence of a vastly increased demand for money. And for shorter periods, the influence of the mere quantity of money on prices is frequently outweighed by changes not only in the rapidity of circulation, but more especially in the various factors that make up the demand for money. Sometimes it is stated that the value of money depends upon its cost of production. This does not, however, involve any new principle. The only difference between money and other commodities is that the influence of cost of production upon the supply, and hence upon the value, of money works itself out more slowly. The value of money, it must be remembered, is not due to the value of gold any more than the value of iron beams to that of iron ore. On the contrary, just as the value of iron ore is due to that of iron beams (and other iron products), so the value of gold bullion is due to the value of gold money (as well as of gold used in the arts). Just as the value of any reproducible commodity tends to adjust itself to the point of marginal cost, so the value of money tends to adjust itself to the marginal cost of the money commodity. A decrease in the expense of mining, such as that which has been effected by the modern cyanide process, renders possible a far greater output. Since the precious metals, however, are exceedingly durable, this annual increment forms only a small fraction of the entire available supply, and will not produce any immediate change in value. In 1912, for instance, the annual production of gold was 466 and that of silver 138 millions of dollars, while the world's stock exclusive of China was estimated at 8,481 and 3,132 millions respectively. While fluctuations in particular prices are often sharp and sudden, because of the insignificance of the stock on hand as compared to the quantities that can be produced at an altered cost, the variations in the general price level due to changes in the cost of money are far more gradual. Sooner or later, however, an alteration in the rate of annual increase will make itself felt. A lower cost of production of § 189] The Price Level 461 money may hence be said to raise general prices, in so far as it augments the quantity of the money commodity. The cost-of- production theory thus resolves itself into the quantity theory. 189. The Price Level The level of prices may be affected by impulses starting from the side of commodities as well as from that of money. The price level in China dififers from that in America. In Athens, in the time of Pericles, money was worth at least three times as much as to-day; in America a century ago the pur- chasing power of money was far greater than at present. The explanation is to be sought in the general conditions of demand and the circumstances of cost. Modern industrial methods lead to vast and varied consumption, to more efficient produc- tion and to higher wages. The greater command of wealth and the lower real cost to society are, however, accompanied by the higher money prices that go with the augmented wages. In other words, the general price level tends to rise; that is, more money is needed to effect the exchanges. This can, how- ever, come about only if there is an increased supply of money which adjusts itself to the newer price at a lower cost level. Thus, while diversified demand, augmented consumption and mass production set in motion an increase of prices, they must be accompanied by a reduction in the relative cost of producing or acquiring the money commodity, if the rise is to be perma- nent. This is what happened in Germany a generation ago, and what is happening on a far greater scale in Japan at present. Because of the fact that values of commodities as well as of money itself are constantly changing, it is not always easy to measure with precision the variations in the purchasing power of money. The best expedient is that suggested by Evelyn in 1798, by Lowe in 1822, by Scrope in 1833, and by Porter in 1836, but elaborated by Jevons in 1863, and known as the in- dex number. Here the price of an article at a given time, or its average price during a given period, is taken as a basisi and 462 Money, Nature and Value [§ 189 called 100. If at the next selected date the price has risen one-tenth, it would be assigned the figure no. By choosing a number of different articles and taking the average of the figures as they vary from the base line of loo, we reach the index number. The percentage of change in the value of money is obviously not the same as the percentage of change in the general price level. If general prices double, that is, if the index number in- creases from 100 to 200, each unit of money will buy only half as much as before, or, in other words, the value of money will fall one-half. A rise of prices of 15 per cent, or a change in the index number from 100 to 115, during one year means that the purchasing power of 100 cents at the end of the year is ii5 or 86.95 per cent of its purchasing power at the begin- ning. This is equivalent to a loss of 13.05 per cent. A rise of 15 per cent in the general price level thus equals a fall of 13.05 per cent in the value of money. The change in the in- dex number shows the alteration in the price level; the change in the reciprocal of the index number shows the change in the value of money. The utihty of the index number depends partly on the number and choice of commodities, partly on the decision to use retail or wholesale prices, partly on the kind of average employed. (i) It is obvious that the larger the range of commodities selected, the less w'ill be the chances of error arising from sudden fluctuations in the price of any single one. Even if we take a large number of ordinary articles, however, there still remain two important classes as to which it is exceedingly difficult to quote accurate price lists. One is the price of real estate, or house and land rent; the other is the price of labor, or general wages. The almost universal exclusion of these catego- ries undoubtedly impairs the accuracy of the index number. (2) While there is a general correspondence between whole- sale and retail prices, there is no precise relation. It is well established that retail prices fluctuate less than wholesale prices, t \- '-< 1 ^■ y ^- -- '' CQ ,— -*" — ^ '^ s ^~' ■* — -^^ ^^ 1 N \ V --. -- ^ ^r N \ ^. / / / i :^ / r 7 '\ / \ i-H / J r \ \ \ \ > \ OO s\ s >y \ 1 \j ^ v.. \ ■N ^V •x^ v.^ ■■^ — ^ ^^ "^ ,.*^ -^ 1 ^' i-^ T m ^^ § r-t \ \\ -f 1 y^ y y^t ^y s X. \ V C'i N i-H J'' X y ^' 1 " ""^■^^^ """ •^• -•«.. o 1 ** — . CO -t< '^> o CO «: ^3sS§ssls^'^^^^ (>J 3<» (>2 C^J 1-5 1- < - J cc °= 2T6T II6T 0I6T 606T 8061 Z06I 9001 e06T t06T 8061 g06I IQ6T 0061 668T 8681 2681 9681 2681 t68T 8681 S68T I68T 0681 V x, V, ^ \ \ 1 1 1 / I \ V \ \ "v V, v^ \ I-' / / ? / / / s \ s \ \ \ \ ^ \ s - \ \ V \ s / / \ \ \ \ ■v V V <^ \ / 1 1 \ V •N. s ^ >. \ ^ \ s \ \ 1 \ / • r ^ ■^ 1 / ^ -^ c ^ y '' ^ ' / ' y '" y / I . 1 1 § iSg] The Price Level 463 because they are more dependent on custom and not so read- ily altered. This is apparent from the charts opposite pages 462 and 463. Since it is impracticable to compute the pro- portion of retail to wholesale transactions in various commodi- ties, the index number must be confined either to the one or to the other, with a necessarily resultant lack of precision as to the actual purchasing power of money in all transactions. (3) The ordinary average is the arithmetic average, where the figures representing the variation from the base line of 100 are added together, and the aggregate is divided by the number of commodities used. This average tends, as can be easily calculated, to exaggerate the influence of rising prices. As a consequence, statisticians often utilize the so-called geo- metric average which is found by multiplying a number of quantities and extracting a root equivalent to that number. Sometimes to secure still greater precision, use is made of the harmonic average, or the reciprocal of the arithmetic average of the reciprocals of the quantities. Finally there is still another choice, known as that between the simple and the weighted average. Weighting means assigning to each article an im- portance proportionate to the amount sold or to some other criterion which distinguishes one commodity from another. In practice, however, it has been found that there is not enough difference between these various methods seriously to impair the value of the result, which can at best only be ap- proximate. The most familiar index-numbers are those of Messrs. Jevons, Palgrave, Soetbeer, Sauerbeck, Dun-Gibson, Bradstreets, the London Economist, the Board of Trade and the United States Bureau of Labor. ^ Without their use it is virtually impossible to make more than a mere guess at the rise or fall in the general price level. It will be of interest nevertheless to append opposite page 466 a chart showing the 1 For an explanation of the earlier index numbers see the Biillclin of the Department (now Bureau) of Labor, no. 39, 1902. tor the later ones see the same Bullclin, no. 181 (1915) and no. 226 (1917). 464 Money, Nature and Value [§190 changes in the general price level for the last quarter of the century in the United States as compared with Great Britain and Germany.^ In the chart following page 464 will be found the changes in the price level in England from 17 go to 1913, showing the great extremes of a century. In the table opposite page 467 we give the index numbers of wholesale and retail prices of food for the United States from 1890 to 191 2, showing the great depression culminating in 1897, and the remarkable rise thereafter.^ Finally, in order to bring the facts down to date we add in the table opposite page 468 the index numbers of wholesale prices from 1914 to 1919 in the United States, Great Britain and France, showing the striking influence of the Great War.'' 190. The Distribution and Stability of Money Variations in the price level are not uniform or instantaneous over the whole economic field, but propagate themselves in waves from commodity to commodity and from country to country. When, for instance, a miner brings in his gold dust or nuggets, he deposits them in the nearest sub-treasury, taking in return cash and bank drafts. A part of this he may spend on articles which for that very reason tend to rise in price. But most of his annual output will be deposited in the banks, whose reserves are thereby increased to such an extent that they will send the funds to New York to be loaned on call on / ' Based on an article by R. H. Hooker in the Journal of the Royal Statistical Society, vol. 75, pp. 1-50. 2 Bulletin of Bureau of Labor. The base of 100 in each case is the aver- age price for the years from 1890-1899 inclusive. The index number of wholesale prices is based upon 258 representative staple commodities. The wholesale prices of food are based on 54 articles, the retail prices on 30 articles of food. In the case of retail prices the weighted average is used. ^ In this table the index numbers are e.xpressed as percentages of the index numbers for 1913. O "M -<< «C — Ci C5 CT t O O O O O r- ) ^H T-H f— ( f-H f^^I 1^1 fX (>i fM C^ OOCOCOOOCOOOOOOOCOCOODCOCOCOCOcy i i ill ji 1 — GENERAL L FROM 1790 TO 1S20 THE 1820 TO 1912 " 1913 ON •l ; ! « A \ I 1 / 1 S,'' 1 1 1 u / / K r 1 ^ 1 1 / 1 1 1 1 1 1 1 1 1 1 \ T V, ' 1 ; 1 I 1 1 ^ \ ^ / \ / \ ) 1 \ y 1 / I* V ) / V j 1 \ / / V. 1 / \ / \ / 1 V / \/ \ 1 f y / A 1 N ,^ / /\ "1 r t 1 I II I y 1 \ / 1 y 1 V, K - V . ii 8 '2 ;!■ 5D 00 O M •* JC S M S 00 So S 5 a)30«*3S»xia)coc)03: S = o 'S o 2 2J -5 « 2 S ?! - i 1 , F PRICES IN ENGLAND, 1790 TO 1920 S REPRESENT JEVONS' AVERAGE OF 40 COMMODITIES SAUERBECK'S ■■ ■■ 45 PAISH'S .. " 45 .1 •i ' ! 1 i ! ! \ \ 1 1 I RD S" TH I \ F ERIOI ) 1866 -18 67 1 i * 9 • f \ "^ \ ; 1 1 ~ / \, / - ~ 1* V V / - — — s / 1 / \ ""l r ' \ -^ s ^ -^ ^ -^ \ 1 Vi V, p' -^ ^ i —I A 1 -l 1 K / ¥ 1 \ V 1 ' \ \ -^ \ ^ \ \ ■^ V ^ ^ -^ \ -^ \ ^' ^ J — ' 1 1 "^ r 1 § iQo] Distribution of Money 465 the exchanges for transactions in securities as well as in cotton and wheat. The lower rates for "money" will tend to increase the dealings in, and the prices of, the great speculative staples, while the higher prices of railroad securities and industrials will tend to augment the demand for railroad supplies and the raw materials of industry. Gradually the banks will increase their loans to the ordinary merchant, thus stimulating the demand for commodities and ultimately for labor. It is largely for the reason that they are more amenable to speculative influences that, in a period of rising prices, as Cairnes pointed out, crude products rise more than manufactures and animal more than vegetable products, while wages are almost always the last to advance. A broader generalization, however, would be that the rise in prices is noticeable first in stocks and bonds, then in speculative staples, next in ordinary commodities, then in retail prices, and finally in labor and land. The same progression could easily be shown in the case of falling prices. In the meantime, however, the perturbation of prices is transmitted from country to country. The distribution of metallic money is in large measure the result of international forces. Some commodities have an international, others only a local, market; the price level in each country is a result of both considerations. Every, nation will, under normal condi- tions, secure enough money to preserve this relative price level. If there is an abnormal increase in the quantity of gold in one country, it will tend to produce higher prices, augment- ing imports of commodities and exports of gold until the equiUbrium is restored at a somewhat higher level. The pro- cess may indeed be retarded by various influences. If the increased supply of gold comes from the mines, it may be ex- ported at once, or it may go to the bank reserves and flow* out under general banking operations without at once sensibly affecting the general price level. Or the international trans- actioixs may take place in securities rather than in commodi- ties. Or, finally, through the intervention of credit transactions, 466 Money, Nature and Value [§ 190 there may be a temporary change in prices unaccompanied by any movement of gold. As the prices of securities, however, are ultimately dependent on the price level of commodities, and inasmuch as all credit rests at bottom on the basis of coin, there can be no long-continued disarrangement of the equilibrium without setting in motion the forces working for its reestablishment. The equilibrium is one between relative price levels, which is only another way of stating the relative amounts of metallic money in each country. Any sudden alteration in the use of credit devices will exert its temporary effect; but in the long run there is a correlation between the price level and the money supply. Under healthy fiscal conditions, that is, when the currency is on a metallic basis, the amount of money in any country will be self-regulative and adequate to maintain the relative price level. Since the purchasing power of money is reflected in the level of prices, an appreciating standard is equivalent to lower prices and a depreciating standard to higher prices. The instability of the value of money leads to important results. If the standard appreciates, that is if prices fall, because the supply of money does not keep up to the demand at the old level, the first consequence in countries like the United States, at all events, is apt to be noticed in the stock market. As the bank reserves decrease, because of the relatively declining sup- ply of money, the banks call in their loans, and interest rates on call loans are apt to increase for a time. Speculators first in securities and then in staple commodities tend to sell their holdings at a sacrifice, and there develops what is called a "bear" market. As the fall in prices reaches general indus- try, profits are curtailed in some businesses and enterprise slackens. Raw materials are indeed cheaper, but the manu- facturers cannot market their goods at satisfactory figures and lose money. With the falling off in the demand for new capi- tal, interest rates in general will finally fall. r cr ~^-. "4 \ \ s N^ \ "^ \\ \ ,^ ?„' ^^ ^' "■-• ^ >^ ^^ ^ \^ \ \ \ \ / ' \ \ \ ""- .^ \ V^ / •^''i V ^ ^ ^"^ >^\ ■^ ^N \^ .\ \ ' ,# 1 1 / /!/ in 1 UJ Z 1 t< 1 <^ ^' H t 1 1- ujq; z cc Ul 3(3 j 1/ V '/ / 1 1 1 O ^ S 00 I^ ^1 '^ <^ " i"l w n •* ■* >o I^ "+ fO M ro " ►- <~l i^l '^ '■0 "* •+ Tt- ro Lo t^ -6 u O — o ■3 '0 COM tN I^OCOO t^t^fO in ro M I- I^ CO IM I-- rt- CO M M W " -^1 "^l '^1 fO PO 'O .0 C^o 0^^0*0 00 »>oO CO NO -+ ri ro ro >0 f^l C^ '^1 "-I CT' M ►-. w M ri ri CI ri ro CI ro ir ro CO OOOOOOOO"" (N ro '^ 8 tJ ■ •+ w 1^1 M n t^ 1^ C<3 ^ M ro M ^ l^ 10 00 C^C^C^C^C^O 2 2 5J 5 -Tj-r— MCOOoo r^--t-cO Cl On IN 10 CO On ^ fO 1^ ^ CO mmQi-iOnOnOOOOOnI^ M M M M -t 1-0 cj M^O lose COO OnCO*-. mwOOO^OnOncOO^O M l-< M M H^ 1/-) 10 d CO - OwNro^io-Or^cOON OnO^OnOnO^O^OnO^O^On OOOOOOCOCOCOCOCOOOOO 8 5 On On § igo] Distribution of Money 467 Thus the farmer, the merchant, the manufacturer and the banker all in turn suffer from the falling prices and the "bad times" are ushered in. No one realizes that the trouble is due to any general change in monetary conditions, but all ascribe the depression to over-production or other special causes. It might seem that the laborers are relatively better off, because their wages are the last to fall. But in reality the lack of prosperity affects them equally, because the employers either lay off part of the laborers or work on half time. The professional classes suffer because of the decline of business. Borrowers are embarrassed because they must work harder to pay back an equivalent sum of money. Owners of land and of corporate shares will get less rent and less dividends. There are only two classes who do not suffer, — those in receipt of a fixed income, like teachers and government officials; and bond- holders (as distinct from stockholders), who, receiving a fixed sum while the general rate of interest is falling, will see the capital value of their bonds appreciate. In the main, however, the "bad times" are general. A depreciating standard, or a rise in prices, such as that which the world has witnessed from 1896 to 1914, produces the opposite effect. Some classes are benefited, some are injured. If the gold is produced in the country, as in the United States, the increasing supply will swell the bank reserves and for the time reduce the rate of interest on call money, benefiting borrowers, and tending to produce a "bull market" by putting up the price of stocks. If the increased supply of gold comes into a country in return for extra exports to the gold-producing countries, the effect on interest will be slighter at first, and that on prices more immediate. In either case, however, stocks and speculative commodities rise in price. Debtors benefit, because they have to work less to repay their obligations. On the other hand, the salaried and wages classes find it difficult to subsist on their accustomed stipends, and there is a concerted movement looking to the demand for 468 Money, Nature and Value [§ 190 increased wages, which with real estate are the last to rise. But profits increase with the rising prices, and the resulting activity in business will not only increase the demand for raw materials and thus the gains of the farmer, but will also aug- ment the demand for new capital, and thus tend ultimately to raise the rate of interest and to increase the prosperity of the financial sections of the community. But with a rise in interest, the price of bonds will fall. In the main, however, the community feels itself prosperous, and the danger now is that production may be artificially stimulated and that the result may be a speculative mania culminating in a crisis. Thus both rising and falling prices create an unstable equilib- rium which means disturbance in industry and unequal gains or losses to different classes. It is not high or low prices as such which do the harm, but rising or falling prices. WhUe many factors influence the value of money or the level of prices the one of chief importance in time of peace is the out- put of the precious metals used as money. The figures wiU be found opposite page 476. Between 1570 and 1640, with the enormous new supplies of silver from America, prices rose from 200 to 300 per cent, constituting the famous "Revolution of Prices." In the nineteenth century we have had several cycles of severe fluctuations. Between 1790 and 1810 prices rose about 80 per cent as a result of the wars; between 18 10 and 1850 they feU about 60 per cent, the supply of sflver being cut oR by the political disturbances in South America, and that of gold not increasing sufficiently to keep pace with the expanding industry. From 1850 to i860 came a rise of prices of about 20 per cent, due to the gold discoveries. That the rise was not still greater is due partly to the drain of silver to India, but chiefly to the en- larged demand for money which accompanied the increase of business transactions, resulting from the revolution in the media of transportation. From i860 to 1873 the price level remained relatively stable, rising considerably, however, from 1870 to 1873, owing to the speculation which culminated in the crisis WHOLESALE PRICES 1913-1921 (BASES ARE THE INDEX NUMBERS FOR 1913^ 1913 JAN. 1914 JAN. 1915 JAN. 1916 JAN. 1917 JAN. 1918 JAN. 1919 JAN. 1920 1921 JAN.MAYiJAN.MAY ^ 1 > ^ ■» \ \ \ 580 570 550 520. A 470 /\ l/ \ r \ \ V ii \ i ! , ;- / \ 1 ^» / 1 / ^ >• / \ 370 / N /'/ \ / \'' \ ' ^ '>v / \ ^'' / 4l / '^Z A 1 / /o^ \ /' if ' \ 280 270 / A / \ / / J a' / .' / A \ 250 240 230 / / / J ' \ \ / / cf^y J \ \ / / -^t^ / \ \ / ' x^ ^'^J^'^ y 1 \ 210 200 190 180 170 160 // 0^- ^^ ^/'^ \ // /" \^^^ 1 \, .' / / ^^' \ ' / / y. :<^^ \ / / / /^ V 1 / / / \ / / / / X 110 ' / I'JO '' /y / 120 110 100 00 //y y y^ -^\ ^ f— ■- 1 1 § 190] Distribution of Money 469 of 1873. From 1873 to 1896 prices fell almost 60 per cent, as a result of the relative diminution in the output of gold. Since 1896 the prodigious increase in the production of gold has caused another era of rising prices which by 1914 amounted to almost 60 per cent. Then came the Great War with a further increase of over 100 per cent by 1919. These fluctuations in the price level have only recently been recognized as an evil. No practical method has yet been dis- covered to reduce them to a minimum. Perhaps the best- known proposition is that of the so-called multiple or tabular standard.^ The unit of measure would here be the aggregate price of a number of commodities, whose values might be reached by a method of index number. Even, however, if such a sys- tem were practicable, — a fact open to the most serious ques- tion, — it may be impugned on the ground that for short-time debts it is not needed, and for long-time debts there is no assur- ance that the two parties will be put in a more equal position than if ordinary money is used. With all its shortcomings, therefore, the gold standard seems to be the one which involves the least injustice to both. Until, therefore, a more practicable scheme is devised, it is altogether probable that the business world will have to content itself with a money unit which, like the gold standard, is exposed to the inevitable fluctuations in value that are incident to all articles of human desire and that are so largely influenced by the bounty of nature. 1 Many other standards have been proposed. Walsh, who has de- voted an entire volume to this topic, sums them up in The Fundamental Problem in Monetary Science, part 4, as the commodity, wages and cost standards. Edgeworth, in pp. 162-164 of his Report of 1889, discusses them as the capital, consumption, currency, income, in- definite production and wages standards. Kinley, Money, ch. xiii, mentions the labor time, labor cost, disutility of labor, marginal utility, total utility and purchaser's surplus standards. Professor Irving Fisher in Tlic Purchasing Poivcr of Money (191 1) has championed a somewhat analogous, but not very practicable, international scheme. CHAPTER XXIX MONEY, PRACTICAL PROBLEMS 191. References J. F. Johnson, Money and Currency (n. d., 1905), chs. ix-xvii; F. A. Walker, Money (1878), parts i and ii; J. S. Nicholson, Principles (1901), bk. iii, chs. xi-xiv; H. White, Money and Banking (4th ed., 191 1), parts i and ii; W A. Shaw, The History of the Currency (1896); H. G. Moulton, The Financial Organization of Society (1921); A. B. Hep- burn, A History of Currency in the U. S. (1915); H. P. Willis, History of the Latin Monetary Union (1901) ; H. B. Russell, International Monetary Conferences (1898); A. D. Noyes, Forty Years of American Finance (1909) and Financial Chapters of the War (1916); S. P. Breckenridge, Lei:,al Tender (1903); W. C. Mitchell, A History of the Greenbacks (1903); Count Masayosbd, Report on the Adoption of the Gold Standard in Japan (1895); United States Commission on International Exchange, Reports on the Introduction of the Gold Exchange Standard into China, etc. (1903 and 1904); E. W. Kemmerer, Modern Currency Reforms (1916); J. M. Keynes, Itdian Currency and Finance (1913). 192. Coinage Problems. Seigniorage and Debasement The term free coinage is employed in two senses. If the government makes no charge for converting bullion into coin, the coinage may be said to be free. On the other hand, free coinage may mean the right of any owner of bullion to have it converted into coin. When we commonly speak of the free coinage of silver we employ the term in this second sense. The real distinction that ought to be observed is be- tween free and gratuitous coinage, the former implying the right to have bullion converted into coin, the latter being coinage without any charge. There may be free coinage, with or without gratuitous coinage. Another term susceptible of several meanings is seigniorage. 470 § 192] Seigniorage and Debasement 471 Ordinarily it signifies the charge made by government in re- ceiving bullion at its market value, and deducting a certain amount before or after coinage. It involves to this extent a difference between the bullion and the mint value of the coin, and it was this difference which accrued to the mediaeval seigneur or local potentate who had the monopoly of coinage. But where, as in the United States, owing to a fall in the mar- ket price of the bullion, the government purchased a quantity of silver for fifty or sixty cents and converted it into a silver dollar, the difference, which was officially called "gains" and put into the "silver-profit fund" (or in the case of the sub- sidiary silver into the "minor-coinage-profit fund"), was also popularly called seigniorage. Sometimes a further distinction is made between seigniorage (in the first sense) and brassage or mint-charge proper. Bras- sage is the sum levied to cover the actual cost of preparing the bullion to be coined, while seigniorage would then be a sur- plus charge representing a net gain to the government. This distinction is, however, not always observed. In England the mediaeval charges were divided between the king and the mint, seigniorage proper being abolished in 1666. In the United States the law of' 1792 provided for gratuitous coinage, but imposed a charge of ^ of i per cent if the coins were de- manded at once. The act of 1853 levied a general seignior- age of ^ of I per cent, but when free coinage of silver was abolished in 1873 the seigniorage on gold was reduced to i of I per cent, and finally disappeared in 1875. The government, however, still makes a charge, as fixed by the Director of the Mint, to cover the actual cost of preparing the bullion for coinage. In France seigniorage is effected by withholdins: some of the coins, instead of the bullion, — in the case of gold, seven francs out of the 3100 into which a kilogram of gold is coined. Seigniorage is thus used in three senses: (o) mint-charge proper or brassage, to cover the cost of coinage, and techni- 472 Money, Practical Problems [§ 192 cally a fee; (6) an additional charge in the nature of a tax; and (c) the gain or profit arising from converting buUion of a low market value into coins with a high face value. Seignior- age exists in the United States only in the first and third senses. In whatever sense the term is used, however, the im- position of a seigniorage always involves a discrepancy be- tween the value of the coin and that of the bullion in the coin. A discrepancy between the original value of the bullion and that of the coin may occur for three further reasons: abra- sion, mint accidents and debasement. (i) Abrasion denotes the loss of weight by use. There is generally a limit of tolerance below which coins forfeit their legal-tender quality. In the United States the tolerance is ^ of I per cent of the weight of the gold coins within twenty years from the date of coinage, or a proportionate loss for a smaller period. (2) Accidents in minting involve the so-called remedy or deviation. Since the mechanical operations of the mint are not mathematically exact, there will always be a slight varia- tion in the contents of the new coins. Remedy is the amount of variation permitted by law from the exact standard of either weight or fineness of the new coins. In England the annual test is called the "trial of the pyx." In the United States, where the "pyx" or box is also used, the "trial of the coins" is conducted by the Assay Commission. (3) Debasement can take place in three ways: (a) by diminishing the weight of the metal from which the coin is made; (b) by raising the nominal value of a coin and making it legal tender at a higher rate than before; and (c) by lower- ing the standard or fineness of the metal. (a) When the weight of the metal is diminished by private individuals, it is called clipping or sweating. But it was formerly also practiced by governments. The English pound was originally a pound of standard silver, coined into 240 pence. Since 1816, a pound of silver has been coined into 792 pence, or § 192] Seigniorage and Debasement 473 66 shillings. In the same way the silver livre at the time of the French Revolution weighed only yV as much as the liber or pound of Charlemagne. In some cases, in lieu of diminishing the weight of the metal, governments have seen fit to alter the material. So the florin, now a silver coin, was originally a gold coin; and the Spanish maravedi, which was at first made of gold, is now made of copper. ib) Debasement by raising the nominal value of the coin was common in mediasval Europe, especially with the gold pieces, a new coin with a different name, but with the nominal value of the old coin, generally being issued by its side. This explains the great variety of English gold coins like nobles, angels, rials, unites, laurels, crowns, and guineas. The guinea, so-called because coined from gold brought from Guinea by the African company, was first struck in 1663 with a value fixed in 1717 at 21s., at which figure it still serves to-day as a money-of-account. The actual gold coin is the sovereign, of 20s., first coined in 1485, which became the standard in 1816. It is popularly called the pound sterling, both words being survivals. For the weight to-day is far less than a pound, and the sterling fineness is no longer that employed by the "Easterlings" or Scandinavian traders. (c) Debasement by lowering the standard of the metal was also frequent in mediaeval England and especially in France, where the classic example is Philippe le Bel who figures in Dante's poem as the typical false moneyer. The purposes of debasement have been, first, the discreditable one of securing for the king a revenue arising out of the discrepancy between nominal and actual values; and secondly, the entirely credit- able, but often mistaken, belief that a change in the weight or the fineness of the coin would effectually prevent its exporta- tion. In the United States, as in most modern countries, the few examples of debasement are of this second character. This brings up what is known as Gresham's law. When different grades of an article can be secured for the 474 Money, Practical Problems [§ 192 same price, individuals use the better one; when different grades of money arc in existence, they use the poorer one. In the first case the individuals act as buyers, in the second as sellers. The use of money is not its consumption, but its alienation in order to secure things that can be consumed. Hence, so long as the poor money has legal tender equally with the good, individuals can make profits by melting or exporting the latter and paying out the former. This principle is known as Gresham's law. The name Gresham's law is due to the fact that a Scotch writer, McLeod, who was not familiar with the history of eco- nomic thought, happened half a century ago to find the idea in a report to Elizabeth by Sir Thomas Gresham. In reality, it is expressed more fully and forcibly by many of the earlier mediaeval writers, not to speak of those of classic antiquity. It applies primarily to underweight or debased coin which will drive out the full-weight or good coin of the same metal. This will happen, however, only under two conditions. First, the total amount of money, good and bad, must be in excess of the country's needs. In the second place, both the good and the poor coins must be actually used as money. A better statement of Gresham's law would therefore be that whenever a coin is worth appreciably more as bullion than as money it will disappear from circulation. Gresham's law applies also to paper money as contrasted with metallic money. Here, however, as before, not only must the paper be issued to excess before it drives out the coin, but public opinion may entirely prevent the circulation of the paper money, as was the case with the greenbacks on the Pacific slope during the civil war. Gresham's law finally applies practically also to coin of one metal whose bullion value is less than that of coin of another metal, provided that both metals are legal standard money, with free coinage. In every case, whenever there is a double standard with free coinage of both metals, a discrepancy be- § 193] Choice of the Money Standard 475 I ween the mint and the market ratio makes one of the two metals the poorer money, and leads to a gradual disappearance of the better money. 193. The Choice of the Money Standard The value of gold and silver is closely related to the cost of production. The chief factors that affect the supply, and therefore the cost, are the existence or discovery of new stocks, and improvements in methods of extraction. The ascertainment of new sources of supply is largely a mat- ter of chance. To speak only of modern times, there have been four such fundamental changes: the opening of the Potosi mines in the sixteenth century, the discovery of gold in California and Australia around 1850, the development of the Comstock silver lode in Nevada in the seventies, and the great increase in the output of gold in Africa and the Klondike at the close of the century. In the methods of operation also there have been great changes from the early "placers," to the modern cyanide process. It must not be overlooked, however, that the supply itself is affected by the value. If gold, for instance, should become relatively scarce, and rise in value, all the com- modities, including the wages of hired labor for which the miner exchanges his gold, would fall in price, and the resulting increase of profits would lead him to use lower-grade ore and to increase the output. Per contra, a great increase and cheapen- ing of output means a fall in the value of gold or a rise in the general price level, and this increased cost or lower profits will lead the miner to restrict his operations to the better-grade, and hence the less abundant, ore. Thus in the case of tne metal used as the money standard, a relative abundance or dearth tends to correct itself automatically, rendering improbable any con- tinuous and permanent increase or decrease in the value of money. Within these broad limits, however, there is still ample room, as we have seen, for oscillations in the price level. The conditions of supply throughout most of recorded his- 4/6 Money, Practical Problems [§ 193 tory have been such as to make gold far more valuable than silver. We arc told, indeed, that in early times in Arabia silver was worth more than gold, and we know that when Japan was opened to the Western world gold was worth only four times as much as silver. In classic antiquity the value of gold was far higher. At one time in Rome the ratio was as high as 17 to I. The discovery of the gold mines in Noricum about 150 B. c. changed the ratio to 9 to i, and in the early empire it was about II to I. In the early middle ages the ratio hovered about 10 to I. The discovery of American altered it to 15 to i; and the revolutionary changes in the last quarter of the nineteenth century resulted in a ratio of as much as 30 and 40 to I at various dates between 1900 and 191 5. The table facing page 478 will show the changes in production since the discovery of America. In the charts opposite pages 476 and 477 the same facts in somewhat greater detail are shown for the more important periods of the nineteenth century, not alone for the world in general, but for the United States in particular. In the table facing page 480 will be found the salient figures illustrating the gradual decline in the price of silver from 1873 to 1892, the sudden fall during the next two years, and the fluctuations thereafter. The reasons for this will be explained later. In view of the changing relations of gold and silver the prob- lem as to whether both, or only one, and if so which one, should be used as the money standard was until very recently a subject of serious discussion. The problem has now been solved by the adoption, wellnigh throughout the entire world, of the gold standard as opposed either to the silver standard or to the conjoint use of both metals under the name of bimetallism.^ 1 The word "bimetallism" was originated by M. Cernuschi in 1869. Before that, the term "double standard" was always used. Symnietal- lism, as a kind of bimetallism, proposes a single coin composed of the two metals. The coins of classical antiquity were sometimes made of elec- tron, or a combination of gold and silver. PRODUCTION OF SILVER IN THE PRINCIPAL COUNTRIES OF THE WORLD FROM 1875 TO 1919, IN TROY OUNCES. 1875 1880 1885 1890 1895 1900 1905 1910 1915 1919 ■ r' 1 1 1 1 1 1 1 l\ • -7o,y.y,..y- I -J v/ \ / k. / ^ 1 7l s / ^ /o . ^I /\ / ■ ^^ /. ^' . / ' 50 1 1 000 f^^f^ r / ■ , Oj' A^ \ i Sj <; \, /j / \ \ -s /<" 1 V /.^ \ / .♦ / H ^ k y< \^ 1 A / <.^ \ / / <^ ^• yo y H^ K^ A ' 5, )0 ),< )0( \ / T s _ ^ I \ ^; 7" •^ p , /\ / / 1 \ A^^ 1 1 r— /' s y *> $^ [^ 0, )0 3,( 10 ■) - 1 *i .' ; 1! i/ / ■"• /- ss-. O/ X h // 0.80 1 c r<^ *■ K-i -^/ y/i i . — ^^ f-^^ K c7 / 1 .fvl /' \ _^ -A r ),C ^V -■~ oV' -y ! .U 1 / 1 >• nL^ r L J— 1 N« ,r * / 0.20 ^ -'■ ( 1 _ 1 J ^ PRODUCTION OF GOLD AND SILVER IN THE UNITED STATES FROM 1845 TO 1919^ '*S§S«S'''«§SsSSSsSSS'^S^SS'^'^ "^^ PRODUCTION OF GOLD IN THE PRINCIPAL COUNTRIES OF THE WORLD FROM 1880 TO 1919. VALUES IN UNITED STATES CURRENCY 1890 1895 1900 1905 1910 1915 1919 1885 $270, $255,000,Q00 000,000 $240,000,000 $225,'000,000 $195, $180,000,000 $210J' 000,000 000,000 $165,000,000 ^ a X ^ § 193] Choice of the Money Standard 477 The history of the evolution of the gold standard may be divided into several periods: (i) the alternating standards up to 1816; (2) the embarrassments of bimetallism to 187 1-3; (3) the struggle for silver to 1900; (4) the final disappearance of the silver standard since 1900. In the early middle ages the currency was composed almost entirely of copper and silver. It was not until the fourteenth century that the needs of a growing commerce led to the intro- duction of gold coins in the trade centres. As both gold and silver coins of definite weight and fineness circulated, each country practically had its own legal ratio, which not only differed from the market ratio (varying from 9 to i to 12 to i) but almost invariably differed from the legal ratio in the other countries. As a result the ratio was constantly changed by each government through successive recoinages, now of gold, now of silver, in order to keep the coins in the country, the confusion being heightened by the debasements designed to secure a profit for the sovereign. No one but a few keen business men, primarily Italians, Southern Frenchmen and Jews, who took advantage of these discrepancies, comprehended the true reason of the alternating outflow or inflow of the precious metals or understood the difference between coin and bullion value. What is to-day deemed a perfectly legitimate business — that of exporting gold or silver — was then considered a heinous offence. But neither an adverse public opinion nor drastic legal prohibitions were of avail in preventing the disappearance now of gold, now of silver. The period, in short, was one of unconscious bimetal- lism, with virtually an alternating standard in actual circulation. In the sixteenth century came the discovery of the American silver mines and the "revolution of prices," which was consum- mated by 1660, when the market ratio had risen to 15 to i, a fall of about 50 per cent in the value of silver. For the next two centuries the relative output of the precious metals did not alter materially, and the changes in the market ratio were only 478 Money, Practical Problems [§ 193 slight. The mint ratios in the various countries had accom- modated themselves somewhat more closely to the marlcet ratio, but recoinages and oscillations were not infrequent. It happened that during the greater part of the eighteenth century the mint ratio in France and most of the continental countries was in favor of silver, while in England it chanced to be in favor of gold. As a consequence the actual currency at the close of the century was gold in England, but silver in France. This largely accidental situation had important consequences. In France the mint ratio of the silver ecus to the gold louis was in 1726 14! to i, which resulted practically in a silver currency. The ratio was again changed in 1785 to 15I to i and was continued by the law of 1803, which adopted the dec- imal system, made the silver franc of five grammes the unit, and provided for 20 and 40 franc gold pieces. In England, on the other hand, the guinea, which had become since 1663 the chief gold coin, was intended to pass at 20 shillings, but was actually current at a higher figure. The recoinage*of 1696-8 was designed to furnish a better silver currency, but the value of 22 shillings assigned to the gifinea caused the silver to dis- appear. After constant changes — the government abandon- ing for a time the free coinage now of gold, now of silver, now raising and now lowering the maximum value of the guinea — its value was definitely fixed in 1717 at 21 shillings, equivalent to a ratio of 15.21 to i. As the market ratio was under 15 to I, this reduction of the guinea was insufificient, and silver con- tinued to disappear, only the poor and worn pieces remaining. From 1760 to 1773, however, the market ratio changed from 14! to 15^ to I, overtaking the mint ratio, so that gold began to be exported, only the poor coins remaining. This led to the gold recoinage of 1774, when silver in sums over £25 was declared to be legal tender only by weight. Although this provision expired in 1783, it was renewed in 1798, when the free coinage of silver was also suspended. Thus by the end of the century silver had become subsidiary money, and England was really PRODUCTION OF GOLD AND SILVER SINCE THE DISCOVERY OF AMERICA, ooo OMITTED. Gold Silver Total for Period Average ^Annual Value in Dollars Total for Period Annual Average Coining Value in Dollars Fine Ounces Value in Dollars Fine Ounces Coining \'alue in DoUars I 493-1 5 20 5,221 $107,931 §3,855 42,309 $54,703 $1,954 1521-1540 5,525 114,205 4,759 69., 598 89,986 3,740 1541-1560 4,378 90,492 5,656 160,287 207,240 12,952 1561-1580 4..39S 90,917 4,546 192,578 248,990 12,450 15S1-1600 4,745 98,095 4,905 269,353 348,254 17,413 1601-1620 5,478 113,248 5,662 271,925 351,579 17,579 1621-1640 5,337 110,324 5,516 253,085 327,221 16,361 1641-1660 5,639 116,571 5,828 235,531 304.525 15,226 .... 1661-16S0 5,954 123,084 6,154 216,691 280,166 14,008 16S1-1700 6,922 143,088 7,154 219,842 284,240 14,212 14.81 1701-1720 8,243 170,403 8,520 228,651 295,629 14,781 15-04 1721-1740 12,268 253,611 12,681 277,262 358,480 17,924 14.94 1741-1760 15,824 327,116 16,356 342,812 443,232 22,162 14.14 1761-1780 13,313 275,211 13,761 419,712 542,658 27,133 14.72 1781-1800 11,4-39 236,464 11,823 565,236 730,810 36,540 15-68 1801-1810 5,716 118,152 ii,8is 287,469 371,677 37,i6S 15-77 1811-1820 3,6So 76,063 7,606 173,857 224.7S6 22,479 15.62 1821-1830 4570 94,479 9,44s 148,070 191,444 19,144 15-82 1S31-184P 6,523 134.841 13.484 191,759 247,93c 24,793 15.62 1S41-1850 17,605 363,928 36,393 250,903 324,400 32,440 15-70 1851-1855 32.051 662,566 132,513 142,443 184,169 36,824 15.38 I 856-1 860 32,431 670,415 134.083 145,477 188,092 37,6iS 15.29 1861-1865 29,748 614.944 122,989 177,010 228,861 45,772 15.44 1866-1870 31,350 648,071 129,614 215,258 278,313 55,663 15.57 1871-1875 27,955 577,883 115,577 316,585 409,322 81,864 16.64 1876-1880 27,715 572,931 114,586 393,878 509,256 101,851 1 8.05 1881-1885 23,074 495,582 99,116 460,020 594.773 118,955 19-41 I 886-1 890 27,306 564.474 112,895 544,557 704,074 130,815 19.75 1S91-1895 39,413 814,786 162,947 787,907 1,108,708 203,742 31.60 I 896- I 900 62,235 1,286,505 257,301 828,467 1,071,148 214,230 33-33 1 90 1- 1 90s 77,890 1,610,310 322,061 825,140 1,066,848 213,370 33.87 1906-1910 103,357 2,166,603 433,321 986,585 1.274,411 254.882 38.22 1911-1915 111,157 2,292,558 458,512 1,014,791 1,283,437 256,687 36.67 1916 21,971 454,176 454,176 161,178 218,302 218,302 30.11 1917 20,491 423,590 423,590 163,993 225,212 225,212 23.09 1918 18,557 383,605 383,605 198,168 256,218 256,218 21.17 1919 17,665 365,166 365,166 174,517 225,638 225,638 18.44 THE FALL IN THE VALUE OF SILVER SINCE 1873 London Price per Equivalent Bullion Market Year oz. of Bar Silver, Price in Dollars Value of Ratio of Ending British Standard per oz. Silver Silver to June 30 (■92s) of Fine Silver Dollar Gold 1873 59 nod I 298 I .004 15-93 1874 58^6d. 1.278 989 16. 16 1875 56!Ji6d. I 242 961 16 64 1876 53K8d. I 164 900 17 75 1877 54%d. I 202 930 17 20 1878 525^d. I 154 892 17 92 1879 5iJ4d. I 124 869 18 39 1880 52Md. I 145 886 18 05 1881 5i^d. I 132 876 18 25 1882 51 %d. I 136 878 18 20 1883 5oMd. I 109 858 18 64 1884 50% I III 859 18 61 1885 . A^% I 065 824 19 41 1886 45^ 995 769 20 78 1887 44'ir6 979 758 21 10 1888 42% 940 727 22 50 1889 42M 935 723 22 10 1890 47M I 046 809 19 75 189I 45JI6 988 764 20 92 1892 39M 871 674 23 72 1893 35% 780 604 26 49 1894 28% 635 491 32 56 1895 29!,¥6 654 506 31 60 1896 30l?lG 676 523 30 59 1897 27.«l6 604 467 34 20 1898 2(>% 590 456 35 03 1899 2l}i 602 465 34 36 1900 28^6 620 480 33 33 I90I 27^16 596 461 34 68 1902 243-16 528 408 39 15 1903 24% 543 420 38 10 1904 26i| 579 448 35 70 1905 27'^16 610 472 33 87 1906 3oJ^8 677 523 30 54 1907 30^16 661 512 31 24 1908 24M 535 414 38 64 1909 23M 520 402 39 74 I9IO 24f| 540 418 38 22 I9II 24if 539 417 38 33 I912 28M 615 475 33 62 I913 21% 605 487 34 19 I914 25H 553 .428 37 •34 I915 23^ 519 .401 39 •84 I916 315^ 687 •531 30 .11 I917 403f6 875 .692 23 09 1918 47H 981 .761 21 13 1919 r- 1 5/32 I 125 .867 18 44 § ig4] Bimetallism 479 on a gold basis. It was, however, not until 1816 that the gold standard was definitely adopted, silver being frankly made token money by becoming legal tender only up to 40 shillings, and by being henceforth coined only on government account. A pound of silver f fine is since then cut into 66 shillings, but issued to the public at 62 shillings; while any one is entitled to receive for an ounce of standard gold H fine £3 175. lo^d., or in cash from the Bank of England (because of delay in coinage) £3 175. gd. 194. Bimetallism In the other countries the problem was yet to be solved. In the United States, Hamilton, in following the custom of the time, had recommended the use of both metals at a ratio of 15 to I (3711 grains silver and 24! grains gold to the dollar). The market ratio, which had been a little less than that in 1790, rose to a little more after 1794; but the discrepancy was not serious. After 1820, however, the market ratio varied from 15.6 to 15.8 to I, and gold as the undervalued metal began to leave the country. To remedy this state of affairs the eagle was in 1834 reduced to 258 grains standard and 232 grains fine, making the ratio 16.002 to i; while in 1837, the standard weight remaining the same, the fineness was made to conform to that of silver (A), with a resulting fine content of 232.2 grains or a ratio of 15.998 to i. This virtual ratio of 16 to i caused gold now to be the overvalued metal, and silver was gradually ex- ported. The transition was especially marked in the later forties until, in order to keep the small silver in the country, the weight of all the subsidiary coins was reduced in 1853. Practically, thus, the country had come to be on a gold basis. The question, however, now aroused no interest, because the actual currency consisted of state bank notes until the civil war, and of greenbacks and national bank notes thereafter. In France, where up to 1850 the mint ratio of 155 to i was slightly below the market ratio, gold gradually disappeared, leaving the country to all intents on a silver basis. From 480 Money, Practical Problems [§ 194 1850 on, however, the markel ratio fell below 152 to i. Gold began to be imported, and Franee was slowly being drained of its silver. The difficulty finally became so serious that France formed, in 1865, together with Belgium, Italy, and Switzerland, the Latin Union. Greece joined in 1868, and at various later dates Spain, Roumania, Servia, and Bulgaria patterned their systems on that of the Union. This agreement, while not affecting the old silver five-franc pieces, reduced the fineness of the subsidiary silver coins, and made them legal tender only to fifty francs between individuals and to one hundred francs in payments to the government, their coinage by the respective states being limited to six francs per capita. The coins cir- culated interchangeably and each state bound itself to redeem its own coins in gold or five-franc pieces for a period of two years beyond the termination of the Union. In the other countries the unrest grew. Portugal followed England in adopting the gold standard in 1854, and the first international monetary congress, held in Paris in 1867, pro- nounced itself in favor of the same scheme. Germany also took advantage of the victory over France to adopt the gold standard in 1871-1873. The new silver mark was to be legal tender only to 20 marks ($5), although the old Vereinsthaler still remained legal tender. Free coinage of silver, however, was discontinued, and much of the old silver was thrown on the market to be sold. The Scandinavian monetary union also adopted the gold standard in 1873. These measures, coupled with the discovery of the Comstock lode, combined to depress the price of silver and to bring the difficulties of bimetallism to a head in the other countries. The Latin Union was now flooded with silver under the free coinage provision and was threatened with a loss of its gold. Belgium had already provisionally suspended free coinage in 1873, and France followed in 1876. Finally, in 1878 the Latin Union, definitely abrogated the free coinage of the five-franc pieces. Thus was introduced the "limping" or "halting" § 194] Bimetallism " 481 standard, so called because silver now lost one of the two sup- ports — legal tender and free coinage — which are essential to real bimetallism. Free coinage was technically permitted, but it was provided that any state adopting this system could not circulate its silver coins in the other countries, and would be obligated to redeem in gold the five-franc pieces of the other countries. This meant, of course, that free coinage was practically im- possible. Moreover, if the union should be terminated at any time, each state was held to redeem its five-franc pieces circulating in any other country. Thus was added to the sus- pension of free coinage the principle of redemption of the silver currency in gold. Owing to the fact that France holds large quantities of silver coined by the other members of the Union, some of which would find great difficulty in redeeming their quota, the Union bids fair to continue for a long period. To all intents, however, the Latin Union has been on a gold basis since 1878 because although the silver five-franc coins are still full legal tender, there is no free coinage, and the value of what is virtually a token money is kept at parity with that of the gold-standard money by a limitation of the quantity coined and by its acceptance at the treasury for public dues. In the United States the agitation did not begin until the fall in the price of silver had become marked in 1875. The act of 1873 omitted the silver dollar from the list of American coins, largely because of the fact that for years no such dollars had been coined. The few outstanding dollars, however, retained their full legal tender quality until 1874, when the revised statutes, reenacting the subsidiary silver law of 1853, provided ■that "the silver coins" of the United States should be legal tender only to five dollars. The American silver producers now thought that the fall in the price of silver could be arrested by an artificial increase of the demand, and the Bland-Allison act of 1878 directed the secretary of the treasury to purchase monthly at the market price not less than two, nor more than 31 482 Money, Practical Problems [§ 194 four, million dollars' worlh of silver bullion, and to coin il into the standard silver dollars, which were again made legal tender. For each dollar, so coined and kept in the treasury, silver cer- tificates were to be issued. Neither this act nor the suspension in 1878 of the sales of the old Thaler by Germany served to arrest the fall in the price of silver. The gold standard had been virtually adopted by the Netherlands in 1875-6, and in 1885 it was introduced into Egypt. The Western farmers now began to ascribe the low price of wheat to the competition in the silver-standard coun- tries, and demanded the remonetization of silver in the belief that this would increase prices. The union of the farmers with the mine owners led to a renewed agitation for free silver, the resvdt being a compromise measure known as the Sherman law of 1890. This act abrogated the law of 1878 (under which a total of 370 million silver dollars had been coined), and sub- stituted the monthly purchase by the government of four and a half miUion ounces of silver, at the market price, to be paid for in new Treasury Notes, which were to be redeemable in gold or silver coin. After July i, 1891, the coinage of the silver dollars was to cease, except so far as it might be necessary to secure the outstanding treasury notes. In the course of a few years the gradual accumulation of silver drove out the gold and endangered the stability of the gold reserve. When the government of India closed its mints to the free coinage of silver, a crisis ensued, and led in November, 1893, to the hasty repeal of the Sherman law, under which 168,674,682.53 fine ounces had been purchased at a cost of $155,931,002.25. With this came to an end the govern- ment's effort to create an artificial market for silver as a stej^ ping-stone to bimetallism. As a result of the Indian and Ameri- can measures the price of silver now dropped enormously, the ratio jumping from 19-4 to i in 1890 to 32^ to i in 1894. From now to the end of the century came the acute struggle in the United States and the progressive adoption of the gold § 195] Adoption of the Gold Standard 483 standard elsewhere. In 1892 it had been introduced into Austria, followed by Chile in 1895, Costa Rica in 1896, and Russia and Japan in 1897. In the same year Peru suspended the free coinage of silver, in 1898 Ecuador limited its legal tender, and in 1899 India adopted the gold standard. In the United States a fierce presidential campaign was waged in 1896 for the complete remonetization of silver at the old ratio of 16 to 1. The defeat of the silver agitation was followed by the act of 1900, which defined as the standard the gold dollar. It was provided that all forms of money issued or coined by the govern- ment should be maintained at a parity with the standard, and that the United States notes (greenbacks) and treasury notes should be redeemed in gold coin and not reissued except in exchange for gold; and for such redemption purposes a reserve fund of 150 millions of gold was created. Whenever the fund should fall below this figure the issue of gold certificates was to cease, ^ and the secretary of the treasury was empowered to sell bonds to replenish it. Finally, the treasury notes of 1890 were to be cancelled and replaced by silver certificates as fast as the silver bullion bought under the Sherman act might be coined. Thus the United States placed itself in line with the other gold- standard nations. 195. The Adoption of the Gold Standard The gold standard had now been adopted in the most im- portant countries. But there remained some of the American republics, the colonial possessions of the United States and a large part of Asia, still on the silver standard. In almost all of these countries the currency was composed exclusively of silver, and the situation had become wellnigh intolerable to merchants and others having foreign dealings, because of the so-called "dislocation of the exchanges," whereby purchasers ' In 1906 the limit was reduced so that the issue of gold certificates is to cease only when the fund falls below fifty millions. 484 Money, Practical Problems [§ 195 of bills of exchange (see § 198) were exposed to the continual fluctuations in the silver which they paid or received for the bills. In the more important states, however, it would have been entirely too costly either to melt down the old silver currency or to purchase enough gold to serve as a circulating medium. It was necessary to devise some method which would furnish the chief advantages of the gold standard and yet retain the circulation of silver. The first country to under- take this task was India. India was in a peculiarly embarrassing condition because the fall in the price of silver caused the government a constantly increasing loss in the large remittances which it was obliged to make in gold to the mother country for interest on the debt and for its contribution to imperial expenditures.. The Indian standard was the silver rupee, originally worth about two shillings, but which had fallen by 1893 to about i4d. The ordinary mode of making remittances to England was by the India Government Council in London selling to merchants who had bought goods in India bills of exchange, known as Council Bills, and payable in rupees in India by the government. The Indian government now in 1893 suspended the free coinage of silver, and declared that it would sell bills of exchange in Lon- don, or mint rupees in India in exchange for gold, at the rate of 15 rupees to a pound, or i6d. for a rupee — equivalent to a ratio of about 22 to i. Although gold was not legal tender, the government agreed to accept it in payment of public dues. The object of these measures was to Hmit the coinage, and hence the quantity, of the rupees in the hope that their value would, in the face of an increasing demand, gradually rise to the desired par. After two or three years the stationary cur- rency in the face of growing population and business meant a relative contraction, and the gold price of the rupee gradually rose until, by 1898, it reached, and even slightly exceeded, the desired par of i6d. As a consequence, gold now began to flow into India, because there was a profit in tendering it to the § 195] Adoption of the Gold Standard 485 government for silver. This permitted the government to ac- cumulate a reserve of gold, and in 1899 India decided to adopt the gold standard, declaring gold coins to be legal tender at the rate of 15 rupees for a sovereign. In 1920, as a result of the price changes, this was altered to 10 rupees. In India, therefore, the rupees still have unlimited legal tender, but are virtually a token currency, because there is no free coinage. Gold, but not silver, can be tendered at the reserve; and while the Indian government will take gold in exchange for rupees, it is under no obligation to pay out gold. As long, however, as the free coinage of silver is suspended, the government is able to maintain the value of the rupees by coining only as many as are necessary, procuring the silver for this purpose by selling gold. Thus the gold standard is automatically preserved through the paper currency reserve, although the currency is composed of token silver and paper notes. The same principle, although in a slightly different form, was adopted in the Philippines in 1903, under what has become known as the gold-exchange standard. The unit of value was made the geld peso, but the actual coins were the new silver pesos. The pesos, in lieu of which silver certificates may be emitted, are legal tender, but can be coined only on govern- ment account. In order to keep the silver coins at a parity with gold, and in order to redeem the silver certificates, the govern- ment maintains, in both the Philippines and New York, a cur- rency reserve fund against which bills of exchange are sold at a fixed rate whenever there is a demand for gold for making payments abroad. If there is a danger of a scarcity of money, the government can put more pesos into circulation; and if there is an imminent excess of silver, with a resultant rise of prices which would normally mean an export of coin, the government stands ready to sell drafts upon its gold fund abroad at a fixed price. The local silver coins paid for such drafts are then withdrawn from circulation, thus diminishing the redundancy of the currency and causing prices to fall. If prices threaten to fall too far, and there is a renewed demand 486 Money, Practical Problems [§ 195 for silver money, gold may be deposited in the local reserves, setting free a corresponding amount of silver currency. In this way a stability of value is attained. The ratio selected was 32 to i. This was supposed to be a safe margin; but silver unexpectedly rose in price, and by 1906 was worth 3if^. an ounce, equivalent to less than 30 to I. In order, therefore, to prevent the disappearance of the silver pesos, the act of 1906 provided for a recoinage, reducing the fineness of the peso. The act also authorized the deposit in the Philippine treasury of United States gold coin for cer- tificates hereafter to be coined, up to 60 per cent of the total issues. Thus not only is the uncoined gold peso the standard, but the government paper currency becomes in major part a currency of gold certificates. In 1904 Panama adopted the same system, the monetary gold unit, not coined, being the balboa, equivalent to an Ameri- can dollar. The silver peso is full legal tender, but as there is no free coinage, it is really a token coin, and officially spoken of as fractional currency. Its parity of value with gold is insured by a deposit in the United States of a gold reserve equal to 15 per cent of the issue, on which bills of exchange may be drawn in case of need. Mexico also adopted the gold-exchange standard in 1905, but reached in 1907 the full gold standard, with a large actual circulation of gold. Finally, the Straits Settlements decided in 1906 to adopt the method pursued in India from 1893 to 1899, rather than the gold-exchange standard. It fixed the sterling value of the new silver dollar, established in 1903 and not subject to free coinage, at 2s. ^d. by offering to give dollars in new silver notes for sovereigns at that rate. As the government has not yet (1914) offered to give sovereigns in exchange for dollars, only an upper limit to the fluctuation of the silver dollar has thus far been fixed. But a gold reserve was estabHshed in 1908 out of the profits of the silver coinage, and the weight of the § 195] Adoption of the Gold Standard 487 dollar was reduced in 1907. The Straits Settlements ought accordingly soon to reach the position attained by India in 1899, and be ready for a gold standard. Thus, of the countries on the silver standard there remained in 1914 only Bolivia, China, a part of Central America, the minor British colonies in the Orient, and Indo-China; and it is to be expected that despite peculiar difficulties incident to some of these nations, they will also before long follow the example of India, the Philippines or Mexico. We see therefore that the gold standard has been wellnigh universally adopted in one of several ways: (i) The gold standard proper, with a gold coinage and where there is neither free coinage nor full legal tender for silver, as in England, Germany and the United States. (2) The limping standard, with a gold coinage, where the silver still possesses unlimited legal tender but is kept at a parity with gold by the abrogation of free coinage and by the offer of redemption in gold. This is the case in the Latin Union, in India and in Mexico. (3) The exchange standard, where the actual currency is full legal-tender silver kept at a parity with gold, not only by the suspension of free coinage but by the adoption of either (a) the gold-exchange method, where gold, although not coined, becomes the standard and where the silver is redeemable in gold exchange; or what may be called {b) the fixity-of -exchange method, where gold is not yet the standard, but where the silver coin is pulled up to, or kept at, a fixed value by the re- striction of the coinage coupled with the offer to give silver coins in exchange for gold at a fixed price. Of these two methods the former is preferable, because it does not neces- sarily involve any alteration in the money unit or the domes- tic price level. The latter is open lo the objection that the sudden raising of the silver unit, or appreciation of money, involves a decline of prices with all the perturbations and disorders incident thereto. Furthermore, under the former 488 Money, Practical Problems [§ 196 method, gold or gold-exchange is paid out for silver, as well as silver for gold, thus setting an inferior as well as a superior limit to the fluctuations of the par of exchange. Thus the evolution of the money standard has completed its natural course. At the outset of civilization a metal of slight value suffices; with the growth of trade a more precious metal is necessary; and finally with the highest development of industry the most valuable metal becomes the standard. While, however, gold is now the standard, the money in actual circulation in modern times is in almost all progressive countries coming to be in more or less substantial proportions money made of paper, rather than of metal. To this we must now turn our attention. 196. Paper Money Paper money as opposed to metallic money may, as we have learned (p. 451), be classified into fiduciary or credit money, representative money and fiat money. (i) In one sense all money, paper and metallic, is credit money, in that the value of all money rests at bottom on the beUef that other people will receive it in exchange. In the narrower sense, however, credit money means money issued by credit institutions. Credit money, then, consists chiefly of bank notes, which are usually convertible into coin and are not legal tender. When, however, they are both inconvert- ible and legal tender, they become in many respects practically indistinguishable from fiat money. Credit money will receive a fuller discussion in chapter xxxi. (2) Representative money consists of paper which certifies that an equivalent amount of coin or bullion is deposited in the government treasury. It is thus in the nature of a warehouse receipt, and is virtually equal to coin, the chief advantage con- sisting in the fact that it affords the public a more convenient medium of exchange. The larger part of the paper circulation of the United States is composed of these coin certificates. § iq6] Paper Money 489 The gold certificates were originally authorized in 1863, in denominations of $20, on deposit of gold coin or bullion. Their issue was suspended in 1878 (in order to facilitate the resump- tion of specie payments), authorized anew in 1882, again sus- pended in 1893 (when the gold reserve was being depleted by the silver agitation), and reauthorized in 1900. It was then provided that their issue be suspended when the gold reserve kept in the treasury for the redemption of the United States notes and treasury notes falls below 100 millions, a danger limit which was reduced in 1906 to 50 millions. The gold certificates are not legal tender, but are receivable for customs, taxes, and public dues, and may be counted as part of the law- ful money reserve of the national banks. Since 1907 they may be issued also in denominations of $10. In April, 192 1, there were 419 millions in circulation. Partly like these gold cer- tificates are the German Reichskassenscheine , of which there were outstanding before the Great War 1 20 million marks, covered by an equal amount of gold coin in the fortress of Spandau. The silver certificates were issued in 1878, upon silver dollars deposited in the treasury or coined under that act. The de- nominations were limited to ten dollars and upward, but were changed in 1886 to one, two, and five dollars. Like the gold certificates, they are not legal tender, but are receivable for customs, taxes, and public dues, and may be counted as part of the lawful reserve of the national banks. In April, 192 1, there were in circulation 164 millions. While representative money usually represents coin or bul- lion, we occasionally find certificates representing the standard, legal-tender, fiat paper money. In that case the certificates are obviously only as good as the fiat money which they repre- sent. Of this character were the currency certificates issued between 1872 and 1900 to national banks in large denomina- tions on deposit of United States notes, and utilized chiefly in settlement of clearing-house balances. Analogous to, although not identical with, the money hitherto 490 Money, Practical Problems [§ 196 described, is the paper issued by goverumenl in relatively small amounts and protected, if not by an equivalent quantity of coin, at least by ample reserves of bullion. Of such character are the exchequer notes and treasury certificates occasionally found in European countries, and the treasury notes issued at various periods in the United States. Herein may also be included the treasury notes of 1890, issued by the United States in that year, in denominations of from $1 to $1000, in exchange for the silver bullion purchased under the Sherman law. These notes were redeemable in coin (gold or silver), and were legal tender for customs duties and for all private debts except when otherwise stipulated, and could also be counted as a part of the lawful reserves of banks. When the Sherman act was repealed in 1893 their further issue ($155,931,000 being outstanding) was stopped, and their redemption has since then continued, until in April, 192 1, only $1,591,000 remained. (3) Fiat money, i. e., money issued on the simple fiat or declaration of government, constitutes the typical case of paper money. Here the government assigns an arbitrary value to a piece of paper and invests it with legal-tender qualities. It has sometimes been questioned whether paper of this kind is really money, the objection being made that in order to serve as a measure of value the commodity used as money must possess value in and of itself. It is now, however, almost universally conceded by careful thinkers that money cannot be confined to that made of metal, and that paper money is money in precisely the same sense as metallic money. It may not always be good money, and it is undoubtedly subject to serious dangers; but as long as it serves as a medium of ex- change and the standard in which accounts are kept, it is none the less money. Although it may have no value as paper, it may possess a value as money — a value arising from the de- mand for it for monetary purposes. In issuing coins, govern- ments, as we know, often charge a seigniorage, making a discrepancy between the value of the coin and that of the bullion § 196] Paper Money 491 in the coin. As Ricardo first showed, paper money is a case where the seigniorage amounts to loo per cent. Even debased coin, i. e., coin whose legal value far surpasses its bullion value, will, as we pointed out in the discussion of Gresham's law, retain its value if used as standard money, on condition that it is received by the public and that its issue is so limited that the total supply of money does not exceed the monetary demand. Fiat money is in this respect comparable to debased coin, and may equally serve as the standard money. Fiat money is almost always, but not necessarily, paper money. The silver rupee in India, for instance, was fiat money from 1893 to 1899, because the government assigned to it a higher value than it really possessed and was able, by limiting its supply in the face of a growing demand, gradually to pull it up to the desired level. So the new dollar coined in 1906 by the Straits Settlements is fiat money, i. e., standard money to which an artificial value is given by restricting the quantity. When government gives an artificial value to subsidiary money, like the American fractional currency, we usually speak of token, rather than of fiat, money. Fiat paper money (or "soft" money as opposed to "hard" or metallic money) may thus perform all the important mone- tary functions within a country. Since, however, international debts can be paid only in gold or its equivalent, the paper money of any one country is a good international money only so far as it preserves its value in reference to gold. The two causes of the depreciation of irredeemable fiat money — i. e., paper which the government refuses to redeem in coin — are over-issue and distrust. (a) The over-issue of fiat money means that the supply, susceptible of easy multiplication by the printing press, may exceed the ordinary monetary demand of the community. In this case we have a simple illustration of the quantity theory of money, its value, after a certain amount has been issued, falling at a rate somewhat proportionate to the increase in the 492 Money, Practical Problems [§ 196 supply. The reader need not be reminded, however, thai any concurrent changes in the demand for money, as explained in § 187, may arrest and modify, without however seriously affect- ing, the influence of an over-issue. (6) Distrust of the government's ability ultimately to redeem the fiat money is ordinarily the consequence of the mere fact of over-issue. It may, however, exert an independent influ- ence, even when the issue is not redundant. Thus, during the Civil War the depreciation of the greenbacks, or the premium on gold, frequently varied with the military outlook, without any synchronous changes in the supply of money or in the other factors affecting the demand. The mere afifixing to the greenbacks of a promise to pay is as unavailing as it is superflu- ous. For fiat money retains its value only because of the public belief that it is as good as coin and that the government proposes to keep it so. If it depreciates, the public gauges the government's ability to redeem it by the actual and pro- spective economic and fiscal conditions, and not by any printed asseveration of intentions. An explicit promise, which is not observed, is less good than an implicit promise which is sup- ported by the facts. What gives fiat money its value are facts, not promises. Although fiat money was first used in China in the twelfth century, the chief examples of modern times date from the eighteenth century, and are found in America and France. Almost all the American colonies issued paper money with various resultant degrees of depreciation, in some cases as much as eleven to one, until stopped by the British laws of 1 751 and 1763. In the Revolution, fiat money was again utilized by the separate commonwealths as well as by the con- federation, the early continental issues depreciating to such an extent that within a few years they were redeemed at the ab- surd figure of forty for one. In France the fiat money under the Mississippi scheme of John Law in 1716-1721 began as a convertible bank-note issue, which was soon made inconvertible § 196] Paper Money 493 and legal tender, thus becoming indistinguishable from irre- deemable fiat money, and through its collapse bringing France to the verge of ruin. The costly experiment was not renewed until the close of the century, when an endeavor was made to finance the Revolution by the issue of "assignats" based on land security. The advantage of such a system of "land- notes" is, however, illusory; in pre-revolutionary Pennsylvania, where they were also tried, the depreciation was indeed only moderate, because the issue was restricted; in some of the other colonies, as well as in France, where this precaution was not observed, the experiment ended in dire failure. Since the beginning of the nineteenth century, while numer- ous examples of depreciated fiat money are found on the Eu- ropean continent and in South America, the two chief cases of interest to us are the Bank Restriction in England and the issue of the American greenbacks. In England, the govern- ment, owing to the contest with France, and solicitous of its specie reserve in the Bank of England, procured the enactment of a law in 1797 "restraining" the bank from making specie payments. The convertible bank notes thus became legal- tender fiat money, and depreciated almost fifteen per cent before the resumption of specie payments in iSig. In the United States, on the outbreak of the Civil War, a law of 1 86 1 authorized the issue of fifty (subsequently increased to sixty) millions of demand notes, i. e., notes payable on de- mand. In 1 86 2 the issue was increased to 150 millions, and the notes were made legal tender for the payment of all debts, public and private, except customs duties and interest on the public debt. The lowest denomination had originally been $5, but smaller issues were now permitted. Officially they were called United States notes; popularly they were known as legal tenders or, from their color, greenbacks. Later, in 1862, the issue was increased to 300, and in 1863 to 450 millions. The result of this, coupled with the fortunes of the war, was a pro- gressive depreciation, reaching its climax in July, 1864, when 494 Money, Practical Problems [§ 196 a paper dollar was worth only 35 cents in gold. In 1866 the retirement of the notes was initiated, at the rate of ten millions a month for six months, and four millions a month thereafter. By the close of 1867 the amount outstanding had been reduced to 356 millions when, owing to the fear of a further contrac- tion in prices and the spread of the "soft-money idea" in the Middle West, the reduction was stopped in 1868, leading to a further period of uncertainty and confusion. During the panic of 1873 the issues were augmented to 382 millions, but after the veto by President Grant of the "Inflation Bill" of 1874 to in- crease the greenbacks, the Resumption Act of 1875 provided for a retirement at the rate of 80 per cent of the national bank notes to be issued in their stead. On May 31, 1878, their re- tirement was stopped at the accidental figure of $346,681,016, and the amount outstanding has remained at that point to the present day. In 1879 the resumption of specie payments was finally accomplished, and the greenbacks have ever since been forming a constantly declining proportion of the American paper circulation, being protected and kept at par by the exist- ence of the gold reserve. In 1900 the smallest denomination permitted was ten doUars, but in 1907 issues of one, two, and five dollars were authorized. When bank money loses its convertibility, it partakes, especially when invested with the legal tender quality, of the nature of gov- ernment or fiat money. In Europe, as the result of the Great War, much of the so-called bank money has in fact, if not always in name, gone through this transition. This is true of the cur- rency notes, issued by the Treasury in England against com- mercial paper deposited by the banks, of the German banknotes, and Darlehenskassenscheine or loan bank notes, and of the French bank notes. At the close of the war in September, 1918, there were outstanding in Great Britain 1,304 million doUars of currency notes, with a gold cover of only 138 millions; in Ger- many 5,285 million dollars of imperial bank notes with a gold cover of 538 millions; and in France 5,838 million dollars of bank § 196] Paper Money 495 notes with a gold cover of 664 millions. When, as in all these cases, the reserve amounts to only about 10%, we cannot speak of convertible bank currency. An inconvertible bank currency is scarcely in any respect superior to an irredeemable government currency. Fiat money, then, is satisfactory only if the amount is care- fully restricted. Because of the inherent danger of, and tempta- tion to, inflation, fiat money is inferior to credit money, which under a good system possesses the advantage not only of an elasticity, but of an automatically regulated supply. The three kinds of paper money discussed in this section may also be classified into the two categories of bank money and government money. In Europe almost the entire paper currency was until the Great War composed of the former; in the United States, as a result partly of accident, partly of the silver movement, partly of a certain ungrounded distrust of the national banks, and partly of defective legislation, about three-fourths of the paper circulation consisted until 1913 of government money. Since the introduction of the Federal Reserve system, the proportions tend to be reversed. On the chart opposite page 532 will be found the details of the bank and total monetary circulation since 1878. The great advantage of a carefully guarded government currency is absolute security. The convertibiHty of all the United States issues, for instance, is now assured by law, the act of igoo imposing on the Secretary of the Treasury the obligation to maintain all other forms of government money at a parity with gold, and assigning for such redemption purposes, particularly of the greenbacks, a special reserve fund of 150 million dollars of gold, to be replenished in case of need by the sale of bonds. On the other hand, the dis- advantages of government paper consists not only in the temp- tation to inflation, but also in a certain rigidity or incapacity to adjust itself to the varying needs of the business community. Bank money, on the other hand, as we shall see, may be made to possess all the safety of government money without incurring any of its hazards. CHAPTER XXX CREDIT AND BANKING 197. References J. S. Mill, Prhiciples, bk. iii, chs. xi-xiii; W. S. Jevons, Investigations in Currency and Finance (1884); chs. i, v-viii; H. D. McLeod, The Theory and Practice of Banking (15th ed., 1892); C. F. Dunbar, Chapters on the History and Theory of Banking (2d ed., 1901), chs. ii and iv; J. T. Holdsworth, Money and Banking (2d ed., 1918); J. F. Johnson, Money and Currency (1905), ch. iii; Horace White, Money and Banking (4th ed., 1912), bk. iii, chs. i-iii; W. Bagehot, Lombard Street (1873); \V. A. Scott, Money and Banking (1903), chs. vii, viii-xi; Publications of the National Monetary Commission (23 vols, 1901-1912); E. E. Agger, Organized Banking (1918); H. H. Withers, The Meaning of Money (15 imp., 1917); and The War and Lombard Street (3d ed., 191 7); J. P. Norton, Statistical Studies in the Netv York Money Market (1902); R. H. Inglis Palgrave, Bank Rate and the Money Market in England, France, Germany, Holland, and Belgium, 1844-IQOO (1903); G. L. Taylor, The Credit System (191 4). 198. The Nature and Forms of Credit Credit is an exchange or transaction which consists in the temporary transfer of the usance of wealth. The wealth may- be composed of concrete goods, a fund of capital, or a mere right or privilege. In modern times most of the wealth so trans- ferred has come to consist of money, so that credit nowadays primarily implies a temporary transfer of money or of rights to money. We must be careful not to confuse the legal with the eco- nomic conception. Legally, if we part with the ownership of anything, it is a sale; if we part with the possession while re- taining the ownership, it is a loan. Economically, the essence of credit is the temporary usance of wealth. A sale on credit is, from the economic point of view, no sale at all. Legally, 496 § 198] Nature and Forms of Credit 497 the ownership is transferred and the payment is deferred; economically, it is a grant to the purchaser to utilize the com- modity subject to the prior economic right of the seller to have a certain sum of money returned to him. The economic aliena- tion does not become complete until the payment of the money is effected, that is, until the credit expires. From this fundamental fact flow three consequences: (i) Since the transfer is temporary, it must terminate at a future date. The loan must be repaid, and if in the meantime the subject of the loan has disappeared, its economic equivalent must be returned. (2) Whenever commodities are loaned and payment is deferred until the expiration of a certain period, there is, strictly speaking, a case of credit. In the overwhelm- ing mass of modern business transactions, however, what is loaned is not a commodity, but a sum of money. Credit thus virtually becomes a contract for the future delivery of money, or a "short sale" of money, and credit is thus best discussed in connection with money. (3) The lender must trust the ability of the borrower to meet his obligation at the stipulated date. All credit rests on confidence, — a confidence which runs through i the whole gamut of risk. The essence of credit, then, is the right of enjoying some- thing, in most cases money, the ultimate economic title to which belongs to another. According to the use made of the enjoyment we distinguish between production and consumption credit. If we borrow money from a friend or pawn a watch in order to buy a meal, the credit is for purposes of consumption. If we borrow funds to increase our business, the credit is for purposes of production. With the advent of modern economic conditions, credit has become to an overwhelming degree pro- " ductive credit. This explains its advantages and its dangers alike. If the goods, capital, or privileges are so utilized by the borrower as to yield a surplus over and above that part of the produce requisite to pay for the use of the loan, credit performs the function of capital and may be deemed equivalent to an 32 498 Credit and Banking [§ k; increase of capital. In that sense credit might be called au;- iliary capital. By this is not meant that credit is actualb capital, for if the capital is in the hands of the borrower, it i- withdrawn from those of the lender. In the hands of the bor- rower, however, the capital does more good than in those of the lender, for otherwise it would not be transferred. To the extent that credit puts capital where it is more productive than it would otherwise be, it is equivalent to an increase, or at all events to an increased usefulness, of capital. On the other hand, if the funds secured through credit arc unwisely utilized or dissipated, they diminish the productive forces of the community, because the debtor not only wastes his own efforts, but is unable to replace the borrowed capital. Owing to the facility with which modern credit can be obtained, it is peculiarly susceptible of abuse. If a man has to create or to accumulate capital, he will be moderately careful in its employment; if he secures it on credit, he is more apt to take chances. He is relieved from immediate cares, and is likely to paint the future in roseate hues. Inasmuch as credit rests on confidence, it is human nature, in dealing with the property of another, to have a misplaced confidence in one's self. Credit, like capital, is either commercial, industrial, agricul- tural, or financial. In the broader sense all credit is financial, because money or money's worth must be repaid. But the classification is none the less useful from the point of view of the credit instrument. Commercial credit takes the form, apart from the ordinary book accounts and due bills, of promissory notes and drafts or bills of exchange. A promissory note is a written promise to pay a certain sum to the person designated as payee, either on demand or at the expiration of a definite period. It can be indorsed by the payee, and is then further negotiable, the indorser making himself responsible (unless he adds the words without recourse") in case the note is not honored at maturity by the original maker. If there is one indorsement on the § 198] Nature and Forms of Credit 499 mote, it is called double-name paper, because both maker and indorser are responsible. If there are two indorsers, it is called three-name paper. A draft or bill of exchange is a written order addressed by the seller of merchandise to the purchaser, requesting the payment of a definite sum. If payable on demand, it is called a sight bill; if at the expiration of a fixed period, a time-bill, which is itself either a short or a long bill, according to the period for which it runs. The seller of the goods is said to draw upon the purchaser, and is hence called the drawer of the bill. A time-bill is at once presented to the "drawee," who by writing his name below the word "accepted" is said to "accept" it, thus virtually converting the bill into his own promissory note. By negotiating the bill, the seller of the goods can hence secure immediate payment, less the commission or discount. If both drawer and drawee live in the same country, the bill of exchange is termed a domestic bill or in America a draft; if they live in different countries, it is a foreign bill. Oftentimes it is sought to add to the personal security of the note or bill. In the case of promissory notes, the collateral securities pledged are generally stocks, bonds, and mortgages, and the note is then called a collateral note. Drafts or bills, on the other hand, are fre- quently accompanied by certificates testifying to the possession of commodities, like bills of lading, dock warrants, and ware- house and elevator receipts. In the case of a bill of lading it is customary to attach the invoice and the insurance policy. Such bills are usually called "documented" bills. Of this char- acter also are the grain or cotton notes and the cattle paper in the South and West. In the case of a future, instead of a past, transaction, the notes and bills are called accommodation paper. An intending purchaser "accommodates" the future seller by giving his note at the beginning, instead of at the conclusion, of the transaction. Accommodation paper, however, is often issued without any intention of a real transfer of goods, and thus affords ample opportunity for speculation. 500 Credit and Banking [§ 198 As opposed to these promissory notes, drafts, and bills, which constitute the usual "commercial paper," industrial credit in- struments comprise documents or securities connected with corporate industry like certificates of stock, and bonds which represent contingent rather than actual ownership. The prin- cipal forms of these have been described in § 141. Agricul- tural credit instruments assume the form of notes accompanied by mortgages on the land, the farm implements, or the crops. Financial credit in the narrower sense is primarily bank credit, the instruments for transferring the funds being chiefly checks, drafts, and letters of credit. A check is a written order from a depositor in a bank directing it to pay a certain sum of money to the person designated, who may then by indorsement nego- tiate the check further. A check may be certified by the cashier stamping that word across its face and adding his name at the bottom, in which case the depositor's account is at once debited with the amount, the certified check becoming the bank's promise to pay rather than an order on the bank to pay. A cashier's check is an order on a bank signed by the cashier and, like the certified check, is really a promise to pay on the part of the bank. An ordinary check, although technically only an order on the bank, has become legally an implied promise to pay on the part of the maker or drawer of the check. A bank draft is a written order addressed by one bank to another directing the payment of a certain sum to a third party. The first bank is said to draw upon the second, where it keeps a de- posit or has funds to its credit. If, however, the first bank does not desire to do this, and if its customer wishes to remit money, the bank gives him, in exchange for his own check, what is known as a bank certificate, or certificate of deposit, payable to the order of a certain payee. Finally, a letter of credit is a document issued by a bank (or banker) directed to its correspondents abroad, authorizing the holder to draw upon the issuer or some central agent, up to a certain amount and within a certain period like one or two years. As the holder §199] Development of Banking 501 usually draws the sums by instalments through the medium of a draft or bill of exchange, the amounts so drawn are noted on the letter, showing at a glance how much of the credit remains unexhausted. Commercial, industrial, and agricultural credit all finally converge in the bank, which is the lender par excellence. Since modern credit operations centre in the bank, the study of credit is in large measure the study of banking. 199. The Development of Banking The word "bank" was formerly supposed to be derived from the banc or bench on which the early money-changers kept their coins, so that the banker would be the "bencher," as the money-changers were called in Greece (rpaxaftrat) and Rome (mensarii). The more approved modern derivation, however, is from "bank" in the sense of a heap or pile, as in sand-bank or mud-bank. Banco in mediaeval Italy was accordingly used to signify a mass or fund of capital, and the early colonial " banks of money" in America denoted batches or issues of paper money. Originally designating a fund of capital, a bank has to-day come to mean the institution dealing in such funds. As the result of a long evolution the modern bank conducts three kinds of business, — money dealings, credit transactions, and promot- ing or syndicate operations. Dealings in actual money were the most primitive occupa- tion of the bankers. The early money-changers made it a business to exchange one form of coin for another, domestic or foreign. A large part of this business is still done by pri- vate bankers and money-brokers, although most large banks with international relations exchange foreign money, and all banks stand ready to exchange one kind of domestic money for another. Many banks also, when occasion demands, make actual shipments of money from place to place and conduct arbitrage operations in silver, i. e., take advantage of the mo- mentary discrepancies in the price fluctuations in different 502 Credit and Banking [§ 199 countries by purchasing in the cheaper, and simultaneously selling in the dearer, market. Far more important and distinctive, however, are the credit operations. These take the five forms of remittances, deposits, advances, discounts and note-issues. (i) Historically it was an easy transition for the money- changers, instead of returning to the individual himself an equivalent for the sum received, to remit, i. e. pay by remittance, a corresponding amount to some one in another place. To accomplish this, it became necessary to have in these other places agencies or correspondents on whom orders to pay could be drawn. The early bills of exchange were thus primarily foreign bills. At first they were not negotiable. Gradually, however, the custom arose of transferring them by indorsement and delivery, and there grew up a legal system based on busi- ness usages as to conditions of negotiation, presentation for acceptance, payment after certain days of grace, and protest in case of dishonor. Remittances are now also made by means of telegraphic and cable transfers, express orders, and govern- ment postal notes or money orders. (2) When people found that they could pay their debts elsewhere through the money-changers, it was again a short step to intrust to them sums for safe-keeping. Thus arose the custom of making deposits of money and bullion. In the mediaeval Italian towns the campsores, or money-changers and dealers in foreign exchange, came at the close of the thirteenth century to be called bancherii, or bankers, from the capital sum or "bank" in their possession. In London, somewhat later, it was the goldsmiths who performed the same function. In the course of time serious abuses arose in connection with the custody of the deposits intrusted to the private bankers, and finally by the act of 1584 Venice instituted the public Banco di Rialto or della Piazza, the first bank of modern times. ^ In 1 The bank of St. George at Genoa in the fifteenth century, which is sometimes spoken of as the first bank, was indeed the first modern cor- ^ iqq] Development of Banking 503 [619 it was supplemented by, and in 1637 merged into, the Banco del Giro, or transfer bank, so called because the depositors :ould not only remove their deposits on demand but transfer :hem to the credit of some other depositor. The transfer :ould, however, be made only by word of mouth and in the oresence of both parties. When similar causes, as well as the desire to secure a standard free from the fluctuations of the depreciated coins in actual circulation, led to the establish- ment of the government Wissclbank (exchange bank) in Amster- dam in 1609, merchants were compelled to keep their accounts in these assignable deposits known as bank money, for which the town was now responsible, and it became customary to make the transfers by a written order. This order, however, had at first to be presented in person by the payer, and became assign- able to the payee, who had also to be a customer of the bank, anly the day after. When the giro banks at Hamburg and Nuremberg were founded in 1619 and 162 1, these written orders gradually acquired more of the characteristics of the modern check, and came into general use. We even hear of such a giro bank in Liibeck in the fifteenth century. The early banks were thus institutions receiving cash de- posits, dealing in bills of exchange, and making transfers from one depositor to another. During the nineteenth century, [however, there developed a special form of bank designed for jthe sole purpose of securely preserving cash deposits. These are known as Savings Banks ^ which, in contradistinction to most commercial banks, pay interest on deposits, do not treat them as assignable by transfer, and are permitted to invest their funds only in specified securities. While the savings banks are intended primarily for small deposits, there have poration, its stockholders, to whom was intrusted the administration of certain mortgaged municipal revenues, being the subscribers to the government forced loan. It was called a bank because of this fund of capital {banco or monk). But it did not carry on the banking busi- ness referred to above. ^ Date of origin : Germany, 1765; England, 1797; United States, 1816. 504 Credit and Banking [§ 191 arisen still more recently the Trust Companies, to which large |;;re; sums may be intrusted. These, however, as opposed to saving banks, often carry on what amounts virtually to a general bank ing business. Finally, many banks receive deposits of securitiei and silverware to be kept in their vaults, acting, however, ii this respect like storage warehouses or safe-deposit companies. (3) As the private bankers accumulated large deposits, ii was natural that they should begin to compete with the money- lenders, especially as the latter owned their own capital, while the bankers were able to lend the capital deposited with therr by others. When the deposit banks, however, were first formed the safe-keeping of the deposits was deemed incompatible with their loan to others. In the bank of Amsterdam, for instance, it was not until 1656, and more definitely in 1683, that the bank began to make advances upon deposits of coin. The advances took the form of the granting of a credit of so much bank money on the books of the bank, the depositor being given a receipt entitling him to withdraw it within a specified time upon returning the bank money. Gradually other com- modities besides coin and bullion were received in exchange for advances. From the fact that this developed at first in the Italian towns, it came to be known as the Lombard business, a term still employed in Germany to-day. Because of the fact that ordinary commodities are not always immediately salable, and because it becomes embarrassing for the banks to turn themselves into storage warehouses, the character of these h advances has been much restricted, and the modern commercial bank limits itself to a large extent to making loans either on strictly commercial paper or on collaterals which are immedi- ately convertible into cash. Special institutions have accord ingly sprung up in modern times, designed to supply the need of advances on these particular forms of property, and on the less easily realizable securities like land. Such, for instance, are the Agricultural and Mortgage banks abroad, and the Bond and Mortgage companies, Mortgage Guarantee companies, L 1101 En igg] Development of Banking 505 '!)redit companies, and Loan and Investment companies in the S^Jnited States. The Federal Reserve act of 1913, however, ' las permitted the national banks not in a central reserve city o loan on farm lands under careful restrictions. (4) Having once begun to make advances on coin or com- nodities, it was again but a short step for the private bankers o make loans on more intangible security, that is, to open an ccount for him, either on his written promise to pay, or in ome one else's order to pay. Since the promise fell due in the iuture and the banker advanced the cash or opened the account t once, he deducted a certain amount from the face of the note iir order as a discount; and the operation as well as the paper it- elf came to be called a discount. The development was grad- lal, until in modern times discounting has almost everywhere lecome an important function of the commercial bank. (5) In the meantime the banker had learned that in lieu of xtending his credit to the customer by opening an account, le might issue his own promise to pay, in the shape of a banker's tote. Such, for instance, were the goldsmiths' notes in Eng- and. The acceptability of these notes as a medium of exchange lepended largely on the reputation of the individual banker, ,nd the institution of banking corporations with these powers vas designed to increase their safety. The first bank of issue vas the Bank of Sweden, founded originally as a private institu- lion in 1656, but converted into a government bank in 166S. The earliest important private banks of issue were the Bank of England, founded in 1694, and the Bank of Scotland in 1695. These differed from the older deposit banks not only in that hey were banks of issue, but also in that they were invested vith a corporate form. With them modern banking may be aid to begin. Historically, in fact, the business of issue pre- eded that of discount. Banks were noW formed to issue notes o serve as currency, and the discounting of commercial paper ;rew up only very gradually. But the discount business slowly vershadowed the other, until at the present time, especially in 506 Credit and Banking [§ 200 Anglo-Saxon countries, the note-issue function has become subsidiary. Finally, banks have added to these money and credit deal- ings all kinds of transactions in public and private securities. Sometimes they act as agents for governments and for private corporations in cashing coupons and dividends; sometimes they carry on independent dealings in the arbitrage of securities; sometimes they participate in the new issues of government bonds and of industrial securities through promoting syndicates. Here, however, a distinction must be drawn between the English and American banks on the one hand, and those of the European continent on the other. In the former countries, where the deposits are of vastly greater extent than in the latter, it is not considered prudent to jeopardize the liquid assets by such industrial investments, and in the United States iu especial it is the Trust Companies rather than the banks which aid the- private bankers in financing the industrial syndicates. 200. Modern Bank Operations Of all these various classes of business the credit transac- tions have become the most important and the most distinc- tive. The chief function of a modern bank may thus be declared to be that of dealing in credit or of rendering credit mobile. This is now accomplished primarily by the three opera-i tions of discount, deposit, and issue. (i) A business man finds that in order to meet some past or future obligation he needs funds. If he has sold goods on credit, he usually receives a promissory note on which the bank will give him a sum equal to the par value of the note less the interest during the time that the note has to run. This deduction involves a discount, and to discount a note thus means to pay its face value less the interest still to accrue, Legally, the transaction is a sale or exchange of rights: the bank buys the note or the right to demand payment from the maker, and sells to the merchant the right to demand payment § 2oo] Modern Bank Operations 507 from it. Economically, the transaction is a loan, because the bank virtually lends to the merchant the use of the capital repre- sented by the note (less the discount). The bank thus lends its own credit in the form of a contract for the future delivery of money. It is for this reason that bank credit is sometimes spoken of as a "short sale" of money. The borrower, in lieu of presenting some other man's promis- sory note for discount, may offer his own, either in person or, as is customary in England and America, through the bill-broker or note-broker. He may also offer some other form of commer- cial paper mentioned in § 198. The bills receivable, or the paper thus acquired by the bank are called discounted bills, or in America simply discounts. They really become part of the investments or securities of the bank, and in England they are classed under the head of the private securities. Frequently the borrower will desire to borrow on collaterals — that is, on securities, like government bonds and corporate stock or bonds. The loans made in this way are usually called advances in Eng- land, and classed as such under either the public or the private securities held by the bank. In the United States they are included with the others under the single category of "loans and discounts;" properly, so, because the principal evidence of debt which together with the collateral is put into the "loan envelope" is, in the case of time loans, usually a promissory note or, in the case of call loans, a "stock note" which em- powers the lender to close out the collateral in case of default. Loans and discounts, or, as they are called in England, bills dis- counted and temporary advances, thus form a part of its assets, because they represent sums due to the bank by the borrowers or their assignees. (2) The question now arises as to the shape in which the bank lends its credit. When a bank discounts commercial paper, it may, instead of paying actual money, place on its books an equivalent sum to his credit. In other words, it may open in his name an account, which can be drawn out on demand 508 Credit and Banking [§ 200 by check. This deposit, thus becomes a liability of the bank: the bank owes the amount to the depositor. Deposits and discounts hence figure on opposite sides of the bank's balance sheet. The deposits represent bank liabilities; the loans and discounts represent bank assets. A deposit may also arise without any discount, as when one hands to the bank a sum of money or a credit instrument like a check which is immediately payable and collectible without any discount. In every case, however, the deposit gives the depositor a right to draw on the bank to the extent of the de- posit. Legally, a deposit is, therefore, a sale of money or money's worth in exchange for a right to demand a correspond- ing sum at any time in the future. The deposit may be one of money or of bank credit. In former times, as we have learned, the banks dealt only in cash deposits; nowadays they deal pri- marily in credit deposits. A properly managed bank will always endeavor to keep the discount elements in the deposits of such a high character that they are virtually as good as cash, i. e. speedily convertible into cash. An interesting form of deposit is found in Scotland under the name of "cash credit." This consists of an open credit or drawing account granted by the bank to some one vouched for by at least two "cautioners" or sureties. These credits are generally given in sums of from £ioo to £500, and the cus- tomer is expected to draw on the bank only in instalments, interest being charged on the amounts actually drawn. A cash credit, which is thus a right to overdraw an account up to a certain point, is more economical than an ordinary loan, and is peculiarly fitted for frugal but enterprising small mer- chants, and for a country where large operations in ordinary commercial paper are infrequent. (3) Sometimes the borrower who presents the note for dis- count elects to receive money. In place of giving coin or govern- ment paper, the bank may prefer to issue its own promissory notes. So far as the bank and the borrowers are concerned, the § 2oo] Modern Bank Operations 509 economic essence of the bank note is identical with that of de- posits. Both are bank liabilities, because the bank must ulti- mately pay its note or honor a requisition on the deposit; both involve the granting of credit to the borrower, who acquires the right to demand payment of a given sum from the bank. The function of issue differs in form, but not in substance, from that of deposit. So far as the borrowers are concerned, it often makes little difference to them whether they secure the means of pay- ment through actual money or through the possibility of draw- ing checks or drafts on the bank. It is for this reason that checks and drafts are sometimes spoken of as deposit currency in contrast to the note currency. They differ from bank notes in that they are not usually made out for even sums, and that they cannot be transferred without indorsement. To this ex- tent they form credit of limited, rather than of general, accept- ability and are not available for "change" or till money. But for all the larger payments which ordinary merchants have to make, the credit in the form of a deposit is equally as good as the credit in the form of a bank note. Moreover, since bank notes are credits to the borrowers, they are liabilities of the bank. Bank notes, like deposits, are liabilities of the bank in contrast to loans and discounts, which are assets. These three operations of discount, deposit, and issue com- prise virtually the whole of modern credit transactions. For of the two other categories of credit operations referred to in the last section, namely advances and remittances, the former are now really only a species of discount, and the latter are accomplished by means of a combination of discount and deposit. The most significant fact in the evolution of credit is the growth of modern deposit banking. In the early banks, like those of Venice or Amsterdam, the deposits, which were in cash and insignificant at best in comparison with the total exchanges, were designed primarily to serve as a medium of transfer between the actual depositors. In modern times de- 5IO Credit and Banking [§200 posits are not alone chiclly credit deposits arising from dis counts, but perform, through the means of checks and deposits, a most important service as substitutes for money. The use of modern deposits with the check system is everywhere, as we have seen, subsequent to that of bank notes. In unde- veloped communities, where ordinary business transactions are largely of a retail character, the most obvious business of the bank, as well as its chief source of profit, is to issue to the public its own promises to pay in the form of bank notes. It is only as the transactions grow in magnitude that commercial paper is offered for discount, and it is only as the confidence in the bank increases that deposits develop on a large scale. It is accordingly only in the most advanced commercial nations, like England and the United States, that deposits play such a great role. In the first half of the nineteenth century, when the deposits in the American and English banks were small, the banking problem was wellnigh exclusively that of note issue. At the present time in the United States there are many banks which do not take advantage of their privilege of note issue. On the other hand, on the European continent, deposits are still relatively insignificant. The widespread employment of checks has led to special arrangements for liquidating the mutual liabilities of the banks through the device of clearing houses. To obviate the necessity of repeated payments to-and-fro, the banks devised an institu- tion in which the reciprocal claims are adjusted or "cleared" by being set off against one another, with a payment of the uncancelled balances only. Even these payments, moreover, are frequently made, not in cash but, as in New York, in clear- ing-house certificates, which represent deposits of gold. The clearing-house coin certificates (not to be confused with the clearing-house loan certificates described in the next section) are used only for this purpose, and may be counted as part of the bank's lawful reserve. The London clearing house dates from 1775, that of New York from 1854. In 1913 the volume § 2oi] Bank Reserves 51 r (jf exchanges in the 162 clearing Iiouses of the United Slates amounted to over 173 billions of which nearly sixty per cent was recorded in the New York clearing house alone. Bank clearings are now also effected within the Federal Reserve system through the Gold Settlement fund and the Federal Reserve Agents fund. In 1918 the combined clearings and transfers amounted to over a billion a week, involving a change of as little as I % in the ownership of the gold in the fund. On the European continent the clearing houses are both more recent and less im- portant, partly because of the central bank, partly because of the smaller use of checks. 201. Bank Reserves The chief danger to a bank's solvency arises from the ina- bility to meet demand obligations. The bank must therefore keep in reserve in cash, or what is actually equivalent to cash, a sum sufficient to pay all probable demands for cash. This is called the reserve, and this reserve was the original "bank" or pile on which the mediaeval banks did business. It must not be confused either with the so-called "reserve" of the continental banks in Europe, which is equivalent to what we term the "surplus," or with the "reserve-capital," which in England is often used to designate the unpaid capital that must be supplied in certain emergencies by the shareholders of the English joint-stock banks. The problem of the reserve may conveniently be discussed under the four heads of the character, the composition, the amount, and the protection of the reserve. (i) Since the demand liabilities are composed of bank notes and deposits, the character of the reserves will vary with the dif- ferent proportion of these elements to each other. On the European continent the reserve is held primarily against the issues; in England and America, where the deposits far out- weigh the issues, the question is chiefly one of reserve against 1^12 Credit and Hanking [§201 deposits. Wc shall accordingly treat in, tiiis section primarily of the reserve against deposits, leaving the question of reserve against note issues for the next chapter. In the European countries, where central banks exist, it is customary for the smaller banks to keep their reserves as bal- ances in the larger institutions, or even to depend for a reserve chiefly on the central bank. Thus the reserve of the Bank of England is to a very great extent the real reserve for the entire country, a fact that, as Bagehot has pointed out, places on it a most serious responsibility. Opposed to this system of a single reserve is that of the multiple reserve, until recently the Ameri- can system, where each bank is supposed to keep its own reserve. In times of crisis, therefore, when the stability of the entire structure of credit was imperilled by the imprudence of a single bank, resort was taken to the expedient of combined re- serves. In virtue of this system, first tried in New York in i860, under the stress of the impending Civil War, a loan commit- tee of the clearing house was empowered to issue to any bank, on pledge of securities, certificates of deposit known as clearing- house loan certificates which enabled the weaker banks to expand their loans and which were accepted by the others in lieu of cash. The experiment was repeated in 1861, 1863, 1864, 1873, 1884, 1890, 1893, 1907 and 1914, and the certificates were author- ized, but not issued, in 1895. In i860 and 1873, when the issues were limited to ten and twenty millions respectively, the equalization of reserves was effected by the provision that the stronger banks should turn over a balance to the weaker ones. This provision was, however, dropped after 1884. In 1873 the method was adopted in six more cities, in 1893 in several more and in 1907 it spread over the whole country. Although action was often taken too late, it frequently suc- ceeded in helping to tide over the crisis, and forms an interest- ing illustration of the advantages, in time of panic, of the single or combined reserve over that of the multiple reserve. The further need of this device is obviated by the Federal Reserve § 2oi] Bank Reserves 5 1 3 act, under which every bank must now keep a substantial por- tion of its reserves in the federal reserve bank of its district. (2) Since the reserve is designed to meet immediate obli- gations, it must be composed of cash or something that is in- stantly convertible into cash. In countries which possess a legal-tender paper currency, the paper is sometimes counted as a part of the reserve, but as this cannot ordinarily be used in the settlement of international debts, there must obviously be a reserve of coin even for the paper. Other components of the reserve may consist of demands upon other banks and individuals which are immediately realizable, and which in America are included under the rubric "cash-items." When we leave the actual cash and cash-items, we reach more debatable ground. Ordinary or even "gilt-edge" and government securities are no substitute for a cash reserve, be- cause in times of trouble they may not be salable at any price. The same may be said of long-time commercial paper, which although perhaps perfectly safe, is not instantly convertible. It is obvious that those banks are in the strongest position which hold in their portfolios short bills that have only a few days to run and that have been rediscounted by other strong banks. At bottom, however, in order to inspire complete confidence and to insure at least relative security, cash demands can be met only by cash assets. Under the American National Bank system the reserve must consist of "lawful money," by which is meant gold coin and bullion, silver dollars, and the gold certificates, silver certifi- cates, greenbacks, and treasury notes. "Lawful money" includes in fact all the forms of paper currency except national bank notes and the new federal reserve notes. But "lawful money" must not be confused with "legal-tender" money; for silver dollars and silver and gold cerlihcates are not full legal tender, although they are "lawful money" for purposes of the reserve. The same is true of the Clearing House ccrlill- cates. Finally the legal reserve might include, until 1914, not ,13 514 Credit and Banking [§ 201 only the redemption fund of five per cent of its circulation, kept by each bank at Washington, but also the "reserve agents' balances." This refers to the provision permitting ordinary banks to keep three-fifths of their reserve on deposit in the reserve cities, and banks in the reserve cities to keep one-half of their reserves on deposit in the central-reserve cities.^ Under the new law the 5 % redemption fund may no longer be counted as a reserve, and the privilege to keep the reserves in the reserve or central-reserve cities disappeared in 191 7. But one half of the reserves kept by any bank in the federal reserve bank may henceforth consist of approved commercial paper. (3) The proper amount of the reserve is sometimes fixed by law. In the United States, national banks in the reserve or central-reserve cities were compelled until 1914 to keep a reserve of 25 per cent, and other banks a reserve of 15 per cent, of their deposits. Under the new law the federal reserve banks must keep a reserve of 35% of their deposits, while the reserves of ordinary member banks depends partly on whether the deposits are demand deposits (payable within 30 days) or time deposits. (See footnote on opposite page.) The Bank of the Netherlands must also keep a specie reserve of 40 per cent, but this is applicable to notes as well as deposits. Ordinarily, however, it depends on the banks themselves to estimate what Bagehot has well called the "apprehension minimum" — the point below which the community will begin to have doubts as to the ability of the bank to maintain specie payments. It was formerly often stated that a "safe" reserve is one-third of the liabilities. No such hard and fast rule, 1 There are at present 47 reserve and 3 central-reserve cities. The laws of 1887 and 1903 permit any city of 200,000 and 25,000 population respectively to be made a central reserve or a reserve city, on application of three-quarters of its national banks. Chicago and St. Louis have been the only places to avail themselves of the privilege, which New York enjoyed from the beginning, of a central reserve city. Under the law of 19 13 the privilege of creating or abolishing the reserve or central reserve cities devolves upon the Federal Reserve Board. § 20l] Bank Reserves 515 however, can be laid down, for the conditions vary not only from country to country and almost from city to city, but also with the changing complexion of business life. A reserve which is perfectly adequate at one period may be entirely insufficient at another; and the "apprehension minimum" will itself vary considerably with the character of the loans and discounts. In England the reserve of the Bank of England, for instance, has varied in the past fifty years from 42 to 52 per cent. A statistical study of the bank reserves in most countries would show marked fluctuations not only in themselves, but also as measured in percentages of liabilities. Of these, perhaps the most important are the seasonal fluctuations. In New York, for instance, the periodicity is marked. From January to April the reserves fall because the farmers need funds to pre- pare for planting the crops, and all the out-of-town banks call in their balances. After the season of planting and spring clothes-buying is over, the funds flow back to New York and the reserves remain fairly constant, except during the first week The original law of 1913 provided for a division of the reserves between the member bank and the federal reserve bank and vaiying from five per cent for time deposits up to from twelve to eighteen percent on demand deposits. In 1917 it was decided that all reserves should thereafter be kept in the federal reserve banks, and it thus became possible to reduce the reserve require- ments. These are henceforth to be as follows: Demand Deposits Time Deposits Banks not in reserve or central-reserve cities Banks in reserve cities Banks in central-reserve titles 13% 10% 7% 3% 3% 3':j 5 1 6 Credit and Banking [§ 201 in July, when the semi-annual payment of dividends is followed by the Fourth of July festivities with their demands for cash. Toward the end of the summer more money and credit are needed, not only for the fall purchases, but especially for the movement of the gigantic crops; and by mid-autumn the re- serves are at their lowest ebb. It is not until the beginning of November, after the cessation of the autumnal drain, that the advance is again perceptible. Interesting correlations have been worked out by Norton, Palgrave, and others as to the ratio of reserves to deposits, and of reserve deviations to call discounts, and have been suggested as to the ratio of loan devi- ations to foreign-exchange rates. The fluctuations in the re- serve are not only periodical or seasonal, but also irregular and unpredictable, owing to exceptional domestic demands or inter- national complications. Too high a reserve endangers profits; too low a reserve imperils solvency; here, as elsewhere, the balance must be struck between cupidity and timidity. (4) The simplest method of protecting a dwindling reserve is to stop lending. Thus, when the reserves of the national banks fall below the legal minimum, the law prohibits them from increasing their liabilities by making any loans or dis- counts until the reserve has been restored. This, however, is an heroic measure, which sometimes defeats its own object. For it is precisely in times of monetary stringency that the greatest liberality is needed. Many an incipient panic has been checked by the mere knowledge that the banks were ready to extend their loans, on the familiar psychological prin- ciple that when a man believes he can get a thing he is not so anxious to secure it at once. The more usual and less drastic method, therefore, of protecting the reserve is by a practice which is especially suitable in case of a slow and gradual drain, namely, by increasing the rate charged. In Europe this is gen- erally called the discount rate, and in England the bank rate, because the Bank of England is the chief lender; but in the United States, where up to 1914 most of the bank advances § 20l] Bank Reserves 5^7 took the shape of call loans in New York with the interest pay- able at the maturity of the loan, it has hitherto been called the money rate. Under the new law, however, there will now also be a discount rate. In countries hke France, where the banks are at liberty to pay out either gold or silver, it is cus- tomary to charge a slight premium on gold instead of, or at all events prior to, raising the discount rate. To the general public an increase in the discount rate is always unwelcome; but, as in so many other domains, a sta- bility of rates, even with a moderately high level, is preferable to the continual fluctuations which unsettle business. In Eng land the bank rate from 1844 to 1900 varied normally from two to four per cent, with occasional but increasingly rare vari- ations up to ten per cent. The following table gives the rela- tive number of days in this entire period on which the respective bank rate was charged: Bank Rate Number of Davs Bank Rate Number of Davs Per cent Percentage of Wliole Percent Percentage of Whole 2 16.6 5h 13 4 14.6 6 43 3 23-9 6i •4 3i 8.4 7 2.8 4 I3-I 8 1-3 4i 2-3 9 •S 5 9.8 10 •7 In the Reichsbank and the Bank of France the range of variation was smaller. The maximum was 9 per cent against 10 per cent in England, and the minimum in Germany was 3 per cent; while a rate of over 7 per cent was reached in only two years, and a rate of over S per cent only one year in France and Germany as agaiiist four years in England. Moreover, the range of the annual fluctuations is greater in England than in France or Germany, having exceeded 3^ per cent only once 5 1 8 Credit and Banking [§ 202 in France and twice in Germany, as against eleven times in England; while there were in France 20 years and in Ger- many 9 years, but in England only 3 years, without any fluctu- ations at all. The figures for England, however, are sta- bility itself when compared with the New York call rate for money, which varies from day to day, and which has several times reached a minimum of f of i per cent and a maximum of 186 per cent, rates of 10, 15, 20, and 25 per cent not being at all uncommon. The reasons for this remarkable fact will be discussed in the next chapter. It is obvious from what has preceded that successful banking depends largely on the management of the reserve. The sol- vency of a bank and its capacity to extend credit facilities are far more than a matter of concern merely to the stock- holders and the immediate customers. The modern bank is, so to say, the nerve centre of the business world. A shock to its credit at once ramifies throughout the community, and its failure may paralyze enterprises that seem to be only remotely connected with the particular interests involved. The problem of bank reserves is the one of central importance in the subject of credit. 202. Credit and Prices It is from this point of view, therefore, that we must approach the question of the influence of credit upon prices. Some writers, like INIill, assert that since credit virtually means pur- chasing power, credit acts on prices exactly as money does. On the exchanges cotton and wheat futures are no less instru- mental in fixing prices than cash sales. So here, instead of transacting business with "spot gold," "gold-futures" or credit are used. The greater the use of credit, the larger the number of purchases, and therefore the higher will be the level of prices. This theory of the substantial identity of credit and money, as purchasing power, overlooks the fact that in a credit opera- tion only one-half of the transaction takes place now. Where money is used, the transaction is completed at once, — money § 202] Credit and Prices 510 and commodities cliange hands; wiiere credit is used, the com- modity changes hands now, but the debt incurred must be paid in the future. In other words, it is a question not simply of purchasing power, but of Hquidating power. This considera- tion has led writers hlce Walker to assert that credit has no in- llucnce at all on prices, because the debts created by such a transaction are ultimately cancelled by the credits. The truth lies midway between these two positions. If all credit operations were absolutely automatic, and if confidence in ultimate payment were so complete that actual money were never demanded, credit would be a perfect substitute for money, and influence prices just as money does. In point of fact, how- ever, confidence is never so complete. The banks must always keep a certain amount of money on hand to meet possible de- mands. The debts, in other words, are never entirely cancelled by the credits because, as the future ripens into the present, the conditions of the market change. There will always have to be a certain balance which a prudent bank must retain. This balance measures the real influence of credit on prices. It is quite true that credit is purchasing power, and thus tends to raise prices; but credit is not to the same extent liquidating power. In order to serve as a basis for the credit operations a certain quantity of coin must be impounded as a reserve. Thus the medium of the entire transaction is in the broad sense the credit less the reserve: as purchasing power the credit alone operates, as liquidating power the credit must be supple- mented by the reserve. Since the money so reserved is sub- tracted from what would otherwise enter circulation, there is less money disposable for actual cash transactions, or, in other words, the price level is lower than it would otherwise be. The credit thus tends to raise prices, the reserve to lower prices. The reserve, however, is always much smaller than the credit transactions, for there would otherwise be no advantage in using credit. The net result, therefore, is that credit raises prices to a certain point. 520 Credit and Banking [§ 202 Credit, in other words, although it exerts by no means the same amount of influence on price that money does, exerts the same kind of influence. The reason that it does not exert the same amount of influence is that a portion of its ideal efficacy as a substitute for money is lost through the necessity of keeping on hand a reserve for which no substitute can be employed. The extent of this reserve is a measure of the in- completeness of the substitution, and therefore of the degree to which credit fails to equal money in affecting price. The differ- ence between a "wheat-future" and a credit or a "gold-future" is that a reserve is unnecessary in the one case, but requisite in the other. This also serves to explain why credit cannot increase prices indefinitely. It is indeed true that an enhanced use of credit marks a period of rising prices. It is precisely in such times, however, that prudent bankers will be solicitous about their re- serves, and make every effort either to increase their reserves or to diminish their loans. Money becomes "tight," the rate of discount rises, and the increase of price tends to arrest itself. A speculative mania may indeed supervene, and prudence for a time be cast to the winds, with a dangerous discrepancy between bank liabilities and quick assets. This will, however, lead to a crisis, to be discussed in § 209; and when the bubble of inflated values is inevitably pricked, the price level will again fall. All prices must finally be reduced to the basis of metallic money, and with a given quantity of money the oscillations in the price level, so far as the effect of credit is concerned, depend upon the proportion between the money in circulation and that used as a reserve for credit transactions. CHAPTER XXXI CREDIT AND CURRENCY 203. References W. S. Jevons, Money (1879), chs. xvii, xviii, xxiv; C. F. Dunbar' Chapters on the History and Theory of Banking (2d ed., 1901), chs. v-vi: J. F. Johnson, Money and Currency (1905), chs. vii and xv; H. White, Money and Banking (4th ed., 1912), bk. iii, chs. ix-xvii; R. G. Hawtrey, Ciirroicy and Credit (1920); L. H. Langston, Practical Bank Operation (2 vols., 1921); P. M. Warburg, Essays in Banking Reform in the U. S. (1914); T. Straker, The Money Market (1904); Reports and Publications of the National Monetary Commission (1910-1912); The Currency Prob- lem, Addresses at Columbia University (1908); E. W. Kemmerer, The A B C of the Federal Reserve Systetn (191 8). Crises. E. D. Jones, Economic Crises (1900); T. E. Burton, Finan- cial Crises (1902); C. Juglar, Brief History of Panics in the United States (trans, by Thomm, 1893); W. C. Mitchell, Business Cycles (1913); O. M. W. Sprague, A History of Crises under the National Banking Sys- tem (1910); H. L. Moore, Business Crises (1915); D. H. Robertson, A Study of Industrial Fluctuation (1915). 204. Banks of Issue The issue of bank notes was at first entirely free. It was soon seen, however, that the notes served as currency, and the question arose as to the nature of the steps to be taken to in- sure their safety. This consideration led to four distinct sets of problems: (i) Should the bank be a public or a private institution? (2) Should a particular bank have a monopoly of note issue? (3) What should be the character and de- nominations of the notes? (4) Should there be any legal regulation of the methods of emission? (i) Government banks of issue are comparatively rare. The chief examples are the Russian, the Swedish, and the Bulgarian bank. Far more common are the central banks, whose capital 521 52 2 Credit and Currency [§ 204 is provided by private individuals, hul where a considerable degree of control is exercised by the government. Of these the chief instance is the Bank of France. This was founded in 1800 as a purely private bank, but re- ceived the monopoly of note issue in 1803 and became a pub- lic institution in 1806, the management being henceforth vested in a governor and two assistants appointed by the state. Al- though several independent banks were in the interval accorded the privilege of note issue, the monopoly was re-established in 1848. In all the government and quasi-public banks, except the Reichsbank of Germany, and the National Bank of Greece (where, however, the monopoly will begin in 191 7), there is also a monopoly of note issue, and in almost all cases a system of branch banks. The Bank of England is technically a purely private institu- tion. But when it was founded in 1694, its stockholders were composed of subscribers to a loan to the government, which conferred upon it special privileges, and the bank has for a long time acted as the fiscal agent of the government. It is practically, although not legally, a quasi-public institution. In the United States there have been government banks, both national and state, but never with any monopoly of issue. The first and second Banks of the United States, which existed from 1791 to 181 1 and from 1816 to 1836, were private banks, one-fifth of the capital, however, being subscribed by the gov- ernment, which was represented on the board and which utilized the banks as fiscal agents. Many commonwealths in the South and Middle West established, between 1820 and 1840, banks managed by state ofHicials, in which the capital was subscribed either in whole or in part by the state government. Such "state" banks existed in Kentucky, Tennessee, Missouri, Dela- ware, Alabama, the Carolinas, Georgia, Florida, JNIississippi, Louisiana, Vermont, Illinois, Ohio, and Indiana, almost all of them, with the notable exception of the last two, being recklessly managed and coming to a disastrous end. §204] Banks of Issue 52-^ (2) So far as the right of note issue is concerned, there are three systems: (a) monopoly of emission; (b) the mixed system, with the privilege of issue accorded to only a small number of banks; and (c) decentralization of issue. Monopoly of issue is ordinarily confined to the government or quasi-public banks. But it is also sometimes accorded to a purely private bank, as in the case of the Imperial Ottoman Bank in Turkey at present, or of the Bank of Scotland during the two decades after its inception in 1695. The chief examples of the mixed system are at present England and Germany. The Bank of England received the right of note issue in 1697 with the understanding that no other bank should be authorized. This did not, however, mean a monopoly of bank- ing. For not only was "bank" used in the sense of bank of issue, thus in no wise preventing other classes of banking trans- actions by outsiders, but it did not apply, as was explicitly stated in 1707, to the issues of notes by individuals or partner- ships. The London private bankers discontinued their note issues before the end of the eighteenth century, but the country bank notes have persisted to this day. In 1826 the right of note issue was granted to joint-stock companies when over 65 miles from London. In 1844, however. Peel's Act forbade the creation of any more joint-stock banks of issue, and pro- vided that when any of the existing banks (which were, more- over, prohibited from increasing their circulation) should abandon its right of issue, the Bank of England might add to its authorized issue two-thirds of the sums thus lapsed. In 1844 the 279 banks had an authorized issue of £8,631,647, as against somewhat more than fourteen millions of the Bank of England; by the close of 191 2 there remained only 23 banks (12 private and 11 joint stock), with an authorized issue of £1,204,490, as against £18,450,000 of the Bank of England. In Germany there was great confusion until 1875, at which time there were 32 banks of issue in addition to the reor- ganized Reichsbank. The issue of notes by these was subject 524 Credit and Currency [§ 204 lo numerous restrictions, and it was jjrovided thai when any of them surrendered their right of issue, the whole of the equiv- alent sums were to be added to the authorized uncovered issue of the Reichsbank. In 1875 the banks had the right of issuing 135 million marks of notes (as against 250 millions of the Reichs- bank) over and above the coin reserve; by 1914 all but four of the banks had abandoned their note issues as unprofitable, the four still possessing the right of issuing 68,771,000 marks of uncovered notes as against 472,829,000 marks allotted to the Reichsbank. Thus Germany, like England, is on the high- road toward a centralization of note issue. The chief example of decentralization was until recently that of the United States. At the outset, however, the privilege of note issue was granted only by special charter. The democratic wave of the Jacksonian era replaced the charter method by the Free Banking system. Under this scheme, which originated in New York in 1838, any association could freely issue bank notes on complying with certain formalities. As a consequence, there were in 1861 over 1600 state banks of issue. When the national banks were created, the privilege of note issue was taken away from the state banks by the imposition of a ten per cent tax, applicable in 1866. The number of national banks has grown until, in June, 1915, there were in operation 7,560, each with its right of issue. The law of 1913, however, restricts to the twelve federal reserve banks the privilege of issuing the new federal reserve notes, and provides for the gradual retirement of the existing national bank notes. (3) The third problem mentioned above refers to the char- acter and denomination of bank notes. Since bank notes are simply promissory notes, the government does not ordinarily invest them with legal-tender quality. In some cases, however, the government signifies its willingness to receive the notes for public dues, as in the United States, where bank notes are receivable for any payments to the government except for import duties, and for payments by the government except §205] Regulation of Note Issue 525 for interest on the public debt. In the new federal reserve notes these exceptions are removed. In a few countries bank notes are even legal tender, as in the Bank of England, the Bank of France, and since 1909 the German Reichsbank. In England, however, this applies only as long as the notes are kept convertible. The acceptance by the banks of each other's notes at par is either a matter of mutual arrangement, or prescribed by law, as in Germany and the United States. The denominations of the notes depends partly on the de- sire of the government to minimize the use of coin, and partly on the existence of other paper money. When the notes are irredeemable legal tender, and thus virtually ^fiat money, the minimum wUl naturally be smaller. In the Bank of England it was originally £20, but since 1793 £10, and since 1829 £5. During the period of bank restriction it was as low as £1, and during the war of 19 14 as low as los. In France and Italy it is 50 francs ($10); in Germany it was until 1906 100 marks, but it is now 20 marks ($5), as is the case also in Scotland with the £1 notes. In the United States the minimum in the case of the national bank notes was originally $1, but since 1879 is $5. 205. Regulation of Note Issue The two theories as to the regulation of note issues arose at the time of the controversies preceding the English Bank act of 1844. They are known as the currency and the banking principle, respectively. The currency principle, first so-called by Mr. George W. Norman in 1840, was advocated not only by him, but by Lord Overstone and Colonel Torrens, and was accepted by Sir Robert Peel. The banking principle was championed by Messrs. Tooke, FuUarton, Wilson, and Gilbart, and was accepted in part by John Stuart Mill. The currency principle states that whereas in the case of a metallic currency all the specie cannot be exported, for the reason that, as the coin goes out, prices will fall, exports increase and money again flow 526 Credit and Currency [§ 205 in, on the other hand an issue of bank notes may expel the specie because the total volume of money, now composed of coin and notes, will be at least no smaller than before. Hence, to prevent the notes from becoming redundant, safeguards must be adopted. The weakness of this reasoning lies chiefly in overlooking the fact that bank deposits act precisely like bank notes. The ad- vocates of the banking principle pointed out that if the banks could affect prices and the stock of coin by increasing their note issue, they could do the same by expanding their deposits. A restriction on note issue would therefore in itself be futile. In point of fact the banking theorists denied that inflation was possible in either case, since both notes and deposits are issued in response to an actual demand. As long as bank paper is convertible, they claim that there can be no redundancy, be- cause if there were an issue greater than the real demand, the notes would at once automatically return to the bank. The truth again lies in the middle. The banking theory was undoubtedly correct in emphasizing the analogy between notes and deposits, and in stating that the aggregate of currency is not likely to be permanently increased by an issue of notes. It failed, however, to observe that as the bank notes are returned to the bank, specie may be paid out in exchange, and that while the aggregate circulation may remain the same, its proportions may be altered. Even though the redundant notes automati- cally return to the bank, it is precisely this returii which may exhaust the coin reserve and thus jeopardize the entire issue. As a consequence, all nations impose some restrictions on bank issues which affect either the amount of emission, the nature of the reserve, or the character of the security. They are of six chief kinds: the maximum-amount, the fixed-re- serve, the variable-reserve, the emergency-circulation, the safety- fund, and the bond-deposit systems.^ 1 Jevons: Money, 218-235, mentions fourteen different methods: the simple deposit, the partial deposit, the minimum reserve, the proportional reserve, the maximum issue, the elastic limit, the documentary reserve, the § 205] Regulation of Note Issue 527 (i) A good example of the first method is that employed in France. Apart from the requirement that all paper dis- counted must be three-name, the only restriction on the Bank of France is the fixing of issues at a maximum, originally set in 1870, at 1800 million francs, but reaching 6800 millions in 191 1 and enormously increased during the Great War. This method, how- ever, reverses the true principle, restricting what should be left free and leaving free what should be restricted. In France, however, the maximum is so high that it does not really act as a rigid check to the desirable elasticity. (2) The fixed-percentage reserve is found in Switzerland, where the law of 1905 requires 40 per cent of the circulation to be kept as a specie reserve. The same is true in the Nether- lands, with the exception that the reserve applies to deposits as well as to note issues, and that the restriction may be sus- pended in case of emergency. The Dutch method is in accord with the sound principle that deposits and notes are really equivalent forms of credit. (3) The variable percentage is best illustrated by England. Here the regulation takes the form of a fixed limit of uncov- ered note issues, with a specie equivalent for additional issues. The Issue Department is allowed to emit notes only against a corresponding amount of government securities, gold, or bul- lion. The Banking Department must deposit with the Issue Department £14,000,000 of securities and for every pound of notes above that sum the Issue Department must hold coin or bullion. The business of the Issue Department is thus limited to exchanging notes for coin or vice versa, and if the Banking Department desires any notes, it, like any one else, must deposit specie. Under the provision referred to above, the amount of securities held by the Issue Department might be augmented by real-property reserve, the loreign exchange, the free issue, the gold par, the revenue payments, the deferred con\ertil)ility, and the paper money method. They may, however, be substantially reduced to those men- tioned in the text. 528 Credit and Currency [§ 206 two-thirds of the lapsed country note issues, and the uncovered notes have accordingly grown to £18,450,000 by 1914. The total circulation during the past two decades has varied from about 35 to 60 millions, making the uncovered issues from a half to a third of the whole. The chief objection to the English system is that it purchases safety at the cost of an insufficient elasticity. In fact, on three separate occasions, namely 1847, 1857, and 1866, it was found necessary to suspend the act and to permit the issue of notes on government securities. Of more recent years the short- comings of the system have been reduced not only by the great growth in the actual specie reserve, but also by the in- creased importance of deposit as contrasted with note currency. (4) The system of emergency circulation was first tried in Germany. The Reichsbank is empowered to issue a so-called contingent circulation, of 550 millions, subject to the provision that one-third of the issue be covered by cash (coin, bullion, treasury notes, and notes of the other four banks) and the re- maining two-thirds by discounted bills. When the bank desires to increase its notes, it may emit a so-called excess issue on the payment of a tax of five per cent per annum, payable weekly. The chief criticism that can be urged against this scheme is the calculation of the excess issue according to the "contingent" rather than the cash reserve. For a large issue with over 50 per cent reserve may be taxed, while a smaller issue with only one-third reserve, and therefore far less safe, may go un- taxed because not exceeding the "contingent." The four methods thus far discussed involve some form of asset currency, i.e., the system of issuing notes on the basis of banking assets in which a coin reserve plays a certain role. A radically different system was until recently found in the United States. 206. The American Systems The American banks before the Civil War were to an over- whelming degree banks of issue rather than of discount, and § 2o6] The American Systems 529 may be classed under four systems; general-asset banking, the Suffolk system, the safety-fund system, and the bond-deposit system. (i) The issue of notes on general assets, with but few, if any, restrictions, was at first the usual practice. In both the first and the second Banks of the United States the only restric- tion was the limitation of the notes to the amount of capital. In many of the state banks even this restriction was lacking. The wave of ill-managed banks spread from New England to the South and West, until they culminated in the "wild-cat" and "coon-box" banks of the frontier. From 1837 on, when a distinct improvement began, there was, however, the greatest variety, ranging from the rigid requirements of Louisiana to the almost complete freedom in some of the border states. (2) The Suffolk Bank system was in effect a method to se- cure the immediate redemption of the notes. It rested on the significant distinction between ultimate security and immediate convertibility. The Boston banks found that they could not keep their notes in circulation, as they were being crowded out by the country bank issues which were received by them only at a discount. In order, therefore, to maintain the country issues at par, the Suffolk Bank was incorporated in 181 8 and the system was perfected in 1824. The Suffolk Bank agreed to redeem at par in specie the notes of any bank which kept on permanent deposit with it the sum of at least $2000 plus an amount sufficient to redeem the notes, charging interest only on the excess, but agreeing to credit to any such bank the bills of any other bank in good standing that it might send in. The country banks, which at first strenuously resisted, soon found that, unless they consented, their notes would suffer in good repute. As a result the Suffolk Bank acted as a kind of clearing- house, each bank in the system being allowed to pay out only its own notes and sending to the Suffolk Bank weekly the bills of the other banks received by it. In this way aU the notes were kept at par, and there was little need of actual cash redemption. 5 30 Credit and Currency [§ 206 (3) The Safety Fund plan was initiated by New York in 1829. Each bank in the system was obligated to pay to the state treasurer an annual sum equal to one-half of one per cent of its capital, until it reached three per cent. This "Bank- fund" was to be applied to the redemption of the notes of any insolvent bank. Unfortunately it was made responsible for the other liabilities as well, and it was not until 1842, after several failures, that the fund was restricted to the notes. This was, however, too late, and the redemption of the notes was sus- pended for a time, the fund being subsequently replenished by mortgaging future payments. As the charters of the banks belonging to the system expired, the system itself melted away. Had the fund, however, been applied from the outset only to notes, it would have been ample. The safety fund exists since 1890 as a feature of the Canadian system. (4) The Bond Deposit system also originated in New York. Under the Free Banking Law of 1838, any bank might issue notes, to be provided by the state comptroller, on depositing with him an equivalent amount of stock of the United States, of New York, or of any other state approved by him. Un- fortunately, bonds and mortgages on real estate worth double the mortgage might also be deposited, with a result that the notes of insolvent banks which had made such deposits were redeemed in 1841-1842 at a discount of 25 per cent. The deposits were subsequently limited to Federal and New York stock, and the security of the notes was thereafter unquestioned. But in many other states which adopted the scheme, these safeguards were not observed, and the security was frequently worthless. Moreover, even when the security was ample, there was no elasticity. The result of these various methods was, in 1861, a hetero- geneous jumble of good, bad, and indifferent banks, with notes lacking in uniformity and of all degrees of acceptability. The National Bank system was devised to secure a market for the war debt, and to provide a uniform currency. The § 2o6] The American Systems 5 3 i former object was attained by adopting the bond-deposit system of New York, the latter by taxing the state bank notes out of existence. Under the act of 1863, perfected in 1864, any bank with a capital of at least $50,000 could secure, from the Comp- troller of the Currency, bank notes not exceeding the amount of its capital stock and equal to 90 per cent of the market value of the United States bonds deposited with him. The banks were held to redeem these notes, not only over their own counters, but at selected agencies in the principal centres, known as reserve cities. To provide for such redemption the banks were to keep as a reserve in lawful money 15 per cent or, in case of the reserve- city banks, 25 per cent of the circulation and deposits. On fail- ure of a bank to redeem its notes, the government was to do so. Originally the total issues were restricted to $300,000,000. For various reasons the West and South had not secured their due proportions of note issues, and the act of 1865 accordingly sought to favor the smaller banks by restricting the circulation of the larger banks and by apportioning one-half of the circula- tion to the various states according to population. In 1875, all restrictions were swept away by the Resumption Act. The law of 1874 in the mean time permitted the banks voluntarily to reduce their circulation up to a total of $55,000,000, and it substituted for the redemption agencies in the reserve cities a system of government redemption, each bank being now obli- gated to keep in lawful money a redemption fund of 5 per cent of its circulation in the Treasury at Washington. The required reserve was at the same time made applicable henceforth only to notes, instead of to deposits and notes conjoined. By the act of 1882, the total amount by which all the banks might reduce their circulation was limited to three millions a month, and a bank reducing its circulation was prohibited from again increasing it within six months. These last provisions were unfortunate, for they emphasized the existing inflexibility of the system, not only by setting a rigid minimum limit but by rendering impossible any immediate rebound. 532 Credit and Currency [§ 206 Three points now became evident. In the first place, the national-bank circulation, instead of furnishing the major part of the paper currency, as had been originally contemplated, constituted only a small, and in general diminishing, propor- tion. Many of the largest banks in New York issued, and still issue, no notes at all, making their chief profits on deposits. In the second place, a comparison of the fluctuations in circula- tion, as shown in the chart on page 532, with the oscillations in the price of bonds convinced many that some of the banks were utilizing the bond-deposit provision to speculate in the bond market rather than to provide a currency. Thirdly, the restric- tion of banks to those with a minimum capital of $50,000, coupled with the absence of any provision for branches, pre- vented adequate banking facilities in the rural districts and led to a great spread of state banks, often with a capital as low as $10,000 or $5000. By the act of 1900 the minimum capital was lowered tc $25,000, the tax on circulation was reduced from i to one-half of I per cent, and all banks were now allowed to issue notes up to 100 per cent of the bonds deposited. As a consequence of these laws, the circulation gradually rose from 242 millions in 1899 to 802 millions in June, 191 5. In 1907 another slight im- provement was added by the provision permitting the banks to reduce their circulation by a total amount not exceeding nine (instead of the former three) millions a month. The defects of the National Bank system may be summed up as follows: (i) There was no adequate provision for banking facilities in the smaller places as branch banks were not permitted. (2) Since by far the greater part of the public debt was held by the national banks as a deposit for note issue, the govern- ment bonds acquired an artificial value, the virtual dependence of the public credit on the national banks militating against both the payment of the debt and the substitution of some better system of security for note issue. BANK-NOTES, PAPER MONEY, GOLD AND TOTAL MONETARY CIRCULATION IN THE U.S. FROM 1878 TO 1920 IN MILLIONS OF DOLLARS 6000 15500 15000 4500 4000 3500 3000 2500 2000 1500 1000 500 ■■]■ (iOOO 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 / -V S' / 1/ - A Banknote Circulation. i Total Paper Money (Treasury Notes, U.S. p J Notes, Gold and Silver Certificates, "^ National Bank Notes, Federal Reserve ( Notes and Federal Reserve Bank Notes.) C Total Monetary Circulation. D Stock of Gold. E Federal Reserve Notes. ; / • / 1 t , / B L / ' / / \ , 1 1 f 1 i } , ■^ ' / ^ y - -- ,j f »i ~ ,'' t i / / E / ,1 ^ (. / — ' / 1 1 / 1 1 1 y' / 1 /■ ' -; '' ,' / _^ \ ^., / ^^ — B, , 1 ^ ^ __ ,__ — -"' .- ' 1 .-^ ■«. ^ / / __ M 1 ^^ ^ — 1 e > — .'■■ ■"" \ / 7 = L.V ■■ ^ / i 1 R '■-- / , Jl •- .-' -- -, ^ .^^ — if , ^. ». - ■' ^ ' 1 _^ '' 1 _ _ _ A _ ^ _ _ -J _ fT ^ — — ~ = ^ i:^ — — — 3 A, — -\ — -1 — - A c f - — — I— -^ 1 1 *^ oD ^. Ol-H(^lm^ io;oi^oDc;o --< rico--pio-^r--cC' — o — -1 :•; -* 1- — 1^00050 -^ri r*. 'T 1* oi-oc r-. o 1^ 1- cocxjoooooOQOcoaocooo :r. C3 ~. OC5C-. c^ J-. 3: r> o c: c; — ■:: c: Ooooi-i r- — . ^^ ^ __ _-r^^ CO 00 oo 00 00 00 i» 00 00 00 oo 00 oo CO cc CO oo 33 xi 3D CO 00 C5 c-j — . — . ~. ~ .rs Ci C2 35 o i> :r: — . c. n C". c: C-. C-. C"- § 207] The Money Rate 533 (3) The ultimate redemption of the notes was indeed as- sured, but there was no adequate provision for immediate and daily redemption. The 5 per cent redemption fund at Wash- ington served only to replace the soiled and mutilated notes, and accomplished even that object only imperfectly. Not only was the expense great, but the average life of the outstand- ing notes was about two years, whereas it was only about five weeks under the Suffolk Bank system, and is correspondingly short in Canada and Europe. (4) The principal defect was the complete lack of elasticity. In the face of the constant fluctuations in the public demand for credit facilities, the changes in the price of bonds might induce the bank to sell rather than to buy bonds when the community needed more money; and if by any chance more notes had been issued, the banks were prohibited, when the need for them was past, from withdrawing them at will. ,Thus at both ends there was a lack of flexibility, necessitating the trans- mission of actual cash to and from the communities in the West and South, causing violent fluctuations in the "money- rate" and upheavals in the stock-market, and involving con- stant interference by the government in what ought to be an automatically regulated mechanism. Had the demand for credit not been met to an overwhelming degree by deposit cur- rency rather than bank notes, the situation would long ago have become intolerable. As it was, the embarrassments were great, and the spasmodic variations of the money rate in Wall Street were, as we have seen, utterly without parallel elsewhere. 207. The Money Rate Fluctuations in the money rate are due to three causes, — the general rate of interest, the level of prices, and the state of the money market in the narrower sense. (i) The general interest rate is, as we know, the payment for the use of capital as a whole. The "money rate" or "dis- count rate" in the long run follows the general rate of interest. 534 Credit and Currency [§ 207 for a relative plethora or dearth of capital ultimately finds its way to the lending centres. We must be careful, however, not to confuse the demand for money in general with the "demand for money" in the Wall Street sense. The demand for money in general is, as we know, reflected in the price level, because money is needed primarily as a medium of exchange. But the demand for "money," as reflected in the "money rate," is primarily a de- mand for loanable funds or capital. A demand for capital is not necessarily a demand for money. The borrower of capi- tal may indeed get it in the shape of money, but the mere fact that one man rather than another desires to control a cer- tain quantity of capital does not alter the total volume of exchanges or the community's need for money. The demand for capital is reflected in the general rate of interest, the demand for money in the general level of prices. Although, as we shall see below, there is a minor correlation between interest rates and prices, yet so far as prices are primarily dependent on the other factors which influence the value of money, there may be high interest with low prices, or low interest with high prices. Interest depends on capital; prices depend on money: interest depends at bottom on the demand for the creation of new wealth; prices depend on the exchange of existing wealth. So far, therefore, as the fundamental cause of variation in the "money rate" is the alteration in the general rate of in- terest, the "money rate" depends on forces entirely distinct from the demand or supply of money. But while the actually existing price level cannot affect the rate of interest, the latter may be modified by changes in the price level. We thus come to the second point. (2) Alterations in the price level, that is, an appreciation or depreciation of money, may exert a temporary change in the rate of interest. If a man borrows $1000 during a period of falling prices, he will really repay at the expiration of the loan period more than he received. That is, in order to return the nom- § 207] The Money Rate 535 ' inally identical sum of $1000 he must sell more goods or work i more days. As interest is really paid for capital, not money, j and as the prices of commodities have fallen, he is substan- ■ tially paying back more capital or commodities than he bor- rowed. If, therefore, he is able to foresee the falling prices, the borrower will insist on securing a compensation by a re- duction in the rate of interest, and the lenders will be forced by competition to grant it. If competition and foresight are perfect on both sides, the fall in prices would be exactly offset by the fall in interest, or mathematically speaking and allowing for the compounding of interest, the rate of interest would be lowered by slightly more than the rate of appreciation of money. It is precisely because foresight and competition are not perfect that the interest rate is never exactly adjusted to this change in the purchasing power of money, and that varia- tions in the price level are often attended by periods of inflation and depression in the business world. Changes in the price level thus affect the rate of interest, and the "rate of money" in the Wall Street sense is hence partly dependent on the "value of money" in the broader sense. But it must not be overlooked that these changes are merely incident to a period of readjustment of prices, and that as soon as a new relatively permanent price level is again reached, this factor falls away. Since this change in interest is connected with an apprecia- tion or depreciation of money, it is clear that the longer the period which the loan has to run, the greater will be its influ- ence. It is, for instance, an interesting fact that in a period of rising prices, as from 1896 to the present, the rate on "time money" in Wall Street tends to be higher than on "call money." While changes in the price level thus influence the rate of interest, it must not be forgotten that on the other hand changes in the rate of interest itself affect the general price level. A fall in the rate of interest frequently tends to raise the price level. It might be objected that, as Tooke thought, since interest is one 53^ Credit and Currency [§ 207 of the elements in cost, low interest means low prices. It must, however, be remembered that lowering of the interest rate, and therefore an increase of credit facilities, is apt to stimulate pro- duction, and to usher in a period of rising prices. Other things remaining the same, indeed, low interest implies low cost of pro- duction and low prices. But when interest is lowered, other things rarely remain the same; and it is precisely this frequent concomitant in the "other things" that often causes low interest to be associated with higher prices. Such considerations as to relation of interest to prices reinforce the conclusion reached above (§ 193), that while a change in the supply of money is the chief cause of variations in the price level, it is not the sole cause, and that the rate of interest both affects, and is affected by, the general price level. (3) While over longer periods the money rate depends on the supply of capital, and while for somewhat shorter periods it is influenced by the level of prices, for still shorter periods it is affected by the temporary amount of loanable cash in the money market. It is this, and this only, which the ordinary borrower of "call money" has in mind. The chief borrowers of money in Wall Street are those who want funds for meeting immediate obligations or for m.argins in the speculative market. With the continual oscillations in the demand for these loanable funds, it is obvious that a comparative stability in the money market can be secured only by some sys- tem whereby the banks may expand or contract their loans at will without fear of depleting their reserves. It is patent that if the demand for funds may be met by notes issued on the general assets of the banks, rather than by the granting of bank credit in the shape of deposits, not only will there be a slackening of the pressure in the money market, but the demand for cash will be met by notes in lieu of a drain on the specie reserve. The almost complete rigidity of note issue in the United States explains in large part the former violent fluctuations in the New York money market. § 207] The Money Rate 537 Rigidity of note issue is, however, not the sole explanation of the former startling conditions in Wall Street. A matter of at least equal importance is the nature of the commercial paper, which retarded the replenishment of the reserve. If a man wants to borrow money in Europe, he will sell to a bank his own three months' bill drawn on some private banker willing to extend him credit. Or if he is a merchant who has sold goods, he will draw on his customer, get his banker to indorse the bill or draft, and sell it to the bank in the same way. The bank which purchases this banker's accept- ance or indorsed paper can always dispose of it to some one else, usually by having it re-discounted by one of the large central banks. In England it is the bill-brokers and discount com- panies which do the original discounting, and in turn secure advances from the bank of England. The result, however, is the same. The large banks keep most of their funds invested in these bills of exchange, and to a large extent in foreign bills. If the bills were simply ordinary merchants' bills, they would not serve for international purposes, the drawer being generally unknown beyond local circles. But with the acceptance of the bank, which is known everywhere, the bill becomes a thoroughly suitable means of investment and exchange. If "money tightens " in one country, the central banks in the other countries increase their investments in bills of exchange of the country where the rate goes up, and by purchasing this short-time paper tend to prevent the export of specie, sending bills of exchange instead. In this way not only do the banks hold paper which can be almost immediately turned into cash, thus replenishing their reserves, but the credit of the whole community, as repre- sented by the ordinary commercial bills and notes, is added to the credit of the bank as a means of international payments. In the United States, on the other hand, when a man bor- rowed money from a bank, the latter kept the note until it fell due. It became a dead or illiquid asset. There was no re- discounting of domestic paper, only the foreign-exchange bills 538 Credit and Currency [§ 208 being endorsed and resold. These long bills or "finance bills," however, drawn by American bankers on their foreign correspondents in foreign money, were necessarily limited in amount by the extent of the bankers' credit. Since the Amer- ican banks could look upon their discounts of ordinary commer- cial paper only as illiquid assets, and could invest their funds in the bill market, as in Europe, they lent on call in the stock market, which thus attracted the surplus funds of the entire country. Moreover, since the sum invested in call loans was very small compared with the total amount of money bor- rowed throughout the country, it follows that a sudden change in the supply of loanable funds was far more acutely felt in this small field than would be the case if spread over the larger area. In Europe, if money tightens, it takes the form of a slight rise in the rate of discount on practically all the com- mercial paper of the country; in America, if money tightened, the rate rose violently on call loans. The situation was further aggravated in the United States by the Independent Treasury system. The revenues were allowed to accumulate in the Treasury until the semi-annual payments of interest on the debt arrived, thus taking out of the money market the funds which might other- wise in the banks have served as the basis of large credit trans- actions, and then just as abruptly throwing the funds into the market. Not only had this practice helped to create a fre- quent stringency by locking up badly needed funds, but it had become customary in time of urgency to appeal to the gov- ernment to "ease the market" by special measures of relief, putting on the Secretary of the Treasury a burden of a most onerous and responsible character. 208. The Federal Reserve Act of 1913 A comprehensive scheme of banking reform in the United States would therefore include at least four points: modification of the independent treasury system; a reform in discount meth- § 2o8] Federal Reserve Act of 191 3 530 ods; a greater flexibility of note issues; and above all, as we pointed out in the last chapter, a centrahzation of reserves. An attempt to remedy some of the evils was made by the Aldrich-Vreeland law of 1908, which provided for an emergency currency, the use of notes on commercial assets, the formation of national currency associations and the creation of a com- mission. The machinery, however, was cumbrous, and the law was of a temporary character — ^ to expire in 191 5. No use in fact was made of it, except during the war scare of 1914. The monetary commission reported in 191 1 and its fundamental recommendations, with a few not unimportant alterations, were embodied in the act of December 23, 1913. The principal features of the law are as follows: I. Centralization of reserves. The country is divided into twelve regions with a federal reserve bank in each. Every national bank must, and every state bank or trust company may, contribute to the capital of the federal reserve bank in the district; and since 1917 every member bank must keep its entire legal reserve in the federal reserve bank. Each federal reserve bank must have nine directors, six elected to represent the member banks and the business interests, respectively, and three appointed by the Federal Reserve Board. The federal reserve banks, which may open branches anywhere within the district, act as agents of the United States government and may keep the government funds. Their business is limited to trans- actions with member banks and with the government, except that they may deal in commercial biUs, bills of exchange, gold coin and buUion, government bonds and notes. They must keep a reserve of 35% against deposits. One-half of their earn- ings over 6% goes into a surplus fund, until it amounts to at least 40% of the capital stock, and the other half goes to the government. A Federal Reserve Board of seven members, appointed by the President, exercises a general supervision over the reserve banks. It designates the chairman and deputy chairman of the board of 540 Credit and Currency [§ 208 directors of each bank, it may suspend or remove any officer or director, it may suspend any reserve requirements of the reserve banks, it may readjust the federal reserve districts, it may fix the rate of discount to be charged, it may require any federal reserve bank to discount for another, and finally what is most important, it may determine the character of paper elegible to discount. A Federal Advisory Council of twelve members, elected by the reserve banks, is invested with advisory functions, but the real power lies in the Federal Reserve Board. While the monetary commission bill provided for out-and-out centraUzation, the law of 1913 provides nominally for a federalization of banking reserves, but secures to all intents and purposes the essentials of an actual centralization of reserves. 2. The discount of commercial paper. Every member bank is authorized to accept (i) ninety day domestic paper arising out of commercial transactions not including paper issued for carry- ing securities (except those of the U. S.), but including six months paper issued for agricultural purposes or based on live stock; (2) 6 months foreign commercial biUs; and (3) 3 months paper drawn abroad in order to furnish dollar exchange. All such paper when endorsed by a member bank may be rediscounted by a federal reserve bank which since 191 6 may also loan on short time (up to 15 days) collateral notes. Banks not in a central reserve city may loan up to 5 years on neighboring farm lands up to 50% of their value. The federal reserve bank may also carry on so-called "open market" operations, that is, deal directly in paper eligible for rediscount even without the endorsement of a member bank. Finally, every federal reserve bank may receive and transfer on demand funds and balances of member banks or other reserve banks, the Federal Reserve Board having the power to require every federal reserve bank to exercise the functions of a clearing house for its member banks. Thus, by one blow, as it were, the character of our credit facilities was completely changed. J. Note issue. The law transfers the right of note issue by § 2o8] Federal Reserve Act of 191 3 541 gradual steps to the federal reserve banks alone. The new federal reserve notes, instead of being secured by bonds, are to be issued on the basis of discounted bills and may be put out to any amount, with the sole limitation that a 40 per cent reserve is to be kept in gold. This limit may be suspended by the Federal Reserve Board, but in that case a graduated tax of i per cent is to be imposed; and if the reserve falls below 32 per cent a farther tax of i| per cent is to be imposed for every 2^ per cent deficiency of reserve below 32^ per cent. This tax, moreover, is to be added to the rate of discount as fixed by the Federal Reserve Board. In order, however, to prevent the sudden throwing upon the market of the 2 per cent bonds which have hitherto served as a basis of the national bank circulation, it is provided that not more than $25,000,000 a year of the 2's shall be turned over by the national banks to the reserve banks. The federal reserve bank may also issue its own bank notes on the same bond security as the old national bank notes; but if it prefers not to do so, it may exchange one-half of these 2's for one year gold notes and the other half for 3's, wdthout the circulation privilege. The obligation to purchase the one-year gold notes at the discretion of the Secretary of the Treasury may continue for thirty years, so that it will be at least a quarter of a century before the present national banknotes entirely disappear. In ]\Iay, 191Q, there were in circulation 2,521 millions of federal reserve notes and 152 millions of federal reserve bank- notes, while the national banknotes had fallen to 653 millions. The advantages of the new system may be summarized as follows: I. Mobilization of credit. The substitution of bankable commercial paper in the place of bonds not only insures a flex- ibility of credit, which was hitherto lacking, but greatly en- larges the field of banking operations. The banks, instead of being restricted to call loans on the stock exchange and to investment in illiquid assets which repose quietly in their portfolios, now enjoy an opportunity of extending their opera- 542 Credit and Currency [§ 208 tions to a far wider field of business activity, and of immediately converting the commercial paper into cash, if need be. Instead of remaining immobile, the assets of the American banks at once become flexible and mobilized. 2. Insurance against disaster. Under the system hitherto, at the least sign of trouble, each banker sat tight on his own little reserve and became suspicious of his neighbor. Under the new system, he has a great part of the reserve of all the member banks to fall back upon. Instead of jealousy, there is co-operation; instead of fear, there is confidence. Just as the individual householder uses the fire insurance company against the risk of conflagration, so the individual bank uses the federal reserve banks as its insurance against catastrophe. Without the new system it would have been almost impossible to finance the Great War. 3. Democratization of facilities. The small bank was hitherto dependent upon its own little capital and insignificant credit. Under the new system its assets are no longer locked up, but it can at once rediscount its paper at the federal reserve bank and it is thus able largely to increase its facilities. Moreover checks are now collected without discount and transfers of money are made without actual shipment. 4. Internationalization of business risks. Until 1914, if the credit situation differed in this country from that abroad, we were virtuaUy prevented from taking prompt advantage of the difference. In the crisis of 1907, for instance, when the replenish- ment of our gold supply became necessary, it was impossible to secure a large remittance from France, although in a similar emergency a decade previous England was in this way able to ward off disaster. Under the new system, the United States has entered the concert of nations and has begun to take advan- tage of reciprocal facilities through its power to deal in foreign commercial bills and to conclude loans of gold. Just as the federal reserve banks, in their national transactions, have decreased the risks of local banks, so in their international § 209] Credit and Crises 543 transactions they have diminished the risks of all banks. In the Great War this aid has been invaluable. 5. Participation in world-wide profits. Hitherto, when an American had commercial dealings with South America or Asia, he paid by bills drawn, not on New York, but on London. London has been for over a century the world's financial center, and the banking commissions of the world's business amount to many millions a year. With the prodigious foreign trade of the United States there is no reason why a substantial ,share of these millions should not come to this country. Stimu- lated by the Great War, so-called dollar exchange has been de- veloping fast since 191 5. The American banker of the future will have a wider horizon and a broader opportunity, and if he avails himself of his opportunity there is no reason why the world's financial center should not ultimately be shifted from England to the United States, just as at the close of the eigh- teenth century it was shifted from Holland to England. 209. Credit and Crises Crises are sometimes classified as financial and commercial or industrial crises. In point of fact, since the bank is the nerve center of modern business, all crises are financial crises. What is meant by the alleged distinction is that in some cases attention is directed to the immediate occasion of the crisis in the shape of bad banking or bad currency or stock- exchange speculation, while in other cases regard is paid to the underlying cause in the general conditions of busi- ness. Crises are essentially modern phenomena. They are a product of the new system of business enterprise, built upon capital and credit. Sporadic instances are found in earlier centuries, but it is only since the domination of the factory system that crises have become a regular occurrence. During the nineteenth century a certain rough periodicity may be ob- served in the world crises transmitted from country to country. 544 Credit and Currency [§ 209 The important ones were those of 1825, 1837, 1847, 1857, 1873, 1884, 1890, 1893, 1900, 1907 and the war panic of 1914. The surface facts of the phenomenon are famihar. There is a rhythmic movement in all modern business. At a certain period "times are good," prices rise, all manner of new enter- prises are launched, bank facilities are extended, and prosperity is found on every side. Then in the height of this period of exaltation, something happens to disturb confidence. A chance occurrence, a mere rumor, may suffice. Some bank or financial institution considers its credit too heavily engaged or suspects that the collateral deposited with it for loans is inadequate. Just at the flood of the tide, when new demands are constantly being made, it finds itself unable or unwilling to respond. Its refusal intensifies the feeling of insecurity, and with the inability of some important concern to meet its obligations a failure occurs. At once every other institution takes in sail, and en- deavors to realize on its collateral; that is, creditors demand payment and debtors, in their frantic effort to pay, sacrifice securities, often in vain. Prices fall with a thud, failure suc- ceeds failure, and the panic is complete, carrying in its wake loss and suffering to every part of the economic community. Then follows a period of more or less long continued depres- sion, low prices and "hard times" with chronic unemploy- ment and low wages, until gradually the wave of prosperity again sets in, and the process repeats itself. According to the point of view from which the subject is approached, the explanation usually given is that of overpro- duction or underconsumption. The theory of overproduction states, not that there is a general glut of commodities — for that would imply that there can be too much wealth, which is absurd — but that there are more goods than can be sold at a profitable price. Whether this overproduction starts with particular commodities and becomes relative over- production or extends to all commodities and becomes general overproduction is immaterial. The remedy for crises then § 209] Credit and Crises 545 would be to produce less, either of certain things or of all things. On the other hand, the theory of underconsumption emphasizes the inability of the consumer to pay enough to keep the industries going. Were the consumer to save less and to spend more, crises might be averted. The true explanation of crises is somewhat dififerent. The whole problem is one of capitalization. All investment values are, as we know (§ 117), the result of the capitaHzation of esti- mated earnings. The factory system is one of mass production for the anticipated market, not of production to order for a given market. Even if it be said that modern steel mills only fill definite orders, it is none the less true that immense plants are constantly being erected in the expectation that orders will be received in the future. A period of good times may be initiated by large orders for some particular business, — due, for instance, to a new navy programme, to internal improvements, to a war or to any other large demand. Prices rise in that business, pro- duction increases, the movement spreads to other lines, and the new enterprises are financed by loans from the banks or by the sale of securities on a capitalization proportionate to the antici- pated earnings. The psychological character of these credit transactions is such, as we have seen, that the capitalization will inevitably be put too high. The hoped-for earnings do not come in an amount sufficient to justify the investment. It becomes necessary to reduce the capitalization to its true market value on the basis of actual earnings. This process of readjustment of overcapitalized values necessarily involves loss; but readjustment there must be. If the realization of its neces- sity is sudden, we have a crisis or panic; if it can be brought about gradually, we have a process of liquidation. In any event there follows a period of depression, which must continue until the readjustment of capitalization to actual earning capacity has become complete. Crises therefore are not necessarily a result of increased tech- nical production. The important point is not production, but 35 54^ Credit and Currency [§ 209 capitalization. The crisis of 1837 was due to the overcapi- talization of land values; the liquidation of 1903 to the over- capitalization of trust values. In neither case was there any- increased production. Overproduction may indeed accompany overcapitalization, but the emphasis is to be put on the discrep- ancy between the investment and the returns. In this sense all crises and depressions are credit phenomena. Inasmuch as modern business enterprise is based on credit, it is obvious that even an ideal banking and currency system cannot in itself avert crises. It may mitigate the evils by pro- viding great elasticity and preventing the shock of a sudden panic; but the ultimate readjustment must come. More, how- ever, is to be hoped for from the newer tendencies in the organi- zation of economic life. With the growth of the business unit and the integration of modern industry it is possible to dis- cern the beginnings of a more equable and better regulated method of enterprise and capital investment. With every decade panics are visibly becoming less severe. Like some of the other economic evils of the nineteenth century discussed in the pre- vious book, financial crises seem to be peculiar to the infancy of the factory system. Here, as elsewhere, the task of the future consists in retaining the advantages of a healthy competition while doing away with its abuses. Rhythmic oscillations in prosperity and adversity will no doubt continue to occur in busi- ness life as elsewhere. But with a better grasp of the principles of credit, with an increasing responsibility of promoters to in- vestors, with a more stable demand on the part of the wage- earning consumers, and above all with the more efficient regulations of production through the newer forms of business enterprise we may reasonably look forward to a fairly successful adjustment of capitalization to real earning capacity and to a more complete adaptation of the present to the future. When this stage is reached, credit will be shorn of its lurking dangers and will stand forth in its true light as an unmixed benefit to solid economic progress. § 209§] The Federal Farm Loan Act 546* 209^. The Federal Farm Loan Act The discussion of credit would not be complete without a word as to agricultural credit. The granting of better facilities for rural credit has of recent years engaged the earnest attention of the American thinkers and statesmen. The movement has culminated in the passage, ini9i6, of the Federal Farm Loan Act. The law provides for an organization patterned on the federal reserve system. The country is divided into twelve districts, each with a Farm Land Bank and under the general supervision of the Federal Farm Loan Board at Washington. The Farm Loan Board is composed of five members with the Farm Loan Commissioner at the head and represented in each district by a Registrar. Any ten or more persons who own land and desire to borrow on the land may form a National Farm Loan Association, mth a board of at least five directors and a loan committee of three members. The capital stock of these associations is in shares of $5 each, and every applicant for a loan must take stock to the extent of five per cent of the amount of the loan, the stock to be retired when the loan is paid off. The applications for a loan are forwarded to the Farm Land Bank of the district, or to its branches which may be approved by the Farm Loan Board. The Land Bank must then have the land appraised by its own ofiicials and may make a loan not to exceed fifty per cent of the value of the land mortgaged and twenty per cent of the value of the insured improvements. No loan can be less than $ioo or more than $10,000. The Farm Loan Associations are required to endorse and to become responsible for, the payment of the mortgages. The rate of interest on loans cannot exceed six per cent, exclusive of pay- ments for the amortization of the loan, which must be efi'ected in not less than five, or more than forty, years. The capital of the Farm Land Banks is expected to be owned by the National Farm Loan Associations. The stock may, how- 54^** The Federal Farm Loan Act [§ 209I ever, also be subscribed by the public. If the stock is not sub- scribed by either the association or the general pubHc it is to be paid in by the national government. No stock shall have any voting rights except shares owned by the government and by the Farm Loan Associations. Stock owned by the government, however, is to receive no dividends. The Land Banks may apply to the Farm Loan Board for per- mission to issue bonds secured by these mortgages. The rate of interest on these farm loan bonds cannot exceed five per cent. Every Land Bank is primarily responsible for the bonds issued by it; but in case of default the issues of each bank are guaranteed by all the other banks. The Land Banks and the Farm Loan Associations are exempt from all taxation except upon their real estate. Provision is also made for Joint Stock Land Banks, the capital of which must be provided by private parties. They also may issue bonds, but they are not subject to the conditions placed upon the Federal Land Banks as to the purposes for which the money must be used, as to amortization or as to occupation of the land by the owner. The banks of both kinds may be designated as depositaries of pubhc money and as financial agents of the government. In other words they may be employed to sell government bonds. The deposits that may be made by the government for the tem- porary use of the Land Banks are limited to six million dollars. The net effect of the whole scheme is to afford farm loans at a moderate rate. All profits accrue to the borrowers and thus serve to reduce the rate of interest. Moreover, the expenses of the Farm Loan Board are paid by the government and not, as in the case of the federal reserve system, by the member banks. This, together with the exemption from taxation, operates still further to reduce the charge for farm loans. The justification for these favors is naturally to be found in the supreme impor- tance of a prosperous population of small farmers to the American community. The Farm Loan Act thus furnishes a unique ex- ample of practical co-operation and of government aid. CHAPTER XXXII INTERNATIONAL TRADE 210. References J. E. Cairnes, Principles (1874), part 3; C. F. Bastable, Theory of In- ternational Trade (1903); G. Clare, The ABC of the Foreign Exchanges (1893); A. W. IMargraff, International Exchange (1903); W. F. Spalding, Foreign Exchange and Foreign Bills (191 5); H. G. Brown, International Trade and Foreign Exchange (1915) ; G. J. Goschen, Theory of the Foreign Exchanges (1866); F. Y. Edgeworth, Theory of International Values (Econ. Jour., IV, 1893); A. C. Pigou, Protective and Preferential Import Duties (1906); R. Giffen, The Use of Export and Import Statistics, in his Inquiries (1904); A. C. Whitaker, Foreign Exchange (1919); F. W Taussig, Tariff History of the United States (1914), Soine Aspects of the Tariff Question (1915) and Free Trade, the Tariff and Reciprocity (1910); E. Stanwood, American Tariff Controversies in the Nineteenth Century (1903); W. J. Ashley, Tariff Problem (1904); L. Porritt, Sixty Years of Protection in Canada (1908); H. Withers, Money Changing (1913); C. K. Hobson, Tlie Export of Capital (1914). 211. Basis of International Trade It was long supposed that the principles of international trade dififered from those of internal commerce, in that the former was subject to the law of comparative cost and de- pendent on the existence of non-competing industrial groups. We now know that the law of comparative costs or of recipro- cal demand is the explanation of all exchange (§ 95), and that non-competing industrial groups are found in internal in- dustry as well (§ 177). Trade takes place between nations as between individuals, because of relative, not of absolute, advantages. One country A may produce a certain class of commodities at a lower cost than B and nevertheless find it profitable to import them, because A can produce other com- modities still more cheaply than B. It will be advantageous for A to export the second class of commodities and to receive 547 548 International Trade [§ 211 pay for them by importing the iirst. The entire body of eco- nomic doctrine elaborated by Ricardo, Mill and Cairnes, tend- ing to show that international trade rests on the equation of reciprocal demand and comparative cost, has no distinctive application to international exchange and therefore calls for no special discussion here. In only one respect, albeit a most important one, does ex- change between nations differ from that between individuals. In both cases indeed a surplus enjoyment is sought. The individual endeavors to obtain this in the form of money, because the more money he has the richer he is. The nation, however, cannot follow this course. The mere accumulation of money is bootless. A nation can do only one of three things with its funds, (i) The money may be hoarded. In mod- ern times, however, this is not done, because pubhc credit is a cheap substitute for government hoards; and because after a relatively insignificant point has been reached, a reserve of coin, whether for currency or for banking purposes, becomes unnecessary or even wasteful. (2) The money may be spent at once. If expended abroad, the purchases must come in as imports; if spent at home, it diverts to profitable home con- sumption what would otherwise have been available for exports. In the one case imports are increased, in the other exports are lessened. (3) The money may enter general circulation. The necessary result of this is to raise the level of dom.estic prices, to check exports and to augment imports, until the money flows out again and the international level of prices is restored. It is for this reason that imports must in the long run pay for exports, and vice versa. This does not mean that at any given time imports and exports must be equal. The state of recip- rocal liabilities between one country and the outside world may be such as to lead to a permanent excess of either exports or imports. It might be supposed that an excess of imports would represent profits on the transaction. One nation A may § 2ii] Basis of Trade 549 sell its goods abroad at an advantage, and may elect to bring in its gains in the shape of additional goods, which would then constitute a surplus of imports. Ordinarily, however, the other nation B will do the same, so that on the second transaction there will be a surplus of exports from A to B. Assuming the gains to be equal, these will balance each other. Thus, while both parties secure a surplus of satisfaction, there will be no excess of exports or imports. On the other hand, it must be remembered that goods are ex- changed not only for goods, but for services. If a country per- forms valuable services for others, they must be remunerated, and the payment will ultimately assume the form of extra im- ports. England, for example, at the present time does at least three things for the rest of the world, (i) The British merchant marine is so immense that a large amount of trade between other countries is carried on in British bottoms. The freights paid by foreigners go to swell British imports. (2) The British system of marine insurance is so much more admirably organ- ized than that of other countries, that a great part of the ships and cargoes of other countries are insured by British firms. The profits of this business also increase the volume of im- ports. (3) International debts, as we shall see in § 212, are liquidated largely by the purchase of bills of exchange on London. The commissions to the London bankers again reach England in the form of imports. Freights, insurance profits, and commissions together amount to a few hundred millions of dollars a year. Finally, it must not be forgotten that in modern times international transactions take place in securities as well as commodities. If a nation has invested heavily in foreign bonds, government or industrial, the interest on the invested capital will accrue in the shape of imports. Another portion of the vast surplus of British imports is as- cribable to this fact. The so-called favorable balance of trade is for several reasons a delusion. It is difiicult to state with accuracy the exact rela- S50 International Trade [§ 211 tion between exports and imports: for (a) where there is a long frontier or seacoast, it is weUnigh impossible to include everything; (b) even where everything is included, there is no assurance against fraud or undervaluation; and (c) there is no uniformity as to whether values should be calculated at the place of export or of import, that is, whether cost of transpor- tation should be included. The statistics themselves are there- fore of dubious value. Even if the balance could be accurately ascertained, however, it would not tell us anything of impor- tance. Some prosperous countries, like England, Germany and France, habitually import far more than they export; some poor countries, like Peru, Siam and San Domingo, habitu- ally export more than they import. The following table will show the relation of exports to imports in the principal countries of the world: THE RELATION OF EXPORTS TO IMPORTS IN THE PRINCIPAL COUNTRIES Excess of Year Imports Exports Exports ("t") or Imports ( — ) Dollars. DoUars. Dollars. United Kingdom 1909 3,040,127,000 1,840,415,000 —1,199,712,000 Germany . . . 1909 2,027,790,000 1,568,954,000 — 458,836,000 Netherlands 1909 1,261,235,000 986,810,000 —274,425,000 Italy . . . . 1908-9 600,560,000 360,310,000 — 240,250,000 Belgium . . . 1909 7'4.933>ooo 542,277,000 — 172,656,000 France , . . 1909 1,205,500,000 1,103,584,000 — 101,916,000 Switzerland . • 1909 309,213,000 211,849,000 — 97,364,000 United States . 1909-10 1,647,554,000 1,774,824,000 -f- 1 27, 270,000 Brazil .... 1909 179,690,000 308,332,000 4-128,642,000 British India . I 90S-9 417,799,000 486,079,000 4-68,280,000 Russia . . . 1908 470,020,000 514,099,000 -1-44,079,000 Egypt. . . . 1909 109,885,000 128,895.000 4-19,010,000 Siam .... 1909-10 25,663,000 37,705,000 4-12,042,000 Haiti . . . . 190S-9 5,881,000 1 1 ,008,000 4-5,127,000 Guatemala . . 1909 5,251,000 10,079,000 -h4,828,ooo EXPORTS AND IMPORTS OF MERCHANDISE, UNITED STATES Years ending June 30 1872 1873 1874 1875 1876 1877 1878 1879 1880 188I 1882 1883 1884 1885 1886 1887 1888 1889 1890 189I 1892 1893 1894 1895 1896 1897 1898 1899 1900 I9OI 1902 1903 1904 1905 1906 1907 1908 1909 I9IO I9II I912 I913 I914 I915 I916 I917 I918 1919 1920 Total Exports $444,177,586 522,479,922 586,283,040 513,442,711 540,384,671 602,475,220 694,865,766 710,439,441 835,638,658 902,377,346 750,542,257 823,839,402 740,513,609 742,189,755 879,524,830 716,183,211 695,954,507 742,401,37:, 857,828,684 884,480,810 1,030,278,148 847,665,194 892,140,572 807,538,165 882,606,938 1,050,993,556 1,231,482,330 1,227,023,302 1,394,483,082 1,487,755,557 1,381,719,407 1,420,141,679 1,460,868,185 1,518,561,666 1,743,864,500 1,880,851,078 1,860,773,346 1,663,011,104 1,744,984,720 2,049,320,199 2,204,322,409 2,465,884,149 2,364,579,148 2,768,589,340 4,333,482,885 6,290,048,394 5,917,714,371 7,262,282,686 8,111,039,733 Imports $626,595,077 642,136,210 567,406,342 533,005,436 460,741,190 451,323,136 437,051,532 445,777,775 667,954,746 642,664,628 724,639,574 723,180,914 667,697,693 577,527,329 635,436,13^ 692,319,768 723,957,114 745,131,652 789,310,409 844,916,196 827,402,462 866,400,922 654,994,622 731,969,965 779,724,674 764,730,412 616,049,654 697,148,489 849,941,184 822,673,016 903,320,948 1,025,719,257 991,090,978 1,117,513,071 1,226,562,446 1,434,421,425 1,194,341,192 1,311,920,224 1,557,849,988 1,527,226,105 1,653,264,934 1,813,008,234 1,893,925,657 1,674,169,740 2,197,883,510 2,659,355,185 2,945,655,403 3,595,720,018 5,238,621,668 Excess of Ex- ports over Imports ^18,876,698 79,643,481 151,152,084 257,814,234 264,661,666 167,683,912 259,712,718 25,902,683 100,658,488 72,815,916 164,662,426 244,088,694 23,863,443 68,518,275 39,564,614 202,875,686 237,145,950 75,568,200 102,882,264 286,263,144 615,432,676 529,874,813 544,541,898 665,082,541 478,398,413 394,422,442 469,777,267 401,048,595 517,302,054 446,429,653 666,431,554 351,090,880 187,164,732 522,094,094 551,057,475 652,875,915 470,653,491 1,094,419,600 2,135,599,375 3,630,693,209 2,974,055,928 4,136,502,618 2,872,418,065 § -^II] Basis of Trade SS' The table and the chart facing pages 550 and 551 will show the conditions in the United States for the past few decades. Finally, the following table will show the proportion of United States exports and imports to and from the various parts of the world exhibiting the changes produced by the Great War: PERCENTAGE OF IMPORTS AND EXPORTS FROM AND TO GRAND DIVISIONS.i Europe : Imports. . Exports. . . North America Imports. . Exports. . South America: Imports. . Exports. . Asia : Imports. . E.xports. . Oceania: Imports. . ' E.xports. . Africa: Imports. . Exports. . Year ending June 30 1894 45-05 78.56 2549 13.42 15-29 3-72 10.10 2.34 3.28 1-34 -53 •55 1900 SI. 84 74.60 15-30 13-45 11.02 2.79 16.45 4.66 4-07 3-II 1.32 1-39 1910 51-76 65.10 19.69 22.09 12.59 5-34 12.45 3-49 2.38 2.92 I-I3 1.06 1914 47.29 62.86 22.57 22.36 11.76 5-27 15-15 4.80 2.22 3-53 i.oi 1. 18 1917 22.96 68.75 28.80 18.50 20.38 4.12 23-14 6.05 2.46 1.74 2.26 An excess of imports may represent the incurring of HabiH- ties to other countries which must be met hereafter, or it may, on the contrary, represent a Hquidation of past or present in- debtedness by other countries. In the same way an excess of exports may mean that one country is making others its debt- ors or, on .the contrary, it may be a measure of the amount of tribute which that country is paying to others for past or pres- ' Report on the Foreign Commerce and Navigation of the U. S., 1904, Vol. II, p. 1030, continued in the Statistical Abstract. 552 International Trade [§212 ent favors in the shape of capital invested or services rendered. In itself the so-called balance of trade is irrelevant. The error consists in confounding a surplus of exports over imports with a surplus of production over consumption. A nation, like an individual, ought indeed to produce more than it consumes, in the sense that the surplus product or surplus energy can be converted into durable capital and thus contin- ually augment the command of man over nature. But the surplus of production over consumption is a very different thing from a surplus of exports over imports. 212. Rate of International Exchange International like domestic transactions are settled in terms of money: the machinery for effecting payments differ in magnitude, not in principle. A merchant A in France, let us say, has imported coffee from M in Brazil, while B in France has exported the same value of silks to N in Brazil. Instead of A sending money to M, and N sending it back to B, it is far simpler for A and B to settle with each other in Paris, and M and N in Rio de Janeiro. B accordingly writes an order, known as a bill of exchange, to N directing him to pay M, or, in technical language, B draws on N; A buys this bill from B and remits (l. e. sends) it to M, who presents it to N and gets it cashed. Thus no money is exported and only one bill is drawn. Inasmuch as it is not always easy for the M's and N's to find each other in Rio de Janeiro, and the A's and B's in Paris, the business of issuing and purchasing such bills has become the function of the banker and the bill broker. More- over, since these bills can be transferred by indorsement, they are available for payment not only between France and Brazil, but between any other countries that have dealings with either one. This explains the so-called " three-cornered "' exchange, where country A imports from B and pays by drafts on C, which has imported from A. Finally, since it is necessary to make out only one transferable order, bills are generally §212] Rate of Exchange 553 drawn on that country which possesses the larger financial centre. In fact, the great mass of bills, especially in the case of exchanges between less important countries, are to-day drawn on London in pounds sterling. This is due chiefly to the im- mense volume of British trade, to the stability of the British currency, and to the fact that the seller of a bill on London can almost invariably count upon finding a buyer on advanta- geous terms. Where the reciprocal liabilities of two countries are precisely equal, that is, where the payments to be made exactly balance each other, exchange is said to be at par. This means that the amount of bullion paid for a bill in one country is the exact equivalent of the value of the bullion received in the other coun- try. The fine gold in a pound sterling, for instance, is equal to the fine gold in $4.86|; hence the par of exchange between England and the United States is $4.86|. It is obvious that deviations from the par are due to changes in the condition of reciprocal liabilities, which, owing to the continual oscilla- tions of the market, are never for any length of time precisely equal. On some days or seasons there will be a balance in one direction and the demand from would-be purchasers of bills exceeds the supply. At other times the supply of bills offered for sale will exceed the demand. According to these fluctuations bills become dear or cheap, and exchange will be above or below par. The meaning of the phrase "a rise or fall in the rate of exchange" depends on whether, in quot- ing the par, the base line is the domestic or the foreign unit. Thus in London the par of exchange with some countries is quoted in pence; with others in the currency of those coun- tries, like francs or marks. In the United States the par is generally quoted in dollars, so that when exchange is said to rise it means that purchasers of bills must pay more dollars because there is a greater demand for remittances to settle obligations abroad. The limits within which the rate of ex- change can deviate in either direction from par are called the 554 International Trade [§ 212 "gold points," that is, the points beyond which it becomes profit- able to export or to import gold in settlement of the balance. It is only in exceptional instances, as in the case of a very stringent money market when dealers are ready to sell bills at a sacrifice or when there is a short-lived difficulty in a gold- producing country converting its bullion into coin, or in a war crisis like that of 1914, that it is possible for exchange to fall below the specie point, or to rise above it. When the exchanges are not calculated on a gold basis, the deviations are such that we cannot properly speak of a par at all. If a gold standard country trades with a silver standard country, the par itself fluctuates with the daily change in the gold price of silver. The same is true of a depreciated paper currency, where a new limit to the rise in the price of bills is fixed by the premium on gold. In the United States, foreign bills are known as documentary and finance bills. Documentary bills are those drawn against the export of commodities, payable at sight or on the expira- tion of three, ten, thirty, sixty or ninety days. They have attached to them as security the bill of lading, insurance cer- tificates, shippers' invoices, and occasionally other documents like consular certificates, certificates of origin or government inspection certificates. Finance bills are those drawn by American bankers on their European correspondents. They are often covered by collateral security in the shape of stocks or bonds listed on the New York stock exchange. The ordi- nary causes of an over-supply of "foreign bills" are: (i) large exports of cotton, wheat and corn, especially from August to November of each year; (2) heavy purchases of American securities by European houses; (3) high interest rates in New York. In the latter case American bankers find it profitable to issue sixty or ninety day bills on London and "sell sterling," loaning the proceeds on Wall Street. If the interest rate in New York is six per cent and the discount rate in London three per cent, there will be a profit over and above the com- §212] Rate of Exchange ^^^ missions of the drawees and the British stamp taxes. In order to eliminate the risk of having to pay a higher price for the sterling draft required when the loan matures, they buy at once a foreign exchange "future" or demand draft for future delivery. These foreign exchange futures" perform the same function as the wheat and cotton futures described in § 154- Since the rate of exchange depends on reciprocal liabilities, anything that affects temporary indebtedness causes the rate to fluctuate. If we were to strike a balance sheet in the foreign trade of any country, we should have to put on the credit side not only the exports of commodities, but such items as freights, commissions, brokerages, the excess of insurance premiums over payments, loans from a foreign country, interest on loans to a foreign country, profits on capital invested abroad, the amount drawn on letters of credit belonging to travellers from abroad, the sums brought in by immigrants, sales of securities, and the gains made on arbitrage operations. All these items act on the rate of exchange precisely as do exports; that is, they tend to diminish the demand for bills or to reduce the rate of exchange, and they require additional imports to restore the equilibrium. So on the debit side we must put not only the imports, but the purchases of securities, the loans to a foreign country, the interest on loans from abroad, letters of credit issued to travellers going abroad and the like. These tend to increase the demand for bills and to raise the rate. Gold will therefore be exported or imported only when it is necessary to restore the equation of international indebted- ness. This equation or equilibrium, however, as has just been explained, is not between exports and imports but between credits and liabilities. The equilibrium is attained when the credits balance the liabilities, and may be perfectly compatible with an excess of either imports or exports. Unless there are special causes arising out of some defects in the currency system itself, as, for instance, during the period of the silver ^^6 International Trade [§ 213 agitation in the United States, especially from 1894 to 1896 gold will be exported when the liabilities for a time exceed the credits, but not necessarily when the imports exceed the exports. The permanent international distribution of the- precious metals is therefore dependent on the conditions of international trade in the broadest sense. Thus we reach from another point of view the conclusion reached above (chap, xxviii), that no country on a sound currency basis can permanently have more or less money than it needs. 213. Growth of Free Trade By free trade is mean nowadays the freedom of international trade from interference by government restriction or prohibi- tion. Originally, however, the demand for freedom of trade applied as well to internal commerce. In classic Rome the portoria comprised all classes of taxes on transportation. In mediaeval Europe town was shut off against town and province against province by burdensome tolls and interdictions, and at every point on the land and water highways large sums were exacted, just as strangers who to-day traverse the region of some mid-African potentate are required to pay exorbitant passage fees. The origin of interference with trade is thus to be sought in the double reason, — the primeval assump- tion, of which there are still so many survivals, that strangers are synonymous with enemies, and the opportunity of securing a simple and abundant revenue. With the growing recognition of the mutual advantages of an unimpeded traffic, and with the discovery of other equally good sources of income, these relics of a more primitive economic life gradually disappeared. In the United States the results of the commercial jealousy among the states that had just won their independence were so disas- trous that the new constitution of 1789 made it impossible for any commonwealth to interfere with interstate commerce. Freedom of internal trade is now assured in the whole civilized world, subject only to necessary police regulations. I §213] Growth of Free Trade ^^y Even in the sense of international commerce, however, free trade signifies at present something quite different from what it denoted in former centuries. In the middle ages the liberty of exporting commodities was often restricted to especially se- lected individuals or companies or limited to certain localities, as in the case of the Staple ^ towns in England and her conti- nental possessions. The cry for free trade which arose in seventeenth-century England involved the demand for free- dom of export in the sense of freedom from monopolist com- panies or favored towns (§ 50). It was advanced by the very individuals who were clamoring for protection through high duties on imports. Free trade in the modern sense of free imports was a later conception. The mediaeval impediments to international trade apart from those just mentioned consisted of taxes and prohibitions. In the opening centuries of the middle ages they were applied primarily to exports, and even after "free trade" in the earlier sense had been attained the customs^ duties of the European countries still consisted to a large extent of taxes on exports. ilt was free trade because the duties applied to all individuals |alike, and because the goods might be shipped anywhere after ^ The word staple is derived from the German stapebi, ' to heap up," and was applied to certain commodities which were stored in large quan- tities in the Steel-yard {i.e. the Staple yard, " Stapelhof ") which the I flansa towns maintained in London. The list of staple articles which at first comprised chiefly wool, woolfells, tin, and leather, was gradually increased until the number of staple articles at present is considerable. 1^ The term " customs tariff " has a bizarre origin. The English kings were forced to rely for their revenue, apart from the crown lands, to a very large extent on the export and import duties. These became (ithe customary revenue, until finally Parliament granted various rates known as the Great Customs and the Little Customs. The second part af the modern term was formerly said to be derived from the town of Farifa on the Mediterranean near the Straits of Gibraltar, where the Barbary pirates held the straits and exacted a graduated scale of pas- sage money from all vessels. More recent etymologists, however, now ijtrace it to the Arabic " ta'rif," or inventory. ^^S International Trade [§213 payment of the tax. A pronounced increase of import duties, however, was efTected by the rise of the Mercantile system in the seventeenth century. With the awakening of the national spirit and the desire to foster domestic industry, restrictions were imposed on the importation of any foreign commodities that might interfere with home production. The system of protection was not new, but it was now appUed on a national scale. In those countries which possessed colonies, like Por- tugal, Spain, the Low Countries, France and England, it be- came known as the Colonial system, and only later acquired the name of the Protective or Mercantile system. It consisted of several or of all of the following factors: (i) Bounties on the raising or export of raw materials in the colonies; (2) limitation to the mother countries of the export of certain enumerated commodities from the colonies; (3) prohibition of colonial production of manufactured arti- cles; (4) high protective or even prohibitory duties on im- ports of manufactures from abroad; (5) restriction of the carrying trade between the colonies and the mother country to vessels of the latter. In the case of food the policy of agri- cultural protection fluctuated between bounties on exports and high duties on imports. It was in England that the system was carried to an extreme and it was there that the reaction first came. During the perioc of the industrial revolution, which, as we know, began in Eng- land several decades earlier than elsewhere, Great Britain pur- sued a policy of the most rigorous industrial protection. Noi only were many of the import duties quite prohibitory, but the export of machinery or even of the plans of machinery wai absolutely forbidden. Compared with the British tariffs of th( end of the eighteenth and the beginning of the nineteenth cen tury, even the most complex of modern tariffs is simplicity itself When Great Britain had finally attained a virtual monopoly the chief industries and had established her supremacy on thi ocean, she naturally found it to her interest to let down the bars, §213] Growth of Free Trade 559 Not fearing foreign competition any longer at home, her great need was to secure an outlet for her surplus products. More- over, the transition from the agricultural economy to the factory system had converted her from an exporter to an importer of food. The industrial interests experienced no serious oppo- sition to the policy of relaxing the barrier of import duties on manufactures. But when they sought to secure cheaper mate- rials and food by abohshing the agricultural duties, they met with a stout resistance from the landed interests. The victory of the Anti-Corn-Law-League in the forties was the final tri- umph of the industrial over the agricultural interests. Free trade was now an accomplished fact. For a short time the free trade movement made some head- way in other European countries, although in several it was subordinate to the wider scheme of removing the remnants of mediceval shackles on internal trade and industry in general. With the revival of the national sentiment, however, first in Germany and Italy and then elsewhere, the last quarter of the nineteenth century witnessed not only a return to, but an intensification of, protection. Finally, as the younger indus- trial nations are attaining their maturity. Great Britain is com- mencing to lose her proud position of complete industrial domination, and we accordingly find since the beginning of the twentieth century in the classic home of free trade itself a sharply defined movement for a return to protection. In the United States the system of protection on a national scale began with the threatened dangers to the industries that had been called into existence by the war of 1812. From that day to this, the protective poUcy has been followed, interrupted only for the few decades during which the non-industrial South was in the political saddle. With the downfall of slavery there began an era of far more stringent protection which has con- tinued with slight oscillations to the present. The chief dates in the tariff history of the United States are as follows: 1789, first tarff with a few small protective duties, 560 International Trade [§ 214 and a general level of five per cent on the non-protected com- modities; 1816, first general protective tariff, with rates of thirty per cent and over on certain textiles; 1824, moderate increases; 1828, the "Tariff of Abominations," with higher rates and duties on raw materials; 1833-1841, the Com- promise Tariff, with gradual reductions; 1842, slight changes, but a comparatively low level; 1846, the Free Trade Tariff, with ad valorem revenue duties; 1857, ^ still lower revenue tariff; 1861, 1862 and 1864, War Tariffs, with incidental pro- tection; 1871, ten per cent reduction; 1875, restoration to the old level; 1883, slight changes; 1890, McKinley Tariff, higher rates; 1894, Wilson Tariff, considerable reductions; 1897, Dingley Tariff, higher rates; 1909, slight reductions; 19 13, now in force, much lower rates. Free trade, therefore, as a world policy is far from being assured. In fact the tendency of recent years is on the whole away from the more liberal movement. It is accordingly neces- sary to consider the arguments somewhat more closely. 214. The Argument for Protection The reasons that have been usually advanced in favor of pro- tection may be reduced to five heads. (i) The "balance of trade" argument claims that it is necessary to restrict imports in order to secure a surplus of exports and thus to increase the wealth of the country by aug- menting the stock of the precious metals brought in through this favorable balance of trade. The fallacy of this old Mer- cantilist contention is obvious, {a) In the first place, exports, as we have seen, must in the long run pay for imports, and it is impossible to increase the surplus of exports simply by diminishing imports, {b) Secondly, coin is not imported when exports exceed imports, but when credits exceed liabilities, (c) Thirdly, wealth does not consist of money, but of money's worth, and after a certain point has been reached the impor- tation of coin defeats its own object. So defective indeed §214] Argument for Protection 561 is this argument that it is no longer advanced by serious students. (2) The "home market" argument played a great role in ( the earlier political controversies of the United States and in a slightly modified shape formed the basis of Carey's defence of protection. It is founded on the belief that protection is bene- ficial to agriculture as well as to industry, because the resulting increase of population and wealth will afford a larger market for the food and raw material of the immediate neighborhood. Moreover, the existence of industrial centres will enable the farmers to devote attention to the more perishable products to which transportation to a distance would be injurious or fatal, and will thus lead to more intensive and diversified farming. Finally, the development of the home market, it is said, will obviate the costly expense of transportation to distant countries and wUl thus increase the wealth of society in general. This argument has now been weakened, partly because the revolu- tion in the methods of transportation has materially lessened the importance of distance as a factor in cost, partly because the agricultural and mineral output of the United States has so vastly transcended the limits of domestic consumption that the prosperity of large sections depends upon securing an outlet for the surplus. It is the foreign market, not the home market, which has for several decades loomed large in the imagination of the farmer. (3) More important of recent years is the "wages" argu- ment. In the United States this takes the form of ascribing to the protective system the chief efiicacy in maintaining high wages. It declares that unless the tariff rates are elevated enough at least to compensate for the difference between the domestic and the foreign standard of wages, the former will drop to the level of the latter. To this the free trader is accus- tomed to rejoin as follows: (a) The argument as advanced by the manufacturers is insincere, because they arc interested not in high wages but in large profits, (b) There must be a gross 562 International Trade [§ 214 fallacy in the argument, because it assumes precisely the oppo- site form in countries where wages are low. Germany demands protection against England and Russia against Germany, on the ground that their low-priced laborers need to be protected against their more skilful and higher class competitors. In some countries protection is demanded because wages are high; in other countries, because wages are low. If the Russian argument is good, the American argument must be bad, and vice versa. From the point of view^ of economic principle the following considerations may be advanced. In the first place, we must not forget the distinction between high wages and high cost. Other things being equal, higher wages indeed connote higher cost; but, as we learned above (§ 125), there may be an econ- omy in high wages. If high wages are an evidence of high productive efficiency and go hand in hand with improved machinery or superior natural advantages, high wages may mean low cost. It is precisely in those occupations where wages are highest in comparison with abroad, as in the produc- tion of boots, bicycles, cottons and wheat, that America is able to export successfully, showing that in these occupations at least high wages are no obstacle to cheap production. While, however, this consideration undeniably impairs the general argument, it does not successfully meet the point that there are other industries which would not be able to withstand foreign competition at home if the present wage schedule were main- tained concurrently with a withdrawal of protection. On the other hand, this proves only that these particular industries would not exist; it does not prove that there would be any reduction in the rate of wages in the other industries which would continue or which might be newly started. Whether wages would faU would, so far as this point is concerned, de- pend upon the possibility of profitably employing in the old ! and permanent as well as in the newly started occupations the capital and labor hitherto utilized in the now abandoned § 214] Argument for Protection 563 industries. To the extent that this might not be possible there would indeed be a tendency for wages to fall, because of the diminished productivity of labor. It is clearly inadmissible, however, to argue that this must necessarily be the case. This leads to the consideration that the direct influence of protection on wages has been exaggerated. The rate of wages depends, as we know (§ 174), upon the location of the margin of productivity. Where natural resources are abundant, wages will be high with or without protection. The difference be- tween American and European wages was no less striking before the policy of protection was inaugurated in the United States than it is at present. In point of fact, protection was then demanded on the ground that American wages were high, and no one thought of ascribing the existing high wages to a non- existing protection. In the same way, wages in England have exceeded those in Germany alike during the periods of pro- tection and free trade. Moreover, a large part of industry in every country, as the railways, the building trades and the like, is necessarily local and not exposed to foreign competition. Wages in these occupations are hence not directly affected by any pohcy of fordgn trade. It is only to the extent that pro- tection has an influence in relocating the margin of the pro- ductivity of labor in general by affecting the accumulation of capital and the efiiciency of labor that it can exert any influence on wages. But this can be accomplished only if the protected industries actually involve the most profitable utilization of labor and capital. The wages argument in this form, however, dif- fers considerably from the common and crude formulation, and in reahty fuses into the arguments to be mentioned below. In its crude form the wages argument is not convincing. Pro- tection explains the high wages in America as little as the low wages in Russia. Low wages are found under protection; high wages under free trade. (4) The "infant industry" argument is the one which for a long time enjoyed the principal reputation, especially because 564 International Trade [§ 214 Mill in his general defence of free trade made in this case an important concession. Although in its theoretic formulation usually ascribed to Friedrich List, it is found substantially in Alexander Hamilton's celebrated Report on Manufactures in the last decade of the eighteenth century, and more fully in the work of Daniel Raymond with which List had become ac- quainted during his sojourn in America. The theory asserts that just as children need the fostering care of their parents during the period of infancy, so the feeble and newly started industries need to be carefully protected during their years of weakness. It is conceded that this involves an expense, but it is claimed that it must not be considered an economic loss any more than the expense of raising a family is in the true sense a loss; for both will more than pay for themselves when they reach matu- rity. In the case of industries this result will be brought about by the competition between the domestic enterprises, which will ultimately reduce the prices of the commodities to a point lower than that of the foreign wares with the cost of transpor- tation added. List formulated the theory a little differently. According to him production involves not only the turning out of definite commodities, but the creation at present of the possibility of turning out more commodities hereafter. The real economic function of society is not simply to produce goods but to produce productive forces. Through protection, government achieves this educational end and thus trains the nation to industrial efficiency. National strength and power are the keynote of List's programme, just as national industrial inde- pendence was the objective of Hamilton and Raymond. List's work. The National System of Political Economy, bears the motto, Et la patrie et riiumanite, — "my country as well as the world." The policy of government must therefore change with economic conditions. In the purely agricultural stage when a country, like the United States in the eighteenth cen- tury, is not yet ripe for industrial advance, protection would § 214] Argument for Protection 565 be folly; in the fully developed industrial stage, as in England during the nineteenth century, protection would be equally inane; but in the transition stage, as in the United States and Germany at present, protection is as necessary as it will ulti- mately be profitable. It will be recognized that List's argument differs from that of Carey and the home market theorists in two respects: it does not involve agricultural protection and it is confessedly temporary in character. With the lapse of every decade and the growth of the infant industries into lusty manhood the argument becomes continually weaker, and protection becomes less defensible as a permanent policy. This has led to the final and most recent argument. (5) The "variegated production" argument, as it might be called, accepts the one point in the Hamilton-List theory, but discards the other. It emphasizes the! idea of national industrial independence, but maintains that the chief deside- ratum is a well-rounded economic development, with a due consideration for all the various national interests. In a country like Germany, for instance, where the foreign com- petition of virgin lands would mean the ruin of domestic agri- culture, the increased cost of food and raw material, it is claimed, would be a cheap price to pay for the preservation of a healthy and prosperous farming class. On the other hand, a variegated industry is undoubtedly a sign of progress, and to the extent that it denotes a more efficient utihzation of labor and capital and a help to enterprise, it will result in higher wages as well as greater profits, a better standard of life for the workman and a more prosperous condition for the manu- facturer. Even if domestic prices are higher than those of foreign goods, the loss to the individuals as consumers is more than offset by the gain that accrues to them as producers and as participants in the general prosperity. Thus protection is demanded as a permanent policy. 566 International Trade [§ 215 215. The Argument for Free Trade To these arguments the free traders make rejoinders in detail, all of them based on an affirmative position which, as elaborated by Adam Smith and the Physiocrats, is simplicity itself. International trade is like internal trade: the freer it is, the greater are the advantages to both parties. The idea that what one man or one country gains in trade the other loses is a fallacy scarcely less baleful than the idea that any one can get rich by impoverishing his customers. For in for- eign trade the other country is not so much a rival as a cus- tomer; if by restricting imports we exclude their wares, by diminishing exports we necessarily prevent them from buying our wares. By allowing trade to be absolutely unfettered, every one is able to buy in the cheapest and to sell in the dearest market, and the gains of all will be at a maximum. Every nation will thus be in a position to develop its natural advan- tages to the utmost, and the world's wealth will be enhanced because of the distribution of productive energies in the most economical fashion. Just as free trade among the separate commonwealths of the United States results in the most effi- cient utilization of economic forces, so free trade among the nations of the world will bring about the greatest development of wealth. Anything that obstructs this free trade is a step backward. According to this argument, protection is injurious in sev- eral ways, (i) It involves an unnecessary tax on the con- sumer, because it increases prices by the amount of the tariff. Protection is thus a robbery of the many for the benefit of the few. It is class legislation, and for that reason alone repre- hensible. (2) It means a maladjustment of economic forces. Like all other government interference, it savors of paternalism or socialism. (3) Protection does not really protect, because it destroys as many industries as it artificially fosters. Well- nigh every commodity is a raw material for some other com- § 2i6] Conclusion 567 modity. A high duly on iron interferes with the iron industry; a high duty on iron products interferes with the machines constructed of such products; a high duty on machines in- terferes with industries that use the machines. If protective duties were abolished, it is indeed possible that some indus- tries would disappear, but it is more than likely that other industries, now handicapped by high duties on the manufac- tures which constitute their raw material, would flourish. A tariff, therefore, means a dislocation, rather than a protection, of industry in general. (4) Protection involves political cor- ruption on a gigantic scale. One has but to witness the scenes in and about the committee room when a new tariff is being framed in the United States to realize that there exists no more potent engine of political demoralization. Section is pitted against section, interest against interest, business against business, and the final result is due to log-rolling and a series of "unholy aUiances." (5) Protection is responsible for the persistence of national animosities, while retaliatory tariffs and commercial wars are often a prelude to the actual clash of arms. Free trade means peace and good-will; protection leads logically to international hatred and bloodshed. The one implies the reign of humanity and brotherhood, the other of particularism and enmity. The one spells progress; the other, retrogression. 216. Conclusion If now we attempt impartially to weigh these contending arguments, several points at once force themselves upon our attention. In the first place, some of the positions occupied by extremists on both sides are untenable. The protectionists err, as we have seen, in emphasizing the balance-of-trade ar- gument, the home-market argument or the wages argument, at least in its crude form. The free traders err in claiming that protection is simply class legislation or sociaUsm, or that it is responsible for national animosity. 568 International Trade [§ 216 (i) As to class legislation, protection is supported in the United States by factory owners, laborers, and farmers alike. Some sections and some enterprises, indeed, may derive more benefit than others, but that is the inevitable result of almost all legislation. That in certain countries and in special cases indefensible preferences inimical to the common welfare shel- ter themselves under the aegis of a protective tariff cannot be used as an indictment of the system in general. Everywhere we must distinguish between use and abuse. Where popular government and constitutional safeguards exist, legislation in behalf of a particular class is not likely permanently to endure unless the community identifies the interests of that class with its own. (2) Again, to affirm that protection is pater- nalism or socialism is simply to call names, and to make the unwarranted assumption that the ideal of government is laissez Jaire. (3) Finally, to assert that protection is the cause of national animosity is clearly to put the cart before the horse. Abandoning these far from impregnable positions, there still remains an element of weakness in the arguments of both sides. Even the more moderate advocates of protection are apt to overrate its importance. The efficacy of protection, even at the best, is not unlimited. No degree of protection can make cotton growing permanently successful in Maine, or put the silk industry on a stable foundation in the desert of Arizona or the lumber district of Michigan. Protection must work within the limits of general economic advantages. Unless the artifi- cial environment can be created at a comparatively small cost, it is economically not worth creating. But what is done at even a small cost artificially will often come of itself after a time naturally, and sooner or later the permanence of the in- dustry must rest on these natural foundations. Just as the cotton mills which do an export business, and are therefore independent of protection, are now springing up in the South, so various industries are gradually creeping farther West with- out any protection against the long-established enterprises in § 2i6] Conclusion 569 the East. Before the foundation of the Australian common- wealth New South Wales and Victoria pursued opposite poli- cies in foreign trade, and yet their industrial development was approximately the same. Even if there had never been any protection in the United, States, the time would undoubtedly have come when the mere accumulation of wealth and the growth of population would have superinduced the develop- ment of industry. On the other hand, the free traders fail to make allowance for an important element in the problem. The essence of free trade is cosmopolitanism; the essence of protection is nation- alism. Free trade holds up to our contemplation the ultimate economic ideal, but fails adequately to reckon with actual forces. The universal republic is far in the distance, and the separate nations still have an important function to subserve in developing their own individuality and thus contributing dis- tinctive elements to the common whole. Legitimate compe- tition presupposes, as we have seen (§ 63), a relative equality of conditions; as long as the growing nations of the world are in a state of economic inequality, we must expect and not en- tirely disapprove the effort on the part of each to attain equality by hastening its own development. Ultimately, no doubt, patriotism will be as much of an evil as particularism has now become; but in the present stage of human progress patriotism is a virtue. Free traders often overlook the sound kernel in what seems to be the apple of discord. As long as nations continue to form the economic units it is not competent to argue from internal free trade to interna- tional free trade. The cotton mills in the South may injure their competitors in New England, but the nation will look on with equanimity, because it means a surplus production of wealth within the country. When, however, an industry in one country is menaced by the competition of another, it is no solace to the first that the world's we-alth is being aug- mented at the cost of its own. 570 International Trade [§ 216 In the main, then, the conclusion would seem to be that under certain conditions a protective policy is relatively defen- sible. It may be conceded that in countries the mass of whose exports are of an industrial character protection is unwise. It may be taken for granted that when nations reach a state of comparative economic equality, protection will be unnecessary and even injurious, because if let alone each will then develop its own natural advantages. It cannot be gainsaid that protec- tion sets loose the selfish passions of individuals and classes and that it is responsible for its share of political greed and unsavory legislation. But when the economic resources of a country are not yet fully developed, it may none the less Le desirable to accelerate the pace, in the interests of its own immediate national progress, with the idea that the contributions of fully mature and economically well-rounded nations to the common wealth of the globe will in the long run exceed the gain from an uneven and one-sided evolution. So far as the United States is concerned it is scarcely open to question that the system of protection has somewhat hastened the industrial development of the country. It has not created this development, which was bound to come sooner or later, and it is responsible for many incidental evils. , It has con- tributed to political demoralization; it has sheltered under its wing incompetent individuals who would have been eliminated to the common advantage by free competition; it is maintained in several industries where it is no longer needed; and it has. done its share in creating monopoly conditions in other indus- tries. And yet it is difficult to escape the conclusion that pro- tection has been on the whole a wise policy for the United States. Without it, it would probably have taken us somewhat longer to come to our own; without it the immense amounts of capital invested by foreigners in starting industries on this side of the tariff wall would have been employed at home, to that extent retarding the diversification of American industry and the in- fluences that contribute to the increased efficiency of labor; § 2i6] . Conclusion 571 without it the United States would not have entered so soon on its role as a world power; without it, in short, the whole tempo of economic progress would have been slower. To those who deplore the feverish haste of modern life, this will serve as an additional objection to protection. To those, however, who desire to face industrial facts as they exist, and who realize that in the intense national rivalry of to-day, to stand still is to retrograde, the efforts of the statesmen who have guided the policy of the United States almost from the beginning will not seem to be such a tissue of errors or such a chain of mistaken aspirations as they are sometimes represented. As the United States becomes more and more of an industrial nation, seeking an outlet for its manufactures, it is indeed probable that the tariff will be gradually lowered, with advantage to all; but he would be a hasty prophet who would predict any sudden or material change for a considerable time to come. CHAPTER XXXIII TRANSPORTATION 217. References A. T. Hadley, Railroad Transportation (1885); B. H. Meyer, Raikcay Legislation in the United Stales (1903); H. R. Meyer, Government Regu- lation of Railway Rates (1905); E. R. Johnson, American Railway Trans- portation (1910); E. R. Johnson and G. S. Huebner, Railroad Traffic and Rates (2 vols., 191 1); C. S. Raper, Railway Transportation (191 2); W. M. Acworth, The Elements of Railway Economics (1905); D. Knoop, Outlines of Railway Economics (1914); W. Z. Ripley, Railroads, (2 vols., 1912-15) and (ed.) Railway Problems (n.d. 1913); F. N. Judson, The Law of Interstate Commerce and its Federal Regulation (new ed., 1912); L. J. McPherson, The Working of the Railroads (1907) and Railroad Freight Rates (1909); Cleveland and Powell, Railroad Promotion and Capitali- zation (1909); J. M. Clark, Standards of Reasonableness in Local Freight Discriminations (1909); M. B. Hammond, Railway Rate Theories of the Interstate Commerce Commission (191 1); Report of the Railroad Securi- ties Cojnmission (191 2); S. O. Dunn, The American Transportation Ques- tion (191 2) and Government Ownership of Raihvays (1913) ; A. M. Sakolski, American Railroad Economics (1913); M. Wymond, Railroad Valuation and Rates (1916); H. G. Brown, Transportation Rates a>ui their Regula- tion (19 1 6). 218. Transmission of Intelligence — The Post-Office Transportation as an economic factor includes the transmis- sion of intelligence as well as the transportation of persons and commodities. The deeper influence of the modern media of transportation in overcoming the element of distance has been adverted to above (§ 19). The purpose of this chapter is to discuss some of the specific problems connected with actual charges. The chief media of the geographical transmission of intelli- gence are the post-oflice, the telegraph and the telephone. Postal service in classic antiquity was almost exclusively for 572 § 2i8] Transmission of Intelligence 573 governmental purposes. In the middle ages it was largely a private enterprise carried on to serve the interests of the mer- chants, as in the Hanseatic towns, or in the case of the students living far from home at the Universities. It was not until the seventeenth century that a regular postal service was inaugu- rated in Europe. Mail coaches were first used by Pitt in 1784, and the modern postal system was introduced by Rowland Hill's reform in 1840. The four points of the reform were uniformity of rate, penny postage, prepayment and the use of stamps. Up to that time adhesive stamps were virtually un- known, prepayment of postage was deemed a discourtesy, and rates were graduated according to distance in conformity with the so-called zone system. In England the charge for a single thin sheet varied from ^d. for 15 miles to i2d. for 300 miles. A letter weighing two ounces from London to Cork cost gs. lid. — about eighty times the present rate. In America up to 1845 the rates were analogous — 6 cents to 25 cents per single sheet for distances from 30 to 400 miles. Hill concluded that the chief cost was ascribable to the handling of the mails at both ends, and the suggestion of uniformity carried the other schemes of improvement with it. By 1857 the reform was ac- complished in the United States, and in 1874 the international post was inaugurated. The use of universal postage stamps has, however, not yet been found practicable, owing to the diversity in the currency systems. The post-office business is not confined to (i) the trans- portation of letters. In most countries it includes: (2) the parcels post, (3) the passenger post, (4) postal money orders, (5) postal collection of bills, (6) postal savings banks, (7) pos- tal telegraph and (8) postal telephone. In the United States all these additional functions, except the fourth, the sixth and in part the second, are in private hands. But notwith- standing the restricted scope of the American post, the factors of national wealth, popular intelligence and immense distances have combined to make the postal transactions of the United 574 Transportation [§ 218 States by far the most important, not only absolutely, but rela- tively to population. The revenues for 19 13 were over $266,cx)o,ooo, wiping out the old and considerable deficit due partly to the growing demands for rural free delivery, and partly to the misuse by book publishers of the low rates on periodicals. Postal charges are sometimes based upon the principle of joint cost (§ 107). In reality, however, the controlling principle, as we shall see in the analogous case of railway charges (§ 221), may better be described as the principle of value of service. Letters pay more than merchandise, merchandise more than books, books more than newspapers. Were the rates primarily based on cost, they would be inverted, for it obviously costs more to transport a newspaper than a light letter. The higher letter rate is imposed on the principle that the letters can better afford to make a substantial contribution to this end than the newspapers. The receipt of the letter is worth more to the average correspondent than the receipt of the newspaper to the average subscriber. It is the value, not the cost, of the service, which is the controlling factor. Cost of service enters only as a minor ingredient, for letter rates in- crease with weight, speed and risk, as well as in the case of excess postage, special delivery and registered maUs. The same holds good in a modified way of telegraph and telephone charges. Newspaper telegraph rates are lower than ordinary rates; business telephone rates higher than residential rates. In only one important respect is there a difference. The telegraph, telephone, and parcels post charges in America are still calculated according to the zone system, long since abandoned in the letter post. This is due chiefly to the fact that the distance element in cost is greater in the former than in the latter, but in part also to the fact that the former are still conducted on the principle of ma.ximum profits rather than of the greatest social utility. The question of government owner- ship will be discussed later (§ 233). § 219] Railway Development ^y^ 219. Rail-way Development Of the modern media of transportation the railway is the one that presents the most difficulties. Canals, which devel- oped in England and America at the end of the eighteenth and the beginning of the nineteenth century, have lost their origi- nal function as the chief artificial medium of transportation, and are now of importance only in exceptional cases like the Erie and the Panama canals; or where, as in some of the European countries, they are links between rivers or between the rivers and the sea. When Solomon de Cause first advanced the idea of employ- ing steam as a propelling power in 1615, he was shut up in the mad-house as a hopeless maniac. Two centuries later, in 181 2, when Colonel Stevens of Hoboken proposed to build a steam railway at far less cost than the projected Erie Canal, he was regarded as absurdly visionary and somewhat demented. And yet to-day, almost within the short space of a human life, we have a vast network of over half a million miles of iron roads encircling the civilized world, considerably over one- third of which are found in the United States. The table on page 576 shows the railroad mUeage of the world by countries on Jan. i, 1913. In the United States the railway mileage was 23 in 1830; 2,818 in 1840; g,02i in 1850; 30,626 in i860, and 52,922 in 1870. By 1916 the mileage was almost 270,000, and the capital invested about twenty-one billions. In Europe the railways were built to accommodate exist- ing traffic; in America they were constructed, for the most part, to create new traffic. In Europe the railway was the result of civilization, in America an outpost or harbinger of civilization, — a difference which has led to three important results: (i) The cost of railways in America is far lower than in Europe. In a new country the right of way is inexpensive, the 576 Transportation [§ 219 terminals acquire value largely as a result of the railway itself. Moreover the exigencies of business do not necessitate the solidity of construction that is required in older communities. RAILWAY MILEAGE IN EVEN THOUSANDS IN 1915 Europe. Germany .... Russia (in Europe). France Austria-Hungary . Great Britain and Ireland .... Italy Spain Asia. Russia (in Asia) India Japan China 41 000 37 000 32 000 30 000 24 000 II 000 10,000 II 000 35 000 8 000 7 000 North America. United States . Canada . . . Mexico .... South America. Argentina . . Brazil .... Summary. North America Europe .... Asia South America. Australasia . . Africa .... Total . . . 267,000 32,000 16,000 21,000 16,000 324,000 218,000 72,000 49,000 23,000 27,000 713,000 These conditions are reflected in the following table of average cost of railways per mile, as of 191 1: England . . France . . . Belgium . . Germany . . United States $265,000 137,000 177,000 109,000 60,000 (2) The desire of the new communities to secure additional facilities led to the adoption in the United States of the com- petitive method in building railways, whereas in Europe it was recognized from the outset, or soon realized, that one railway between two points could in many cases perform as efficient service as two or three. What occurred at an early date in Europe is in process of accomplishment in the United States. § 22o] Nature of Railway Business 577 The American railways are being rapidly consolidated into large groups, each of them serving a particular section. In the table facing page 578 will be found the details of this process as it had developed in 191 2, with the existence of six groups of over 15,000 miles in length, and of four groups of 20,000 to 30,000 miles. (3) In the United States the existence of keen competition, of rapid improvements in facilities, and above all of the growth of the long-distance traffic conspired to bring about a re- markable progressive reduction in freight rates during the last three decades of the nineteenth century. The facts are rep- resented on the chart following page 580. But it must be re- membered that the earnings have nevertheless increased faster than the mileage. By 1900, however, this reduction reached its limit, and since that time there has been a slight advance. 220. Nature of Railway Business The railway business possesses three distinctive character- istics: it is more than a mere private undertaking; it tends in- evitably to become a monopoly; and, as in all large enterprises where the proportion of fixed capital is relatively great, there is a somewhat peculiar relation of constant to variable expenses. (i) When investors put their money into a railway, they are in a sense its owners. But a railway is not like a shoe factory. The state grants to a railway corporation some of its own sovereign powers, as the right of expropriation of private property; it regards the railway as its agent, and in return insists upon a large measure of responsibility to the public. Even the private railway, therefore, is a quasi-public institution. Railway rates and fares may hence be regarded from two different standpoints. In so far as a railway is a business cor- poration, it is a private matter: it may construct its tariff in accordance with general business principles; it will endeavor to subserve primarily the interests of its owners. It will strive for the greatest possible profits; and this course is legitimate 37 ^yS Transportation [§ 220 and praiseworthy. But in so far as the railway forms the public highway, it is a public matter: the objective point now is the general welfare; it aims not at the greatest possible profits, but at the greatest possible benefits; it looks not at the interests of its owners, but at the interests of the public. The one point of view is individual, the other is social. The modern railway corporation shares both these characteristics: its nature is hybrid. To subordinate the public to the private element is plainly inadmissible. Entirely to engulf the private in the public element is equally unfair, so long as the railway is not owned by the state. In the United States two princi- ples, at all events, have been firmly established during the last generation. The one is that the railway is more than a mere private business; the other is that the capital invested by private individuals in railway enterprises does not lose its claim to a just remuneration or to equal protection before the law because of the fact that the railway is a quasi-public institution.^ (2) The railway tends sooner or later to become a mo- nopoly. So far as the local trafiic is concerned, this is true from the outset. The chief consideration here is the possibihty of increasing production without proportionate increase of plant or capital. The trafiic on a railroad may be doubled without the necessity of duplicating roadbed, track, terminals and general expenses. Several lines paralleling each other at every point would not benefit the public and would certainly ruin each other. But even in long-distance traffic much the same is true. The theory of the beneficence of competition depends on the postulate of the transferabiUty of capital. In case of failure the unsuccessful competitor deserts the enterprise, but the railway, once started, has come to stay; it may change hands, but it will not, and in many states it cannot, be aban- 1 These leading cases were the Granger Cases (Munn v. Illinois), 94 U. S. 113 (1876), and the Nebraska Rate Cases (Smith v. Ames), 169 U. S. 466 (1898). RAILWAY CONSOLIDATION, 1916 Vanderbilt Group: ' New York Central Lines . Chicago and Northwestern Miles i2,8is 8,107 Miles Northern Pacific 7,104 Chicago, Burlington and Quincy 9,366 Colorado and Southern .... 1,871 Union Pacific Grout: Illinois Central 4,709 Union Pacific System .... 7,826 Georgia Central 1,924 San Pedro, Los Angeles and Salt Lake 1,010 Chicago and Alton 1,025 Morgan Group: Southern Railway 7.ii7 Southern Railway { 3 of 615 miles) 307 Chic, Indianapolis and Louis- ville 621 Mobile and Ohio 1,122 Queen and Crescent 926 Reading Company (incl. New Jersey Central, 633) - . . . 2,218 Erie 2,443 Chicago Great Western . . . . 2,115 Small Southern "Lines .... i ,000 Pennsylvania Group: Pennsylvania System 12,102 Norfolk and Western 2,043 Western N.Y. and Pennsylvania 668 Long Island 399 Canadian Pacific: Parts of Main Line in the U.S. about 1,500 Minneapolis, St. Paul and Sault Ste. Marie (Soo Line) ... 3,021 Wisconsin Central 1,059 Duluth, South Shore and At- lantic 627 Gould Group: Texas and Pacific 1,994 St. Louis Southwestern . • . i,754 Denver and Rio Grande, incl. Rio Grande Western and Western Pacific 3,564 Hill Group: Great Northern 8,122 Walters Group: Louisville and Nashivlle . . . . 5,3o6 Nashville, Chattanooga and St. Louis 1,230 Atlantic Coast Line, incl. Plant System 5,039 Georgia Railroad (A. C. L. & L. N. N., lessees) 346 Chicago, Indianapolis and Louis- ville (J of 615) 307 Independent Systems: Chesapeake and Ohio Delaware and Hudson .... Chicago, Milwaukee and St. Paul' Atchison, Topeka and Santa Fe Seaboard Air Line Frisco System Missouri, Kansas and Te.\as . . Southern Pacific System ■• . . . Rock Island Missouri Pacific Wabash .• ■ • Minneapolis and St. Louis . . Baltimore and Ohio System, incl. Cincinnati, Hamilton and Dayton Lehigh Valley s N. Y., New Haven and Hart- ford Boston and Maine 2,371 909 10,075 11,136 3,123 5,253 3,165 10,587 8,330 7,293 2,516 1,550 5,474 1,442 2,065 2,302 Summary: Vanderbilt Group Union Pacific Group Morgan Group . . . Pennsylvania Group Canadian Pacific . . Gould Group . . • Hill Group .... Walters Group . . Independent Systems about Total . . . Small Roads . . Aggregate mileage 267,000 1 A small interest in the Vanderbilt Group is owned by the Union Pacific. 2 Some of the stock of the Reading is owned by the Lake Shore and Michigan. ' A small interest in the St. Paul is owned by the Union Pacific. < Pennsylvania Railroad has a considerable interest in the Southern 1 acihc. * Friendly to Morgan Group. § 22o] Nature of Railway Business 579 doned. A bankrupt individual may be disregarded as a com- petitor; a bankrupt railway is a more dangerous competitor than before, because the receiver need not earn anything to pay interest or dividends. There is hence every inducement for the railways to prevent competition; and the attempts will vary from more or less loose agreements to complete consoli- dation. As Gladstone said at the time of the EngUsh discus- sion in 1844: competition between railways is like a lovers' quarrel: breves inimicitiae, amicitiae sempiternae. Moreover, this tendency cannot be permanently arrested by legislation. We may prohibit railway combinations, but we cannot prevent them. If we make them illegal, we simply make them secret, or cause them to change their form. The public again proiits in some respects no less than the railways. The curse of free building of American railways has been the system of parallel and often needless Hnes. An addi- tional road between two terminal points frequently represents so much wasted capital, and the necessity of earning profits on this swollen capital aggravates the burden on the public. Competition between railways is supposed to be responsible for the facilities and low charges of American railways: in point of fact its influence has been much exaggerated. The competition, while it lasts, is of a desperate character, and each line strains itself to the utmost to secure the business that is often sufficient only for one. Charges may indeed be lowered temporarily, but the strenuous efTort to secure traffic gave birth to the very worst abuses of railway management, — secret per- sonal discriminations and immoderate local discriminations. The changes were violent, the conditions unstable. Reduction of rates was sometimes carried to such a point that not even operating expenses were met. The railway wars, which were the logical and extreme manifestation of railway competition, exhausted the companies and afforded but a dubious relief to the public. Lowness of charge was outweighed by instability of charge. The reduction itself was, moreover, of an ephemeral 580 Transportation [§ 220 character. Continuance of low rates meant universal railway bankruptcy; escape from ruin was possible only through com- bination. If competition was beneficial to the public, it was a temporary benefit; if railway wars, on the other hand, threw trade into confusion and engendered the most aggravated abuses, the cessation of competition was a boon to the public. As was pointed out in § 63, competition in ordinary business is the "life of trade," but competition in railways might be called the death of trade, or at all events the death of honest and impartial treatment of traders. (3) Railway outlays are divided into fixed charges or inter- est, and operating expenses. While the proportion which fixed charges bear to total expenses varies with each line, it may be said roughly that it is usually from forty to fifty per cent. In other words, well-nigh half the expenses are constant or inva- riable. They do not change with the amount of business transacted. The operating expenses are divided into (o) maintenance of way and stations, (5) maintenance of equipment, (c) con- ducting of transportation and (d) general expenses, such as office, law and insurance expenses. Of these (c) and, to a smaller extent, (b) fluctuate almost in proportion to business transacted; but (a) and still more (d) will change only very slightly with the traffic. The proportion of each of these four classes to the whole will vary with the widely different charac- teristics of each line; but it may be safely affirmed that in general about one-half of the operating expenses are constant or invariable. The total constant expenditures of a railway are thus the fixed charges plus one-half the operating expenses. In other words, a large majority of railway expenses are irrespective of the amount of business. They remain the same, notwithstand- ing the increase or decrease of the traffic. The effect of this state of things on the determination of actual rates will be seen in § 222. o S3iva QBHsnand jo bsv; O O O IS o o CO (M "M r-i -^ O \ / 4 / / \ ~" "^1 ^i y V / 0) t:\ c ._- 1 — — o \ \ ^ _— — — c^^. / >v \4- X' -1 ^^^' ^ Wv*- s\ c" t? ^ o ^ ■4:^ o m r/; o rPJ ^ OJ yj u 0) r-J a; bn -l-i • :: 2 g ^ S P^ =3 c3 ^ 2 fcjj CD c3 >^ ^ "cc J~ p., q 00 CO CO CO .9 R s ^ ;- .^H ?tt ^ © ,=\ r=3 -fJ =4-1 r-J © d ni © r^ c3 cr o .2 P5 n ■-* C3 ^ rQ rr S Ph s (^ © g -(J 1-1 _c1 -5 !d o ^ © -1^ .2 -t3 © «4-l u ^ © ert ^ © 'S d ^ O a :;: o ■ji f. f-l © -M 02 .^ P) © -M — H rS © ^n d A d ■*^ i/^ © o ^ .25 ;^ © a ^ cs r3 d =+-! c3 O -^ .H ,to d '<-K d © d ^ c3 O «4-l d © s d 03 © d © d o o Ph © © d d ;d © CO 03 © t> .2 -kj & c3 t; d (T) d © h U -1-^ ,ii !h (rt © © en (T) a > in U i Q O rd O a § 22i] Principle of Railway Charges 581 221. Principle of Railway Charges Whether the railway be owned by the state or by a private corporation, there must, up to a certain point at least, be a similarity in the principle of charge. For the interests involved are so enormous, and the particular benefits to the patrons so separable, that no country has yet proposed to run its railways free or below cost. Some states like Prussia make large profits out of their government railways; others as in Australia en- deavor just to cover the cost; but none has attempted to make up a railway deficit by taxation. The principle sometimes advanced as an ideal is that of cost of service. A fair criterion in ordinary commodities is cost of production; why, it is asked, should it not be appHed to rail- way transportation? (i) Obviously, however, this cannot mean the cost of the particular service. In the first place, such cost is impossible of ascertainment. There is a wide disparity in the cost of car- riage on the same line according to the changing conditions under which the service is performed. At one time the greater portion of the freight may be carried over the whole line; at another the local business may outweigh the through traffic, so that the capacity of the rolling stock is not fully utilized. At one time the traflic -may move in great part in one direction and the number of "empties" returned may be abnormally large; at another time there may be far more back-loading and a more even distribution of traflic. At one time the trains may be started with full loads; at another, they may be. half filled. The proportion of paying freight to dead weight, or the amount of the fare, is of considerable importance. So that, even if it were feasible to construct a tariff based on the cost of service of each particular transaction, it would be of no avail unless the amount of freight remained an unalterable quantity. (2) Secondly, if rates were based on cost of service, most of the work performed by the railways would come to a stand- 582 Transportation [§221 still. It costs immensely more to transport a given value of heavy goods like coal than an equal value of silk. If rates were fixed according to cost of carriage, the expense of con- veyance would so vastly exceed the prime cost of the coal as effectually to bar its use except in the immediate neighborhood of the mines. In the same way it costs so much more to bring wheat from North Dakota to New York than from Troy to New York, that unless a lower ton-mile rate was granted on the North Dakota business, there would be no market for it at all in New York. Individual cost of service can hence not possibly be a criterion of railway charges. (3) If therefore anything is meant by cost, it must be joint cost. As we have seen, however, in our general discussion of value, joint cost refers only to the cost of all the services in the aggregate, and affords no criterion as to the principle govern- ing the separate services. To ascertain this we must revert to an anterior law of value, namely, the law of marginal utility. In other words, the principle of charges is not the cost of the individual service, but the value of the individual service. The object of a railway is to increase its traffic and to de- crease its expenses. This it finds can be best attained by lower- ing the charges on certain classes of goods, or on the same classes to different localities. But this is equivalent to saying that what influences the manager is not the cost, but the value, of the service. This practice in railway parlance is called "charging what the traffic will bear," — an unfortunate ex- pression, and liable to much misconception. If we mean by the principle "charging what the traffic is able to bear," it is correct; but if we mean "charging what the traffic can be made to bear," it is incorrect. Charging what the traffic wiU bear, rightly understood, simply serves as an excuse for re- ducing rates on low-class traffic because it cannot bear higher rates. The phrase is a bad one, because it may be twisted into meaning that the greatest possible charges on high-class goods are also legitimate. Correctly interpreted, it justifies § 22i] Principle of Railway Charges 583 lower charges on certain kinds of business; incorrectly inter- preted, it seems to justify extortionate charges on other kinds of business. The attempt to make the theory of joint cost the funda- mental explanation of railway rates, is, moreover, erroneous for another reason. Prices are fixed at the point of cost of pro- duction or joint cost, as we know, only when the products are competitive products. There is always a marginal producer who sells at cost price without any profit. But in monopolies there is no marginal producer, and, as we have seen (§ no), the relation of price to cost is far more indirect. Price may be continually above cost, the difference being the monopoly profits. Price in such cases is fixed according to the principle of monopoly ma.ximum returns, which is nothing but charging what the consumer can afford to pay. The charges on each monopoly by-product will be put at the highest price consist- ent with greatest sales or profits, and not necessarily propor- tionate to cost of production. As we have learned in the last paragraph, however, a railroad is in the long run a monopoly. Railway charges, therefore, are fixed not by any principle of cost, but by the principle of monopoly profits, that is, char- ging what the traffic wUl bear. This also explains the analogy that is frequently drawn be- tween railway charges and taxation, with the idea of ability or capacity to pay. Taxation is compulsory, but payment for a monopoly of a necessity of life (like railroad charges in the present stage of business activity) is in one sense equally com- pulsory. The principle of charging what the trafiic will bear, in any monopoly, has reference to the ability of the patron to pay. The monopolist is indeed not moved by ethical consid- erations, but the price that he charges depends upon what the purchaser can afiford to pay. Justice in taxation requires that a man shall pay in some proportion to what he can afford ; the fixing of monopoly price depends on what he thinks he can afford: at bottom, there is a real analogy between the cases. 584 Transportation [§222 Some object to the value of service principle as the ex- planation of railway rates, because they hold that value means intrinsic utility and grain and coal would then be charged more than silks and spices. This is to revert to the old fallacy that value and utility are identical. The slightest acquaintance with the modern theory of value suffices to dispel this objec- tion. When we say that railway rates are fi.xed by value of service, we mean that the marginal utility of the service is definitely estimated by the shipper; that if the rate exceeds this estimate, the commodity will not be sent; and that a different estimate may be put on each shipment or commodity. The marginal utility of the service fixes the prices of all com- modities; but it is only in the case of competitive production that this is equivalent to joint cost. Thus the theory of joint cost, in so far as it is true at all, is a subordinate part of a more general rule; and to the extent that the railroad is a monop- oly, the theory becomes less and less true. The dispute will easily be avoided as soon as it is recognized that cost of service or joint cost is simply a variation of value of service, and that the theory of marginal utility (which is nothing but value of service) is the fundamental explanation not only of railroad charges but of all prices. 222. Classification Charging according to what the service is worth results in the two fundamental principles of classification and discrimi- nation. Classification is due to the fact that the same service has a varying value when rendered to different commodities. Discrimination {i. e. local discrimination) is due to the fact that the same service has a varying value when rendered to different places. Whether the same service has a varjdng value for the freight of different persons, and may -thus give rise to personal discrimination, is a question to be treated by itself. Value of service influences classification in a double way, — ■ §222] Classification 585 it puts the same articles into different classes, it puts different articles into different classes. The first method is illustrated by the distinction between freight and express traffic. In the United States the general classification applies only to freight traffic. In the rest of the world, where separate express com- panies are unknown, the rates are classified according to this distinction, as in England, where they are known as goods and parcels rates. In the same way passenger fares on express trains are often higher than on ordinary trains. Far more important, however, is the classification of different articles into different categories. Cost of service indeed in- fluences classification to a minor extent in so far as the articles differ in bulk, shape, risk, direction, or regularity of shipment, or as passengers use a Pullman or a plain coach. Actual rates, however, are mainly influenced not by cost of service, but by what the service is worth. The main point is the development of the traffic. We must keep in mind the distinction drawn in §220 between the constant and the variable expenses. If the freight or the cheap passenger business, like immigrant traffic, can be secured at rates which will more than cover the variable expenses, — the actual hauling and a proportionate part of the station expenses, — it will pay the road to take this business, because a contribution, however small, is thereby made to fixed expenses. These would have to be met at all events. A small contribution to constant expenses is better than none at all. Yet to apply this low rate to all business would ruin the company. Classification again benefits the public. The meagre surplus over hauling expenses on the cheap goods contributes, if ever so little, to the fixed expenses, and diminishes to this extent the amount which it is necessary to raise from the remaining traffic. If we had no classification, not only would we not have cheap meat and cheap wheat, but the charges on the dear goods would be higher. It reduces the rates on the cheap goods immensely and the rates on the dear goods moderately. 586 Transportation [§222 The principle of classification is the first corollary from the distinction between constant and variable expenditures. To uphold the legitimacy and necessity of classification is, however, quite another thing from attempting to palliate unde- niable abuses. Classification plays only a very sHght role in passenger traffic because, especially in democratic countries, one man is considered as good as another; but the freight classifications, most of which have grown up in a hap-hazard way, are full of inconsistencies. There are two problems in freight classification, — to secure uniformity between different railways and to secure uniformity between shippers. (i) At the outset every road had its own classification. With the growth of consolidation and agreements classifica- tions apphcable to connecting and competing roads were elaborated. In a small country like Italy it has been found possible to construct a uniform tariff for the entire country. In the United States the difficulties arising from the conflicting interests of different sections have been found insuperable. The South demands a specially low rate on cotton, the West on wheat, the Pacific slope on fruit, and so on. There are now four chief classifications, — the official (in the North and East), the Southern, the Western, and the Transcontinental classifications. Cotton piece goods, for instance, are in class one in the Western, in class three in the official, and in class five in the Southern classifications. What the railroads, how- ever, are not able to accomplish by mutual agreement will probably be effected in no distant future by legislation.^ If this is done, however, the greatest care will have to be taken, when prescribing a national classification, to provide for an adequate number of special or commodity rates outside of the regular classes. (2) The American classifications, although far superior to 1 A histoiy of the attempts to secure a national classification will be found ia Interstate Commerce Commission Reports, second, fourth, and eleventh and thirty-second reports. § 223] Discrimination 587 those of a few decades ago, are still often lacking in uniformity, in stability and in justice. If the railway is a quasi-public in- stitution, these wide powers of fixing the classes cannot be put in the hands of private individuals or corporations as sole arbi- ters. To imply with many of our eloquent railway officials that there is an identity of interests between the railway and the shippers is unfortunately not borne out by experience. To demand, on the other hand, a rigid law prescribing all details would impute to our legislators a knowledge which they cannot possess. To cure the abuses of classification by Congress designating administrative agents who, under the spoils system, shall fix the classification, would be a jump from the frying pan into the fire. An escape from the dilemma seems to be outlined in the principle of advisory boards or consultative councils, which have been established in Germany, Italy and Japan. These councils represent the commercial interests, and the classification finally adopted is the result of a conference, and often a compromise, between the shippers and the railways. 223. Discriniiuatiou As opposed to classification a discrimination may be defined as an inequaUty in the charge for hauling a like quantity of similar articles or individuals for an equal distance in the same manner. All discrimination is either personal or local. While differences in rates based on classification are in a sense legitimate, it is impossible to find any principle on which to base personal discriminations. Personal discriminations in passenger fares take the form of free passes; personal discrim- inations in freight rates occur in a multiplicity of ways. They are beyond doubt the most flagitious abuses of arbitrary railway management. Allowance for quantity or making a lower charge for larger shipments is indeed, within certain limits, defensible. It is then, however, really a matter of classification, and may be upheld in the same way as the distinction between slow freight and ex- 588 Transportation [§223 press business. The difficulty, however, is to select the unit above which the rates shall be the same to all. Shall it be the pound, hundredweight, ton, car load, cargo lot, or train load? Usually the car load is taken as the dividing line, and as such does not excite much dissatisfaction, although even this may sometimes work injustice to the small shipper and cause inde- fensible preferences. But if this comparatively unimportant difference be only partially justifiable, the vastly greater discriminations which cannot even claim cost of service as an ostensible reason are indefensible on any theory whatever. To build up one man's business at the expense of another's can never be acknowledged a legitimate function of common carriers. The railroad ad- vocates at one time asserted that a business firm makes wholesale rates less than retail rates and gives special figures to different customers. Why is not the same principle applicable, they asked, to the railroad business? They utterly failed to perceive that the railroad is not simply a private business, but a public trust; that a merchant is not bound to treat his customers equally, but that a railroad exercises public functions, is invested with pubhc rights and therefore has public duties. The whole- sale principle or allowance for quantity, when carried to this extreme, becomes utterly untenable. Personal discriminations, then, cannot be upheld on any theory. To attempt to abolish them by relying on free compe- tition as a remedy is absurd. Cut rates and rebates were never so common as during railway wars. The great mass of personal discriminations were due not to the volition of the railway managers, but to the stress of competition and the desire to attract business. The Interstate Commerce Law, which in one section attempts to maintain competition by prohibiting rail- way pools and in another section forbids personal discrimina- tion, is endeavoring to secure two diametrically opposite ends. If we strengthen competition, we inevitably increase personal discrimination. It is not so much the Elkins law of 1903, impos- § 223] Discrimination 589 ing severe penalties, as the spread of combination among the railways which is responsible for the recent gradual disappear- ance of personal discrimination. Local discrimination may arise in two ways, (i) The road may desire to extend its traffic in commodities coming from a distance. If they are to be carried at all, they must be trans- ported at less than regular rates. Hence arises the necessity of a distinction between local and through traffic. Goods coming from a distance must be treated in the same manner as cheap goods. Local discrimination is like classification. The distant freight is the cheap freight, the near freight is the dear freight. Local discrimination of this kind is in principle legitimate. The long-distance traffic, by making a contribution to constant expenses, reduces the local rate as well. It is the immense long-distance traffic in the United States which has enabled the American railways to reduce their charges, local as well as through, far below the European level. The abolition of local discriminations of this kind would level up, not level down. (2) Local discriminations may arise from competition at the junction points. The competition may be due to cheaper water transportation, to a foreign railway or to a better equipped or shorter domestic railway. A lower rate to the competitive centre is the sole condition of the retention of the competitive traffic. It is sometimes stated that local discriminations are in prin- ciple reprehensible because they remove geographical advan- tages; and it is claimed that the true principle is that of the equal mileage rate. This argument, however, is not convincing. There is no such thing as an inviolable geographical advantage. There are no vested rights in situation. One town may be connected with the coast only by a turnpike; another farther distant may have the good fortune to see a railway built through its limits. Has the former any cause to complain because it is robbed of the benefits of its hitherto advantageous 590 Transportation [§223 situation? The object of all improved means of communica- tion is, in fact, to annihilate distance, to minimize differences in situation. Maintenance of original geographical advantages would render impossible all but local business in the vast mass of commodities; it would again turn our Western fields into barren wastes. DifTerential rates widen the field of supply; they increase the specialization of wants and create the possi- bility of satisfying these wants, so characteristic of modern society. Opposition to local discriminations arises from view- ing solely the interests of the producer; rational economics leads us to consider also the consumer. Opposition to differential rates is based on the supposed welfare of a particular class or section of producers; a wise national economy will ponder over the interests of the whole community, irrespective of sec- tional jealousies. If local discriminations are so arranged that distant producers are enabled to compete with local producers, the latter may indeed see their profits curtailed, but the former will see their profits increased, and the consuming public as a whole will evidently gain. This does not, however, justify all differential rates. The abuses have often been outrageous, the methods undeserving of palliation. Local interests have been disregarded, and the discriminations so conducted as to ruin whole businesses or towns in order to build up others. It is not necessary to as- cribe illicit motives to the railway managers. They have often been forced into unjust discrimination by the stress of compe- tition and the instinct of self-preservation. But railway officials commit a great mistake in calling all local discriminations just, because they are the effect of competition, precisely as the demagogues err in opposing undeniably valid discriminations and at the same time upholding competition. Competition is made to cover a multitude of sins. Railway profits and public interests do not always go hand in hand. The possible diversity of interests renders some form of governmental supervision imperative. §223] Discrimination 591 It is indeed true that, in the main, rates should increase with distance or mileage. Some extremists propose to apply to railways the postal principle of making a uniform charge irrespective of distance. This, however, completcdy overlooks the fact that in the post the chief item of cost is the handling at each end and that the expense of transportation itself is an insignificant fraction of the whole; while in the railway, on the other hand, a far greater part of the cost, especially in longer distances, is the mere hauling expense. To disregard distance would require such an immensely high average rate as to make even wagon transportation cheaper for short stretches. The postal principle is utterly impracticable as well as theoretically erroneous. But while cost increases with distance, it does not increase proportionately to distance, precisely because of the relation of constant to variable expenses. Hence distance rates do not imply, as some demand, equal mileage rates. Both the cost and the value of the service increase less rapidly than the distance. Even in the relatively simple passenger business mileage rates are used only for comparatively short distances; the fares to the more distant competitive centres are almost always less than mileage rates. As soon, however, as we have any derogation from the principle of equal mileage, we have a local discrimination. The simplest limitation on the practice of local discrimi- nations is the enactment of the short-haul principle. This prescribes that the charge to any intermediate point shall not exceed the aggregate charge to the final point. Although there is no vested interest in geographical situation, it be- comes an anomaly to charge to a way station the rate to a competing point further on, plus the additional rate from the competing point back to the way station. This is an inversion of the principle of distance. The attempt, however, to enforce such a hard and fast rule is perilous. As long as the law cannot be applied to waterways and to foreign com- 592 Transportation f§ 223 peting railways as well, the anomalies cannot be entirely re- moved. Unless the railways from the East to San Francisco met the all-sea rates, or the Canadian rates to the coast, they would lose their through transcontinental traffic, and would have to raise their intermediate rates as well. While therefore the Interstate Commerce Law accepts the short-haul principle, it permits the commission to make exceptions; and among the nicest duties imposed on the commission is that of deter- mining when an exception is legitimate. But if even this comparatively simple matter requires such delicate handling, what shall be said of the great mass of other discriminations, where the charge to an intermediate station is relatively, without being absolutely, greater than the charge to a more distant point? Among the perplexing problems that arise are the following: Is it legitimate to make export or im- port rates less than domestic rates, that is, to charge less be- tween the two points for the same commodities when the haul is only a part of the distance to a foreign country? Is it rea- sonable to make group or blanket rates, that is, to put aU stations within a radius of a few tens or even hundreds of miles in a group and make the same charge to all? Is it just to make allowance for "milling in transit" or "floating cotton," that is, to allow grain to go from the fields to the mill, or cotton from the plantation to the compresses, or logs from the forest to the saw-mill, and then to proceed to the point of destina- tion on its proportion of a through rate rather than the local rate? Is it defensible to follow the "basing point" system, whereby local rates are based according to the relative dis- tance of the local points from the competitive points, the rate being ascertained in each case by adding to the through rate to the basing point the local rate from that point back to the local point? Is it permissible to make differentials between cities — as, for instance, on grain, flour, and provisions, where the domestic rates from the West to New York are two cents a hundredweight higher than to Philadelphia, three cents higher § 224] Railway Regulation 593 than to Baltimore and two cents lower than to Boston, with different figures for ex-lake grain (grain from the West which leaves Bufi"alo after storage, on a new and independent rate) and still different figures for export rates? These are only 'a few of the embarrassing questions which call for decision. Three points are, however, obvious: (i) No hard and fast rule can be laid down. All the circumstances and conditions must be taken into consideration, and these may change from day to day or season to season. (2) It is not only a question of railway practice, but of business and local rivalry. (3) The final decision of such dehcate and im- portant matters must not be left to the shippers or the railways, but must be intrusted to some higher authority, which should be not only expert in the transportation business, but completely impartial as between the railways and the shippers, on the one hand, and the rival sectional interests on the other. 224. Rail\vay Regulation The preceding discussion has made it clear that some form of railway regulation is necessary. There are five different methods of dealing with railways, (i) The government may own and manage the railways, as in Prussia, Italy, Switzerland and Australasia. (2) The government may own the railways, but leave the operation in private hands, as in some of the roads in North Carolina and all the roads in some minor European countries. (3) The railwaj'^s may be owned by private companies, but operated by the government, as until 1905 in Italy. (4) There may be mixed ownership and opera- tion, either with the idea that the competition of the state railways will regulate the private companies, as formerly in Belgium, or without any such intention, as at present in Russia, France, India and many other countries. (5) The railways may be left to private ownership and management, as in Eng- land and the United States. The general discussion of government ownership or manage- 38 594 Transportation [§ 224 ment, and the special reasons against it in the United States, may be left to a later chapter. Points one to three may there- fore be omitted. On the fourth point the experience of Belgium has conclusively proven that a government railway is not an effective regulator of private companies, and that instead of the government railway drawing the private companies up to its level, the government railways, on the contrary, are invari- ably pulled down by the stress of competition to the level of the private companies, with personal discrimination and ille- gitimate preferences of all kinds. This leaves as the practical problem in Great Britain and the United States point five, or the governmental supervision of railways which remain in private hands. In Great Britain, where the situation is much simpler be- cause of the smallness of the country and the extended sea- coast, competition was eliminated at an early date, and personal discriminations have been correspondingly rare. The chief questions have been those of relative rates between localities and maximum rates on different classes. After several more or less feeble attempts at regulation a railway commission was instituted in 1873, with judicial powers. Their findings as to facts are final; as to law, they are reviewable by a higher court. In 1888 a law was enacted giving the Board of Trade power to suggest maximum rates, and during the years 1891-94 Parliament accepted the recommendation and enacted maxi- mum rates. Finally, in 1894 it was provided that no railway should increase its existing rates within the maximum without affirmatively proving to the satisfaction of the Railway Com- mission that the increase was justifiable. It has been claimed that this provision has seriously interfered with the progressive reduction of rates which would naturally come through the increase of business; for the freedom to reduce a rate, and the lack of freedom to restore it if found to be unprofitable, will prevent even the most venturesome railway manager from making a hazardous experiment. § 224] Railway Regulation 595 In the United States the early attempts at regulation were confined to the separate states. It was not until 1887 that national supervision began with the enactment of the Inter- state Commerce Law. The law was the result of a compro- mise. It endeavored to maintain competition, and prohibited pools, but it did not try to lay down a rigid short-haul rule. Not only was pooling forbidden, but under the Sherman Anti- Trust Law of iSgo it was subsequently held that even railway traffic associations are illegal. The author of the anti-pooling clause — Senator Reagan, of Texas, who later served on the railway commission of his native state — subsequently con- fessed that his original opinion had been erroneous, and the Supreme Court of the United States, in declaring the illegality of traffic associations, conceded that they were economically beneficial. The Act of 1887 prohibited unjust and unreasonable charges, and instituted the Interstate Commerce Commission to enforce the law. Unlike its English predecessor, the American com- mission is not a judicial court, and its decisions are not final even as to facts. In the closing years of the century the powers of the Interstate Commerce Commission were practically emas- culated by various decisions of the Supreme Court so that little of its functions remained except the collection of statistics. With the beginning of the new century the powers of the Com- mission were gradually restored and then increased by legislation. After the great agitation due to the efforts of President Roosevelt, the Hepburn law of 1906 was enacted, which gave the Com- mission definite powers to determine and to prescribe maximum rates. The law was now also extended to express and sleeping car companies. Furthermore, the commodity clause forbade rail- ways from transporting any commodity, other than timber or the products thereof, which might be manufactured, mined, or 596 Transportation [§ 224 produced by it or in the production of which it might have any interest other tnan that of common carrier. Moreover a uniform system of accounting (which went into effect in 1907) was pre- scribed for all common-carriers. The Mann-Elkins Act of 1910 extended the law to telegraph and telephone companies and gave the Commission additional powers to prescribe classification and to suspend changes in rates. In 191 2 the commission was invested with the duty of making a valuation of all the railroad property in the country, and in 1914, tne Supreme Court virtually held^ that the state railway commissions must give way to the national commission in the control of rates. Within a few years, however, the rigid restrictions of the law so reduced railway profits as to prevent further construction and to limit facilities. As a consequence, after the interlude of the war during which the railways were managed by the government, the Esch- Cummins law of 1920 was enacted. On the one hand, the law conferred increasing powers on the Commission not only over rates but over traffic, the extension and construction of lines, tiie keeping of accounts, and the regulation of securities. But, on the other hand, the law directed the Commission to fix rates at such a point as to yield a six per cent return on a valuation to be ascertained by the Commission. Furthermore, it not only authorized pooling, but directed the commission to elaborate a plan for the more comprehensive consolidation of all railways; it did away with all state powers over securities; and it created a national labor board to adjust differences between the railways and their employees. Thus the country has started upon a new era. The government now exercises a fourfold control over rates, facilities, accounts and securities and it provides a fourfold program of aims to be achieved: (i) assurance of adequate earnings in order to induce proper service; (2) the amicable and more or less automatic adjustment of rates and labor disputes; (3) regional operation 1 In the Shreveport case, decided in May, 1914. § 224] , Railway Regulation 597 with definitely central control; (4) division of profits above a fair minimum between the railways and the government. It is not unreasonable to hope that such a governmental control of private monopoly may be made to redound to the interests of the entire community, including the investors, the employees, the shippers, and the ultimate consumers. CHAPTER XXXIV INSURANCE 225. Reference A. H. Willett, The Economic Theory of Risk and Insurance (Columbia Studies, XIV, No. 2, 1901); S. S. Huebner, Property Insurance (1911); W. F. Gephart, Principles of Insurance (191 1) and Insurance and the State (1913); L. E. Zartman, Yale Readings in Insurance (2 vols., 1910); C. Walford, Insurance Cyclopedia (5 vols., 1871-1880); and Insurance Guide and Handbook (3d ed., 1900); A. J. Wilson, The Business of In- surance (1904); A. C. Campbell, Insurance and Crime (1902); Journal of the Institute of Actuaries (1850-); Transactions of the Actuarial Society of America (1889-). Special Classes of Insurance: F. Martin, History of Lloyds (1876); M. M. Dawson, The Business of Life Insurance (1906); W. Gow, Marine Insurance (1895); W. Alexander, The Life Insurance Company (1905); B. J. Hendrick, The Story of Life Insurance (1907); F. H. Kitchen, Prin- ciples and Practice of Fire Insurance (1904); P. Mayet, Agricultural In- surance (1893) ; E. MacNeill, A Study of Accidents and Accident Insurance (1900); C. B. Elliott, Fidelity Insurance (1907). 226. Nature of Insurance The economic life of man is subject to uncertainty. Even the old adage that there is nothing sure in life save death and taxes is incomplete, because even though the uncertainty does not attach to the fact itself, it does attach to the time of the occurrence or to the magnitude of the phenomenon. Insurance is a device to remove the economic consequences of uncertainty. From one point of view it might be claimed that there is no such thing as chance. Everything that happens in the uni- verse is obedient to law; that is, it is the result of a cause. If we had full knowledge of all causes, we could predict every event with accuracy, and thus eliminate such a thing as a chance occurrence. For if we previously knew that it was to happen at that moment, it would not be a chance. On the 598 § 226] Nature of Insurance 599 other hand, the word chance may be used in a slightly different sense. If a pack of cards has been well shufHed, it is an even chance that we turn up at the first deal a black or a red card. Chance here means the degree of probability of an occurrence. The more numerous the occurrences, the more regularity will their be in their happening; so that when we have very large numbers, there is even such a thing as a law of chance. The degree of uncertainty, however, is not the same thing as the degree of probability. When the probability is zero or small, the uncertainty indeed is zero or small, and there is no chance or little chance. The uncertainty, however, increases only up to a certain point. The uncertainty is greatest when the chances are even, and then diminishes as the chances in- crease, until the uncertainty disappears, when the probabil- ity of occurrence becomes infinite. Certainty means either no probability or no improbability; after the point of even chance has been passed, probability increases as the uncer- tainty decreases. The term risk may be applied to either probability or un- certainty. If there is only one chance in a hundred of a man's success in an enterprise, we say that he is taking an immense risk. In that case the probability of failure is immense, but the uncertainty very small. In ordinary economic life, how- ever, men will rarely enter upon any business enterprise unless they think that they have at least an even chance of success, and usually not unless they think that they have more than this even chance. In other words, they will not act unless they feel that although both the probability of loss and the un- certainty increase together, both may be guarded against. Putting it in another way, the risk with which economic activity commonly concerns itself is the degree of uncertainty rather than the degree of probability. The need of protection against risk grows, therefore, with the degree of uncertainty which in economic actions increases as probability increases. Uncertainty is clearly a disadvantage, which every prudent 6oo Insurance [§ 226 man desires as far as possilile to eliminate. This can be ac- complished in three ways: by avoidance, by prevention, or by assumption of risk. (i) In certain cases involving the investment of capital, he can avoid the risk by joining to the economic transaction in question another which counterbalances it. This, as we have learned (§ 154), is one of the functions of speculation, as in the ordinary "covering transactions" of the cotton, or wheat, or foreign exchange "futures." The scope of such speculative transactions, however, is comparatively restricted. (2) He can prevent or greatly reduce the degree of risk. If he wants to be assured that his house will not burn down, he may make it absolutely fire-proof. That, however, involves an immense expense which he perhaps cannot afford. If this were the only alternative, he would make the house fairly sub- stantial, putting capital into it up to the point where the ad- ditional cost would in his opinion outweigh the chance of loss by fire. An ounce of prevention is worth a pound of cure; but two pounds of prevention are not worth a pound of cure. In modern society as a whole, far greater sums are spent in preventing losses of all kinds than formerly; in fact, govern- ment expenditures are to-day to an overwhelming extent of a preventive rather than of a remedial character. But that is because we realize that the cost of a board of health is insig- nificant when compared to that of a plague, or the cost of education slight in comparison to the economic and political losses due to popular ignorance. Municipal ordinances may compel individuals to erect substantial structures, but the prevention of risk can profitably go only to a certain point. Moreover, no matter how elaborate the precautions, there are certain catastrophes against which no human ingenuity can avail. Earthquake, lightning, flood and tempest will destroy property just as accident, non-employment or illness will de- stroy personal income. Something more than prevention is requisite. §227] Growth of Insurance 601 (3) He can face and assume the risk, but reduce it by com- bining his own risk with that of others into a group and dis- tributing the losses to the group as a whole. In this way he makes what was uncertain sure. This method, hence, is called assurance or, more commonly in modern times, insurance. 227. Growth of Insurance Insurance is in its important manifestations a modern phe- nomenon, and a result of industrial capitalism. It is due to the fact not so much that men are now more anxious to avoid risk than formerly, but that risks have increased to a prodigious extent. It seems at first blush absurd to say that modern civi- lization, which implies prudence and forethought, should at the same time mean increased risk. The contrary assertion, how- ever, which assumes that economic progress implies the dimi- nution of risk, is clearly an error. Progress and increased risk are not incompatible. Uncertainty is assuredly to be depre- cated; but if the saving of cost due to a new invention or a new economic process exceeds the risk of loss due to the greater uncertainty, society is justified in adopting it. An express train, for instance, involves more risks than a slow freight, but is none the less an indication of progress. It is only when an eighteen- hour train is put on between New York and Chicago that it becomes a question whether the risk does not outweigh the advantage. Up to that point, at all events, it is either directly or indirectly an economic gain. The increase of risk in mod- ern times is therefore ascribable to the spirit of invention and the better utilization of the forces of nature. Risk and progress increase together. The pace of modern life is rapid; competi- tion and the factory system have engendered uncertainties, whereas the leisurely mediaeval methods of customary price and handicraft industry meant a slow and certain humdrum. In- dustrial capitalism has virtually created risk as well as the way of meeting risk through insurance. The beginnings of insurance are to be sought in three entirely 6o2 Insurance [§ 227 distinct germs: primitive mutual help, the classic bottomry loans and the mediaeval rent charges. (i) Well-nigh all primitive societies practise some methods of collective responsibility. Thus in the earliest Teutonic Frithgilds we find mutual responsibility for loss by murder, fire, theft, or loss of cattle. Again, in the medieval guilds the principle of joint guarantee was almost universal. The same principle in one sense underlies the modern mutual in- surance company. But it would be hazardous to attempt to trace any direct connection between these early groups and the modern business enterprises. (2) The first^ permanent and well-authenticated form of business insurance is that of the only kind of enterprise in which capital was employed on a large scale, namely, in over- sea trading. Ancient and mediaeval insurance started with commercial capital. The marine insurance of the middle ages was an outgrowth of the ancient system of bottomry loan, known in classic Rome as foenus nauticum or pecunia trajec- titia. If the owner of a vessel needed funds, he could secure a loan on condition that it be repaid with interest, provided the ship were not lost or did not fall into the hands of enemies or pirates. The bottomry contract was therefore in a certain sense an embryonic insurance, but with the peculiarities that the insurance money was paid in advance and that it included a loan as well. In point of fact the loan, rather than the insur- ance, was the principal thing. When a new form of contract was devised in the Italian towns of the thirteenth and four- teenth centuries, whereby the payment was made after, and not before, the loss of the ship, the loan element disappeared and the contract became one of insurance. The person who as- ^ The only instance of insurance, pure and simple, in classic antiquity that has come down to us is that mentioned by Boeckh, Public Economy of Athens, where Antigenes of Rhodes undertook for a payment of eight drachmas per slave to make good his price, as estimated by the owner at the time of his escape. § 227] Growth of Insurance 603 sumed the risk was called the underwriter of the risk. In England these marine underwriters or insurers met in the coffee-houses, one of which at the end of the seventeenth century- happened to be owned by Edward Lloyd. This gradually drew to it more and more of the underwriters, until by the middle of the next century virtually all the marine insurance was done at "Lloyd's." (3) The final source of modern insurance can be traced more particularly in connection with the growth of life insur- ance. It is true that marine insurance itself after a time de- veloped in part into a kind of life insurance, for it gradually became the custom for the underwriter to insure not only the ship and its contents in the shape of commodities, but also the cattle and the lives of the passengers themselves. Far more important, however, as a source of life insurance was the mediaeval system of rent charges. These were utilized to evade the rigor of the usury laws. Loans were made to in- dividuals on the transfer of lands for a definite time, during which the lender enjoyed the fruits. These fruits were in lieu of the interest which was prohibited by statute. Gradually, however, instead of transferring the use of the lands them- selves, there was substituted in its stead the obligation to pay a rent or annuity, called a rent charge, because the annual pay- ment was charged on the rent or produce of the land. These annuities were either for life or for a term of years. Life annui- ties were granted, after a time, even by the church through the societas sacri officii. From decade to decade, however, the speculative element developed. The transaction became popular. It was techni- cally not a loan, but a transfer of land. It yielded large returns, — eight to twelve per cent on the capital invested. More important than all, it was generally accompanied by the condition that the principal should be repaid only if the annuity-payer (the borrower) should die before the annuitant, in the course of time the payment of a capital sum was dis- 6o4 Insurance [§ 227 pcnsed with, but an annuity (premium) was paid every year and the capital was handed over only in case of the death of the premium payer. Thus the sj'stem became practically indis- tinguishable from life insurance. Other mediaeval methods akin to modern insurance were the ransom and the marriage-portion annuities. In the first case payments were made to individuals to provide against possible capture by brigands. In the second case the church took loans in the shape of annuities from individuals without paying interest, but with the obh- gation to pay the capital when the daughter married. In the middle of the seventeenth century an Italian by the name of Tonti introduced the principle of survivorship in a group and thus gave rise to the modern Tontine annuity. Out of these small origins the modern system of insurance has developed. The most important forms of modern insur- ance are marine, life and fire insurance. Marine insurance has not changed much in character for several centuries. But life insurance could not develop on a large scale until the scien- tific principles underlying it were thoroughly understood. In every insurance the (gross) premium payable by the beneficiary who takes out the insurance is composed of two parts, — the so-called loading and the net premium, or sum which is mathematically necessary for the creation of a fund sufl&cient to enable the company to pay the policy in full when it falls due. The loading is the amount added to the net premium to provide for expenses and for contingencies, like loss of invested funds or failure to earn the anticipated inter- est. The important constituent naturally is the net premium. In life insurance this is the joint product of the theory of probabilities, the experience of vital statistics and a calcula- tion of interest rates. The so-called mortality table shows how many in a given large number of persons will live to each age, and consequently how many will die at each age. It is impossible to predict in what year a particular individual will die, but it is possible to state with approximate accuracy § 22-j\ Growth of Insurance 605 how many out of a given number will die at any specified age. On the basis of such a mortality table it is a simple arith- metical computation to ascertain the premium necessary to be charged at any given age in order to create a fund which will accumulate to a fixed point at a given rate of interest. The first attempt to apply mathematical principles to life annuities was made in 167 1 by Jean DeWitt, grand pensionary of Hol- land and West Friesland. The first approximately correct mortality table was constructed by Dr. Edmund Halley in 1693. As these tables became more precise, life insurance developed as a business. The first enterprise started on a really scientific basis was the Equitable Society in London in 1762. In America the first society was the New York Life Insurance and Trust Company, inaugurated in 1S30. The centre of marine insurance is still in England. But with the uncertainties, the vicissitudes anil the magnitude of modern business life in the United States, the American life insurance companies have far transcended all others in importance. Of the amount of life insurance in force in the world in 1905 four American companies — the Equitable Life, the Mutual Life, the New York Life and the Northwestern ISIutual Life com- panies — had between a third and a quarter of the entire amount. The figures are as follows: The four American companies .... $5,680,316,147 All other life insurance companies in the world . $13,862,232,600 Total $19,542,548,747 Wherever uncertainty can be removed we find insurance. In addition to life, fire and marine insurance, there have developed in recent years cattle insurance, hail insurance, glass insurance, windstorm and tornado insurance (first in America \n 186 1), aqueduct insurance (against the risk of damage from a break in the aqueduct or water mains), boiler insurance, burglary insurance, elevator insurance, automobile insurance, 6o6 Insurance [§ 228 credit insurance (through the credit indemnity companies), guaranty insurance (against the risk of breach of trust by offi- cials), accident insurance, illness insurance, out-of-work insur- ance, old age insurance, insurance against damages to others by defects in the insurer's premises, and loss-of-rent insurance. We even find such remarkable examples as machine insurance (against the risk of damage through the carelessness of work- men), strike insurance, crop-failure insurance, gate-receipts insurance (in sporting matches) and insurance of the voice of a prima donna. In Russia there is a company which insures individuals against the economic consequences of political per- secution, and in England and America there has even been talk of insurance against divorce and insurance against twins. 228. Theory of Insurance The essence of insurance is the effort to diminish the risks of uncertainty. Insurance is productive, that is, it involves an increase of wealth, because it lessens the social costs of risk. We must be careful not to confuse the loss due to the uncer- tainty with the loss due to the occurrence itself. The occur- rence is bound to happen. Death will come, fire will consume, the tornado will strike. In some cases the probability of the occurrence or the amount of the loss may indeed be some- what lessened by preventive action. A good police force will diminish burglary; an efficient fire department and a model building code will decrease fire losses; carefully devised factory laws will lessen accidents. In all these cases, however, we have to deal with prevention, not with insurance. Insurance takes the fact itself for granted; it does nothing to eliminate the occurrence. The loss is hence the same, whether we have insurance or not; the house is burned and there is less wealth than before. There is, however, in every case an additional loss, due not to the occurrence but to the uncertainty. This can be most clearly seen in the investment of capital. The ordinary man § 228] Theory of Insurance 607 will not assume risks unless he is remunerated for it. In the case of the entrepreneur, indeed, the assumption of risk is one of the elements in enterprise, because he expects in the end to derive profits sufficiently large to compensate for possible immediate losses. But when a capitahst loans funds, and there is any special degree of risk connected with the transaction, it is a familiar fact that he will increase the rate of interest by a corresponding amount. This increase in the interest rate is an addition to the expenses of the borrower. If the risk is not peculiar to the individual borrower, but it is connected with the entire class of transactions in question, and if the borrower utilizes the loan in productive enterprises, the increase in the interest rate becomes an addition to the cost of the product and thus to the price ultimately charged to the consumer. In other words, if the uncertainty could be eliminated, the price of the commodity would be lower and there would be a corre- sponding gain to the community as a whole. What is true of the investment of capital is true of the employment of any produc- tive factor. Wherever there is an economic action — whether it be the application of labor, the employment of capital, or the utilization of any form of wealth — uncertainty results in a lower degree of productivity or in a smaller surplus of utility than would be the case if the uncertainty were obviated or decreased. Insurance minimizes this uncertainty and is ac- cordingly productive of wealth. Like transportation, insurance falls under the head of ex- change of wealth, while exchange, as we know, is itself a species of production. Improved transportation reduces the cost of hav- ing a commodity in one place become a more valuable commodity in another place; improved insurance reduces the cost of having the uncertainty of the future change into the more valuable cer- tainty of the present. Transportation overcomes the disadvant- ages of space; insurance overcomes the disadvantages of time. Transportation is productive because it increases space utilities; insurance is productive because it increases time utilities. 6o8 Insurance [§ 228 It will be asked, however, how does insurance minimize un- certainty? The answer is, through the combination of risks. This is a result of the law of probabilities. If we have accu- rate statistics of fires, for example, for a term of years and take the number of fires with a given number of houses during that period, we get an average. If the figures in any year corresponded exactly to the average, there would be a cer- tainty in the number of fires, and the only uncertainty would be as to which house would burn. In point of fact, however, in any particular year there will be a variation from the aver- age. According to a well-established law, the probable varia- tion increases only as the square root of the number of cases. If there are a hundred times as many houses, there will be only ten times as much probable variation from the average loss. Hence the larger the number of cases, the less will be the uncer- tainty as to the amount of loss which will be borne by the group as a whole. Insurance combines the risks into a group, and thus reduces the element of uncertainty. The risk of the group is less than the sum of the risks of the individuals who form the group. An individual can manifestly not afford to insure himself, because the insurance fund which he would be obliged to accu- mulate would be out of all proportion to his possible earnings. An immense corporation, like a steamship company with hun- dreds of vessels, may practise self -insurance with a better chance of success; but the advantages of having the insurance business entrusted to a separate class is so pronounced that self-insur- ance is extremely rare. The great benefit of an insurance company is not only that the risks are combined, but also that they are transferred to a class who can afford to make a special study of the problem, and who can thus reduce the cost of in- surance by displaying their ability to estimate uncertainties. Whether the company is a stock corporation or a mutual company is of importance only as to the ultimate distribution of the profits of the enterprise: in the one case, as in the § 22g] Regulation of Insurance 609 other, however, the management of the l)usiness is confided to a class of experts. The more adept the insurance com- panies, and the more scientific their methods, the closer will be the correspondence between the preparation for, and the fact of, loss and the smaller will be the accumulation of the necessary insurance fund, the lower will be the insurance pre- mium, and the greater will be the net gain to the community. Insurance properly conducted is the opposite of gambling. If any one takes out an insurance policy, he frees himself from an existing uncertainty and transfers the risk to some one who is more qualified and ready to assume it; if he makes a wager with another, the newly created uncertainty attaches to both. Insurance is the transfer and reduction of risk; gambling is the creation and increase of risk. 229. Methods and Regulation of Insurance The primary function of the insurance company is to reduce uncertainty. Insurance companies as business enterprises, however, seek to enlarge their profits in other w-ays. (i) Sometimes insurance companies endeavor to combine the business of insurance and of prevention. Strictly speak- ing, the insurance premium is the payment made to the com- pany to induce it to assume the risk. But fire insurance companies, for instance, conduct the fire-patrol system, and organize for protecting coverings in case of fire; and the cost of this is added to the insurance proper and is included in the so-called premium. In reality, however, as we have seen, this is prevention, not insurance: it tends to reduce the loss through the occurrence, not the uncertainty of the occurrence. In the same way certain fire insurance companies make a lower rate when the insurer engages to use certain precautions, like better buildings, automatic fire-sprinklers, etc. This again is no insurance, but prevention. (2) Life insurance companies do an immense business not alone as insurance companies but as media of secure invest- 39 6 1 o Insurance [§ 229 ment. As a consequence there is a great variety in the kinds of policies issued. The ordinary form is the annual dividend policy. Here, by the time the second annual premium is pay- able by the policy holder, a dividend is declared on the policy. This may take the form of a "reversionary addition" which is added to the amount of the insurance, the premium remaining the same; or it may be a "cash dividend," necessarily smaller, which can be used to reduce the premium, the amount of the in- surance remaining the same. With every year this dividend grows, and after the lapse of several years the policy acquires a "cash surrender value," that is, a sum which the company will pay to the holder on the surrender of the policy. In lieu of the annual-dividend policy, the holder may prefer a deferred- dividend policy, according to which a cash sum or its equivalent will be paid at the end of a term of years. Thirdly, he may choose a policy without any dividends at aU, the so-called non-participating policy, under which he obtains his insurance at a lower rate in consideration of the fact that he waives all claims to dividends. Again, the policy may be either a life policy payable upon his death or an endowment policy, whereby the insurance is payable to the beneficiary at the expiration of a certain period. These endowment policies may, like the others, be issued either on the annual-dividend or the deferred- dividend plan. Finally, the policy may be a term policy or a limited-payment life policy, where the premiums do not con- tinue for life, but are limited to a definite number of years, after which the policy becomes "paid up" and remains in statu quo until the death of the insured. Moreover, there may be all manner of combinations of these various kinds of policies, such as continuous-instalmcnt-endowment, yearly- renewable-term, return premium, and double-endowment policies. It is especially in such cases as this, where the accumulated surplus becomes so enormous, that the wider problem of public policy assumes considerable importance. In the case of banks, § 229] Regulation of Insurance 611 as we know, legislation is needed to protect the reserve. In the case of insurance, which is primarily a method of making accumulations to protect the great mass of beneficiaries, the need of regulation is even more obvious. Almost all of the American states have a legislative code and an administrative department designed to control the various classes of insurance companies. The recent scandals connected with the financial manage- ment of the leading insurance companies in the United States, have emphasized the necessity of a more carefully devised legislation and a more effective supervision calculated to enforce responsibility and to guarantee solvency. In some countries, as in Australia, the public is so solicitous of the in- terests of the policy holders that the government has even assumed the management of the insurance business, at least in part. Some of the American commonwealths, like Wisconsin, have also made a similar beginning in the state provision for life insurance. Radical as such a step may seem, it is at all events indisputable that there is both room and need for careful public scrutiny and effective social supervision of a business that has intertwined itself with the very roots of modern economic life. In the above exposition we have only rarely alluded to one group of insurance which represents social policy rather than business interests, and which is primarily applicable to the great mass of the working population — namely so-called social in- surance. This is so important that we must assign to it a sepa- rate discussion (chapter xxxviii). Part IV Government and Wealth CHAPTER XXXV SOCIALISM AND PUBLIC OWNERSHIP 230. References Socialism: T. Kirkup, History of Socialism (3, 1906); J. Rae, Con- temporary Socialism (1908); A. E. F. Schaeffle, The Qmntessence of Socialism (1889); W. Sombart, Socialism and the Social Movement in the Nineteenth Century (1909); O. D. Skelton, Socialism, a Criticism and Analysis (1911); M. Beer, History of English Socialism (1919); W. E. Walling, Socialism as it is (191 2) and The Larger Aspects of Socialism (1913); E. V. Zenker, Anarchism, A Criticism and History (1898); J. Spargo, Socialism (1910); M. Hilquitt, History of Socialism in the United States (1903) and Socialism in Theory and Practice (1909); V. G. Simkohvitch, Marxism and Socialism (191 2); E. Bohm-Bawerk; Marx and the Close of his System (1891); J. W. Hughan, The Facts of Socialism (1913); J. G. Brooks, American Syndicalism: the I. W. W. (1913); L. Levine, Syndicalism in France (Columbia Series, 1914); R. F. Bris- senden. The L. W. W. {Ibid., 1919). Public Ownership: H. C. Adams, The Relation of the State to In- dustrial Action (Am. Economic Association, Publications, I, 1886); E. W. Bemis, ed.. Municipal Monopolies (1899); Major Darwin, Municipal Trade (1904); B. Shaw, The Common Sense of Municipal Trading (1904); The Facts of Municipal Ownership, Report of the Commission of the National Civic Federation (3 vols., 1907); D. F. Wilcox, Municipal Franchises (2 vols., 1910-11). Subsidies: R. Meeker, History and Theory of Shipping Subsidies (1905); W. W. Bates, The American Merchant Marine (1902); F. R. Rutter, The International Sugar Situation (1905); R. G. Blakey, The Beet Sugar Industry and the Tarif (1912). 231. Socialism Government was devised in large measure to afford protec- tion and to subserve the economic interests of the community. 6l2 § 23i] Socialism 613 From the very outset therefore more or less influence was ex- erted by the constituted authorities on the progress of wealth. While the state, however, has always participated in economic life, there have been two opposing theories, neither realized in practice, but both nevertheless advanced as ideals toward which human effort should be directed. On the one hand we have the advocates of laissez-faire. Their programme is "hands-off," and their aspiration is to reduce the function of government to the narrowest possible limits. The logical conclusion of such a theory is anarchy or no government. For even if we accept the "policeman the- ory" of the state, — the doctrine that government is instituted only to protect liberty and property, — it is obvious (as was pointed out in chapter xi) that protection involves some re- straint on the liberty of others. If, therefore, restraint or in- tervention is to be completely abolished, there must be no restrainer, that is, no government. While we may reasonably object to the ordinary anarchist who illogically uses violence in order to bring about the absence of compulsion, the theoret- ical anarchists like Tolstoi and Kropotkin in Russia, Proudhon and Reclus in France, Warren and Tucker in America, are true to their premises. If we are to have no immixture of govern- ment in the economic life of the individual, it must be con- ceded that the only sure means of compassing the desired end is to abolish government. At the opposite pole are to be found those thinkers who discover the root of all economic evil in private property. Here, again, the logical conclusion is that of communism, the entire sinking of individual property rights in those of the group. This is, however, so manifestly opposed to the consti- tution of human nature that the idea has remained a counsel of perfection. Every communistic experiment has been more or less short-lived. Less thorough-going but almost equally ideal is socialism, which is willing to admit private property in consumption, but demands a community of production, that 6 14 Socialism and Public Ownership [§231 is, the assumption by organized society of all the means of pro duction. According to the "scientific socialists" private prop- erty in the means of production is an anachronism. While socialistic theories are almost as old as economic speculation itself, it is only since the advent of the modern in- dustrial system that socialism has taken a deep hold on the mass of men. This is obviously due to the fact of the prodigious increase of wealth, coupled with the triumphant march of de- mocracy, — both of them, as we know, the results of industrial capitalism and the factory system. The unlocking of the secrets of nature, the conquests of new worlds, and the vast opportu- nities opened to private initiative have made this the era of individualism. The hardy, the venturesome and the conspicu- ously able, together with the adroit, the fortunate and the occa- sionally unscrupulous, have hailed the advent of these well-nigh limitless chances to forge ahead, with but scant regard to the coincidence between their interests and those of others. The Anglo-Saxon "Each for himself, and the devil take the hind- most," like the Romanic "God helps him who helps himself," has been the watchword of modern economic life. In contrast to this idea is to be noticed the solidification of a wage-earning class, now definitely separated from the owner- ship of the tools of production. Their very progress to a more human standard of life has made them painfully conscious of the inequalities of wealth and opportunity, of crying social evils and miscarriages of justice, and of the seizure by indi- viduals of much that seems to them the national heritage. In- stead of being the voice of envy and confiscation, as it often appears to the smug, the sleek and the contented, socialism is to the elect few an inspiring ideal and a veritable religion; while in the case of the mass it is an inarticulate cry of anguish and a vague expression of the demand for social progress. Yet with all its inspired ideals socialism is as one-sided as anarchism. If anarchism forgets the state, socialism forgets the individual. If anarchism exaggerates the possibilities of §232] Public Ownership 615 private action, socialism exaggerates those of public action. The economic theory of "scientific socialism" is, as we have repeatedly seen, completely erroneous. It starts out with the defective labor theory of value; it unjustifiably restricts labor to manual labor; it misconceives the theory of profits; and it erects into a veritable fetish the doctrine of class conflict. So- cialism as a movement, however, is not bound up with any such scientific or unscientific theories. Practical discontent, not sci- entific formulas, has engendered modern socialism; to Lassalle and not to Marx must be ascribed the real paternity of social- ism as a practical movement. In his anxiety to escape from the evils of the present, the socialist is willing to entrust himself to the fortunes of a dubious future. Impatient of the shortcomings of distribution, he does not realize that his scheme will endanger production. Desir- ous of eliminating profits, he does not see that he will stifle progress. In his effort to remove actual inequalities he bids fair to reduce economic life to the hopeless level of a dull and low uniformity. With human nature as it exists at present, and as it bids fair to continue for an incalculable future, social- ism, if ever realized in practice, as at present in Russia, would be the death knell of economic advance and true social betterment. 232. Development of Public Ownership To affirm, however, that socialism, or the assumption by government of all the means of production, is theoretically in- defensible and practically injurious, does not imply that the government must refrain from assuming any of the means of production. If there are any criteria by which to distinguish between different kinds of enterprises, it is possible to advo- cate government ownership in some cases without incurring the imputation of socialism, or involving the necessary accept- ance of government ownership in other cases. It may be laid down in general that there are three con- ditions of government ownership. The government must do 6i6 Socialism and Public Ownership [§2321 what the private individual cannot do, will not do and ought not to do. Private enterprise can, for instance, no longer provide an army or a navy. Again, private enterprise was not willing to construct the first New York subway. Finally, it is universally agreed that such matters as justice and police pro- tection ought not to be left, as formerly, to private individuals. There i-s, however, still a large fringe of occupations where there is an opportunity of discussion as to whether private in- dividuals ought to be permitted to carry on the enterprise. It is in this fringe that the modern problem of government owner- ship has arisen. Government enterprise in such occupations may be divided into fiscal and social monopolies. The government may decide to monopolize a business for purely fiscal reasons. In the case of certain raw materials or easily manufactured articles of wide consumption which readily lend themselves to the purposes of taxation, the government may prefer to conduct the operation itself and to enjoy the monopoly profits. Thus some of the European governments have a monopoly of the sale or sometimes of both the sale and the manufacture of tobacco. In others we find a government monopoly of salt, and in the Eastern countries we find monopolies of opium, of tin and of other commodities. The monopoly of spirits, however, as in Russia, Switzerland and up to 1907 in South Carolina, is only partly fiscal in character. A consideration of fiscal monopolies belongs properly to the science of finance. It may be said, nevertheless, that in the most progressive countries fiscal monopolies are not desirable, because the government at best secures as revenue only the surplus between cost and selling price, while in the case of pri- vate competition there would be a tendency for cost to fall. In the former case, therefore, the public really loses more than the government receives, while in the latter case the government may secure the same revenue through indirect taxation, and the price of the product to the consumer ^yill §232] Public Ownership 617 nevertheless be lower. When the political objections to a high indirect tax, however, seem considerable, or when the chances of private competition are increasingly remote, it may be wise to secure the desired revenue by fiscal monopoly. Some fiscal monopolies, indeed, are no longer tolerated by public opinion. This is in general true of lotteries, which were extensively employed in former times: especially in America many churches and educational institutions were started through this agency. Government lotteries were prob- ably based on the quaint defence of Petty in the seventeenth century: "A lottery is properly a tax upon unfortunate self- conceited fools. The world abounds in such fools; it is not fit that every man that will may cheat every man that would be cheated. Rather it is ordained that the Sovereign should have guard of these fools, even as in the case of lunatics and idiots." Nowadays, by a revulsion of popular feeling, not only public, but private, lotteries have disappeared in Anglo-Saxon countries. The continuance of the government lottery in southern Europe and in even so enlightened a country as Prussia is as surprising as it is deplorable. Contrasted to the fiscal monoplies of government are the social monopolies, that is, enterprises which are undertaken by government for general social reasons. If we look at the existing examples of government ownership, we shall find that they may be included under the following heads: I. Transfer of values: (i) Coinage; (2) Non-Metallic Money; (3) Banking. II. Transfer of Products: (i) Markets; (2) Docks and Piers. III. Transmission of Intelligence: (i) Post-Office; (2) Tele- graph; (3) Telephone. IV. Transportation of Persons and Freight: (i) Roads; (2) Canals; (3) Ferries; (4) Bridges; (5) Railroads; (6) Ex- press Companies. V. Transmission of Utilities and Power: (i) Waterworks; 6i8 Socialism and Public Ownership [§232 (2) Gas and Electric Light Works; (3) Electric Power Works; (4) Steam-Heat and Hot- Water Lines; (5) Irrigation and Power Canals. What is common to all these enterprises is that they are of fundamental social importance, and either lie, or may lie, at the basis of general industry. This is, in fact, the criterion which distinguishes them from ordinary occupations, — the existence of a sufficiently widespread common interest and public im- portance to warrant their assumption by the government authorities. This interest and importance did not always ex- ist, do not everywhere exist at present, and are not found in the same degree in the various occupations or countries. With wide variations in detail, we can trace a general law of develop- ment, in five stages: (i) Everywhere at first all of the above enterprises are in private hands, and are used for purposes of profit and some- times of extortion, like the highways, the coinage and the post offices of mediaeval Europe, or the early bridges, canals and markets. (2) In the next stage they are "affected with a public interest" and are turned over to trustees who are permitted to charge fixed tolls, but who are required to keep the service up to a certain standard. This was the era of the canal or turn- pike trusts and companies. (3) In the subsequent stage the government assumes the business, but manages it for profit, as is still the case in some countries with the postal and railway systems. (4) In the fourth stage the government charges tolls or fees to cover expenses only, as was recently true of canals and bridges, and as is the theory of the postal system and municipal water supply in America to-day. (5) In the final stage the government reduces charges until finally the service is free and the expenses are defrayed by a general tax on the community. This is the stage now reached in the common roads, in the coinage, in most of the canals §233] Conditions of Public Ownership 619 and bridges, and which has been seriously proposed by officials of several American cities for other services, like the water supply. It is obvious, however, that many of the industries referred to have not gone through the whole of this evolution, and that some of them still remain in the first stage. It is also clear that where we find other isolated examples of government ownership, as in the case of powder mills or shipyards or ord- nance factories or even in the insurance business and frozen-meat transportation of Australasia, we must ascribe them to the sense of the overwhelming public importance of the enterprise and the inadequacy or proven unfitness of private individuals to conduct them. What, then, are the reasons that weigh with some communities in inducing them to permit industries of paramount public importance to remain in private hands? 233. Conditions of Public 0"wnership The three conditions which must be carefully weighed before government ownership and management of any industry are decided upon are: (i) the simplicity or complexity of the enterprise; (2) the amount of capital invested; and (3) the effectiveness or ineffectiveness of social control. In the case of the industries included on page 617 under the head of transfer of values there is comparatively little, dis- cussion. The coinage of money is now everywhere conceded to be a public function. In the case of the banking business, however, which is far more complex, calls for a large capital and is easily made amenable to pubhc control, the decision is clearly in favor of private ownership. The only moot question is as to whether the paper currency should be issued by private banks or by the government. The decision of this question is, as we have seen, largely dependent upon political conditions. Coming to the industries mentioned under the second head, it is to be noted that the markets, which in the middle ages were almost exclusively private, are now generally in public 620 Socialism and Public Ownership [§ 233 hands. In England as elsewhere in Europe the vested rights of individuals in the markets are being bought out by the local corporations. In America the large provision markets are fre- quently owned by the cities, and yield a substantial income. In the case of the docks and piers, much the same develop- ment has taken place. In America the progress has not been so rapid as abroad, but in cities like New York the municipali- zation of the water front is leading to a great increase of facili- ties as well as of public revenue. When, however, we come to the last three classes in the schedule, we reach burning problems. In a few of the sub- divisions, indeed, the controversy has been laid to rest. For instance, in the case of the common highways the process is about complete and the private turnpike companies have well nigh disappeared. In certain rural sections there is still some debate as to whether the roads should be toll roads or free high- ways, but in general it may be said that the discussion is a thing of the past. The same is true in the main of bridges and canals. The old private canals have almost entirely vanished, and it is only about a quarter of a century ago that canal tolls were abolished on the Erie Canal. In the case of ferries a similar development is to be noted; in Boston and New York City the process of municipalization is proceeding apace. The same considerations apply to the fourth class of indus- tries. Everybody, with the exception of extreme individualists like Herbert Spencer, is agreed that the post-office should be in public hands. The amount of capital invested is insignifi- cant, nothing being needed but the sites and buildings and a few simple devices for stamping and transporting the letters; the management also is comparatively simple. Yet even in the post-office it is a notorious fact that government manage- ment is more costly than private management. An American postmaster-general once stated that if he were at the head of a private company he could perform the postal business about §233] Conditions of Public Ownership 621 one-fourth cheaper, by a more effective administration and consolidation of post-oiJ&ces, which is now impossible because of political conditions. Nevertheless, no one would think of abandoning the govern- ment postal service. The only controversy arises over what are in other countries ancillary features of the service. Such, for instance, is the parcels post. Almost everywhere, except until very recently in the United States, this is a well-recognized postal function; here, however, the private express companies were so firmly intrenched that it was not until 1913 that the parcels post was introduced. All the arguments in favor of a letter post apply almost equally well to a parcels post. In the case of the telegraph practically the same is true. The investment of capital is indeed somewhat greater than in the case of the post, but it is still insignificant as compared with other interests, while the complexity of management is likewise slight. In every other country in the world, including England, Australasia and Switzerland, the -telegraph, although frequently starting out in private hands, has been brought under government management. In the United States, in fact, the telegraph began as a government business in 1844, and was abandoned chiefly because the postmaster-general at that time erroneously thought that it would prove a dire fail- ure, and did not desire to commit the government to a haz- ardous experiment. Yet the originator of the telegraph, who was wise enough to appreciate the final outcome, did not con- ceal his opinion that it ought to form a natural adjunct to the government post-office. The chief reason why there is not a louder outcry for a govern- ment telegraph is that the abuses of the private telegraph are not important. On the other hand, it must not be for- gotten that while postal rates are lower here than abroad, tele- graph rates are much higher, for short as well as for long dis- tances. The use of the telegraph service in the United States is accordingly far slighter than in England or France. Every 622 Socialism and Public Ownership [§233 argument in favor of government post applies almost equally to the telegraph. In the case of the telephone the situation is a little different. The complexity of management is indeed slightly greater than in the telegraph, and it requires somewhat more care to keep up to the level of modern science. Nevertheless the difference is not material. Most countries have nationalized their telephone system, and even in England, where the private telephone was at first in complete control of the field, it was taken over in 191 1 by the government. But while under government man- agement abroad telephone rates are in some cases lower than in the United States, the efficiency of management abroad cannot be compared with that in the United States. The choice is really one between low government rates coupled with poor service and high private rates accompanied with good service. While the arguments hitherto advanced would lead to govern- mental assumption- of the telegraph and in a less degree to that of the telephone, they would lead to precisely the opposite conclusion in the case of railways. There are, in fact, three sets of arguments against government railways, — the economic, the fiscal and the political argument. (i) The railway is the most stupendous of modern industries. Not only is the capital account enormous, but the railway business calls for the most delicate handling, and must needs pay for the highest possible business ability. Railway presi- dents of single lines to-day receive salaries superior to that of the President of the United States; for without consum- mate capacity the attempt to run a railway would be a failure. The time may come in the distant future when democracy will be willing to pay higher salaries, and when the ablest men will be ready to give up comfort and wealth for the more ideal end of serving the public. Under present conditions in the United States, however, to turn over the greatest, the most complex and the most fundamental industry of modern times § 234] Municipal Monopolies 623 to the government would inevitably lead to such a decrease in efficiency as to become well-nigh intolerable. (2) The revenues of our railways were, before the Great War, about triple those of the government. The entire budget would then depend upon the temporary prosperity or ill fortune of the railway system. In bad times the railway revenues shrink by tens or even hundreds of millions. This would so embarrass the income side of the national budget as to necessitate a com- plete revolution not only in our tax system, but also in our entire budgetary methods. This point, hitherto almost com- pletely overlooked, would in itself suffice to defeat the scheme for government railways. (3) In comparison with railway charges within the country, tariff rates into the country are of slight importance. The political demoralization that occurs whenever a new tariff is framed is familiar to all. The imagination shrinks from the thought of what would happen in the United States if the nec- essarily continuous manipulation of railway rates were entrusted to the tender mercies of the legislature, or of an administrative body under its immediate influence. These arguments against government railways in the United States do not of course imply that the railways should be let alone. Social control of private railways, however, has as yet scarcely begun, and until the ineffectiveness of social control has been affirmatively proven it would be rash in the extreme to plunge into government ownership. 234. Municipal Monopolies There still remain for discussion the fifth class of businesses mentioned on page 617. It will be observed that with the exception of the last item they have two points in common: they are local enterprises and, because they depend on the use of the streets which cannot be continually torn up, they tend to become monopolies. It is for these reasons that they are usually called municipal monopolies, or public utilities; and 624 Socialism and Public Ownership [§ 234 because of these facts the street railways or omnibus lines are ordinarily included in the same category. In the United States municipal ownership has been common in the case of waterworks, somewhat less usual in electric lighting, rare in gas works, and only just beginning in street railways. In Great Britain, on the other hand, waterworks have ordinarily been in private hands, but gas works to a large extent under municipal control, while of late there has been a marked tendency toward municipal tramways and electric lines. In 1902, for instance, there were 118 municipal tram- ways with 85s miles of track, as compared to 115 private tram- ways with 598 miles of track. In the United States, in 1902, fifty-three per cent of all waterworks were in the hands of the public, and in cities of over 8,000 population the waterworks were owned by the municipalities in 135 cases, by private com- panies in only 36 cases; whUe the gas works were owned by the cities in only 5 cases, by private companies in 130 cases. At the same date only 13 cities owned their electric lighting plant. The chief examples of municipal street railways in 1914 were the New York and Boston subways, and the electric surface railways in Seattle, San Francisco, Detroit and Bay City. In the case of the water supply the arguments are decidedly in favor of municipal ownership. The social interests are of the most commanding importance, and there is the utmost simplicity of management. When the watershed, the aqueduct and the water-pipes are ready, nothing is needed but a few engineers to regulate the pressure and a few workmen to re- pair leaks. It is true, indeed, that with the growth of cities the necessary capital augments, until as in the case of New York tens of millions may be needed. On the other hand it must be remembered that water rates can easily be fixed at such a point that, without unduly burdening the public, they will be sufficient to defray interest on the debt as well as the running expenses. Even here, however, the experience of our large cities shows how important is a good system of municipal § 234] Municipal Monopolies 625 accounting in order that the capital and income accounts may be kept distinct, and in order that the public may understand what is the actual cost of the enterprise. With the gas business the matter is not so simple. Here the complexity of management is considerably greater. The stimulus of private initiative is needed to a far greater extent in order that the management may avail itself of the constant improvements in the process, thus leading to a reduction of cost. In the one great example of municipal gas ownership that has existed in America, — namely, in Philadelphia, — the results were satisfactory neither to the treasury nor to the consumer. Whatever may be said of the dubious methods employed by the private monopoly to which Philadelphia has farmed out the management of the gas service, there is little doubt that the consumer as well as the city has profited in a noteworthy degree. In the case of the electric light the arguments in favor of municipal ownership are somewhat more convincing, at all events in the smaller towns, where natural conditions are favor- able and where the outlay is relatively inconspicuous. Although the complexity of the enterprise is largely minimized, consider- able care must still be observed in the financial management. Finally, with street railways the arguments for municipal operation are less strong than in either the water or the elec- tric light supply. For here, although the complexity of man- agement is by no means so great as in the ordinary railroad, it is of far more importance than in the telegraph, the telephone or waterworks. It is unlikely that the municipal authorities of any American city would have had the courage to undertake such revolutions in the methods of transportation as have been completed during the past few decades in our chief cities. Furthermore, the financial problems involved are intricate. Even if municipal ownership be decided upon, however, the argument would seem to be in favor of following the plan of the New York subway, — namely, government ownership but 40 626 Socialism and Public Ownership [§ 234 private management under conditions fixed by the municipality, which should safeguard the social interests of the community, the needs of the treasury, and especially the legitimate de- mands of the employees. In this way the best features of each system might be retained. It is obvious, then, that in considering this problem we must not be led away by preconceived notions on either side. The outcry of socialism is a bugaboo, for in these enterprises free competition is inapplicable. The only choice is between a pub- lic monopoly and a private monopoly under social regulation. The problem is not simply the abstract one of the general lim- its of government activity, but the very concrete one as to how far the practical political conditions in any locality permit of the application of the abstract principle. We may all agree that in these enterprises the public element is the predomi- nant one. We may all concur in the belief that even where it seems desirable to retain for a time the management in pri- vate hands, the period may come when the advantages to be derived from private management under social control will be outweighed by the benefits of direct government operation. Yet in a democracy it is always wise to make haste slowly and to refrain from taking a leap in the dark. It is more than likely that the future has in store a complete transference of quasi- public enterprises to the public itself, if for no other reason than to check the corruption and control of local politics by vast business enterprises. Until general economic and politi- cal conditions, however, are ripe for such a radical change, the probable result would be the substitution of one kind of cor- ruption for another, and the realization of an abstract principle at the cost of efficiency and progress. That social control of quasi-public enterprises will in the near future undergo a marked development is beyond all question. But it is not until social control has been tested and found wanting that we shall be ready for the further step of public management of the gas supply and the street railways. § 235] Government Regulation 627 235. Government Regulation If government ownership is, as we have seen, limited to a comparatively narrow range of occupations, government regu- lation of private enterprise is widespread. There are two currents discernible in the course of history: one has set away, from government interference; the other in its direction. The progress of liberty and the recognition of the advantages of competition in modern times have caused the government to abandon many forms of regulation which were common in ancient and mediaeval civilizations, but the complexity of modern capitalism and the abuses of freedom have necessitated the development of new kinds of government activity. The chief forms of modern government interference with private industry may be put under the four heads of action in behalf of consumers, of producers, of- investors and of the com- munity in general. (i) In the middle ages the government interposed in behalf of the consumers either to guarantee good work or to insure reasonable price. Both of these forms of interference have disappeared in general industry to-day, because custom has been replaced by competition. The producer who gives short measure or turns out a defective product or charges an exor- bitant price cannot retain the trade in the face of competition. In modern times, accordingly, we find that the chief form of in- terference with competitive industry in behalf of the consumer is legislation to safeguard health, as in the case of food inspec- tion and quarantine regulation. In addition we have the cases where competition disappears, as in the actual monopolies mentioned in the preceding sections of this chapter and in the so-called trusts to be discussed in the following chapter, and where social control becomes requisite. Unregulated private monopoly is a menace to the consumer. (2) On the other hand, the interests of the laborer have been so materially affected by the advent of the factory sys- 628 Socialism and Public Ownership [§ 235 term that modern interference on behalf of the producers is well-nigh exclusively limited to them. As we shall see in the succeeding chapters, there are five classes of such interference, all of which are rapidly becoming universal: (a) legislation to safeguard health, through the so-called factory laws, applicable to men, women and children alike; (b) legislation to ensure safety through employers' liability and compensation laws; (c) legisla- tion regulating maximum hours of work; (d) legislation fixing minimum wages; and finally (e) compulsory insurance against illness, old age or lack of employment. While the advisability of some particular application of this principle in a given country is naturally open to question, there is no longer any doubt, as we have learned in chap- ter xi, that such forms of interference are not necessarily incompatible with the highest ideal of liberty, in the positive and social sense. Experience alone can disclose the line be- yond which such legislation may imperil business enterprise and thus injure the prospects of the laborer himself. To the social economist, however, who remembers that the objective is man in relation to wealth rather than wealth in relation to man, the prosperity of a so-called successful business which rests upon a degraded and miserable labor force is illusory and not really worth having. (3) In former times the striking example of interference by government in case of investment was in behalf of the borrower. The usury laws, designed to protect the unfortunate debtor, have, as we know (§ 170), been rendered almost com- pletely unnecessary through the growth of competition in the loan of capital. This same development has, however, brought about the need of intervention of the opposite kind. To-day it is the lender or investor in corporate enterprise, and not the borrower, who requires protection. Nowadays it is rare to find any one who is not a depositor in a savings bank, a policy holder in an insurance company, a stockholder in a railroad or other corporation, or the possessor of a bank note or a bank account. § 236] Bounties and Subsidies 629 So wide and intricate are the ramifications of modern credit and finance that investors or creditors are obliged to rely more or less implicitly on the representations and good faith of the managers of these enterprises. Sad experience, however, has shown that the conception of real trusteeship among those entrusted with the funds of others is by no means so sacred as it ought to be; and government has been obliged every- where to take precautions to define and to enforce responsi- bility. Here, again, there are dangers on both sides, the risk of over-rigidity which may hamper legitimate enterprise, and the danger of lax accountability which may destroy confidence. That, however, some solid measure of regulation is requisite can no longer be successfully disputed. 236. Bounties and Subsidies We come, finally, to the case of government interference in behalf of the general interests of the community. This takes the form of protection, which has already been discussed in chapter xxxii, and also of bounties and subsidies. The danger of such intervention is that particular interests may foist themselves upon the legislator in the guise of general interests. Bounties may be classified as (a) military bounties, (b) forest bounties, (c) agricultural and industrial bounties, and (d) land transport and shipping subsidies. The first two are not primarily economic in character and may be passed by. Agri- cultural and industrial bounties were frequent in former cen- turies, but disappeared in the main with the downfall of the mercantile system. The chief modern example is that of beet sugar in Europe, and it is so instructive as to merit some attention. The continental blockade under Napoleon put a stop to the colonial trade in cane sugar and gave an impetus to the culture of beets. After peace was established the beet-sugar industry was strong enough to claim and to receive encouragement in France, and the movement spread somewhat later in other continental countries. Cane sugar was shut out, and as the 630 Socialism and Public Ownership [§236 yield of beet sugar now exceeded the domestic demand, it be- came necessary to secure a foreign market. This was accom- plished by exempting sugar for export from the internal excise tax imposed for revenue purposes, or by a drawback. The drawback was frequently greater than the excise tax, and thus was to all intents a concealed bounty. Other countries even granted direct bounties on export. The effect of this legislation was to confine the market of each country to domestic sugar, to raise prices greatly at home, to diminish domestic consumption, to provide a large surplus for export, to lower prices on the world market enormously, and ultimately to cause a serious financial loss to each bounty- granting country. While the cane sugar production of the world increased from 1,200,000 long tons in 1853-1854 to 4,300,000 tons in 1903-1904, that of beet sugar rose from 200,000 tons in 1853-1854 to 6,700,000 tons in 1901-1902. In the half-century the proportion of beet sugar rose from 14 to 58 per cent of the total output of sugar. The system of sugar bounties gave Great Britain cheap sugar and made British jams and preserves world-famous; but it ruined the West Indies, brought about the Cuban war, and was continually more burdensome to the European continent. After several unsuccessful attempts the Brussels convention of 1903, participated in by the chief European countries except Russia, abolished all bounties and excessive drawbacks as well as all discrimination, beyond a certain moderate point, in the domestic market against foreign sugar. Expenses thereupon decreased to such an extent that many countries also lowered their excise taxes. As a consequence domestic prices fell, export prices rose, beet sugar became more profitable and government expenses were reduced. The history of sugar bounties is an excellent illustration of the danger and ultimate inefficacy of agricultural or industrial bounties on a large scale. It is for this reason that such boun- ties are now extremely rare. In the United States the only recent §236] Bounties and Subsidies 631 examples are the bounty on sugar, which was granted during the early nineties for the four years that foreign sugar was imported duty free, and the insignificant bounties for beet sugar granted by a few of the Western states. Shipping subsidies, on the other hand, are still a topic of active discussion. The experience of the United States with its subsidies to the Collins and Pacific IMail lines during the two decades from 1845 to 1867 was so unsatisfactory that the system was abandoned. More recently, however, subsidies not only in the shape of postal subsidies but also for tonnage, and in some cases even for construction, have been inaugu- rated by Great Britain, Germany, France, Japan and other countries. In the United States they were, until the Great War, limited to postal subsidies. The argument for shipping sub- sidies is akin to that for protection in general, which has already received attention. The situation since the close of the war in 1918, with the prodigious output of vessels by the govern- ment, is of course ver\' different from that of the preceding period. But before such subsidies are granted on any considerable scale it must be shown that a large merchant marine is not likely to develop of itself, that the aid conferred by government will really stimulate the efficient rather than shelter the inefficient and that the subsidies will not be confined to a few favored enterprises. CHAPTER XXXVI THE CONTROL OF TRUSTS 237. References W. S. Stevens, rndiistrial Combinations and Trusts (1913) and Unfair Competition (191 7); J. W. Jenks, The Trust Problem (191 7); J. B. Clark, Control of Trusts (1912); C. R. van Hise, Concentration and Control (1912); Bruce Wyman, Control of the Market (1911); W. J. Brown, The Prevention and Control of Monopolies (1914); O. W. Knauth, The Policy of the U. S. towards Industrial Monopoly (1914); A. S. Dewing, Corporate Promotions and Reorganisations (1914); F. Walker, The Law concerning Monopolistic Combinations in Continental Europe (Polit. Science Quarterly, vol. xx, 1905). 238. The Causes of Trusts We have learned in a previous chapter that v^^hat are popularly called trusts are simply combinations of capital in huge corpora- tions or holding companies. We have also learned that this world-wide movement toward consolidation responds in large part to the increased efficiency and economy of production. As it was previously intimated, however, it would be a mistake to ascribe the development of trusts in the United States en- tirely to this cause. In fact, many of the largest combinations have succeeded through different methods, which may be summed up under the term unfair competition. Unfair competition is indeed not confined to trusts. The opportunities, however, of indulging in these practices, repro- bated by the higher business ethics of to-day, are multiplied in the case of combinations. The chief forms of this unfair com- petition are the following: (i) The formation of bogus independent companies, designed to deceive the public. 632 § 238] The Causes of Trusts 633 (2) The reduction of local prices for the time being and often below cost, in order to drive the competitor out of business, with a resulting increase of price as soon as the object has been accomplished. Midway between (i) and (2) and partaking of the characteristics of each is (3) The utilization of special devices like "fighting brands" or "fighting ships." (4) The use of certain articles as a condition of the use of other articles that are needed. This practice, based on what are often called "tieing clauses," because the use of one is tied up with that of another, is found especially in the case of expired patents. (5) The acquisition of new devices for the sake not of utiliza- tion, but of withholding them from rivals. (6) The employment of secret agents, spies or detectives. (7) The exchange of customers' lists, sometimes called "yes and no" lists, with an agreement to refuse to sell to those who deal directly with consumers. A modification of this is the classification of customers in order to avoid "scalping" and to provide that the wholesale dealers should sell only to certain specified retail agents. (8) The production of defective and low-priced articles, as in the case of the "knockers," so called because designed to knock out competing articles. (9) Factors' agreements, and similar exclusive arrangements, whereby supplies are withheld from dealers who accept rival commodities. An added advantage has in the past often been secured through railway rebates. These, however, are now much less frequent than formerly. The influence of the tariff must also not be over- looked. Mr. Havemeyer of the Sugar Trust went so far as to state that "the tariff is the mother of trusts." In that bald form, of course, the statement involves an exaggeration, for not only are there trusts which derive no benefit from the tariff, but we find similar combinations in European countries where 634 "^^^ Control of Trusts [§ 239 protective duties are lower or even non-existent. There is, however, little doubt that an exaggerated duty, by enabling an industrial combination to maintain its prices at a relatively high level, may augment the advantages enjoyed by a trust already In possession of the field, even though the benefit of these in- creased prices would ordinarily accrue also to the independent competitors. The causes of trusts, therefore, may be declared to be various. Their object is to secure larger profits, and to the producer it is immaterial whether these profits are attained by efficiency and economy, or by unfair competition. That both causes have influenced the development of trusts is reasonably certain. From the point of view of the general welfare, the greatest bene- fits will obviously accrue by eliminating as far as possible the latter and giving the freest possible scope to the former. 239. The Effects of Trusts The effects of combination may be regarded from the five- fold standpoint of the owner, the wage-earner, the independent producer, the purveyor of the raw material and the consumer. (i) The owner in modern times is the corporate investor. So far as the problem is one of general corporate profits depend- ing on the ordinary mutations of business, or affected by the capitalization of the enterprise, it has already been touched upon in a preceding chapter. The surest protection of the in- nocent investor is to be sought, as we have seen, through the avenue of publicity and of the responsibility imposed upon corporate trustees. (2) The influence of industrial combination upon the wage- earner is to accentuate the general effect of capital upon wages. This has already been studied. So far as the prosperity of the laborers is bound up with the productivity of the enterprise, the industrial combination which tends toward greater stability and enlarged productivity may work toward an improvement in their condition. To this may be opposed the consideration § 239] The Effects of Trusts 635 that the mere fact of concentration may enable the enterprise to present a more solid and effectual front to the demands of the trades-unions. Thus the earlier indifference of the Amer- ican Federation of Labor to the Steel Trust or the American Tobacco Company soon changed into open antagonism. On the other hand, the dangers of a strike are multiplied when it extends through all the ramifications of a vast trust. Finally, the far-sighted heads of a great combination are apt to take a broader view of the labor problem, and to seek industrial peace by wise concessions and a policy of making the worker realize that his interests are in a large sense bound up with those of the combination. Yet when the combination becomes a monop- oly, there is, as we have seen (§ 177), a real and insidious lurking danger in its ultimate effects upon wages. (3) The independent producer is undoubtedly assailed by the combination. We must, however, distinguish between the legitimate and illegitimate, the natural and unnatural effects of combination. Where the combination wins its way by better service to the public, the disappearance of the inefficient small competitor may be as advantageous to the community as was the substitution of the factory for the sweat-shop or the railway for the coach. Even for the individual himself, as long as he is not pre-eminently capable, it may often be better to be an official of a huge enterprise on a fairly secure salary and with prospect of advance than an independent producer continually on the fringe of defeat, in much the same way as the "inde- pendent" hand-loom weavers in England and America were glad to join the ranks of the factory operatives. To rid the community of the inefficient producer and to convert him into a useful agent may be the beneficial result of combination. This, however, presupposes that the way is kept open for the efficient. In other words, a combination must not be per- mitted to become a monopoly except in those quasi-public enterprises where competition is itself undesirable. It is here that the greatest difficulty arises. The dangers of cut-throat 636 The Control of Trusts [§ 239 competition are undeniable; but in the main, fair competition between honest rivals eliminates the inefBcient and perpetuates the capable. Competition, indeed, need not be actual; potential competition may serve equally well as a check to the dangers of monopoly. Nor does the persistence of competition neces- sarily mean the continuance of the small producer; the competi- tion may be one between large units. The objective is the ehmination not necessarily of the combination but of the monop- oly. If the trust is not allowed to become a monopoly, it may still be subjected to actual or to potential competition. (4) So far as the purveyor of raw material is concerned, much is supposed to depend upon the precentage of the output taken by the combination. Where the business is only one degree removed from the raw material of nature, and especially where the supply of this material is restricted, the tendency to concentrate the ownership of the raw material becomes very strong. It is significant that most of the largest combina- tions on the list in page 348 have grown out of an ownership of raw material which is not annually reproducible, like iron ore, copper and lead. In several cases, however, like oil, to- bacco, sugar and beef, the combination does not own the raw material, because it is the result of annual production at once too minute and too widespread for concentration. In these and similar cases the complaint is often heard that the trust keeps down the price of the raw material by reducing its offer to the lowest limit. While there undoubtedly is some founda- tion for this charge, as especially in the recent history of the Beef Trust and of the Standard Oil Trust in Kansas, it is proba- ble that the statements are frequently exaggerated. For in some cases, as in tobacco and sugar, the market is an inter- national one, and even if the combination forms so large a part of the international demand as to control the price, the restric- tion of the offer below the cost of the marginal producer would have the effect of reducing the supply and thus ultimately lead- ing to an increased price. As long as the total demand for the § 239] The Effects of Trusts 637 raw material suffers no appreciable change, it is questionable whether the concentration of demand into a few hands is apt to have a permanent effect on the producer of the raw material. Nevertheless the temporary consequences may be burdensome and injurious. (5) Finally, the combination influences the consumer, either favorably or unfavorably. A favorable effect is the tendency to steady prices. Unrestricted competition is always attended with sudden and extreme oscillations of prices according to market conditions, as influenced by the hopes and fears of com- petitors. A large combination is often in a better position to refrain from either cutting or inflating prices. After the forma- tion of the railway pools a generation ago the range of variation in the New York-Chicago rates was materially reduced. So also the United States Steel Corporation has exerted a markedly steadying influence on prices since its formation. The larger the combination, the greater the possibility of this influence. The other side of the problem is not so favorable. The advantage of combination may be lower cost, but the object of combination is higher profits. It does not necessarily follow that higher profits mean, as is usually supposed, actually higher prices. If the demand can be stimulated by a reduction of prices, higher profits are compatible with greater sales at lower prices. There is in every industry, competitive or monopolistic, an obvious limit to high price, caused by the possible substitution of some lower-priced equivalent. This commodity competition is omnipresent. The real problem, however, is whether in those combinations which produce so large a share of the output as effectually to control the market, the "trust" price is higher than would be the competitive price. A careful investigation into some of the leading combinations by the Industrial Com- mission disclosed the fact that during selected periods when the combinations were actually in control, the "differential" or margin between the price of the raw material and of the 638 The Control of Trusts [§240 finished product had risen, even though the actual selling price might have declined. The conclusion therefore seems to be that we must distinguish between the effects of combination and those of monopoly. In so far as the trust can be shorn of monopolistic features it will disclose all the advantages of combination. In so far as the trend is toward monopoly, the evils of the situation will pre- ponderate. Up to the present time we have had both the ad- vantages and the evils. There remains, however, one further consideration. Is the mere fact of bigness itself to be deprecated? It is sometimes stated that the industrial ideal is competition between small units, and that the mere size of large combinations is a menace, both because the limits of efficiency may have been overstepped and because the massing of immense capital in a single hand is in itself dangerous. It would seem, however, that these statements are exaggerated. The point at which the increased efficiency disappears is generally one which would render possible the existence of very large combinations; and the possible menace from great aggregations of capital tends to be removed by the assumption of the corporate form, whereby individual ownership in the enterprise may be widely distrib- uted. The modern age, with its international business scope has become one of large ventures; and it is hopeless to expect the wheel of progress to reverse itself. Combination of capital is inevitable; monopoly may be averted. 240. The Prohibition of Trusts The first attempt of the American government to deal with trusts was to prohibit them. From the end of the eighties of the last century most of the states vied with each other in stringent prohibitions; but the laws were without exception futile. National legislation, on the other hand, took the form of the Sherman Act of 1890. This provided that: "Every contract, combination in the form of trust or other- § 24o] The Prohibition of Trusts 639 wise, or conspiracy in restraint of trade or commerce among the several states or with foreign nations is hereby declared to be Ulegal. . . . Every person who shall monopolize or attempt to monopolize or combine or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states or with foreign nations shall be deemed guilty of a misdemeanor." In the Knight case, decided in 1895, the American Sugar Refining Company was held to be not subject to the law. Two years later, however, it was decided in the Trans-Missouri Freight Association case — a decision reinforced in the Joint Traffic Association case in 1898, that combinations are illegal, even if reasonable in themselves. In 1899 the Addyston Pipe and Steel Company case was distinguished from the Knight case and the pooling agreement was declared to be illegal. Finally, in the Northern Securities Company case in 1904, it was held that the Sherman Act embraced all direct restraints of any kind, and that the projected combination of two com- peting railroads was illegal. A determined effort was now made to apply the Sherman Act to industry in general. When the suits instituted against the Standard Oil and the Tobacco trusts were finally decided, in 191 1, the Supreme Court showed that it had made considerable progress in its appreciation of the economic principles involved. The Standard Oil case virtually held that the Sherman Act was meant to prohibit only unreasonable or undue restraints of trade. The Tobacco case held further that the test of illegality is whether the transaction in question represents a purpose to monopolize. The mere fact that direct competition comes to an end does not necessarily carry with it the purpose to acquire monopolistic control. Both cases decided that the test of legality is whether the combination lessens competition in such a way as may reason- ably be thought to injure either the consumer or the competitor. The test, in other words, is the character of the resulting injury. 640 The Control of Trusts [§ 241 The earlier cases had decided that any direct restraint of com- petition is illegal, irrespective of the effects on the outsiders. Under the new interpretation of the law, enterprises may increase their business to any extent, provided that they do so by proper methods and do not interfere with the rights of others to compete. What is now prohibited, in other words, is unfair competition, for this alone seems to disclose a purpose to acquire monopoly control. As a matter of fact, both the Standard Oil and the Tobacco companies were declared obnoxious to the law for this very reason. Serious doubts, however, may be expressed as to whether the dissolution of the combinations has really availed to reintroduce the active competition which it was the object of the law to maintain. Thus there has slowly grown up the conviction that what is needed is not so much the prohibition, as the regulation, of trusts. 241. The Regulation of Trusts The idea of the regulation of trusts rests upon the principle that we must endeavor to preserve the good while eliminating the evil in modern combinations. It involves the creation of an administrative body of suthciently broad character to exercise an efficient national supervision. What this should ultimately be is still undecided. There are at least four duties which may be delegated to such a body. (i) The securing of publicity — not that publicity which would disclose trade secrets and put an enterprise at the mercy of its competitors — but the financial publicity to which stock- holders are entitled, as well as the reasonable publicity in the management which is of importance to the public. The purpose of publicity is to permit a judgment as to profits as well as to the conditions under which the enterprise is conducted. With such publicity potential can more readily be converted into actual competition. (2) The prohibition of unfair competition. Railway rebates § 24i] The Regulation of Trusts 641 are now gradually being eliminated by the Interstate Commerce Commission. The restriction of the other practices described above (§ 238) is more difficult. But the mere existence of a commission invested with the duty of examining complaints will go far to remedy the situation. Whether the unfair practices should be specified in the law is questionable. Inasmuch as it is not easy, however, to frame a measure at once compre- hensive and exact, it seems preferable to allow a large degree of discretion to the commission. (3) Helping the courts to watch over the dissolution of such trusts as have actually become monopolies, when the monopo- listic practices are not discontinued. The courts have neither the time nor the technical knowledge needed to execute their own decrees. (4) Whether the commission should have the power to fix prices is doubtful. The difficulties of such a scheme are great. In the case of the single industry of the railways, almost the entire time of the Commission is occupied with deliberations as to particular charges. Yet the problem of fixing railway rates is simple compared with that of fixing prices in general. For in the great mass of commodities we have the continual changes in market conditions, due to alterations not only in the demand, but in supply. In the case of railways, fluctuations in supply are almost wholly absent. A rate once fixed may consequently be presumed to remain reasonable for a short time at least; whereas in ordinary commodities what is reasonable to-day may be unreasonable to-morrow. An adequate supervision of trust prices would therefore call for a detailed business knowl- edge of all the changing conditions of each trade by experts. We should need not one commission, but a separate commission for each line of business. Moreover, while it is to be expected that any comprehensive attempt to fix prices would probably be unsuccessful, it would in all likelihood be rendered unnecessary by the adoption of the provisions mentioned above. 41 642 The Control of Trusts [§ 241 The final question is as to the character of the business to be subjected to regulation. Manifestly not all combinations are trusts. Inasmuch as the dangers arise chiefly in large combina- tions, only those of a certain size should be subject to regulation, and that too only when they control a certain proportion of the entire business. The exact figure must indeed be arbitrary. If the important fact in restraint of trade is the influence exerted upon prices, it may be that a concern with a 50% control of the trade may exert more influence than another concern in a differ- ent industry with 90% of the trade. Since the control of the market does not stand in any exact relation to the proportionate amount of business, all that can be said is that if a combination controls from 40% to 50% of the entire business it becomes at least a legitimate object of suspicion. We see, then, that the real solution of the trust problem is regulation rather than prohibition. In Europe the governments have long since recognized the futility of prohibition and are now concerned chiefly with attempts at moderate control. The United States is just entering upon that field. For this is virtually the meaning of the so-called anti-trust laws of 1914, creating a federal trade commission. If we are able to maintain conditions of equality in transportation, if we are able to secure a reasonable publicity in the formation and the conduct of the enterprise, and if finally we are ab^e to eliminate unfair compe- tition, the community may expect in the large mass of private industry to reap the benefits of combination without' suffering the burdens of monopoly. The pratical policy of the future must rest upon a detailed analysis of large business enterprises in the hope of ascertaining where combination is possible without monopoly and where, on the other hand, monopoly itself must be frankly recognized and held in check. CHAPTER XXXVH LABOR LEGISLATION 242. References In General: Beatrice Webb, ed., The Case for the Factory Acts (1901); S. & B. Webb, Problems of Modern Industry (1898) and The Prevention of Destitution (191 1); Hutchins and Harrison, History of Factory Legis- lation (1911); G. G. Groat, Attitude of American Courts in Labor Cases (191 1); Commons and Andrews, Principles of Labor Legislation (1916); Preliminary Report of the New York Factory Investigating Commission, (3 vols. 191 2). Child Labor: O. J. Dunlop, English Apprenticeship and Child Labour (191 2); F. Keeling, Child Labour in the United Kingdom (1914); George B. Mangold, Child Problems (1910); Child Labor Bulletin. Women's Labor: Josephine Goldmark, Fatigue and Efficiency (191 2); L. D. Brandeis and J. Goldmark, Summary of "Facts of Knoidedge" submitted on Behalf of the People in support of its Brief on the Law, in People vs. Schweinlcr (1914); B. L. Hutchins, Women in Modern In- dustry (1915); E. J. Hutchinson, Wotnen's Wages (1919). INDUSTRLA.L Hygiene: W. G. Thompson, Occupational Diseases (1914); Studies in Vocational Diseases by U. S. Public Health Service (1916); P. S. Florence, Factory Statistics and Industrial Fatigue (1918). Hours of Labor: J. Rae, Eight Hours for Work (1894); Report of the U. S. Commission on Hours of Labor and Conditions of Employment in the Iron and Steel Industry in the U. S. (191 2); Frankfurter and Gold- mark, The Case for the Shorter Working Day (191 6). Minimum Wage: The Theory of the Minitnum Wage (American Economic Ass'n, 1913); Irene O. Andrews, Minimum Wage Legislation (1914); R. H. Tawney, Studies in the Minimum Wage (1914-1916); L. D. Brandeis and J. Goldmark, Appendix to Briefs fled in the Case of Sleiller vs. O'llara (Ore.) (1914); M. B. Hammond, Judicial Interpreta- tion of the Minimum Wage in Australia (American Economic Review, vol. iii, 1913); E. F. McSweeney, The Case Against the Minimum Wage (1912); P. S. Collier, Minimum Wage Legislation in Australia (1915). 243. The Employment of Children and Women Legislation in behalf of the laborer has assumed three principal forms, dealing respectively with the conditions of employment, the conditions of remuneration, and the results of employment. 643 644 Labor Legislation [§ 243 The chief abuses m the conditions of employment first dis- closed themselves in the factories. The enactments designed to deal with these abuses were hence called factory laws. It was not long, however, before the provisions of the laws were extended to other occupations than those conducted in technical factories. But the name persisted. The earliest form of factory legislation was the prohibition of child labor. Children of tender age must be protected not only against the unprincipled employer but against the greedy or necessitous parent. The argument is biological and social as well as economic. To permit child labor is to stunt body and mind, to breed ignorance and immorality, to foster a progressive deterioration of the working population. The claim that the earnings of the children are needed for the family support is dispelled by the well authenticated fact that when the father is the sole wage earner his income tends to equal the previous earnings of the entire family. England as the original home of the factory system led the way in factory legislation. The conditions before the law of 1802 were distressing. The factories were filled with pauper children of the tenderest age lodged in rough and dirty barracks, driven by hard task-masters, sometimes for fourteen hours a day, under conditions that beggar description, and receiving food of the most disgraceful character. The law of 1802 applied only to pauper children, received as apprentices in cotton and woollen mills. In 1819 the law was applied to all young children in cotton mills. In 1825 and 1831 the age limit was raised; and in 1833 the law was extended to other textile industries. Thus from decade to decade, the age limit was increased and the scope of the law extended until at present in England, as well as in many other European countries, the child may be said to be, in large measure, emancipated from industry. In the United States the movement began much later, and although the abuses were never quite so glaring as Europe, they were, and still are, sufficiently great to demand attention. In § 243] Children and Women 645 New York, child labor is now regulated by the compulsory- school law which prohibits employment of children under 14 during the school term; by the factory law, which forbids child work under 14, limits it to eight hours a day between the ages of 14 and 16, and protects children from overtime; by the mercantile law which extends substantially the same provisions to all commercial employments; and by the street trades law which applies to newspaper vendors. In the country at large, during the past few years, great progress has taken place along the following lines: (i) The 14-year age limit below which children are not to be employed, has been extended to continually new occupations; (2) work during school term or school day has been prohibited; (3) hours of labor for minors between 14 and 16, or in some cases between 14 and 18 years, have been limite-d to eight; (4) night work for minors has been prohibited in whole or in part; (5) compulsory education laws have been extended and better methods of proving the age of children seeking employment have been introduced. The above program, however, has by no means been accepted everywhere. The slowness of the development in some sections led to the passage^ in 1916, of the Federal Child Labor Law which prohibited any business employing children under six- teen from engaging in interstate commerce. When this was de- clared unconstitutional, it was replaced in 1919 by the law imposing a 10% tax: on the employment of such child labor. The second stage was the application of the law to women's work. In the English coal mines, during the early part of the nineteenth century, women, used in the place of mules to haul the trucks in the galleries, were compelled to go naked and on all fours, never coming to the surface and often bearing their children below ground. The English laws, which were first applied to women in mines and in textile factories in 1841 and 1844 were opposed until almost the middle of the nineteenth century as an interference with the freedom of contract." In the United States, where the legislation began much later, the 646 Labor Legislation [§ 244 same objection was long successfully urged. The last few years, however, have seen a great change. In 1908 the ten-hour law of Oregon and in 191 5 the eight-hour law of California were up- held. The movement for the protection of women in industry is accordingly now taking four forms: limitation of hours of work; prohibition of night work; provision of special conveniences; and protection to childbirth. By 1919 the limit of hours of work had been reduced to 9 in twelve states, and to 8 in six states. In most of the older states the limit was still 10 hours a day, or 52 to 54 a week. In only seven states was there no legal regulation of hours of work at all. In Europe, following a conference on the subject in 1906, an agreement to prohibit night work was signed by fourteen coun- tries. The movement is now rapidly spreading in the United States. The last few years have also seen improvement in the conveniences required for women workers, such as seats, ade- quate dressing rooms and the like. The latest form of protec- tion is that of the treatment of women shortly before or after childbirth. Italy led the way several years ago with an en- forced rest period; and some countries, like England and Ger- many, even provide a method of insurance for this enforced vacation. In the United States, Massachusetts made a be- ginning with a law of 191 1, prohibiting the employment of women for two weeks before, or four weeks after, childbirth. New York followed in 191 2 and Connecticut and Vermont in 1 913 with somewhat similar laws. The benefits of such restric- tions from both the medical and the larger social point of view are so obvious as to require little discussion. 244. The Protection of Life, Health, and Comfort The recognition of the legitimacy of factory laws applicable to men came much later. The actual legislation either deals with the protection of life, health, and comfort, or regulates § 244] Protection of Health 647 the hours of labor. Under the former head are to be classed the laws regarding: (i) accidents; (2) fire; (3) sanitation and ventilation; (4) occupational disease; (5) especially hazardous industries; and (6) home work and sweatshops. After the early appalling experience of the ease with which operatives were maimed, governments intervened to require elaborate precautions and safety appliances. Such provisions are now common, although not uniformly enforced. From the protection against accident to that against fire is only a step. The need of such protection in the United States is greater than abroad, owing to the more extended use of wood in building construction. The Triangle fire in New York in igi2 led there and elsewhere to the adoption of far more stringent protective legislation. The protection of life was soon followed by that of health. The advance of medical knowledge and the increasing realization of the dangers of unsanitary conditions have led to the elabora- tion of the new discipline of industrial hygiene, the teachings of which are gradually being enforced in laws that lay down mini- mum requirements as to the character of light, amount of ventilation, and cubic feet of air necessary for each employee. Still further advances have been made in the treatment of occupational disease. Europe has long since been paying especial attention to the "poisonous trades"; in the United States the movement has only just begun. The first national conference on industrial diseases was held in 19 10, and a recent memorial to the federal government declares that at least 25% of such disease may be readily eliminated. Occupational diseases are due to the following factors: (i) harmful substances, such as metal poisons, toxic fluids, toxic or irritant juices, organic germs and miscellaneous irritants; (2) harmful conditions of physical environment, such as hazards from air pressure, hu- midity, temperature, or light; (3) injuries to nerves, muscles, and bones; (4) injuries to special organs, like the skin, eyes, ears, nose, and throat. In 191 1 several states. New York 648 Labor Legislation [§ 245 among them, initiated legislation requiring the annual report- ing of accidents in such occupations. In 191 2, the national government put an end to phossy jaw," by imposing a prohibi- tive tax on the manufacture of poisonous phosphorus matches. The first state legislation of a similar character was that of 1913 in Pennsylvania, Ohio and Mississippi. By 1916 there were no less than sixteen states which had enacted legislation de- signed to protect the workers against infectious or occupational disease. Closely related to the poisonous trades are the peculiarly hazardous occupations. Almost all American states in which there are coal or other mines have enacted special laws pro- viding for rescue cars, emergency rooms, machine drills, the regu- lation of the quality of illuminants and the handling of powder. Even more widespread are the laws affecting railway transporta- tion, with detailed provision for safety couplers, air brakes, etc. Similar legislation has also now become common in the building and the electric trades, and in the construction of tunnels, caissons, etc. Still more recent is the application of factory legislation to home work or sweatshops, especially in the so-called parasitic trades. Here, as in Massachusetts and New York, a license is now required for the manufacture of articles like clothing, artificial flowers and cigars, in the home. It is an attempt to make domestic workshops amenable to factory restrictions. 245. The Regulation of the Hours of Labor The second category of laws dealing with general conditions of employment affects the hours of labor. Such laws either pro- vide for a periodical day of rest or restrict work on weekdays. The first point is that of Sunday labor. There are, indeed, certain occupations which must be carried on every day in order to provide the necessities of life. The gradual weakening of the religious prohibitions and the increasing complexity of modern social conditions have cooperated to break down the old colonial § 245] Regulation of Hours of Labor 649 "blue" laws. But the obvious need of intermission from continuous work is now recognized and the new one-day-rest- in-seven laws, based on economic rather than on religious con- siderations, now provide that Sunday workers must receive a holiday during the w'eek. The matter has been complicated by the development of in- dustries where continuous labor is needed, not to supply the daily wants of the consumer but to prevent the losses which would ensue upon a periodical shutting down of the machinery. A recent government report, for instance, has pointed out that in 1 9 10 of 173,000 employes in the blast furnaces and steel mills and rolling works, 50,000 or 29% worked seven days in the week and 20% worked 84 or more hours per week, that is, at least 12 hours a day, including Sundays, and that in Massa- chusetts at least 222,000 individuals were engaged in seven days' labor. In 192 1 the situation was not much better. The chief industries in which such labor is now found are the metal and the public-service industries. American legislation on the subject is here also in its infancy. In 1913 New York and Massachusetts provided that all em- ployees in factories and mercantile establishments must be given at least 24 hours' consecutive rest in seven days, although the New York law was weakened in 1914 by granting the Com- missioner of Labor the privilege of exempting employees in neces- sarily continuous industries which have the eight-hour day. The other form of labor time legislation restricts the hours of daily toil. Here, as in the case of female labor laws, the courts at first clung to the freedom-of-contract theory. In 1898, however, the Supreme Court upheld the Utah law estab- lishing the eight-hour day in mines and smelters; and about a decade later the federal law affecting the hours of labor on inter- state railways was declared valid. In 191 1 Georgia enacted a ten-hour law applicable to textile factories. In 191 2 Massa- chusetts applied the principle to conductors and motormen and New Jersey to bakeshops; in 1913 Mississippi and in 1914 Ore- 650 Labor Legislation [§ 246 gon applied the principle to all factories and mercantile establishments. In the case of public-service corporations, many countries have gone further by creating the eight-hour day as the maxi- mum limit. This applies not alone to government employees but to ship-building and army-supply industries which manu- facture directly for the government. In the United States the eight-hour day has long been enforced in the national as well as in many state and city governments; but it was applied for the first time to public-service corporations in a somewhat modified form by the federal eight-hour railroad service act of 1916. Not a few private industries, both here and abroad, have voluntarily adopted the eight-hour system and have found it profitable. 246. The Minimum Wage The second phase of labor legislation mentioned on page 643, concerns the conditions of remuneration. These fall under four heads: (i) The contract of employment; (2) strikes and boy- cotts; (3) the truck system; and (4) the minimum wage. Of these the first is of relatively minor importance and the second has been touched on above. The truck or company store system, however, has from the beginning been a glaring abuse. Large employers have frequently provided stores at which nearly everything needed by the workman could be purchased. Before long, however, wages were paid in scrip or tickets on the stores, instead of in cash; the quality of the goods depreciated; and the temptation to overcharge was often irresistible. So notorious did the abuses become that the stores earned the name of "pluck me" stores, and often proved to be an insidious way of nibbling at wages. Anti-truck laws as a consequence were enacted at an early period in England and are now found in many of the American states; but the abuse itself has by no means entirely disappeared. The most recent legislation deals with the minimum wage. In the middle ages the attempt was to regulate maximum wages in the interest of the employer; the modern endeavor is to § 246] The Minimum Wage 651 regulate minimum wages in the interest of the employee. The need of such regulation has made itself felt in three classes of trades: the so-called parasitic trades, the immigrant trades, and the department stores. The parasitic trades are found chiefly in the case of home workers, where the work is so simple that almost anyone, including children, can be employed. In the complete absence of labor organization, the conditions are such as to enable sub-contractors to play individual against individual and to beat wages down to the starvation or sweat- shop level. Many of these trades are recruited in the United States by immigrants; but immigrants, unaccustomed to the prevalent standard of living and willing to take only a little more than what they received at home, are found in many other occupations. Finally, in department stores, wages are often exceedingly low because they constitute only a partial support of some of the workers, because the position of the girls who look forward to marriage is often regarded as temporary, and because there is always a relative oversupply of applicants for positions requiring little or no training. The result is that we find large sections where the wages are wofuUy inadequate, and where the minimum wage is not far different from the living wage. A good definition is that given by Justice Higgins of the Australian court, as "the wage necessary to satisfy the normal needs of the average employee regarded as a human being, living in a civilized community." ]\Iinimum-wage legislation was initiated in Australasia. New Zealand began in 1894, making it part of a movement to prevent strikes through the compulsory arbitration court. Victoria started a different method in i8g6, when it created a system of wages board through the compulsory cooperation of the employer and the employee, — a system followed by South Australia in 1900, Queensland in 1908, and Tasmania in 1910. The New Zealand system of compulsory arbitration was adopted by New South Wales in 1901, West Australia in 1902, and the Australian 652 Labor Legislation [§ 246 Commonwealth in 1904. New South Wales, however, added the system of wages boards in 1908, and New Zealand introduced conciliation councils in the same year. On the other hand, Victoria added a court of industrial appeal in 1903 and South Australia in 1907. In England provision was made in 1909 for the erection of trade boards and district trade committees, empowered to prescribe a minimum wage in four occupations: the readymade and wholesale-bespoke tailoring, paper-box making, machine- made lace and net finishing, and certain kinds of chain making. In 191 2 a similar system was introduced into the coal mines of England and Wales and in 1913 four more occupations were added. In the United States the first minimum-wage law was that of Massachusetts in 191 2. This did not provide a com- pulsory enforcement of the award of the trade boards, limiting itself to the privilege, under certain conditions, of publish- ing the names of the offending employers. The movement now spread rapidly, especially after the Oregon law had been upheld, and by 1919 fifteen states had adopted minimum- wage legislation of a compulsory nature. The administrative autho- rities are known as trade boards, state wage boards or indus- trial welfare commissions and in a few cases, the act itself fixes a classified minimum-wage scale. American legislation, however, in contradistinction to that of England and Aus- tralasia, applies thus far only to women and children, although in some cases the law includes minors up to 21. There is every prospect that the next few years will see a great extension of the system. The arguments for a minimum wage are not materially differ- ent from those in behalf of the other forms of labor legislation. If it is legitimate to defend a minimum standard in respect to protection against accidents, and to the hours of labor, it is difficult to see why the arguments do not apply to the remunera- tion for labor; for to work for wages below a necessary minimum is at least equally hazardous to health and to efficiency. The §246] The Miniinum Wage 653 arguments advanced against the minimum wage are the follow ing: (i) the industry cannot afford to pay the increased wage. The answer is: first, that, as experience has shown, an increase of wage, especially in the parasitic trades, often leads to an increase of efficiency; and secondly, that if the industry is not able to pay living wages, it is better to replace it by one in which the natural advantages will render this possible. (2) The danger is that all wages will be leveled down to the minimum, so that the minimum will tend to become the average wage. This is the same argument formerly advanced against the trade unions (§ 180); but it is borne out by neither theory nor experi- ence. (3) The implication is that the government must provide work at the given wage as well as wages for a given work. The answer here is that there is no more implied obligation on the government to provide work when it fixes a minimum wage than when it restricts the hours of labor or enacts laws affecting industrial hygiene. The law simply states that if the employer carries on the industry he shall do so under certain conditions. (4) The law is difficult of enforcement. This may readily be granted without, however, impugning the necessity of the law. The correct conclusion to be drawn is the need of adopting the best administrative methods. (5) The danger of interstate competition will render all such state laws nugatory. This objection may also be conceded in part; but to the extent that it holds good it follows that we shall ultimately have to come to federal regulation. (6) A compulsory minimum will mean a virtual gratuity to the unemployable. This, however, is really an advantage; for if the law will lead to a sifting out of those who do not want or are not able to work, the public will be in a better position to deal with the problem of unemployment. The short experience with the minimum wage tends to show the following advantages of the system: (i) A distinction is made between the unemployed and unemployable; (2) the field of competition between the workers is restricted and the fluctuations not only in earnings but in production are some- 654 Labor Legislation [§ 246 what checked; (3) an impetus is given to the formation of labor unions among the hitherto unorganized and weaker laborers; (4) the increased wages have been met partly by an increase in the quantity or quality of the output, partly by a reduction in profits, and partly by an advance in price. There is every reason to believe, therefore, that the movement initiated in Australasia and subsequently adopted in Great Britain will spread rapidly in the United States and on the European continent. CHAPTER XXXVIII SOCIAL INSURANCE 247. References In General: I. M. Rubinow, Social Insurance (1913); H. R. Seager, Social Insurance (1910); Frankel & Dawson, Workingmen's Insurance in Europe (1911); S. & B. Webb, The Prevention of Destitution (1911); Workingmen's Insurance in Europe, U. S. Bureau of Labor, 2 vols. (1911); W. H. Dawson, Social Insurance in Germany (1912). Accident Insurance: Crystal Eastman, Work Accidents and the Law (1910); Schwedtman & Emery, Accident Prevention and Relief (191 1); Report of the New York Commission to Inquire into the Question of Employers' Liability (1911). Health Insurance: T. Smith, Everybody's Guide to the National Insurance Act (191 2); Carr, Garnett and Taylor, National Insurance (1Q14); Sir. J. Collie, Malingering and Feigned Sickness (1913); Am. Labor Legislation Ass'n, Brief for Health Insurance (1916). Old Age Insurance: Rogers & Millar, Old Age Pensions (1903); S. Wellington, Old Age Dependency in the United States (1914); M. Nassau, Old Age Poverty in Greenwich Village (1915). Unemployment Insurance: W. H. Beveridge, Unemployment (1909); I. C. Gibbon, Unemployment Insurance (191 1); S. & B. W^ebb, Public Organization and the Labour Market (1910) ; S. Webb, ed. Seasonal Trades (191 2); Rowntree, Seebohm & Lasker, Unemployment (191 1); A. C. Pigou, Unemployment (1914); A. KeUor, Out of Work (1915). 248. The Reasons for Social Insurance Social insurance may be defined as the attempt to remove from the working classes through associated effort those peculiar hazards to life, health and comfort which are due to the modern industrial system. The difference between business and social insurance is that in the one case the premiums are paid by the insured, whereas in the other this is true only in part, if at all. For the object of social insurance is to emphasize the social causes of these hazards and to accentuate the responsibility of 655 656 Social Insurance [§248 society as a whole. The term, however, also includes those forms of aid where the workman makes no contribution at all and where we have to deal with state pensions rather than with premiums. The problem here involved is a result of modern industry and democracy. On the one hand the instability of modern indus- trial life and the hazards to which the wage earner is exposed have multiplied enormously; and on the other hand the relative ability of wage earners to withstand these risks has diminished. That the condition of the workman has improved is true. This means, however, that his general standard of life has risen; it does not mean that there is an increase in the available surplus above his necessary living expenses. Yet without such surplus there is little opportunity of meeting the cost of these im- mensely augmented risks, which are responsible for much of modern poverty and destitution. The inadequacy of individ- ual provision for these risks is one of the chief reasons for social insurance. The other reason is the feeling that every individual should, so far as possible, be permitted to share in the benefits of modern civilization; and that he is often prevented from doing this by something other than his own fault. If there is such a con- ception as social wealth, or the wealth created by society as a whole, there is room also for the conception of social risks, that is, risks created by modern industry and which tend to check the growth of this social wealth. The aristocratic ideas in both industry and politics formerly emphasized the need of the exceptional man and underrated the importance of the many. The meaning of modern democracy, whatever be its short- comings, is that insistence be placed in both economics and politics on the needs and the opportunities of the many. One of these needs is that of social or community provision for the hazards that are not referable to individual fault. Thus both democracy and industry are responsible for the modern concep- tion of social insurance. § 249] Accident Insurance 657 The five chief hazards in question are those connected with accidents, sickness, invalidity, old age and unemployment. There are therefore five chief forms of social insurance. 249. Accident Insurance That the modern factory system has multiplied industrial accidents is now universally recognized. In eleven European countries there are now about two million industrial accidents a year, of which over 22,000 are fatal. In the United States in 1908, in the so-called "registration area," covering about one- half of the population, the number of fatal accidents due to "industrial causes" varied from 20,000 to 36,000, according to the interpretation given to the term. In the railroad industry alone in 19 10 there were about 130,000 accidents to employees. In the country as a whole industrial accidents are probably not far from two millions a year, of which about 30,000 are fatal, about 200,000 lead to permanent disability, and about 170,000 result in a disability of at least three months. The first attempt to grapple with this evil was the system of employers' liability. The effort of the wage earner, however, to secure redress was, in English-speaking countries at least, seri- ously impeded by the development during the nineteenth century of the so-called three defences: (i) The fellow-servant doctrine. Why should the employer, it was argued, be held responsible for the injury that was caused by one employee to another? (2) The assumption-of-risk doctrine. If a workman chooses to take up a specific occupation does he not voluntarily assume the risk connected therewith, and is he not at liberty to abandon the employment? (3) The doctrine of contributory negligence. Why should the employer be responsible when the wage earner himself through his negligence contributes to the accident? The result was that only in exceptional cases could the work- man recover any damages at all. Most accidents remained uncompensated; the amount recovered bore little proportion to 42 658 Social Insurance [§ 249 the nature of the injury or the need; and it was secured, if at all, only after a long time. Furthermore, a great part of the funds was wasted in lawyers' fees and the attempt of a workman to bring suit for an accident ordinarily led to his dismissal. Even, therefore, in cases where the force of the alleged three defences was gradually weakened by judicial interpretation or statute, the employers'-liability system continued to be distasteful to the wage earner; while on the other hand, the increase in occa- sional large verdicts and the loss resulting from the friction in industrial disputes gradually caused the employers to realize the inadequacy of the system. Accordingly, employers' liability has been replaced by work- men's compensation or accident compensation. The funda- mental feature of this is the adoption of the principle of the trade risk or the professional risk, based on the conception of a hazard attaching to the industry. While under the compensation system the burden is shifted to the industry and is ultimately borne by the community, it is borne in the first instance by the employer. In order to distribute over a group the risks of the individual employers, recourse was taken to the principle of insurance. Accident insurance is of two kinds: voluntary insurance, where the employer is left at liberty to insure, as in England under the workman's compensation act of 1897 and in France since 1898; or compulsory insurance, which was introduced in Germany in 1884 and adopted by Austria in 1887 and Italy in 1898. Of the European countries Vv'ith the compulsory insur- ance system some permit the employers to choose the insurance institutions, while others prescribe institutions under more or less strict control of the government, and some even offer insurance through the government itself. Which method is pursued makes perhaps little difference as long as the chief objects of an accident-compensation system are achieved, namely, the inclusion of as wide a range of industry as possible (in Great Britain all industries); the security of payment, which can be § 249] Accident Insurance 659 reached only through some form of governmental guaranty or supervision; and the provision of adequate compensation, which was originally about half, and which is now gradually being increased to three-quarters, of the wage. In the United States the first law on the subject, that of Maryland in 1902, was declared unconstitutional. The first federal act was that of 1908. The Massachusetts law of 1909 providing for optional insurance remained a dead letter and the Montana law was declared unconstitutional. A similar fate befell the New York law in 1910. Since 191 1, however, the movement spread so rapidly that by 1920 all but five Southern states had adopted compensation laws, representing every phase of the system from optional and voluntary insurance in private institutions to an out-and-out government insurance. The most advanced law is the workmen's compensation law of New York of 1913-14. Compensation, granted in forty-two groups of occupations (not including agricultural or domestic service) is due in every case except where the injury is occasioned by the willful act of the employee or where it results solely from intoxication. The normal rate of compensation is two-thirds of the average weekly wage, which continues during the period of disability, with special provisions for the loss of various members of the body, and carefully defined death benefits. The payment is secured by the employer's obligation to insure in the state insurance fund, in a private insurance company, or in exceptional cases by self insurance under strict control of the compensation commission. The objection is sometimes made that accident insurance is no solution, because what is desired is prevention rather than compensation. It is forgotten, however, that compulsory com- pensation is the surest inducement to achieve prevention. Just as fire-insurance methods have led to improvements in fire prevention, so the employers have banded themselves together in occupational or territorial groups, which have vied with each other in installing improvements to prevent accidents and thus 66o Social Insurance [§ 250 to keep down the insurance premiums. Hence accident insur- ance is thoroughly justified — from the point of view of the individual workman, of the employer, and of society at large. It tends not only to diminish accidents but to eliminate the risks of accident. 250. Health Insurance While the conception of individual fault has now finally dis- appeared in the case of accident, the social aspect of illness is only beginning to be recognized. Yet the distinction is after all one of degree rather than of kind. There are indeed non- occupational diseases, but so there are non-occupational accidents; and as in the case of accidents the overwhelming mass of illness from which the modern wage earner suffers is due more or less directly to the conditions of employment or of remuneration. The destitution caused, under the modern industrial system, by more or less preventable illness is scarcely inferior to that occa- sioned by accidents. Most of the arguments used in the case of accident insurance are therefore applicable to health insurance. As a matter of fact the first law on the subject was the German act of 1883, which provided for compulsory health insurance. Austria followed in 1888, but the movement subsequently lagged until a new impetus was given to it by the enactment in 191 1 of the British National Insurance Law. While we do not find in either Germany or England any state insurance fund, government control is rigid, and the insurance is compulsory. In the United States the compulsory insurance system has come first in the case of accidents; in England and Germany it has come first in the case of illness. In Germany a distinction is made between sickness as a merely temporary phase and invalidity as a more permanent condition. The sick benefits in Germany are therefore limited to a definite period, originally thirteen weeks, but changed in 1903 to from twenty-six to fifty-two weeks. This method has been followed §250] Sickness Insurance 661 in all of the other countries except in England, where the na- tional insurance act provides benefits unlimited in time. The strictly sickness benefit, however, lasts even in England only for twenty-six weeks. In the second place, the insurance premiums are divided in Germany between the employer and the employee, the former defraying one-third and the latter two-thirds of the cost, the premiums being affixed weekly to the cards by means of stamps. Under the British act the state also makes a contribution, thus recognizing more specifically the essential social character of the scheme. The state makes a weekly payment of 2d., the employer 3d., and the wage earner 3d. in the case of women and 4d. in the case of men. Finally, while the general basis of sick benefits in Germany is one-half the wage, the British law grants definite amounts, los. a week to men and 7^5. to women, with a continued payment of 5s. a week after twenty-six weeks. Equally significant with the financial aid are the provisions of the British law for medical and surgical benefits, medicine supplies and ap- pliances of various kinds, and hospital treatment. WhUe there has undoubtedly been some malingering or feigned sickness, the drawbacks of the system are overwhehningly outweighed by the benefits. In addition to the sick benefits attention must be directed to the lying-in or maternity and the funeral benefits. Italy, where there is as yet no general compulsory sickness insurance, first introduced a special, compulsory maternity insurance in 1910, as an outcome of the law requiring the cessation of female work for a month after childbirth. In England and Germany provi- sion for lying-in or maternity benefits is included in the general system. Health insurance in the United States is thus far only private and voluntary. With the growing realization on the part of the public that the social aspect of disease is often more important than that of accidents, it is to be expected that this form of social insurance will before long be introduced here also. 662 Social Insurance [§ 251 251. Old Age Insurance The modern importance attaching to old age is due to the speeding up of the new industrial system and to the great diminu- tion in the period of life during which full wages can be earned. Not only is the age limit at which applicants for work are taken on continually being reduced, but the strain of modern machinery frequently induces a premature weakening of the capacity for work which accentuates the normal disadvantage of natural old age. So much pauperism has resulted that the problem of insurance against old age is now everywhere coming to the front. The earliest forms of such insurance were entirely of a voluntary character. In the middle of the nineteenth century, however, France instituted a system designed to encourage indi- vidual provision for old age, to put old age pension insurance upon sound actuarial principles, and to reduce the cost to the lowest limit. Half a century later Italy and Belgium offered government subsidies to voluntary old age insurance. It was not, however, until 1889 that a national system of compulsory old age insurance was adopted by Germany. Two decades later, in 1910, France adopted a similar system. In both countries the dues, which vary with wages, are shared equally between employer and employee. The employer is required to attach the stamps to the workman's card and is permitted to deduct the one-half from the wages. In many cases, in Germany at least, employers defray the entire cost. The government bears the cost of the central administration, furnishes the postoffices as financial agencies, and when the pensions have finally matured, makes a contribution (50 marks in Germany, 100 francs in France). In Germany the pensions begin at 70, in France, since 191 2, at 60 years of age. In Germany the administration is in the hands of large territorial institutions under government supervision; in France there are in addition to the government fund mutual benefit societies § 251] Old Age Insurance 663 and other institutions. In both countries, however, employees as well as employers are represented in the management. Another method of meeting the old age problem is illustrated by the system of non-contributory pensions provided entirely by the government. Denmark introduced this system in 1891, followed by New Zealand in 1898, and the Australian states a few years later. In 1908, England adopted this method, granting to everyone who has reached the age of 70 and whose annual income does not exceed £31, los., who is not a pauper, and who has been a resident at least twenty-five years, a sum varying from IS. to 5s. a week. The number of pensioners in England in 19 1 3 was about a million and the expenses over twelve millions of pounds. In the United States the discussion has only just begun. Until recently the recognition of its need was very imperfect. As late as 19 10 the Massachusetts Commission advanced the following objections: (i) heavy expenses; (2) moral effect upon the character in destroying the habit of thrift; (3) disintegrating influences on the family; and (4) harmful effect upon wages. These criticisms, however, are not substantiated by the experi- ence of the European countries which have adopted the system. A variation of the movement has recently been spreading in the United States in the shape of the widows' pensions. From the very beginning of the old age insurance system, attention was directed to the necessities of the surviving dependents. Even in the original German law, where financial conservatism was at the outset necessary, a provision was inserted by which there are returned to the widows or orphans all contributions made by a workman if he dies before receiving a pension. A similar section was inserted in the French law of 1910, with an additional provision for death benefits, varying from 150 to 300 francs. In 191 1, however, in the general revision of the insur- ance laws Germany added a comprehensive national system of widows' and orphans' pensions. In the United States the first mothers' pensions act was 664 Social Insurance [§ 252 passed by Illinois in 191 1. Two states followed in 191 2, four- teen more in 1913. By 1919 the system had spread throughout the country. Although popularly called mothers' pensions they are really pensions for dependent children to be paid to the widows or wives of deserting, disabled, or imprisoned husbands. As an entering wedge for a broader application of the principles of social insurance, the movement for mothers' pensions is significant. 252. Invalidity Insurance By invalidity is meant incapacity to earn wages through physical weakness. Invalidity may be the result not only of accident, but of sickness, or old age. Accordingly it is dealt with as a part sometimes of sickness insurance, sometimes, as in France, of old age insurance. As the sick pensions almost everywhere cease at the expiration of a short period, and as old age pensions do not begin until the attainment of a definite age, there is evident need of caring for cases of invalidity which are not relieved by some form of accident compensation. The conception of invalidity as found in some of the European laws is total and permanent disability to earn a living. This is true of England under the national insurance act of 191 1, one of the objects of which is stated to be "to provide for insurance against loss of health." Here, it will be remembered, the sickness benefit ceases after 26 weeks. It may then be followed by a "disablement benefit" of 5s. a week payable after two years' weekly insurance contributions, and continued as long as the laborer is "rendered incapable of work by the disease or disable- ment." The chief criticism of this provision is the difficulty that will be encountered in interpreting the term "incapable of work." The old phrase "able-bodied" in the English poor law proved to be a thorn in the flesh of the commissioners and much the same may be expected from the new term. In France the insured is permitted to demand the beginning of his old age pension at 55 instead of 60, but with a corresponding actuarial § 253] Unemployment Insurance 665 reduction in the amount of the pension. Furthermore, anyone suffering from a permanent and total disability may secure in addition to special invalidity subsidies an immediate liquidation of his old-age pension under these rules. In Germany, on the other hand, there is a separate system of invalidity insurance; and invalidity is not confined to total and permanent disability to earn a living. On the contrary a re- duction of the earning capacity to one-third of the normal is sufficient to establish invalidity, which may come from either sickness or incipient old age. An invalidity pension, ranging from no to 300 marks, may be obtained after 200 weeks of insurance, even though but 100 weekly contributions have been made, or after 500 weeks of insurance, irrespective of the number of contributions. As a consequence anyone whose illness lasts for more than 26 weeks is turned over from the sickness to the invalidity fund, and even if he has not had any disease, ap- proaching old age will enable him to take advantage of the invalidity pension. Invalidity pensions are hence becoming more popular than the old-age pensions. Congress established in 1920 a system of compulsory, con- tributory old age and disabiUty insurance for employees in the classified civil service. As the discussion develops, much will be learned from a comparison of the foreign methods. 253. Unemployment Insurance Perhaps the most baffling of modern labor problems is unem- ployment. In 1900 in the United States there were about six and a half million workers unemployed for more than a month, and of these about two and a half millions were unemployed from four to sLx months, and about three-quarters of a million between seven and twelve months. As Mr. Beveridge has stated: "The problem of unemployment lies, in a very special sense, at the root of most other social problems." That there is a personal factor in unemployment is undoubted. Some are inefficient; some like the hobo, the tramp, and the 666 Social Insurance [§253 criminal are altogether unemployable. But far more important than this is the social or industrial factor — the unemployment due to the organization of modern industry. Unemployment is due largely to fluctuations in industry, of which there are four chief categories: (i) Periods of prosperity and depression. The problem of crises and business cycles has been discussed above (§ 209). (2) Short-time fluctuations due to seasonal trades, that is, trades active for only a part of the year or more active in one season than in another. The cause of this is either directly or indirectly weather conditions. (3) Fluctuations in the casual trades, where the labor contract is made for only a few weeks, a few days, or even a few hours, as in the case with dock laborers, lumberjacks, etc. (4) Fluctuations due to the disappearance of old and the creation of new industries, as a result of mutations in business fortunes, of change of fashion, or of inventions. The last point is the one to which least attention has hitherto been paid. Yet it was emphasized over three quarters of a century ago in the following passage: "Humanity and justice to man demand that those who themselves suffer for the public good should be relieved at the public expense. Whenever a new application of mechanical power throws a particular class of operatives out of employment, a national fund should be pro- vided to aid them in betaking themselves to other occupations. It is a disgrace to the legislature of the country that the enormous body of hand-loom weavers should have been left so long in misery and destitution and toiling to death in the hopeless competition with the power loom."^ The problem of the unemployable is a problem of the defec- tive and the criminal classes. The problem of the unemployed, is that of the able-bodied man willing to work but unable to find a chance. Three suggestions have been made to lessen unemployment iTorrens, On Wages (1834), p. 34. § 253] Unemployment Insurance 667 First, is the creation of public employment exchanges. We frequently find an oversupply of labor in some industries, coupled with a simultaneous undersupply in others. In the United States farmers are often crippled for help when industries not far off are working on half time. The object of the public employment bureaus is, as it has been expressed, to bring to- gether the jobless man and the manless job. In the United States this phase of the problem is being attacked by both state and federal legislation. The second suggestion is the regularization of employment. The cyclical fluctuations do not perhaps at present lend them- selves to regulative action; but it is different with the seasonal and the casual trades. Not a little can be accomplished by pri- vate effort and through carefully devised regulation to spread more equally over a whole year the activity which is now found only in spurts. In casual trades, like the docks, English ex- perience has shown that a simple change in the method of engaging the laborers may bring about a far greater regularity in employment. Thirdly, the development of vocational schools may do much to diminish the horde of ill-prepared young people whose onset into industry often accentuates the difficulties of irregularity of employment. The above methods, designed to diminish irregularity, are preventive. But in so far as the irregularity persists, the resulting evils may largely be obviated by attacking the uncer- tainty itself through insurance. Unemployment or out-of-work insurance is of three kinds first, subsides paid by govern- ment to the insurance funds of trade unions, known as the Ghent system, because first employed in the city of Ghent in 1900, and since then imitated in many other places. Secondly, we find the system of government unemployment funds where the government itself organizes the insurance institution and offers its benefits, including a financial subsidy, to the workman. Such a fund was started by Berne in 1893, followed in 1896 by 668 Social Insurance [§ 253 Cologne, and other cities. The third method is the system of compulsory insurance for all workmen. This was initiated in 1894 by St. Gall, although abandoned after a short time. In 191 1, however, the English national insurance act introduced this system on a huge scale. The English law applies to seven trades where the evils of unemployment have been the greatest: building, construction of works, ship building, mechanical engineering, iron foundries, construction of vehicles, and saw milling. The Board of Trade however, has the power under certain conditions to extend the provisions of the act to other trades. The number of workmen in these trades is calculated at about two and a half millions. Every employee must deposit an insurance book with the em- ployer who is obligated to pay the insurance premium by affixing weekly a 5d. stamp, one-half of which he may deduct from the wages. The government adds one-third of the total contribu- tions received; or, in other words, contributes one-quarter while the employer and the employee together pay three-quarters of the total premium. The unemployment benefit, of ys. a week and limited to fifteen weeks in any year, begins after the first week of unemployment. In the case of strikes the benefit ceases. The government offers a subsidy to trades unions that provide additional unemployment insurance. After a man has reached the age of 60 and has paid 500 weekly contributions, he may receive back with interest all that he has paid in, less what has been received as benefits. Finally, employers who h^ve kept their workmen continuously employed for a year may claim a refund of one-third of their payments at the end of the year. The English law is the latest and most interesting attempt to deal with the evils of unemployment on a gigantic scale. Its operation will be watched with the greatest interest, and it may fairly be surmised that it will before long be followed by other countries, including the United States. CHAPTER XXXIX POVERTY AND PROGRESS 254. References In General: Charles Booth, Life and Labour of the People in London (17 vols., new ed., 1902); B. S. Rowntree, Poverty; A Shidy in Tou'n Life (1901) and The Human Needs of Labour (1918); M. Parmelee, Poverty and Social Progress (1916); J. A. Hobson, Problems of Poverty (1891) and Work and Wealth (1914); H. Fawcett, Pauperism; Its Causes and Remedies (1871); C. B. Spahr, Distribution of Wealth in the United States (1896); C. D. Wright, Practical Sociology (1914), chs. xviii, xxv; W. Smart, The Distribution of Income (1899), bk. ii, ch. viii; B. and S. Webb, The Prevention of Destitution (191 1); F. H. Streightoff, The Distribution of Incomes in the U. S. (191 2); W. I. King, The Wealth and Income of the People of tlie U. S. (1915). Descriptions of Poverty: C. B. Spahr, America's Working People (1900); W. A. Wyckoff, The Workers (189 7- 1899); J. A. Riis, How the Other Half Lives (1890), and Tlie Battle with the Slum (1902); Hull House Maps and Papers (1895); A. M. Simons, Packingtown (1899); P. Roberts, The Anthracite Coal Communities (1904); The Pittsburgh Survey (6 vols., 1910-1912), Bowley and Burnett, Livelihood and Poverty (1915); C. B. Barnes. The Longshoremen (1915). Luxury: E. de Lavelcye, Luxury (1891); H. M. Thompson, The Purse arui the Conscience (1891). Cost of Living: W. O. Atwater, Principles of Nutrition and Nutri- tive Value of Food (Farmers' Bulletin, no. 142, rev. ed., 1902), and The Chemical Composition of American Food Materials {Bulletin, no. 28, rev. ed., 1899); Atwater and Benedict, Experiments in the Metabolism and Energy in the Human Body, 1900-1902; L. B. More, Wage Earners' Budgets (1907); T. Ryan, A Living Wage (1907); WartinK Changes in tlie Cost of Living, igi4-igig (National Industrial Conference Board, 1919); F. H. StreightofT, The Standard of Living among the Industrial People of America (1911); F. Franklin, The Cost of Living (1915); Stand- ards of Living: a Compilation of Budgetary Studies (rev. ed., 1920), pub. hy Bureau of Applied Economics. Poor Laws and Charity: J. Nicholls, History of the English Poor luiw (1854, new ed., 1904); A. J. Warner, American Charities (2d ed., 1908); £ W, Capen, Historical Development of the Poor Law of Connecti- 669 670 Poverty and Progress [§ 255 cid (1904) ; E. T. Devine, The Principles of Relief (1904) and Misery and its Causes (1909); J. Lee, Constructive, and Preventive Philanthropy (1902); Committee of Fifteen, Report on the Social Evil (191 2); National Conference of Charities and Corrections, Annual Reports (1874 — ). 255. Luxury In our study of the distribution of wealth attention was devoted primarily to the shares of the various classes in distri- bution. To the individual, however, the share of the total product that accrues to the particular class is of slight conse- quence when compared to his own participation in this share. The economic problem to him is as to the amount of wealth that he personally can secure. To the community as a whole, also, it makes a great difference whether a given sum of wealth is shared in an approximately equal fashion among its separate members or whether a minority lives in affluence and the mass in squalor. The coexistence of luxury and poverty has always been the stumbling-block of the social reformer. To this most baffling question we must now turn our attention, although almost every one of the preceding chapters has indirectly touched upon the same subject. The problem of luxury in itself, and not considered as a concomitant of poverty, involves few difficulties. The discus- sion, however, has often been one-sided; for here as elsewhere extremists have not been lacking. The apologists for luxury, for example, have from time immemorial sought to justify themselves by the plea that luxurious expenditure is beneficial because it affords employment to labor. The merest tyro in economic reasoning, however, will at once perceive the weak- ness of this hoary argument. If luxurious expenditure is productive simply because it employs labor, the accidental breaking of a window-pane or the wanton destruction of a growing crop is also productive in so far as it will require labor to repair the damage. The fallacy clearly consists in the assumption that the wealth spent in luxurious outlay would otherwise not be devoted to production. Obviously, however, §255] Luxury 671 if the spendthrift chooses not to waste his funds, they will take the form of the purchase of securities, of investment in some enterprise or of a cash balance in the bank; and in each case they will ultimately be devoted to production and thus give employment to labor. On the other hand, the opponents of luxury go to an equally extravagajit length. "Plain living and high thinking'' is indeed a most admirable moral precept, inattention to which has re- sulted in the ruin of many an individual. The evils of ostenta- tion and the passions of sensuality are as glaring as they are reprehensible. From a broader point of view, however, plain living may be carried to an extreme. Civilization, as we learned at the very outset of this treatise, depends on the multiplication of wants. If goods are to be divided into necessaries, con- veniences and superfluities, progress may be described as the process of converting superfluities into conveniences and con- veniences into necessities. The diversification of consumption lies at the root of human development. It is undoubtedly true that we can have no lasting progress without the accumulation of capital and the application of labor to raw material; but it is equally evident that while a population every member of which is devoted entirely to wheat-raising or to the making of rough clothes or shelter may be very estimable, it will indis- putably be lacking in many of the qualities that we associate with higher civilization. It would, to mention nothing else, leave no room for the whole domain of art, which is in some respects the supreme achievement of the human race. Yet no one will make fine or beautiful things unless there is a demand for them, and this demand necessarily implies luxury some- where. Thus we seem to reach the position that luxury is evil and at the same time indispensable. The difficulty, however, is really not serious. Luxury of some kind is indeed inevitable, but what is one man's luxury is another man's necessity. The real test of the economic legitimacy of luxury is the relation between the economic importance of the 672 Poverty and Progress [§ 255 outlay and the economic importance of the result to the commu- nity as a whole. If a particular individual is markedly important for the community, society will not and ought not to begrudge him a more or less lavish expenditure in keeping with its estimate of his public importance. There is usually a close relation be- tween consumption and production. It is true that in a young country like the United States men will often accumulate wealth for the sake of power and lead comparatively simple and busy lives. Almost everywhere else, however, it is a fact, and even in the United States it is a tendency, for people who acquire wealth easily to spend it lavishly. To the extent, therefore, that con- sumption is the objective point of production, the prohibition of luxury would be apt to work as an impediment to enterprise, and what would be gained at one end would be lost at the other. From this point of view the luxury of an individual who is eco- nomically important in the sense that he is adding materially to the productive forces of the community is justifiable. Luxury as a legitimate economic phenomenon may, however, be abused by those who possess the wealth or power without enjoying the real social importance. They spend, but give nothing in return. In the case of private individuals the most obvious example is the man who has received a large fortune by gift or inheritance and who has done and is doing nothing of value to the community. Luxury of this kind is economi- cally injurious. But luxury may also be associated with the government. Where there is an absence of constitutional liberty, the individual potentate may abuse the privilege, and we reach a situation like that in the time of Louis XIV in France, where the luxury of the court proved to be a heavy burden to the people. In a democracy, however, this danger does not exist, and there is even a risk of going too far in the opposite direction. The president of republican France indeed receives a special allowance for entertainments; but the lack of suitable homes and adequate salaries for American diplomatic represen- tatives abroad has long been a national mortification. § 255] Luxury 673 The real economic ideal is the socialization of luxury, in the sense either that private luxury should give way to public luxury, or that the luxury of the individual should be confined to those who are of true importance to the community and who are transfused by the sense of social responsibility. The economic test of all expenditure is the creation of a surplus of satisfactions. The wider the range of the participants in a given expenditure, the greater the surplus. Artistic and beautiful, even if expen- sive, things are indeed desirable; but to accomplish the greatest economic as well as ethical good, their enjoyment should not be monopolized by the few. In classic Greece the choicest sculptures and paintings were displayed in the streets and temples; and even in modern times the public galleries are assuming continually greater dimensions. Where the principle of the public trusteeship of private wealth has permeated the community we find, as in a few of the European cities, that the private galleries are so only in name, and that they are peri- odically, if not continuously, thrown open to the public. Thus the economic view of luxury does not really differ from the ethical. From the moral point of view the self-indulgent luxury of the mere sensualist is always to be deprecated: a pri- vate Maecenas is relatively defensible; but a public Maecenas is still more admirable. From the economic point of view, the test is the importance to society of the luxurious outlay. The luxury of a mere faineant is always an economic loss; the luxury of the individual who has honestly acquired his wealth, who has been spurred on to activity by the thought of the ultimate reward, and who has succeeded by serving the community is relatively defensible; but public luxury or the luxury of the same individual when he devotes his wealth to public purposes is a more distinct economic gain, because with the same outlay of effort there is now a greater enjoyment, and thus a greater surplus of utility. In both public and private expenditure, however, great care must be exercised not to carry luxury to an extreme. Ethically the danger is that the aesthetic element may be engulfed in sensual- 43 6/4 Poverty and Progress [§ 256 ity; economically the clanger is that the surplus or the wealth of the community may be whittled down by increasing consump- tion at the expense of production. 256. The Facts of Poverty Poverty, like luxury, is a matter of degree. Yet from one point of view we may contrast absolute with relative poverty. Abso- lute poverty may be defined as that condition where the income is insufficient for the bare minimum necessary to maintain phys- ical efficiency. Relative poverty, on the other hand, would be the inability to maintain the standard of life which in civilized, countries includes something more than mere subsistence. Poverty depends on the relation of income to the cost of liv- ing. It is therefore a matter of considerable importance to de- termine on the one hand the income and on the other the ex- tent and the elements of the cost of living. Unfortunately the material at our disposal is exceedingly inadequate, except as to the proportion of elements in expenditure. As to these the three fundamental expenses are, in their order of importance, the expense for food, shelter and clothing. Sev- eral decades ago, the German statistician, Engel, made some cal- culations as to the percentages of various items of expenditure. More recently the United States Bureau of Labor has conducted elaborate investigations. Taking several thousands of normal families classified according to their income, the bureau found the percentage of expenditures in 1901 to be as shown in the table on the following page.^ The same facts are illustrated graphi- cally in the chart opposite page 674. These results in the main confirm those obtained by Dr. Engel, although there are some discrepancies. Dr. Engel's propositions were as follows: — (i) The greater the income, the smaller the percentage of ^ United States Bureau of Labor, Eighteenth Annual Report, Cost of Living and Retail Prices of Food, 1904, p. loi. PER CENT OF TOTAL EXPENDITURE MADE FOR VARIOUS PURPOSES IN NORMAL FAMILIES IN THE UNITED STATES, 1901. BY SIZE OF INCOME. INCOME 20 .10 00 SO 1 UNDER $200 1 ■ $200 TO $300. ^P 1 $300 TO $400 ^1 1 $400 TO $500 ^p $500 TO $600 .__ ^H 1 00 TO $700 WK^^M 1 "00 TO $800________ Rowntree. "Poverty, A Study in Town Life." The startling fact, however, is that, even with an average family and regular work, over one-half of those living in poverty at any moment are reduced to that state simply because, not- § 257] The Causes of Poverty 681 withstanding the exercise of thrift, sobriety and care, the income is inadequate for support. When we ask what is the ultimate cause of poverty, it is at once obvious that no single reason can be separated from the others. Modern poverty is bound up with the facts of modern economic life, and modern economic life is a complex product. To select any characteristic feature of the present industrial sys- tem and to single it out as responsible for poverty is naive, but worthless. The Malthusian seizes upon redundant population, the communist upon private property, the socialist upon prop- erty in means of production, the single taxer upon property in land, the co-operator upon competition, the anarchist upon gov- ernment, the anti-optionist upon speculation, the currency re- former upon metallic money, and so on. They all forget that widespread poverty has existed in the absence of each one of these alleged causes. Density of population, private property, compe- tition, government, speculation, and money have each been ab- sent at various stages of history without exempting society from the curse of poverty. Each stage has had a poverty of its own. Nothing is more natural, but nothing is more fraught with danger, than to cast a halo over the past and to make of it a golden age. The poverty of to-day is sad and even heartrending, but to the student of economic history it is clear that in the older industrial countries at least, where alone a fair compari- son can be made, the poverty of to-day is less than it was a century ago, and far different from what it was in former ages. Even the socialists are now abandoning their contention as to the gradual pauperization of the mass of society, and are restricting themselves to the complaint that the workman is not securing a fair share of the undoubted increase of wealth. More- over, at the present time there is bitter poverty in India, a country without the modern industrial system; and still more acute destitution among savages who are ignorant of property in land. The causes of poverty are as complex as the causes of civilization and the growth of wealth itself. 682 Poverty and Progress [§ 258 258. The Relief of Poverty- All remedies for poverty fall into one of two classes, — the palliative and the curative, — the endeavor to relieve poverty and the attempt to prevent poverty. The distinguishing feature of modern life is the growth of a public sentiment which seeks to cope with the evils of poverty from both points of view. The relief of poverty has taken the forms of private and public relief. Private charity, again, has been either individual or institutional. We thus have the three classes of individual relief, private institutional relief and public relief. (i) Individual charity, while incontrovertibly of great weight in special cases, is often likely to be of ethical importance to the bestower rather than of economic benefit to the recipient. Experience has shown that indiscriminate personal charity is frequently ill-advised, because it is the result only of the heart rather than of heart and head combined. The consequence is that it is just as likely to perpetuate as to relieve beggary and pauperism. The realization of this fact has led to the replace- ment, or at all events to the supplementing, of personal by institutional relief. (2) Institutional private relief is exemplified by the char- itable agencies like benevolent societies, relief and aid societies, associations for improving the condition of the poor, fatherless and widows' societies, and societies for promoting frugality and repressing mendicancy. Above all, however, we must signalize the charity organization societies which have been rapidly de- veloping during the last half-century. These are endeavoring to substitute scientific principle for hap-hazard action, and have done not a little to direct the stream of generosity into the right channels. Pauperism, however, either brings in its train or aggravates many other distressing evils such as the various forms of disease, unsanitary homes, dependent chil- dren, and liability to economic and legal exploitation. Num- berless, therefore, are the modern institutions like private § 2s8] Relief of Poverty 683 hospitals, dispensaries, sanatoria, anti-tuberculosis leagues, improved dwellings and model lodging-house companies, orphan asylums, creches, kindergartens, juvenile homes, fresh air funds, retreats for the aged, the convalescent and the in- curable, provident loan societies, employment agencies, wood- yards and laundries, industrial colonies, legal aid societies, peoples' palaces and the like. Bewildering in their complexity, the proper management of these philanthropic agencies has become a distinct profession and the subject of a separate dis- cipline, with a stupendous literature of its own. In former times institutional philanthropy was to a large extent religious in character. All the great religions of the world have inculcated the virtue of benevolence, and not the least contribution of Christianity consisted in the new spirit of universal brotherhood and charity which it infused into the pagan European world. During the major portion of the middle ages, in fact, the charities of the church were virtually the sole embodiments of organized philanthropic activity. It was only after the Reformation, when the property of the church and of many of the religious orders was "secularized," that the need of some form of public relief was recognized. (3) The most important illustration of public relief is that known as the Poor Law System. In England, after the con- fiscation of the guilds and chantries during the sixteenth cen- tury, the bishops were admonished to exhort their parishioners to more liberal gifts for the poor. As these exhortations grad- ually lost their efficacy, it was finally provided that in case of contumacy the justices of the peace might order an assessment. Thus did the voluntary contributions gradually change into compulsory payments, — a process which may be observed in the history of all taxation. In 1601 a general assessment was levied for the support of the able-bodied and impotent poor. In 1662 the settlement act was passed, designed on the one hand to increase the facility of relief, but on the other to limit it strictly to native inhabitants of the locality. The act of 1722 684 Poverty and Progress [§ 258 authorized the building of workhouses, and the withholding of relief from those that refused to enter. Gilbert's act of 1782 directed the local authorities to find for the unemployed poor work suitable to their requirements and in the proximity of their homes. The system reached its climax in the act of 1796, when Parliament followed a similar resolution of some justices of the peace who had assembled at Speenhamland in the pre- ceding year and authorized outdoor relief for the necessitous as a substitute for the now discredited workhouse test. It was at one time the custom to ascribe a disproportionate influence to the poor law. The English system was undeniably a direct premium on improvident marriage and lack of frugal- ity. But the oft repeated assertion that it impoverished the comfortable and perpetuated the miserable is clearly an ex- aggeration. The situation at the close of the eighteenth and beginning of the nineteenth centuries was indeed deplorable; but, as we know, it was very largely the result of the abuses connected with the transition from the domestic to the factory system. The poor law played its part, but after all a relatively inconspicuous part, in maintaining the degradation of the working classes. In the same way the great reform of the poor law in 1834, by which outdoor relief was abolished, was only one of the many ameliorative movements which revolutionized the condition of the laborers in the second quarter of the cen- tury, such as the abolition of the conspiracy acts, the passage of the factory laws, the repeal of the corn laws, the reform of taxation, and the growth of democracy. The old poor law did not create English poverty, and the new poor law did not abolish it. In the United States, where pauperism has been for obvious reasons less acute, the two salient features of the poor-law sys- tems have been the almshouse and outdoor relief. Public out- door relief, however, has been substantially arbolished in some of the larger Eastern cities, like New York, Philadelphia, Balti- more and Washington, with distinctly good results. A consider- § 259] Prevention of Poverty 685 ation of the relative merits of public and private relief, which is becoming the subject of warm discussion in many parts of the United States, would however lead us too far astray; for the controlling considerations are not primarily economic in character. 259. The Prevention of Poverty We have seen that there is no single cause of poverty; there can accordingly be no single preventive of poverty. The naive and simple remedies that are commonly advanced may be re- duced in their practical operation to two, — a diminution of population and a diminution of wealth. After the discussion in chapter iv. the suggestion that pov- erty can be abolished by checking population scarcely needs any further comment. Human beings are producers as well as consumers, and under proper conditions an increase of population may be entirely compatible with an increase of general wealth. Nothing is more indisputable than that num- bers have increased and relative poverty has decreased in many modern countries. The diminution of wealth, on the other hand, is in itself never advanced as a remedy, for that would be too obviously absurd. But all the other naive remedies for poverty are prac- tically tantamount to this. To the attentive reader of the preceding chapters it should be abundantly clear that private property and individual initiative have been the motor forces of the accumulation of wealth and the real progress of humanity. Anything therefore which seriously saps these foundations neces- sarily undermines not only the whole structure of industrial society but the edifice of civilization itself. Anarchism would abolish government, but in so doing would rob society of the fundamental protection which enables it to exist in peace. Communism would level distinctions of wealth, but in eliminat- ing private property would destroy progress. The restriction of large fortunes by taxation, by direct prohibition or by limita- 686 Poverty and Progress [§ 259 tiou of bcquosl might seriously impair the spirit uf enterprise. Socialism, which would abolish private control of production, would in the present condition of the human race necessarily diminish production. Socialism is virtually co-operation; and the true co-operative spirit is wofuUy lacking in the mass of mankind. There are indeed conspicuous examples of wealthy socialists, but they have been for the most part men of lofty idealism who would have played an equally prominent part in the reform rather than the reconstruction of modern industry. If the rank and file of men were ethically as advanced as are many of the socialist leaders, there would be no need of reform. Socialism assumes that mankind is ready for the self-abnegation implied in the very idea of the public and co-operative activity which is to include the whole of productive enterprise. History and psychology alike teach us that this grossly underrates the importance of the economic motive. When the world is ready for socialism, socialism will be unnecessary. In the mean time any serious encroachment of socialism would inevitably bring with it a slackening in the pace of accumulation; and in the long run a diminution of wealth cannot mean a diminution of poverty. To say, however, that poverty has always existed is no reason for believing that it should continue forever to exist. Absolute equality of conditions is indeed an iridescent dream, for it runs counter to the inequality or differentiation which is the law of all life and the explanation of all change. But if the preceding discussions in this volume have emphasized any one point it is the fact of the progressive intermingling of the individual and social points of view, — the interpenetration, as it were, of the individual by the claims of society, and on the other hand the infusion into the collective activity of some of the surplus energy which must always continue to find its tap-root in the efforts of the individual. Translated into economic terms, this means that the modern industrial system is slowly producing not only political democracy but economic democracy, and that eco- § 259I Prevention of Poverty 687 nomic democracy is incompatible with permanent and wide- spread poverty. This does not imply that economic forces alone and directly are creating a millennium, or that the political ideal is laissez- faire. Government and the public sentiment behind it are in a sense the outgrowth of the economic situation; but, as we have learned, they are also potent factors in modifying the situation. Economic, political and ethical forces are conspiring to bring about progress by raising the social level. In ordinary business life this means the gradual but clearly discernible elevation of the standard of commercial morality. So far as poverty is concerned it means the lifting of the standard of life of the laborer and the setting, in ideal at least, of an irreducible minimum, below which national production is not worth having. Practically this process assumes the varied forms of trade-union activity, of education of the unskilled, of factory legislation, of social insurance, of workmen's compensation, of improved housing, of trade agreements, of control of monopoly and above all, of the curtailment of special privileges. The process is a slow one, because it is an arduous task to make the successful and self-satisfied business man realize that the true ultimate interests of his class are associated with the increased consump- tion that can come only from the higher standard of life of the mass of the producers. It is in the last instance public opinion alone which in a democracy can proteci the well-intentioned and long-sighted employer from the unfair competition of his unscrupulous and selfish rivals. The way, therefore, to have progress without poverty is not to level down but to level up; to do nothing which will pre- vent the capable, the resourceful and the daring from exerting their skill and inventive ingenuity; but, on the other hand, to keep open the door of opportunity for all and to throw about the mass of the less fortunate and the less gifted the protect- ing mantle of a public sentiment which will be intolerant of injustice, and which wiU insist upon the creation of conditions 688 Poverty and Progress [§260 that insure to every worthy human being at least the possi- bility of a worthy human existence. 260. The Future of Economic Life We come finally to the questions which at the close of such a study as this inevitably force themselves upon us: Whither are we tending? What lessons have an economic interpretation of the past and of the present to teach us in our guidance for the future? What are the forces that are making for progress or retrogression? There is no blinking the fact that many give a pessimistic answer to these queries: they call attention to the increase of luxury and materialism; they look with suspicion upon what they term the growing plutocracy and the new feudalism; they point to the warning example of the oriental monarchies, of classic Greece and Rome, and tell us that in our case, too, the period of prosperity which is now upon us will be followed by one of decay and final dissolution. What has been will be: there is nothing new in human affairs. Yet a discriminating study of the considerations set forth in this volume should preserve us from so gloomy and despondent an attitude. The three factors of importance to which all that has preceded may be reduced are: the growth of industrial capital, the internationalism of science, and the emergence of the democratic ideal. (i) In ancient Rome, as in feudal Europe and colonial America, the conditions of landholding played a dominant role. The control of the trade routes was the chief factor in the rise and fall of the oriental monarchies, of the Greek city states, of the Italian and German towns, of Portugal and Spain. The distinguishing mark of modern times, on the other hand, is the existence of industrial capital. We speak glibly of the recent progress of science, but few realize the true import of this growing subjection of nature to man, and of the revolutionary character of this harnessing of the powers § 26o] The Future of Economic Life 689 of the universe to the yoke of the human intellect. For one thing, it has made possible an almost hmitless increase in production. Landed capital, under the unscientific methods of the past, was able to go so far and no farther. The advent of commercial capital indeed increased prosperity, and to the extent that exchange is really a phase of production, augmented the productive power of the world. But here, again, its efficacy was confined within narrow bounds. Creating new values simply by the bartering of existing values, the pyramid of wealth rested on the basis of the actual production within each community, and could not be piled up beyond a certain height. But with modern industrial capital and the snatching from nature of her intimate secrets, the utilization of natural re- sources within each country has become almost boundless, and provides an ever-broadening base for the benefits of trade and commerce. It is for this reason alone that the history of the world in the future is to be so different from the past. In former times, after a certain point had been reached in agriculture and com- merce, human ingenuity was powerless to do more than divide existing wealth; and with this fixed limit to production, it is no wonder that each civilization in turn should have attempted to secure the prize for itself. Hence the rise, the glory and the decline of nations. In future, however, in lieu of dividing existing wealth, each nation which lives up to its opportunities will be able to create new wealth. Important as will continue to be the land question and the trade relations, the secret of ultimate success is to be sought in the fundamental conditions of industrial enterprise at home; and with the growth and control of industrial capital there need be no limit to the con- tinuous march of wealth and progress. (2) Science is not only boundless in its possibilities, but im- partial in its activities. Science transcends all national lines. Never again will a country be able to achieve or to retain a monopoly of industrial advantages. For the time being, in- 44 690 Poverty and Progress [§ 260 deed, climatic conditions or racial characteristics may give one nation a temporary preponderance in some particular cat- egory of production; but with the overwhelming importance of new industrial methods, applicable impartially to all natural forces, the advantage cannot be permanently retained. We are accustomed to speak of the changes brought about by the alteration in the media of transportation and the growth of the world market; we do not yet realize the full implications of the industrial revolution. Rightly conceived, it means the coming internationalism of mighty empires in friendly com- petition with each other, not for the division of what exists, but for the utilization of what can be made to exist. For the immediate future, indeed, while nations are still in unequally developed stages of industrial growth, and while there remain extended markets not yet on the highroad to industrial pre- dominance, there will still be some room for the nationalism of the old type with its protective features and its commercial rivalries. In these contests we must undoubtedly take our part. But with every decade's progress in science the condi- tions will change, and the old nationalism of exclusiveness will melt into the new cosmopolitanism based upon the continual progress of each great and economically homogeneous community. (3) The final point of difference — the flower and fruit of all its forerunners — is the existence of the democratic ideal. We point, indeed, with complacency to the advance made by the skilled members of the working class, but to those who realize the essential conditions of successful democracy, where the mass of citizens are necessarily the laborers, the ideal to be attained advances still more rapidly than the actual progress. The brutish, lethargic peasant of the old world is, perhaps, content with his crust and his misery. The free citizen of 'the modern industrial state wants, and wants justly, to participate in the spiritual as well as the material benefits of modern civil- ization. With every ^advance in his economic position, due to the interplay of mode'rn industrial forces, new vistas of possi- § 26o] The Future of Economic Life 691 bilities disclose themselves, new sources of legitimate satisfac- tion make their appearance. The social unrest of to-day, with all its disquieting and regrettable incidents, is on the whole a salutary symptom. It is but the labor pains in the birth of the new industrial order which has been in the making for the past few generations, and of which the faint outlines are even now discernible. This new industrial order depends, however, on the emer- gence of a healthy public opinion. In antiquity political and social opinion was a class opinion. In the middle ages the incoherent public opinion was intolerant to competition. In modern times the progress of economic thought and the pres- sure of economic fact in uplifting the hitherto submerged classes of the community are generating a public opinion which frankly recognizes the benefits of a healthy competition, but which insists more and more on an effective social control of compe- tition to the end that it be elevated and purified. A study of the economic forces now at work therefore jus- tifies a reasonable hopefulness. The productive powers of society are augmenting at such a prodigious rate that we need no longer apprehend a decay of general prosperity or of national power. There is to be no further irruption of the barbarian, because there will soon be no more barbarians. There is to be no swinging back of the pendulum of civilization, because under the influence of the new economic forces only those nations can succeed that understand how to utilize industrial capital; and this comprehension implies an ever-ascending stage of civilization. There is to be no domination of each people in turn over all the others, because of the internationalism of science and the impartial territorial diffusion of industrial agencies. And within each nation, while the rich are un- doubtedly getting richer and while poverty still stalks abroad, the poor are not getting poorer. The creation of a more equa- ble, because a more complete, competition through the develop- ment of the system of collective bargaining and the curtailment 692 Poverty and Progress [§ 261 of all special privileges; the recognition on the part of the public that lasting prosperity depends not only on the con- servation and free play of capital, but also on the gradual ele- vation of the laborer from a cheap man to a dear man; the coming social control of competition itself in the interests of a more enlightened and hence really freer rivalry, — all these will inevitably tend to secure to each class in the community its proper share in the national dividend. 261. The Role of Economics Economics, then, has a progressively important role to play in the future. We thus come at the end to the position from which we started out. With the commanding significance of the economic life in its influence on social progress, econom- ics, in pointing out exactly what is, must necessarily concern itself with what ought to be. If the economic student is the real philosopher of social life, he will take a more notable part in future speculation and future legislation. The various social classes, by reason of their very being, see only the particular, not the general, interests. The farmer understands the work- ings of Wall Street, and the factory hand comprehends the condition of the world market, as little as the capitalist real- izes the true ideals of the laborer. To let any one class act as spokesman for the other is pregnant with danger. The eco- nomic student, if he is worthy of his calling, will proceed with- out fear or favor; he will be tabooed as a socialist by some, as a minion of capital by others, as a dreamer by more. But if he preserves his clearness of vision, his openness of mind, his devotion to truth and his sanity of judgment, the deference paid to his views, which is even now beginning to be apparent, will become more and more pronounced. The influence of economic conditions on economic theory has been, let us hope, abundantly demonstrated; but the reciprocal influence of economic thought on actual conditions is in danger of being overlooked. As the science itself becomes more and more § 26i] The Role of Economics 693 complete, it will be in a better position to apprehend and to explain the real content of existing conditions and the true method of making the actual conform to the ideal. Economics, which is to-day only in its infancy, and which is of all disci- plines perhaps the most difficult and the most complicated, is indeed interlaced with and founded upon the actual condi- tions of the time; but like natural science the economics of the future will enable us to comprehend the living forces at work, and by so doing will put us in a position to control them and to mould them to ever higher uses. Economics is there- fore both the creature and the creator. It is the creature of the past; it is the creator of the future. Correctly conceived, adequately outlined, fearlessly developed, it is the prop of ethi- cal upbuilding, it is the basis of social progress. INDEX INDEX ^BRASION, 472- Accidents, laws regarding, 647. Advances, 504, 509. Agricultural stage of private property, 12S. Agricultural credit. Federal Farm Loan Act, 546*. Agriculture, possibilities of, 44, 45; in early period of American eco- nomic life, loi; in America since the Civil War, 103-106; extensive and intensive, 308, 309, 315, 316; stages in, -313-316; migrator>', 313, 314; surface tillage, 314; sta- tionary, 314; alternating, 315; two-field system, 315; three-field system, 315; open-field or inter- mixed system, 315; convertible, 315; rotation of crops or diversified farming, 315; enclosures, 315; capi- talistic farming, 316; in the United States, 316: large-scale, 338-341; combination eliminated in, 350. Aldrich-Vreeland Bill, 539. America, early period of economic life of, 100-102; growth of industry in nineteenth century in, 102-104; recent development of industr>^ in, 104-106; modern problems of, 106- 108. American system, the, 102. Anarchism, 685. Annuities, 409, 410, 603, 604; ton- tine, 604. Apprenticeship, trade union restric- tion of, 167, 168, 436, 437. Arbitrage, 361. Arbitration, 446-448. Aristotle, no, 138. Arnold, Matthew, 203. Associated and corporate enterprise, 96-99. Auction sale, 231, 232. Austria, money standard in, 483. gAClEHOT, WALTER, 512, sn- Balance of bargain, 117. Balance of trade, 117, 549-552, 560. Bank certificates, 500. Bank drafts, 500. Bank notes, 505; steps to insure safety of, 521- 525; public or private issue of, 521, 522; right of issue of, 523, 524; monopoly of issue of, 523; de- centralization of, 524; character of, 524, 525; denominations of, 525; regulation of, 525-528; French, Swiss, Dutch, English, and German systems of issue of, 527, 528; Ameri- can systems, 528-533; under the Federal Reserve Act, 540, 541. Bank of England, 522, 523. Bank of France, 522. Bank rate, 516-518. Bank reserves, 511-518; character of, 5 1 1-5 13; single and multiple, 512; combined, 512; composition of, 513, 514; amount of, 514-516; protec- tion of, 516-518. Bank restriction, 493. Banking, Credit and, ch. xx.x, 496- 520; development of, 501-506; foreign systems of, 527, 528; Amer- ican systems of, 528-533; general asset, 529; Suffolk system, 529; safety-fund system, 530; bond-de- posit system, 530. Banking principle, 526. Banks, origin of, 97; derivation of word, 501; money dealings of, 501, 502; credit transactions of, 502- 506; early, 502, 503; private, 502- 50s; in Venice, 502, 503, 509; trans- fer, 503; in Amsterdam, 503, 504, 509; giro, 503; savings, 503; deposit, 504; loan, 504, 505; of discount, 505; of issue, 505, 521-525; first government, 505; syndicate and promoting operations of, 506; state, 697 698 Index 522, 524, 532; federal reserve, 539- 543; national, 515, 524, 530-533; wild-cat and coon-box, 529; Suf- folk, 529; safety fund, 530; farm land, 546*. Barrator, 76. Barter, 68, 76, 87, 227-229. Basing point system, 592. Bequest, right of, 137. Billeter, G., 406. Bills, foreign, 554; documentary, 554; finance, 554. Bills of exchange, 499. Bimetallism, 68, 476, 479-483. Biology, relation of economics to, 30. Birth rate, 57-59, 61. Blacklist, 440. Bodin, 116. Bond deposit system, 530. Bonds, 330, 331. Bonus plan, 445. Booms, 361. Bottomry loans, 602. Bounties, 629-631. Boycotts, 441-443. Brassage, 471. Biicher, C, 90. Bucket-shops, 367. Business, 4, 85. Business enterprise, 85-89. Buyers and sellers, 229-235. Buyer's monopoly, 231. By-products, 254. QAIRNES, J. E., 158, 465, 548. Call loans, 397, 536-538. Canals, 575, 620. Capital, ch. xxi, 317-332; and income, 15-19; traditional definition of, 17; origin of term, 17; as capitalized income, 17, 18, 209, 404; as con- trasted with income, 18; chief function of, 18; measure of wealth, 19, 21; appearance of, on a large scale, applied in industry, 81; in classic antiquity and in modern times, 84; combinations of, 168; composed of pieces of capital, 215, 216; marginal efficiency of, and in- terest, 266, 267; as a factor of production, 283-285; and land, as factors of production, 304- 307; consumption, 317; lucrative or acquisitive, 317; production, 317; fixed and circulating, 318, 319; active and passive, 319; agricul- tural, 319; land or landed, 319; commercial, 319; industrial, 319; financial, 319, 320; productivity of, 320-326; function of, 320-325; as basis of roundabout production, 320, 321; creation and growth of, 323-326; as foundation of civiliza- tion, 323, 324; as available stock of wealth, 325; nature and influence of, 326-329; characterized by mass production, uniformity, and inter- changeability, 327, 328; investment of, 329-332; concentration of, 335; as a homogeneous fund, 395-397; can never become costless, 407- 410; monopoly of, and wages, 428; reserve, 511; industrial, growth of, 688, 689. Capital value, 17, 206-209, 211, 220- 223, 399- Capitalist economy, 81-84. Capitalists, rise of, 8x; and laborers, 289. Capitalization, of rent, 218; rate of, 220; and efficiency, 268, 269; and trusts, 276; and crises, 545, 546. Capitalization of Value, The, ch. xiv, 204-222. Carey, H. C, 2S0, 561, 565. Cartel, 343. Cash credits, 508. Cash-items, 513. Cash reserves, 513. Cernuschi, M., 476. Certificates, coin, 488; gold, 489; sil- ver, 489; of deposit, 500; clearing house, 510, 512. Character and Factors of Production, ch. xviii, 278-287. Charity, individual, 682; institutional, private, 682; institutional, public, 683-685. Chattels, 127. Check system, 500, 509, 510. Child labor, 287, 643-646. Civilization, 15. Clan, the, 85-87. Clark, J. B., 124, 185. Clark's law, 185-188. Class competition, 143, 144. Index 699 Class legislation, 566, 568. Classic antiquity, economic theory in, iog-ii2. Classification, railway, 584-587. Clearing house, 510, 511. Clearing house certificates, 510, 512. Climate, effect on economic life, 38- 40; the altering of, 43, 44. Clipping, 472. Closed shop, 439. Coin, in early middle ages, 477; gold and silver, 477-483. Coinage, 619. Coinage problems, 470-475. Combination, 152; of labor, 299-301; successive, 300; simultaneous, 300; advantages of, 345, 346; causes of, 347; growth and extent of, 347- 349; limits of, 349-351- Commerce, 46, 83. Commercial economy, 77-81. Commercial paper, discount of, 540. Commission work, 94. Commodities, the term, q, 10; and services, 10; speculation in, 362; contrasted with laborers, 415, 416, 422. Commodity competition, 141, 142. Communication, effect of improve- ments in, 48. Communism, 65, 128, 129, 136, 613, 685. Comparative costs, law of, 226, 227. Comparative marginal utilities, law of, 227. Competition, ch. x, 139-153; 68, 136, 230, 234-238; rise of, 82; nature of, 139-141; group, 139, 140; relation to progress 141, 144, 145; forms of, 141-145; com- modity, 141, 142; individual, 142, 143; market, 143; class, 143, 144; race or national, 144, 145; dan- gers of, 145-147; brute and human, 145-147; cut-throat, 146, 147; lim- its of, 147-150; fair and unfair, 148; substitutes for, 150-153; sometimes harmful, 349; hard to prevent, 350; unfair, forms of, 632, 633; and trusts, 635, 636; unfair, prohibition of, 638-641; between railways, 579, 580. Concentration, of .population, 52-54; meaning of, 333-335; kinds of, 334, 335; of labor, 335; of land, 335; of capital, 335; of employment, 335. Concentration of Production," The, ch. xxii, 333-351. Conciliation, 446-448. Consolidation, 341-345; of railways, 579- Constant returns or cost, law of, 253. Consumer's rent, 195. Consumer's surplus, 194, 195. Consumption, freedom of, 168, 169; relation of social surplus to, 201- 203; relation of production to, 278- 281, 286. Contract, freedom of, 169, 170. Control of Trusts, The, ch. xxxvi, 632-642. Co-operation, 140, 151, 152, 443-446. Co-operative societies, 151, 446. Copyrights, 153, 369, 391. Corner, 361, 362. Corporate and associated enterprise, 96-99. Corporate finance, 331. Corporation problem, 98. Corporations, 97-99; taxation of, 269, 270; regulation of, 273-275; signifi- cance of, 329, 330; holding, 344, 345. Cosmopolitanism, theory of, 1 18-120. Cost, meaning of, 189-192; and price, 190; as equivalent to pain, 190, 191; individual and social, 192-194, 197, 198; marginal, equivalence with marginal utihty, 192; and surplus, 194-198; depends on reciprocal de- mand, 196; social, equivalence with social utility, 197, 198; and utility, 198-201; of reproduction, 245, 246; equivalence between individual and social, 246; law of marginal or maximum, 247-249; marginal, as determining normal price, 248-251; law of minimum, 249-251; law of varying, 251-253; constant and uniform, 251-253; increasing, law of, 252; diminishing, law of, 253; joint, law of, 253-255; of replace- ment, 274; of labor, 289-291; rela- tion to wages, 289; measured by efficiency, 290, 291; and rent, 378- 381; and wages, 416-418. JOO Index Cost of production,. 244-247; relation to normal price, 245; meaning of, 24s; defined, 247; relation to joint cost and individual cost, 255; and value, in privileges, etc., 262-264; and price, 265, 266. Cost theory, of wages, 417; of money, 460, 461. Costs, comparative, law of, 226, 227. Cournot, A. A., 30. Course of interest, 405-407. Crafts, 92. Credit, 450, 455; becomes integral part of production and exchange, 82; nature and forms of, 496-501; commercial, 498-500; industrial, 500, 501 ; agricultural, 500, 546* ; financial, 500, 501; and prices, 518- 520; and crises, 543-546. Credit and Banking, ch. xxx, 496- 520. Credit and Currency, ch. xxxi, 521- 546. Credit economy, 68. Credit transactions of banks, 502-511. Crises and credit, 543-546. Cropping system, 388. Currency, Credit and, ch. xxxi, 521- 546. Currency principle, 525, 526. Currency question, 107. Custom, 150, 151. Custom system, 91, 94. Customs tariff, 557. See Tariff, Protection. J)ANBURY HATTERS, 442, 443. Death rate, 58-61. Debasement, 472, 473. Deductive and inductive methods in economic investigation, 28, 29. Demand, and supply, 199, 223, 224, 255. 256, 416; reciprocal, law of, 227; normal, 241-244; elasticity of, 241-244; joint, 243, 244; of money, 454-456. Demand price, 238. Democracy, 686, 687. Democratic ideal, emergence of, 688, 690, 691. Demolins, E., 42. ' Density of population, 49-52. Department stores, 651. Deposits, 502-504, 507, 508; and checks, 509, 510; importance of, in England and United States, 510. Depreciation, law of, 206-209, 211. Determination of Market Value, ch. XV, 222-240. Determination of Normal Value, ch. xvi, 241-261. Development, economic, of the United States, 100-108. Development of Economic Thought, ch. viii, 109-124. Deviation, 472. Differential, value as a, 217-220. Differential rates, 589-593. Diminishing cost, law of, 253. Diminishing returns, law of, 63, 212- 214, 252, 306, 308, 310, 346, 375, 402, 419. Diminishing time and space utility, laws of, 210. Diminishing utility, law of, 175-179, 212-214. Discommodity, 191. Discount, 505-507. Discount of commercial paper, under the Federal Reserve Act, 540. Discount rate, 516, 517. Discounting of future, 210. Discrimination, railway, 587-593; personal, 587-5S9; local, 587, 589- 593- Distribution, classical theory of, in; theory of, 118, 120, 121; shares in, 352-354; relation to production, 353- Distribution of population, 50, 52, 54-56, 57. Disutility, 190-192; marginal, 192. Division of labor, nature and advan- tages of, 293-298; social, 293-295; industrial, 295; technical, 295-297; territorial, 297, 298; defects of, 298, 299. Divorce, freedom of, 165, 166. Documentary bills, 554. Domestic system, 93, 94, 96. Double standard, 476. Drafts, 499, 500. Dumping, 255. Dutch-auction system, 232. Dynamic normal value, 225. Index 701 gCONOMIC action, 12; liberty of, 163-165. Economic activity, primitive, 85-87. Economic conditions, influence on density of population, 51. Economic development, 67-69. Economic Development of the United States, ch. vii, 100-108. Economic freedom, iig, 120, 155, 163-170. Economic investigation, methods of, 28, 29. Economic law, meaning of, 24-28. Economic Law and Method, ch. ii, 24-36. Economic life, 3-6, 14; effect of chmate on, 38-40; of geological formation, 40; of flora, 41; of fauna, 41; of geographical location, 42, 43; the future of, 688-692. Economic man, 5. Economic margin, 177, 178. Economic motive, 4, 5. Economic progress, 18; bearing of Malthus's doctrine on, 62; classi- fication of, 74. Economic science, as opposed to economic art, 36. Economic Stages, The, ch. v, 67-84. Economic theory, in classic antiquity, 109-112; mediaeval, 11 2-1 15; mer- cantile doctrine, 116-118; Ada,m Smith and the Physiocrats, 118- 121; Ricardo and modern econom- ics, 1 21-124. Economic thought, development of, 109-124. Economic value, 174. Economics, definition of, 4, 7, 8, 13, 14, 35; a social science, 6, 7, 179; origin of term, 8; often called science of wealth, 8; the true scope of, 23; relation to other sciences, 29-35; to psychology, 30; to biology, 30; to mathematics, 30, 31; to statis- tics, 31; to politics, 31, 32; to juris- prudence, 32, 33; to ethics, 33-35; scope of, 35, 36; pure and applied, 35, 36; the role of, 692, 693. Economy, barter, money, and credit, 68; animal, vegetable, and mineral, 68; self-sufficing or isolated, 75-77; trade or commercial, 77-81; local or village, 78; capitalist or indus- trial, 81-84; national, 82, 83; inter- national, 83. Edgeworth, F. Y., 469. Education, factor in eiSciency, 292. Efficiency, and value, 265-268; the measure of cost, 290, 291; of labor, 292, 293; of combination, 345-349; and wages, 418-421. Egypt, money standard in, 4S2. Eight-Iiour laws, 597. Elasticity, of demand, 241-244; of supply, 251-253. Electric lighting, 624, 625. Emigration, 60, 61, 166. Eminent domain, 136. Employers and workmen, 289. Employers' liability, 657, 658. Employment, concentration of, 335; margin of, 403, 404; of women and children, 643-646. Enclosures, 315. England, money standard in, 478, 479; railways in, 594. Enterprise, ch. xxii, 333-351; the term, 85; associated and cor- porate, 96-99; carried on by individuals, 96, 97 ; by partnerships, 97; by trusts, 97-99; quasi-public, 149, 150; freedom of, 169, 170; as a factor of production, 284, 285; a species of labor, 284; meaning of, 333- Entrepreneur, 85, 300. Environment, natural, 37-48; change of, 43-48. Equality, 148, 149, 163, 164, 170. Essartage, 314, 316. Ethics, 6; relation of economics to, 33-35- Exchange, relation to wealth and value, 13; process of, 76; in mediae- val economics, 11 2-1 15; value in, 182-184; ratio of, 184; conditions of, 226, 227; law of, 227; rate of, 227-235; money as medium of, 449- 451, 454-456; rate of international 552-556; three-cornered, 552; at p;ir, 553. Exchanges, stock and produce, 363- 368. Exchequer notes, 490. E.xogamy, 87. 702 Index Expenses, constant and variable, ass- Exports, balance of, over imports, 117; from the United States, 104, 105; relation to imports, 548-552. pACTORY laws, 644-648. Factory system, 94-Q6, 327, 328, 336, 337. 627, 628. Family, the, 87-90, 96; matriarchal, 86; patriarchal, 88. Fauna, effect on economic life, 41, 46. Federal Child Labor Act, 645. Federal Farm Loan Act, 546*. Federal Reserve Act of 1913, 538-543. Fees, 215. Feudalism, 130. Finance bills, 554. Fire, laws regarding, 647. Fisher, Irving, 469. Flora, effect on economic life, 41 ; the altering' of, 45, 46. Food, and population, in Malthus's doctrine, 62-66. Forbearance, marginal, as determin- ing the rate of interest, 398-401. France, money standard in, 478-481. Fraternity, 165. Free coinage of silver, 470, 480-483. Freedom, ch. xi, 154-172; econo- mic, iig, 120, 155, 163-170; , bodily, 155; with equality and responsibility, 163-165, 170; of marriage and divorce, 165, 166; of movement, 166, 167; of occupa- tion, 167, 168; of association, 168; of consumption, 168, 169; of pro- duction, 169, 170; of trade, 170; individual, as a social concept, 171, 172. Free Trade, and Mercantilists, 117, 118; corollary of Ricardian doctrine, 123; when harmful, 170; growth of, 556-560; meaning of, 556, 557; on exports, 557; in Great Britain, 559; arguments for, 566, 567; arguments opposed to, 560-565; criticism of arguments, 567-571. Freight rates, 577, 586-593- Fundamental concepts, ch. i, 3-23. Future, discounting of, 210. Future estimates, law of, 209-211. Futures, in commodity market, 363, 365- Q.AIN sharing, 444, 445. Gas works, 624-626. General asset banking, 529. General Law of Value, The, ch. xvii, 262-277. Gens, the, 86. Geographical location, effect on eco- nomic life, 42, 43. Geological formation, effect on eco- nomic Hfe, 40; changes in, 46- 48. Germany, money standard in, 480; banks of issue in, 523, 524. Ghent system, 667. Gold, relation of prices to supply of, 460, 464-469; new sources of supply, 475; and silver, changing relations of, 476-483. Gold certificates, 489. Gold standard, evolution of, 477- 488; in England, 478, 479; in Portugal, 480; in Germany , 480; in Scandinavia, 480; in Latin Union, 480, 481; in Netherlands, 482; in Egypt, 482; in other coun- tries, 483; in the United States, 483; in Mexico, 486; ways of adopting, 487. Good-fellowship system, 445. Good-will, 264. Goods, the term, 9, 10; free, 11; eco- nomic, 1 1 ; indirect or instrumental or production, 212, 278; consump- tion, 212; complementary, 243; non-reproducible, 262, 265; con- sumers', 278; producers', 278. Gossen, H. H., 30. Government and Wealth, ch. xxxv, 612-631. Government ownership, conditions of, 615, 616; fiscal and social monop- olies, 616; classes of, 617, 618; development of, 6i8, 619; condi- tions of, 619-623. Government regulation, 627-629. Government, purpose of, 612, 613. Gratuitous coinage, 470, 471. Greece, ancient, economics of, iio- 112. Green, T. PL, 163. Greenbacks, 492-494. Gresham's law, 473-475. Guilds, 92. Ind ex 703 PJALES, 116. Hamilton, Alexander, 564. Handicraft system, 9i-g3, 96. Help system, 90, 91, 96. Hire, 205. Hire system, go, 91. Historical Forms of Business Enter- prise, The, ch. vi, 85-99. Historical law, 27. Holding corporation, 344, 345. Home market, 561. Hours of labor, regulation of, 648-650. IMMIGRATION, 60, 61, 166, 167. Imports, balance of exports over, 117; relation to exports, 548-552. Income, and capital, 15-19; pleasure or benefit, and money, 16, 19; capi- talized, 17; fundamental test of wealth, 19, 21, 22; taxable, 19; measure of wealth, 19, 21. Income tax, 19. Increasing cost, law of, 252. Increasing returns, law of, 253. Increment, marginal, 178; and value, 185-188. Independent Treasury System, 538. Index number, 461-464. India, money standard in, 484, 485. Indifference, margin of, 403-405. Individual, enterprises carried on by 96, 97. Individual and social cost, 192-194. Individual and social value, 179-182. Individual competition, 142, 143. Individualism, 39, 614. Inductive and deductive methods in economic investigation, 28, 29. Industrial economy, 81-84. Industrial Revolution, the, 95. Industry, growth of American, in the nineteenth century, 102-104; recent development of American, 104-106; standardization of, 434, 435. Infant industry, 563-565. Inheritance, right of, 137. Inheritance taxes, 137. Injunctions, 438, 439. Insurance, ch. xxxiv, 598-611; nature of, 598-601; growth of, 601-606; origin of, 601-603; in antiquity, 602; marine, 602-605; life, 603- 605; other forms of, 605, 606; theory of, 606-609; productivity of, 606, 607; compared with trans- portation, 607 ; primary function of, 607-609; self, 608; methods of , 609, 610; policies, kinds of, 610; regula- tion of, 611; social, reasons for, and forms of, 655-657; accident, 657- 660; sickness, 660, 661; old age, 662-664; invalidity, 664, 665; un- employment, 664-668. Integration, 341-345. Intelligence, transmission of, 572-574. Interest, ch. xxv, 394-412; classical theory of, in; mediaeval theory of, 114, 115; relation to rent, 216; contrasted with wages and rent, 217; as a discount of the future, 219; meaning of term, 219; rate of, 220, 396, 397, 533, 534; and efficiency, 266, 267; contrasted with profits, 357; nature of, 394- 397; loan or contract, 394, 395; natural or economic, 395; on call loans, 397; and forbearance, 398- 401; and productivity, 401-404; the measure of marginal productivity or forbearance, 404; tendency of, to a minimum, 407-410; regulation of, 410-412; contrasted with wages, 413, 414. International exchange, rate of, 552- 556. International trade, ch. xxxii, 547- 571; basis of, 547-552. Internationalism of science, 689, 690. Interstate Commerce Commission, 5Q5-S97. 641. Interstate Commerce Law, 588, 592, 595- Inutility, 191. Inventions, 82, 94. Investigation, economic, methods of, 28, 29. Investment and valuation, 275-277. Investment of capital, 329-332. Irrigation, 43, 134. Isolated economy, 75-77. Issue, 505, 508, 509; banks of, 505, 521-525; monopoly of, 523; de- centralization of, 524; of notes, under the Federal Reserve Act, 540, 541- Itinerant workmen, 90. 704 JAPAN, 1 •J Jevons, Index money standard in, 483. W. S., 30, 123, 191, 198, 199- Joint cost, law of, 253-255, 582-584. Joint-stock principle, beginnings of, 97- Jurisprudence, 6; relation of econom- ics to, 32, ss- J^ING, GREGORY, 457. Kjnley, D., 469. LABOR, ch. xix, 288-303; free, 68; combinations of, 168; marginal efficiency of, and wages, 266, 267; as a factor of production, 283-285; en- terprise a species of, 284; meaning of, 288, 289; physical and mental, 288 real value of, 289; cost of, 289-291 efficiency of, 292, 293; division of nature and advantages of, 293-298 defects of division of, 298, 299 combination of, 299-301 ; supply of 301-303; seasonal demand of, 302 concentration of, 335; distinguished from other commodities, 415, 416, 422; monopoly of, 427, 428; or- ganizations, 432-437; standardi- zation of, 434, 435; lump-of-labor doctrine, 436; strikes, 437-440; boy- cotts, 440-443; profit sharing, 443- 446; arbitration and coociliatton, 446-448; hours of, regulation of, 648-650; Sunday, 648, 649. Labor Legislation, ch. xxxvii, 643-654. Labor Problem, The, ch. xxvii, 432- 448. Labor theory of private property, 132, 133- Laborers, and capitalists, 289; con- trasted with commodities, 415, 416, 422. Laissez Jaire, 123, 169, 613. Land, ch. xx, 304-316; imder the feudal system, 15; in the American colonies, 15, 16; property in, growth of, 128-131; theories of rights to, 131-134; content of rights in, 136- 138; and slavery, 157-163; as a factor of production, 283-285; 304-307; extension of, 305, 308; fertility of, 308-311; agricultural 308, 309; timber, 309; grazing. 309; mineral, 310; urban, 310, 311; situation or geographical location of, 311-313; cultivation of, 313- 316; concentration of, 335. Land banks, 546*. Land rent, 353; one of many kinds of rent, 373-375; relation of, to other rents, 375-378; and price, 378-381; growth of, 381-385; justification of, 389-393- Land tenure, 385-389. Latin Union, the, 480, 481. Law, economic, meaning of, 24-28; various meanings of, 24, 25; scien- tific, 25; natural, 25-27; historical, 27; of population, 62-66. Legal theory of private ownership, 133- Letter of credit, 500. Level of prices, international, 54S. See Price level. Limited liability, 97, 98. List, Friedrich, 564. Lloyd'.s, 603. Loan Associations, 546 *. Loans, 396, 411; call, 397; and dis- counts, 507. Local economy, 78. Location, geographical, effect on economic life, 40; changes in, 4M8. Lombard business, 504. Lotteries, 617. Luxury, 670-674. ]yjACHINE system, 327. Machinery, invention of, 82, 94; saving of cost due to, 296, 297; relation to demand for labor, 302; saving of time due to, 321, 322; farm, 338-341. Maine, Sir Henry, 68. Malthus, 62-66. Manufacturer, the, 94, 95, loi, 121, 122. Manufactures in the LTnited States, 103-106. Margin, economic, 177, 178; specu- lating on, 364; of indifference, 403- 405; of employment, 403, 404. Marginal cost, 192, 200; law of, 247- 249. Marginal disutility, 102. Ind ex 705 Marginal efficiency, 264-268. Marginal increments of wealth and value, 185-188. Marginal utilities, comparative, law of, 227. Marginal utility, 175-179, 185-188, 199, 213. Marginal utilization, 213, 214. Market, 224; and normal price, 224, 225; cornering, 361, 362. Market competition, 143. Markets, public and private, 619, 620. Marriage, group, 86; outside of clan, 86, 87; by capture, 88; free- dom of, 165, 166. Marriage rate, 56-58. Marshall, A., 30, 124. Mar.x, Karl, 124, 371. Mathematics, relation of economics to, 30, 31- Matriarchate, 85. Maximum or marginal cost, law of, 247-249. Meaning of Value, The, ch. xii, 173- 188. Measure of Value, The, ch. xiii, 189- 203. Measure of wealth, 15-19. Mediaeval economic theor\% 112-115. Mercantile doctrine, the, 116-118. Mercantile system, 558. Mercantilists, the, 117, 118. Metayer plan, 387, 444. Methods of economic investigation, 28, 29. Mexico, money standard in, 486. Migration of population, 60, 61, 166. Mill, J. S., 27, 52s; 548, 564. Minimum cost, law of, 249-251. Minimum living wage, 677, 678. Minimum wage, 650-654. Mint-charge, 471. Mobilization of credit, 541, 542. Money, Nature and Value, ch. xxviii, 449-469; Practical Problems, ch. xxix, 470-495; contrasted with wealth, 19, 20; classical theory of, 112; mediaeval theory of, 115; later theories of, 116, 117; origin and functions of, 449-453; a medium of exchange, 449-451, 454-456; a standard of deferred payments, 450; a store of value, 450; a reserve for credit operations, 450; actual and ideal, 45 1 ; metallic, 45 1 ; paper, 45 1 , 452, 488-495; representative, 451, 488, 489; fiat, 451, 452, 490-495. fiduciary, 452, 488; standard , 452; token or subsidiary, 452, 481, 485, 486, 491; value of, 453-458; supply and demand of, 454-458; general law of, 456, 457, 459; quantity theorj' of, 458-460; cost theory of, 460, 461; and price level, 461-469; dis- tribution and stabiUty of, 464-469, coinage problems, 470-475; seign- iorage on, 470-472; debasement of, 472, 473; Gresham's law, 473-475; the choice of the standard, 475-479; bimetalhsm, 479-483; credit, 488; soft and hard, 491; bank and gov- ernment, 494, 495; lawful, 513; coinage of, 619. Money economy, 68. Money interest, the, 122. Money rate, 517, 533-538. Monogamy, 88. Monometallism, 68. Monopolies, kinds of, 152, 153; regu- lators of competition, 152, 153; fiscal, 616, 617; social, 617, 618; municipal, 623-626. Monopoly, 230-234, 236-239, 334; buyer's, 231; of labor, 427, 428; of capital and wages, 428; of issue, 523; railways tend toward, 578- 580; government, 616. Monopoly of value, normal, 258-261. Monopoly profits, 368, 369. Montchretien, 117. Multiple standard, 469. Mun, Thomas, 117. Municipal monopolies, 623-626. RATIONAL bank system, 530- 533- National competition, 144, 145. Natural Environment, The, ch. iii, 37-48. Natural law, 25-27, 119, 132. Natural rights theory of private property, 132. Nature, 132. Netherlands, money standard in, 482. Normal and market price, 224, 225. 45 7o6 Index Normal demand, 241-244; and nor- mal supply, equilibrium of, 255, 256. Normal monopoly value, 258-261. Normal supply, 244-247; and normal demand, equilibrium of, 255, 256. Normal value, determination of, 241- 261. Norman, George W., 525. Notes. See Bank Notes. QBJECTIVE value, 182, 183. Occupation theory of private property, 131, 132. Occupational disease, 647. Open shop, 439. Oriental nations, economic theory among, 109, no. Over-capitalization, 276, 277, 546. Over-population, 62-66. Overproduction, 544-546. PANICS, 543-546. Paper money, 488-495. Parcels post, 573, 574, 621. Partnership, 97. Patents, 153, 369, 391. Patriarchal family, 87-90. Pensions, widows', 663; orphans', 663; mothers', 663, 664. Philippines, money standard in, 485, 4S6. Phratries, 87. Physiocrats, 27, 118-121, 280; 566. Picketing, 438. Political economy, definition of, 4; origin of term, 6, 7; term when to be used, 7, 8. Politics, 6; relation of economics to, 31, 32. Polygamy, 88. Pools, 99, 342, 343, 345, 350. Poor Law System, 683, 684. Population, The, ch. iv, 49-66; density of, 49-52; status of, 49, 50; density of, 50-52; distribution of, 50, 52, 54~S7; concentration of, 52-54; in- crease of 56-66; migration of, 61; the law of 62-66; the problem of, 65, 66. Portugal, money standard in, 480. Post-ofEce, the, 572-574, 620. Poverty, the facts of, 674-678; the causes of, 678-681; the rehef of. 682-685; the prevention of, 685- 688. Poverty and Progress, ch. xxxix, 669- 693- Power, transmission of, 47. Power loom, 94. Practice and theory, 28. Premium payment system, 445. Price, classical theory of, 112; medi- aeval theory of, 113, 114; just or natural, 113; customary, 113, 151; and competition, 142, 235-238; and value, 184, 185; means money value, 184; and cost, 190; market and normal, 224, 225; natural, 225; and monopoly, 236-238; demand, 238, 239; supply, 238, 239; mar- ginal, 238, 239; and elasticity and inelasticity of demand, 241- 244; relation to cost of production, 245, 246; normal, as determined by marginal cost, 248-251; and joint cost, 254; normal influence of, upon market price, 256, 257; monopoly, by what regulated, 258- 261; and rent, 378-381. Price agreements, 341-343, 345- Price level, dififerences in, 461; and index number, 461-464; changes in, 462, 464-466; equilibrium of, 466- 468; and money rate, 534-536; international, 548. Prices, revolution in, 116; rise and fall of, 185; contrasted with wages, rents, and interest, 217; and cost of production, 265, 266; and mar- ginal efliciency, 268; contrasted with wages, 413, 415; relation of, to supply of money, 459-461, 464-469; retail and wholesale, 462, 463; revo- lution of, 468, 477; fluctuations of, 468, 469; and credit, 518-520; re- lation of trusts to, 637; the fixing of, 641. Primitive economic activity, 85-87. Primitive technique, 69-72. Private Property, ch. ix, 125-138; 119; origin of, 26, 125-128; theories of, 131-134; limits of, 134-136. Privileges, 263-265. Produce exchange, 363-368. Producer's surplus, 194. Product sharing, 443, 445. Index 707 Production, consumption the end of, 18; of the United States, 104-106; classical theory of, 1 10, in; freedom of, 169, 170; relation of social sur- plus to, 201-203; cost of, 244-247; its meaning and relation to con- sumption, 278-281, 286; kinds of, 281-283; factors of, 283-285, 304- 307; and the producer, 285-287; mass 327; uniformity of, 327, 328; interchangeability of, 328; con- centration and monopoly of, 334; large-scale, 335-338; consoHda- tion and integration of, 341-345; combination and etBciency, 345- 340; relation to distribution, 353. Productivity and interest, 401-404. Profit sharing, 443-446. Profits, ch. xxiii, 352-372; Ricardo's theory of, 123; definition of, 353, 354; ordinary, 354-358; nature of, 354; normal, 354; are a surplus, 354> 371; a^re unstable, 356; con- trasted with interest, 357; a result of price, 358; aleatory or chance, 358-360; contrasted with wages, 358; industrial and pecuniary, 359; speculative, 360-368; monopoly, 368, 369; regulation and justifica- tion of, 370-372; analogy between rent and, 376-378; relation to wages, 429-431. Progress and social surplus, 201- 203. Progressive wage system, 445. Promissory notes, 498, 499. Property, contrasted with wealth, 20, 21; advance from common to pri- vate, 68; in land, growth of, 128- 131- Property rights, content of, 136-138. Protection, rise of, 557, 558; factors of, 558; in Great Britain, 558, 559; in Germany and Italy, 559; in the United States, 559, 560, 570, 571; arguments for, 560-565; arguments opposed to, 566, 567; criticism of arguments, 567-571. Protective tariff, 102, 149, 170. See Protective tariff. Psychology, relation of economics to, so- Public opinion, 691. Public ownership, development of, 615-619; conditions of, 619-623. Public utilities, 623-626. Pyx, 472. QUANTITY theory, of money, ^- 458-460. Quasi-public enterprises, 149, 150. Quasi-rents, 218. Quesney, 120. J^ACE competition, 144 145. Race suicide, 66. Railway problem, 149, 150. Railway rebates, 640, 641. Railways, 103; after 1830, 94; esti- mate of value of, 273-275; flotation of securities of, 275, 276; develop- ment of, 575-577; in the United States, 575; in Europe, 575; cost of, 575; mileage, 575, 576; nature of business, 577-580; a quasi-pubhc institution, 577, 578; rates and fares, 577, 578; tend to become monopoly, 578-580; expenses of, 580; principle of charges, 581-584; classification, 584-587; discrimi- nation, 584,587-593; regulation of, 593-597; government ownership of, 593, 594; governmental su- pervision of, 594-597; arguments against government ownership of, 622, 623; street, 624-626. Rate, money, 517, 533-538. Rate of exchange, 227-235. Rate of international exchange, 552- 5S6. Ratio of exchange, 184. Raymond, Daniel, 564. Reciprocal demand, law of, 227. Reference rate system, 445. Regulation, and valuation, 273-275. Relations, 263, 265. Remedy, 472. Remittances, 502, 509. Remnant, 203. Rent, ch. xxiv, 373-393; consumer's, 195; relation of interest to, 215, 216; contrasted with wages, prices, and interest, 217, 219; definition of, 217; how measured, 217, 218; capital- ized, 218; principle, 218; quasi, 218; and value, 204-206; definition of, 7o8 Index .105; Iradilional use of term, 205; from land, 205; land or ground, 35.5, 381,382; monopoly, 369; natureof, 373-375; land, one of many kinds of rent, 373; traditional law of, 375; land, relation of, to other rents, 375- 378; analogy between profit and, 376-378; and price, 378-381; growth of land, 381-385; land, and land tenure, 385-389; contract and economic, 386, 387; rack, 387; justification of land, 389-393; con- trasted with wages, 414. Rental value, 206-209, 211, 220-223. Reserve banks, 539-54?. Reserve-capital, 511. Reserves, bank, 51 1-5 18; centraliza- tion of, 539, 540. Residual utility, 194. Responsibility, 164, 165, 170. Restraint of trade, 168. Returns, diminishing, law of, 63, 212- 214, 252, 306, 308, 310, 346, 375, 402, 419; increasing, law of, 253; constant, law of, 253. Revolution of prices, 468, 477. Ricardo, 1 21-124, 19S, 199, 491; 548. Risk, in speculation, 364; application of the term, 599; avoidance of, 600; and progress, 601. Rome, ancient, economics of, i lo-i 1 2. Rural credit, 546 *. Russia, money standard in, 483. 3AFETY Fund System, 530. Salaries, 215. Sanitation, laws regarding, 647. Savings banks, 503. Scandinavia, money standard in, 480. Science, internationalism of, 688-690. Scientific law, 25. Securities, speculation in, 362, 363. Seigniorage, 470-472. Self-sufficing economy, 75-77. Sellers and buyers, 229-235. Selling bureaus, 343. Serfdom, 68, 159-162. Sena, 117. Services, and commodities, 10; hu- man, 214. Share system, 387, 388, 444. Sherman Act, 638-640. Shipping subsidies, 631. Short-hand principle, 591, 592. Silver, new sources of, 475; and gold, changing relations of, 476-483; free coinage of, 480-483. Silver certificates, 489. Silver standard, in India, 484, 485; in the Philippines, 485, 486; in Pana- ma, 486; in Mexico, 486; in the Straits Settlements, 486, 487; countries still under, in 1914,487. Single-tax, 393. .Single-taxers, 391. Sinking fund, 208, 211. Slavery, 68, 103, 287; in Greece and Rome, no, 157, 158; in mediaeval times, 113; beginnings of, 127; ex- tended, 128; origin and growth of, 154-158; dependence on free land, 157. 158; in America, 157, 158, 160; decay and disappearance of, 158- 163; traditional defence of, 162. Smith, Adam, 34, 76, 118-121, 224, 297, 318, 425; 566. Social and individual cost, 192-194. Social and individual value, 179-182. Social economics, 7. Social Insurance, ch. xxxviii, 655-668; the reasons for, 655-657; forms of, 657; accident, 657-660; sickness, 660, 661; old age, 662-664; in- vaHdity, 664, 665; unemployment, 665-668. Social life, 35. Social science, 6. Social solidarity, 164. Social surplus and progress, 201-203. Social utility theory of private prop- erty, 133. 134- Socialism, 136; bearing of Malthus's doctrine on, 62; theory of, 613, 614; one-sided, 614, 615; as a remedy for poverty, 686. Sociology, 6. Specialization, 293-299. Speculation, 360-368; one function of, to avoid risk, 600. Spencer, Herbert, 68, 163, 293. Spinning frame, 94. Spinning jenny, 94. Standard, multiple, 469; tabular, 469; choice of, 475-479; evolution of gold, 477-488; limping or halting, 480, 481, 487; adoption of gold, Index 709 in various countries, 479-488; gold- exchange, 485-487. Standard Oil Company, 236, 237, 261, 343, 639. 640. Standardization, of labor, 434; of in- dustry, 434, 435. Standing rent method, 388. Staple towns, 557. State, the, 7, 130. State banks, 522, 524, 532. Static conditions, 225. Statistics, relation of economics to, 31. Steam engine, 94, 121. Steamship, after 1830, 94. Stock exchange, 363-368. Stocks, 330, 331. Stock-watering, 275, 276. Straits Settlements, monej' standard in, 486, 487. Strikes, 437-440. Subjective value, 182, 183. Subsidies, 629-631. Substitution, principle of, 142. Suffolk Bank system, 529. Sugar bounties, 629-631. Sumptuary laws, 169. Sunday labor, 648. 649. Supply, 189, 190; limitation of, char- acteristic of wealth, II, 12; and de- mand, 199, 223, 224, 241, 244-247, 416; elasticity of, 251-253; con- stant, 251; joint, 253; and demand, normal, equilibrium of, 25s, 256; of labor, 301-303; of money, 456-458. Supply price, 238. Surplus, and cost, 194-198; produ- cer's, 194; consumer's, 194; of utility, 194-198; and value, 195- 198; SQcial, and progress, 201-203. Sweating, 472. Sweatshops, 648. Symmetallism, 476. Syndicates, 506. •yABOO, 87. Tabular standard, 469. Tariff, protective, 102, 149, 170; origin of the term, 557; relation to trusts, 633, 634. Taxable income, 19. Taxation, of inheritances, 137; and valuation, 269-273; of corporations, 269, 270; of general property, 270, 27 T, 273; diffusion of, 271; influ- ence of capitalization on, 271, 272; eUsion of, 272. Technique, primitive, 69-72. Telegraph, 574, 621. Telephone, 574, 622. Tenure, land, 385-389. Theory, alleged antithesis to practice, 28. Third and fourth system, 388. Tobacco trust, 639, 640. Tontine anniuties, 604. Torrens, 666. Totem worship, 87. Trade, freedom of, 170; internal and international, 547, 548. See Inter- national trade. Trade agreement, 447. Trade Disputes Act, 442. Trade dollar, 453. Trade economy, 77-81. Trade-mark, 263, 265. Trade unions, 168; apprenticeship regulations of, 167, 168, 436, 437; restriction of membership by, 302; rise of, 433, 436, 437; in the United States, 433; justification of, 433; militant and fraternal, 433; stand- ardizing tendencies of, 434, 435; restriction of output by, 435-437; strikes, 437-440; closed and open, 439; boycotts, 441-443; and trusts, 635- Trading companies, 97. Tramways, 624-626. Transmission of intelligence, 572-574, Transportation, ch. xxxiii, 572-597; effect of improvements in, 46-48. Treasury certificates, 490. Treasury notes, 490. Trial of the pyx, 472. Tribes, 87 Truck system, 76, 650. Trust, origin of the term, 99. Trust companies, 504. Trusts, 97, 99, 153, 343; the causes of, 632-634; relation of tariff to, 633, 634; object of, 634, 637; effect of, 634-638; advantages and evils of, 638; question of size, 638; prohibi- tion of, 638-640; regulation, O40- 642. Turgot, 116, 120, 121. JIO Index UNDERCONSUMPTION, 544, 545- Undertaker, the term, 85; Unearned increment, 392, 393. Unemployment, 664-668. Union label, 440. United States, economic develop- ment of, 100-108; money standard in, 483; government banks in, 522; banks of issue in, 524; exports and imports of, 551; protective tariff in, 559. 560; railways in, 595. United States Steel Corporation, 347-349- Use, value in, 182, 183. Usury, 410, 411. Usury doctrine, 114. Utilities, conferred by objects and services, 10, 11; law of compara- tive, 226, 227; comparative mar- ginal, law of, 227; relation of con- sumption and production to, 278- 281; material or form, 2S1; place, 281, 282; time, 282. Utility, definition of, 9; grade of, whicTi results in value, 11; marginal, 175- 179, 185-188, 213; law of dimin- ishing, 175-179; total, 176, 177, 179, 181; effective, 176, 177, 179, 181; final, 176; individual and social, 179-182, 200; indirect, 180-182, 193; residual or surplus, 194; surplus, 194-198; social, equivalence with social cost, 197, 198; and cost, 198-201; ultimate cause of value, 201; law of dimin- ishing, 212-214. Utilization, margin of, 213, 214. yALUATION, and taxation, 269- 273; and regulation, 273-275; and investment, 275-277. Value, definition of, 11, 201; and wealth, 12; original meaning of, 173-175; kinds of, 174; relation to marginal utiHty, 179, 180; in- dividual and social, 179-182; in exchange, 182-184; in use, 182, 183; subjective and objective, 182, 183; and price, 184, 185; and marginal increments of wealth, 185-188; measure of, 189-203; relation to cost, 190, ig8, igg; social nature of, 193; as depend- ent on social cost, 193, 200; and surplus, 195-198; as dependent on limitation, igg; is expression of re- lation between demand and supply, 200; capitaUzation of, 204-222; and rent, 204-206; rental, 206-209, 211, 220-223; property, 206; capi- tal, and rental, 206-209, 211, 220- 223; of producers' goods, 212; is reflected back to original agent, 212; fundamental law of, 212; forms of, 214-217; as a differential, 217-220; determination of market, 223-240; depends on demand and supply, 223; determination of normal, 241-261; normal, and cost of production, 250, 251; the general law of, 262-277; of non- reproducible goods, 262-264; of relations and privileges, 262-264; and efficiency, 265-268; funda- mental explanation of, is marginal efficiency, 265; of corporations, measurement of, 274; normal, by what regulated, 255, 256; normal monopoly, 258-261. Value of service, 255. Varying Cost, law of, 251-253. Ventilation, laws regarding, 647. Vested rights, 136. Village economy, 78. Vocational schools, 667. Von Baer, 293. "YyAGE, the minimum, 650-654; minimum living 677, 678. Wages, ch. xxvi, 413-431; bear- ing of Malthus's doctrine on, 62; always income, 215; con- trasted with prices, rents, and in- terest, 217; law of, 218, 416; and efficiency, 266, 267, 418-421; rela- tion to cost, 289, 416-418; con- trasted with profits, 358; monopoly, 369; nature of, 413-416; contrasted with prices, 413, 415; contrasted with interest, 413, 414; contrasted with rent, 414; rate of, 414, 415, 421, 422; money and real, 415; cost-of-production theory of, 417; minimum-of-subsistence theory of, 417; iron or brazen law of, 417; Ind ex 711 wages-fund theory of, 417, 418; paid out of product, 418; stand- ard-of-life theory of, 421-423; productivity theory of, 421; course of, 423-425; differences between actual and normal, 425- 42g; 'relation to profits, 429-431; and protection, 561-563; and trusts, 634, 635. Wages-fund theory, 2q, 65, 417, 418. Wage-work, the term, 90. Walker, F. A., 124, 376. Walsh, C. M, 469. Waterworks, 624, 625. Wealth, meaning of, 8-13; character- istics of, 8-1 1, 13; original mean- ing of word, 8; intangible, 10; definition of, 11, 13, 19; an abun- dance of things limited in supply. 12; and value, 12; and man, 13-15; a surplus of satisfactions, 14; the measure of income and capital, 15- 22; contrasted with money, 19, 20; contrasted with property, 20, 21; public and private, 21- 23; and population, antithesis between, 64, 65; right of accu- mulation of, 137, 138; limitation of, 138; duties of, 138; marginal increments of, and value, 185-188; concentration of, 334. Weighting, 463. W^idows' pensions, 663. Women, employment of, 643-646. Workmen, itinerant, 90; rise of in- dependent class of, 91; and em- ployers, 289. Workmen's compensation, 658-660. AMERICAN CITIZEN SERIES A. series of books on the practical workings of the functions of the state and of society, with especial reference to American conditions. Edited by ALBERT BUSHNELL HART, LL.D., of Harvard Uni- versity, editor of Epochs of American History, etc., etc. Crown 8vo. Outlines of Practical Sociology; with Special Reference to American Conditions By CARROLL D. WRIGHT, formerly United States Commissioner of Labor, President of Clark College, etc. New Edition, largely re- written by Herbert N. Shenton, Columbia University, N.Y. With Maps and Diagrams. Working Bibliographies and Index. {Nearly ready) Actual Government as Applied imder American Conditions By ALBERT BUSHNELL HART, Professor of History in Harvard University; author of "Formation of the Union," etc., etc. 643 pp. Financial History of the United States By DAVIS R. DEWEY, Professor of Economics and Statistics in the Massachusetts Institute of Technology. Sixth Edition, revised, 1918. 587 pp. Constitutional Law in the United States By EMLIN McCLAIN, Justice of the Supreme Court of Iowa; sometime Lecturer on Constitutional Law at the State University of Iowa. 476 pp. Principles of Economics; with Special Reference to American Conditions By EDWIN R. A. SELIGMAN, McVickar Professor of Political Economy in Columbia University. Ninth Edition, Revised. About 766 pp. Organized Democracy; An Introduction to the Study of American Politics By FREDERICK A. CLEVELAND. 515 pp. Public Opinion and Popular Government By A. LAWRENCE LOWELL, President of Harvard University. 429 pp. LONGMANS, GREEN, and CO., Publishers Foixrth Avenue and Thirtieth Street, New York RAILROADS, RATES AND REGULATION By WILLIAM Z. RII'LKY, Ph.D. Nathaniel Ropeh, I'kofessor of Economics in IIakvard University With ^1 diagrams in the text. Small 8vo. Pp. xviii-659 FOR various reasons, railroads during the last ten years have occu- pied a peculiarly prominent place in public attention in the United States. Representing an investment of about one-fifth of the nation's wealth, their affairs are a matter of direct concern, through bankers, to thousands of holders of their securities all over the country. Every merchant and manufacturer, in connection with the every day conduct of business, is bound, as a shipper, to be inter- ested in their status. Several million officials and employees are dependent upon railroad welfare for their livelihood. The general pub- lic,, as consumers, is vitally concerned with the manner in which they • are conducted; and now, since the advent of strict public control of rates, in the outcome of that political experiment. The legal profes- sion is directly interested also — -^y way of the multitude of cases now arising for settlement before the various federal and state railroad commissions. This treatise, more detailed and elaborate than a/mere text-book, aims to set forth the nature of the railroad problems of the time, commercial, fiscal and political; while at the same time avoid- ing the extreme technicalities of the narrow specialist. This first vol- ume deals with the matter of rates and government regulation; while a second, in preparation, will deal with matters of finance and corpo- rate organization. Amply provided with footnotes and references, the text, nevertheless, deals with the subject in a manner comprehensible to the ordinary reader. Over forty maps and illustrations in the first volume alone serve to render the problems discussed more interesting and intelligible. It is a work which should appeal alike to bankers, investors, railway officers and employees, lawyers and publicists, as well as to all students of economics and politics and the serious gen- eral reader. " Professor Ripley is presenting the most exhaustive study of the railway problem in the United States that has yet appeared. By his intimate knowledge of the whole field of railway operation and by his attractive literary style, he has produced a book that is likely long to remain a standard authority on the subjects discussed. ... A treatise of high merit, and the most scholarly work that has appeared since Hadley's book in 1885." — The Nation. "Taken as a whole, Professor Ripley's first volume seems likely to become the authoritative treatise on the subject." — The Economic Review. LONGMANS, GREEN & CO., . - New York RAILROADS, FINANCE & ORGANIZATION IJy WILLIAM Z. RIPLEY, Ph.D. NathanieIj Ropes Professor of Economics, in Harv.\rd University With 29 Map.f and dicujrams in the text. Small Svo. Pp. xx-638 '"r^HIS volume on Railroad Finance and Organization is a companion X and a logical successor to Railroads: Rates and Regulation. It is not merely a treatise upon the details of raili-oad finance — a stock exchange hand-book or a bankers' manual. The comprehensive treatment of such matters as the nature and kinds of railroad securi- ties, the course of market prices, and receivership and reorganization should render it serviceable to bankers, investors, and members of the legal profession. Likewise, the amplitude of footnote references and the wealth of historical explanation fit it for academic use. But it pur- ports to be more than either a treatise upon private finance or a college text-book. It is "a constructive essay in government," systematizing information for others in a single great department of public affairs. Until witliin a few years, public regulation was largely concerned with rate-making, which forms the subject matter of the first volume, already issued. State regulation, however, has now spread over into the field of finance. Partly as a result of grave losses to investors through mis- management and dishonesty; partly, and to an increasing degree within the last decade because of a belated perception of the economic truth that all phases of the great business of transportation are inex- tricably entangled, legislators, public officials and property owners have been brought face to face with a large number of financial problems. Among these are the regulation of the capitalization and financing of public-service corporations, the determination of reasonable rates and physical valuation. These questio is are discussed in a large way, keep- ing the collective interest in view; but recognizing, nevertheless, that the encouragement of private capital by the prospect of a satisfactory return upon its ventures is essential both for adequate service in the present and for the future development of the greatest single material agency upon which the industrial life of the nation depends. Many diagrams employed in lieu of statistics and a number of maps serve to clarify the text, and to make it interestingly readable. LONGMANS, GREEN & CO., - - New York UNIVERSITY OF CALIFORNIA LIBRARY J Los Angeles ■ This book is DUE on the last date stamped below. ■ V 1^ aeiaiREl^. |gC 1 8 1961 ?EC'D MLO /2 S^ggf iV ^ ^ . 1984 DEC 241^ 1 4268 1 mL9-32m-8,'58(5876s4)444 " uiDrary HB171.5.S46 p9 L 009 596 398 9