THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA IRVINE GIFT OF JERRY ROHACEK G. G. rACLElS OUTLINES OF ECONOMICS THE MACMILLAN COMPANY NEW YORK BOSTON CHICAGO ATLANTA SAN FRANCISCO MACMILLAN & CO., LIMITED LONDON BOMBAY CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, LTD. TORONTO OUTLINES OF ECONOMICS (REVISED EDITION) RICHARD T. JELY, PH.D., LL.D. PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF WISCONSIN REVISED AND ENLARGED BY THE AUTHOR AND THOMAS S. ADAMS, PH.D. PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF WISCONSIN MAX O. LORENZ, PH.D. ASSISTANT PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF WISCONSIN; DEPUTY COMMISSIONER IN THE WISCONSIN BUREAU OF LABOR AND INDUSTRIAL STATISTICS ALLYN A. YOUNG, PH.D. PROFESSOR OF ECONOMICS IN LELAND STANFORD JUNIOR UNIVERSITY THE MACMILLAN COMPANY 1909 All rights reserved COPYRIGHT, 1893, BY HUNT & EATON. COPYRIGHT, 1908, BY THE MACMILLAN COMPANY. First published elsewhere. Reprinted May, 1900; July, October, 1901; August, 1903; July, September, 1904; July, 1905; January, August, 1906; July, 1907; April, 1908. New edition, revised and enlarged, September, October, 1908; January, August, 1909. Xoriuooti J. 8. Cashing Co. Berwick & Smith Co. Norwood, Mass., U.S.A. PREFACE SINCE the first edition of the Outlines of Economics was pub- lished fifteen years ago, there has been considerable progress in economic discussion. In this revision an attempt has been made to include so much of the new thought as seems to have established itself. No chapters remain unaltered, most of them have been entirely rewritten, and some new ones have been added. But the plan of the former edition has been retained. This book differs from the Elementary Principles of Economics, published in 1904 by Ely and Wicker, in that it is a more advanced treatise, and in- tended primarily for college and university use; whereas the latter, although used in a number of higher institutions, is intended pri- marily for high schools. Four persons have taken part in this revision, but a free inter- change of criticism has, it is hoped, resulted in a unified product. Numerous passages, amounting in the aggregate to many pages, have been printed in smaller type. Such are the passages which, either from their greater difficulty or from their subsidiary char- acter, may best be omitted by a teacher pressed for time. More- over, for classes in which the time limits are too narrow to permit careful study of the whole text, it may be found expedient to omit Book III, on Public Finance ; while, on the other hand, some teachers may wish to take this Book up for independent study. Considerable attention has been given to the questions at the close of each chapter, and an endeavor has been made to frame these so as to require a mastery of principles to answer them. Perusal of the text alone will not enable one to answer them all. In some cases it will be necessary to use the references to literature given at the close of chapters. There are also cases in which the correct answer must be a matter open to differences of opinion. It is hoped and believed that the questions will give rise to fruitful class discussions. VI PREFACE The aim of the authors has been to cover the entire field of eco- nomics, feeling that in this way they best serve the purposes of those students who are going to carry their studies further as well as those whose systematic school study of economics will end with the present treatise. At certain points in the discussion of distribution, use has been made of the so-called "productivity theory." In order that there may be no misapprehension, it may be well to say here, what is repeated in the text, that in our view this theory has little or no ethical significance, and that its principal value is as an expeditious method of approaching the supply and demand theory, with which it is in complete harmony. When properly handled, it has the pedagogical virtue of leading the student directly to a study of the innumerable forces which condition supply and demand. But to regard the productivity theory as an end, is to mistake the problem for its solution; and to pass from this theory lightly to the imme- diate solution of those problems which the theory of distribution is designed to explain, is to offer, in place of scientific explanation, a mass of pretentious platitudes. Valuable suggestions have been received from Dr. H. C. Taylor and from Dr. W. H. Price, both of the University of Wisconsin. In conclusion, I wish to express my high appreciation of the work of my friends and colleagues in the revision of this book. RICHARD T. ELY. MADISON, WISCONSIN, July, 1908. CONTENTS BOOK I. INTRODUCTION PACK PREFACE v CHAPTER I. THE NATURE AND SCOPE OF ECONOMICS Diversity of economic study, 3 ; Definition of economics, 4 ; A social science, 5 ; Studies man in process of development, 6 ; Econo- mic laws, 7 ; Principal divisions of economics, 15. CHAPTER II. THE CHARACTERISTICS OF THE PRESENT ECONOMIC SYSTEM Human and physical conditions of economic activity, 16 ; Private enterprise and state activity, 1 6 ; Division of labor and exchange, 18; Mutual dependence, 19; Economic classes, 19 ; Private prop- erty, 20; Inheritance, 21; Contract, 21 ; Vested interests, 22; Freedom, 23 ; Competition and markets, 24 ; Cooperation, 26 ; Monopoly, 26 ; Custom, 27 ; Authority and benevolence, 27. CHAPTER III. THE EVOLUTION OF ECONOMIC SOCIETY Basis of the economic stages, 29 ; Direct appropriation, 30 ; Primitive man, 31; Pastoral stage, 32; Agricultural stage, 33; Manorial economy in England, 34 ; Handicraft stage, 35 ; Gilds, 35 ; Domestic system, 36 ; Agricultural changes, 37 ; The mercan- tile system, 37 ; Patents of monopoly, 38 ; Industrial stage, 39 ; Other classifications, 39. CHAPTER IV. THE EVOLUTION OF ECONOMIC SOCIETY (Continued} England in 1760, 43 ; Revolt against restrictions, 43 ; Mechani- cal inventions, 44 ; Agricultural changes, 46 ; Effects of industrial revolution, 47 ; The factory system, 47 ; Expansion of markets and industrial specialization, 48 ; Evils of the transition, 48 ; Competi- tion and laissez-faire, 49 ; Reaction against the passive policy, 50 ; Quality of goods, 50 ; Protection of labor, 51 ; Labor organizations, 53 ; Extension of government enterprise, 54.. Viii CONTENTS CHAPTER V. THE ECONOMIC DEVELOPMENT OF THE UNITED STATES Economic stages in American industrial history, 56 ; Sectional- ism, 57 ; Characteristics of the American people, 58 ; Growth of population, 59 ; Changes in the birth rate, 60 ; Slavery and the negro problem, 6l ; Immigration, 62 ; Natural resources, 66. CHAPTER VI. THE ECONOMIC DEVELOPMENT OF THE UNITED STATES {Continued") Mercantilism in America, 70; American industries in 1776, 72 ; The Industrial Revolution in America, 72 ; The development of agriculture, 75 ; Manufactures, 76 ; Transportation, 80 ; The labor movement, 83 ; State regulation of industry, 86. BOOK II. PRINCIPLES AND PROBLEMS PART I. INTRODUCTION CHAPTER VII. ELEMENTARY CONCEPTS Motives in economic activity, 93 ; Utility, 95 ; Free and econo- mic goods, 95; Effort, 96; Waiting, 96; Services, 96; Personal qualities as goods, 97 ; Wealth, 98 ; Wealth and income, 98 ; In- dividual and society, 98 ; Wealth and value, 99 ; Capital and other forms of wealth, 100 ; Capital goods and capital value, loo ; Social and individual capital, 101 ; National wealth and national divi- dend, 101. PART II. CONSUMPTION CHAPTER VIII. CONSUMPTION Consumption denned, 106 ; Productive and final consumption, 106 ; Human wants, 107 ; Law of diminishing utility, 107 ; Differ- ent uses for the same commodity, 108 ; Marginal utility, 108 ; The economic order of consumption, 1 10 ; Future wants, 1 1 1 ; Alleged present consumption of future products, H2; Consumption and saving, 113; Luxury, 113; Ideal distribution of wealth, 114; Harmful consumption, 116; Statistics of consumption, 117. PART III. PRODUCTION CHAPTER IX. PRODUCTION Production defined, 121 ; The factors of production, 122 ; Saving and capital formation, 123 ; Production and sacrifice, 124; Cost of production and expense of production, 125 ; Separation in owner- ship and organization of factors, 126 ; The undertaker, 127 ; Kinds CONTENTS of division of labor, 127; Advantages of division of labor, 128; Effect upon the worker and the product, 129; Territorial division of labor, 131 ; Productive organization of the American people, 132. CHAPTER X. BUSINESS ORGANIZATION Nature of business units, 136; The corporation charter, 141; Corporation capital and securities, 143 ; Overcapitalization, 144 ; Forms of capitalization, 146 ; Corporation management, 147 ; Ad- vantages and social aspects of corporations, 148; Trusts, 150; Publicity, 153; Federal control, 154. PART IV. VALUE AND EXCHANGE CHAPTER XI. VALUE AND PRICE Meaning and significance of value, 156 ; The market, 158 ; Con- ditions of competitive valuation, 159; Supply and demand, 160; Nature of demand, 160; Elasticity of demand, 163; Consumer's surplus, 164; Nature of supply, 165 ; The determination of price, 167 ; Producer's surplus, 169. CHAPTER XII. VALUE AND PRICE {Continued} Normal value, 170; Different conditions of supply, 172; Con- stant and variable expenses, 174; Joint expenses of production, 177; Surplus of bargaining, 177; Non-reproducible goods, 178; Monopoly value, 1 79 ; Retail prices, 1 79 ; Public authority and value, 179; Imputed value, 181 ; Valuation of production goods, 182; Other theories of value, 183. CHAPTER XIII. MONOPOLY The idea of monopoly, 187; Partial monopoly, 191 ; Classifica- tion and causes, 192 ; Public and private, 193 ; Social and natural, 194 ; Local, national, and international, 196 ; monopoly price, 197 ; Law of monopoly price, 201 ; Class price, 202 ; Monopoly price, high price, 206 ; Monopolies and distribution of wealth, 208 ; Public policy toward monopolies, 209 ; Relation of monopoly to trusts, 211. CHAPTER XIV. MONEY Definitions, 214 ; Metallic money, 216 ; Coinage, 217; Seignior- age, 217; The standard of value, 221; Limited coinage, 224; Bimetallism, 225 ; The gold standard, 234 ; Government paper money, 234 ; Colonial and Revolutionary bills of credit, 235 ; The greenbacks, 236 ; Hat money, 241. CONTENTS CHAPTER XV CREDIT AND BANKING Credit transactions, 243 ; Personal credit, 246 ; Bank credit, 247 ; Bank notes, 250 ; State banks of issue, 250 ; The national banking system, 251; The reserve system, 252; The New York money market, 253 ; Speculation and the New York money market, 255 ; The independent treasury system, 257 ; The movement of money, 258 ; Elastic currency, 260 ; A central bank, 262 ; State and pri- vate banks, 263. CHAPTER XVI. OTHER PROBLEMS IN MONEY AND BANKING Crises, 267 ; Effects of changes in the value of money, 270 ; The standard of deferred payments, 271 ; Index numbers, 272; The value of money, 275 ; The production of gold, 280. CHAPTER XVII. INTERNATIONAL TRADE Nature and advantages of international trade, 284 ; Law of com- parative costs, 285 ; Restrictions on international trade, 286 ; Bal- ance of trade, 288 ; Foreign exchange, 292 ; Regulation of gold supply, 296. CHAPTER XVIII. PROTECTION AND FREE TRADE The case for protection, 300 ; Arguments of free-traders, 305 ; Conclusions, 311. PART V. DISTRIBUTION CHAPTER XIX. DISTRIBUTION AS AN ECONOMIC PROBLEM Distribution controlled by existing institutions, 317; The dis- tributive process, 318; Distribution as valuation, 319; Law of diminishing productivity, 319-326 ; Marginal productivity, 326- 331 ; Marginal productivity and valuation, 331 ; Social aspects of diminishing productivity, 332. CHAPTER XX. THE PERSONAL DISTRIBUTION OF WEALTH Wealth and income, 335 ; Absolute and relative well being, 335 ; Concentration of wealth and large scale production, 335 ; Methods of measuring concentration of wealth and income, 336 ; Statistics of distribution, 337 ; Causes of poverty and riches, 341 ; The diffu- sion of wealth, 343 ; Modifying wealth acquisition, 345. CHAPTER XXI. THE RENT OF LAND The services of land, 349 ; Rent under uniform intensivity of cul- tivation, 351; Rent under actual conditions, 354; The different uses of land, 357 ; The capitalization of rent, 359 ; Rent and social progress, 360 ; The unearned increment, 363 ; Urban lands, 365. CONTENTS xi CHAPTER XXII. THE WAGES OF LABOR Wages as the price of labor, 367 ; Demand for labor, 368 ; Labor saving machinery, 369 ; Supply of labor, 371 ; Growth of popula- tion, 373 ; Subsistence theory of wages, 376 ; The standard of life and wages, 377 ; Supply of labor in different occupations, 380 ; The wage contract, 381 ; Wages and efficiency, 382. CHAPTER XXIII. LABOR PROBLEMS Types of labor organizations, 387 ; Jurisdiction disputes, 388 ; Economic justification of labor organizations, 389 ; Labor organiza- tions and monopoly, 390 ; Methods and policies of labor organiza- tions, 391 ; Educational and fraternal activities, 394 ; The strike, 395 ; Employers' associations, 400 ; Agencies of industrial peace, 401 ; Trade arbitration, 403 ; Voluntary arbitration, 404 ; Com- pulsory arbitration, 404 ; Profit sharing, 406 ; Industrial democracy, 408 ; Cooperation, 409. CHAPTER XXIV. INTEREST Definition, 416; Inadequate explanations, 417; Why interest can be paid, 418 ; The necessity of interest, 419 ; The investment and replacement of capital, 420-428 ; The expense and value of capital, 428 ; Capital and land, 431 ; Capital and consumption goods, 434 ; The rate of interest, 435 ; Gross and net interest, 437. CHAPTER XXV. PROFITS The entrepreneur's wage, 440; Speculative gains, 441 ; Chance gains, 445 ; Gains of bargaining, 446 ; Non-competitive profits, 446 ; The social dividend, 448. PART VI. THE RELATION OF THE STATE TO INDUSTRY CHAPTER XXVI. NECESSITY OF STATE ACTIVITY The state and the meaning of state activity, 458 ; State and gov- ernment, 459 ; Purity and efficiency of the state in relation to eco- nomic activity, 459 ; general statement of the necessity of state activity, 460 ; The state and the fundamental institutions of society, 460 ; Property, private and public, 461 ; trade-marks, copyrights, and patents, 463 ; Public property, 465 ; Inheritance of property, 466 ; Contract, 466 ; Ethical level of competition, 467 ; The con- sumer, 467 ; Monopolies, government ownership, etc., 468 ; The state as the guardian of the permanent interests of society, 468. xii CONTENTS CHAFFER XXVII. TRANSPORTATION Scope and significance, 471 ; The railway system of the United States, 472 ; Railway competition, 473 ; Pooling and consolidation, 475 ; The movement of rates, 475 ; The level of rates, 477 ; Rela- tive rates, 478 ; Distance, 480 ; Government ownership, 479 ; Regulation of railways, 481 ; The Interstate Commerce Commis- sion, 483. CHAPTER XXVIII. INSURANCE Nature of insurance, 485 ; Law of probabilities, 486 ; Origin and development, 486 ; Forms of insurance organization, 489 ; Life tables, 490; The reserve, 491 ; The surplus, 491 ; Endowments, 492 ; Industrial insurance, 493 ; State insurance, 493 ; State regu- lation, 494. CHAPTER XXIX. ECONOMIC ACTIVITIES OF MUNICIPALITIES Importance of municipal activity, 496 ; Character of municipal activities, 498 ; Protection through competition, 501 ; Methods of public regulation, 503 ; Municipal management, 507 ; Municipal home rule, 512. CHAPTER XXX. SOCIALISM Socialism defined, 515; Distributive justice, 515; Varieties of socialism, 516 ; Communism, 519 ; Socialism an extension of exist- ing institutions, 519; The strength of socialism, 520; The weak- ness of socialism, 521 ; Social reform, 523 ; The socialist movement, 524 ; Anarchism, 525. CHAPTER XXXI. AGRICULTURAL PROBLEMS Size of farms, 528 ; Ownership and tenancy, 533'; Farm labor, 536 ; Farm indebtedness and agricultural credit, 538 ; Tenancy vs. encumbered ownership, 540 ; Marketing of farm products, 543 ; Speculation, 546 ; Education and organization, 548. BOOK III. PUBLIC FINANCE CHAPTER XXXII. PUBLIC EXPENDITURES Nature and significance of public finance, 555 ; Expenditures of public and private economics contrasted, 558; The proper propor- tion between the total income of society and public expenditures, 560; Economy vs. parsimony, 564; Historical development, 566; Development of public expenditures with respect to regularity and irregularity, 570; Terms used in public expenditures, 572; Classi- fication of public expenditures, 573. CONTENTS xiii CHAFFER XXXIII. PUBLIC REVENUES FROM LOANS AND GOVERNMENT OWNERSHIP Classification, 580 ; Temporary revenues and public debts, 582 ; Public domains, 586; Land policy of the United States, 587; Forest lands, 589; Mineral lands, 591; Success of our land policy, 593; Land nationalization and municipalization, public industries, 595; Public industries, 597. CHAPTER XXXIV. PUBLIC REVENUES: DERIVATIVE REVENUES, FEES, SPECIAL ASSESSMENTS, AND TAXES Definitions, 605; Fees, 606; Special assessments, 608; Taxes, 610; Justice in taxation, 612; Progressive taxation, 616; The shifting of taxes, 619. CHAPTER XXXV. PUBLIC REVENUES: FEDERAL, STATE, AND LOCAL TAXES Direct and indirect taxes, 625; Customs duties, 627; Internal revenue duties, 631 ; Taxes on transactions, 633; Inheritance taxes, 637; General property tax, 640; Corporation taxes, 645; Business and license taxes, 648; Poll taxes, 649; Federal control of taxa- tion of interstate commerce, 650; Separation of sources of state and local revenues, 651. BOOK IV. HISTORY OF ECONOMIC THOUGHT CHAPTER XXXVI. HISTORY OF ECONOMIC THOUGHT The development of economic thought, 657 ; Economic ideas in the ancient world, 658 ; The Middle Ages, 661 ; Modern times, 662 ; Adam Smith, 664 ; The classical school, 665 ; Socialism, 668 ; The sociologists, 669 ; The historical school, 669 ; The eco- nomic optimists, 670 ; Early American economists, 672 ; The Austrian school, 673 ; Present condition of economic thought, 674. APPENDIX A : Statistics of Public Expenditure 677 APPENDIX B : Subjects for Essays and Courses of Reading . . . 685 INDEX 697 BOOK I INTRODUCTION OUTLINES OF ECONOMICS CHAPTER I THE NATURE AND SCOPE OF ECONOMICS THE most striking characteristics of the great field of knowledge the Outlines of which we attempt to sketch in the present volume are its rich diversity and spacious amplitude. Starting from psychol- ogy in its analysis of the human needs which explain or condition wealth, it traverses the entire field of social activities and institu- tions arising from man's efforts to supply his material needs. It touches on one side the physical sciences from which it borrows some of its most fundamental principles; occupies joint terri- tory at places with politics, ethics, and law, although their respective jurisdictions are in the main distinct; and forms at once the most fertile and most thoroughly developed province of the broad science of human society. Within its borders, if we may continue to compare the scientific possibilities of economics with the natural resources of an opulent territory, opportunity is offered for the exercise of every mental aptitude and every scientific method. The historian's gift is needed to unravel the past and trace the development of the industrial institutions whose present- day problems, in turn, offer indefinite scope for the studies of the more practical student with a taste for administration or business management. For the legal mind there are the subtle problems of property, inheritance, labor legislation, and corporation control; for the mathematically inclined, insurance and modern statistics; for students with practical political interests, the tariff, currency reform, and a score of important problems in which economics and politics are inextricably interwoven; for the philanthropic, unemployment, accident insurance, and a number of social prob- 3 4 OUTLINES OF ECONOMICS lems growing out of the maladjustments of modern industry. Animating the entire subject, blended of course with the love of truth for truth's sake common to all sciences, is the persistent hope that by systematic study we may eventually abolish the ma- terial poverty which deadens and dwarfs the lives of millions of our fellows. Economics is a science, but something more than a science; a science shot through with the infinite variety of human life, calling not only for systematic, ordered thinking, but for human sympathy, imagination, and in an unusual degree for the saving grace of common sense. To define such a subject adequately in a few sentences is mani- festly impossible. It is frequently said that economics treats of man's efforts to earn a living, and this definition is not inaccurate if by "man" we understand "mankind," and if we fully appre- ciate that the individual's efforts to turn an honest penny's profit receive but little attention in comparison with the community's efforts to feed, clothe, and shelter itself. Satisfaction of social need, and not individual profit, is the objective point of the science. So, similarly, economics has been characterized as the philosophy of human industry; and this description is illuminating provided we interpret "industry" broadly enough. Even the old tradi- tional definition, that economics is the science of wealth, is true enough if we clearly understand that there can be no wealth with- out man, and that the science which deals with wealth, so far from being a "gospel of mammon," necessarily begins and ends in the study of man. As we prefer to define it, however, econo- mics is the science which treats of those social phenomena that are due to the wealth-getting and wealth-using activities of man. Economics treats of Man. The supreme importance of man in the study of wealth has not always been appreciated by those who have expounded the science. Too often they have considered man simply as a producer of wealth, the one "by whom" the necessaries, conveniences, and luxuries of life are created, whereas the infinitely greater truth is that man is the one "for whom" they are all produced. Of course no one denies this truth, but one might almost as well deny it as to leave it out of account. The result of such neglect is that men devise with great skill THE NATURE AND SCOPE OF ECONOMICS 5 rules by which man may be made the best possible manufactur- ing machine. It sometimes quite escapes the notice of these persons that in making man the best possible manufacturing machine they may make him a very poor sort of a man; that in teaching him to supply his wants very bountifully they may pre- vent his developing and correcting those same wants. They for- get that there are two kinds of poverty one a lack of goods for the higher wants, the other a lack of wants for the higher goods. To become rich in goods while losing at the same time the power to profit by them is unfortunately one of the commonest retro- gressions in human experience. We do not mean that the whole problem of human development is the subject of economics, but simply that manhood, rounded human development, is the goal of all social sciences, and none must consider their subject so narrowly as to exclude that object. Another common mistake has been to regard as of chief im- portance the economic activities of one particular class, especially the employer. Other men were treated simply as "a factor in production." An English writer speaks of dear labor as one of the chief obstacles to England's economic prosperity. Could anything be more utterly an oversight of general human well- being? Dear labor should be the very goal of England's eco- nomic effort, for that means abundant supply of the wants of the great mass of her people ; and the fact that labor is dear, so far from being an obstacle to prosperity, is the very proof and sub- stance of that prosperity. A glance at history indicates that men have made these mistakes not only in theory but in practice. Industries have been developed to majestic proportions while man was sinking into deeper degradation ; wealth has grown at the expense of that human weal in whose service it won its name. Economics treats of Man in Society. This is one of those truisms which only history can make real to us. As we pass from the savage and cannibal, up through all the stages of development, we find an ever-increasing interdependence among men. Man is least dependent when he wants least, cares least, has least, knows least, and is least. With every betterment of condition and char- 6 OUTLINES OF ECONOMICS acter he/ is more dependent than before, more dependent and yet more free. The beginnings of barter are a confession of mutual need; the coining of money is a declaration of dependence to all men. We look with pride upon a century of progress, but that progress has consisted in little else than a growth of dependence, an ever-increasing departure from that rude kind of literal self- help in which each one does everything for himself. Our fathers drew water, each for himself, in "the moss-covered bucket," while our mothers dipped candles for the evening's light. If one was negligent, the rest did not suffer. To-day a network of pipes radi- ate from a common center to enter a thousand households. An engineer makes a blunder at the station, and thousands are in darkness or drought. Progress is a passage from independence to dependence, from distrust to confidence, from hostility to amity, from helplessness to helpfulness, while the great law of social solidarity gains ever-increasing importance. Our science, then, is interested primarily in man in his relations to others, and not in man by himself. Moreover, as a science which studies the pres- ent in order that it may predict and prepare for the future, and discovering that interdependence is the law of progress, it must not hesitate to shape its principles with reference to a solidarity which shall grow more rather than less, stronger rather than weaker. Economics treats of Man as in Process of Development. Few truths are more easily admitted or more persistently ignored than that of change in human life and condition. History makes it real. Man now wanders about by force of necessity and age-long habit, now starves rather than be moved from his home. Land is now free to all, now parceled out with well-nigh absolute right of individual possession. The seemingly eternal features of the social structure are gone in a few generations. Nothing so invali- dates theories, laws, general principles, institutions, and enter- prises as this great law of change of which we seldom take full account. Take, for instance, bequests. Nothing is commoner than for a man to leave a legacy under specified and detailed regulations, binding for all time. One leaves money to endow a religious service in a language which in a few generations no one THE NATURE AND SCOPE OF ECONOMICS 7 understands; another founds a college to teach certain doctrines which in a century no one believes; and so on indefinitely. These and a thousand other laborious efforts of statesman, warrior, or philosopher quite lose their worth for the future because their authors assumed that the future would be like their present. Even the wages system and the division between capital and labor which seem rooted in the constitution of society are scarcely two centu- ries old as a general system. One must never forget in the study of economics that the phenomena with which it deals are per- vaded by the spirit of life, moving forward or backward, pro- gressing or decaying, under those influences which control the rise and fall of social institutions. The science is biological rather than mechanical. The Laws with which Economics Deals. The evolutionary character and complexity of economic phenomena, which account for much of the charm of the subject, endow it also with unusual difficulties. Conclusions true for one generation are invalid in the next. Terms and definitions appropriate to one stage of in- dustry are misleading in a succeeding stage. Generalizations valid for one nation and government are inapplicable to another. Even those laws or uniformities which the science prizes as the finest product of its research are but statements of probabilities dec- larations of what is most likely to occur for the mass of men in the long run under certain specified circumstances. In no department of knowledge, consequently, is there greater need of temperate statement and of that humility of mind which is the surest safe- guard against bigotry and dogmatism. No system of economics is appli- cable unchanged to all times and all places : the premises of the arguments change ; the ingredients of nearly every problem present themselves in differ- ent proportions; and the conditions of almost every question vary from country to country and from generation to generation. The student must not expect rules of thumb by which he can decide offhand the economic problems of the particular city or country district in which he is for the moment inter- ested. No general treatise on economics can authoritatively decide the practical problems of particular times and places; although the economist, before all other students, is forced to deal with practical problems. What such a treatise can do is to point out mistakes of logic common in the current discussions of economic questions, call attention to obscure factors some- times of great importance which the practical man is likely to overlook, 8 OUTLINES OF ECONOMICS give solutions of typical problems which are likely to arise, and thus afford a training which will assist the student in solving practical problems for himself. The peculiar and distinctive office of the economic scientist, however, is to emphasize the less tangible truths, the remoter consequences, the deeper and consequently less obvious forces of economic society. The impulses of the moment, the immediate demands of the hour, the present "fact" that stares us in the face (and sometimes blinds us), are not likely to lack vigorous champions ; and to preserve the balance there is need of a craft of thinkers far enough removed from the battle to preserve the wider outlook, mindful of the lessons of the past, jealous for the rights of the future, insistent upon the less obvious truths. This is why economics so frequently appears to the practical man strained and academic. This impression arises from a difference of emphasis which in the main is as salutary as it is inevitable. The academic quality of the economist's work arises sometimes from igno- rance, sometimes from pedantry, but more frequently from his courageous insistence upon the importance of the less tangible truths and the distant consequences of present action. Is not economics, then, a science based upon natural law ? The question is largely a verbal one. What do we mean by natural law? In the narrowest sense natural laws are the habits of na- ture which know absolutely no variation. Such are gravitation and chemical affinity; and the sciences based upon such laws astronomy, physics, and chemistry were the first to develop, and have attained a maximum degree of exactitude. The term " science " is sometimes used in a way to imply only sciences of this character. These sciences are more properly known as exact sciences, and they are characterized by the fact that the relations with which they deal can usually be expressed quanti- tatively. When we come in contact with life, however, and especially with its higher forms, the exactness with which an astronomer predicts an eclipse or a chemist anticipates a reaction becomes impossible. Not that life is without laws; very far from it. There is, in the first place, the basis of physical nature, with its perfect regularity, upon which all life rests and to which it must conform. Then, too, there are laws governing life directly and pertaining to it. These form the subject of the group of sciences known as biology. We must remember, however, that all we can say of natural laws is that they are habits, not compulsory necessities of THE NATURE AND SCOPE OF ECONOMICS 9 nature, and the laws of life seem to differ from those of inanimate nature in that they are not quite invariable habits. Variability seems to be inherent in life, increasing as life rises in the scale of development. It is often assumed, to be sure, that these laws are as invariable as any other, and that this seeming variability is only a greater complexity which we do not yet understand. How- ever that may be, the result is the same for the present. The sci- ences of life are not exact in the sense we have defined. We must further note that in so far as a science deals with facts which seem to be governed by no invariable law, or whose law has not been discovered, it must content itself with a description of this part of its subject. Thus we have the term " descriptive science." We might better speak of the descriptive part of a science, for all sciences are able in part to reduce their facts to law. What has been said of the sciences dealing with life applies to an even greater extent to those sciences which deal with man. It is perfectly true, of course, that within certain limits man is gov- erned by absolutely invariable laws. He is as much bound by gravitation as anything else, and if he falls over a precipice, we can predict the results as certainly as though a stone fell over. But, without entering the bog of discussion as to the nature of human freedom, we may safely assume, for practical purposes, that man is also, within certain limits, a law unto himself. No- where do we find an element of variability so great and so seem- ingly ultimate as here. We must remember, therefore, that the sciences which deal with man deal with a being who is modified by his environment, but who has the power of modifying that envi- ronment by his own conscious effort. Let us consider very carefully what this means. It does not mean simply that man modifies his environment because he has been modified by it and so reacts upon it, just as things do when they come in contact. If we accept this view, we shall come to Herbert Spencer's theory of natural selection. The forces at work accomplish their own results, according to this theory, whether man will or will not, simply by natural action and reaction. This implies that man is modified by his environment, and that he in turn modifies that environment without conscious effort. This 10 OUTLINES OF ECONOMICS theory is based on an assumption that man has no power of initi- ating an influence, and consistently concludes that social develop- ment, like geological development, must be left to work itself out. Mr. Spencer, however, goes farther, and stoutly maintains that man, by conscious effort, especially by collective or state effort, not only does not help this development, but actually hinders it. In this the whole theory is abandoned, for it is plain that if man by conscious effort can hinder a process, he can help that process in the same way, if he only has enough wisdom and sense. These it is the purpose of science to give him. In opposition to the theory of natural selection, or unconscious development, has been urged the theory of artificial selection, or conscious development. Ages of natural selection made of the potato a lean, watery, unpalatable tuber; a few years of artificial selection made it a valuable food product and a table delicacy. Compare the development of domestic animals in the last few years, under man's conscious guidance, with then- slow and meager development in a state of nature. Man has precisely this power of consciously modifying the natural and artificial elements of his environment, and this power continually enlarges. So, when we ask if economics deals with natural laws, we really ask whether this being, whose activity in a certain line we are studying, is governed by such laws. It we mean by this to ask whether his action is characterized by absolutely invariable hab- its, like the forces of physics, we must plainly answer, no. If man had no power of initiative, or, on the other hand, were so perfectly rational as to always do the wisest thing, there would be a regularity in his action which might perhaps form the basis of a complicated, but exact, science. As it is, all social sciences are approximate and partly descriptive. There is much in man's ac- tion which is exceedingly (though not perfectly) regular, and hence we have general, though apparently not invariable, laws. There is a part of his action, however, that seems as yet to be capricious, and we can only make note of it till we have more knowledge. The laws of economics are not comparable to the laws of inani- mate nature in invariability, but they are of very general applica- bility, and are wholly in line with the action and intent of nature, THE NATURE AND SCOPE OF ECONOMICS II and are, in this sense, "natural." But the laws of economics are not natural laws in the sense in which the word is often used; namely, laws external to man and not at all the product of man. The laws of economics have been designated as social laws to distinguish them from those of physical science. Social laws de- scribe tendencies, or regularities, which appear especially in the consideration of large masses of facts. Human mortality serves as an illustration. When and how a certain man, as A, will die, is proverbially uncertain; but when we speak of hundreds of thou- sands of lives, we can predict with such an approximation of accu- racy that a vast business-like life insurance can be built upon the regularity of the action of death. The foregoing discussion enables us to answer in a word the much-mooted question, "Is economics a science?" It is not an exact or mathematical science, though certain portions of the sub- ject may possibly become so. It is an approximate and partially descriptive science, like all sciences dealing with man, or even with life. The inexactness of the social sciences is due to the very thing which gives them their supreme value, the nature of man and the greatness of their subject. The Relation of Economics to other Sciences. We have al- ready referred briefly to the relations between economics and some of the other sciences, but the topic is one which requires fuller treatment. In one sense, economics may be said to be dependent upon practically every other science, since the discoveries in every field of knowledge almost inevitably react upon the industrial life of man. Modern chemistry, to take a single example, has revo- lutionized some industries, wholly created others, and, through the agency of the pure food laws, may claim most of the credit for entirely suppressing others. From psychology economics takes the axiomatic principles upon which the laws of value rest; from physical science the law of diminishing returns which plays such an important part in the theory of distribution; and from mathe- matics the methods by which to ascertain how insurance may be safely supplied against accidents, death, and loss by fire. But it is to the sister sciences dealing primarily with man that eco- nomics is most vitallv related. 12 OUTLINES OF ECONOMICS Man has been busy from the first in several lines of effort. He has talked, worshiped, fought, studied, and each of these lines of effort has developed its own faculties and institutions. For convenience we may arrange these in eight groups, as follows: language, art, education, religion, family life, society life, politi- cal life, economic life. Each of these is the subject of a science more or less developed. The group of society life that is, the life of polite society, calls, parties, balls, and the like has been studied but little, and we know few of its governing principles. 1 Language, on the other hand, is a science which has attained to very complete development. The rest lie scattered between these extremes. A peculiar feature of these activities is that they are all of them collective activities, activities which one man cannot well carry on alone. This is obviously true of family and political life, language, and others, and on careful examination it proves to be true of the rest. It is now admitted, after many experiments, that art and even religion do not thrive in solitude. It would seem that if a man could do anything by himself, it would be to get a living; but our brief study of history impresses us with the insignificance of all such effort and the inevitable tendency of men to drift to- gether in their economic activity. If it were possible for men to live in isolation, every one of the eight lines of effort we have men- tioned would soon dwindle into insignificance or altogether cease. So these sciences are all of them social sciences; and as the sci- ences that deal with life are now grouped together under the name biology (science of life), so the social sciences are grouped under the title of sociology, or the science of society, although some sociologists do not define the word "sociology" in this broad sense of an all-embracing science of human association. Economics, then, is a branch of sociology. We have already defined it as the science which treats of those social phenomena that are due to the wealth-getting and wealth-using activities of man. We may speak of the wealth-getting and wealth-using 1 An attempt to examine scientifically some, at least, of the phenomena of polite society has been made by a learned jurist, the late Professor Rudolph von Ihcring, in his Zweck im Rtcht. Cf. also Veblen, The Theory of the Leisure Class. THE NATURE AND SCOPE OF ECONOMICS 13 activities in all their relations as economic life or economy. Ac- cordingly, economics is the science which deals with the economy of man. A useful distinction in language is thus made between economy, the life itself, and economics, the science dealing with that life. If this distinction could always be observed, much con- fusion would be avoided. We have economies of various sorts: the economy of an indi- vidual, of a family, a tribe, a city, a state, or a nation, and we have, correspondingly, many economic units. The dominant unit in ancient Greece, for example, was the household, which included the family and all the slaves and other dependents. These lived together and formed a little group by themselves. The economic life of Greece meant, largely, a sum of the economic activities of these households, each of which strove to be sufficient unto itself. It is interesting to know that many a well-managed Southern plantation before the late Civil War endeavored to produce all the means of life on the plantation, and in this respect, as in others, resembled a Greek household. But as time has progressed, these old groups have been partially dissolved, and in many instances in modern times the individual, in his economic activity, consti- tutes a unit, although the family is still the prevalent economic unit. It is a natural outcome of industrial progress, as already explained, that the relations between these units have multiplied indefinitely in number and in importance. This is simply another way of describing the growing interdependence of men. Eco- nomics deals especially with the mutual relations of economies of all kinds, private and public. It is chiefly, if not exclusively, a science of human relations, and without these relations could not exist. Because of the organic connection of these relations in their common origin, man, and because economics deals with the indi- vidual as he is, and not with an artificially simplified "economic man," it is impossible wholly to dissociate the social sciences, and particularly impossible to divorce economics completely from ethics and politics. This does not mean that these sciences are all one and cannot be profitably subdivided. On the contrary, because of the limitations of the human mind, they must be 14 OUTLINES OF ECONOMICS studied separately so far as is possible. Scientific progress, like industrial progress, comes largely through specialization and the division of labor. Man cannot profitably study things in general. What it does mean is that there is some territory common to all these sciences, and that occasionally the economist is forced to pass ethical judgment and to decide political questions. In the consideration of railway rates, for instance, the economist is not only compelled to pass judgment upon what is just and reasonable, but he discovers upon investigation that by common consent what is fair or reasonable is decided largely upon economic grounds. The same is true of the apportionment of taxes, in which subject ethical, legal, and economic questions are inextricably interwoven. Commercial policies, restrictive regulations, and sumptuary laws have been the very stuff and subject-matter of the science of eco- nomics from its very beginning. In analyzing the progress of the past or the conditions of the present, we are forced to pass judgment upon the success or failure of many laws and policies which are still in force or under active discussion. Many of these must be indorsed or repudiated either solely or largely upon economic grounds; and because of these facts, the economist can- not, even if he would, refrain from passing judgment upon laws and political policies. Nevertheless, as was stated before, eco- nomics does not undertake the complete and systematic study of law, ethics, and politics, and its conclusions must almost always be supplemented by non -economic considerations which the economist may not have taken into account. In the preface to the first edition of his Principles of Economics, Professor Marshall seems to dissent from the views here expressed, maintaining that " the laws of economics are statements of tendencies expressed in the indica- tive mode and not ethical precepts in the imperative." But even this most cautious and consistent of economists cannot refrain from laying down ethical precepts in many parts of his work. On almost the very last page he declares that : " The most imperative duty of this generation is to provide for the young such opportunities as will both develop their higher nature, and make them efficient producers. And an essential condition to this end is long-continued freedom from mechanical toil ; together with abundant leisure for school and for such kinds of play as strengthen and develop the character." * 1 Marshall, Principles of Economics, 5th ed., p. 720. THE NATURE AND SCOPE OF ECONOMICS 15 Principal Divisions of Economics. This view of the inevitably practical character of economic science is carried out in the treat- ment of the subject in the following pages. The history and evo- lution of economic society, sketched in Book I, are followed, in Book II, by a discussion of the consumption, production, exchange and distribution of wealth. These subjects are treated in close connection with those illustrative economic problems of which the so-called ''economic theory," at its best, is but a more com- prehensive and consequently more abstract analysis. Book III has been reserved for the subject of public finance, which, in the opinion of the authors, constitutes as integral a part of economic science as the subjects of money or international trade. In Book IV is given a brief sketch of the history of economic thought. QUESTIONS 1. What is the most essential characteristic of economics? Define eco- nomics. 2. Is man or goods the more prominent thing in economic study? Does economics teach the student how to get rich ? 3. What determines ultimately whether a man is poor or not? What kinds of poverty are there ? 4. What is meant by "dear labor"? Is it a good thing for society in general? for employers in general? for an individual employer? 5. What is the difference between natural and artificial selection? Which applies to human society ? 6. Are practical ethical and political judgments the chief ends and prod- ucts of economic science ? 7. Is economics concerned with the negro question? asset currency? prohibition? anti-trust laws? race suicide? protection? REFERENCES CAIRNES, J. E. The Character and Logical Method of Political Economy. COSSA, L. An Introduction to the Study of Political Economy. INGRAM, J. K. .4 History of Political Economy. Chap. VII. KEYNES, J. The Scope and Method of Political Economy. MARSHALL, ALFRED. Principles of Economics, 5th ed., Appendix C. MILL, J. S. Essays on Some Unsettled Questions of Political Economy. SIDGWICK, HENRY. The Scope and Method of Economic Science. WAGXER, A. " On the Present State of Political Economy." Quarterly Journal of Economics, Vol. I. CHAPTER II THE CHARACTERISTICS OF THE PRESENT ECONOMIC SYSTEM IT is the object of the present chapter to give a descriptive survey of the fundamental institutions and forces of the existing economic order. Our Environment. Lying back of all of our economic activity is the fact that we live in an environment in which the things that we desire are not furnished spontaneously in unlimited quantities. Whether it be looked upon as due to the niggardliness of nature or to the insatiability of human wants, the fact is that, for the most part, the material things that we use must be economized. We must put forth effort and exercise self-denial in order to enjoy the good things of life. Those human arrangements which help to determine how much of effort, of self-denial, and of enjoyment is to fall to the lot of each of us are the characteristics to which we now turn our attention. There are, however, a number of social institutions which do not fall within the scope of the pres- ent chapter. We deal here only with the social conditions directly underlying our economic activity, which is but one aspect of our social life. We must leave to the sociologists and other students of society a discussion of such topics as the family, religion, mo- rality, ceremonial institutions, and the nature of government, although, to be sure, these also have their effect upon the economic sphere and are in turn affected by it. In the present chapter also we omit a study of the economic significance of our physical environment, which receives independent treatment in books on economic geography. Private Enterprise and State Activity. We live in an age when private enterprise, for the most part, is relied upon to furnish us 16 THE PRESENT ECONOMIC SYSTEM 17 with the necessities and enjoyments of life. The cultivation of the soil, the exploitation of the mines, transportation, the various stages of manufacture, and the distribution of the finished prod- uct are all left mainly 1 to private initiative. The discovery of new processes, invention, and experimentation are carried on mostly by private individuals or corporations who take upon their own shoulders the risk of failure. The State, on the other hand, participates in this activity in a variety of ways. It maintains order, promotes the public health and safety, provides roads, and takes charge of some industries completely. In its educational institutions the State, through its agents, undertakes various ex- periments, and encourages the growth and diffusion of knowl- edge, an indispensable condition of continuous advancement of our economic life. The state university and the experiment farms may be mentioned, and also the large and extremely useful De- partment of Agriculture of the United States, with its annual expenditure now exceeding six million dollars. Certainly in the vast majority of the enterprises with which we are familiar, pri- vate and public activities are combined in varying proportions. Let us take the case of an industry which is as nearly private, perhaps, as any we can find, that of agriculture, and notice the part which public activities play in securing the farmer's re- sult. First, we may say that the farmer owns the farm that he cultivates; this is private property. But how comes it that the farm is his? Why does not a stronger man drive him off and take the farm himself ? Plainly because the State protects him in the possession of the farm. When he bought the farm, he took his deed to a government official, who recorded it, and thus gave him an additional guarantee of possession. A neighbor's dog kills his sheep, and an appeal to the State compels the neighbor to redress the grievance. Another, far below, dams a river and backs the water up so that it overflows his land. Another appeal to the State removes the dam or secures compensation. When wheat is raised, the farmer hauls it to market by a road built, not by private, but by public, activity. The railway lowers the price 1 This applies especially to the United States and England so far as transpor- tation is concerned ; it would scarcely hold true of the world as a whole. C l8 OUTLINES OF ECONOMICS of his wheat by a discriminating rate, and again government in- terferes in his behalf. But manifold and important as are the regulations of the government, State activity seems very much restricted when we reflect that it might extend over the entire industrial field. To-day the distinctive characteristic of our eco- nomic life is private, not public, enterprise. Division of Labor and Exchange. It is commonly taken for granted that every man should prepare himself for some special occupation, that one should plow while another builds or sings. Hardly any civilization seems possible without some industrial specialization, but our own age is peculiar on account of the ex- tent to which this has been carried. The introduction of machin- ery and the development of large-scale production have split up so minutely the work of men that the products which they turn out are not only not of immediate use to themselves in most cases, but they are also useless to any one else until combined with the results of other men's labor, often performed years before or after- wards. It is a long and complicated process from the man who mines the ore which is to reappear in a steel plow, to the man who bakes the bread. The effects of this specialization of employ- ment are far-reaching : (i) It implies the exchange of goods. If we produce things we do not need, we must find some one else who does want them and some one who has the things we desire. Money, banks, and transportation agencies could largely be dispensed with if each family produced for itself alone. There would be none of the complex problems that center about the question of how much each of us is to receive in exchange for his services. One of the striking characteristics of this process of exchange is the great extent to which it is automatic. There is no government official whose business it is to discover how much of each commodity will be needed, and to direct that that amount shall be produced. 1 Men are legally allowed to engage in almost any undertaking that attracts them, and yet we take it for granted that somehow things will get produced in the proper proportions. A hundred men are 1 The government does help, however, in collecting and publishing information, as in the case of crop reports. THE PRESENT ECONOMIC SYSTEM 19 set to work in a factory making nothing but hats, many more than they or their friends can use, but the manager has faith that heads will be found to wear them all. Farmers confidently pro- ceed to raise wheat, never troubling themselves about the grind- ing and baking. Neither workmen nor employers in general know why wages are as they are. Men lend money or goods, now for one price, now for another, but few know why they demand interest or why the rate changes. These processes go on visibly before us, but the governing laws are hidden except to the care- ful investigator. In this respect they are like the laws of physi- ology. We eat and digest our food, but how many people know how or why digestion takes place? It is easy, however, to over- emphasize this idea, for a great deal of our economic activity is conscious and volitional. When we decide to make a law or levy a tax, we do it consciously, considering arguments, and finally will the thing in question. Further, in the large business con- solidations, much knowledge regarding the course of trade is obtained directly through special agents or reports and is made the basis of conscious action. (2) Specialization of work and exchange of goods just referred to, necessarily implies mutual dependence. Instead of a number of distinct, self-sufficient units, we have a coherent society where one individual relies upon many others to complete his own one- sided economic activity. A strike of the street car employees, or of the teamsters, or the destruction of an electric lighting plant, would each send a shock of inconvenience through a community. A prolonged railway strike would be felt as a national misfortune. Indeed, this interdependence is international in its scope. Eng- land relies on other nations to send her food in exchange for her manufactured products, and many a German workman would be in distress if there should be a sudden failure in our cotton crop. Economic Classes. In part, also, the specialization of work is responsible for the division of society into classes, but only in part. The difference in the work of the carpenter, machinist, or railway brakeman does not result in the formation of classes of a higher and lower rank. On the other hand, the professional brain worker enjoys some social esteem that does not fall to the lot of 20 OUTLINES OF ECONOMICS the manual worker. But doubtless the most important basis of social classification is the possession of wealth. The power to spend freely, while not the only test, is to-day the most widely rec- ognized test of social status, regret it as we may. Private Property. We proceed now to examine the founda- tion stones of this system of private enterprise. Private property is the most important of these. The leading English writers of economic treatises have usually taken the institution of private property as something to be assumed as a starting point in their discussions. John Stuart Mill, indeed, made an excellent beginning in the discussion of property and inheritance in his Principles of Political Economy, but other English writers have not generally followed up his lead. It is to the merit of the German writers that they have critic- ally examined these fundamental institutions in their economic bearings. The work of Professor Adolph Wagner may be mentioned especially in this connection. For our present purpose we may define private property as. the exclusive control over valuable things by private persons. It is to be distinguished from mere possession. The possessor has the use of the thing for the time being, but unless he is at the same time the owner, he is dependent upon the will of another for the use of it. Ownership implies the right of excluding other per- sons from the enjoyment of a thing. The exclusive right must be recognized and guaranteed effectively by third parties. If I defend my exclusive right of control over some valuable thing against your claim simply by the strength of my right arm, I have not thereby established the right of private property. My ex- clusive right of control must be recognized by others and must be maintained by them. Over against private property we have public property, and there are some things, such as air, which fall in neither of these categories. The sphere of private property at present includes, not only food, clothes, and other things of personal use, but it also includes the instruments of production land, buildings, and machinery. In the most important pro- ductive processes the tools are in general not owned by the per- sons who use them. Hence our present wage system. It may be said that property is the chief seat of social authority. As property carries with it the exclusive right to control things, others may have THE PRESENT ECONOMIC SYSTEM 21 access to these things only on conditions named by their owners. If we look about us, we find men organized and acting together under direction for purposes of production. In a factory we find an organization of men like that of an army. We discover men moving here and there and performing arduous tasks in obedience to command. If we examine the nature of the authority which some thus exercise over others, we shall find that it resides in property. The law of the land to some extent establishes the authority of man over man ; but where one man obeys another because the law in so many words tells him to do so, we find a hundred men obeying others because these others have the authority which resides in exclusive control over valuable things. Indirectly this latter sort of authority rests back upon the laws in so far as these are responsible for the establishment of property. But the chief seat of authority in society is based only indirectly upon the government ; it rests immediately upon private property. Inheritance. Inheritance is often regarded as a necessary part of the right of private property, and it is true that the entire abo- lition of the right of inheritance would result in a great enlarge- ment of the public sphere of property at the expense of the private sphere, unless gifts were made to accomplish the same object as the system of inheritance. But strictly speaking, we have here to do with two rights. Private property is an exclusive right of con- trol, whereas inheritance is concerned with the transmission of this right from one generation to another. As in the case of private property itself, the right of inheritance is not recognized to-day as an absolute one. Detailed regulations exist on our statute books regarding the descent of property where no will is made, and also regarding the making of wills, and there is an increasing tendency to limit the right of inheritance by taxa- tion. Some features of the present law of inheritance well illus- trate the tendency of institutions to persist after the conditions that gave rise to them have disappeared. The recognition which we give to the claims of very distant relatives to a share in an estate where there are no near relatives, and where no will has been made, had its origin at a time when blood relationship played a much more important part in society than it does at present. Contract. Scarcely second to the right of private property is the right of contract, for the maintenance of which we are equally dependent on the State. Some sort of contract lies at the basis of all associated activity. To secure the condition of such activity, 22 OUTLINES OF ECONOMICS it is necessary, first, that men should be allowed to bind them- selves; and second, that they should be compelled to respect the agreement thus entered into. The entrance into a valid contract is ordinarily voluntary, but once entered into with due formality, the State will use its superior power to enforce it. To the anar- chistic mind this seems oppressive, and it must be admitted that a state of society is conceivable in which the element of force would be removed from the idea of contract, but something else would have to be substituted to make the keeping of agreements the general rule. There are doubtless many people living to-day with whom the feeling of honor or fear of social disapprobation would be sufficient for the enforcement of contracts, just as these persons might not need the threat of a jail sentence to keep them from stealing. The economic ties which hold men together in industrial society on their legal side are very generally contracts. The organization of an industrial corporation implies many contracts. Our property is acquired very largely through contract, and through contract we determine the conditions under which we do our work, such as the length of the working day. The conti- nuity of our economic life rests upon contracts, which bind together past, present, and future. Still, all that we have by no means comes to us through contract. "Contract" does not exhaust the significance of parentage, home, and education, and much wealth changes hands through gifts and inheritance. Vested Interests. 1 A few words should be said about vested interests. Vested interests may be denned as pecuniary interests which are legally recognized to be such that they cannot be im- paired by public action without indemnification. Vested inter- ests generally arise through property and contract. Outside of property and contract, however, there may be vested interests. Leeds was compelled by a feudal arrangement to grind its corn, grain, and meal at the lord's mill till well on in the last cen- tury, and finally had to pay 1 3,000 to terminate this obligation. When Prussia bought the railways, the railway presidents were indemnified for the loss of their positions by large payments; in other words, their offices were looked upon as vested interests. England is the classic land of vested interests. An office in the army was until recently looked upon as such, and so was an 'The term " vested rights " is also used. THE PRESENT ECONOMIC SYSTEM 23 appointment in the Established Church. It is generally held that saloon keepers in England have a vested interest in their busi- ness, so that they must be indemnified if their licenses are taken from them. Workingmen have frequently claimed that they have a vested interest in the advantages which their acquired skill gives them, and consequently that if through industrial changes this skill ceases to be of as great value as formerly, they ought to be indemnified and in some way their former income continued. This claim of the workingmen, however, unlike many other claims put forward in the name of vested interests, has not received rec- ognition, either by Parliament or the courts. Vested interests, apart from property and contract, are of less significance in the United States than in most countries, but they may become of more significance in the future. Freedom. The words " liberty " and " freedom " have given rise to some of the deepest philosophical discussions, but we may avoid confusion if we say that the freedom to do certain things is legally guaranteed at the present time, such as moving from one part of the country to another, choosing one's own occupation, and acquiring property. These, together with the absence of chattel slavery and imprisonment for debt, are characteristic features of the present economic order as distinguished from past conditions. The right to manufacture and sell what and when one pleases is a comparatively recent one. It has often been greatly limited by despotic governments, and the right has been made a matter of sale for the purpose of raising revenue. Most such limitations have been of the nature of abuses, and our own time has seen the abolition of an immense number of hampering and vexatious re- strictions designed for plunder rather than for the promotion of private enterprise. So far as the absence of legal restrictions on the actions of individuals is concerned, the past century has been distinctively an age of liberty. Restrictive laws, however, are not the only limitations on our freedom of action. The system of private property itself means that certain individuals in the community have power to command other people to work, and the lack of an income under our present regime implies the lack of the real freedom to do things. The 24 OUTLINES OF ECONOMICS cost of a railway ticket may be quite as effective as a legal barrier would be in preventing movement from one state to another. It is said that we are free to acquire unlimited property. True, the law does not expressly prohibit such acquisition, but as a matter of fact many persons do not acquire much property. Again, we say involuntary servitude, except as punishment for crime, has been abolished, yet men are compelled to work by the threat of eco- nomic distress, in most cases quite as effectively as by means of the slave-driver's whip, for the counterpart of legal freedom is the economic responsibility of the individual. "Sink or swim," says the State to the millions struggling for worldly goods. That is the end of the matter according to the laissez-faire theory. The modern State helps men to learn to swim. Again, the choice of an occupation is free according to the law, but we may find that a long and expensive course of training is necessary, or we may be compelled to conform to trades-union regulations, and always it is necessary to find some one who deems our services valuable. The right to establish enterprises is granted to all alike according to the law, but to-day it would be difficult and hazardous to embark upon the refining of oil or the manufacture of steel. Practically, the freedom to establish new enterprises has been growing less and less in this era of large-scale production. Competition and Markets. As a result of the legal conditions that have been mentioned, we find men engaged in many kinds of rivalry. Our economic society is often called "competitive" for this reason. But when this term is used, not all forms of rivalry are meant, for even if private property and free contract were abolished, some form of struggle might still persist. There might still be conflicts between races and nations, and the men of any single nation might still vie with one another to prove their superiority in the eyes of womankind or to gain positions of pub- lic honor and power. The kind of competition which is distinc- tive of the present economic order is the all-pervading endeavor to obtain the largest possible amount of wealth in exchange for commodities produced or services rendered. If we except the idlers, the parasites, and the cheaters, men are everywhere en- deavoring to discover what other people want urgently, and then THE PRESENT ECONOMIC SYSTEM 25 to satisfy that want in the most efficient manner possible. On the other hand, they attempt to give as little as possible of their own products in exchange for the things they themselves desire. Busi- ness competition thus has two sides: rivalry in rendering a serv- ice, and alertness in exacting a return. Each individual takes part in the competitive contest in two ways: first, as a seller of goods or services, in which case he finds that others are anxious to render the same service; and second, as a buyer of the things he wants, in which case he finds that these same things are sought after by other people. The intensity of the competitive struggle is subject to a good deal of variation. At times it may be characterized as cut-throat, where the slashing of prices has for its object the elimination of one or more of the contestants. But the rivalry is not necessarily so fierce. In some lines of business many competitors may con- tinue to exist side by side indefinitely, each competitor being con- fronted by the ever present threat that if his service becomes very poor, some other man will outstrip him. Various as may be the character of competition, now predator)', now a friendly rivalry, there is no resting place in the contest unless one secures some special privilege as a shelter. He who is energetic, and wins suc- cess in a certain line of business, must continue to defend himself from a host of imitators who are anxious to snatch his gains from him. Most of the competitors are successful in getting something, some more than others, but many fail altogether. These last, the inefficient, whether made so by sickness, by inherited weakness, or by lack of proper training, fall by the wayside and must be cared for by private charity or by the State. The process is cruel in many of its details, but there is also a beneficent aspect in the sifting out of the incompetent and in the encouragement of the strong. Here, again, reference may be made to the automatic character of the present industrial system. It is through competition and bargaining in the market that a price is fixed, and it is to the vari- ations in this price that business men look for indications as to what people want rather than to the reports of some government official, although such reports are of some assistance. Price is 26 OUTLINES OF ECONOMICS the universal barometer that indicates changes in the demand for goods of all kinds. Competition has been spoken of as a struggle, a contest, ac- companied by success and failure, elation and disappointment. But the State sets limits to the rivalry it makes regulations and acts as an umpire to compel fair play. It attempts to eliminate fraud and brute force; it trains the rising generations for an en- trance into the struggle by a system of free education; it insists that no person shall sacrifice the life and limb of another in the rush for wealth; and it protects children and women when they seem compelled to labor under unhealthful conditions. Those who fail entirely in the struggle it tries to rescue from suffering. In short, the State, as will be explained more fully in a later chap- ter, aims to raise the plane of competition, changing it from bru- tal warfare into a contest in which there are prizes for all, but in which the prizes are graded according to the energy and ability of the contestants. Cooperation. The statement that our age is one of competi- tion is misleading if it gives the impression that every individual is continually struggling against all of his fellows. On the con- trary, the achievements of modern industrial civilization would be impossible without a far-reaching cooperation between individ- uals. Employers and employees may quarrel and bargain about the wage contract, but when they have settled their relations for a week or a year, they become cooperators during that period in the conduct of the business enterprise in which they are engaged. Again, there is an unconscious cooperation between those who work upon a commodity in the different stages of the process from raw material to finished product. The division of labor itself necessarily implies cooperation. Competition merely determines the conditions on which the cooperation takes place. If these conditions could be determined in some other manner, it would be possible to conceive of the elimination of competition from our industrial system, but cooperation is so vital and fundamental that its elimination would mean a return to barbarism. Monopoly. Everywhere in the industrial field the tendency toward monopoly is present. Business men endeavor so far as THE PRESENT ECONOMIC SYSTEM 27 possible to shelter themselves from the effects of the competitive struggle by means of some privilege, but if none is to be found, and if competition becomes very keen, they endeavor to combine with other business men. But while this attempt to escape com- petition is universal, it is only under certain conditions that it is at all likely to succeed. The success is least in agriculture and in the mercantile business, where new enterprises are started rather easily because no special privileges stand in the way and because no very large capital is required to work efficiently. It is greatest in mining and transportation, where special privileges are present and where large capital is required. Scarcely anywhere is it pos- sible wholly to escape competition, and we are still warranted in speaking of the present era as a competitive rather than a monopolistic age. Side by side with the growth of monopoly there is an increase in government interference in industry. The desire of the busi- ness man is to be uncontrolled, but wherever he succeeds in throw- ing off the control exercised by his competitors, he inevitably substitutes that of the government official. Custom. Custom plays an important part in our economic activity as well as in every other department of social life, although its sway is not so marked as in former ages or among primitive peoples. The custom of giving gratuities, or tip*, to servants is in many places so strong as to have almost the force of law. Again, to-day much of our personal expenditure is controlled by what custom has declared to be proper rather than by any act of our own individual reason. Any attempt to lower wages which would make impossible the maintenance of a customary standard of liv- ing would be stubbornly resisted. Custom is the result of habit, and is continually broken into by our tendency to imitate a leader who proposes a new line of action. Recent events in the spelling reform movement afford an illustration. While custom may have its beneficent aspect in preventing hasty and impulsive changes, it frequently retards progress and causes our legislation and judi- cial decisions to lag behind industrial development. Authority and Benevolence. In the preceding pages frequent reference was made to the limitations upon the rights of private 28 OUTLINES OF ECONOMICS property, inheritance, contract, and freedom. Public authority may be looked upon as one of the forces governing the economic process. The conduct of private enterprises is continually being interfered with by State authority. Legal rates of interest are established, and "reasonable" railway charges are substituted for actual charges. The authoritative fixation of wages is a future possibility. Benevolence, or the caritative principle, may be mentioned as another force in economic society, modifying and supplementing in many ways the work of competition. QUESTIONS AND EXERCISES 1. Attempt to classify the leading occupations in your city with respect to the social prestige attaching to them. 2. Describe the property relations existing in the Amana Society, or in other communistic groups. 3. What regulations concerning the inheritance of property are in force in your state ? 4. To what extent are gambling contracts valid ? 5. Compare the legal freedom of workingmen to-day with the conditions described in the Wealth of Nations, Book I, Chap. X, Part II. REFERENCES BAKER, C. W. Monopolies and the People, Chaps. X and XI. BLISS, W. D. P. Encyclopedia of Social Reform (new ed.), article on Amana Community. See also on sample subject, Ely, R. T., in Harper's Monthly Magazine, October, 1902. ELY, R. T. Evolution of Industrial Society, Part II, Chaps. I, VII, or XI. GREEN, T. H. Liberal Legislation and Freedom of Contract, Works, Vol. Ill, p. 365. MILL, J. S. On Liberty, Chap. IV. MILL, J. S. Principles of Political Economy, Book II, Chaps. I and II. NICHOLSON, J. SHIELD. Principles of Political Economy, Vol. I, Book II, Chaps. II-VIII. PATTEN, S. N. Development of English Thought, pp. 22-23. STEPHENS, J. F. Liberty, Equality, and Fraternity. SIDGWTCK, HENRY. Principles of Political Economy, Book II, Chap. XII. WEBB, SIDNEY and BEATRICE. Industrial Democracy, Vol. II, pp. 562-572. CHAPTER III THE EVOLUTION OF ECONOMIC SOCIETY IN the preceding chapter were described the fundamental insti- tutions of the present economic order. Here a brief sketch will be given of the origin and development of these institutions. Such a study is advisable in a general survey of the field of political economy because many of the problems and proposed reforms which are met with raise questions as to the soundness of the very foundations of our present economic life, and these can only be understood when they are viewed as historical products. The evolution of economic society is but one of many stand- points from which the development of mankind may be consid- ered. The history of literature, the history of government, the history of religion, each treats of man in one line of his activities. Many thinkers have considered the economic activities of man- kind as the fundamental factor in social progress, determining in the long run even our ethical and religious conceptions. Prob- ably human life is too complex for any such simple explanation. The economic factor, however, is clearly of the most fundamental importance in the sense that the higher things in life cannot be cultivated if man's entire time is spent in getting a mere subsist- ence, so that economic progress, or gaining control over the forces of nature, must accompany general social advancement, at least for the mass of the community. Under primitive methods of production, only a select few can have this leisure time. The Economic Stages. Many attempts have been made to divide economic history into stages through which mankind passed in arriving at modern industrial civilization. These attempts have been the subject of lively criticism, but it appears that the classifi- cation which in the past has been most widely used is still, with 29 30 OUTLINES OF ECONOMICS some modifications, the most serviceable, and in the main, this will be followed in the present chapter. The basis of this classification is the increasing power of man over nature. This is the fundamental fact in man's economic development, and his position in the scale of economic civilization is higher in proportion as this power over nature increases. In- creasing control of nature is accompanied by changes in man himself, especially by a growth and diversification in his wants, so that we may say that economic civilization consists largely in wanting many things and in learning how to make and use them. From this standpoint economic history may be divided into the following stages : I. Direct Appropriation. II. The Pastoral Stage. III. The Agricultural Stage. IV. The Handicraft Stage. V. The Industrial Stage. I. DIRECT APPROPRIATION The economy of primitive man is characterized by finding things ready to use instead of making them. It is not intended to assert that the lowest examples of mankind that we know do absolutely nothing in the way of transforming the materials of nature for use. The lowest types know the use of fire and have rude tools, but, nevertheless, the farther back we go, the more direct do we find the reliance on nature. One cannot read descriptions of the Negritos, Veddahs, Fuegians, or native Australians without being impressed with the similarity between the economy of these peo- ples and that of the lower animals. But there are many tribes commonly regarded as savages that show a great advancement over those that have been mentioned. Among the North Ameri- can Indians, for example, we find a rude sort of cultivation of the soil along with hunting and fishing. Such soil cultivation has been termed " hoe-culture," and is to be distinguished from agri- culture with the aid of domesticated animals found in a later stage of development. THE EVOLUTION OF ECONOMIC SOCIETY 31 This kind of agriculture is found in its highest state of development among the negroes of Africa. " The ground for cultivation," says Ratzel, " is cleared by means of fire, or with the hatchet or small ax. On the east coast a broad chopper with a spear-shaped blade and short handle is also used. The lance or spearhead has, in general, to serve many peaceful purposes. Larger trees are killed by barking. Thorny branches are placed as a border to the fields, under the shelter of which close, quick hedges gradually grow up. The ground is broken and cleared of weeds with a wooden spade sharpened to an edge at either end. Many peoples have hitherto not ventured to use iron tools, since they keep away the rain. When the ground has been got ready, somewhere about the beginning of the rainy season, the sower walks over the field, scraping a hole with his naked foot at every step, into which he lets some grains fall from his hand ; the foot covers them up, and if the good witch doctor makes rain enough, and the bad one does not keep it back, there is nothing more to be done until harvest, unless to hoe the weeds once. . . . To the present day the plow is practically strange to them." * The following characterization of the economy of primitive man applies with varying force to the many tribes that may be placed in this first stage. Characteristics of Primitive Man. The range of wants is nar- row, as the savage is almost completely satisfied if he obtains mere subsistence of the rudest sort. In the satisfaction of these few wants he is, according to our modern standards, remarkably inef- ficient. P>om the best natural resources he manages to get a very poor living, depending as he does largely on the spontaneous products of nature. Magic and ritual are very generally relied, upon as aids to wealth production. Primitive man is improvi- dent, for he does not feel keenly the uncertainties of the future, and fails to make provision for them. Hence we find him sub- jected to alternate periods of starvation and plenty. Only a scanty population is possible in this stage, as a tribe must have a large expanse of territory from which to draw its sustenance. The place of abode is easily changed, and warfare with neighboring tribes frequent. Cannibalism is found among many primitive peoples. Private property in land is absent, although the begin- ning of the institution of ownership appears in the recognition of the individual's right to articles of personal use. There is little division of labor. What one man can do, all can do. The soil 1 Ratzel, History of Mankind, trans, by A. J. Butler, Vol. II, pp. 380-382. 32 OUTLINES OF ECONOMICS cultivation by the women and the specialized work of the medi- cine man are exceptions. As each tribe is economically self-suffi- cient, the development of trade is slight. The beginning of slavery may be observed, but this institution plays no impor- tant part in the economy of primitive man, except among the most advanced tribes. II. THE PASTORAL STAGE In the older accounts of economic evolution, the impression is given that hunting peoples learned to domesticate animals arid then led a pastoral life, later learning to subdue the vegetable kingdom, and then becoming agriculturalists. This view is not accurate. It is possible that the domestication of animals was developed in regions where considerable progress had been made in hoe-culture. As this knowledge spread, certain tribes became and remained pastoral nomads in regions where agriculture was impossible. But whatever the actual steps may have been, the pastoral peoples represent a type of culture that is lower than that of the agricultural stage (as distinguished from hoe-culture), and higher than that of the hunter. Within this stage also are classed together tribes of varying advancement. Illustrations of existing pastoral life are found in the tribes of central Asia, many of the Arabian and African tribes, and the Todas of India. Attempts have been made to trace the pastoral stage in the early history of the Hebrews, Germans, Greeks, and Britons. Characteristics of Pastoral Peoples. Some marked features of the first stage are found also among pastoral peoples. A fixed abode is not possible, as food must be found for the herds and flocks. Cities do not develop. Moreover, while the land will now sup- port many more inhabitants per square mile than before, much land is still needed for pasture, and there is frequent collision and warfare between neighboring tribes. It follows also that there is very little private ownership of land among these peoples. Tribes as a whole lay claim to certain districts and try to keep other tribes from pasturing on them. In this stage there are frequently individual accumulations of wealth, consisting mostly of herds or THE EVOLUTION OF ECONOMIC SOCIETY 33 flocks, and thus the contrast between rich and poor makes its ap- pearance. Customary rules regarding the inheritance of wealth are recognized. But this early wealth does not produce com- merce to any considerable extent, simply because there is little division of labor either between localities or within the tribe. III. THE AGRICULTURAL STAGE In this stage there is an enormous increase in man's power over nature. The production of wealth is increased especially by the use of animal power in cultivating the soil. One result is to in- crease population. Land which under the more primitive meth- ods of production would give a scanty support to a small tribe for a part of the year will now maintain a whole community with a fixed abode. It is necessary for human development that men should live in definite places and have homes and a country. This results in new relations between men, new duties, new arts, and new possibilities. The beginning of the institution of private ownership in land falls within this stage, although it is difficult to trace the actual steps in the process. A most important characteristic of this period is slavery. Slav- ery begins long before improved agriculture, but it now attains its full magnitude as an institution. There have been many dis- cussions as to whether slavery is right or wrong. It is both. There is a time in human development when slavery represents a step in human progress. The slavery of the early period we are now considering was inevitable, and is not to be judged by modern standards. We now know that free labor is better than slave labor, especially in the later stages of industrial development; but, inasmuch as primitive man is induced with difficulty to work at all, slave labor is a great improvement on free idleness. Commercial intercourse is still comparatively slight in this stage. Fixed residence develops village communities, and these are econom- ically self-sufficient. They produce the things that they consume, and as a rule have not surplus products to dispose of to others. Hence money does not at this time perform important functions in the life of every day. The economic condition of Europe dur- D 34 OUTLINES OF ECONOMICS ing the middle ages before the growth of cities illustrates the agricultural stage. The Manorial Economy in England. England was almost wholly agricultural for three centuries following the Norman Con- quest. In the thirteenth century the population for the most part lived in villages or manors, each controlled by a lord to whom the rest of the inhabitants were bound by customary rules to ren- der certain assistance in the cultivation of the lord's land. The villagers were of various classes, according to the amount of land which they held and according to the services which they were required to perform. The land of each tenant was not a com- pact area, but was composed of strips scattered in the three great fields into which the arable land was divided for purposes of crop rotation. Some handicraftsmen were also found upon the estate, but they do not occupy an important place in the economy of the village. For the most part, they were probably slaves or household servants. Slaves in England con- stituted at the time of the Conquest about nine per cent of the population, but "in some of the eastern and midland shires do not appear at all, or fall to a percentage of four or five," while they rise to as much as twenty-four per cent in other parts of the country. "We cannot but explain this by the supposition that in the later stages of the English conquest a greater number of the British cultivators were spared, so that in these districts slaves came to form a considerable part of the rural population. Absolute slavery, how- ever, disappeared in less than a century after the Conquest, and the servi became customary holders of small plots, like the cotters elsewhere, but on more onerous conditions." l While these manors were largely self-sufficient in their economic life, there was, to be sure, some trade. England exported raw products to the continent and received back some of the finer forms of manufacture. But the ordinary needs of the very frugal life which the tenants had to live were supplied by products of the village itself. During the centuries following the Norman Conquest important changes took place in the manorial system: (i) a rapid growth in the number of free tenants; (2) the com- mutation of customary services into fixed payments in money or kind; and (3) the appearance of a class of agricultural laborers 1 See Ashley, English Economic History, Vol. I, pp. 17-18. THE EVOLUTION OF ECONOMIC SOCIETY 35 dependent on the wages which they received. In contrasting the manorial economy with the village of the present day, Professor W. J. Ashley has pointed out the following differences: (i) Now farmers live in separate homesteads among the fields they rent, but then all the cultivators lived side by side in the village street. (2) Now each farmer follows his own judgment as to his agricul- tural operations, but in this early period he took his share in the common method of cultivation, which was regulated by custom enforced by the manor courts. (3) To-day, if the landlord him- self engages in farming, his management is independent of that of his tenants, but under the manorial system he depended almost exclusively upon the labor of his tenants, who contributed plows, oxen, and men. Finally, (4) aside from the great gulf between lord and tenants, there was then no such social separation between the cultivators as there is to-day between large and small farmers. The manorial economy of England was a type, though somewhat more systematically developed, of conditions on the continent of Europe. IV. THE HANDICRAFT STAGE This stage begins with the development of towns as centers of trade and handicraft in the latter part of the middle ages, and ex- tends to the introduction of power manufacture in the latter part of the eighteenth century. During such a long period many changes took place in the economic life of the people of Europe, but so far as the expansion and satisfaction of wants is concerned, the power over nature, the whole period is in marked contrast with the modern era of machine production. Gilds. The growth of trade in the town brought with it the merchant gild, the purpose of which was to regulate the conduct of trade and to keep a monopoly of it for the merchants of the town. Merchant gilds appeared in all the larger towns of Eng- land in the twelfth century. But a new class was developing in the towns, the craftsmen who were engaged in the making of things for sale. As this handicraft grew in importance, the mer- chant gild was superseded by the craft gild, which in England attained its fullest development in the first half of the fourteenth 36 OUTLINES OF ECONOMICS century. Each craft had its gild, which specified in detail how the business should be carried on, how many should be admitted to it, and how the trade should be learned. This growth in spe- cialization meant also a growth in trade, but in this early part of the handicraft period, commerce was much restricted as compared with that of the present day. The towns made exchanges mostly with the country surrounding them, there being as yet no national or world market of any importance. Plainly such a general sys- tem of exchange cannot be carried on by barter, and in this period money became increasingly important. The agricultural stage had in the greater part of Europe cul- minated in the feudal system. The nobility maintained order and attended to the fighting while the serfs tilled the soil. The manufacturing cities became the rivals of the feudal lords, who felt their power threatened, and hence they bitterly opposed the cities. The cities were free, and the serfs who fled to them were accepted and made freemen. The Domestic System. With the beginning of the modern period the town system gave way to a larger economy. The towns lost the control of trade. The gild system was succeeded by the domestic system, which prevailed in England from the middle of the fifteenth to the middle of the eighteenth centuries. As in the gild system, industry was carried on by hand in a small way, but the functions of merchant and workman were now sep- arated. The gild master sold the goods which he produced in his shop directly to the customers who were to use the goods, but under the domestic system the workman came to be less inde- pendent. He received the raw material from a middleman, to whom he also delivered the finished product. Much of this work was done outside of the towns, the artisans thus being enabled to devote part of their time to agriculture. Defoe, in his tour through Great Britain (1724-1726), describes the methods em- ployed as follows : The land " was divided into small inclosures from two acres to six or seven each, seldom more ; every three or four pieces of land had an house belonging to them, . . . hardly an house standing out of a speaking distance from another. . . . We could see at every house a tenter, and on almost every THE EVOLUTION OF ECONOMIC SOCIETY 37 tenter a piece of cloth or kersie or shaloon. ... At every considerable house was a manufactury. . . . Every clothier keeps one horse, at least, to carry his manufactures to the market, and every one generally keeps a cow or two or more for his family. By this means the small pieces of inclosed land about each house are occupied, for they scarce sow corn enough to feed their poultry. . . . The houses are full of lusty fellows, some at the dye-vat, some at the looms, others dressing the cloths ; the women or children carding or spinning, being all employed, from the youngest to the oldest." The domestic system should be distinguished from the mano- rial economy of the agricultural period, for the production under the domestic system was not for home consumption simply, but for the market. Agricultural Changes. During the handicraft period there were also important changes in the agricultural life of England. The most prominent of these is the process of inclosing the com- mon fields for the purpose of pasturage during the Tudor period. Later, the farmers practiced what was known as "convertible hus- bandry"; that is, the pasture was plowed up every few years for raising crops. This, again, has been superseded by the modern system of crop rotation. The Mercantile System. The decay of town authority did not imply that industry and commerce were left to the free play of competition. The supervision of the central government took the place of that of the towns. The national system of regula- tion has been called the Mercantile System, which prevailed in England in the sixteenth, seventeenth, and most of the eighteenth centuries. Its essential idea is the guidance of economic affairs in such a way as to increase the commercial and military power of the nation as a whole. The navigation laws which the student has met with in his study of American history were a part of this system. An attempt was made to create a "favorable" balance of trade and to maintain a good supply of the precious metals. Agriculture was fostered with the aim of promoting the growth of population. The mercantile system has often been de- scribed as consisting chiefly of trade restrictions, but it is the con- tention of Professor Schmoller that in its essence the system meant "the replacing of a local and territorial economic policy by that 38 OUTLINES OF ECONOMICS of the national state." Within the nation it tended to make trade free. It was characteristic of the mercantile system, too, to interfere in the conduct of internal trade. Prices, wages, and the rules of apprenticeship were fixed by public authority. The quality of goods was inspected by public officials. Patents of monopoly on the sale of certain commodities, such as gunpowder, matches, and playing cards, were extensively granted by royal authority to fa- vored individuals or companies, ostensibly to foster new industries. "At the Council of York, Charles was obliged to declare many of the industrial patents void; but enough remained to call forth an indignant declamation from Sir J. Colepepper in the Long Parliament: 'I have but one Grievance more to offer unto you ; but this one compriseth many ; it is a nest of wasps, or swarm of vermin, which have overcrept the land, I mean the monopoler and polers of the people. These like the frogs of Egypt, have got possession of our dwellings, and we have scarce a room free from them ; they sip in our cup, they dip in our dish, they sit by our fire ; we find them in the dye-vat, wash-bowl, and powdery tub ; they share with the butler in his box, they have marked us and sealed us from head to foot. Mr. Speaker, they will not bate us a pin ; we may not buy our own cloaths without their brokage. These are the leeches that have sucked the com- monwealth so hard that it is almost become hectical. And some of these are ashamed of their right names; they have a vizard to hide the brand made by that good law in the last Parliament of King James; they shelter themselves under the name of a corporation ; they make bye-laws which serve their turns to squeeze us and to fill their purses ; unface these and they will prove as bad curs as any in the pack. These are not petty chapmen, but wholesale men.' " 1 A full account of this stage in English history would deal with (i) the regulation of labor, including the Statute of Artificers passed in the reign of Elizabeth, which provided that all able- bodied men might be compelled to serve as agricultural laborers, and that all artificers, rural or urban, should undergo an appren- ticeship of at least seven years. In this same reign provision was made for the assessment of wages by the Justices of the Peace. Every year in each locality the justices were to assemble, and, " calling to them such discreet and grave persons ... as they 1 Cunningham, English Commerce and Industry, Modern Times, Part I pp. 307-8. THE EVOLUTION OF ECONOMIC SOCIETY 39 shall think meet, and conferring together respecting the plenty or scarcity of the time," they were to fix the wages for every kind of manual labor, skilled or unskilled, by the year, week, or day, and with or without allowance of food. (2) The stage would deal further with the development of systematic poor relief by civil authority ; (3) the encouragement of shipping and of (4) the im- migration of foreign artisans to introduce new industries; (5) the regulation of the corn trade; (6) the establishing of plantations in the colonies; (7) the regulation of the coinage; (8) the develop- ment of banking, insurance, and foreign commerce, and the decay of the old notions regarding the sinfulness of interest taking. V. THE INDUSTRIAL STAGE In the latter part of the eighteenth century, the slow-going methods of the handicraft stage were radically changed by the Industrial Revolution. The fundamental feature of this change is the introduction of power manufacture. The industrial revo- lution and the chief features of the Industrial stage will be dis- cussed in the following chapter. Before proceeding to the consideration of the last stage, it may be well to notice some of the other views which have been expressed concerning the periods of economic development. The German economist, Hildebrand, has taken as his principle of classification the method of exchanging goods, and from this standpoint he gets the following three stages : (i) barter, (2) money, and (3) credit. All three methods of exchanging, to be sure, are in use at the pres- ent time, but the extensive use of credit is the new and character- istic thing about present-day exchange. It has been objected that the period before the use of money became prominent is charac- terized not so much by the barter of goods as by the fact that exchange itself is unimportant. Another writer (Biicher) has divided economic history accord- ing to the length of time which elapses between the production and the consumption of commodities, as follows: 1. The independent domestic economy. 2. The town economy. 3. The national economy. OUTLINES OF ECONOMICS In the first stage the interval between the production and con- sumption is small. Things are produced where they are consumed, as in the village communities of the early middle ages. In the town economy the interval is somewhat greater. The artisans in the town produce for the consumption of other persons, for the most part in the immediate neighborhood, so that the producer meets the consumer without intermediaries. In the third stage, produc- tion is for a national market, so that goods may pass through many hands before reaching the consumer. Possibly, according to this view, a fourth stage might be added, that of a world economy. Again, we might pay attention chiefly to the condition of labor. Beginning with a condition where there is no distinct laboring class, we pass through slavery and serfdom to free labor, regu- lated at first by law and custom, and then the free laborer arranges THE ECONOMIC STAGES STANDPOINT FROM BOCHER'S FROM HILDEBRAND'S FROM THE LABOR ILLUSTRATIONS FROM ENGLISH OF PRODUC- STANDPOINT STANDPOINT STANDPOINT HISTORY TION I. Direct Ap- Prehistoric propriation 2. Domestic Barter Laboring Pastoral Economy class not dif- Before Christ Economy ferentiated 3- Slavery and nth-i4th Agricultural Serfdom Centuries 4- Handicraft Town Economy Money Economy Free Labor governed by Custom I3th-i8th Centuries 5- Industrial National Economy Credit Economy Individual Contract Group i8th Century to the Pres- ent Time Contract THE EVOLUTION OF ECONOMIC SOCIETY 41 the conditions of work by individual contract, and finally to an increasing extent by group contract or collective bargaining. These various classifications are not contradictory; on the con- trary, they supplement each other. Still other divisions are pos- sible. In the preceding table these various points of view are correlated and applied to the history of England. QUESTIONS AND EXERCISES 1. Write a description of the economic life of a tribe in one of the first two stages. 2. What are the theories concerning the origin of cannibalism ? 3. What is the extent of slavery in Africa at the present time ? 4. Sketch the development of the woolen industry in England to 1760. 5. Give an account of the origin of the Bank of England. 6. Summarize the history of poor relief in England. REFERENCES ANDREWS, C. M. The Old English Manor. ASHLEY, W. J. English Economic History, Vol. I. BUCHER, KARL. Industrial Evolution (trans, by S. M. Wickett). CHEYNEY, E. P. Industrial and Social History of England, Chaps. I to VII. CUNNINGHAM, W. Growth of English Industry and Commerce, Vol. I (Middle Ages) and Vol. II (Mercantile System). ELY, R. T. Evolution of Industrial Society, Part I, Chap. III. LUBBOCK, SIR JOHN. Prehistoric Times, Chap. I. MORGAN, L. H. Ancient Society, Chap. I. PRICE, L. L. A Short History of English Commerce and Industry, Chaps. I to VIII. PRICE, W. H. English Patents of Monopoly. RATZEL, F. History of Mankind (trans, by A. J. Butler), 3 vols. SCHMOLLER, G. The Mercantile System (Economic Classics, edited by W. J. Ashley). SEEBOHM, F. The English Village Community. STANLEY, H. M. In Darkest Africa, Vol. I, Chap. XXIII. WALLACE, A. R. Russia (edition of 1905), Chap. VIII. WARNER, T. Landmarks in English Industrial History, Chaps. I to XIV. CHAPTER IV THE EVOLUTION OF ECONOMIC SOCIETY (Continued) The Industrial Revolution. The passage from the handicraft to the industrial stage in England is generally known as the In- dustrial Revolution. It has been objected that this term is mis- leading because the introduction of the modern factory system required many years and was but the working out of conditions that had been long maturing. It is true that the growth in the division of labor, the expansion of commerce, and the technical progress of former ages were necessary preliminaries to the in- dustrial revolution, but there is little danger of overemphasizing the importance or the rapidity of the change. The period from 1770 to 1840, the span of a single life, is, after all, a short period from the standpoint of the historian. Yet the changes of this period swept away the inefficient methods that had been used for centuries, and caused profound modifications in social structure. To understand the nature of this movement, we must review the condition of things before it began. England in 1760. England was at this time largely self-suffic- ing in its economic life, producing for itself its food and other articles of ordinary consumption, although compared with medi- aeval days there had been a marked expansion of international and colonial trade. Woolen goods were the most important ex- port. The imports consisted largely of wines, spirits, rice, sugar, coffee, oil, and furs, and some wool, hemp, silk, and linen yarn. Within the nation, too, there was not such a degree of specializa- tion of industry in particular localities as is found at the present day, although the beginning of such localization had clearly been made in the textile and iron industries. On the whole, however, the commerce between the different sections of the country was 42 THE EVOLUTION OF ECONOMIC SOCIETY 43 slight. The means of transportation were exceedingly poor, not- withstanding the growth of turnpike roads. The roads were de- scribed by a traveler as "most execrably vile." Such was their condition that pack horses were still a common means of getting goods to market. Rivers were important highways, canal build- ing having barely begun. The system of hand manufacture was still in general operation. Although the workmen under the domestic system were no longer owners of the material upon which they worked, yet the tools they used were their property. The beginnings of certain fea- tures of the factory system, however, are to be seen long before the use of power machinery, for in some cases workmen were em- ployed in large numbers in buildings owned by the employer, who also furnished the mechanical equipment. But to a large extent manufacturing was combined with agriculture, not only in the textile trades, but in other branches also. "At West Bromwich, a chief center of the metal trade, agriculture was still carried on as a subsidiary pursuit by the metal workers." The mediaeval system of common field tillage was extensively used, a large part of the land being still uninclosed. The culti- vation was exceedingly poor, but important experiments tending toward a "new agriculture" were being made in the second quar- ter of the eighteenth century by JethroTull and "Turnip" Town- shend. Of the whole number of farms, approximately one half "were owned and occupied by the various classes of freeholders and copyholders; that is, by land-owning farmers." The mediaeval notion of government was still nominally in force. Detailed and special legislation was supposed to be the means of securing a well-ordered trade, as explained in the preceding chap- ter. But a tremendous revolt had begun against this whole sys- tem of government. This revolt had its religious and political as well as its economic aspect. The same year that Thomas Jeffer- son wrote the Declaration of Independence, asserting that all men are by nature equal, Adam Smith published the Wealth of Nations, the most influential book ever written on economics. "Every individual," said Smith, "is continually exerting himself to find out the most advantageous employment for whatever capital he can command. 44 OUTLINES OF ECONOMICS It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage, naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society. . . . What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every in- dividual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can for him." l The Mechanical Inventions. During the last half of the eight- eenth century the progress of invention was exceptionally rapid. Kay's flying shuttle (1738) had facilitated the weaving process to such an extent that it became difficult to secure enough yarn from the spinners. Hand spinning was improved by Hargreave's "jenny" about 1767; Arkwright, in 1771, made a practical success of roller spinning (a method patented long before), using horse power, and later, water power. Crompton combined these two processes in 1779. After 1785 steam power was applied to cotton spinning, and then it was the weaving process that was felt to be too slow. Cartwright began his experiments in 1784, but the power loom did not come into general use until early in the nine- teenth century. The improvement in the steam engine also made possible great advances in the iron industry, of fundamental importance in an age of machinery. The production of English iron was over sev- enty-five times as great in 1840 as it had been in 1740. The need for better transportation was met by improved roads, by the building of canals (especially 1790 to 1805), and by the development of steam locomotion. The germ of the modern rail- way is seen in the tramways used in the coal mines. Cast iron rails were used as early as 1738. The first tramway to be used for public purposes was chartered in 1801, the cars to be drawn by horse power. Trevithick made a locomotive in 1803 that was of practical use. In 1814 Stephenson constructed a locomotive that could draw a load of thirty tons at the rate of three miles an hour. The Stockton and Darlington road was opened in 1825 with a Stephenson locomotive that made fifteen miles an hour, but two years later the directors of the road considered the advisa- bility of abandoning the use of locomotives. In 1829 the direc- >A. Smith, Wealth of Nations, Book IV, Chap. II. THE EVOLUTION OF ECONOMIC SOCIETY 45 tors of the Liverpool and Manchester Railroad arranged a prize contest to determine the practicability of steam locomotion. The success of Stephenson's "Rocket" in meeting the requirements of the contest demonstrated that the new method of locomotion had come to stay. "A general survey of the growth of new industrial methods in the textile and iron industries marks out three periods of abnormal activity in the evolu- tion of modern industry. The first is 1780-1795, when the fruits of early inventions were ripened by the effective application of steam to the machine industries. The second is 1830 to 1845, when industry, reviving after the European strife, utilized more widely the new inventions, and expanded under the stimulus of steam locomotion. The third is 1856-1866 (circa), when the construction of machinery by machinery became the settled rule of industry." * It is impossible here to review all the lines of progress in inven- tion and discovery. This progress is not confined to mechanical matters, and taken as a whole, undoubtedly has been much more rapid in the nineteenth than in any preceding century. Mr. Alfred Russel Wallace says that " to get any adequate comparison with the nineteenth century we must take, not any preceding century or group of centuries, but rather the whole preceding epoch of human history." A basis for his statement is given by the following comparative lists of great inventions and discoveries. One hesitates to make such a comparison, but it possesses some interest : OF THE NINETEENTH CENTURY OF ALL PRECEDING AGES 1. Railways i. The Mariner's Compass 2. Steamships 2. The Steam Engine 3. Electric Telegraphs 3. The Telescope 4. The Telephone 4. The Barometer and Thermometer 5. Lucifer Matches 5. Printing 6. Gas Illumination 6. Arabic Numerals 7. Electric Lighting 7. Alphabetical Writing 8. Photography 8. Modern Chemistry Founded 9. The Phonograph 9. Electric Science Founded 10. Rontgen Rays 10. Gravitation Established 11. Spectrum Analysis n. Kepler's Laws 12. Anaesthetics 12. The Differential Calculus 13. Antiseptic Surgery 13. The Circulation of the Blood 14. Conservation of Energy 14. Light proved to have Finite Velocity 1 Hobson, Evolution of Modern Capitalism, new edition of 1907, p. 89. 46 OUTLINES OF ECONOMICS OF THE NINETEENTH CENTURY OF ALL PRECEDING AGES 15. Molecular Theory of Gases 15. The Development of Geometry 1 6. Velocity of Light directly measured, and Earth's Ro- tation experimentally shown 17. The Uses of Dust 18. Chemistry, Definite Propor- tions 19. Meteors and the Meteoritic Theory 20. The Glacial Epoch 21. The Antiquity of Man 22. Organic Evolution established 23. Cell Theory and Embryology 24. Germ Theory of Disease, and the Function of the Leuco- cytes. 1 Agricultural Changes. During the Industrial Revolution there were also important changes in agriculture. Bakewell, in the sec- ond half of the eighteenth century, improved the breeds of sheep and cattle. The inclosing of the common fields proceeded with great rapidity, not, as in the sixteenth century, for the purpose of sheep raising, but to permit of more efficient tillage of the soil. Between 1760 and 1850 over seven million acres were inclosed in England. The small land-owning farmer was crowded out, partly because more investment per acre was needed with the new agri- culture, partly because "gentlemen farmers" (men who had made money in other pursuits and took up agriculture because it was fashionable) bought them out, and because the price of land was greatly increased by the desire of wealthy men to build up family estates. To-day practically all English farmers are tenants. The small farmer, who under the domestic system was also frequently a handicraftsman, was thus crushed between the new agriculture and the new industry. "Hitherto the rude implements required for the cultivation of the soil, or the household utensils needed for the comfort of daily life, had been made at home. The farmer, his sons, and his servants in the long winter evenings carved the wooden spoons, the platters, and the beechen bowls, plaited wicker 1 Wallace, The Wonderful Century, pp. 154-155. THE EVOLUTION OF ECONOMIC SOCIETY 47 baskets, fitted handles to the tools, cut willow teeth for rakes and harrows and hardened them in the fire, fashioned ox yokes and forks, twisted willows into the traces of other harness gear. Traveling" carpenters visited farm- houses at rare intervals to perform those parts of work which needed their professional skill. The women plaited the straw for the neck collars, stitched and stuffed sheepskin bags for the cart saddle, wove the straw and hempen stirrups and halters, peeled the rushes for and made the candles. The spinning wheel, the distaff, and the needle were never idle; coarse hand-made cloth and linen supplied all wants; every farmhouse had its brass brewery kettle. . . . All the domestic industries by which cultivators of the soil increased their incomes, or escaped the necessity of .selling their produce, were now supplanted by manufactures." * Effects of the Industrial Revolution. As has already been indi- cated, the Industrial Revolution introduces one of the great stages in the development of man's power over nature. But along with the new opportunities came also new dangers and perplexing problems. (i) The Factory System. The use of expensive machinery and steam power made it impossible for men to carry on their work in their own homes. The factory supplants the home as the typical unit of production. Instead of working by themselves or with a few assistants, men now to a much greater extent than before must congregate in cities, and submit to a new discipline in large groups organized for purposes of production. This brought with it a new division of society into classes. The machine and the workshop, as well as the raw material and the product, are at no stage in the productive process owned by the men who do the manual work. The masses become wage earners. Now, in some industries not one in a hundred can by exceptional ability become an independent employer, and the workman knows that he is a workman for life. So we have now two industrial classes, laborers and capitalists, with a great gulf between them which compara- tively few men can cross, and with interests which often seem irreconcilable. What the ultimate effects of the new system of production will be cannot be stated, but it has been suggested that these changes in external relations are affecting also men's 1 Prothero, quoted by Cunningham, Growth of English Industry and Com- merce, Modern Times, Part II, p. 722. 48 OUTLINES OF ECONOMICS habits of thought. Can we expect the institution of private prop- erty to seem as natural and sacred to those who have nothing to do with the buying and selling of products as to those who engage much in pecuniary transactions? It has been suggested that the feeling that we have a right to the product of our own labor is merely a survival of the era of small-scale hand manufacture. (2) The Expansion of Markets and Industrial Specialization. Along with the new methods of production there has been a change from restricted local markets to national and even world markets. Improved methods of transportation make it possible for different branches of production to be localized in regions where there are special facilities for raw material or power. This implies greater economic interdependence and greater liability to trade fluctua- tions and disturbances. One great advantage of the old slow- going system of manufacture and trade was its regularity. As the area of the market increases, manufacturers find it more difficult to decide what and how much to produce. Trade fluctuations have increased in severity with the growth of large-scale produc- tion. This is due not merely to the changing and enlarging de- mand which cannot be calculated, but also to the fact that manu- facture itself is constantly being disturbed by improvements which cannot be foreseen. It is possible that a still larger scale of manu- facture hereafter will bring steadiness in industry, but whatever the cause of these fluctuations, the effect upon the wage earner is demoralizing. If he were wise enough to save his earnings dur- ing good times, and so have something for hard times, he would not suffer so much. But very few people who live in abundance can do this; how much less those whose condition even in good times is one of meager comfort ! Evils of the Transitional Period. The condition of the English working classes in the latter part of the eighteenth and early nine- teenth centuries was undoubtedly worse than in any other period in the history of the country. It is difficult to say to what extent this was due to the introduction of the factory system. In addi- tion to the new methods of manufacture there were wars, peculiar facts about land ownership, duties, and taxes. There is some evidence that the condition of child workers under the domestic THE EVOLUTION OF ECONOMIC SOCIETY 49 system was often worse than in the factories, their parents prov- ing the hardest taskmasters. "The evils and horrors of the industrial revolution are often vaguely ascribed to the ' transition stage ' brought about by the development of ma- chinery and the consequent ' upheaval.' But the more we look into the matter, the more convinced we become that the factory system and machinery merely took what they found, and that the lines on which the industrial revolution actually worked itself out cannot be explained by the progress of material civilization alone ; rather, the disregard of child-life, the greed of child-labour, and the maladministration of the poor law had, during the eighteenth century, and probably much farther back still, been preparing the human material that was to be so mercilessly exploited." * But whatever the causes, the facts that have been revealed re- garding the conditions in English mines and factories of this period are amazing. The picture includes cruelty to apprenticed chil- dren, excessive hours, and unhealthful conditions of work. The evils were worst in the smaller factories, the owners of which were hard pressed by relentless competition. Outside of the factories, also, those who attempted to continue to work in their homes in the old way suffered from irregular employment and low earn- ings. The distress of the hand-loom weavers affords an illustra- tion. Competition and Laissez-faire. We have seen that Adam Smith advocated liberty. He asserted that every man, if allowed to do as he pleased, would sooner or later do that for which he /as best fitted, and would consequently work where he could get the most wages. Every man would buy what suited him best, and, after some experiment, manufacturers would make what was called for. If one line of work was more profitable than another, more men would go into it and by their competition would bring prices down. If men cheated their customers, the men would go somewhere else, and cheating would not pay. Everywhere men would look out for their own interests and would make the bar- gain that was most advantageous to themselves. This system of balanced self-interests resulting from competition was the best regulator possible, infinitely better, he claimed, than the old-time laws, which only incumbered the development of industry. If 1 Hutchins and Harrison, A History of Factory Legislation, p. 13. E 50 OUTLINES OF ECONOMICS the policy of industrial freedom were adopted, he prophesied a great increase in the national production of wealth. This view gained in favor during the Industrial Revolution. Not that a wholesale repeal of the old laws occurred, such things never happen in England, and are difficult anywhere, but there is a quiet and effective way of changing laws by changing men's ideas regarding them and leaving them unenforced. A law that has been long observed has often to be long dead before people gain the courage to repeal it. So the law requiring seven years' apprenticeship before one could enter certain trades quietly died during the eighteenth century, and when, finally, in the labor troubles early in the nineteenth century, some workmen in desper- ation discovered the old law and prosecuted employers for violat- ing it, the law was first suspended and then repealed, as being plainly ill adapted to the new condition of industry. So, little by little, the old laws were repealed or forgotten, and men were left free to bargain and manufacture as they pleased. This policy of laissez-faire, or letting things drift, was very gen- erally accepted by the economic writers who followed Adam Smith, and was clearly reflected in the parliamentary debates. The uni- versal free play of competition came to be the prevailing ideal in this first phase of the industrial stage. It was in keeping with this spirit that England became a free-trade nation in this period, the last step being taken when the "corn laws" were repealed in 1846, the act going into effect in 1849. The Reaction against the Passive Policy. It may be said that by 1850 the abandonment of mercantilistic ideas was complete in England, but long before this date a new system of legislation was enacted for the purpose of controlling industry. The government could not ignore the actual condition that resulted from competi- tion and the introduction of machinery. We have now to con- sider some of the main lines of development of industrial regula- tion. (i) The Quality of Goods. In repealing the laws for the in- spection of wares it was urged that cheating would not pay and would cure itself. Indeed, it was said that the very inspection of wares by the government was the cause of fraud; for, the govern- THE EVOLUTION OF ECONOMIC SOCIETY 51 ment brand being often put on carelessly, men bought poor goods, because of the brand, which they would have rejected if they had examined them. The abolition of the laws would result in each ex- amining goods for himself, it was asserted. It is hardly necessary to say that these hopes were not realized. Men might be trusted to attend their own interests if they knew enough to do so, but they do not. Who can tell the quality of baking powder, or ground spices, or patent medicines, or many other things that are misrep- resented when offered for sale? For these the ordinary buyer's knowledge is worthless; an expert must be employed. Such has been the experience of the English people and also, more recently, of the people of the United States, and the law now provides for the inspection by government experts of many articles of food. The theory that men will ruin their business prospects if they cheat, and so will be deterred from cheating, has been utterly exploded by this great English experiment. The reputation for honesty is undoubtedly a source of strength to many business houses; but many a man has perpetrated an audacious fraud upon a country for a few years and retired with a fortune when his cheating began to be known. The inspection of goods by the State is a principle now fully recognized, the only question being how far it should be applied. (2) The Protection of Labor. As a result of a series of epi- demics of infectious fevers, public attention was called to the con- dition of the apprenticed children in cotton factories. In 1 796 the Manchester Board of Health reported upon the unhealthful con- ditions under which the children worked, pointing out that "the untimely labour of the night, and the protracted labour of the day, with respect to children, not only tends to diminish future expectations as to the general sum of life and industry, by impair- ing the strength and destroying the vital stamina of the rising gen- eration, but it too often gives encouragement to idleness, extrava- gance and profligacy in the parents, who, contrary to the order of nature, subsist by the oppression of their offspring." In 1802 the first factory act was passed to protect the health and morals of pauper children in cotton factories. The apprentices were not to vrork more than twelve hours by day, and after 1804 not at all by 52 OUTLINES OF ECONOMICS night, but the law was not effectively administered. After much agitation, in which Robert Owen took a prominent part, a second step was taken in 1819. The act prohibited children under nine years from working in cotton mills, and no person under sixteen was to be employed more than twelve hours per day. As with the act of 1802, the enforcement of the law was left to the justices of the peace. In 1833 regulations as to conditions of work for chil- dren and young persons were made for all textile factories, and special inspectors were provided to enforce the law. In the fol- lowing years the controversy concerning labor legislation was vio- lent and bitter. After a report by a committee revealing shameful conditions in the mines, an act was passed in 1842 prohibiting the employment of women and children underground. In 1844 wo- men were included in the protective factory legislation and the half-time system for children was enacted. The Ten Hours' Act of 1847 limited the working day to ten hours. Subsequently, pro- tective legislation was made to cover industrial establishments gen- erally. These various laws were consolidated in 1878, and again in 1901. Laws now in force provide for (i) the fencing in of dangerous machinery; (2) sanitation in factories; (3) a minimum age and schooling for children at work; (4) limitation of the hours of work for women and children. There is no direct regulation of the hours of adult male workers, nor of the wages of any class of workers. Another important line of legislation that has been made neces- sary by the extensive use of machinery deals with the liability of employers in cases of accidents to their workmen. Under the common law a workman was entitled to receive damages when injured as a result of the negligence of his employers, but he was supposed to assume the ordinary risks of the business. When the injury was caused by the workman's own negligence or by the negligence of a fellow- workman, the employer was not respon- sible. The Employers' Liability Act of 1880 gave the workman a right to compensation also in certain cases where the injury was caused by the negligence of other employees, but in 1897, by the Workmen's Compensation Act, a radical departure was made from previous legislation. The employer is now liable to pay damages THE EVOLUTION OF ECONOMIC SOCIETY 53 even when there has been no negligence on his own part, and even when the accident has been due to the neglect of the injured work- man himself, except only in cases of "serious and willful miscon- duct." This principle now applies also to agriculture, shipping, and mercantile and domestic employments, and certain trade dis- eases have been made to count as accidents. (3) Labor Organizations. Modifications in the working of free competition have also been effected by the voluntary organi- zation of the worker, not only by their influence upon legislation, but also by direct dealings with employers. We have noticed the gilds, which played a large part in the history of the middle ages. These, however, were not like modern trades unions. They were unions of men who worked, but not exclusively of wage earners, nor in the interests of wage earners even chiefly. They were formed of masters. But combinations of the wage-earning classes are found long before the Industrial Revolution. They do not become prominent, however, until the nineteenth century. Laws prohibiting the combination of laborers had been passed at inter- vals since the middle ages, and in 1800 Parliament, finding that unions were increasing, passed a most comprehensive law to sup- press them, declaring illegal "all agreements between journeymen and workmen for obtaining advances of wages, reductions of hours of labor, or any other changes in the conditions of work." Under this law many workmen were prosecuted and severely punished, but in vain. In 1824 Parliament confessed the law a mistake, and repealed it along with previous laws relating to combinations of workmen. Trades unions thus tolerated grew at an astonish- ing rate, but they were still subject to legal persecution. Judicial decisions, especially, were adverse to them, as the courts regarded them as agreements in restraint of trade. But in 1871 a law was passed which declared that the purposes and actions of trades unions were not to be deemed unlawful as being in the restraint of trade, and in 1875 the legality of trades unions was still further recognized by the provision that acts which were not punishable as crimes when done by one person should not be indictable as conspiracy when done by two or more in furtherance of trade dis- pute, and finally, in 1906, the courts were forbidden to entertain 54 OUTLINES OF ECONOMICS actions for damages against trades unions. In this same year peaceful picketing was legalized. (4) The Extension of Government Enterprise. The reaction against a laissez-faire policy is further shown by a growth in the sphere of industry directly managed by the government. We find municipalities operating street railways and furnishing water, gas, and electric light. Municipal enterprise includes also in various places markets, docks, dwellings, baths, race courses, oyster fish- eries, slaughterhouses, milk depots, employment bureaus, sewage farms, theaters, and many other lines of activity. Again, the na- tional government conducts the postal savings banks, the parcels post, and the telegraph and telephone systems. Summary. In this chapter a brief- sketch has been given of England's attempt to deal with a new set of forces. An immense increase in production has taken place, due in part to competition, more to machinery. But the distribution of this wealth, growing directly out of the principles of competition so long as they were unrestrictedly applied, was such that poverty grew rapidly, and some said even faster than wealth, and the laboring population of the realm sank into deeper distress and degradation. The par- tial benevolence of employers, which would fain have mitigated this disaster, was, as a rule, neither welcomed nor tolerated by the competition which had made itself law. Not until this benevo- lence was formulated, generalized, and enforced by disinterested legislation was the horror of the situation diminished. When we hear the principle of "a fair field and no favor" and "no State intervention" advocated by a man strong in the consciousness of personal advantages, we must remember that he is a century be- hind his time, and that he has not read or has not profited by one of the most dolorous chapters in human history. The English nation, after a trial of free competition and no interference, as thorough as could well be made, has undeniably returned to the principle of governmental activity which she had abandoned, a principle which recognizes as the function of the State the protection of the citizens, and the furtherance of their material and social well-being, by every law and every activity which offers a reasona- ble guarantee of contributing to that end. It is to be noticed fur- THE EVOLUTION OF ECONOMIC SOCIETY 55 thermore that, as a matter of fact, all this activity of the State con- tributing to material and social well-being has also increased free- dom as a positive, constructive force. It has promoted the growth of individual powers and enlarged the scope of activity of the average citizen. It has not tended to slavery, as Herbert Spencer long ago maintained, but its tendency has been in the direction of the sort of liberty that is really worth while ; namely, liberty as a power of development and of contributing (in the words of the philosopher T. H. Green) to the "common good." QUESTIONS AND EXERCISES 1. What is the origin of the terra " laissez-faire " ? 2. What laws are in force in your state regarding the inspection of food and other articles offered for sale? 3. Give a detailed account of the development of one of the great inven- tions. 4. Give a sketch of the enactment and repeal of the "corn laws." 5. Give an account of the development of monopolies and trusts in Eng- land. REFERENCES BEARD, C. The Industrial Revolution. CHEYNEY, E. P. Industrial and Social History of England, Chaps. VIII and IX. CUNNINGHAM, W. Growth of English Industry and Commerce, Modern Times, Part II. Laissez-Faire. HOBSON, J. A. Evolution of Modern Capitalism, Chaps. Ill and IV. HOWE, F. C. " Municipal Ownership in Great Britain," Bulletin of the United States Bureau of Labor, January, 1906. HUTCHINS and HARRISON, A. A History of Factory Legislation, Chap. II. PRICE, L. L. Short History of English Commerce and Industry, Chaps. IX andX. TAYLOR, H. C. " The Decline of Land-owning Farmers in England," Bulletin of the University of Wisconsin, Economics and Political Science Series, No. 142. TOYNBEE, A. The Industrial Revolution. VEBLEN, T. B. The Theory of Business Enterprise, Chap. IV. CHAPTER V THE ECONOMIC DEVELOPMENT OF THE UNITED STATES THE economic development of the United States has in some respects been very unlike the economic development of England, and yet very like it in other respects. Let us note in the first place the points of difference, the factors and characteristics of our eco- nomic history which are peculiarly American. Economic Stages in American Industrial History. The transit of civilization from Europe to America, as an American historian 1 has finely phrased it, thrust the European laws, customs, and in- dustrial technique of the seventeenth century into the primitive environment of a wilderness, and for the moment the wilderness dominated. Industry was forced to begin at the beginning and retrace as the child is said to retrace the mental development of mankind the industrial evolution of the race. The American people have thus, during the comparatively brief historical period which has elapsed since the settlement of this country, run the whole gamut of industrial evolution, passing through with striking rapidity all the stages differentiated in the preceding chapters. There was slaughter of captives in the In- dian wars, enslavement of Indians, particularly but not only in the Spanish colonies, later the introduction of negro slavery and modified serfdom in the bond or indented servants, then the individual wage contract, still supreme among agricultural laborers, and finally, collective bargaining through the great trades unions of the present generations. In a similar way, practically all the stages differentiated in the table given on page 40 may be traced in the industrial evolution of the United States. 1 Edward Eggleston, Transit of Civilization, New York, 1900. 56 ECONOMIC DEVELOPMENT OF THE UNITED STATES 57 Naturally it is not to be supposed that American industrial so- ciety worked its own way unaided through all those economic stages which the race, with "painful steps and slow," has labori- ously traversed in its upward march. Stimulated by European culture, we hurried through the earlier stages, for the most part, retracing them merely as an incident of frontier conditions, and skipping some such as the pastoral stage in many sections of the country. On the other hand, it must not be inferred that we have everywhere passed beyond the so-called primitive stages. Barter is still the commonest mode of exchange in some parts of the country, and there are comparatively few rural dis- tricts in which credit transactions have in the main taken the place of money transactions. It is interesting to observe that, owing to the progressive Western movement of the population of the country, the stages in the history of man's productive efforts appeared in regular order from West to East. Thus, a few years ago, the country of the frontier was occupied by hunters and trappers; next were great stretches of country almost entirely de- voted to grazing; farther east, agriculture predominated; trade and commerce were active, especially in the country east of the Mississippi; manufacture on a large scale was prominent in the North Atlantic and North Central groups of states; while finally the large industrial combinations which mark the latest step in development were confined (with respect to legal residence at least) to the Atlantic seaboard. Sectionalism. This phenomenon of the contemporaneous ex- istence of several industrial stages, side by side, under the same gov- ernment, has laid upon this country some of the hardest problems which it has had to solve. The ever present but ever reced- ing frontier has continually created a set of interests antagonis- tic to those of the settled industrial and commercial communities. Shays's Rebellion in 1786 was in part a protest of the more thinly settled debtor communities against the determination of the commercial centers to introduce the sound currency which a developed commerce requires. The federal Constitution was adopted and the present government created in order, largely, to strengthen national credit, insure taxation, remove trade 58 OUTLINES OF ECONOMICS barriers, and provide a sound currency; and the opposition to the ratification of the Constitution came largely from those agricul- tural and thinly settled communities that wanted to keep paper money, evade debt payment, and resist the collection of taxes. During the earlier history of the country wildcat banking and in- flated currency regularly followed in the wake of the frontier. Tariff legislation, with its different appeal to the agricultural and industrial sections of the country, has been another prolific source of territorial conflict. After the War of 1812, the manu- facturing centers of the North redoubled their efforts for protec- tion. This was strenuously resisted by the South, where manu- factures had practically gained no hold, and the struggle of the sections over the tariff led to Nullification in South Carolina and the acceptance by the South of the doctrine of secession. The Civil War itself was largely a sectional quarrel growing out of ceaseless friction between a section which had reached the indus- trial stage and a condition of free-wage contract with a section which had been held in the agricultural stage by the retention of slavery. As a late illustration of sectional conflict arising from the natural clash of districts in different stages of economic devel- opment, we have the free-silver campaign of 1896, when the min- ing, agricultural, and debtor communities of the West and South arrayed themselves against the industrial and creditor communi- ties of the East and North. The typical political struggles of the past have been territorial and sectional; now that the frontier has disappeared, the typical political struggles of the future will take the form, possibly, of class against class. Characteristics of the American People. Although the frontier has disappeared, the pioneer work of "winning a continent from nature and subduing it to the uses of man" has left an indelible impress upon the American character. In the beginning the dan- gers and hardships of the frontier acted as a powerful selective force in determining the character of our earlier immigrants, giv- ing us an unusually restless, mobile, and enterprising people. The process of settlement which followed merely emphasized these qualities and added others of a kindred nature. The primitive settler, following the trapper and the trader into the wilderness, ECONOMIC DEVELOPMENT OF THE UNITED STATES 59 was forced to depend upon himself for protection and subsistence; he expected little aid from the government, was unused to the restraints of law, and a little contemptuous of its possibilities, either for good or for evil. The process of settlement, then, merely con- firmed the American in that excessive individualism which has made him independent and resourceful, to be sure, but partial to the spoils system, tolerant of lynch law and labor violence, indif- ferent to waste and weakness in the administration of his govern- ment. At the same time the great natural wealth of our land and the ease with which it could be secured from the government have taught our people, particularly in the West, to regard nature rather than thrift as the source of wealth, to exploit rather than create, to work and study as we farm extensively. As a people, we are optimistic but careless, generous but wasteful, buoyant but boast- ful. Industrially, we have risen to our exceptional opportunities with spirit, playing the commercial game at times with excessive energy and devotion; but we have come to emphasize quantity rather than quality, product rather than finish. We "lead the world" in the use of labor-saving machinery, but depend largely upon Europe for our skilled artisans. Growth of Population. The mere growth of the American peo- ple has been as striking as it is familiar. In 1640 there were about 25,000 persons, excluding Indians, in British North America; about 260,000 at the end of the seventeenth century according to Bancroft; according to the same authority the million mark was reached in 1743; and in 1790 the first federal census showed a population of 3,929,214 in the United States alone. In the next hundred years the population doubled every twenty-five years on an average, and although the rate of increase has fallen off some- what since the Civil War, we are still growing at a marvelous pace, the population of continental United States being estimated at 82,574,195 in ^QS- Despite this enormous increase, there has been at no time any evidence that the population of this country was multiplying more rapidly than the means of subsistence. Wages and incomes in general have risen, not without interruption, but with compara- 60 OUTLINES OF ECONOMICS tive steadiness, over long periods; and the dismal predictions of overpopulation which were so common in the first half of the nine- teenth century have been signally discredited as practical propo- sitions applicable to the American people of this epoch. The exploitation of national wealth, the perfection of business organi- zation, and the invention of labor-saving machinery have more than kept pace with the population; and it has been discovered that over long periods prosperity and high wages tend to depress rather than to raise the birth rate, even of the wage-earning popu- lation. We are in no danger of a " devastating torrent of chil- dren." On the contrary, the real problem of the twentieth century, or at least the problem that has evoked the greatest discussion, is found in the steady decline of the birth rate. According to some of the most eminent authorities, the race is dying at the top, the ablest and most successful people have the smallest families; and this constant sterilization of the ablest stock of the race is, in the opinion of such authorities, second in importance to no problem which Western civilization is called upon to solve. It is not that we want more people. Population is still increasing with suffi- cient rapidity. The problem lies in the apparent failure of the most efficient individuals to multiply as rapidly as certain classes of the less efficient. Other authorities, it should be added, main- tain that this "race suicide" has been going on for centuries, that it has not in the past, and will not in the future, lower the vitality or general efficiency of the race. Such writers view with compla- cency the ceaseless sterilization of the upper classes, maintaining that the process stimulates the ambition of the abler members of the lower classes by creating room at the top, and that so long as the habits and ideals of the upper classes remain wholesome, there is no cause for regret that the individuals who compose these classes are not self-perpetuating. Social heredity, not personal heredity, the preservation of sound morals, wholesome customs, and habits of social helpfulness, together with the opening up of new opportunities, are the important factors. Second only in importance to "race suicide," and intimately connected with it, is the problem created by the rush to the city. ECONOMIC DEVELOPMENT OF THE UNITED STATES 6l In 1790 about 33 Americans in every thousand lived in a city of 8000 inhabitants or more, in 1900 more than 33 in every hundred lived in a city of this size. The mere facts in this connection are familiar to every one and need no elaboration. Their importance lies in the fact that the rush to the city is apparently universal, that it has been going on for centuries, and that it indefinitely com- plicates and aggravates the social, industrial, and political prob- lems of our time. "Race suicide," for example, is more attribu- table to social conditions created by city life than to any physical incapacity of the women of this generation to bear children; the evils commonly charged to the factory system are due as much to city crowding as to the factory system itself; and, speaking gen- erally, whatever plan of reform for existing evils we devise or champion, we must reckon with this deep-rooted and persistent force which draws to the city so much of the best talent and abil- ity which the rural districts produce. Slavery and the Negro Problem. From the earliest period of settlement, one of our fundamental industrial problems has been to get enough labor to exploit the great national wealth of the country. The first solution attempted was by importing bonds- men or indentured servants. "Nearly all the immigrants that came (to Virginia) between 1620 and 1650 were bondsmen," and in 1680 an English official estimated that about 10,000 persons were kidnaped or "spirited away" to America every year. This class of indentured servants consisted of runaway apprentices, penniless debtors, kidnaped children, honest laborers, vagrants, and criminals of all kinds. They were sometimes subject to the most inhuman treatment, but, because they had white skins, soon melted into the free population and never created a race problem. The first negro slave landed in Virginia in 1619. For about thirty years they did not increase very rapidly, but after that, and until the close of the eighteenth century, they multiplied with greater rapidity than the white population. In 1790 there were 750,208 negroes or persons of negro descent in this country, con- stituting 19.3 percent of the population. Since 1790 the negro population has steadily declined in relative importance, and in 1900, numbering 8,840,789 in all, it constituted only n.6 percent 62 OUTLINES OF ECONOMICS of the general population. The relative decline of the negro popu- lation is probably not due to white immigration, since the natural growth of the white population is markedly greater than that of the negroes in the South, where white immigration has been un- important. The negro problem to-day, in so far as it is an economic as dis- tinguished from a political or social problem, arises from the tend- ency of the negroes to concentrate in the cities and in a narrow district of the cotton-growing states known as the black belt; from their shiftlessness, their ignorance, their dependence upon credit advances in the farming districts, and their alarming con- centration in a few occupations, some of which particularly as they practice them are neither educational, uplifting, nor devel- opmental. In 1900, for instance, 63 per cent of the male and 90 per cent of the female negro breadwinners were employed in un- skilled trades, and the proportion confined to the unskilled trades shows no signs of diminishing. This condition of affairs is due in some degree to the economic inertia and shiftlessness of the negroes themselves, but it is also due in part to the race preju- dice of their white brethren, which, unfortunately, shows no abate- ment with the passage of time. The trades unions, for instance, evince a growing disinclination to receive negroes as members on the same status as white workingmen. Vigorous efforts are now being made in the South to provide industrial training of a sys- tematic kind for the negroes, and in the future the rather men- acing movement of the present day may be checked or wholly reversed. Immigration. Next in importance to the negro question is the problem of immigration. We have always had an immigra- tion problem. "Governor Thomas Dongan, in 1685, made a re- port to the King of England full of dreadful forebodings as to the future of the 'Royal Province' of New England unless the tend- ency to overcrowding were promptly checked. . . . George Wash- ington and Thomas Jefferson are both recorded as opponents of an unrestricted policy of immigration, and it may be safely asserted that no considerable period has elapsed since their day without producing eloquent and forceful advocates of a rigid restrictive ECONOMIC DEVELOPMENT OF THE UNITED STATES 63 immigration policy." 1 Owing, however, to the extraordinary in- crease of immigrants in recent years the number rose from 223,299 in 1898 to 1,285,349 in 1907 unusual interest in the subject has been aroused, the restrictive features of our law have been repeatedly strengthened, and a commission has been ap- pointed by Congress to investigate the subject. Most of the alarm which has recently been expressed, however, is due to the change in character, rather than the increase in vol- ume, of our immigration. Instructive statistics bearing upon this point are given in Table I on the following page. From this table it appears that until nearly the last decade of the nineteenth century, most of the immigrants came from the United Kingdom, Germany, and northwestern Europe, while since that time the arrivals have been largely from southern Europe; and it is charged that the new immigrants are more illiterate, more given to crime, of poorer physique, and possessed of less property than the earlier immigrants. "These people," it has been said, "have no history behind them which is of a nature to give encouragement. They have none of the inherited instincts and tendencies which made it comparatively easy to deal with the immigration of the earlier time. They are beaten men from beaten races, representing the worst failures in the struggle for existence. Centuries are against them, as centuries were on the side of those who formerly came to us." 2 There can be no doubt about the real gravity of the problem. In times past charitable associations, and even certain foreign gov- ernments, "assisted" the poorest and neediest of their citizens to migrate to this country; famine and revolution in Europe spurred the impecunious and the radical to take refuge among us; regu- larly, also, the tide of immigration has ebbed and risen in close correspondence with the business prosperity of this country, arti- ficially swelling our laboring population in times of industrial ac- tivity, encouraging our industrial managers in their spasmodic, jerky methods of production, and thus augmenting the severity of 1 Commissioner of Immigration, Robert Watchorn, in The Outlook, Vol. 87, p. 900. * Walker, Discussions in Economics and Statistics, " Restriction of Immigra- tion," p. 447. OUTLINES OF ECONOMICS our alternating periods of industrial depression. Moreover, in certain industries the immigrant with his relatively low standard of living has driven out the native workman; and most of the immi- grants have shown an unfortunate tendency to linger in the cities of the eastern seaboard, swarming in the slums and intensifying all those social evils which have their origin in urban congestion. In the light of history, on the other hand, the immigration prob- lem is far less alarming than it is in the dry light of recent statistics. In the first place, the statistics themselves, as ordinarily published, TABLE I TOTAL NUMBER OF IMMIGRANTS (IN THOUSANDS) AND PROPORTION COMING FROM DESIGNATED COUNTRIES BY SPECIFIED PERIODS : 1821-1906.' 1821 1851 1861 1871 1881 1891 1901 1850 1860 1870 1880 1890 1900 1906 Total Number, ooo omitted 241:6 2?o8 2TIC. 2812 C247 3844 4074 Per cent Germany 24. 2 36.6 34.0 2?. 6 27.7 14.1 4.7 Great Britain I .O 16.1 26.2 IQ. <; 115.4 8.0 e.4 Ireland 42.3 1C. 2 18.8 ic.e 12.1; IO.S 4.4 Norway, Sweden, and Denmark 0.7 0.9 5-4 8.6 12-5 9-9 7.0 Total 82.2 89.0 84.4 69.2 68.1 43-4 21. 1 Austria Hungary . . O 4. 2.6 6 7 Itrc 24 C. Italy O.2 O.T O.C. 2.O C.Q 17.1 2C..O Russia and Poland. . . . O.I O.I O.2 1.8 S- 15-4 17.7 Total o-3 0.4 I.I 6.4 17.6 48.0 67.2 All other Countries. . . i7-S 10.6 I4-S 24.4 14-3 8.6 II.7 Grand Total IOO. IOO. IOO. IOO. IOO. IOO. IOO. f Data from Adams and Sumner : Labor Problems, p. 73, and the Statistical Abstract, 1006, p. 56. These figures are not exact and not altogether comparable, owing to changes in the immigration year, the distinction of nationalities, and the immigration laws. For the ef- fect of these changes, see Boeckh : The Determination of Racial Stock among American Im- migrants, Publications of the American Statistical Association, December, 1006 ; and Willcox, National Civic Federation Review, November, December, 1906, p. 7. ECONOMIC DEVELOPMENT OF THE UNITED STATES 65 are misleading, because they take no account of the large number of immigrants who return to Europe. In the second place, the importance of the number of immigrants depends largely upon its relation to the population of the country; and relative to the population immigration seems to be declining rather than increas- ing. For instance, immigration reckoned in proportion to the population was heavier in the period 1850-1855 than in the period 1900-1905. In the next place, the attraction of the city for the immigrant has been exaggerated. While a great majority of the immigrants are forced to locate temporarily in our large seaboard cities, the later and more trustworthy studies indicate that the immigrants are less rather than more disposed to remain perma- nently in the cities than our native population, and that the new immigrants show no greater tendency to stagnate in the cities than the earlier immigrants. Finally, it is to be noted that our immi- gration laws regarding the exclusion of diseased, criminal, im- moral, feeble-minded, and indigent persons are constantly becoming stricter and their administration more efficient. In addition to the plainly undesirable classes just noted, Chinese laborers have been excluded since 1882, aliens under contract to take up par- ticular work since 1885, and anarchists since 1903. Surveying the whole history of immigration, three general con- clusions may be drawn which must be fully considered by those engaged in the solution of the present problem. (i) We have, as a people, shown a marvelous ability to assimi- late rapidly people of diverse races, tongues, and religions, amal- gamate them and stamp them with the characteristic qualities of the American. Even at the close of the eighteenth century, about one fifth of the population spoke some other language than Eng- lish as their mother tongue, and probably one half of the popula- tion were of other than Anglo-Saxon blood. The heterogeneous character of the population is illustrated by the fact that nine of the men most prominent in the early history of New York repre- sented as many different nationalities. (2) We have failed, how- ever, to amalgamate the negro and the Chinese; the incidental feature of a dark skin creates especially difficult problems; and it is this fact which makes the suggested exclusion of Japanese 66 OUTLINES OF ECONOMICS laborers worthy of serious consideration. The high qualities of the Japanese, their industry, intelligence, and native refinement make them in many respects the most desirable kind of immi- grants; but it is conceivable that they might come to this country in sufficient numbers to create a problem similar in character and gravity to the negro problem; and if investigation show that there is real probability of such a result, they should be excluded, even though the danger be attributable to race prejudice of the natives rather than the clannishness and exclusiveness of the Japanese themselves. (3) In the main, however, the traditional policy of this country has been "to improve rather than to check immigra- tion," and the burden of proof is upon those persons who would restrict immigration by arbitrarily limiting the number of immi- grants. Natural Resources. Next to the character of the people with which this continent has been stocked, the most powerful factor in shaping the economic development of the United States has been its enormous natural wealth. With a territory (excluding Alaska and our insular possessions) more than three fourths as large as all Europe, indented, particularly on the eastern coast, with a large number of good harbors, intersected by internal water- ways that make communication cheap and easy, endowed with water power that in the opinion of one authority is probably "more valuable than those of all other lands put together," marked by every variety of climate and soil, covered in many places, at least originally, with magnificent forests, and liberally stocked with almost every variety of mineral wealth, it is not surprising that at the present time the United States "leads the world" in the pro- duction of iron and steel, cotton, coal, coffee, gold, silver, dairy products, corn, wheat, lead, lumber, tobacco, petroleum, and hogs. It would be strange, indeed, with the vast mineral and agricultural resources at our command, if we did not "lead the world" in many things. Of the 2,972,584 square miles of territory in continental United States, about three fourths at one time or another has belonged to the central government. The possession of this vast common treas- ure by the United States has played an important part in digni- ECONOMIC DEVELOPMENT OF THE UNITED STATES 67 fying and strengthening the federal government. But the lavish alienation of the public lands in endowing free schools, subsidiz- ing railways, and other internal-improvement companies, and in providing free homes for the landless, has been an even more po- tent factor in hastening our economic development; even though it has led, as has been said with some justification, "to the ravish- ment rather than the development of our natural resources." The public domain and its disposition are discussed at some length in a later chapter, but one aspect of this subject the part which free land has played in our economic development is so vitally important that it requires special notice at this point. While it was not until the passage of the Homestead Act in 1862 that land could be legally acquired without cost by simple occupation and cultivation, it is practically true to say that since the seventeenth century any enterprising citizen, by the exercise of a minimum amount of industry and frugality, could secure a homestead large enough to support himself and family. This op- portunity offered to the artisan a free choice between wage ser- vice and farming, constantly depleted the ranks of mere laborers, operated to keep wages at least as high as the earnings of a " no- rent" homestead, and kept fresh and vigorous that sturdy feeling of independence that has been the distinguishing mark of the American workingman. By 1904, for instance, the national gov- ernment had given away, under the Homestead and Timber Cul- ture Acts, 106,240,464 acres of land; and in addition to this, 278,001,612 acres had been sold at less than cost, that is, at less than the cost of acquisition, management, survey, patenting, and the like. How long the public lands will hold out it is impossible to say. Notwithstanding the fact that the national government is dispos- ing of its lands at the rate of from fifteen to twenty million acres a year, there is still left if we count Alaska almost as much territory as we have alienated since the adoption of the Constitu- tion. Much of this is worthless or unavailable; but irrigation and dry farming are constantly reclaiming large districts formerly re- garded as worthless, and the railways and some of the Western states still possess large quantities of ordinary farming land which, 68 OUTLINES OF ECONOMICS fortunately, they are willing to sell at low prices. All in all, we are tempted to say, there is still enough cheap land to exert in the West that influence upon industry, wages, and the distribution of wealth generally which has come to be the distinguishing mark of the American social economy. But this is a matter of dispute. Fifteen sixteenths of the population reside in the eastern half of the United States, and in the East land has become costly, trade and manufactures taken together have outstripped agricul- ture, and a large majority of the people lack the inclination and necessary training, even if they possessed the courage and energy to avail themselves of the cheap land of the West. Whatever the amount of this cheap land, its importance has diminished and must continue to diminish, as an outlet for the population upon whose economic condition it formerly exerted so salutary an influ- ence. Considering the population as a whole, the conclusion seems irresistible that we have reached, if indeed we have not already passed, the parting of the ways; and the assistance that in the past free land rendered in maintaining wages and restraining the evil tendencies of the modern system of capitalistic production must in the future be secured from other sources. The distinc- tive Americanism of the past was generated, as has been said, in the performance of our national task "of winning a continent from nature and subduing it to the uses of man"; 1 it was a product of the frontier. But the frontier has now disappeared. QUESTIONS 1. What peculiar characteristics mark the economic stages of the United States ? 2. Is the pastoral stage through which the people of our Great Plains have passed essentially different from the pastoral stage through which the people of Israel passed ? 3. Enumerate the great sectional struggles which have disturbed the United States. Why does radicalism accompany the frontier? 4. Has the frontier and the work of settlement left a permanent impress upon the American people? Of what kind? 5. How rapidly is the population increasing at the present time? Are the richer or poorer classes multiplying more rapidly ? Can you state the reason ? 1 Bogart, Economic History of the United States, p. i. ECONOMIC DEVELOPMENT OF THE UNITED STATES 69 6. What are the distinctively economic factors of the negro problem? 7. When did the immigration problem first alarm residents of this country? What charges are directed against the "newer immigrants "? 8. Have we shown an ability to assimilate all kinds of immigrants? What has been the historical policy of this country toward immigration ? 9. What part did the public domain play in bringing about and preserv- ing the Union? in maintaining wages? 10. How does the growing size of the country modify the influence exerted by free land ? REFERENCES BOGART, E. L. Economic History of the United Stales. Contains bibli- ography. BRUCE, P. A. Economic History of Virginia. COMAN, KATHERINE. The Industrial History of the United States. Con- tains bibliography. COMMONS, J. R. Races and Immigrants in America. ELY, R. T. Studies in t)ie Evolution of Industrial Society. EMERY, H. C. " Economic Development of the United States," in The Cambridge Modern History, Vol. 7, Chap. XXII. LIBBY, O. G. " The Geographical Distribution of the Vote of the Thirteen States on the Federal Constitution," 1787-1788, Bulletin of the Uni- versity of Wisconsin, Economics, Political Science, and History Series, Vol. i, No. i. McMASTER, J. B. A History of the People of the United States. McVEY, F. L. Modern Industrialism, Part I, Chap. III. SEMPLE, ELLEN C. American History and its Geographical Conditions. SHALER, N. S., Ed. The United States of America. TURNER, F. J. " The Significance of the Frontier in American History." Fifth Yearbook of the National Herbart Society. First edition in Report of the American Historical Association, 1893, pp. 197-227. WEEDEN, W. B. Economic and Social History of New England. CHAPTER VI THE ECONOMIC DEVELOPMENT OF THE UNITED STATES (Continued) IN the preceding chapter attention was confined to certain fun- damental and peculiarly American conditions which have influ- enced the economic development of this country. They form the background and setting of the picture. When we come to fill in the details, however, the general effect is very similar to that pro- duced by the description of English industrial development given in Chapter IV. There are differences, of course, differences important enough to make this separate discussion of American economic evolution necessary. But, on the whole, it is surpris- ing how rapidly we have developed the industrial maladies and economic problems of the old world. Mercantilism in America. In the American colonies, as in England itself, the Industrial Revolution was preceded by a period in which trade and industry were subject to minute regulation by the government. Bounties were freely offered in several colonies for the manufacture of leather, iron, paper, silk, and cloth; land grants were made and taxes remitted particularly in the support of the iron industry; and in order to encourage the home manu- facture of shoes, for instance, the General Court of Massachusetts in 1640 commanded that every hide "be sent to a tannery under penalty of a, 12 fine," while "leather searchers" were appointed to see that the law was obeyed. This early colonial regulation was restrictive as well as protec- tive. In the New England colonies, in the seventeenth century, laws were repeatedly passed prohibiting idleness, fixing the hours of labor, and prescribing rates of wages, with appropriate penal- ties for workmen who took or employers who paid more than the 70 ECONOMIC DEVELOPMENT OF THE UNITED STATES 71 legal rate. In the Boston Town Records of 1635, for instance, we find this resolution: " That Mr. William Hutchinson, Mr. Wil- liam Colborne and Mr. William Brenton shall sett pryces upon all cattel, comodities, victuals and labourers and Workmen's W 7 ages and that noe other prises or rates shalbe given or taken." * But the restrictive laws, in general, failed dismally. The abundance of cheap land and the independent spirit generated by the pioneer life prevented the enforcement of obnoxious colonial laws, and eventually led the colonists into armed resistance against the re- strictive legislation of the English government. English Colonial Policy and the Navigation Acts. In accord- ance with mercantilist views of colonial relationships, English statesmen of this period looked upon a colony as a community which was to supply raw materials for the industries of the mother country, secure its manufactured goods from the mother country, and so far as trade with the rest of the world was concerned, buy and sell through the mother country. In accordance with this general policy, England gave bounties for the production in America of raw materials such as flax, indigo, naval stores, barrel staves, and the like, but restricted manufacturing proper by prohibiting, for instance, the erection of mills for slitting or rolling iron, and furnaces for making steel and fettered our commerce in a variety of ways. It is unnecessary to enter into the details of this conflict, which is familiar to every student of American his- tory. The English laws were not so severe as might be inferred from our brief statement of their nature and purpose; they were laxly enforced; and it is to be remembered that England encour- aged some industries while she attempted to destroy others. Eng- lish colonial policy of this period was not so much malicious as mistaken. The important points for us are these: that it did not seriously hamper the development of American industry in gen- eral, while it did strengthen and stimulate in the American peo- ple that spirit of individualism which the industrial opportunities of the new world and the frontier conditions of the time combined to create. As a consequence the new nation, created in 1789, was 1 Governor Winthrop's Journal, printed at Hartford, 1790, p. 188; reprint of 1853, PP- 377-38i- 72 OUTLINES OF ECONOMICS pledged to the doctrine of individual liberty, and its constitution contained specific guarantees of personal freedom not only in matters political, but in industrial and social relationships as well. American Industries in 1776. When the Revolutionary War broke out, American industry was still in a primitive stage. The extractive industries were, relatively, the most advanced. Large quantities of lumber and timber products were exported to Eu- rope; the fisheries were in a prosperous condition; and shipbuild- ing had reached a really remarkable stage of development, in 1775 "nearly one third of the tonnage afloat under the British flag had been built in American dockyards." Agriculture, how- ever, was carried on in the most wasteful and unscientific way, owing to the cheapness and fertility of the soil; and manufacturing was still in the household stage. In the Middle and New England Colonies spinning and weaving, the manufacture of shoes and food products, were carried on within the home; and, in fact, the typi- cal farm household of this period constituted almost an independ- ent economic unit, raising or making what its occupants consumed, and buying little save salt and a few necessary iron implements. Of manufacturing for sale and export, however, there was little worth mention. The absence of adequate means of transport was largely responsible for this state of affairs. The roads were little more than widened Indian trails. Some years later, when con- ditions were considerably improved, the roads were still so poor that " Madison spent a week going from New York to Boston by stage, while the cost of cartage of a cord of wood for a distance of twelve miles was three dollars." Agriculture, however, was the dominant industry of the country. In 1787 less than one eighth of the working population was engaged in manufactures, fishing, navigation, and trade combined. The Industrial Revolution in America. The Industrial Revo- lution was sudden, and in its consequences momentous in America as well as in England. The Revolutionary War, by interrupting trade with Europe, threw the American people upon their own resources: goods that had hitherto been imported had now to be manufactured at home; a large number of new industries sprang up rapidly; and the idea became prevalent that the new nation ECONOMIC DEVELOPMENT OF THE UNITED STATES 73 must make itself industrially as well as politically independent of the old world. The state governments endeavored to foster the new industries by protective tariffs, and this policy was later con- tinued, in a moderate form, by the federal tariff act of July 4, 1789. Prizes were offered by various societies, and even by cer- tain state governments, for the introduction of the new machines and methods which were revolutionizing industry in England. Attracted by one of these offers, Samuel Slater, "the father of American manufactures," who had been apprenticed to a manu- facturer of cotton machinery, and was particularly familiar with Arkwright's machines and processes, came to this country in 1 789, and in the following year started the first cotton factory at Paw- tucket, Rhode Island. The factory system secured its first real foothold, however, be- tween 1806 and 1815, when the Non-Intercourse Acts, the Em- bargo, and the War of 1812, by suppressing trade with Europe, forced the American people to do their own manufacturing, and turned large amounts of capital, which had previously been em- ployed in trade and shipping, into manufactures. The growth during this period of isolation was extraordinary. In 1804 only four cotton mills were in operation. "In 1807 there were fifteen cotton mills running 8000 spindles and producing 300,000 pounds of cotton yarn annually. In 1811 there were eighty-seven mills operating 80,000 spindles, producing 2,880,000 pounds of yarn per year and employing 4000 men, women, and children. In 1815 500,000 spindles gave employment to 76,000 persons, with a pay- roll of $15,000,000 per year." l It is hardly necessary to add that when resumption of peace with Great Britain opened the new American industries to the fierce competition of the older English manufacturers, increased protection was granted in the tariff acts of 1816, 1824, and 1828. A little later, in the Middle Atlantic and New England states, the period of factory production had fully arrived. A separate class of wage earners was appearing, who were especially appealed to by new arguments concerning wages in the tariff discussions; workingmen's parties were organized; strikes and trades unions multiplied, and the latter were combined 1 Coman, Industrial History of the United States, p. 181. 74 OUTLINES OF ECONOMICS into municipal and state federations; in the thirties and forties radical reformers linked the "white slaves" of the North with the negro slaves of the South and worked for the abolition of both "wage and chattel slavery"; the factory town and the city slum became recognized economic conditions, and the dangers of the latter were multiplied by the heavy immigration after 1845. By the middle of the nineteenth century the Industrial Revolution was in full sway, and the economic triumph of modern capitalism was assured. As might be supposed, the Industrial Revolution produced far less suffering and want in the United States than in England. The evils attributable to the Industrial Revolution in England were of two kinds. One arose from the rapidity and magnitude of the industrial change itself; the other was due, not to the change, but to the system under which the new industry was conducted the system of capitalistic industry working in a regime of practi- cally unregulated competition. In our country the evils resulting from transition alone were slight. Our manufacturing industries were scarcely started when the spinning jenny, the power loom, and the steam engine were introduced, and so almost from the beginning the factory system seemed the natural one. Thus, the change which in England was a revolution was in America an evolution, a process of construction with little destruction. And for a time even those evils inherent in the system itself were miti- gated and disguised by the immense natural wealth of this country, the ease with which land could be obtained, and the unusual mo- bility of our working people, which permitted them to take quick advantage of the unusual opportunities open to them. But, as will appear in the following pages, these ameliorating agencies served only to check and delay, not to destroy, the evil possibilities of the new industrial system. As free land has be- come less and less abundant, the wage earners of the East have had forced upon them conditions of life which have kept down, although they have not absolutely lowered, their standard of life. Extremes of wealth and alienation of social classes have become so great as to arouse the apprehension of all thoughtful men. Labor riots that call for military interference testify to the fact ECONOMIC DEVELOPMENT OF THE UNITED STATES 75 that we have not escaped, that in the future we can hope less and less to escape, the friction that accompanies all unfraternal re- lations among men. We have been greatly blest in that we have escaped the worst results so long. The Development of Agriculture. The presence and power of those economic forces which softened the asperities of the new industrial system in America are revealed in a particularly strik- ing way in the history of American agriculture. In England, it will be remembered, the changes in agriculture intensified the evils of the industrial revolution, led to the consolidation of small farms into large landed estates, and put the actual business of farming largely into the hands of tenants. In the United States, however, practically none of these tendencies has shown itself at least, not in an alarming form. There is a constant migration from the country to the city, to be sure, but this is in no sense due to the consolidation of farms. Thus between 1870 and 1900 the proportion of all breadwinners (persons ten years of age and over gainfully occupied) engaged in agriculture fell from 47.6 to 35.6 per cent. On the other hand, more persons are still employed in agriculture than in any other branch of industry; and owing to the opening up of old Indian reservations for farm settlement, the constant alienation of the public domain, and the breaking up of Southern plantations and "bonanza farms." the number of farms seems to have increased quite as rapidly as the general population. / The great improvement which has taken place in agricultural methods and machinery enables the relatively smaller farm population to satisfy the demand for agricultural produce even more completely than in the past. That is to say, the machine power introduced into farming has more than taken the place of those persons and their descendants who have abandoned agriculture. It has been estimated, for instance, that in 1895 it actually required only about 120,000,000 days' work to produce the nine principal farm crops of that year, whereas, had they been produced by the methods and machinery of 1850, at least 570,000,000 days' work would have been required. 1 1 H. W. Quaintance, "The Influence of Farm Machinery on Production and Labor," Publications of the American Economic Association, Third Series, Vol 5, No. 4, pp. 27-29. 76 OUTLINES OF ECONOMICS Notwithstanding the improvement of farm methods and ma- chinery, the agricultural industry shows no real tendency to assume a capitalistic form. The average farm of to-day is smaller than it was fifty years ago, and although it represents somewhat more capital, the increase of the capital investment is not great, is much less, in fact, than the increase in the wealth of the average individ- ual. Moreover, a majority of American farmers own the farms they cultivate, and the statistics indicate that it is still compara- tively easy for an enterprising farm laborer to rise to the status of tenant and from that condition into the ranks of the farm pro- prietors. 1 Manufactures. In agriculture, as we have seen, the passage of time has not brought about a highly capitalized form of indus- try, the typical farm represents only a small investment and is tilled by its owner, there is no sharp distinction between employees, unions of wage earners are practically unknown, and passage from the wage earning to the employing class is still comparatively easy. In manufactures, practically all these conditions have been reversed since the end of the eighteenth century. And it is the tone of the manufacturing industry rather than that of agriculture which represents the keynote of the modern economic movement, because agriculture is constantly decreasing while manufacturing and allied industries are constantly increasing in relative im- portance. At the beginning of the last decade of the eighteenth century, seven eighths of the working population were employed in agriculture, and the manufactured products of the coun- try were valued at $20,000,0x30. Half a century later, in 1840, 77.5 per cent of the breadwinners were employed in agriculture, 16.5 per cent in trades and manufactures alone, and the products of the manufacturing industries were valued at $483,278,215. Fifty years later, in 1890, 35.7 per cent of the workers were in agriculture, 24.4 per cent in manufacturing and mechanical pursuits, and the manufactured products were valued at 'Tenancy seems to be increasing in the United States, but the authorities differ in their interpretation of the phenomenon, some regarding it as a favorable and' others as an unfavorable sign. This and other questions touched upon in the preceding paragraphs are discussed at greater length in a later chapter. ECONOMIC DEVELOPMENT OF THE UNITED STATES 77 $9,372,437,283. In 1905, to cite the latest figures, the value of the products had reached the enormous sum of $16,866,706,985. The change in the character of the industry has been even more striking than its growth and expansion. In the first place, ma- chinery and capital have become increasingly prominent. In 1850, for instance, $556 worth of capital was invested for each wage earner, while in 1900 the average amount of capital per wage earner was SiSso. 1 In the second place, the organization of the industry has changed, so that the individual owner and ordi- nary partnership are rapidly being replaced by the corporation. At the beginning of the nineteenth century, corporations, though not unknown in commerce and banking, were very uncommon in the manufacturing industries. In 1905, incorporated companies employed 70.6 per cent of the wage earners and manufactured 73.7 per cent of the goods produced in all the manufacturing industries. This change in organization has been a powerful factor in de- stroying the personal relation between the owners of capital and the wage earners who man their plants, and has thus helped to widen the growing breach between capital and labor. It has also con- tributed greatly to the concentration of industrial control. Law and custom in this country have combined to make the small stockholder in the largest corporations a virtual nonentity so far as practical participation in the management of the corporation is concerned; and the individual or clique of "insiders" who own a bare majority of the stock rule the business despotically. Incorporation, then, instead of introducing a greater measure of real industrial cooperation and thus democratizing industry, has too frequently turned out to be an ingenious device by which en- ergetic promoters borrow or secure the spare savings of the com- munity on the most flexible terms and with a minimum of respon- sibility. The corporation thus, while it appeared to be diffusing the ownership of industry, has in reality worked toward the con- centration of industrial control. 1 Owing to variations in the definition of "capital" and other similar changes, the statistical comparisons made in this and the preceding paragraph are not very accurate, and are to be accepted as illustrations rather than measurements. 78 OUTLINES OF ECONOMICS Other forces, moreover, have been working toward industrial concentration, the most powerful of which, perhaps, has been ex- cessive competition. For many decades in this country the unre- stricted competition of rival manufacturers made them almost Ishmaelites in their business relations with one another. Tied down to their large investments of fixed capital, they were com- pelled to stand and fight without quarter. In every such war the number of combatants tends to decrease. As old rivals are killed off, the successful acquire greater skill and greater power in the conflict. With the passage of time greater and greater equipment is required to give any hope of a successful struggle, and some of the contestants, learning prudence from the struggle, combine to increase their fighting power. The inevitable result, whether through simple survival of the fittest or through combi- nation, is a marked increase in the sixe and importance of the in- dustrial unit. Between 1900 and 1905, for instance, the number of establishments in the factory industries increased only 4.2 per cent, but their capital increased 41.3 per cent, and the value of their products 29.7 per cent. In many of our most important in- dustries the number of establishments is actually decreasing. In the manufacture of agricultural implements between 1880 and 1905, to take a single illustration of the many that might be cited, the number of establishments decreased from 1943 to 648, while the capital grew from $62,109,668 to $196,740,700, the wage earn- ers from 39,580 to 47,394, and the value of the products from $68,640,486 to $112,007,344. There are industries, of course, in which no such consolidation has taken place, but they are unim- portant in comparison with those in which it has. The extent to which the giant industry and large-scale production have come to dominate our manufacturing industries in the year 1905 is shown in the following table, which will repay careful study. Es- tablishments of the largest size, i.e. those whose annual output exceeds $1,000,000, constitute less than i per cent of the number of establishments, but manufacture nearly 40 per cent of all the goods. Nearly three fourths of the wage-earners are employed in industries having a capital of more than $ 100,000 each. ECONOMIC DEVELOPMENT OF THE UNITED STATES 79 o o^ U i g! c i>^ 1 z j, Q Jf ^ Ov un M Z vcT IO q % ~j_ vo" o r-. ^ ^ V. n to oo f^ M to O . M O q; M ^- oo 8 to M TJ- O o" n 10 4 t? 4 -T t 06 CO f*5 M O * M O ^. vO to * * v> to U 8 w? X M ' jj- 3 0_ qv Q\ ~- ^~i O H b 1 M 00 rO ON 10 OO t q o~ ^ 00" N cc" 06" vO ro B * 6 ^J. t w CTJ to ^ 6s q M 8 z M to M 8 < X to N ro a H (ft V> in ON -T S 8 * H to 8 0* H P 8 M N M o 10 00 q ro ^ ^ N tC W Tf W *-^ CH ^^ ro * N * OO ^ * OC <^5 ^O 'j ci 1 4 00 W ^- M C4 ^ m I-I M Ov M O "i ^ to O^ *~~ Ox f*5 o * B M "? H i o M f) if' J i/-, 00 i-i H vO o ^ to ^ to t>. o" M ^ oo oo" O --c vo" B - C5 r^ "i 4 o\ t> S ti ^ 4 r^; 1 to 8 < f M 5- CC o" e< M IO * * ^ M <^' IO J vO M s- X Q P4 ^ vO c<; TJ- M *"!. H en tf> vO M M I? VO" M ^ vq M O^ IO o" o 6 10 ^ M M 8 _i *"" to O M 1 M M \0 M | v? M IO !>. f 5 to vO n o" 6\ o> Tt j a 1 vO O n" P 8 ^ O q 8 8 |s I M oo M to W to t 4 W H ' v> 0) i w 'a. ri U bo 3 y i 1 U I 8o OUTLINES OF ECONOMICS Recently the movement toward large-scale industry has taken on another phase. In addition to concentration or centralization of industry, we are now having a rapidly increasing integration of industry. Large business concerns are finding it profitable to carry on under one management several closely related industries. For illustration, take the case of the United States Steel Corpora- tion. Here we have united under one management the American Bridge Company, the American Sheet Steel Company, the Ameri- can Steel Hoop Company, the American Steel and Wire Company, the American Tin Plate Company, the Federal Steel Company, the Lake Superior Consolidated Iron Mines, the National Steel Company, the National Tube Company, and the Carnegie Steel Company. Of the last itself, Mr. Charles M. Schwab says, in his testimony before the Industrial Commission (Vol. XIII, p. 448) : "The Carnegie Company were large miners of ore mined all the ore that they required themselves, to the extent of over 4,000,000 tons per year. They transported a large percentage of it in their own boats over the lakes; they carried a large percent- age of it over their own railroad to their Pittsburg works, and manufactured it there, by the various processes, into a great vari- ety of iron and steel articles I think perhaps a larger general variety of steel articles than almost any other manufacturing con- cern." Transportation and Railways. The industrial concentration of which we have been speaking does not necessarily lessen competi- tion at all. It merely gives the business into the hands of increas- ingly powerful rivals among whom competition may be all the more bitter because of the size of the contestants. But in the principal transportation industries time has amply demonstrated that another rule prevails: competition has utterly failed to pro- tect the consumer, and the progress of consolidation has operated to emphasize and strengthen the inherently monopolistic character of the industry. The history of transportation in this country since the estab- lishment of the Union falls into three stages. The "turnpike period" extends from 1790, the year in which the first turnpike was constructed, until 1816, when steam navigation upon the Ohio ECONOMIC DEVELOPMENT OF THE UNITED STATES 8l River became fairly regular. The second stage, the "river and canal period," ends with the panic of 1837, and is marked particu- larly by the introduction of steam travel on the Hudson (1807), the Ohio, and Mississippi rivers (1808 to 1817) and the opening of the Erie Canal in 1826. The last stage, the "period of the railway," extends from about 1840 to the present time. Of course, in con- trasting these periods, it is not meant to suggest that canals were not built before 1790, or that turnpikes are not important at the present time. As a matter of fact, a canal was built in Orange County, New York, as early as 1750; and there are few economic needs of greater importance at the present time than the improve- ment of our roads. These "periods" merely indicate the kind of transportation facilities which at different times have been most prominent in the minds of the people. In the development of the railway, certain approximately defi- nite stages may also be distinguished. Between 1830 (when the first railway the Baltimore and Ohio was opened for traffic) and 1840, the railways were short, local lines used in large degree to supplement or piece out the rivers and canals. In the next period, 1840 to 1870, many new roads were built, and the process of "linear consolidation" the linking together of local com- panies into through trunk lines began. By 1869 both the New York Central and the Pennsylvania had effected through connec- tions with Chicago. In the same year, the completion of the Cen- tral and Union Pacific railways linked the Pacific Ocean with the eastern railways, and the continent was spanned. The period between 1870 and 1890 is marked by three striking developments. First, it was a period of feverish expansion: the railway mileage of the country increased from 52.000 to 160,000 miles, more than 200 per cent. Secondly, the completion of sev- eral through routes from the Atlantic seaboard to Chicago brought about a period of destructive competition, which led to discrimina- tion and rebating in through traffic and the overcharging of local or non-competitive traffic. "Wherever competition appeared, discrimination followed; and in the scramble for business the stronger shippers were favored at the expense of the weaker. Where there was no competition the public felt that they were 82 OUTLINES OF ECONOMICS being oppressed by a monopoly, to make up for sacrifice rates elsewhere a feeling which was intensified by the absentee own- ership of the western roads." l Thirdly, this condition of demor- alization led to a double reaction. The railways sought to re- strain competition by the creation of pools and traffic agreements, while the people sought to protect themselves through legislation and the creation of railway commissions. The Federal or Inter- state Commerce Commission was established in 1887. The last period, from 1890 to the present time, has been marked by an unprecedented amount of consolidation and combination among competing roads, and by a general acceptance of the truth that the railway industry is inherently monopolistic and must be subjected to public control. Thus, at the same time that the control of the magnificent railway system of this country greater in extent than all the railways of Europe combined has fallen into the hands of seven or eight groups of men or "inter- ests," dominated by a number of men small enough, some one has said, to sit about the same table, the people themselves have per- fected administrative machinery strong enough, it is hoped, to hold the great monopoly in check. Complete monopoly and effect- ive public control are being perfected at the same time, and with this dual consummation there closes a great epoch in eco- nomic thought and public policy. The new Interstate Commerce Act of 1906 is a public recognition of the fact that the old prob- lem of private competition versus public regulation has given way to the new problem of public regulation versus public ownership. It would be almost impossible to exaggerate the part which transportation agencies, and particularly the railways, have played in the economic develop- ment of this country. Ours is a country of "magnificent distances," and because of this fact, it was particularly necessary that superior means of communication and transportation should be early introduced, if the country was to be held together. After the Revolutionary War there was real danger that the settlers west of the Alleghanies would be completely alienated. Washington was quick to realize this fact. "The Western settlers," he wrote to the governor of Virginia, shortly after the Revolutionary War, " stand as it were upon a pivot. The touch of a feather would turn them any way. They have looked down the Mississippi until the Spaniards, very impoliticly, I 1 H. C. Emery in The Cambridge Modern History, Vol. 7, p. 706. ECONOMIC DEVELOPMENT OF THE UNITED STATES 83 think, for themselves, threw difficulties in their way ; and they looked that way for no other reason than because they could glide gently down the stream, without considering, perhaps, the difficulties of the voyage back again, and the time necessary to perform it in ; and because they have no other means of coming to us but by long land transportations and unimproved roads." This danger was averted by the building of the Cumberland Road, the introduction of steam navigation on the Ohio, and the completion of the Erie Canal. Later it looked as if the use of the Mississippi and other natural avenues of communication would link the Middle West more closely to the South than the northeastern states, thus giving the South a preponderant influence in the inevitable struggle over slavery. This problem, however, was solved by the railways, which, unlike the rivers, ran east and west rather than north and south. The railway was thus a strong factor in the preser- vation of the Union. And since the Civil War, Western settlement has fol- lowed the railroad. It has been the great pioneering agency of the last half century, and is entitled to as much credit as the public land policy for the rapid settlement of the West. In the development of our transportation facilities, however, the State has been from the very first an active partner of private enterprise. Not only has the State built roads, canals, and railways of its own, but it subsidized the private companies which engaged in similar enterprises, with prodigal liberality. Of the total state debts $170,806,187 in all contracted prior to 1838, $60,201,551 were chargeable to canals, $42,871,084 to railways, $52,640,000 to banks, $6,618,868 to roads, and $8,474,684 to miscella- neous objects. After the panic of 1837 there was little direct construction by the State of internal improvements, but national, state, and local govern- ments vied with one another in assisting private companies by exemptions from taxation and by grants of land, money, and credit. How much these subsidies amounted to we do not know, but the aggregate must have been enormous, as appears from the statistics of land grants. " During the twenty- one years between 1850 and 1871, at which time land grants were discontin- ued, more than 159,000,000 acres were placed at the disposal of railroad corporations by the federal government and 55,000,000 by the state govern- ments." * In their origin and genesis, therefore, as well as in their essential nature, the railways are quasi-public institutions. The Labor Movement. In the preceding pages we have seen how capitalistic industry under a regime of free competition passed from an earlier period of cut-throat rivalry to a later period of com- bination amounting in many cases to monopoly. A similar phe- nomenon is discernible in the labor movement. At the beginning of the nineteenth century there were probably less than a dozen 1 Cf. Bogart, Economic History of the United States, pp. 195, 308, passim. 84 OUTLINES OF ECONOMICS trades unions in the United States, and we actually know of the existence of only one. Between 1825 and the panic of 1837, how- ever, they multiplied rapidly, and efforts were made to unite the scattered "locals" of separate trades into broader national unions, and to confederate the unions of different trades into municipal and district federations. These efforts were only partially suc- cessful, however, and it was not until after 1850 that permanent national unions were established, and not till the organization of the Knights of Labor in 1869 that a fairly permanent national federation was created. The Knights of Labor reached the zenith of its power about 1886, and since the panic of 1893 its place has been gradually taken by the American Federation of Labor, with which most American unions, except the Railway Brotherhoods and the socialistic unions west of the Mississippi River, are affili- ated. In 1893 tne membership of the American Federation of Labor numbered about 250,000. By 1906 it had grown to ap- proximately 1,444,200. These figures give some idea of the strik- ingly rapid growth of trades unionism in the last fifteen years. As the membership of the American Federation of Labor is usually understated, and as there are probably from 500,000 to 700,000 members in organizations not affiliated with the American Fed- eration, we conclude that the aggregate membership of American labor organizations at the close of the year 1906 amounted to about 2,300,000 persons, mostly men. There are thus at least five periods distinguishable in the history of American trades unionism: the germinal period, 1789-1825; the revolutionary period, 1825-1850, so called because of the close con- nection in this period between trades unionism and more radical reforms such as socialism and cooperation; the period of nation- alization, 1850-1865; the period of federation, 1865-1893; and the period of collective bargaining, 1893 to the present time. We speak of the present epoch as the period of collective bargaining because it is only in recent years that employers and the general public have recognized that the trades union is here to stay, and must be regarded as an irrepressible, permanent institution with which many employers of labor must bargain, whether they like it or not. ECONOMIC DEVELOPMENT OF THE UNITED STATES 85 The avowed aim of the trades union is a complete combination of all the workers in a given occupation or industry. The Broth- erhood of Locomotive Engineers, for instance, probably counts among its members more than 90 per cent of all the locomotive engineers in North America, although there are few trades which are so completely organized as this. With the passage of time, moreover, the trades unions have made increasing use of the monopolistic principle of the closed shop the principle which leads union men to refuse to work with nonunion men, and which finds expression in the trades-unionist's new commandment: " Thou shall not take thy neighbor's job." Very recently several authori- tative court decisions have held that labor combinations, particu- larly national or international combinations, are contracts or agreements in restraint of trade, and as such are illegal under the federal or state anti-trust acts. This is but official recognition of the fact that the forces which have led to the rapid development of trades unionism since the Industrial Revolution are the same forces which explain industrial combination and consolidation. The anti-trust acts need amendment: not all combinations in restraint of trade, but only unreasonable combinations, should be prohibited. The development of powerful combinations in the labor world has engendered a counter movement among the employers, which expresses itself concretely in the modern employers' association. Such organizations are not new; we have record of such an associa- tion among the master shoemakers of Philadelphia in 1789. But in recent years these associations have become permanent, formal, and aggressive. They fight the labor organizations with their own weapons, matching the lockout against the strike, the black list against the boycott, and the "labor bureau" against the "un- fair list" with which the reader of trades-union journals is familiar. Most of the employers' associations, like most of the trades unions, have associated themselves for common action in a large national federation, the Citizens' Industrial Association of America, with which, in December, 1903, there were affiliated sixty national em- ployers' associations, sixty-six state and district associations, and three hundred and thirty-five local or municipal associations of employers. 86 OUTLINES OF ECONOMICS The bitter conflict between organized labor and organized capi- tal has forced the State, in the interest of industrial peace, to inaugurate "Wage Boards" and Boards of Arbitration and Concili- ation. Some of these, such as the New Zealand Court of Arbitra- tion, are empowered to enforce their awards upon employers and employees; while others, like the Canadian and some of the American State Boards of Arbitration, have no power to settle disputes authoritatively, although they may make "compulsory investigations" and publish their finding as to the equities of the case. These and similar topics, however, are reserved for more detailed discussion in a later chapter. State Regulation of Industry. The growing interference of the State in the conflict between capital and labor brings us natu- rally to the general subject of the State in relation to industry. When the American colonies were planted, mercantilism was the dominant political philosophy ; but, as we have seen, mercantil- ism gave way to a philosophy of individualism in the eighteenth century, under the combined influence of the reaction against the English Navigation Acts, the natural antipathy of a frontier com- munity to legal restraint, the philosophy of Locke, and in a minor degree the teachings of the French physiocrats. The triumph of individualism, as a philosophical system, came at the critical pe- riod when our State and federal constitutions were in the making, and it thus became intrenched in the organic law of the nation, giving constitutional sanction to the doctrine of laissez-faire, and establishing a constitutional guarantee of freedom oj contract, in ac- cordance with which adult men were left "free" to work as long as they "pleased" (or were compelled), for whatever wages they were "pleased" (or forced) to accept. Under the influence of these doctrines, for instance, our courts have annulled such whole- some regulations as laws prohibiting payment of wages in store orders, and statutes limiting the hours of labor of men in bake- shops, or other exhausting occupations. Decades of experience have amply proved that the average wage earner is too weak to protect himself against many evils; but our constitutional law has made it exceedingly difficult for the State to protect him. For- tunately, however, the American people have a fashion of bend- ECONOMIC DEVELOPMENT OF THE UNITED STATES 87 ing their constitutional law to fit the facts, not blinding them- selves to the facts by worshiping the law; and in recent years the Supreme Court of the United States has progressed so far as to sanction a state law restricting the hours of labor of men in underground mines and smelters, although many of the state Supreme Courts are far less enlightened. It is impossible to show in detail how the free trade and indi- vidualistic tendencies of the Revolutionary period gave way to a constantly growing programme of State interference. The doctrine of laissez-faire was never adapted in its entirety, and year by year we have moved farther and farther away from it. State in- terference began with the adoption of a tariff act in 1789, "for the support of the government, for the discharge of the debts of the United States, and tlie encouragement and protection of manu- factures"; reached almost a maximum in the Embargo Act of 1807; showed itself in the policy of internal improvements and State aid to turnpike, canal, and railroad companies; brought us the great mass of labor and factory legislation which has been adopted by so many states since the Civil War; led in turn to the Interstate Commerce Act of 1887 and the Sherman Anti-Trust Act of 1890; and finally culminated in the new Interstate Commerce Act, the National Meat Inspection Law, and the National Pure Food Law. Excessive competition among laborers, which forced them to accept work under conditions destructive of physique and morals, has led to the factory acts, prohibition of child labor, and limitation of the hours of labor of women; excessive competition leading to the adulteration of products and their manufacture under insanitary conditions has given us the Meat Inspection and Pure Food laws; excessive competition among corporations, lead- ing to combination and oppressive monopoly, has brought us the anti-trust acts and regulation through state and national commis- sions. Whether the individualistic character of industrial society endures or disappears, individualists and socialists alike are now agreed that the State must interfere. As a prominent English statesman expressed it, "We are all socialists now," although he merely meant by this statement that the passive theory of govern- ment has been wholly discredited. 88 OUTLINES OF ECONOMICS Up to the present time State interference has had as its princi- pal object the improvement and preservation of competition. The conscientious manufacturer who would not poison consumers for the sake of swelling his profits, the high-minded employer who would not "sweat" women and children merely to reduce the cost of production, the delicately scrupulous shipper who would not undermine a rival by forcing a common carrier to pay him rebates, all these have suffered as much from the abuses of competition as the general public itself. Industry under the competitive regime is a rough game played for high stakes, and if it is to be played fairly, there must be intelligent rules of the game and an umpire powerful enough to enforce them upon all contestants alike. If the manufacturers of Massachusetts are prohibited from employ- ing children under fourteen years of age while those of South Caro- lina are encouraged to do so, decency is penalized, and the vic- tory goes to the contestant guilty of the greatest number of fouls. State interference, as we have said, has had as its principal object the maintenance of competition upon a higher and more wholesome basis. But this has not been its sole object. Our re- cent regulation of public utility companies aims not to bolster up or preserve competition among such companies, but to introduce a substitute for competition; and the strong movement now on foot to modify the Federal Anti-Trust Act is partially based upon a recognition of the possibility that perhaps regulated monopoly may prove on the whole more beneficial than regulated competi- tion. Upon this point we pass no judgment; time alone can tell. Whether it is desirable, whether in the long run it will be possible, to check the monopolistic tendency of the age and thus maintain a competitive as distinguished from a socialistic regime of indus- trial society, may be said to be the supreme economic problem of the twentieth century. QUESTIONS 1. How do you account for the failure of the early colonial restrictive legislation ? 2. What was the effect of English colonial policy and the Navigation Acts upon American manufactures? shipbuilding? American political philoso- phy? ECONOMIC DEVELOPMENT OF THE UNITED STATES 89 3. What was the condition of American agriculture in 1776? of manu- factures? shipbuilding? transportation? 4. Was the Industrial Revolution as important in this country as in Eng- land? Was it attended with as much suffering? Why? 5. What part has been played by war in the tariff and industrial history of the United States ? 6. In what respects has the agricultural development of this country differed from that of England ? from that of the manufacturing industry ? 7. What changes have taken place in the organization of manufacturing industries in the last century? 8. What are the principal causes and effects of industrial concentration? 9. What is the difference between industrial concentration and integra- tion? between large-scale production and monopoly? 10. W 7 hat stages are distinguishable in the history of transportation and railways in this country? 11. What part did the State play in the development of railways? Is railway consolidation a recent phenomenon? 12. What movement has the development of trades unionism elicited from employers? from the State? 13. How did the doctrine of non-interference secure such a strong foothold in American constitutional law? What has been the principal object of State interference up to the present time ? REFERENCES (See also References for Chapter V) BISHOP, J. L. History of American Manufactures. BRYN, E. W. Progress of Invention in the Nineteenth Century. Census Reports. Tenth Census, Agriculture, p. 131. Twelfth Census, Manufactures, Part I, Chap. II, I-VI, XVII, XXXIX. DEVVEY, D. R. Financial History of the United States. HADLEY, A. T. Railroad Transportation, its History and its Laws. JOHNSON, E. R. American Railroad Transportation, and Ocean and Inland Water Transportation. RABBENO, UGO. The A merican Commercial Policy. SCMNER, W. G. History of Banking in the United States. TAUSSIG, F. W. Tariff History of the United States. WEBER, A. F. The Growth of Cities in the Nineteenth Century. Columbia Studies in History, Economics, and Public Law, Vol. II. WELLS, D. A. Recent Economic Changes. BOOK II PRINCIPLES AND PROBLEMS PART I INTRODUCTION CHAPTER VII ELEMENTARY CONCEPTS IN political economy many of the technical terms employed are often misunderstood because the same words a.re used in ordi- nary speech with inconsistency and confusion. We have often to choose between the alternatives of being inconsistent and of vio- lating current usage. The present chapter is devoted to a defi- nition of some of the fundamental notions in political economy. The statement is sometimes made that economics is a mere bread-and-butter science, and this charge is not without some foundation, since the science studies men in their endeavor to make a living, but it would be an error to suppose that we are concerned with only the sordid aspects of human nature. This is apparent if we enumerate the motives which impel men to acquire wealth. Motives in Economic Activity. (i) There is, in the first place, the endeavor to satisfy one's strictly personal wants, giving rise to the struggle for food, shelter, comforts, amusement, etc. These things are wanted for their own sake, because of the pleas- urable effect which they produce upon the individual acquiring them. We have here, in short, the motive of self-maintenance and development. (2) But every normal individual feels such a degree of affection for certain other people that he is also anxious for their maintenance and development. Striving for the wel- fare of others is a second motive which impels men to labor for the acquisition of material things, and in many cases is more effec- tive as a spur to endeavor than the first. A man will hold him- self to the daily grind more persistently when he feels some one 93 94 OUTLINES OF ECONOMICS is dependent upon him than when he is standing alone. (3) A third motive is the desire to gain the esteem of one's fellows. This motive may take the form of an endeavor to do one's part and to be deserving of the companionship of the class of people whom we admire. But much of our wealth acquisition is motived by the hope of impressing our fellows with a sense of our own importance, to show that we are successful, admirable, enviable. When the income permits, old coats are discarded, not because they cease to give protection, nor because they have become aes- thetically objectionable, but because the wearers wish to make a favorable impression upon other people. Half the pleasure of owning fine houses comes from the fact that most people do not have them. This motive is not always a conscious one, since our standards of beauty or propriety may themselves have been the result in part of this desire for distinction. Now that bi- cycles are within the means of workingmen, it is no longer fash- ionable to ride these machines. Somewhat similar to the desire for distinction is (4) the desire for power. Men like to dominate and command their fellows, and this want may be satisfied by means of the dollar as well as with the sword; hence our Napoleons of Finance, Captains of Industry, and Railway Kings. (5) Again, the desire for activity for its own sake may be men- tioned. Enforced idleness is as painful as prolonged labor, ex- cept to the degenerate. This desire may result in the production of goods, but more commonly it requires the use of goods that have been produced, as, for example, the implements of athletic exercise. Finally, (6) religion or the ethical impulse may be an important factor in controlling the economic activity of the indi- vidual. Observe, for instance, the difference in the history of communistic experiments in which religious feeling has been strong and those in which it has been weak. In this discussion the use of the word "motive" must not be taken to mean that all of the economic life of the individual is a consciously rational one, in which pleasures are balanced against pains in such a way as to secure the maximum surplus of satis- factions. Man is, it is true, a rational being, and as such pursues ELEMENTARY CONCEPTS 95 definite lines of action under the influence of conscious motives; but he is also a creature of instincts and habits, and much of the economic activity of the individual has to be interpreted as the working out of instinct and habit. We speak, for example, of such things as the "instinct of workmanship," the "habit of in- dustry," the "habit of saving," and the like. The foregoing analysis of the motives in economic activity is, however, broad enough if we remember that "pleasure" is something that is not always consciously sought, but is often to be understood as the result of the functioning of inherited instincts and acquired habits. Utility. As a result of these motives, human beings are striv- ing for the possession of certain things. These we call goods or utilities. To understand the meaning of the term "utility" in economks, we must recall the central fact of our science, that eco- nomics is a science of man. Goods may be of interest to chemistry and physics merely as things, but they have no significance what- ever in economics until they come into relation with man. That fact in man which reflects upon things a new character and makes them goods is the fact of human wants. Anything that is capable of satisfying a human want is a good or a utility. We need here to guard against a misunderstanding which the word "utility" sometimes suggests. There is a tendency to con- found it with the idea of benefit, and to suppose that articles are useful just in proportion as they are beneficial. But in economics these two ideas cannot be taken as identical. Utility is the power to satisfy wants, not the power to confer benefits. Cigars are as useful in the economic sense as bread or books, for all three sat- isfy wants. Economic wants may be serious, frivolous, or even positively pernicious, but the objects of these wants are all alike "utilities" in the economic sense. Free and Economic Goods. But it is apparent that the wants we have mentioned are very unlike in character. Air and water, for instance, we seldom think of as things we want at all. We usually have them in abundance and without exertion, so that, though they satisfy wants as vital as any we know, we seldom spend any time thinking about them or our dependence upon them 96 OUTLINES OF ECONOMICS These are free goods, that is, goods that exist in quantities suffi- cient to supply all wants for them. Land in a new country is frequently a free good. But the list of things that are free is quickly exhausted. On the other hand, goods that are the ob- jects of exchange are called economic. Economic goods are those which exist in quantities less than sufficient to satisfy all wants for them. Hence, we must economize in the use of them, are willing to undergo sacrifice to obtain them, and usually they are obtained only by exertion. It is, however, their scarcity and not the fact that they have cost labor that makes them economic goods. Land, for example, a free gift of nature, is one of our most important categories of economic goods at the present time. Effort. Fortunately, the supply of economic goods can, in most cases, be increased by human exertion applied to the ma- terials of nature; but this exertion, if carried beyond ft certain point, is irksome and has an important effect upon our economic life. If the labor force of the community were unlimited, a great many of the goods which we now use sparingly would be as free as air. Idealists have pictured for us a condition of the future where a few hours' work per day for each individual (an enjoyable means of working off surplus energy) will be sufficient to supply us with all of the goods that we have time to consume. At present, however, most of us find that our consumption is limited by the pain of additional effort. The end of our eco- nomic activity is, therefore, not only to get the greatest amount of satisfaction, but also to minimize the amount of painful labor. Waiting. Another fact that persists in our economic life is the necessity for waiting. The people of the United States wish to have the Panama Canal, but they cannot get it without years of waiting. They must spend millions of days of labor with no benefit in return for a long time to come. This waiting has often been called abstinence; but that suggests that the waiting is always painful, which is not true, as we shall see later in dis- cussing the subject of interest. Services. Goods have been commonly divided into (i) ma- terial things, such as food, clothes, and books, and (2) personal services, such as the advice of a physician or lawyer. ELEMENTARY CONCEPTS 97 The advisability of the distinction has been denied, Actors and singers, it has been urged, sell us perishable material things, i.e. light and sound waves of a peculiar kind. A recent writer also considers the distinction con- fusing because it obscures the fact that material things give off services just as human beings do. The piano yields services as does the singer. From this point of view persons are durable economic goods along with cattle and wheelbarrows. But, on whatever ground the distinction is made, it is im- portant to recognize that among the things that contribute to our well-being are some personal services that are so perishable that they must be used with the direct cooperation of some other human being, while in other cases the services are, as it were, stored up in some inanimate material things, and the relation between the producer and consumer becomes an impersonal one. The service of a musician, for example, is personal and must be used the moment it is rendered ; the purchase of a musical instrument, on the other hand, means the purchase in a lump of a long series of uses. Personal Qualities as Goods. The central point in our science is the conception of man in his relations to his environment, and hence it does not seem reasonable to include the personal quali- ties of men under the head of goods. Good health and techni- cal skill make a man's services more valuable and assist him in the acquisition of wealth, but they are a part of him rather than of his possessions. It is his services that he sells, and it is these that we have placed under the head of goods. When we con- sider the importance of the priceless heritage which the present generation has received in the shape of knowledge and skill, we might make these a separate category as immaterial goods. On this point Professor Marshall says : " German economists often lay stress on the non-material elements of national wealth ; and it is right to do this in some problems relating to national wealth, but not in all. Scientific knowledge, indeed, wherever discovered, soon becomes the property of the whole civilized world, and may be considered as cosmopolitan rather than a specially national wealth. The same is true of mechanical inventions and of many other improvements in the arts of production ; and it is true of music. But those kinds of literature which lose their force by translation may be regarded as in a special sense the wealth of those nations in whose language they are written. And the organization of a free and well-ordered State is to be regarded for some purposes as an important element of national wealth." But knowledge does not exist in a disembodied state, and we shall omit nothing and avoid some confusion if we divide all goods into material things and personal sendees. 98 OUTLINES OF ECONOMICS Wealth. Political economists have frequently called economic goods wealth, thus excluding free goods. Some writers, however, include free goods in the idea of wealth. The truth is, that this term cannot be defined satisfactorily unless we specify whether we are speaking from the individual point of view or from the social point of view. From the individual standpoint, wealth means valuable claims to goods; from the social point of view, we shall regard wealth as an aggregate or stock of goods. This excludes personal services from the category of wealth, for they disappear as soon as rendered, and in an inventory of existing wealth, personal services would not appear. Wealth and Income. Wealth refers to the stock of goods on hand at a particular time. Real income, on the other hand, has reference to the satisfaction which we derive from the use of material things or personal services during a period of time. Money income should, perhaps, refer to the value of the goods consumed and services enjoyed, although in popular speech and by many economists the word is used in the literal sense of the net amount of money that comes in, whether it is spent for en- joyable things or is saved. In this book we shall use the term " money income " in the latter sense. The Individual and Society. One distinction runs all the way through political economy, and that is the distinction between the social and the individual standpoint. That which is wealth to the individual is often not wealth to society. An individual holding a government bond finds that he can exchange it for the things he wants almost as readily as though it were gold or some other commodity. He recognizes that the paper itself cannot be used directly for any useful purpose, yet he prizes it because it represents an indisputable claim on the services or commodi- ties of other people. If the bond should be destroyed, the holder as an individual would suffer loss, but society as a whole would be neither richer nor poorer, and society, exclusive of the bond- holder, would have gained at his expense. From the social stand- point the bond is not wealth at all, but only an evidence of a legal right to a part of the social wealth. All property rights are sim- ply claims to a part of the social wealth or income. The claims ELEMENTARY CONCEPTS 99 to concrete, material things, such as farms and store buildings, are included by an individual when he enumerates his wealth; the farms and store buildings are social wealth. Again, in mak- ing an inventory of his wealth, an individual would not ordinarily include such an item as the post office, which is public and not private property; but, strictly speaking, the post office is owned jointly with other members of society. A successful patent is frequently looked upon as an item of wealth, but it is simply a means by which the owner gets more from other people in return for his services. If the patent is declared invalid, others gain what he loses (not counting the check to the inventive impulse). Again, "good will" in business is frequently paid for as though it were an economic good, and is wealth from the individual point of view, but it is not social wealth. If a business man loses his established trade, his competitors are the gainers; society as a whole is not affected. This distinction between individual and social wealth, however, is valid only when we look upon the social wealth as composed of concrete material objects. When we are measuring the amount of wealth in dollars, no such dis- tinction can be drawn. To attempt to say how much an item of wealth is worth from the social point of view and how much from the individual point of view, would be futile. The owner of a franchise that is declared invalid suffers financial loss; the community suffers no loss, for the tangible property which yields the enjoyable services is not affected. Here is a valid distinction between the individual and social points of view, but from any point of view it cannot be denied that the selling value of the property has been decreased. Wealth and Value. In the preceding paragraphs wealth has been spoken of as consisting of particular things. A lead pencil and the year's crop of wheat are both wealth. How shall we measure the amount of wealth that these objects represent? Since the items of wealth are composed of very heterogeneous objects, we cannot use such units of measure as bushels, pounds, or feet. We must select a measure that has reference to some quality common to all kinds of wealth. This quality is the power to give satisfaction to those who have unsatisfied wants, and a 100 OUTLINES OF ECONOMICS measure based upon this quality is value. This is a subject which will be discussed in detail later, the valuation of goods and personal services being the central problem in economic theory. It is sufficient to say at this point that high value in an object implies the existence of important unsatisfied wants which this object is capable of satisfying. Thus, free goods have no value, not because they do not satisfy important wants, but because these wants do not ordinarily go unsatisfied. Capital and Other Forms of Wealth. Some material things, as well as personal services, yield satisfaction to human beings directly. From clothes, dwellings, food upon the table, musi- cal instruments, and the like, we derive enjoyment directly. These are consumption goods. Other goods are of service only indirectly. A plow, we say, is useful, but we cannot eat or wear it. It simply helps to produce the things that we can enjoy. Such articles are production goods. The distinction is a matter of degree. Even the food upon the table is not quite ready to be enjoyed. It must be handled with knives and forks. This has led some writers to make no distinction between wealth and capital goods. But it has been pointed out that great differences in degree are more important than many differences in kind. The distinction, it may also be noted, is not made on the ground of durability. Consumption goods may be very durable, such as a painting or work of fiction. Production goods, again, are divided into capital goods and land. Land is a gift of nature; capital goods machinery, warehouses, raw material, etc. are produced by man. Other differences between these two classes will be discussed later. Capital Goods and Capital Value. Capital goods, as well as other forms of wealth, are of such a heterogeneous nature that we cannot measure them by such units as pounds or inches. Here, again, we must select some quality that is common to all of them, which is value, and this can be measured in terms of dollars. Very frequently the value of capital goods is confused with the concrete good itself. A typewriter is a tangible, material capital good; its weight is measured by pounds; its bulk by cu- bic inches; its value by dollars. In this book the word " capital " is frequently used as a short expression for either of the phrases ELEMENTARY CONCEPTS 101 " capital goods " and " capital value," but it will always be clear from the context which is meant. Social and Individual Capital. The individual may include items in an enumeration of his capital which are not capital from the standpoint of society. The landlord who has dwell- ings to let regards them as part of his capital, but from the social standpoint they are consumption goods. We may call such goods acquisitive capital. Again, a street railway may consider its franchise as a part of its capital, but from the social standpoint a franchise is not capital at all, nor even a good, but is simply a right to use the streets in a certain manner. Destroy the fran- chise, and the items of social capital would not be directly les- sened. Figure i will make clear these various distinctions: Circle A B represents goods. Circle AC represents economic goods. Circle AE represents producers' goods. Circle AF represents land. Zone BC represents free goods. Zone CE represents consumers' goods. Zone DE represents acquisitive capital. Zone EF represents social capi- tal. FIG. i The National Wealth and the National Dividend. Attempts have been made to ascertain the total wealth of a nation. The latest estimate made for the United States by the census authori- ties is given on the following page. Such a table is useful, even though it may contain some rather arbitrary estimates, as showing the relative importance of dif- ferent classes of our material equipment. Notice the small total value of the metals used as money and the relatively large value embodied in real property. It is rather surprising that manu- facturing machinery, tools, and implements are worth less than 102 OUTLINES OF ECONOMICS ESTIMATES OF WEALTH FOR 1900 AND 1904 FORMS OF WEALTH 1904 1900 Real property and improvements taxed $55,510,228,057 6,831,244,570 4,073,791,736 844,989,863 3> 2 97>754,i8o 1,998,603,303 11,244,752,000 2,219,966,000 227,400,000 585,840,000 123,000,000 846,489,804 275,000,000 562,851,105 1,899,379,652 7,409,291,668 495,543,685 408,066,787 2,500,000,000 5,750,000,000 $46,324,839,234 6,212,788,930 3,306,473,278 749,775,97 2,541,046,639 1,677,379,825 9,035,732,000 1,576,197,160 211,650,000 400,324,000 98,836,600 537,849,478 267,752,468 402,618,653 1,455,069,323 6,087,151,108 424,97 ,592 326,851,517 2,000,000,000 4,880,000,000 Real property and improvements exempt Live stock Farm implements and machinery Manufacturing machinery, tools, and implements Gold and silver coin and bullion Railroads and their equipment. . Street Railways, etc. : Street railways . Telegraph systems Telephone systems Pullman and private cars .... Shipping and canals Privately owned waterworks. . Privately owned central elec- tric light and power stations All other : Agricultural products Manufactured products Imported merchandise Mining products Clothing and personal adorn- ments Furniture, carriages, and kin- dred property Total $107,104,192,410 $88,517,306,775 our live stock. But great care should be taken in comparing the total wealth as estimated in this and in preceding census valuations and in drawing conclusions as to the significance of a growth in national wealth measured in dollars. In addition to the difficulty of getting accurate information on these various items, there are several things to be kept in mind in making use of such an estimate. First, the returns are ELEMENTARY CONCEPTS 103 made in money, so that fluctuations in the value of money will show a change in the total valuation even if there is no change in the relation between the wants of a community and its goods other than money. Again, free goods are not included in such an estimate. Also, a good deal of public property does not have a money estimate put upon it. Who would attempt to say what our rivers and harbors are worth, and yet why should not these be included in the estimate if our canals are? It seems that much that is included in the estimate is wealth from the individual standpoint only, but not from the social, as in the case of the valuation of a business whose value consists largely of patents or monopolistic privileges. In the table above, for example, the value of railways in 1904 was obtained by capi- talizing their net earnings. Is this sum properly included in an estimate of the total amount of wealth in the United States? The inclusion is proper if we are confining ourselves to a state- ment of the sum of the values of property rights, but it is mislead- ing if we wish to show the relative importance of railways and of property in a competitive industry, or if we are discussing rail- ways in relation to the public welfare. A similar line of thought is suggested with reference to land values. Ten years ago we had about the same area and the same quality of land as we now have, so that its high value to-day cannot mean that we are better equipped with natural resources. We must be on our guard against attaching improper signifi- cance to estimates of total wealth. Changes in total value are not an accurate index of changes in well-being. It is possible that an increase in concrete material goods will actually decrease the total quantity of wealth measured in dollars. A hundred bushels of wheat at $i per bushel have a higher selling value than two hundred bushels at 40 cents per bushel. If by some magical process all goods could be made free as air, there would be no value whatever. An estimate of the value of our stock of wealth also necessarily omits to take account of personal services. It is obvious also that per capita wealth has a more direct rela- tion to well-being than total wealth. Individual wealth and value connote scarcity; well-being implies abundance. Nevertheless. 104 OUTLINES OF ECONOMICS under present conditions, it is probable that an increase in per capita individual wealth, when not due to fluctuations in the value of money, also indicates an increase in well-being. There is no likelihood of our being able to increase the quantity of economic goods to such an extent as to render them free and hence value- less; and, on the other hand, as will be more fully explained later, new wants are constantly developing, and value is at bottom the power to minister to unsatisfied wants. The national income is a concept which takes account of the services rendered directly by persons as well as of the material things that are used. The national income, objectively consid- ered, is a gigantic stream of food, clothes, comforts, personal ser- vices, etc., which is used up in the direct satisfaction of wants in a specified period, such as a year, by the millions of individual acts of consumption. Some writers would include also the additions to our industrial equipment, such as new machines; but they may also be regarded as promises of an enlarged future income of society, not a part of its present real income. These two views correspond to the two definitions of income on page 98. It is difficult to make an accurate estimate of the national in- come in terms of its money value, and not much confidence can be placed in the estimates that have been made. A reliable cal- culation of this kind would, however, be useful as an index of the maximum gain that might be derived by the mass of the people from agitation for a more nearly equal distribution of wealth. It would be interesting to know what the scale of living would be if the national income were equally distributed. At present we do not know whether a family of five persons would have $800 or $1600 to spend. The national income may be looked upon as the national divi- dend, the sum total of good things to be divided among the vari- ous families or individuals. The forces determining the size of this dividend, the manner of its division, and the saneness of its use are the main topics for discussion in political economy, and hence it will be our purpose in subsequent chapters to describe the general tendencies in the consumption, the production, and the distribution of wealth and income. ELEMENTARY CONCEPTS 105 QUESTIONS AND EXERCISES 1. Does the following statement agree with the definitions in the text? "The true basis for an estimate of a nation's wealth is to be found in the en- joyments of its members." Hadley, Economics, p. 4. 2. Are the following wealth : air ? whisky ? a copyright ? Lake Michigan ? skill as a carpenter ? good health ? 3. Discuss the following : " Among the motives which lead men to accumu- late wealth, the primacy, both in scope and intensity, therefore, continues to belong to this motive of pecuniary emulation." Veblen, Theory of the Leisure Class, p. 34. 4. State the significance of the following : " A horse is not wealth to us if we cannot ride, nor a picture if we cannot see, nor can any noble thing be wealth except to a noble person." Ruskin, Munera Pulveris, p. 10. 5. Discuss the following statement : " In 1770 Arthur Young reckoned the income of England to be 120,000,000; in 1901 the income may be roughly set down at 1,600,000,000. Making correct allowances for population and for prices, this growth of income would signify a large increase of com- modities per head ; but would it tell us that we are working and living some- what better than our ancestors?" Hobson, The Social Problem, p. 43. REFERENCES CARVER, T. N. The Distribution of Wealth, Chap. III. CLARK, J. B. The Philosophy of Wealth, Chaps. I and III. FISHER, IRVING. The Nature of Capital and Income, Chaps. I and II. HOBSON, J. A. The Social Problem, Book I, Chap. V. LESLIE, T. E. C. Essays in Political Economy, Chap. I. MALLET, B. A Method of Estimating Capital Wealth from the Estate Duty Statistics, Journal of the Royal Statistical Society, March, 1908. MARSHALL, ALFRED. Principles of Economics, Book II. RUSKIN, JOHN. Munera Puheris, Chap. I. SIDGWICK, HENRY. The Principles of Political Economy, Book I, Chap. III. SMART, WILLIAM. Studies in Economics, Chap. VIII; and Distribution of Income, Book II. SPAHR, C. B. The Present Distribution of Wealth in the United States, Chap. V. VEBLEN, T. B. The Theory of the Leisure Class, esp. pp. 24-34. WAGNER, ADOLPH. Crundlegung der politischen Oekonomie, 3d ed., VoL I, pp. 83-135. Special Census Reports, 1907, Wealth, Debt, and Taxation. PART II CONSUMPTION CHAPTER VIII CONSUMPTION Consumption Defined. Consumption in economics means the use of goods in the satisfaction of human wants, which is the pur- pose of a large part of our economic activity, but it is not the sole purpose, since activity is to a certain extent an end in itself. Nev- ertheless, in economic society as it is organized to-day we are per- haps justified in looking upon consumption as the motive force behind production. Wants are so far from satisfied at present that men look for work, not because they seek to be rid of surplus energy, but because they crave the goods which their wages will buy. The power of unrestricted consumption seems to be the prevailing ideal. Industry, furthermore, is organized and con- ducted primarily to satisfy the consumer, not the worker. This fact is the basis of the Consumers' League, which aims to improve conditions of production by asking the consumer to refuse to pur- chase the goods of unfair employers. A study of the consumption of wealth falls only partly within the domain of economics, for the use of wealth is a large part of the problem of life. Passing judgment on the standards accord- ing to which the rationality of certain wants is to be measured does not directly concern the economist. Productive and Final Consumption. When used without quali- fication, the word " consumption " in economics is commonly taken to refer to the use of goods to satisfy wants directly. But some goods, such as machines and raw materials, are used up in the production of other goods. This we may call productive consump- tion, while that consumption which attains the ultimate goal of 106 CONSUMPTION 107 economic activity directly in the satisfaction of wants is final con- sumption. It is now less necessary than it was in the days of Car- lyle and Ruskin to insist that food consumed by laborers is not productive consumption. They consume, not merely for the sake of production, but also for the sake of satisfaction. Man is our final term. Human Wants. In the study of human wants as a starting point in economic theory, two facts stand out prominently: the expansion in the number and variety of the wants, and the satia- bility of any particular one of them. As man has progressed from savagery to civilization, the variety of things he desires and even considers necessary to his existence has expanded enormously. His interests become more varied, his capacity to enjoy becomes larger, and he lives a fuller and more complex existence. There are indeed those who would have us "return to nature " and live a simple life, but taking the world as it is, we may assume that there is no limit to the capacity of the community to use more goods. But when we turn to the consideration of some particular want by itself, the matter is wholly different. Our nerves grow weary of a repeated stimulus, and any attempt to continue indefinitely the enjoyment of some sensation results in satiation. A phono- graph record grows stale after a number of repetitions. An apple does not always have the same degree of utility for any one of us, van-ing from the highest degree, if we are on the point of starva- tion, to disgust, if a considerable number have just been con- sumed. Law of Diminishing Utility. This fact is of fundamental im- portance in the study of economics and has been dignified by the term "the law of diminishing utility." In formal words: The intensity of our desire for additional units of any commodity de- creases as we consume successive portions. It should be observed that an interval of time between the successive acts of consump- tion may permit our nerves to recuperate so that no diminution in the degree of utility is apparent. Again, the increase in a person's stock of an article held for the purpose of exchange, such as money, can cause a decrease in the utility of an additional unit only to the Io8 OUTLINES OF ECONOMICS extent that all of his wants are being satisfied, since such an ex- changeable commodity in reality stands for all commodities avail- able to him. Again, consumption of certain articles may result in the development of new related wants. The amateur pho- tographer, for example, finds that the crude pictures which de- lighted him at first give him less and less pleasure, but his interest in photography may continue to increase because he sees an end- less variety of results to be achieved. Different Uses for the Same Commodity. In the preceding paragraph mention was made of the different degrees of intensity of a particular want. The utility of a commodity may also vary because of its capacity to satisfy different wants of varying im- portance. Thus water, first of all, satisfies thirst. The impor- tance of this utility is altogether incalculable, for without it we should die. Then it serves for bathing, a use which certainly seems essential, but one which is far less urgent than the foregoing. If we had to do without one or the other, there is no doubt which we should prefer. Then it serves for washing dishes, clothes, and a multitude of such things, then for sprinkling lawns and streets, then for fountains, artificial ponds, etc. All these uses and many more are economic, because men will and do pay for water to satisfy these wants. Marginal Utility. It must be evident, therefore, that to say that a certain thing is a utility is very indefinite. That merely tells us that it is capable of satisfying some want, perhaps impor- tant, perhaps unimportant. We become definite only when we have specified the degree of utility possessed by the commodity. This is commonly called its final or marginal utility, because when we think of a commodity as consumed in successive portions, the present is the last or marginal unit consumed. Marginal utility means simply the importance which is attached to an additional unit of the commodity at the present moment. This individual valuation of a unit of the commodity may be spoken of as its sub- jective value. This is to be distinguished from its market value, or what can be obtained in exchange for the commodity, which is a resultant of many individual valuations. Market value will be discussed in subsequent chapters. CONSUMPTION FIG. A clearer notion of subjective value (or marginal utility) may be given with the help of Figure i, following. We return to our illustration of water, which we remember had numerous uses of various degrees of importance. We have marked off dif- ferent portions of the base line representing quantities of water available for man's use. The first quantity, ab, is just enough for drinking purposes. Suppose this is all the water to be had. There will be no question of sprinkling lawns or even of bathing under such cir- cumstances. What will be the utility of water? Evi- dently the extent of the service which it renders us, and as this is the preservation of our life we cannot estimate it. We will indi- cate it by the area above the line ab which runs upward indefi- nitely as the curved line fails to close in. What will be the impor- tance of another portion of water at this point of supply ? As this additional portion which we desire is not needed for drinking but for a less important purpose, the subjective value of the water will now depend upon this less-important want. Now suppose we have three portions of water, represented by the lines ab, be, and cd. We now have enough for all our wants, down to sprin- kling the lawn and the street. We are willing to pay something for more water for this purpose, but how much? As much as when we had only water enough to drink ? By no means. The next want on our list is comparatively unimportant, and of course we value an increased supply accordingly. With two or three more portions of water all our wants are satisfied, and water will have for us no value whatever. Its marginal utility will have become zero. As the amount of water is increased, the subjec- tive value falls according to the curved line hi, till finally it touches the base line, where the utility of the water ceases and it has no value at all. no OUTLINES OF ECONOMICS It should be carefully noted that marginal utility tells us noth- ing about the total subjective value of the whole stock of the com- modity. It refers solely to the present value of an additional unit, or the sacrifice that would be occasioned by the loss of a unit. We cannot get the total subjective value by multiplying the margi- nal utility by the number of units, even though they be all alike. The very term "marginal" tells us that the conception implies successive additions, and the present value of an additional unit tells us nothing definite about the marginal utility at a previous period. If we wish to ascertain the total subjective value of a stock of a commodity, we have simply to treat it as one large unit, and ask what would be lost if it were taken away. By this test all air would be found to have an immeasurable utility, at the same time that the marginal utility, that is, the subjective value of an additional quart, would be nothing. Thus it will be seen that the cause of subjective value is utility under a condition of scarcity; that is, such a limitation of the supply that all wants cannot readily be satisfied. The Economic Order of Consumption. What has been said regarding the way in which our individual estimates of the im- portance of a commodity are determined will help to explain how we make our choices in attempting to obtain the largest amount la Ib Ic Id 2 a 2c FIG. FIG. 3 of satisfaction with the income at our disposal. Evidently we must spend each succeeding dollar for purchasing that commodity of CONSUMPTION III which a dollar's worth will give the greatest satisfaction. Let Fig- ures 2 and 3 show the declining importance of two commodities which an individual is consuming, and suppose that each unit of each commodity costs one dollar. If the individual has ten dollars to spend upon these two commodities, his order of con- sumption will be as follows: he would begin with 2a, but another unit of commodity 2 would give him less satisfaction than a unit of commodity i. Hence, his consumption will continue as follows : la, 2b, 20, ib, ic, id, zd, 2e, le. In this illustration it was assumed that a unit of each commodity had the same cost. In this case, the unit consumed is always the one that has the largest marginal utility. But where the cost of the units is different, cost must be considered also, and we com- monly do so by asking ourselves whether the thing we are buying is worth as much as other things which could be obtained with the same expenditure. Thus we are constantly abstaining from the further consumption of one thing, not because our wants for it are fully satisfied, but because something else of equal cost appears at that moment to be more important. Future Wants. Not all of the goods for which we strive are wanted for present consumption. We recognize that we shall have needs next month or next year, and we attempt to make some preparation for them. These future wants, it is true, usually ap- 1m Ib Ic Id FIG. 4 Z fit Sf i * C |*^*J _ FIG. 5 peal to us less vividly than if they were present, but we attach a definite importance to them and grade them, and they enter into 112 OUTLINES OF ECONOMICS our calculations when we spend money, modifying the order oi our consumption. This will be seen from Figures 4 and 5. Let us suppose that in Figure 4, a, b, c, d, c represent the diminishing importance of successive units of a commodity for present con- sumption, and that Figure 5 shows the importance of similar quan- tities of the same commodity for future consumption. Then la would be consumed first, i.e. in the present. But a second unit now would be less important in this individual's estimation than the saving of a unit for future use. The second unit, therefore, that is consumed would be 20,, and then the order would be as follows: ib, 2b, ic, etc. Thus this individual has saved two out of five units, i.e. 2d and 2b, with the same sort of mental calcu- lation as he would use in deciding to spend a nickel for a peach rather than for a pear. But if some one should ask him to spend his fifth dollar for 20 instead of for ic, he would require some extra inducement to repay him for the loss in enjoyment. It thus ap- pears that a certain amount of saving is done without irksome- ness, which emerges only when the saving is carried beyond a certain point. Alleged Present Consumption of Future Products. We often hear of consumption in advance of production. It is said people live on the future. It is frequently argued that during the Civil War we were consuming faster than we were producing. It is alleged that the federal bonds represented the consumption of future earnings. But it must be apparent that it is impossible to consume faster than we produce unless we consume past sav- ings by not replacing worn-out equipment. We cannot eat to-day the wheat or potatoes of to-morrow, nor can we wear coats before they are made. What is alleged can only be true of the individual consumer within the nation, or in case of the nation as a whole when the capital or other wealth of the country is diminishing, whereas during our Civil War it increased. What really hap- pened was this: we as a nation became indebted to some extent to foreigners, and within the nation some of us gained while the rest were losing. Bonds do not represent a present consumption of future wealth, but a special use of productive power for which a government agrees to remunerate its owners in the future. If CONSUMPTION n-j war can be carried on with the aid of bonds, it can, leaving out of consideration what foreigners send us, with a sufficiently per- fect taxing machinery, conceivably always and practically some- times, be carried on without bonds. It is only a question of how- to get hold of the means of producing powder and bullets. War was formerly carried on without bonds; they are a comparatively recent contrivance. Consumption can never anticipate future production for the nation as a whole taken by itself; it can only anticipate future ownership. Consumption and Saving. It is difficult to say in practice at what point consumption should stop and saving begin, but the principle itself is clear. So much, and only so much, should be saved as will maintain a maximum final consumption over long periods of time. It is conceivable that the present generation might deny itself everything except the barest necessities and labor to increase the productive equipment to be used in the future; but the next generation could not pursue the same policy, for some one must consume the products of the factories built to-day, otherwise the building of them was wasted effort. To provide for old age or for possible accident may be a suffi- cient motive for saving in some cases, but saving is stimulated when the goods saved will bring an increase. It is, therefore, necessary to an extensive saving that the conditions of profitable investment should be provided; and if wealth is to be widely dif- fused, opportunities for investment should be readily available. It is a perceived opportunity to make an investment with proba- bility of increase which stimulates saving above everything else. Another important condition is security. If the investments of a country fluctuate between loss of principal and unreasonable profit, the condition is one to encourage speculation rather than saving. Among the institutions which encourage saving are private property, corporations, cooperative enterprises, savings banks, and insurance. Luxury. Luxury is the name of a vague something which society has always viewed with a sense of mingled tolerance and condemnation. In the first place, it is clear that people ordinarily consider as luxuries many things in themselves innocent and de- i 114 OUTLINES OF ECONOMICS sirable, as silk dresses, jewels, pictures, etc. No one but an ascetic will condemn as wrong in themselves things that appeal to taste and finer appreciations, and yet we feel that the use of such things is often unjustifiable. Second, the popular idea of luxury recog- nizes a difference in persons. We cannot help condemning in one person what we approve in another. Third, we judge luxury differently at different times. There is a continual transfer of articles from the list of luxuries into that of comforts and neces- sities. This transfer is brought about by the consensus of social judgment, and is increasingly acquiesced in by all. So we see that the term " luxury " does not apply to goods of a certain char- acter, but to certain goods in their relation to time and person. For the purpose of discussion, we shall define luxury simply as excessive consumption. But what determines whether consump- tion is excessive or not ? The answer to this question depends, first, upon our idea of right living, and second, upon our idea of a just distribution of wealth. The former question we shall not discuss. It is that of the simple life versus the complex and varied life, and may be left to the sociologists, philosophers, and moralists. But what is a just distribution of wealth? In the world's speculation upon this subject, three ideas stand out prominently: (i) equality, (2) product, (3) needs. Let us examine these three bases of distribution. The ability of men to use wealth sanely is enormously unequal, and there is no probability that this inequality will soon be re- moved. To distribute wealth equally, therefore, would be to use goods where they satisfied trifling wants or none at all. But in addition to its wastefulness, an equal distribution is further objec- tionable because of the discouragement it might give to the ener- getic members of the community. Would a man continue to work hard if his lazy neighbor received as much as he ? There is only one sense in which we must regard men as equal, and that is that the happiness of one is as important as the happiness of another. That wealth should be distributed according to what men pro- duce is perhaps the most widely held idea at the present time, CONSUMPTION ue; sometimes on the ground that it is theirs by natural right, which is fallacious, and sometimes on the ground that such a method of distribution is a cure for laziness. There is, however, great difficulty in applying this test accurately under the complex con- ditions of modern industry. Who shall say what the president of a great life insurance society is producing? How many dollars' worth has a physician produced who has saved a man's life? However satisfactory the test of productivity may be in the case of a man who produces a pair of shoes with his own implements and labor, it fails at many points under modern industrial condi- tions, and its failure has become increasingly apparent with the growth of large-scale production and monopoly. Those who are impressed with the difficulty of saying what a man has produced, suggest that we ascertain what he needs. This, it is true, is not capable of exact determination; but any wide departures from justice might be agreed upon by judicial inquiry. Needs are the basis of the distribution within the family. The solidarity of the family demands it, and this is but the epitome and type of the solidarity of society. It is unquestionably in the interest of society that those with the highest capacities should be allowed to attain the fullest development of all their powers, pro- vided these powers are used in the service of humanity. What is necessary to make a man a good citizen? That, according to this third view, is the ultimate test of a just distribution. It is not necessary for us to select as a practical programme any one of these tests and wholly reject the others. The first, equal- ity, reminds us that the lowliest human being is to be looked upon as an end, not as a means to the happiness of others; the second is safe and convenient so far as it can be definitely applied; but the final test, so long as we are social beings, will always be that of needs, understanding by "needs," not what the individual asks for, but what is required for a full development of his powers. While, then, justifiable consumption will, according to these principles, be exceedingly variable, can any one for a moment claim that such principles now govern consumption? Immense sums are squandered on passing caprices whose satisfaction can- not by any standard be considered necessary. On the other hand, Il6 OUTLINES OF ECONOMICS multitudes of fine natures with keen appreciations and large ca- pacities for development and present enjoyment are left without the means for either. So long as these things exist, so long as a vast amount of the world's wealth is destroyed by vulgar and in- competent consumption which might impart satisfaction of a high order if consumed otherwise, and by others, the moral sense of the world will condemn luxury as a social wrong. And what is the excuse for this abuse ? Usually the simple fact of ownership. "It is ours," they say. But for what? Simply because the interests of production require capital to be massed under specialized control. There is no more reason why a mil- lionaire should consume all the income he controls than there is why a philosopher or an artist should withhold from society the satisfactions afforded by his genius. A successful manufacturer once expressed the opinion that a man has the right to put down silk velvet on a muddy crossing to walk on if he is rich enough to afford it. When a man tramples in the mire the fruit of human industry, he tramples with it human rights and humanity, and he should expect humanity to avenge the affront. The right of pri- vate property, like other social institutions, is ever on trial. The obsolete objection is sometimes urged that luxury gives employ- ment to labor. Does not philanthropic and productive expendi- ture do the same? But that is not the question. What comes of the employment? The payment of wages only helps men to get more of existing goods from other persons. That may be good for those workmen individually, but the only way to help society as a whole is to give men useful employment, to aid and encourage them to produce needed goods. Every employment of labor which encourages production of luxuries is a misdirection of social energy, an encouragement to society to spend its money for that which is not bread and its labor for that which satisfieth not. Harmful Consumption. We have been careful to avoid the impression that luxury consists in the use of pernicious goods. It is a common query, "Why should I not have this if it does me no harm?" This we have tried to answer in the preceding para- graphs. A luxury may be a positive good in itself, a satisfaction CONSUMPTION Iiy which society may well hope to make general, but it is a good which society cannot yet afford because other and greater wants are yet unsatisfied. But there is another kind of consumption which is objectionable in an entirely different way, not because it is excessive or premature, but because it is harmful in itself. Such are frequently drugs and alcoholic beverages. As we have said before, these wants are as economic as any other, and we have no intention of assuming the function of the physiologist or the moralist in enumerating the evils which come from the con- sumption of certain goods. But in one respect we have a distinct part in this discussion. All production is for the sake of man, and consumption is its final term. But in turn man is the prin- cipal factor in production, and as the consumption of certain goods affects him, the result is necessarily transmitted to the pro- ductive process. Now the consumption of certain goods clearly unfits men for efficient production, lessening bodily vigor, blunt- ing the perception, and these goods the economist regards as harm- ful in the sense of being destructive of human energy. Statistics of Consumption. Instructive investigations have been made as to the relative importance of the leading items in the fam- ily budget. The late Ernst Engel, the former distinguished head of the Prussian Statistical Bureau, advanced the theory that it might be possible by a careful study of a sufficient number of family budgets for a period of years to indicate the broad changes in consumption, and thus by a sort of social signal service to pre- dict the coming of industrial storms. Nothing has been so far accomplished along this line, but Engel's tables are interesting. From Table I (page 118) he deduces the following four propo- sitions : First. That the greater the income, the smaller the relative percentage of outlay for subsistence. Second. That the percentage of outlay for clothing is approxi- mately the same, whatever the income. Third. That the percentage of outlay for lodging or rent, and for fuel and light, is invariably the same, whatever the income. Fourth. That as the income increases in amount the percent- age of outlay for sundries becomes greater. n8 OUTLINES OF ECONOMICS TABLE I ENGEL'S LAW SAXONY ITEMS OF EXPENDITURE PER CENT OF THE EXPENDITURE OF THE FAMILY OF A Workingman with an Income of from $225 to $300 a year A Man of the Middle Class with an Income of from $450 to $600 a year A Man in Easy Circumstances with an Income of from $750 to $1000 a year i. Subsistence 62.0 16.0 I2.O s-. 2.O I.O I.O I.O 95-o 5- 55-] 18.0 I2.O 5-Oj 3-5 2.0 2.O 2-5 90.0 IO.O 50.0" 18.0 12. 5-o. 5-5 3-o 3-o 3-5. 85.0 'S-o 2. Clothing *. Lodging. . 4. Heat and light 5. Education, public worship, etc 6. Legal protection ' . . 7. Care of health 8. Comfort, mental and bodily recreation Total 1 00.0 IOO.O IOO.O Subsequent investigations in the United States have confirmed in a general way the conclusions of Engel, but the correspondence is not exact, as will be seen from Table II (page 119), from the reports of the United States Bureau of Labor, summarizing the expenditure of over two thousand families in 1891 and over eleven thousand in 1903. A recent careful study of two hundred families in New York gives the following division of expenditures : BRANCH OF EXPENDITURE AMOUNT SPENT PER CENT or TOTAL Food $367 A2 A.1 Rent Clothing 88 4? 10 6 Light and Fuel 42 J.6 C T Insurance 12 1Z 7 O Sundries 147.31 17.6 Total 8*6 2? IOO O CONSUMPTION The author of this study comes to the conclusion that a "fair liv- ing wage for a workingman's family of average size in New York City should be at least $728 a year, or a steady income of $14. TABLE II EXPENDITURES OF AMERICAN FAMILIES INVESTIGATED BY THE UNITED STATES BUREAU OF LABOR (From the Seventh [1891] and Eighteenth Annual Reports [1903]) PER CENT OF TOTAL EXPENDITUB Food Clothing Rent Fuel and Miscella- Light neous 1891 1003 1891 1903 1891 1003 1891 1003 1891 1003 Under $200 49.6 5-9 12.8 8. 7 15-5 16.9 8.1 8.0 14.0 15-6 $200 or under $?oo . . . . 4.4.3 47.7 14.3 8.7 14.7 18.0 7.6 7.3 IO 2 18.8 wsy*" $300 or under H-T-O *T/ "O *t* o / **T* / / / iy..* $400 4C 6 48 I I4.I IO.O 1C o 18 7 7 O 71 18 \ 16.1 $400 or under o*** ^"* - " **T* ij.w *"/ /" * 10.3 Ss;oo 4C..I 46 o 14.4 1 1. 4 1C. -I 18.6 6.6 67 18.6 i6<; wyw $500 or under 1O * t"-y *T't "*T ^J'O "/ v3 Sooo - . 43-8 46.2 IS-3 I2.O 15-2 18.4 6.6 6.2 19.1 17.2 $600 or under STOO A.I 2 1 C. le.o 12 O jc e 18."; e c.8 21.6 IO 4 V/vw $700 or under 41 * too *o - y i^.y 1 jO **-*o J'V J " iy.^ $800 *8 Q 4.1 4. 16.3 ia.c ic 6 18.1 e.'i C.5 27. 21.6 $800 or under sr**jr 41 .-4 * v *o *O'J *j-" J'O JO o y $900 38.1 41.4 J5- 1 13-6 16.1 17.1 5-3 5- 25-5 23.0 $900 or under $1000 34-3 39-9 1 6.8 14.4 14.9 17.6 4-7 5- 29.1 23.2 $1000 or under $1 IOO . . 34-7 38.8 '7-5 i5- r IS- 1 17-5 4-5 4-9 28.1 23-7 $i 100 or under $ i 200 70 7 3.7 7 16 c 14 12.2 16.6 ?.O 4-7 *6.7 26.1 $1200 or over .. . J^'l 28.6 jl 1 36.5 w*3 IS-7 *H-y IS-7 12.6 17.4 o y 3- *? / S-o o / 40.1 25-4 All 41.1 43- 1 15-3 13-0 IS-I 18.1 5-9 5-7 22.7 20.1 120 OUTLINES OF ECONOMICS a week. Making allowance for a larger proportion of surplus than was found in these families, which is necessary to provide adequately for the future, the income should be somewhat larger than this; that is, from $800 to $900 a year." l QUESTIONS AND EXERCISES 1. If you had four sacks of corn all alike, could you tell which is the marginal one ? 2. If an individual estimates his present wants as 10, 8, 6, 3, i, and his future wants as equivalent to the present value of 9, 7, 5, 2, o, and if he has $9, and if each want is satisfied with $i, how many dollars will he save? 3. Give as many expressions as possible that are equivalent to the term "subjective value." 4. Comment on the following : " Doubtless the best thing to do about them (the spendthrifts) is to do nothing not even to worry about their waste of money. Their waste of money, in fact, is the least silly thing they do, for the money is in constant flux and serves its purpose." World's Work, June, 1906, p. 7597. 5. Comment on the following words of Adam Smith: "Nothing is more useful than water ; but it will purchase scarce anything ; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use, but a very great quantity of goods may frequently be had in exchange for it." Wealth of Nations, Book I, Chap. IV. 6. Point out the differences in the tables of consumption statistics quoted in the text. REFERENCES BOHM-BAWERK, E. VON. Positive Theory of Capital, Book III, Chaps. 3 and 4. CARVER, T. N. "How Ought Wealth to be Distributed?" Atlantic Monthly, 1906, Vol. 97, p. 727. DEVINE, E. T. Economics, Chaps. V and VI. HOBSON, J. A. The Social Problem, Book II, Chap. VII. JEVONS, H. S. Essays in Economics, Chaps. II and III. KELLEY, F. " Aims and Principles of the Consumers' League." American Journal of Sociology, Vol. V, p. 289. MARSHALL, ALFRED. Principles of Economics, Book III. MAYO-SMITH, RICHMOND. Statistics and Economics, Book I, Chap. II. MORE, L. B. Wage-Earners' Budgets. ROWNTREE, B. S. Poverty, Chaps. VI, VII, and VIII. SMART, WILLIAM. Introduction to the Theory of Value, Chaps. I to VI. Eighteenth Annual Report of the United States Bureau of Labor. 1 More, Wage-Earners' Budgets, New York, 1907, pp. 208 and 269. PART III PRODUCTION CHAPTER IX PRODUCTION Production Defined. Man creates no new matter. Neither the farmer nor the merchant adds one atom to the existing material of the earth. Yet they are both properly called producers because they increase our supply of economic utilities. Production, then, means the creation of economic utilities by the application of man's mental and physical powers to the materials of nature. The act of production can be reduced to the following three opera- tions: (i) changing the form of things, (2) changing their place, and (3) keeping them until such times as they are wanted ; in other words, production adds to the materials of nature, form utilities, lime utilities, and place utilities. It has seemed to some that the farmer is more truly a producer than the manufacturer, and the manufacturer than the merchant; but such is not at all the case. All of these industrial classes help at some stage in the process of getting the materials of nature ready for consumption. The miner gets iron ore from the ground, the manufacturer trans- forms it into stoves, the railway company transports them, and the merchant keeps them until they are wanted. One stage is as essential as another if wants for stoves are to be satisfied. It may well happen that the utilities produced by the merchant could be produced with a smaller expenditure of economic force, and that by a better organization of the factors of production saving could be effected; or it may be that at times the merchant has been able to secure a larger return for a given effort than the farmer, but this is no justification whatever for the popular impression that he is not a productive worker. 122 OUTLINES OF ECONOMICS Factors of Production. It has been customary to speak of three factors of production nature, labor, and capital. Under nature are included all forces external to man, as the wind, the movement of water, attraction of gravitation, cohesion, etc. Fre- quently these things furnished by nature are called simply land, because, of what belongs to external nature, it is with land that we have principally to do in political economy. Labor, as a factor of production, includes human activities of every sort, intellectual as well as physical, which have economic significance. We might better, perhaps, substitute man for labor as the second factor. Labor is supplied by human beings and is different from material goods because it is always connected with a personality. Moral and intellectual qualities increase its pro- ductiveness. Temperance, trustworthiness, skill, alertness, quick perception, a comprehensive mental grasp, all these and other qualities belonging to the soul of man are of paramount impor- tance. Man's mere physical strength in itself is a poor thing, being surpassed by that of the lower animals, but man is far more productive, and even as a slave sold for more than the lower animals. Man can get but little from nature with his unaided hands. The instruments which assist him, as we have seen, are called capital; in other words, capital is every product which is used or held for the purpose of producing or acquiring wealth. By this definition, land is evidently excluded from the category. The nation's capital, then, consists of tools, machinery, business buildings, transporta- tion systems, raw material, etc. We may here again caution the reader against confusing these concrete goods with their value. Capital cannot be looked upon as an independent factor of produc- tion, since it is derived from the labor of man applied to nature. This fact has led some persons to say that capital is simply stored- up labor, but this overlooks the important element of time re- quired for production with the aid of capital. When we say that to print a book according to present-day methods requires the co- operation of labor and capital, we do not deny that the type-setting machines and printing presses which are used are themselves the product of other kinds of labor. To substitute capital for labor PRODUCTION I2 3 may seem to be simply substituting one kind of labor for another. But a long time elapses between the digging of the iron ore and the actual using of the machines in printing. Capitalistic production, as distinct from simple hand labor, is merely a different method a roundabout method of applying human labor to the materials of nature. It is this time element which gives rise to the problem of interest to be discussed in a later chapter. " Capital is an intermediate product of nature and labour, nothing more. Its own origin, its existence, its subsequent action, are nothing but stages in the continuous working of the true elements, nature and labour. They, and they alone, do everything from beginning to end in bringing consumption goods into existence. The only distinction is that sometimes they do it all at once, sometimes by several stages. In the latter case the completion of each stage is marked outwardly by the appearance of a fore-product or inter- mediate product, and capital has emerged. But, let me ask, is a thing any the less the work of its author that it is not produced all at once, but in in- stallments? If to-day, by allying my labour with natural powers, I make bricks out of clay, and to-morrow, by allying my labour with natural gifts, I obtain lime, and the day after make mortar and so construct a wall, can it be said of any part of the wall that I and the natural powers have not made it ? Again, before a lengthy piece of work, such as the building of a house, is quite finished, it must naturally be at one time a fourth finished, then a half finished, then three quarters finished. What, now, would be said if one were to describe these inevitable stages of the work as independent requisites of house-building, and maintain that, for the building of a house, we require, besides building materials and labour, a quarter-finished house, a half-finished house, a three-quarters finished house ? In form perhaps it is less striking, but in effect it is not a whit more correct, to elevate those intermediate steps in the progress of the work, which outwardly take the shape of capital, into an independent agent of production by the side of nature and labour." * It has been customary to distinguish fixed capital, which lasts for a succession of operations, and only a part of the value of which passes over into the product with each use, from circulating capital, which is used up in one act of production. Coal used in a loco- motive is an example of circulating capital; the car in which the coal is hauled is fixed capital. The difference is one of degree only. Saving and Capital Formation. From the individual stand- point, saving means the postponement of consumption. To lend 1 Bohm-Bawerk, Positive Theory of Capital (trans, by W. Smart), p. 96. 124 OUTLINES OF ECONOMICS to another, and thus secure a claim on his services for the future, is an act of individual saving, but this does not necessarily result in saving from the social standpoint. An act can be termed social saving only when the total social income in the future will be in- creased thereby. It is conceivable that this might take the form of merely hoarding up finished consumption goods in anticipation of a famine, but that is not the kind of saving that is typical of modern industrial nations. It is true that we frequently produce durable consumption goods which will be used for a long time in the future. The construction of a public library building in part involves social saving. But true social saving may also consist in bettering the industrial equipment of society. To provide more and better machines it is necessary to use some of the labor which might be used to increase our present income. If all of the labor now used in the construction of new milling machinery, ovens, etc., were employed in turning into bread all of the flour we now have on hand, we could doubtless greatly increase temporarily our present income in bread, but it would be at the expense of the future income. Thus the saving which results in the formation of social capital requires two things: (i) abstaining from the largest possible income to-day, and (2) using part of our labor in bettering the industrial equipment. Individual saving, however, itself commonly results in social saving also, as will be explained in a later chapter. Production and Sacrifice. Over against the enjoyment re- sulting from wealth consumption lies the discomfort of wealth production. Enjoyment, we have seen, grows less and less as the consumption of a particular good is continued, but the irksomeness of producing it, on the contrary, grows greater and greater the x longer labor is continued. Let FIG. i us take the case of Robinson Crusoe picking berries. We may represent the diminishing utility of the berries to him by the line ab (Fig. i), and the in- creasing irksomeness of picking them by the line cd. He would PRODUCTION I2 5 not pick more than Ox, because the xih berry costs him just as much pain as it yields him pleasure, and any further continuance of gathering fruit would result in an excess of pain. The degree of utility represented by mx, then, represents at the moment that the xih berry is picked and eaten, both the marginal utility and the marginal disutility, or marginal pain or sacrifice. Each of us is continually making such comparisons balancing the pleasure of further consumption against the pain of further production. Many persons who are working eight or ten hours a day could increase their income somewhat by working twelve hours, but the additional discomfort is greater in their estimation than the additional fruits of their labor would be worth. To be sure, much of our economic action goes on unconsciously. We accept a position, considering its advantages and its disadvantages in a general way as compared with the income it yields, but once we enter upon the work, we accept the daily grind as inevitable, and, in spending our income, think not of the pain it causes us, but simply of how we can get the maximum satisfaction from it. In discussing future wants we saw that postponing the con- sumption of goods from the present to the future began to be irk- some only after a certain amount of goods had been saved. Under present methods of production, it has just been explained, a large amount of this postponement of consumption is required. Ma- chines must be made, and the result of this labor cannot be enjoyed until these machines have been used up in making finished products. This means that some one must wait for the result, and in many cases this is irksome. Thus production may require, in addition to the pain of labor, the sacrifice of irksome -waiting or abstinence. This is a point which will be discussed further in the chapter on interest. Cost of Production and Expense of Production. The preceding paragraphs explain the most fundamental sense in which the term "cost of production " is used, i.e. (i) the subjective cost of painful labor or irksome waiting. But (2) the phrase is commonly used to refer to the expense of production, that is, the number of dollars' worth of labor and capital goods spent in getting an article on the 126 OUTLINES OF ECONOMICS market. (3) A third meaning is also found, which may be termed opportunity cost. Let us say that a person is confronted by the alternative of engaging in either of two occupations. He may be either a lawyer or a merchant, but he has not the time to be both. If he chooses to be a lawyer, he sacrifices his opportunity of being a merchant. In some cases this form of sacrifice is not easy to dis- tinguish from the first. If a man is hesitating whether to accept a position requiring nine hours' work per day or one requiring ten hours, shall we think of him as considering the irksomeness of the tenth hour, or the leisure which he would be sacrificing? But where the opportunity that is sacrificed is an occupation or busi- ness, this "opportunity-cost" is simply one way of looking at the fact that we aim to get the greatest possible return for our labor. Organization of the Productive Factors. The three factors, land, labor, and capital, must be brought together for purposes of production. In the case of many farmers and small-scale manufac- turers, all three are furnished by the same person, but under our system of private property, a marked differentiation of ownership takes place as industrial development becomes more complex. In a large-scale establishment it is the exceptional case where the majority of the laborers have any share in the ownership of the capital, but generally the owners of the capital are also the owners of the land. In American agriculture, ownership of the land and the capital by the same person is also widespread, but in England at the present time it is the rule that the landowner and farmer are different persons. On the other hand, factories are frequently built upon leased ground, and much land is farmed in America by tenants who furnish their own capital. Separation in the owner- ship of the productive factors and accurate accounting make neces- sary a distinct valuation of the services of each one of the factors. The Entrepreneur, or Undertaker. The one who manages a business for himself was formerly called an undertaker, or ad- venturer, but the first word has been appropriated by one small class of business men, and the latter has acquired a new meaning, carrying with it the implication of rashness and even dishonesty. We have consequently been obliged to resort to the French language PRODUCTION 127 for a word to designate the person who organizes and directs the productive factors, and we call such a one an entrepreneur; but recently the term " undertaker " has been more frequently em- ployed with this broad general meaning. The function of the entrepreneur has become such an important one in modern society that it is often convenient to regard him as a fourth factor in production, distinct from other classes of laborers. He has been well called a captain of industry, for he commands the industrial forces, and upon him more than any one else rests the responsibility of success or failure. A business which has achieved magnificent success often becomes bankrupt when, owing to death or other causes, an unfortunate change in the entrepreneur is made. The prosperity of an entire town has sometimes been observed to depend upon half a dozen shrewd captains of industry. Division of Labor. A characteristic feature of the organiza- tion of the factors is what is commonly called a division of labor, but this term suggests a number of related ideas which must be distinguished, (i) We may mention first a separation of occupa- tions, each one being independent of the other, as is shown, for example, in the splitting up of medical work into various special- ties, and again, entirely new occupations are continually appearing. (2) We also find production divided into stages, each one giving rise to a commercial product, but not to a finished consumption good. This becomes clear if we think of the history of almost any article of daily use : the making of bread presupposes the flour and wheat stages. (3) We have in the third place what is most com- monly referred to by the term " division of labor," where the pro- ductive process is divided into minute parts, and one part given to each laborer. The organization of a cotton mill affords an excellent illustration : In cotton mills, as in all other textile mills, there are men of skill and ex- perience who superintend or oversee the work in various buildings and in the rooms and yards. These supervisory employees have assistants, and the division of superintendence is carried down to the sections of rooms, so that all sections have their supervisors, known variously as section bosses, section hands, section girls, and third hands. The following list of occupa- 128 OUTLINES OF ECONOMICS tions will indicate the extent to which division of labor is carried in this industry: alley boys (or girls); bundle boys; filling and roving carriers; belt makers, blacksmiths, carpenters, machinists, masons, painters, steam fitters, and other mechanics, including sometimes electricians and battery- men ; roll coverers ; helpers ; laborers (unskilled) ; bale openers ; picker hands or cotton shakers; lap tenders; card brushers; first and second breaker hands; finisher pickers; card boys; card hands; waste hands; wastemen; card clothiers; card strippers; card grinders; combers; lap- head hands; doublers; drawing -frame tenders ; rail way -head tenders; slub- bers; speeders, fly-frame tenders; jack tenders; rovers; spinners; bobbin boys; yarn pourers; piecer and doffer; back boy; band boys; doublers and twisters ; winders ; yarn untanglers ; spool boys, white spoolers ; warp- ers ; slasher tenders ; size makers ; reel hands ; dye-house hands (with further subdivisions) ; beamers and splitters ; beam carriers ; warp drawers ; harness menders; harness brushers; handers-in; twisters-in; loom fixer; pattern makers; putters-up oi^amples; cloth weavers; weavers of designs; yarn carriers ; smash piecers ; spare weavers ; inspectors ; trimmers. The finish- ing of the cloth is a separate industry. 1 This form of the division of labor may also exist without the use of complex machinery, as in the slaughtering and meat- packing industry. "It would be difficult to find another industry where division of labor has been so ingeniously and microscopically worked out. The animal has been surveyed and laid off like a map ; and the men have been classified in over thirty specialties and twenty rates of pay from 16 cents to 50 cents an hour. The 5o-cent man is restricted to using the knife on the most delicate parts of the hide (floorman) or to using the ax in splitting the backbone (splitter) ; and wherever a less skilled man can be slipped in at 18 cents, i8| cents, 20 cents, 21 cents, 22^ cents, 24 cents, 25 cents, and so on, a place is made for him and an occupation mapped out. In working on the hide alone there are nine positions at eight different rates of pay. A 2o-cent man pulls off the tail, a 22^ cent man pounds off another part where the hide separates readily, and the knife of the 4o-cent man cuts a different texture and has a different "feel" from that of the 5o-cent man. Skill has become specialized to fit the anatomy." * Advantages of Division of Labor. The advantages of a divi- sion of labor have been enumerated as follows: (i) A gain of time. A change of operations costs time. Less time is also consumed in 1 From the Glossary of Occupations in the volume on Employees and Wages. Twelfth Census, Special Reports, 1903. 2 Commons, Trade Unionism and Labor Problems , p. 224, in a chapter appear- ing originally in the Quarterly Journal of Economics, Vol. XIX, p. i. PRODUCTION 129 learning one's business, as the labor of each is more simple. (2) Greater skill is acquired, because each person confines himself to one operation. (3) Labor is used more advantageously. Some parts of an industrial process can be performed by a weak person, others require unusual physical strength; some require extraordinary intelligence, some can be performed by a man of very ordinary intellectual powers, and so on indefinitely. Each one is so employed that his entire power is utilized, and work is found for all, young and old, weak and strong, stupid and intel- lectually gifted. (4) Inventions are more frequent, because the industrial processes are so divided that it is easy to see just where an improvement is possible. Besides this, when a per- son is exclusively engaged in one simple operation, he often sees how the appliances he uses could be improved. Workmen have made many important inventions. (5) Capital is better utilized. Each workman uses one set of tools, or one part of a set, and keeps that employed all the time. When each workman does many things, he has many tools, and some are always idle. (6) Finally, where the division of labor results in the simplification of opera- tions, it facilitates the substitution of machinery with mechanical power in place of direct human labor. "It is the largeness of markets, the increased demand for great numbers of things of the same kind, and in some cases of things made with great accu- racy, that leads to subdivision of labor; the chief effect of the im- provement of machinery is to cheapen and make more accurate the work which would anyhow have been subdivided." l Effects upon the Worker. The effect of the introduction of machinery upon wages will be discussed in a later chapter, but here some attention should be given to the effect of division of labor and machinery upon the life of the worker. It is frequently said that when labor is rendered simple it loses both its attractive- ness and its educational value. A man can like his work when he manufactures a whole watch, bearing the impress of care and skill, but who can like the mere routine of feeding material into some machine ? A workingman becomes a mere cog in a great mechanism, driven at a certain speed, day after day, with no 'Marshall, Principles of Economics, 4th ed., p. 334. K 130 OUTLINES OF ECONOMICS further interest in the result of his labor than that it is the source of his daily wage. But much may be said on the other side. To a large extent the heaviest labor is done with mechanical appliances, and those movements which are very simple and regular are precisely the ones which are likely to be taken over by machinery, leaving to human beings the work which requires intelligence and skill. "Looked at broadly, is the average work of a laborer in a machine industry less dignified, less agreeable, less humanizing than it was before the industry reached the machine stage ? From the nature of the question, it is danger- ous to dogmatize, because neither the affirmative nor the negative is capable of being demonstrated. The negative view seems to rest mainly upon the assumption that it is more dignified to be occupied with a great many purely mechanical operations than with a very few. The old-fashioned shoe- maker, for example, was largely occupied with purely mechanical opera- tions, most of them of a very elementary nature, such as a machine can do quite as well as a man. Each of these operations required great concen- tration of attention, leaving him very little opportunity for other forms of mental activity. He was the slave of each particular task as truly as a modern machine worker can be said to be the slave of his single task. But the old-fashioned shoemaker had to turn from one kind of work to an- other. This increased the difficulty, and, on the whole, required of him a greater amount of concentration than is now required of the operator of a machine. The latter, who has but one routine task to learn, learns it easily, and can carry it out without very intense concentration of mind. His mind, therefore, would seem to be freer than that of the old hand worker, though there was more variety to the work of the latter. Whether this greater variety is to his advantage or disadvantage would be difficult to determine offhand. It looks as though the operator of a machine in a shoe factory, being relieved of the necessity of acquiring several forms of specialized manual dexterity, would be in a better position for free mental activity than the old-fashioned shoemaker." l It seems that those who declaim against factory life do not dis- tinguish those things which are temporary and those things which are inherent in the system. Long hours, insanitary conditions of work, and frequent industrial accidents need not be inevitable ac- companiments of the use of machinery. It is the efficiency of machine methods that makes leisure possible for the workingmen, and when they learn to use that leisure sanely, their condition will *T. N. Carver, "Machinery and the Laborers," Quarterly Journal of Eco- nomics, February, 1908, p. 230. PRODUCTION I3I be far in advance of what it could be under more primitive methods of production. The charge is also brought against machine production that it is antagonistic to the development of art. Machine production means uniform production. It is possible that a growth in the desire for what is beautiful rather than cheap will limit the use of machinery in some directions (e.g. we may insist upon more hand work in the making of furniture), but an extensive use of machinery will always be necessary as a servant of art, and that in two ways: (i) for an appreciation of art there must be leisure, or at least leisurely work, and without machine methods this is not possible for the masses; (2) there is much work that is preliminary to the work of the artist, and that can be done by machinery. Will a building be less artistic because much of the heavy work of dress- ing the stone is done by machinery? Territorial Division of Labor. The concentration of a certain industry in a particular region is often called the territorial division of labor, or the localization of industry. Illustrations are seen in the prominence of the boot and shoe industry in Massachusetts; the collar and cuff manufacture in Troy, New York ; oyster can- ning in Baltimore; the manufacture of gloves in Gloversville and Johnstown, New York ; of coke in the Connellsville district, Pennsylvania; of brass ware in Waterbury, Connecticut; of carpets in Philadelphia; of jewelry in Providence, Rhode Island. Attleboro, and North Attleboro; slaughtering and meat packing in Chicago; the manufacture of plated and britannia ware in Meriden, Con- necticut; and the manufacture of silk in Paterson, New Jersey. The following causes of localization have been mentioned: (i) prox- imity to raw material, (2) accessibility to markets, (3) presence of water power, (4) favorable climate, (5) availability of labor, (6) availability of capital, and (7) the momentum of an early start. The explanation of how these causes have operated in particular instances is left as an exercise for the student. 1 1 Consult Hall, "The Localization of Industry," Census Bulletin, No. 244 (also found in Twelfth Census, Manufactures), and Ross, "The Localization of Industry," Quarterly Journal of Economics, Vol. X, p. 247- Also the Federal Census of Manufactures for 1905, Vol. I, Chap. XII. 132 OUTLINES OF ECONOMICS Productive Organization of the American People. According to the Census of 1900, nearly two fifths of the total population and about one half of the population ten years of age and over are engaged in gainful occupations. In the following table the extent to which persons in each age group are gainfully employed is shown for each sex : TABLE I NUMBER OF MALES AND OF FEMALES OF EACH SPECIFIED AGE ENGAGED IN GAINFUL OCCUPATIONS COMPARED WITH THE TOTAL NUMBER OF THE SAME SEX AND AGE : AGE GROUPS MALES 10 YEARS OF AGE AND OVER. PER CENT OF TOTAL IN EACH GROUP FEMALES 10 YEARS OF AGE AND OVER. PER CENT OF TOTAL IN EACH GROUP 10 to 15 years 26 i IO 2 1 6 to 20 years 768 12 1 21 to 24 years m i 10 8 2C to id. vears . . 06 i 3S to 44. years . . 96 6 it 6 45 to 54 years os e 14 7 ? w > W H M & S5 !s $.10 600,000 $ 60,000 $.03 $ 18,000 $50,000 $ 68,000 -SS.cco .09 800,000 72,000 03 24,000 50,000 74,000 2,OOO .08 1,200,000 96,000 3 36,000 50,000 86,000 + 10,000 .07 1,800,000 126,000 .O^ 54,000 50,000 104,000 + 22,000 .06 2,500,000 150,000 .O "? 75,000 50,000 125,000 + 25,000 5 3,500,000 175,000 3 105,000 50,000 155,000 + 20,000 .04 5,500,000 22O,OCO 03 165,000 50,000 215,000 + 5,000 1 This subject would require further treatment in a larger work, but the limit of space and proper proportions compel us here to confine ourselves to the broad general statement. 200 OUTLINES OF ECONOMICS Study of the table will show why, in the case assumed here, the monopoly price will stand at six cents. Competition, if it were present, would keep on increasing the supply as long as normal profit could be obtained. In our illustration the lowest price at which production could be carried on so as just to secure a profit above the expenses of production would be four cents; and four cents would therefore be the competitive price, or the price deter- mined by the balancing of marginal utility against marginal cost of production. But since the monopolist has such control over the production that he can control the supply, he will cut off pro- duction at 2,500,000 units, at which point demand will fix a price of six cents, and will give the largest net return, viz. $25,000. But the case here assumed is one that is far simpler than the cases frequently presented by real life. We should have to take many different illustrations even to approximate the rich complexity of economic life. We have, for example, assumed constant fixed charges, and such an assumption is one that is frequently helpful, because it often corresponds to actuality. But "fixed charges," so called, are, from the long-time point of view, variable. The constant charges of a street-railway system imply a street-railway system at a particular time and place and a street-railway system of a particular kind, e.g. one with single track and switches. If a street-railway system is enlarged so as to necessitate "double-tracking" and a new power plant, we will have new fixed charges. But anything like an exhaustive discussion of these points requires so much space as to be suitable only for special treatises. 1 The Effect of a Tax. Our numerical illustration may be made to convey a lesson regarding the influence of taxation upon monopolies and monopoly price. Fixed expenses have no influence in determining the price. If, therefore, a fixed tax, say of $5000 a year, were to be laid upon this monopoly, it would not result in an increase of price. A study of the table will show that with such a tax the net revenue at price .08 would be $5000; at price. 07, $17,000; at price .06, $20,000; at price .05, $15,000; at price .04, nothing. Thus price .06 will still be the point of maximum net revenue, and hence the monopoly price. On the other hand, a variable tax, for instance, a tax of one cent per unit, would result in this case in raising the monopoly price. In our illustration, such a tax would make the net revenue at the price .08, $2000; at the price .07, $4000; at the price .06, nothing; at the price .05, $15,000. Thus, though the monopoly would find its profits greatly curtailed by such a tax, consumers would be compelled to pay one cent more per unit for the monopoly product. The possible advantage which society might 1 See references to literature at the close of the chapter. See also the treatment of Constant and Variable Expenses in Chapter XII on Value and Price. MONOPOLY 201 draw from the tax would therefore be wholly or in part offset by the increased cost of the commodity. Such a raising of the price will not take place, however, if the demand at the higher price is not sufficient to make as great a net revenue as at the lower price. We may conclude, therefore, that fixed taxes, or taxes on the net revenue of a monopoly, cannot be shifted wholly or in part by a change in price ; while taxes laid in proportion to the amount of business, since they contribute an addition to the variable expenses, may be wholly or in part shifted by a change in price. A Law of Monopoly Price. It is sometimes said that the price of a monopolized good depends solely upon the will of the monop- olist. In the strict sense of the phrase this is not true. As our explanation has shown, the monopolist is forced by economic mo- tives to establish such a price as will give the maximum net reve- nue. There are certain conditions on the side of demand which therefore have a decisive influence in determining monopoly price. We may group the most important of these in a general statement which may properly be called the law of monopoly price: The greater the intensity of customary use of the monopolized commodity or service, the higher the general average of economic well-being, and the more readily wealth is generally expended, the higher will be the monopoly price which will yield the largest net returns. The phrase, intensity of customary use, may require explanation. It signifies simply the strength of custom with respect to the use of a monopolized article. If the people of France, for example, are accustomed to use large quantities of tobacco, there a gov- ernment monopoly, and if they cling with a high degree of in- tensity to this custom, it will obviously be possible profitably to raise the price a great deal above competitive price; whereas, if the custom is one that is relatively weak, that is, weak as com- pared with the force to which they cling to their customary con- sumption of other articles, a very high price will so diminish consumption as to lessen net profits. Thus monopoly, without any effort of its own, shares in the in- creasing wealth of a country, and absorbs a considerable part of it. It is, for example, among other influences, the larger wealth and the greater willingness to spend freely that makes monopoly more profitable in the United States than in Germany or other European countries. The search for other illustrations of the 202 OUTLINES OF ECONOMICS law should prove an interesting and valuable exercise for the student. Class Price. Thus far we have assumed that the monopolist charges one uniform price and sets the price at the point which yields him the largest net returns. But it is obvious that his gains will be increased if he is able to vary his price. His gains would be highest if he could charge each individual that price which would yield the largest net returns, taking into account the number of sales and profits on each. A rich man and a free spender might pay double the current rates for gas or electric light without diminishing his consumption in the least. But in the case of any large modern business it is obviously impracticable to fix a price for each individual, even were there no legal difficulties in the way, as there are in the case of the great monopolistic businesses such as gas and electric lighting, railway transportation, etc. The next best thing for the monopolist is to divide his public into classes, and to charge to each class that price which will yield the largest net returns. In the table already given, we found that six cents was the monopoly price on the hypothesis of one uniform price, but obviously, if the eight-cent and seven-cent prices could be secured, and six cents reserved as a price for sales that could not be made at eight or seven cents, the profits would be still higher. This gives rise to what, in its broad, general terms, we call class price. The monopolist seeks in every possible way to divide his community into classes and to secure from each the highest possible price. We observe a remarkable development of class price in the case of our railways; and, unless legal obstacles are interposed, this development will doubtless go still farther. We have special trains with an extra charge. We have privately owned railway coaches; our drawing-rooms and single seats in "parlor cars"; our ordinary first-class tickets ; and our second-class tickets, the purchasers of which frequently ride in the " day coach " with the first-class passengers. Then we have single tickets, fifty-trip family tickets, monthly commutation tickets, etc., with enormous variations in price. We may go farther and say that the whole American railway rate system of " charging what the traffic will bear " is a consummate example of monopoly prices. MONOPOLY 203 Nor need it be supposed that in all its ramifications class price is a bad thing. It is, when ignorance and need are exploited by a special high price ; frequently it works well when an attempt is made to reach a class of limited means with a very low price, as in the case of early and late workingmen's trains, etc. Monopoly price will vary with use also ; and this is one special subhead under class price, and may be designated as use price. The typical instance is that of two prices frequently charged for gas : a higher when it is used for illuminating purposes ; a lower when it is used for fuel. Monopoly price necessarily varies from country to country, from place to place, and from time to time. This follows neces- sarily from our law of monopoly price, and is a matter of familiar observation. The monopoly price yielding the highest net returns is lower among the careful, prudent Germans with relatively small incomes than it is among the free-spending Americans with rela- tively large incomes often easily earned. A difficulty suggests itself at this point, and this is found in the departure from uniformity of price of non-monopolized articles and services. We have to consider the question: Are the apparent class prices in competitive businesses class prices in the true sense of the term ? If so, wherein does the competitive class price differ from the monopolistic class price? To answer this question we must first of all consider the distinction between what we may term " commodity competition " and " business unit competition." When we speak about commodity competition, we have refer- ence to that competition with respect to a commodity which gives uniform price, if competition works perfectly. We think of the great staples like wheat and wool, those staples which have a world market. But the competition between retail business men is a competition of a different sort. It is the competition of one business unit as such with another business unit as such. It is a kind of competition that exists between the grocers in the same city, or mammoth department stores in New York and Chicago. It is competition which is frequently very sharp ; but even when it is the sharpest, it does not mean in retail trade real commodity competition. It does not mean that the prices of all goods sold 204 OUTLINES OF ECONOMICS are the same, but it means this: where we have sharp competition the gains are in proportion to expenditure of economic energy, using that term " economic energy " as a composite term imply- ing a certain output of economic force, whether this takes the form of labor or capital or business management. Each one of the business units will make a specialty of some one line of commodities upon certain days. Special prices will be offered ; but that means something very different from the class price which we have considered in our discussion of monopoly. Every one will agree that that is the case. The consumer considers very generally the prices charged as a whole. He knows very well when he goes to one retail establishment that for a certain par- ticular article he may be paying a little bit more than he would pay in some other store ; but the retail purchaser as a general rule does not consider each individual price, but he considers all the prices that he pays. It is intolerable for the consumer to go about a town searching for the lowest price of every little com- modity, to buy a paper of pins at one place because it is a little cheaper than at any other place, to buy a pound of butter at one place, a pound of sugar at another. People do not ordinarily do that. Now each retailer looks upon his business as a unit. He tries to derive from the business as a whole the greatest profit. Each one is putting his capacity into the business. One says, " I can do better if I sell this article at cost, or if I sell that article some- what below cost." It was not very long ago that' a large depart- ment store in New York City sold the popular magazines at less than was paid for them. That was not a class price in any sense of the term. That was a certain expenditure for advertising purposes. To some extent people do go about and try to get all the special prices in each particular establishment, but that is not done usu- ally, so far as purchases as a whole are concerned. On the other hand, there is a limitation very often in the arrangement that a store will sell only so much one pair of gloves or so many yards of silk at a special price to one customer. But we are dealing here with a different sort of phenomenon from class price. MONOPOLY 205 In wholesale business there is an attempt to unite the business unit competition and the commodity competition. Here the pur- chases are very much larger, and a person does not hesitate, to a certain extent, to go from one wholesaler to another wholesaler to make a particular purchase of some articles. Many persons would be a little bit ashamed to divide their groceries among a half-dozen grocers so as to get at each place the articles selling at a special price. When we have a unity of these two sorts of com- petition, then we have what we may call perfect competition, where we have a competition between the business units which includes a commodity competition, so that all articles are selling at the same price and each dealer has net returns in proportion to what he puts in of economic energy. It is in the nature of competition to cater to various economic classes in the community, and this is an entirely different phenome- non from that in the case of the gas company charging two different prices for an article according to the use to which it is put. Every retailer considers the class to which he will cater. Retailers tell us that such is the case. One will say, " We try to cater to the fashionable, wealthy people, the high-toned people." Another will say: " I do not try to reach the so-called ' best people '; I try to cater to the middle class. My training fits me better to cater to this middle class than to cater to the fashionable people. If I find that I can do this too, very well; but I especially cater to the middle class." 1 We find that at stores like Marshall Field's they recognize the various classes of the community and try to reach the various classes of the community by their basement department, and by their first floor, and the upper floors. But that does not mean the absence of competition in the business as a whole; but, taking the business as a whole, it competes with other retail establishments in Chicago. Here we have a different class 1 It must not be overlooked that there is a variation in cost of doing a retail business dependent upon the class of people to which a particular retailer caters. Over against the higher prices charged, let us say by a fashionable grocer, we have to put the higher quality of service. People of wealth and fashion require prompt service, involving expense. Also, frequently the shops that cater to fashionable people give very long credit and lose heavily in many cases. These are consider- ations of a different kind from those mentioned in the text. 206 OUTLINES OF ECONOMICS price from that we have considered. We have a competitive class price which, if the competition is perfect, yields no surplus. This does not mean that some will not gain more than others in com- petitive business. The gain is in proportion to the output of energy. Monopoly Price High Price. It is often said, and frequently even in judicial decisions, that the monopolist can charge any price that he pleases. We have already seen that this is not the case. The law of monopoly price shows that the price, even in the case of monopoly, is determined by economic forces. It is conceivable that there may be cases in which monopoly price will exactly coin- cide with competitive price, although the probabilities would be against a frequent coincidence of this kind. There are also cases where monopoly price may be even lower than competitive price. If a monopolist should be able to effect great savings as compared with the expense of doing business under competition, it could theoretically happen that the price which would yield the largest net returns would be a lower price than would be possible under competition. Probably, and in fact almost certainly, under a condition of competition, letters could not be carried as cheaply as they are. Generally there are strong reasons for the position that mo- nopoly price is high price. Monopoly is formed for the sake of gain. Gain may be secured in two ways by monopoly : first, through economies of production; and it is alleged by trust pro- moters that these economies are a chief motive in their activity. There are some gains of this kind, but it is too early to say precisely what they are. When we compare a monopolistic business with a competitive business organized on such a scale as to secure the maximum of efficiency, the gains of competition in alertness and inventiveness, stimulated by rivalry, have recently been too little considered. The second source of gain in monopoly is found in the ability to charge high price. In confirmation of the position that monopoly price is high price, we may refer to history, the utterances of which seem to be clear and distinct. At any rate, there can be no doubt that, in the opinion of historians who have treated the subject, MONOPOLY 207 monopoly means high price. Hume, in his treatment of monop- oly in his History of England, speaks of the price of monopolized articles as exorbitant, and cites the price of salt, the price of which had been raised by monopoly tenfold and even more. The pro- duction or sale of salt, or both, is frequently a government mo- nopoly, and it is generally conceded that in all cases of monopoly the price has been so extremely high as to be a real popular griev- ance; and it is generally necessary to inflict severe penalties to prevent the people from securing the salt at a lower price from non-authorized sources. But of still greater significance are the results of the investigations of the Industrial Commission of the United States, as seen in the Preliminary Report of 1900 (Vol. I of the complete report). It is there made evident that when monopoly appears in a form at all clear and well-defined, the tendency is plain to increase the margin between the prices of finished products and raw materials. 1 The courts of the world have made it clear in their judicial ut- terances that they regard monopoly price as high price; and, as their opinions are based upon cases actually brought before them, we cannot do otherwise than attach great importance to their view. Wherever commissions have been formed with power to regulate monopoly price, and these commissions have been comprised of independent and strong men, there has been a marked tendency to reduce monopoly price; because unregulated monopoly price has been found to be excessive and unjust. The judicially minded Railroad Rate Commission of Wisconsin affords an illustration. This Commission has authorized a higher price in a few cases, but generally has been forced to lower prices, although in the notable case of passenger rates it did not go so far as the legislature. The investigations of the Railroad Rate Commission led the members to believe that a reduction from three cents to two and one half cents per mile for all the leading railways in Wisconsin was just; whereas, subsequently, the legislature lowered the rate to two cents 1 See Report in Vol. I (Industrial ^ Commission), by Professor J. W. Jenks.on " Industrial Combinations and Prices," pp. 39-57 ; and also Chap. VIII, " Prices," in the same author's work, The Trust Problem. 208 OUTLINES OF ECONOMICS per mile. But even the decision of the Commission (which was accepted by the railways) was a reduction of over 16 per cent. Investigations held have resulted very generally in a lower price for gas. All important investigations of street-car service in the great cities of the United States have terminated in the conclusion that the monopoly price of five cents per passenger is a high price. The recent settlements with the street-car companies of Chicago have been based upon an agreement to maintain a five-cent fare and to give to the city of Chicago 55 per cent of the net gains. According to the statements of the interested parties, even this will leave a very handsome return for the owners of the street-car properties. In the next place, we refer to the experience and observation of men when they have had dealings with well-defined monopolies. The express companies and the oil business afford illustrations falling within the experience and observation of nearly all readers and students of this work. Monopolies and the Distribution of Wealth. We have not the precise statistical data which will enable us to state the exact influence of monopoly upon the distribution of wealth. We have, however, sufficient data to warrant the opinion that the high price of monopoly and the gains resulting from the exclusive posi- tion of the monopolist give us a large privileged class in countries of modern civilization, but especially in the United States. An advantage of the monopolist in the United States is found in the law of monopoly price, coupled with the failure to regulate monop- oly as carefully in our country as it has been regulated in Europe, generally speaking. Ours is a country in which there is large wealth, in which wealth is easily acquired, and in which conse- quently people spend freely. Monopoly price must, then, be excep- tionally high price and yield exceptional gains. Even when the increment of price is comparatively small, it has large significance in the case of the sale of a vast number of units of services or com- modities. The difference between a four-cent street-car fare and a five-cent street-car fare may not appear to be great, but it is a difference of 25 per cent and is enormous. All the many investigations that have been held recently in MONOPOLY 209 various lines of business (especially in railways, beef industry, coal mining, etc.). point to monopoly as a prime cause of the so- called swollen fortunes of this country. In this and other countries some histories of families distinguished for wealth have been written, and probably few if any cases could be found in which some mo- nopoly element had not entered. Various lists of rich men have been published, among them one published by the New York Sun in 1855, and one published by the New York Tribune in 1892. These lists cannot by any means be presumed to be accurate, and yet they do afford very considerable evidence of the sources of large fortunes, and point to monopoly as a prime cause of the mod- ern enormous fortunes. This is a subject which in itself would require a larger book than the present one for adequate treatment. The student must attempt by observation and study to carry for- ward the lines of investigation and thought here suggested, being constantly on his guard against undue haste in generalization. Public Policy with Respect to Monopolies. It is possible to throw out only a few suggestions in this place. As many monopo- lies have come as a result of underlying laws of industrial evolu- tion, they cannot all be abolished. Experience and the nature of industries like railways, gas works, etc., falling under the head of " public utilities," so called, should be conclusive. We must have monopoly in these cases, and the only question we are concerned with is, " What kind of monopolies shall we have ? " Again, we cannot abolish monopoly simply as a result of legislative enact- ment. The anti-trust laws of our states, so generally failures, should be conclusive as to this point. On the other hand, legis- lation is not powerless, but it must be in accord with the laws of industrial evolution. The problem is abolition of undesirable monopoly where this is feasible; and very generally regulation rather than destruction. Here, again, we have the experience of the United States and of other modern nations as confirmation. We may, to begin with, admit that unregulated monopolies in private hands have always been odious and are opposed to the principle of the laws of civilized nations. They are opposed to that endeavor to secure equality of opportunity which is funda- mental in modern democracy and which manifests itself as a red 210 OUTLINES OF ECONOMICS thread running through American history. Even George Wash- ington, generally looked upon as so calm and self-contained, denounced monopolizers and wished they might be " hunted down as pests of society " and " hanged on a gallows five times higher than the one prepared for Haman." * It is not so much high price that disturbs the modern man as it is inequality of opportunity; and this general sentiment has been very clearly and forcibly expressed in court decisions. It makes little impression upon the American public when it is attempted to show that the Standard Oil Company has lowered price. The enormous fortunes to which it has given rise suggest that price has been higher than it should be, yielding far greater than competitive gains; but even if it could be proved that the price had been voluntarily lowered, it would not be convincing, because we are disturbed by the alleged engross- ment of opportunities by a few members of the community and not open to others. Nor would it satisfy the American public to be convinced of the sincerity of the professed benevolence and of the personal integrity of the leaders of this gigantic undertaking. The question is one of the action of economic forces, largely im- personal; the leaders are often really coerced by these forces; and from one point of view are to be looked upon as their victims. Obviously, the first step in a treatment of monopolies is to dis- criminate between monopolies owned and operated by organized society (that is, nation, state, or city, and managed in the general interest) and private monopoly. If it is true that a certain portion of the industrial field is naturally monopolistic, special privilege can be removed by government ownership. This is the first and most obvious method. The difficulties of government ownership are such, however, that another method is by many advocated as preferable and is, as a matter of fact, being thoroughly tried in the case of railways in the United States. And that is the method of public control of monopolies privately owned and operated. The public control, to secure equality of opportunity, must so regulate monopolies and limit price that the gains will be no higher than those produced by equally wise investments and equally wise 1 Bullock, Essays on the Monetary History of the United States, p. 67. MONOPOLY 211 and prudent management in the field of competition. 1 Some- times it is stated that owners of railways and other monopolistic enterprises should have a competitive return upon all the money that they have invested. This would give them a position of spe- cial privilege, inasmuch as in the competitive field a great deal of money is lost. It is only wise investment and careful management in the field of competition that can secure returns equal or supe- rior to the current rates of interest. Imprudently invested capi- tal is lost in the field of competition; and when it is imprudently and unwisely invested in the field of monopoly, it cannot justly claim any return. Finally, democratic sentiment demands that there should be no needless extension of the field of monopoly through favoritism, as seen in rebates and special rates of railway transportation com- panies. The Relation of Monopoly to Trusts. The development of industry is treated elsewhere in this work, and it is shown that, as a result of the forces inherent in industrial society, we pass over from labor aided with few and simple implements, scarcely more than an extension of hands and feet, so to speak, to labor aided by increasingly complicated and costly tools, and then we find labor supplemented and even replaced by machines, ushering in the era of capitalism; and, as this transition is made, industry is conducted on an ever larger and larger scale. The business unit grows from the small, isolated shop to such a mammoth concern as the United States Steel Corporation, owning an appreciable propor- 1 This does not mean that in the case of old enterprises price must always be so reduced that the gains shall yield a competitive return only on the physical value of a plant. The principle of vested rights or interests has to be given a certain r&le. These have often been created by society rather than by private persons, and faith must be kept. In the case of railways and the telegraph, the American nation and states have deliberately encouraged a wasteful policy of competition which is in large measure responsible for high capitalization. It would not be right to place upon holders of these properties all the burdens of a mistaken public policy in the past. What is needed is to declare a public policy for the future and to base returns for the future upon future actual investments in the case of public utilities. In any case, we should have a physical valuation of railways, gas works, etc., as a help in determining fair prices for present and future. Now and here we can do no more than to throw out these suggestions in regard to a pressing present problem of great magnitude. 212 OUTLINES OF ECONOMICS tion of the wealth of a vast nation. These large business units, as a result of evolution, are commonly designated as trusts; but they present simply the problems of large-scale industry unless they com- prise elements of monopoly. This indeed very often, perhaps usually, happens in the case of the largest industrial establishments. They have been aided by rebates and other favors from railways, and they have made themselves master of peculiarly rich and espe- cially limited supplies of natural resources, such as petroleum oil, anthracite coal, and the Mesabi iron range. The trust problem resolves itself into two classes of problems: first, the class of prob- lems belonging to large-scale business; and second, the class of problems falling under monopoly. The discussion of so-called trusts can be profitably considered under these two categories. There is no magic in the mere word " trust," although it seems to have power to awaken alarm and has helped produce precipitate legislative action; whereas action must be preceded by an analy- sis of the trust problem into its proper elements to make possible its satisfactory solution. QUESTIONS AND EXERCISES 1. Has bigness anything to do with monopoly? Do you know any small business which is a monopoly ? Do you know any very large business which is keenly competitive? Contrast a state of competition with a state of monopoly. 2. Define monopoly and discuss each point in the definition. 3. Describe as fully as you can the relation of industrial evolution to the idea of monopoly. 4. Do you think that monopolists now show a worse spirit than formerly ? a better spirit? Describe the monopoly established by Joseph in Egypt. (Genesis, Chap, xlvii). What good effects did it have? Is it apparent that it had evil effects? 5. What do we understand by partial monopolies ? What is there, strictly speaking, illogical in the term ? Is this a sufficient reason for not using it ? 6. Contrast land-ownership with monopoly. 7. Explain the importance of classification of monopolies, and especially of distinguishing between private and public monopolies. 8. State the main classes of monopolies, and give the divisions and sub- divisions in each class. 9. A public tobacco monopoly exists in France and produces large revenues. The business is said otherwise to be well managed. Do you see any benefits MONOPOLY 213 that would accrue from the establishment of such a monopoly in the United States? any evil effects? 10. Define monopoly price and show how it is determined. 11. What does class price mean? Compare monopoly class price with competitive class price. Explain "use price." 12. Contrast "commodity competition" with "business unit competition." 13. Why do we think of monopoly price as high price ? Do you know any monopoly price which is a low price? What do you mean by high price? by low price ? 14. What relation has monopoly to large fortunes? to small fortunes? W T hat, if any, to poverty? 15. What is the wise public policy with respect to monopolies ? 16. Describe the relation of trusts to monopolies. LITERATURE BAKER, C. W. Monopolies and the People, Part II. BULLOCK, C. J. Introduction to the Study of Economics, Chap. XI. " Trust Literature : A Survey and Criticism." Quarterly Journal of Economics, Vol. XV, 1901, pp. 167-216. Reprinted in Ripley's Trusts, Pools, and Corporations, pp. 428-473. ELY, R. T. Monopolies and Trusts, Chap. Ill, pp. 102-104; also Chap. VI, pp. 229-231. HOBSON, J. A. Evolution of Modern Capitalism, new and revised ed., 1907, Chap. IX. JENKS, J. W. The Trust Problem. National Civic Federation Report, 1907 : Municipal and Private Operation of Public Utilities. 3 vols. PRICE, W. H. The English Patents of Monopoly. Report of the Chicago Conference on Trusts. Report of the United States Industrial Commission, Vols. I and II. RIPLEY, W. Z. Trusts, Pools, and Corporations; Railway Problems. SHAW, ALBERT. Municipal Government in Great Britain; also, Municipal Government in Continental Europe, Chap. VI. CHAPTER XIV MONEY THE vast system of valuation and exchange, which is the most characteristic single feature of present-day economy, rests upon the use of money. Some economic writers have pictured an im- aginary primitive state of "barter economy," in which, before the use of money, goods were exchanged directly for goods. But what little definite information there is on this point leads to the belief that about as soon as men began to exchange things, and conse- quently to attach exchange value to them, they began to use some kind of money some commodity or commodities for which things were generally exchanged, and in terms of which the values of other things were generally measured. These earliest forms of money were crude and simple, but they sufficed to meet simple needs. As exchange economy has ad- vanced through the growth of individual and industrial specializa- tion and the localization of industry to the present complex division of labor, the monetary system has developed pari passu, the most conspicuous feature of this development in modern times being the growing importance of credit as a means of effecting exchanges. Industrial and commercial progress has led to monetary progress, and has, in turn, been stimulated and made possible by it. Various Meanings of the Word "Money." The word "money," like so many other terms with which economics has to deal, has in common usage no restricted technical meaning, but may denote any one of a number of different things. It sometimes means individual wealth of any sort. A "monied" man is simply a wealthy man. This is, however, only a colloquial and purely de- rivative meaning. A second, and very common, use of the word is in the sense of generally exchangeable purchasing power, whether 214 MONEY 215 this be embodied in concrete forms of money, or exist only in the intangible form of credit. Money in this sense is synonymous with "money funds." The "money market" is the market for loanable money funds. When we speak of "money income," "money expenditures," "money investments," etc., we refer to this exchangeable purchasing power. Other meanings of the word " money " suggest that, for some purposes, a distinction may he made between "money" and credit instruments. But to look for any definite line of demar- cation, consistently followed in common usage, or even in eco- nomic writings, would be a vain search. The element of credit is found in most forms of money, even, as we shall see, in some kinds of metallic money. A useful and important distinction, how- ever, is made by the very common practice of restricting the term "money" to those instruments of general acceptability which pass freely from hand to hand as media of exchange. The particular things included in this third concept of money vary for different periods and for different countries. In the United States this freely exchangeable medium includes the metallic and paper money issued by the federal government, together with national bank notes. Checks drawn by individuals upon their bank accounts are not money, or money instruments, in this sense, because they do not pass freely from hand to hand as media of exchange. They can be used only in making payments to persons who know and have con- fidence in the drawer, indorser, or holder of the check. This third meaning of the word " money" possesses, as has been suggested, the sanction of a very common and prevalent usage; it corresponds, moreover, to the technical definition given to the word by many economic writers, and to the official usage of the United States Treasury. Some writers, however, have drawn the line between money and other means of payment somewhat differ- ently, either refusing to count bank notes as money, thus limiting the term to money instruments issued by the government, or nar- rowing the application of the term yet further by using it to denote only metallic money, all other media of exchange being counted only as promises to pay money. Yet another, and still more restricted, meaning is attached to the 2l6 OUTLINES OF ECONOMICS word when it is employed to denote only that part of the stock of metallic money which serves as a standard of -value as well as a medium of exchange. Although this extreme limitation of the meaning of the word " money" is neither common nor justifiable, the distinction suggested by it is a fundamental one. For, as we shall see presently, the value of all other media of exchange is determined by their relation to what is best distinguished by calling it standard money. All these different uses of the word " money " imply distinctions of greater or less significance, but for purposes of economic analysis the most important concepts are the second, third, and last in the foregoing enumeration. Recognition of the fact that exchangeable purchasing power, money instruments of general acceptability, and the standard of value are different things is indispensable to clear thinking in this field. In this chapter the word " money " will be employed in the sense of money instruments of general accept- ability. Metallic Money. The earliest and simplest forms of money were commodities. Particular commodities came to serve as money, not because they were arbitrarily designated as such by king or chieftain, but because they possessed some properties which made them exceptionably exchangeable. In some cases a primi- tive community came to use a commodity as money because it was something for which they had a dependable "foreign market" - something, that is, which they customarily sold to other communi- ties in exchange for their products. In other cases a commodity which a community did not itself produce, but which it got only in the course of trade with other communities, became the money commodity. Or, if for any reason a particular commodity came to be particularly esteemed as a mark of wealth or a badge of social prestige, it was very apt to be used as money. But whatever the original ground of the choice, a commodity which a community once began to think of as money had its exchangeability, and con- sequently its suitability for monetary uses, increased in a cumulative way, just as to-day most of us are willing to accept anything as money which we think we can use as money. A great variety of commodities have at one time or another been MONEY 217 used as money. Some typical examples are cattle, grain, furs, oil, salt, tobacco, ivory, shells, and tea. But with the advance of politi- cal and economic civilization the metals have, through the process of the survival of the fittest, proven themselves everywhere to.be preeminently and indisputably the best money commodities. Copper, silver, and gold have each in turn been chosen as the prin- cipal money metal of the civilized world, the transition from the cheaper to the dearer metals indicating the growth of exchange and the consequent need of larger money units. Metals, and especially the precious metals, have certain qualities that give them a peculiar fitness to serve as money. They are durable, easily recognized and tested, and may be divided into homogeneous units of convenient form and weight. Moreover, as compared with most other commodities, the precious metals are relatively stable in value a fact that arises in part from their durability, for any one year's output of the mines makes but a comparatively small addition to the total stock of metallic money. Coinage. When metals were first used as money, they passed from hand to hand simply by weight, or, in some cases, in the form of ornaments. Coinage speedily developed, however, as a con- venient way of certifying to the weight and fineness of money units. 1 Such a guarantee is naturally of little avail unless it is generally recognized as authoritative. On this account the coinage of money has almost universally been regarded as a prerogative of the sov- ereign. In England, even under the divided sovereignty of the middle ages, the coining of gold and silver was generally a privilege belonging to the king alone. The lesser feudal lords and the char- tered cities issued token coins, made of the baser metals, and in- tended especially for local use, but if they possessed the right of coining the precious metals, it was through a special grant of the king. Seigniorage. Sovereigns have in the past very often viewed the monopoly of coinage as an opportunity for personal profit. By 1 The names of many ancient coins and of some modern ones are also the names of weights, although it has generally happened that through successive debasements of the. coinage these names have lost their original significance. The Greek talent, the Jewish shekel, the Roman as, the English pound, and the French livre are familiar examples. 2l8 OUTLINES OF ECONOMICS calling in the stock of metallic money in the country for recoinage, they have frequently reduced the weight of coins without changing their nominal value, thus increasing the number of coins, so that a handsome profit was netted for the royal treasury. Debasement of the currency was a favorite financial expedient of Henry VIII, of England, and of Philip the Fair and Louis XIV, of France. Somewhat less reprehensible in theory, although amounting to about the same thing in its effects, was the common practice of making a charge for coinage, called seigniorage. This practice was based on the idea that it was possible to maintain a dif- ference between the value of a coin and the value of the bullion put into it. 1 A great deal has been written about the possibility of seigniorage, for the subject is one that involves considerations that are fundamental in monetary theory. It has been often said, for example, that it is the "government stamp," rather than the metallic content, that gives value to a coin. Leaving aside the matter of limited or subsidiary coinage (which will be considered presently), we may dispose of this statement by saying that if it means that the use of certain metals as money decreases the supply of them available for other purposes, and thus increases their value, it is a truism; but if it means that in coinage we can add an arbi- trary and intangible element of value to the metallic content of the coin, the statement is a false and misleading doctrine that has been disproved over and over again by the monetary experience of almost every country. There is, however, a stronger statement of the theory of seignior- age. If the only way in which I can convert bullion into a medium of exchange is by being content with 750 ounces of money for every looo ounces of bullion I take to the mint, will not the coins have a value one third greater than that of the metal they contain ? May not their "metallic content" be said to be, in a figurative sense, one third more than their weight, because they cost me that much more in bullion? If their bullion value sinks below this point, bullion will not be brought to the mint, as it would be worth more 1 Under Philip the Fair, of France, the seigniorage charge went as high as 50 per cent. Charges of from 2 to 15 per cent were more common. MONEY 219 than the coins one could get for it ; just as when the value of the coins rises above this point the supply of bullion would be stimu- lated so that as a result the value of the coins would tend to maintain this fixed relation to the value of bullion. Confidence in the sta- bility of the government may be assumed in this reasoning; and as a matter of fact, it is probable that in a completely isolated community the government could, through wise and careful regu- lations, maintain a constant rate of profit on the coinage, with- out endangering the stability of the monetary system. The fundamental difficulty with seigniorage is, however, that in foreign trade coins pass current only as bullion, so that when seigniorage was charged, the prices of imported goods, measured in money, were necessarily higher than their prices measured in bullion, by an amount equal to the seigniorage. It was impossible that one ratio could long be maintained between the value of coined money and the value of bullion in domestic trade and another ratio in foreign trade. The interdependence of the prices of all kinds of goods prevented that. Money prices, in general, always rose ; that is, the value of the coins sank to the level of the value of the bullion they contained. Under these conditions no one would voluntarily undergo the loss inseparable from taking bullion to the mint for coinage, and with the cessation of coinage the profits from coinage stopped. Every possible expedient, short of the absolute prohibition of foreign trade, was tried by sovereigns in their efforts to retain these profits. 1 But market forces were found to be stronger than royal regulations, which at best only served to retard somewhat the depression in the value of the official coinage. About the only effective way of getting seigniorage profits was for the sovereign to admit that the coins in circulation possessed only their bullion value, and then to call in the currency for recoinage 1 The use of any other circulating medium than the official one was prohibited ; no one was allowed to sell imported gold or silver, whether in bullion or coin, save to the royal mint ; if there were mines within the country, they were some- times prohibited from disposing of their products except to the royal mint ; gold- smiths were forbidden to melt down coin or to purchase more bullion than they needed, and this they were forbidden to buy at less than the mint price; restric- tions were placed on the export of bullion ; these and other similar methods were tried, but all to no avail. Cf. W. Lexis, article "Miinzwesen," in Handworterbuch der Stuatswissenschaften. 220 OUTLINES OF ECONOMICS into smaller pieces, in the manner that has already been mentioned, thus starting afresh with a new seigniorage charge. The result was invariably a repetition of the process of a more or less rapid depreciation in the purchasing power of the coins, leading often to further debasements of the currency. Modern nations have abandoned the attempt to secure profits from their monopoly of the coinage. Since 1666 England has made no charge whatever for coining bullion into standard money. 1 Most of the countries of continental Europe make a charge just sufficient to cover the expense of coinage. This charge is some- times called seigniorage, but it is usually, and more properly, called brassage. The United States made no coinage charge until 1853, when a charge of one half of i per cent was made for coining standard money. This was reduced in 1873 and was abandoned entirely in 1875. At present the United States exchanges gold coins, weight for weight, for bullion of standard fineness (nine tenths gold, one tenth copper) brought to the mint in lots of one hundred dollars or more in value. For crude bullion, or bullion not of standard fineness, gold coins are exchanged containing as much fine gold as is contained in the bullion, less a trifling charge for assaying, refining, and for the alloy. 2 Instead of viewing coinage as a profitable prerogative of the government, we have come to view it as a government duty, to be performed at government expense. The question of seigniorage versus gratuitous coinage is no longer a live issue. But the student who has grasped the significance of the lesson contained in the his- tory of seigniorage has taken an important step toward the under- 1 In practice most of the gold bullion coined in England is supplied to the mint by the Bank of England, which is required by law to purchase it at the minimum price of 3 175. gd. per ounce. An ounce of bullion makes 3 175. io$d. in gold coin, the difference going to compensate the bank for the delay involved in getting the bullion coined at the mint. In the United States the waiting devolves upon the government, for gold coins, or, at the option of the depositor, checks upon United States subtreasuries or upon depository banks are paid to depositors as soon as their bullion can be weighed and assayed. 2 The coinage mints are at Philadelphia, San Francisco, New Orleans, and Denver. In addition there are assay offices at New York, Carson, Boise, Helena, Charlotte, St. Louis, Deadwood, and Seattle, which receive bullion on the same terms as the mints, plus an additional charge of one eighth of i per cent. MONEY 221 standing of monetary theory. There is no mysterious element of intangible value created by the operation of coinage. The coinage of standard money is now in law, and always has been in fact, a device for dividing the standard money metal into convenient units of certified weight and fineness. The Standard of Value. We have seen in an earlier chapter that prices are exchange values measured in terms of money. Goods and services are exchanged for money in certain ratios, and these ratios constitute the prices of the goods and services. Some writers have made a distinction between the functions which money performs as a medium of exchange, and its functions as a measure of value. These are not, however, two different functions, but merely two different aspects of the same thing. By the very process of exchanging a commodity for money, we of necessity measure its value in terms of money, and only as a medium of ex- change does money measure value. We may speak of a pound weight as an instrument used in weighing or as a measure of weight, but we would all recognize that this refers only to two aspects of the same thing. In the United States the actual medium of exchange with which we measure values is heterogeneous in that it comprises a variety of coins, made from different metals, together with several kinds of paper money of many different denominations. But it is homo- geneous in that first, all these different forms of money are alike in name, that is, they are dollars, or multiples or fractions of a dollar, and second, these various kinds of dollars are identical in value. This familiar and very satisfactory condition of uni- formity in the units in which we measure value does not, however, suggest to us the real nature of the value of money in the way that a less perfect monetary system would. It would be possible to have a number of different monetary units, just as the weight or size of an object may be stated in terms of either the metric system or the English system of weights and measures. In fact, before the United States had an adequate monetary system of its own, the actual medium of exchange con- sisted largely of English, French, Spanish, and Portuguese coins, and there were as many different ways of stating prices, that is, of 222 OUTLINES OF ECONOMICS measuring values, as there were units of value. 1 Nor does the mere name of "dollar" give to different pieces of money a uniform value. The silver dollar of Mexico is worth only about half as much as the silver dollar of the United States, although it is of ap- proximately the same size. More significant, however, is the fact that in the United States we have had at different times "dollars" of unequal value. What is it, then, that gives uniformity to the dollar as a unit of value in our present monetary system ? To say that various kinds of money are equal in value because they will purchase the same amounts of goods is, obviously, to argue in a circle. But the an- swer is found in the fact that they are interchangeable, and so long as any number of kinds of money, all named in dollar units, are freely exchangeable, dollar for dollar, it is impossible that a dollar in one kind of money should be worth more than a dollar in any other kind of money. We do not refer here to the fact that the different kinds of money are exchanged for each other at par in business transactions and in banking, for this is a result, rather than a cause, of the uniform value of the money units. The ex- changeability that underlies the uniform value of our different kinds of money is maintained by the federal government. All coins smaller than a dollar are by law exchangeable at the United States Treasury for "lawful money," which includes gov- ernment notes, silver dollars, and gold coins. Government notes, in turn, are simply promises to pay, which are redeemable in gold at the government Treasury. While there is no definite legal man- date requiring the redemption of silver dollars in gold, yet the cur- 1 An instructive bit of monetary experience may be found in the efforts of some of the colonies to reduce this foreign money, especially Spanish money, to the English system of pounds, shillings, and pence, in which accounts were generally kept. They were not content with a simple official statement of the actual ratios between the different value units, but sought to give an artificially enhanced value to the foreign coins by increasing the number of shillings to which they were to be considered equivalent. The result was not, however, an increase in the value of the coins, but a decrease in the value of the nominal "shilling" in which accounts were kept. This was the origin of the now rapidly vanishing use of the word "shilling" as equivalent to 12^ cents in some localities and to 1 6$ cents in others. The student may find an instructive parallel in this experi- ence and the official statements of coin values by which sovereigns tried to retain their seigniorage profits. MONEY 223 rency act of 1900 makes it the duty of the Secretary of the Treasury to maintain all other forms of money at a parity with gold a requirement which means that he would have to redeem silver dollars in gold if such action should at any time be needed to maintain their parity. Gold certificates and silver certificates, are simply a mechanism for putting gold and silver money into circu- lation in convenient form. They are analogous to warehouse re- ceipts, because they represent gold coins and silver dollars that are stored in the government Treasury to the full amount of the certifi- cates issued, and which may be obtained at any time in exchange for the certificates. National bank notes, which constitute a large part of our actual circulating medium, are redeemed at the federal Treasury in government notes. In practice the government is con- tinually receiving all kinds of money, including silver dollars, and exchanging other kinds of money for them. The significant thing is that all other kinds of money are exchange- able, directly or indirectly, for gold coin. In the case of gold coin, there is* a further kind of exchangeability the unlimited and free convertibility of gold coin and gold bullion. So long as any one can secure gold coin in any amount for the same weight of gold bullion of standard fineness, and so long as gold coin can be freely melted down into gold bullion, it is impossible that there should be any difference between the value of a gold coin and the value of its metallic content. We have, then, not only the interchangeability of all parts of the circulating medium, but also the positive physical identity of one part of it and the material of which this part is made. Gold, whether in coin or bullion, constitutes the standard of value, for it is the value of gold that fixes the value of the dollar. The measuring of values in terms of dollars through the exchange of goods and services for money of different sorts, the equalizing of the values of dollars in all varieties of money through their ex- changeability, and the automatic standardization of the value of the dollar through the free and unlimited coinage of gold l ; these are the fundamental facts of our monetary system. 1 In fixing the value of coins at the value of their metallic content, unlimited coinage is of more importance than free coinage, as the history of seigniorage shows. Some writers have emphasized the importance of the legal tender quality 224 OUTLINES OF ECONOMICS Gold coins, because their value as bullion is equal to their value as coins, constitute standard money. The gold dollar weighing 25.8 grains, and containing 23.22 grains of fine gold, is by law the unit of value. The coinage of the gold dollar was discontinued in 1890, but the gold coins that are minted contain precisely this amount of gold per dollar. Limited Coinage. Gold is the only metal which is made into coins by the United States government for any one who deposits bullion at the mints or assay offices. All other coins are made from metal purchased from time to time for that purpose as Con- gress may direct. In none of these coins is the bullion worth as much as the coin. In 1878, when the United States began the limited coinage of silver dollars, the value of the 371^ grains of pure silver in a silver dollar was about 89 cents. The value of silver de- clined steadily until 1902, when 371^ grains of silver were worth only 41 cents. Since that time there has been a slight upward move- ment, but nevertheless the present (1908) bullion value of a silver dollar is only about one half its value as a coin. The bullion value of the smaller silver coins is still less, for they contain but 347.22 grains of silver to the dollar, while the bullion value of our nickel and bronze coins is yet smaller, relatively. Such coins are sometimes called "token coins," the implication being that the fact that they pass from hand to hand at their full nominal value is merely a matter of habit or usage, supported by general acquiescence. More accurately, however, they are credit coins, because the excess of their coin value over their bullion value depends ultimately, as we have seen, upon the good faith and credit of the government, evidenced by their redeemability in gold. If, for example, a catastrophy should overthrow the present federal government, and if the new government should refuse to recognize the obligations of the old, nothing could prevent these coins from sinking to their bullion value. in this connection. But experience has shown that while the fact that money must be accepted by a creditor at full value sometimes makes an otherwise undesirable kind of money a "generally acceptable medium of exchange," it does not suffice to maintain its value, so far as prices made after such money has been issued are concerned. MONEY 225 A very considerable profit accrues to the government from this limited coinage. The difference between the amount paid for silver bullion from 1878 to 1907, and the value of the coins made from it, amounted to $143,000,000. In the accounts of the federal treasury this profit is called seigniorage, but it is to be carefully distinguished from real seigniorage, a charge exacted for the conversion of standard bullion into standard coin. If the federal government should issue a general balance sheet of the kind used in corporation accounting, the credit element in its outstanding limited coinage would properly appear as a liability, which might be greater or less than the profits that had accrued on such coinage, depending upon whether the present value of the bullion in the coins happened to be greater or less than the prices which the gov- ernment had paid for it. Bimetallism. A monetary system like the present one of the United States is a single standard system, because only one com- modity is used as a standard of value. The double standard system, under which two different commodities serve concurrently as legal standards of value, has, however, been used in the past by many governments, including our own, and its superiority over the single standard system has been alleged by many advo- cates. Practically the only commodities that civilized nations have used as standards of value in modern times are gold and silver. The question of the double standard resolves itself, accordingly, into the question of the bimetallic standard, which means in practice the unlimited coinage of both gold and silver. Bimetallism does not mean, in theory, as might be supposed, the establishment of two different monetary units of different names, one measured by the value of a certain amount of silver, the other by the value of a certain amount of gold, prices being measured according to convenience in terms of either unit. On the contrary, it contemplates the establishment of one nominal unit, such as the dollar, to be measured at the same time by the value of either a defi- nite amount of gold or a definite amount of silver. More concretely this means the opening of the mints to the unlimited coinage of both gold and silver into dollars, or dollar multiples, the amount of silver Q 226 OUTLINES OF ECONOMICS in a silver dollar and the amount of gold in a gold dollar being established by law. Many of the arguments that have been advanced by bimetallists have related to the alleged immediate advantages to be secured from the adoption of the double standard under particular condi- tions of time and place. One argument, however, of more general significance is based on the probable greater stability in value of the double standard. Silver and gold are produced under some- what different conditions, and are used for somewhat different pur- poses. It has been suggested that tendencies toward fluctuations in the value of silver and gold would, therefore, be as apt to be in opposite directions as in the same direction, and that so far as they were in opposite directions they would tend to counterbalance each other. Most opponents of bimetallism, while admitting that, if feasible, it might possess some advantages, deny its possibility. The diffi- culty is, they maintain, that while the ratio of the weight of gold in the monetary unit to the weight of silver in the monetary unit has to be fixed and definite, the ratio of the value of gold to the value of silver is not fixed and definite, but is subject to the fluctuations of the market. If one metal is relatively undervalued and the other relatively overvalued by the legal ratio, the result will be that only the overvalued metal will be brought to the mint for coinage, for the undervalued metal will be worth no more than the overvalued one as coin, but will be worth more as bullion. The actual result will be, in such a case, not a bimetallic standard, but a single standard composed of the metal which, at the mint ratio, is the cheaper. Moreover, if, by a change in the relative market values of the two metals, this one in turn becomes undervalued by the mint ratio, the standard coins composed of that metal that are already in use will, according to Gresham's law, 1 disappear from circulation, being hoarded, melted down, or exported, and the other metal will take its place as the actual standard of value. 1 Gresham's law is that "bad money drives out good,'"' or that "the cheaper money drives out the dearer." Sir Thomas Gresham, master of the mint under Queen Elizabeth, came to this conclusion as a result of his observation of the difficulties encountered by that sovereign in her attempts to improve the condition of the debased, worn, and mutilated coinage bequeathed to her by her predecessors. MONEY 227 All but the most extreme bimetallists would admit the impossi- bility of establishing and maintaining a coinage ratio between the two metals that would differ by any considerable margin from the ratio corresponding to their market values, but they maintain that a mint ratio established as nearly as possible to the prevailing market ratio will have a steadying influence upon the latter that will tend to prevent any wide divergence between the two. If one metal should rise in value to such an extent that it would not pay to use it as money, more of the other metal would be used for mone- tary purposes, thus decreasing the supply of it available for other uses and consequently enhancing its value. The net effect would be, it is claimed, a tendency toward the equilibrium of the value of the two metals at the coinage ratio. The appeal to history has been used both by bimetallists and their opponents. The claim of the monometallists that legal bi- metallism is apt to mean actual monometallism, with the relatively cheaper metal as the standard, has been substantiated many times in the monetary experience of different nations. The automatic change from one single standard to the other, following a change in market values, is also a phenomenon that has been illustrated by a large number of concrete cases. On the other hand, the bimetal- lists are able to point to some apparently successful bimetallic sys- tems, such as that of France in the eighteenth century. But it is a significant fact that no real bimetallic system has been able to en- dure for any considerable time except when the annual production of gold and silver was relatively small and relatively stable, and where international trade was a relatively unimportant item. There is no scientific student of monetary problems who believes that it would be possible for any nation to maintain independently the double standard under the present conditions of a large and fluctuating annual production of the precious metals, coupled with an inter- national commerce of vast proportions. International bimetallism, that is, the adoption by each of the leading nations of a bimetallic standard, at a ratio fixed by national agreement, has had many supporters, even among those who do not believe in the practicability of national bimetallism, and repre- sentatives of different nations have assembled in several inter- 228 OUTLINES OF ECONOMICS national monetary conferences for the discussion of this subject International bimetallism would remove one difficulty experienced in the attempts made by different nations to maintain independent bimetallic systems at even slightly differing ratios, and that is, the tendency for each metal to flow from the countries in which it is relatively undervalued in the mint ratio to the countries in which it is relatively overvalued. Other difficulties, however, would still remain, and the possibility of maintaining an actual bimetallic standard even under international agreement, supposing that were possible, is open to very serious doubt. The waning of public interest in the question of bimetallism in recent years is of great significance, because it indicates that the real moving forces behind the bimetallist propaganda have not been any real or assumed points of superiority of general significance that may be imputed to a multiple standard, but rather that certain specific results that would flow from the adoption of bimetallism at a particular time and place have been desired. More specific- ally, bimetallism has been supported by those who have desired "cheaper money," and these have been particularly active when the monetary standard in actual use has been increasing in value; that is, when prices in general have been decreasing. The recent great increase in the world's production of gold has, temporarily at least, taken bimetallism out of the list of economic problems of general public interest. Bimetallism in the United States. The national monetary sys- tem was established by act of Congress in I792. 1 The mint was opened to the free and unlimited coinage of both gold and silver, the silver coins containing 371^ grains of fine metal per dollar, and the gold coins 24! grains per dollar, the ratio of 15 to i being thus established. It was soon found, however, that gold was worth in the market slightly more than fifteen times as much as silver, and 1 The act of 1792 followed in detail the -recommendations of a Report of the Establishment of a Mint, by Alexander Hamilton, then Secretary of the Treasury. Hamilton incorporated some of the recommendations contained in earlier reports by Robert Morris and Thomas Jefferson. Hamilton's Report has been frequently reprinted, but it, together with the reports of Morris and Jefferson and other pertinent documents, may be conveniently found in the Report of the International Monetary Conference of 1878. MONEY 229 as a consequence but little gold was brought to the mint for coinage, while the gold that was coined illustrated Gresham's law by speedily disappearing from circulation. Silver dollars, too, disappeared from circulation, but for another reason. They were somewhat lighter than the Spanish dollars which were in general circulation at the time, and would, under the operations of Gresham's law, have driven the latter out of circulation, had it not been that the Spanish dollar commanded a slight premium over the American dollar in ordinary purchases. But the American dollars, on account of their new and attractive appearance, could be used as 'dvantageously as the Spanish dollars in trade with the Spanish possessions in America. They were consequently taken from the country for that purpose, while Spanish dollars were brought back and were often recoined into a larger number of American dollars. This wasteful coinage of silver dollars was stopped in 1806 by order of President Jefferson, leaving the mint open to the coinage only of gold, smaller silver coins, and minor coins. As a matter of fact American coins made up only an insignificant part of our circulating medium before 1834. Realizing the impossibility of maintaining a gold coinage under such conditions, Congress, in 1834, changed the legal ratio to 16 to i by reducing the weight of the gold dollar. By this step, however, they went too far in the other direction, for silver was undervalued at this ratio, and while the number of gold coins increased, but little silver was brought to the mint, and silver coins quickly disappeared from circulation. In order to secure a supply of small change, Congress was forced, in 1853, to abandon the principle of the free and unlimited coinage of silver coins smaller than a dollar, and to order that they should be coined, as at present, only from bullion purchased by the government at the market price. At the same time the weight of these subsidiary coins was reduced by one seventh to insure their being retained in circulation. The discovery of gold in California, in 1848, and in Australia, in 1851, suddenly increased the world's supply of gold by an unprece- dented amount. In fact, the careful estimates of Dr. Soetbeer indi- cate that as much gold was produced in the third quarter of the nineteenth century as in the preceding three centuries and a half following the discovery of America. The result was to increase the discrepancy between the mint ratio and the actual market ratio of gold and silver, although the production of silver had also been 230 OUTLINES OF ECONOMICS greatly increased. Gold was brought to the mint for coinage in enormous amounts, a condition that lasted even after 1861, when paper currency began to be used almost exclusively as the medium of exchange. In a general revision of the coinage laws, enacted in 1873, the silver dollar was dropped from the list of coins that could be manu- factured at the mint. Although this action was almost unnoticed at the time, a fictitious significance has, in subsequent years, been attached to it. Silver was practically "demonetized," that is, its free and unlimited coinage was actually prevented, by the estab- lishment of the ratio of 1 6 to i in 1834. The act of 1873 gave legal recognition to an existing fact. But a sudden depreciation in the value of silver, which began at about this time, brought the question of bimetallism again into the foreground. Since the seventeenth century the relative values of gold and silver had fluctuated only between relatively narrow mar- gins, and in no year since the establishment of the United States mint had the average annual value of an ounce of gold been less than 15 or more than 16^ times the value of an ounce of silver. In 1875, however, the market ratio fell to 1 6.6 to i; by 1878 it was 18 to i; by 1886 it was 20.8 to i; and in 1894 it was 32.6 to i. 1 It is evident that if the opportunity for the free and unlimited coinage of silver at the ratio of 16 to i had still existed, there would have been another sudden change in the actual standard of value. Gold would have been undervalued by that ratio, and would have disap- peared from circulation, and silver would have taken its place. It was the realization of this fact, coupled with the knowledge that the silver standard would mean a "cheaper dollar," that led to a popu- lar agitation for the free and unlimited coinage of silver which continued for more than twenty years. The first tangible result of this agitation was a compromise meas- 1 The causes of this unprecedented decline in the relative value of one of the precious metals were complex and intricate. The following may be mentioned, however, as contributing circumstances: (i) Cessation of an extraordinary de- mand for silver in India which had existed since 1850; (2) Stoppage of the unlim- ited coinage of silver in several European countries; (3) Discovery of large silver mines in the United States; (4) Increase in the value of gold, as evidenced by a general decrease in the prices of commodities. MONEY 2 3 I ure, the Bland-Allison Act, passed by Congress in 1878, which in- stituted the limited coinage of silver dollars by authorizing the sec- retary of the treasury to purchase at market prices not less than $2,000,000 nor more than $4,000,000 worth of silver bullion per month, and to coin it into dollars. The results of this enforced coinage were satisfactory to neither party to the controversy. The amount of silver coined was in excess of the demand for that bulky kind of money, even though as much as possible was put into circu- lation in the form of silver certificates, and although the govern- ment tried to favor the distribution of silver by paying the expense of transporting it to the localities where it was wanted. The move- ment in favor of the unlimited coinage of silver continued to gain in strength, however, its advocates claiming that "more silver," rather than less, was needed. A second compromise was effected in the Sherman act of 1890, which provided for the increase in the amount of silver purchased to 4,500,000 ounces each month, which was to be paid for in treas- ury notes. These treasury notes were to be full legal tender, and were redeemable in gold or silver coin at the discretion of the secre- tary of the treasury. The silver was to be coined only so rapidly as was found necessary for the redemption of the treasury notes. The increase in the amount of silver purchased was a concession to the advocates of the unlimited coinage of silver; the fact that the circu- lating medium based immediately on these purchases was com- posed of treasury notes, which were injected into circulation in proportion to the market value of the silver purchased, was a con- cession to their opponents. The soundness of the principles embodied in the Sherman act was soon tested by a period of financial and industrial depression. Gold had to be exported to Europe in large quantities to settle an adverse balance of trade, and the government found difficulty in maintaining its own gold reserve, which was already seriously threatened by a decline in customs receipts, accompanied by an in- crease in federal expenditures. The gold reserve was at that time simply the amount of gold in the treasury that was available for the redemption of other forms of money, especially the United States notes, or greenbacks, that had been first issued during the 232 OUTLINES OF ECONOMICS Civil War, but which did not become actually redeemable in gold until 1879. During this scarcity of gold the banks were able to secure gold for their own reserves or for export by presenting United States notes at the treasury for redemption in gold. Under the law the notes had to be immediately reissued, and were used in government payments, but no sooner was this done than they were again returned by the banks for redemption in gold. The workings of this "endless chain " by which gold was pumped from the government treasury were aggravated by the fact that the treasury notes authorized by the Sherman act were used for the same purpose. Although they were payable either in gold or silver coin, they were actually redeemed on demand in gold. This was at the urgent insistence of President Cleveland, who believed, with good reason, that a refusal to redeem them in gold would probably have forced the silver standard upon us, by destroying the ex- changeability of silver and gold and thus putting an end to their parity, and that it would certainly have injured the credit of the government and put it to a disadvantage in the bond sales that were needed to replenish the gold reserve. Under the operations of the Sherman act the government was virtually exchanging gold coin for silver bullion at a time when gold was sorely needed and when the value of the purchased silver was steadily depreciating. The gold reserve sank from $190,000,000 in 1890 to $95,000,000 in 1893. I n J une f tne latter year the closing of the mints of India to the unlimited coinage of silver gave an added impetus to the downward movement of the value of that metal. These facts led Congress, in a special session called in 1893 f r tnat purpose, to order, though with obvious reluctance, that the purchase of silver under the Sherman act should be stopped. The agitation for the free and unlimited coinage of silver con- tinued, however, and with increased vigor, and it was made the sole issue in the presidential campaign of 1896. It was alleged that the yet continuing industrial depression could be alleviated only by "more money" and "cheaper money." It was claimed by many intelligent people that the unlimited coinage of silver would not drive gold from circulation, but would increase the value of silver and decrease the value of gold until they met at a parity established MONEY 2 33 by the desired legal ratio of 16 to i. The most effective argument of the protagonists of silver was found, however, in the admitted fact that the value of gold, as shown by changes in the general price level, had been increasing. All indications pointed toward a con- tinued decrease in the annual production of gold, and a consequent further increase in its value. This, it was argued, was a hardship to those who had borrowed money on long time obligations, such as mortgages, because they would be forced to repay in value or purchasing power more than they had borrowed. 1 This agitation was, in fact, simply one of a series of cheap money movements that have characterized the economic development of the United States, and which have sprung from the fact that the expense of opening up and developing new lands has necessitated expenditures of capital in an amount far beyond the resources of the actual settlers. Newly settled regions have usually been debtor regions, and there is more than mere coincidence in the fact that demands for cheap money have always been voiced most loudly on the frontier. 2 This does not mean that a cheap money movement is essentially dishonest; that it represents the conscious attempts of debtors to escape the payment of their lawful debts. The life and vigor in this movement for the unlimited coinage of silver was put into it by men who saw the imputed value of their assets sinking and the difficulty of paying their debts increasing in a financial crisis for which they were not individually responsible. Money funds were hard to get because individual credit, the founda- tion of bank credit, was lacking. This scarcity of money funds was confused, naturally, if erroneously, with the scarcity of "money" in the sense of standard money, gold; and the remedy was sought in an action that would give more and cheaper standard money. The defeat of the advocates of bimetallism in 1896 would prob- ably not have stopped the agitation for the unlimited coinage of silver, had it not been for the return of prosperous conditions, 1 This argument raises the problem of the standard of deferred payments, which is to be considered in Chapter XVI. 2 Cf. C. J. Bullock, Essays in the Monetary History of the United States, Part I. 234 OUTLINES OF ECONOMICS coupled with an enormous increase in the world's annual produc- tion of gold, which has brought with it a general increase in prices. The single gold standard was formally and definitely recognized by law in 1900. All of the silver bullion purchased under the Sherman act has been coined, and silver dollars sufficient in amount to retire the treasury notes have been set aside for that purpose. These treasury notes (which should not be confused with United States notes, or greenbacks) are accordingly on sub- stantially the same basis as silver certificates. Up to June 30, 1907, their amount had been reduced from $156,000,000 to $6,000,000. No silver dollars have been coined since 1904, and under the present law no more can be coined until Congress authorizes the special purchase of bullion for that purpose. The Dominance of the Gold Standard. Within the last few years gold has been accepted more generally and more definitely than ever before as the standard money metal of the world. The change from a silver, or bimetallic standard, to the gold standard is often a difficult and expensive national undertaking, but it brings the advantages of a more stable unit of value and of increased facility in international exchange. In October, 1906, the silver standard prevailed only in Bolivia, four of the countries of Central America, China, Persia, and the Straits Settlements. 1 Government Paper Money. In metallic money of limited coinage, there is, as we have seen, a considerable element of credit value added to the actual bullion value of the coins. In paper money the element of credit is alone present. Government paper money is composed of instruments which bind the government to pay, and usually to pay on demand, equivalent amounts of metallic money, usually standard money. Government paper money also differs from metallic money of limited coinage in respect to the motives which give rise to and regu- late its issue. Subsidiary coins are issued by the government in response to the demand for a circulating medium for use in small transactions and in making change. The public convenience is the first consideration; the profit accruing to the government on such coinage is a secondary thing. In issuing government paper money, 1 Report of the Director of the Mint, in Finance Report, 1907, p. 297. MONEY 2 35 however, fiscal motives have predominated. When hard pressed to swell the government income to cover an increase in expenditures, those responsible for the financial policies of a government have sometimes deemed it advisable for the government to make use of its own notes, promises to pay, in discharging its obligations. These differ from government bonds, which are often issued in similar circumstances, in that the bonds bear interest, are sold to voluntary buyers, and are usually payable at a definite time in the future, while government notes are usually non-interest bearing, represent a forced, rather than a voluntary loan, and are usually, in form at least, payable on demand, or in practice, at an indefinite time in the future. They are, moreover, issued in convenient form for monetary use, and are usually made legal tender, so that they pass from hand to hand as a medium of exchange. The forced loan which they represent is therefore shifted from those who first receive the notes from the government in payment for goods or services. Colonial and Revolutionary Bills of Credit. Paper money issues have frequently been used in the United States as a means of meeting a fiscal emergency, especially those springing from the extraordinary expenditures occasioned by wars. The expense of sending troops to the Indian wars was one of the things that led most of the American colonies to issue paper money. The history of these colonial "bills of credit," as they were called, illustrate two dangers that seem to be inseparable from the use of this financial and monetary device. In the first place, it was very easy to suc- cumb to the temptation of paying ordinary as well as extraordinary expenditures in this easy way. Some of the colonies got entirely out of the habit of taxing themselves to meet current public ex- penses. The refusal to levy taxes was a prolific cause of disputes between colonial assemblies and royal governors. In the second place, because no money was raised for the pur- pose, these bills of credit were not redeemed promptly. Their value, as compared with metallic money, fell because people lost confidence in their redeemability. As the currency depreciated, it took continually larger issues of it to meet the government ex- penditures, and each increase in the amount in circulation led to a 236 OUTLINES OF ECONOMICS further fall in value. After the currency had become practically worthless, it was a common practice of the colonies to repudiate it in whole or in part, and to start afresh with bills of a " new tenor." Any attempt to restrict this reckless use of public credit was met with determined resistance from the "cheap money" advocates of that day. There were frequent complaints of the scarcity of money, especially from the more newly settled districts. The greater the quantity of money issued, the more insistent was the demand for still further issues. In short, this colonial experience in itself gives sufficient basis for the inference that from the monetary as well as the fiscal point of view, the use of paper money easily degenerates into a bad habit. Again, in the Revolutionary War, paper money issues were made, this time by the Continental Congress as well as by the individual colonies. The Continental Congress was really driven to this action by its lack of the power of levying taxes. Its bills became practi- cally worthless, although every effort was made to maintain their parity with metallic money by appeals to patriotic sentiment. After the formation of the national government a few of them were redeemed at one cent on the dollar. It was our unfortunate colonial and revolutionary experience with paper money which led to the insertion of the wise provision in the federal Constitution which forbids the individual states to issue bills of credit or to make anything but gold and silver legal tender in payment of debts. The Greenbacks. The federal government made no important issues of paper money until the Civil War. 1 It was not generally foreseen that that conflict would be so long continued and intense as it was, and Congress consequently neglected to make adequate provision for taxes that would help to meet the increased expendi- tures and to sustain the government credit in the borrowing opera- tions that were necessary. In 1861 the secretary of the treasury was authorized to issue at his discretion $50,000,000 in "demand 'The federal government issued treasury notes in the war of 1812 and the Mexican War, and during the panics of 1837 and 1857. Most of these issues were interest bearing, however ; none of them were legal tender, and none of them got into common use as media of exchange. MONEY 2 37 notes," which, although they were not legal tender, could be used in all payments to the government. These were redeemed promptly on demand until the end of the year, when the withdrawal of gold from the banks by depositors for hoarding, and by the government for its own uses, led first the banks and then the government to suspend specie payments, that is, to refuse to pay their current obligations in gold. In 1 86 1, moved by the absolute necessity of providing some kind of money for the federal treasury, Congress authorized the issue of $i 50,000,000 in legal tender notes, 1 or greenbacks, as they came to be called. It was hoped, moreover, that this increase in the circu- lating medium would improve the market for government bonds for which the greenbacks were at first made convertible at par. This action was not taken without strenuous opposition on the part of those who foresaw some of the disastrous consequences of large paper money issues. But as in earlier American experience with paper money, succeeding issues met with less and less resistance. All together, greenbacks to the amount of $450,000,000 were issued during the war. It was the general expectation when the greenbacks were issued that they would be retired as soon as possible after the conclusion of the war. But when such action became possible, it was opposed by many who thought that the reduction of the circulating medium would decrease prices, impose additional burdens upon debtors, injure business interests, reduce the public revenues, and hamper the government in the refunding of its public debt. In 1866, how- ever, Congress authorized the gradual retirement of the greenbacks, but repealed the act in 1868. The amount in circulation in 1874 was $382,000,000, and in that year a bill requiring the definite in- crease of the issue to $400,000,000 was prevented from becoming law and thus establishing a dangerous precedent only by the veto of President Grant. Some greenbacks were retired under the pro- visions of an act of 1875, but in May, 1878, there were $346,681,000 outstanding, and as a law then enacted provides for their constant reissue after being received or redeemed at the treasury, the amount still stands at that figure. The part that they played in the financial 1 Including the "demand notes," which were now made legal tender. 238 OUTLINES OF ECONOMICS difficulties of 1890-1893, together with the history of the treasury of the notes of 1890, has been described in connection with the dis- cussion of bimetallism. At present the greenbacks constitute a useful and acceptable part of the stock of money. But if another financial crisis should deplete the government treasury, they would very likely prove again to be a source of difficulty. Their retirement is feasible under present conditions, but would be most difficult to accomplish under the very financial conditions under which they would be most dan- gerous.. The currency act of 1900 provides for a gold reserve of $i 50,000,000, to be held against them to insure their redeemability. Jf the reserve falls below $100,000,000, the secretary of the treasury is directed to replenish it from the proceeds of bond sales. Al- though this gold reserve also constitutes part of the real security behind our silver dollars, it could safely be diminished in amount if the greenbacks were retired. Economic Effects of the Greenbacks. The greenbacks are in form promises to pay, but they are not promises to pay on demand, nor at any specific time. During the period of the suspension of specie payments they were not actually redeemable in gold, nor was gold in general circulation as a medium of exchange except on the Pacific coast. Gold was, however, in addition to its industrial uses, employed as money in international trade, in the payment of interest on government bonds, and for customs duties (for which the greenbacks were not legally receivable). There was thus a -constant demand for gold money, which was met by its sale as a commodity in the New York market. The gold market was highly speculative, the daily and even the hourly fluctuations in the price of gold in greenbacks being considerable. Notwithstanding these speculative features the prices paid for gold indicated very accu- rately, in the long run, how much, in the expert judgment of market specialists, the value of the greenbacks had depreciated. Everything that was thought to affect the probability of the ulti- mate redemption of the greenbacks in gold influenced their price. Among these factors were the quantity of greenbacks issued, the condition of the federal treasury, the military successes and re- verses of the Union cause, and, in later years, the prospects for the MONEY 2 39 resumption of specie payments. Greenbacks reached a parity with gold two weeks before the resumption of specie payments on January i, 1879. A fact of special significance is that until July, 1863, the greenbacks were convertible at par into 6 per cent gold bonds. These bonds formed an actual standard of value for the greenbacks, and although themselves depreciated, exercised for the time being a steadying influence upon their value. As the common medium of exchange consisted almost entirely of greenbacks l and of bank notes convertible only into greenbacks, prices were measured in greenback "dollars" and naturally rose as the gold value of the greenback depreciated. Reference to the table on page 240 will show a rough correspondence between changes in the general level of prices, expressed in greenbacks, and changes in the value of gold, measured in greenbacks. But the price of commodities rose relatively higher than did the price of gold, and declined less rapidly. 2 Retail prices, in turn, declined less rapidly than did wholesale prices. Wages advanced more slowly than prices; maximum wages were not paid until 1872, seven years after retail prices and eight years after wholesale prices had reached their maximum. That there was not a closer correspondence between the movement in gen- eral prices and the changes in the gold value of the greenback was due to two sets of influences: (i) Even if greenbacks had not been issued, and if prices had been measured in gold, there would have been marked fluctuations in prices, not only such as continually occur in normal years, but also those due to such exceptional things as the withdrawal of a large number of men from industry and agriculture to military service, the shifting of productive effort in response to the enormous demand for military supplies, the period of extraordinary business activity, of railway building, and of agricultural and industrial expansion that followed the war, the reaction and financial crisis in 1873, and the return of prosperous conditions in the last years of the 1 Subsidiary coins did not go out of circulation until 1862, when the value of the greenback dropped below the value of the bullion in these coins. Postage stamps and notes and tokens issued by cities and by business firms were for a while used as small change. In 1863 the situation was helped by the issue of fractional paper currency in denominations as low as three cents. * The more detailed figures, of which the table given here is only a summary, show that the prices of commodities also advanced more slowly than did the price of gold. For an illuminating discussion of these price changes see MitchelL Gold, Prices, and Wages under the Greenback Standard, Chap. V. 240 OUTLINES OF ECONOMICS TABLE I PRICES AND WAGES IN THE GREENBACK PERIOD 1 YEAR AVERAGE ANNUAL PRICE OF GOLD IN GREENBACKS JULY WHOLESALE PRICES ' AVERAGE ANNUAL PRICES * AVERAGE WAGES Wholesale Retail 1860 100 IOO IOO IOO 1861 95 94 107 99 1862 "3-3 1 20 109 *3 r 104 1863 I45- 2 155 148 1 68 119 1864 203.3 236 225 215 142 1865 157-3 183 224 219 155 1866 140.9 191 203 208 164 1867 138.2 170 J 77 '93 167 1868 139-7 165 180 190 170 1869 133-0 158 172 177 179 1870 114.9 145 156 1 66 179 1871 111.7 137 144 5S 184 1872 112.4 139 138 151 185 1873 113.8 140 M3 148 183 1874 III. 2 138 144 M5 175 1875 114.9 129 134 140 163 1876 III.5 118 1 20 135 153 1877 104.8 114 117 !34 M3 1878 100.8 99 99 127 142 1879 IOO.O 98 93 123 139 1 Compiled from Gold, Prices, and Wages under the Greenback Standard, by Wesley C. Mitchell. The figures in the price column are " index numbers," that is, they are obtained by counting the price of each commodity in each year as a percentage of its price in 1860, and then averaging the various relative prices thus obtained for each year. The figures in the wage column are computed in a similar way. In the " price of gold " column parity between greenbacks and gold is represented by 100. 92 commodities. 331 commodities. * For 78 establishments. greenback period. 1 (2) The depreciation in the value of the greenback in gold was measured quickly and accurately in the gold market, but the move- ment of prices was hampered by habit, custom, existing contracts, local influences, etc. We have seen in the discussion of value that retail prices are less sensitive to changing market conditions than are wholesale prices. 1 This statement is subject to the limitation implied in the fact that general commercial conditions were themselves caused in part by the influence of the cheap and fluctuating medium of exchange. MONEY 2 4 I Wages, in turn, are usually less mobile than retail prices. All these things interacted. Wages, to give only one example, constitute an important part of the expenses of producing commodities, and the sluggish movement of wages kept the expenses of production from advancing, and, later, from falling as rapidly as would otherwise have been the case, and must have had a^corresponding effect on the prices charged for commodities. Aside from these general changes, the minor fluctuations, the short- time variations in prices, were unusually wide and numerous, a fact which may be attributed to the uncertain value of the medium of exchange. Such fluctuations were apt to upset all business cal- culations; chance became more important and foresight less im- portant as a factor in profits. Under such conditions an intense and reckless spirit of speculation was bred, with unfortunate effects on business morality as well as on economic conditions. As a fiscal expedient, the greenbacks led to results as disastrous as those which attended their use as money. The government was forced to sell bonds for depreciated greenbacks, but in order to maintain its credit it had to pay the interest and ultimately the prin- cipal of these bonds in gold. Supplies for the army were paid for in depreciated greenbacks, but these greenbacks had to be ulti- mately redeemed in gold. It has been estimated that the use of the greenbacks increased the cost of the Civil War by nearly $600,000,000. Fiat Money. After 1873 the advocates of cheap money were not content with merely opposing any reduction in the quantity of the greenbacks. They went so far as to urge that the amount of paper money should be greatly increased, and that the use of metallic money should be definitely and permanently abandoned. Bank notes were also attacked because they were issued by "privi- leged corporations." The question came to be an important politi- cal issue, and in 1876 it brought about the organization of the Greenback party, which figured in three presidential campaigns, and which polled more than a million votes in the congressional elections of 1878. In more recent years similar demands were voiced by the Populist party. The theory of money which formed the basis of the contention of the members of the Greenback party is sometimes called the "fiat money" theory. Those who held this theory of money saw 242 OUTLINES OF ECONOMICS no significance in the fact that the greenbacks were in form prom- ises to pay and that they were generally regarded as only tem- porarily irredeemable. In their view they were simply "dollars," made such by the expressed will of the government. Nor did they see any significance in the fact that during the seventeen years of the suspension of specie payments over $500,000,000 in United States gold coins issued from the mints. As a matter of fact the fiat money advocates were misled by what some logicians have called the "jingle fallacy." That the "dollar" of the ordinary medium of exchange and the "dollar" as a standard unit of value were different things did not occur to them. If they had succeeded in eliminating the credit element in the value of the paper currency by ceasing to print "promises to pay" (as they actually proposed to do), and had instituted a new name for the money unit, possibly (to reverse the spelling) "rallod," they would surely have encountered difficulty in getting people to accept pieces of printed paper, informing them that " This is a rallod," as money. It is hard to see how "the supply of money as compared with the demand for it," on which the fiat money advo- cates counted to fix the value of their money units, would have helped matters very much. Nor would the convertibility of fiat money into interest-bearing bonds, which was suggested by some, have given us a standard of value. For the bonds would have been simple promises to pay a certain sum in fiat money units, with interest at a certain rate, also in fiat money units. The difficulties that would have been encountered in international trade would alone have sufficed to make fiat money impossible. Some writers have referred to the greenbacks as the "standard of value" during the suspension of specie payments. As a matter of fact gold, under the operations of unlimited coinage, was the ulti- mate standard, and the standard dollar was the gold dollar. The value of the greenback dollar, in which prices were measured, was the value of the gold dollar, discounted according to the outlook for the ultimate redemption of the greenbacks in gold. The green- backs were at most only a "secondary standard" of value. (For Questions and References, see the following chapter.) CHAPTER XV CREDIT AND BANKING Credit Transactions. Thus far, in our discussion of money, we have failed to take account of the fact that the greater part of ex- changes are credit transactions, which do not directly or immedi- ately involve the use of money (in the sense of generally acceptable money instruments). A credit transaction is a transfer of goods, services, or money, for a future equivalent. In a "cash" transac- tion there are only two elements, the goods sold and the money paid for them. But in a credit transaction a third element time is added. The introduction of this third element leads to ex- ceedingly important results. In the first place it makes possible an enormous number of exchanges in which the buyer is either unable or disinclined to render a present equivalent. In the second place it obviates, to a very large extent, the necessity of using money. Suppose, for example, that A and B are the only inhabitants of an isolated community. Three ways of making exchanges are open to them. They can use a system of direct exchange or barter, which will prevent A from getting goods from B unless he has some equivalent which he is willing to give up and which B is willing to accept. Or, they may use one commodity as money, in which case the purchasing power of either A or B at any given time will be governed by the amount of that particular commodity that he possesses, rather than by the total amount of all his posses- sions. But by combining a system of credit with their use of money, they will be able to make transfers freely, for in an occa- sional balancing of accounts most of the payments due each other will cancel, leaving only a relatively small amount to be paid in money. Something very much like this third process is continually going on in contemporary economic life. The process is more complex, 243 244 OUTLINES OF ECONOMICS however, because A actually sells things to one person or group of persons, and buys them from other persons. And it is very likely that these two groups, the sellers and the buyers in A's transactions, have no direct business transactions with each other in which their respective claims against A and debts to A can be canceled. If, however, we take all buyers and all sellers into account, and if we could push our analysis of the complex network of credit relations far enough, we would find points of contact between A's credits and his debts. That is, if A gives a promissory note in exchange for a purchased good, this promissory note might be passed on from hand to hand until it got into the possession of some one who is indebted to A, if the path it should take were known. The difficulty is that the path is not known. The institution of banking, however, provides clearing centers, where credits and debts are balanced against each other and canceled. A, for example, has a "deposit" in a local bank, which means that he has the right to demand payments from it at any time up to the amount of his deposit. He usually makes a payment to B, not by a promissory note, but by a check, an instrument order- ing the bank to pay B the specified amount. This check will be presented for payment by B at a bank where he has a deposit, but the "payment" will usually be made by adding the amount of the check to B's deposit. If it is the bank where A also has his deposit, the transaction is settled by the simple process of debiting A's de- posit and crediting B's. If it is another bank in the same town, and if the town is a small one, the check will enter into the daily exchange by the two banks of such claims against each other, the daily balance in favor of either bank being usually settled in money. In the larger cities a further economy in the use of money is achieved by means of the clearing house, to which a representative of each bank brings daily all of the checks drawn against other local banks which it has received since the last "clearing." At the clearing house the checks are turned over to the representatives of the banks against which they are drawn, but the balances are not settled between the individual banks. Instead, a balance is struck between the total sum of each bank's claims against other banks and the total claims of other banks against it. Each bank then CREDIT AND BANKING 245 pays to the clearing house, usually in money, or receives from it, as the case may be, the amount of balance due to it or from it. This system achieves a great economy of both time and money. 1 If the banks in which A and B keep their deposits are in different towns, A's check will probably be sent by B's bank to a bank in a neighboring large city, in which B's bank has its own deposit ac- count. If A's bank is also in the territory tributary to this same city, the check may be sent by the city bank directly to A's bank for collection, or to its own correspondent bank in the same town. If A's bank is in another part of the country, the check will be sent to a bank located in a large city in that region, which will attend to its collection. 2 Thus a check drawn on a local bank in California, deposited in a local bank in Illinois, will very likely be collected via Chicago and San Francisco. The balances of credits and debits which are thus created between city and country banks are settled to a very large extent by means of crediting and debiting deposit accounts in city banks, thus obviating by that much the necessity for frequent shipments of money. In general, we have in the United States a continuous balancing and cancellation of debts and credits, first, in each locality; second, between each important city and its tributary territory, and, third, between the different impor- tant cities. Much the same process is characteristic of international exchange, but that is a topic which will be treated in another chapter. 1 Over $95,300,000,000 in checks and drafts passed through the New York Clearing House in the year ending September i, 1907. The money balances paid amounted to $3,800,000,000, or only 4 per cent of the total clearings. The average cash payments required during the last fifty-four years have amounted to 4.64 per cent of the clearings. In times of financial stringency clearing houses sometimes allow the payment of balances in "clearing house certificates," issued to individual banks upon the basis of approved securities deposited with the clearing house. In some cases the banks have temporarily put such certificates into general circulation as an emergency currency. 2 The London Clearing House clears for all England in a very simple and efficient way. A country bank sends its daily receipts of checks on banks in other towns to the London bank in which it keeps a deposit. In a daily "country clear- ing" these checks are distributed to the London banks with which the banks on which the checks are drawn keep accounts. The mere territorial extent of the United States makes such a scheme unworkable here. Various proposals have been made, however, for central clearing houses that will make clearances for limited districts. 246 OUTLINES OF ECONOMICS Personal Credit. If a man does not hoard money on the one hand, or fail to pay his debts on the other hand, his expenditures (including investments) are bound to be, in the long run, approxi- mately equal to his income. But for a business man a continuous equality of income and expenditure is impossible. At some times his deposit account will be built up more rapidly than he checks it out; at other times his need for means of making payments will outrun his receipts. If, for example, he is a contractor, whose ex- penses of production are fairly constant, but whose product is paid for only when completed, or a merchant, who replenishes his stock of goods twice a year but whose sales are distributed throughout the year, or a farmer who must pay his harvest expenses before he sells his crops, he may find it necessary to utilize his credit. Now, his personal credit, his power of purchasing things without immedi- ate payment, will depend to some extent on his personal ability and integrity. But, nevertheless, the fundamental measure of his credit" will be the amount of his realizable wealth. This, however, is apt to consist largely of property that is not "for sale," his stock of consumption goods and his income yielding land or capital. These things do not have to be sold in order to convert them into means of payment. To meet a temporary need they may be made the basis of credit, through the process of hypothecation, a name which means the conditional transfer of property rights. The hypothecation may be definite and formal, as when a mortgage is given on specific items of property or when valuable credit instru- ments of various sorts (such as government or corporation bonds, bills of lading, warehouse receipts, etc.) are put into the actual pos- session of the creditor as "collateral security " ; or it may be simply implied, as in the case of an "unsecured" personal note, for practi- cally all of the property of a borrower, over and above the items specifically hypothecated for certain debts is, in legal fact, hypothe- cated for his remaining debts. It is important to note, too, that future values, rather than present values, constitute the basis of present credit. The lender's interest is in the question of the ade- quacy of the value of the security at the time when payment be- comes due. Present values being equal, a borrower can secure a CREDIT A.\:> BAXKIXO 247 larger amount of credit when market conditions are improving than when they are declining. A man's probable future income and the probable future value of his property, then, constitute the real measure and foundation of his individual credit. His individual credit, however, is of very little use to him as a means of payment. Some difficulties in the way of using individual notes as media of exchange have already been suggested. 1 There is another difficulty in the fact that his personal notes will not be willingly accepted by others in lieu of money payments unless they know him, the value of his property and the extent to which it is already hypothecated. Moreover, these same difficulties stand in the way of such notes being passed from hand to hand through successive indorsements. Bank Credit. In order to make it readily available as a medium of exchange, personal credit has to be transformed into bank credit. Instead of using his own note as a medium of exchange, a business man will normally have it "discounted" by his banker. If the note is for sixty days, for example, the business man yields the right to demand a specific amount of money from him in sixty days, in exchange for a deposit credit, the right to receive on demand the same amount of money less the discount. 2 The business man adds the note to his liabilities and a deposit to his assets. The bank adds the note to its assets and the deposit to its liabilities. Having converted his personal credit into a bank deposit, the business man can now use it as a means of payment through the checking system that has been described. Ordinary commercial banking consists, in large part, of this purchase of personal credit 1 It is true, of course, that business men often accept their customers' notes in payment of accounts, or as an equivalent for goods purchased. These notes, however, do not usually pass any farther as a medium of exchange, but are in- dorsed by the business man and presented to a bank for discount. Such notes, usually known as "trade paper," constitute a large part of the securities of many commercial banks. 2 Discount is simply one form of interest. Banker's discount differs from ordinary interest in that it is computed as a certain per cent of the total amount that is repaid, while ordinary interest is computed as a per cent of the amount that is loaned. Discount is deducted from the principal of the loan in advance; in- terest is paid at the maturity of the loan or (on long time loans) at stated intervals. On demand or "call" loans and on time loans on collateral security "interest" rather than "discount" is charged. 248 OUTLINES OF ECONOMICS and sale of banking credit. The bank builds up assets in the form of loans and discounts at the same time that it builds up its obliga- tions in the form of deposits. The security behind the deposits in any bank consists of : (i) loans and discounts, which in turn rest back upon personal credit or upon specifically hypothecated property (as in the case of loans on col- lateral security); (2) bonds, mortgages, and other securities owned by the bank, which, if necessary, may be sold for the benefit of the depositors, unless specifically pledged as security for bank note issues; (3) the bank's own deposits in other banks, together with the checks or similar claims against other banks that are in its possession; (4) its other property (building, fixtures, etc.); (5) (in national banks and some state banks) the personal liability of the bank's stockholders; 1 (6) its stock of money. But that these assets should suffice to cover the deposit liabilities of a bank is not in itself sufficient to maintain its solvency. Much depends upon the character of the assets, the amount of money included in them, and the ease and quickness with which other parts of the assets can be converted into money. Each deposit account is an obligation of the bank to pay in actual money if it is demanded. The depositor cannot use checks for all kinds of pay- ments, but will often have to draw on his deposit account for money. Even when payments are made by checks, those who re- ceive them will often prefer to cash them rather than to deposit them. Moreover, the process of the cancelation of credit obliga- tions is, as we have seen, not altogether perfect. Balances arise between individual banks in the same city, between city and country, and between different cities that very often have to be settled in money. A bank accordingly has to keep enough actual cash on hand to enable it to meet any demands that may be made upon it for money. 1 Even in case some of the bank's loans or securities prove worthless there is a margin of safety for the depositors in the fact that some of the assets of the bank represent the original investments of the bank's stockholders ("capital") or profits which they have put back into the business ("surplus"), and on such assets the depositors have the first claim. Moreover, in national banks and some state banks the stockholders are personally liable up to an amount equal to the par value of their holdings. CREDIT AND BANKING 249 As deposits constitute the most important cash obligations of a bank, the size of this money reserve, as it is called, is normally fixed for safety's sake at a certain per cent of the amount of the deposits. This proportion varies according to the location of a bank and the nature of its business. In practice it varies in different commercial banks from as low as 5 per cent to as high as 35 per cent of the deposits. If its reserve increases, a bank is at liberty to increase its deposits by extending its loans and discounts, attracting these, possibly, by lowering the discount rate. If the reserve is decreasing, the bank must, for safety, contract its deposits by restricting its loans and discounts, or by taking measures (such as the sale of securities for money) that will replenish the reserve. 1 In order that the ratio of reserve to deposits may be maintained near the point where the right balance is struck between profitableness on the one hand and safety on the other hand, it is necessary that the bank's assets should be as fluid as possible. This is best accomplished by confining most of the loans or discounts to notes or bills of exchange that are payable in thirty, sixty, or ninety days, or, at most, in four or six months, so that a constant flow of maturing obligations makes it possible for a bank to expand or contract its loans and discounts, and hence its deposits, as seems most advisable. There is in the larger cities of the United States, especially in New York, a growing use of bank loans payable on demand. This enables the banks to keep their outstanding loans much closer to the maximum allowed by the state of their reserves than would other- wise be the case, but the practice has, as we shall see presently, other effects that are not so desirable. By the "money market" is usually meant the market for ex- changeable purchasing power in the form of loanable funds ; that is, in reality, the bank credit market. The amount of bank credit available, the freedom with which banks will make loans on certain 1 Some banks maintain a "bond reserve" of high grade securities that may be sold to enable the bank to meet an extraordinary demand for money or to enable it to extend its loans and discounts when necessary. Such investments are normally made by commercial banks when the demand for loans does not absorb the funds at the bank's disposal, that is, when money reserves are unprofitably large. 250 OUTLINES OF ECONOMICS kinds of securities, and the interest and discount rates charged for bank credit are among the things that make up what is called "the state of the money market." But it should be clear to the reader that the state of the money market depends, primarily, on two things: first, the amount and nature of the personal credit that can be converted into bank credit, and second, the amount of money in the bank reserves. Bank Notes. There is one way, however, in which banks can meet some of the demand for money without drawing on their re- serves and thus reducing their power of extending credit. This is by the issue of bank notes, which are simply the promises of banks to pay money on demand, issued in convenient and familiar form for use as paper money. These notes are paid as money to cus- tomers of a bank who want the proceeds of their borrowings in cash, and to depositors and to holders of checks who prefer money to deposit credit. Bank notes pass readily from hand to hand as money, and at the present time constitute an important part of the circulating medium in most countries. Bank notes are like deposits in that both are demand liabilities of banks. Bank notes, however, circulate among persons who have no means of informing themselves as to the solvency of the banks issuing them. The holders of bank notes are accordingly usually given special protection by laws which regulate the conditions of their issue and redemption. State Banks of Issue. Before the Civil War the actual circu- lating medium of the United States consisted in very large part of notes issued by banks operating under state laws. The notes issued by some of these banks were as "good as gold" because the banks redeemed them promptly in gold, a fact which was due in some cases to wise and rigid state regulation of banking, and in other cases, fewer in number, to conservative use of the too exten- sive privileges granted by lax state laws. But the notes of other banks were depreciated and in many cases were absolutely worth- less. Public ignorance of the real nature of banking gave rise to the supposition that wealth could be mysteriously manufactured by means of a bank charter and a printing press (the fiat money theory applied to bank notes). This and the ever recurring demand for CREDIT AND BANKING 25! cheap money were responsible for the situation. Prohibited by the Constitution from issuing their own bills of credit, many of the states, especially in the South and West, responded to the clamor for cheap money by making it possible for their citizens to organize "banks" and issue their own bills of credit, imposing few or no requirements as to the actual investment of capital, the accumulation of assets, or the restriction of note issue. 1 In the panics of 1814, 1837, and 1857 but few banks maintained specie payments. Even so late as 1860, although the hard lessons of experience had brought some improvements, especially in the older states, the bank note circula- tion was of decidedly varying quality. "Bank note reporters" and "counterfeit detectors" had to be issued periodically in order to give to business men the latest quotations and information relat- ing to the depreciated currency they had to receive in the ordinary course of business. After 1861 the" suspension of specie payments led to a general depreciation of bank notes as compared with gold because most of them were thereafter redeemable only in green- backs. The National Banking System. The successful state banking system of New York was the model after which Congress, following the recommendations of Secretary Chase, patterned the national banking system which it established in 1863. The primary, although not the only, motive that led to this action was the desire to provide an artificial market for government bonds, which at the time were a drug on the market. National banks were required to use government bonds as the assets behind note issues, and further- more, the national banks were, in 1866, given a monopoly of the note issue privilege by the imposition of a prohibitive tax of 10 per cent per annum upon the note issues of state banks. The details of the national banking law have been amended from time to time, but the general principles of the regulation of the note issue remained unchanged until Congress passed the Aldrich act in 1908. As the law has stood since 1900, national banks may not be organized unless the stockholders contribute a minimum capital, 1 Some states circumvented the constitutional prohibition mentioned by es- tablishing their own banks for the manufacture of paper money. The Bank of Kentucky was the most famous of these. 252 OUTLINES OF ECONOMICS varying from $25,000 for places of less than 3000 population to $200,000 for places of more than 50,000 population. Three limita- tions are put on the ordinary issue of circulating notes: (i) They must not exceed in amount the capital stock of the bank. (2) United States government bonds have to be purchased by the bank in amount sufficient to equal, dollar for dollar, the quantity of the notes issued, and these bonds have to be deposited with the treas- urer of the United States as security for the redemption of the notes. (3) Each bank must maintain in the United States treasury a re- demption fund in "lawful money" equal to 5 per cent of its note issue. As this last requirement indicates, bank notes are redeem- able at the federal treasury. They may also be used in all pay- ments to the government except customs duties, although they are not legal tender. The Reserve System. While the note holder is thus protected by a special kind of security set aside for the purpose, the depositor in a national bank is protected only by its general assets. These, however, are regulated to some extent by the federal government. There are restrictions, for example, intended to prevent the bank from tying up its funds in long-time investments, from lending too much to one person or firm, or to directors or officers of the banks. Five times a year national banks have to furnish full statements of their condition to the comptroller of the currency at Washington. Each bank is also examined twice a year, without notice, by federal bank examiners. But the most important requirement relates to the money re- serves that must be held by national banks. Banks in "central reserve cities " (which at present are New York, Chicago, and St. Louis) are required to maintain a "lawful money reserve" 1 equal to at least 25 per cent of their deposits. Banks in other "reserve cities" (including at present about forty cities) are also required to maintain 25 per cent reserves, but their deposits in the national banks of the central reserve cities may be counted for one half of this amount. In all other places the banks are required to hold a 15 per cent reserve, three fifths of which 1 Including all kinds of United States money except subsidiary silver, minor coins, and national bank notes. CREDIT AND BANKING 2 53 may consist of deposit accounts in banks in central reserve cities or other reserve cities. In all cases the funds kept by the banks with the United States treasurer for the redemption of their notes are counted as part of their legal reserves. The New York Money Market. Under the operations of this system the cash reserves of the national banks are centered in New York. This appears clearly in Table I, which shows that on the date specified more than a third of the cash reserves of the 6544 TABLE I DEPOSITS AND RESERVES OF NATIONAL BANKS: AUGUST 22, 1907' LOCATION No. OF BANKS DEPOSITS ' RESEKVE CLASSIFICATION OF RESERVE Amount ' Ratios J Lawful money in bank ' Due from reserve agents Redemp- tion fund' New York 38 M 8 306 6178 825-7 262.9 116.8 1423-4 2627.2 221.3 66.6 27.6 362.3 443-5 26.8 25-3 23.6 25-5 16.9 218.8 66.1 26.8 190.3 199.6 2.6 0-5 0.7 6-3 17.2 Chicago St. Louis 165-7 226.7 Other reserve cities Country banks . . Total 6544 5256-1 1121.4 21-3 701.6 392-4 27-3 1 Compiled from Report of the Comptroller of the Currency, 1007, pp. 222-224. ' Millions of dollars. Per cent. national banks in the United States were in the vaults of thirty- eight New York banks. 1 These figures do not, however, convey an adequate idea of the national importance of the New York bank reserves. New York is the great wholesale market for foreign ex- change, the chief center of gold movements to and from Europe, the principal importing and exporting center for commodities, in short, the chief market place of the continent and the focus of financial operations. All state banks, private banks, and trust companies of importance find it to their advantage to maintain deposit accounts in New York, both for their own use, and in order 1 The bulk of the deposits of out of town banks were in from twelve to twenty banks which make a specialty of this kind of business. 254 OUTLINES OF ECONOMICS that they may supply New York exchange to their customers. Even the deposit accounts of national banks in New York are in the aggregate considerably larger than the amount they are allowed to count as part of their reserves. All together the deposits of other banks constituted more than half of the $825,700,000 of deposits in New York national banks in August, 1907. Moreover, something very much like the reserve system obtains among other than national banks, the banks in smaller places keeping deposits in national or other banks in larger cities, which in turn keep deposits in New York. The trust com- panies, and some of the state banks l keep in general very much smaller reserves in their own vaults than are required of national banks, a fact which makes the strain on the New York bank reserves all the greater. Recent legislation in New York has raised the reserve requirements of state banks and trust com- panies in that state. Like an inverted pyramid upon its apex, the great structure of bank credit in the United States rests, in large measure, upon the money reserves of the New York banks. Every important change in the demand for money or credit in any part of the country has an effect on the New York money market; similarly, every important disturbance in the New York money market affects financial con- ditions throughout the country. The central reserve system leads to a great economy in the use of money, and it seems to be a natural and necessary feature of modern banking, for something like it is found in all of the leading commercial nations, although, in Europe, the central reserves are kept in one great bank in each country. Some dangers seem to attend its use in the United States, but these are in large measure attributable to other features of our banking system, chief among which are the dominance of speculative influences in the New York money market, the independent treasury system, and the lack of elasticity in our bank note issues. 1 Savings banks keep reserves that average for the United States only four fifths of one per cent of their deposits. On account of the nature of their busi- ness, which is not banking in the commercial sense, they are a negligible factor in this connection. CREDIT AND BANKING 2 55 Speculation and the New York Money Market. As Table II shows, a large and increasing proportion of the loans of New York banks are not based on "commercial paper " ; that is, on the notes and bills of exchange that arise in the ordinary course of business, but are either time loans on collateral security or demand loans, nearly all of which are secured by collateral. Most of these col- TABLE II LOANS AND DISCOUNTS OF NEW YORK NATIONAL BANKS ON SPECIFIED DATES l (In millions of dollars.) CHARACTER OP LOAN 1890 1896 1901 IOO6 On demand IO2 no 27O 1O 1 On time, with collateral security A-I 60 I 2O IJQ On time, secured by commercial paper 152 144. 2O T, 240 1 Compiled from Reports of the Comptroller of the Currency. lateral securities are the stocks and bonds of corporations, and the loans, especially the demand or "call" loans, are used for the greater part in financing speculation in such securities. This sys- tem is partly responsible for the excessive and useless expansion of speculation over and above the amount that is necessary to secure the best results for the economic interests of the country. Here we are concerned, however, with its effects on the money market. The supply of call loans depends primarily on the amount of the surplus reserves of New York banks; that is, the excess of the re- serves over and above the legal minimum of 25 per cent of the amount of the deposits. If the weekly statement of the clearing house banks l shows a relatively large surplus reserve, this means that the banks can safely expand their loans, the knowledge of which fact has a stimulating effect on speculation. If, however, the surplus reserve is low, the banks are bound to restrict their loans of all kinds and to "call" some of their demand loans. 1 Some of the banks in the clearing house are state banks, but by the rules of the clearing house these were required to maintain the same reserve as national banks even before recent legislative enactments. 256 OUTLINES OF ECONOMICS When the reserve is below the legal limit demand loans have to be called in large quantities in order to enable the banks to meet press- ing demands for credit on the part of their regular customers. 1 The precipitate calling of demand loans by some banks simply in- creases the demand for credit at other banks, which in turn have to curtail their loans. Such a condition of the money market leads to a depression in the price of speculative securities, which is in- creased by the forced sales of securities in order to obtain the money funds that had previously been lent on them; the fall in the price of securities leads brokers to demand more "margins" from the customers for whom they have bought securities, and it leads the banks to demand more securities as collateral for their outstanding loans. Under such conditions the interest rate on call loans some- times goes as high as 125 per cent, or even higher. 2 If the ruling prices of speculative securities have been higher than industrial conditions would warrant, such a disturbance of the money market is apt to be long continued, and might easily develop into a general financial crisis. The call loan market is essentially 1 The rigidity of the New York bank reserves is itself an element of danger to the money market. The Bank of England protects its reserves when they are threatened by the simple process of raising its discount rate. The effect of this is to restrict the loans of other banks as well as of the Bank of England to the more necessitous borrowers. Under our national banking law limiting the rate of interest, further loans have to be stopped absolutely when the reserve goes below the legal minimum. The New York bank reserve is accordingly a real reserve only in the sense that it makes it possible for the banks to meet extraordinary demands for ready cash. So far as the extension of credit is concerned, it is not a reserve, but a dead line. In practice the law is not rigidly observed, a warning from the comptroller of the currency being the only penalty exacted for a tem- porary deficit in the reserves. Nevertheless the reserve does not often fall more than one or two points below the legal minimum. The sudden curtailment of loans which the rigidity of the reserve entails is one of the things that tends to convert an incipient panic into a real panic. 3 That is, the rate on what may be called marginal call loans, effected at the stock exchange by bankers' agents, or by individuals or corporations. Many banks continue to make call loans to their regular customers at such times at rates not exceeding 6 per cent. Under normal conditions the rate on call loans is lower than the rate on time loans. For the period 1901-1906 the bank rate on call loans averaged 3.3 per cent as against an average rate of about 4.5 per cent on time loans. Excessive variability is the chief characteristic of the call loan rate. Cf. W. A. Scott, "Rates on the New York Money Market," Journal oj Political Economy, Vol. XVI, pp. 273-298. CREDIT AND BANKING 2 57 speculative, and it is unfortunate that the condition of the supply of credit for the normal commercial needs of the country should be periodically unsettled on account of this fact. In no other great money center of the world do call loans occupy the important place that they do in New York. 1 The Independent Treasury System. The United States govern- ment is to a very large extent its own banker. It keeps its own money in its own strong boxes, quite after the fashion of a mediaeval monarch. The strong boxes in this case are, however, the vaults of the treasury in Washington and of nine sub-treasuries located in important cities. Apart from the fact that the government revenue and the government expenditures are naturally not dis- tributed evenly throughout the year, the government has the further difficulty that a close balance of revenues and expenditures for any given year must be wholly accidental. Even if the federal budget were carefully and scientifically constructed, as it is not, the public revenues would be liable to uncertain fluctuations, a result in part of the importance of customs receipts among them. The gov- ernment, furthermore, receives most of its income in money, not in bank credit instruments. When a surplus accumulates in the government treasury, that much money is taken out of circulation, which reduces the bank reserves, and contracts the amount of bank credit available. The government is permitted, however, by the national bank act of 1863 to deposit money in selected national banks. Some secre- taries of the treasury have made little use of this privilege, but in recent years such deposits have become more common. Until 1902 banks had always been required to deposit government bonds with the federal treasury as security for federal deposits, but in that year and again in 1906 Secretary Shaw offered to accept approved state and munici- pal bonds in lieu of a certain amount of government bonds, on condition that the latter should be immediately used as security for increased note issues. In 1897 only 168 banks were government depositories. In 1907 1 The control of groups of powerful banks by great chains of "financial Inter- ests" is another anomalous condition of the New York money market. For an account and criticism of this situation as it existed in 1903, see C. J. Bullock, "The Concentration of Banking Interests in the United States," Atlantic Monthly, Vol. 92, pp. 182-192. s 258 OUTLINES OF ECONOMICS there were 1255, which held on June 20 of that year $167,000,000 out of a total treasury balance of $422,000,000. Part of this increase is attributable to the effect of a law enacted in 1907 allowing custom receipts to be deposited in banks. Previously to this deposits could only be made from the proceeds of internal revenue duties and miscellaneous receipts. The Aldrich act of 1908 provided for the payment of one per cent interest on all government deposits except the active checking accounts. The government has, on several occasions, come to the rescue of the banks by cash purchases of its own bonds. The decline in the market price of government bonds in periods of financial stringency makes these purchases relatively advantageous to the government. The periodic shifting of govern- ment deposits to localities where money is most needed, the temporary deposit of gold in New York banks equal in amount to their engagements of gold for transportation from Europe, and even the arbitrary withdrawal of government money from the banks when it was "not needed," in order that it might not be made the basis of speculative activities but kept till the time when it "was needed," * have been recent developments in the relation of the treasury to the money market. In favor of this system as at present developed it may be said that a sur- plus in the government treasury constitutes a real cash reserve, the wise use of which by the secretary of the treasury may possibly avert a serious crisis. But there are dangers in intrusting so much financial power to one man. If used without discretion it is bound to do more harm than good. More- over, some of the recent treasury operations have not been free from the suspicion of favoritism to certain banks. It is to be feared, too, that the knowledge that the government surplus will, in time of necessity, be put at their disposal, will tend to encourage unsound banking by relieving the banks of the proper responsibility for the maintenance of their own reserves. All in all it seems probable that a definite and known policy with regard to government deposits is better than the recently developed system of un- certainty and arbitrary action. The Movement of Money. The demand for loanable funds varies locally, according to the business conditions that exist in dif- ferent parts of the country. These differences make loans worth more in some localities than in others, and result in some shifting of bank credit. New York banks, for example, sometimes invest in "out of town" commercial paper when this is more profitable than employing their funds at home. More frequently, interior banks place loans in New York, either through their correspondent banks there, or by the purchase of securities from note brokers. 1 See Finance Report, 1906, p. 41. CREDIT AND BANKING 259 This shifting of credit, however, is unimportant as compared with the movement of money itself. Money is continually flowing from New York to the interior and from the interior to New York, ac- cording as it can be more profitably employed in bank reserves in one place or the other. Similar movements take place between the various cities of the country. This movement, it will be noted, is not one that is apt to disturb financial conditions. On the con- trary, it tends to prevent extreme local fluctuations in money market conditions by leading to the expansion of credit where it is most needed, and similarly, to the contraction of credit where it is least needed. There is another kind of money movement, however, which is not so fortunate in its effects upon the money market. The amount of money needed as an actual medium of exchange varies for dif- ferent seasons and for different localities. The demand for money to serve as the basis of credit in bank reserves and the demand for money as an actual medium of exchange are different and compet- ing demands. When more money is needed as a medium of ex- change, reserves have to yield and credit has to be contracted. The most important movement of this sort is in response to the annual demand for money to be used in "moving the crops." Harvest expenses are very largely wages, and these have to be paid in cash. Many farmers, moreover, insist on receiving money pay- ments when they sell their crops. The cotton crop of the South and the grain crop of the West necessitate the conversion of bank deposits in those regions into money, and to the negotiation of loans on the security of the crops, the proceeds of which are also taken in cash. The banks in these sections of the country in turn convert their deposits in other banks into money, and in large part this money is obtained, directly and indirectly, from the New York bank reserves. The movement of money from New York to the South and West usually commences in August of each year and continues through November, when the return movement sets in, continuing usually till February. Despite the fact that the New York bankers are forewarned of this movement, it always reduces their surplus reserves and leads to stringent and often precarious Conditions in the New York money market, conditions which are 260 OUTLINES OF ECONOMICS frequently reflected in difficulties in the money market throughout the country. Elastic Currency. To the arbitrary flow of money to and from the treasury, and to its movement to and from the interior, there must be added the movement of gold between this and other coun- tries. This will be discussed in another place; it is sufficient to note at this point that this external money movement is at the same time a cause and effect of changing money market conditions. That these money movements affect the supply of bank credit as they do is partly attributable to the inelastic character of our bond- secured bank currency. Under the provisions of the national bank law that have been described, the variations in the amount of bank notes outstanding bear a close relation to variations in the price of government bonds, and these variations are affected by many other things than money market conditions, and in recent years have been very small. As will be seen in Table III, the creation of the two per cent bonds, payable in 1930, stimulated the issue of bank notes, because TABLE III AMOUNTS OF BANK NOTE CIRCULATION SECURED BY SPECIFIED CLASSES OF BONDS : 1900-1907 l SECURITY March 13, 1900 Oct. 31, 1903 Oct. 31, 1004 Oct. 31, 1005 Oct. 31, 1906 Oct. 31. 1907 Loan 1908, 3*s . . Loan 1907, 4's . . Loan 1925, 4's . . Loan 1004, 5*5 . . Loan 1891, a's . . Consols 1930, 2's Panama Canal . . $56,164,820 130,302,250 14,697,850 21,906,350 20,400,150 $1,797,580 2,797,200 1,410,100 718,650 $1,922,940 5,857,500 1,791,600 $2,215,540 4.050-350 4,465,000 $3.73-7oo 25,124,650 4,602,100 $6,473.080 10,732,900 376,003,300 416,972,75 483,181,900 492,170,650 14,482,080 532,543,550 17,245,380 Total 243,651,420 382,726,830 426,544,790 493,912,790 539,653,180 566,994,910 From Report of the Comptroller of the Currency, Finance Report, 1907, p. 390. the federal tax is only one fourth of one per cent semiannually on bank notes secured by two per cent bonds as against one half of one per cent on notes secured by bonds paying a higher rate of interest. The relative stability of the amount issued in more recent years is noticeable, what increase there was being a natural CREDIT AND BANKING 2 6i result of the increasing number and size of banks. Nor does the amount of note issue respond to any marked extent to the regu- lar seasonal demands for money to move the crops or to the less regular operations of the treasury department or of the foreign exchanges. Students of banking problems have for many years thought that it would be better to allow the national banks to issue part, if not all, of their notes on the security of their general assets, thus placing them on the same basis as deposits. It is clear that if this were done any sudden increase in the demand for money as a circulat- ing medium might be met by the creation of bank credit in the form of bank notes, or by the shifting of bank credit from the form of deposits to the form of note issues. "Asset banking," as this is called, is used in Canada, and enables the banks there to furnish money for crop moving purposes without endangering their re- serves. Most of the great national banks of continental Europe also issue notes on the security of their general assets. To achieve real elasticity it is necessary to provide for the ready contraction of note issues when the special demand for money is over as well as to provide for their ready expansion in time of need. It seems probable that this could best be accomplished under the difficult conditions that prevail in the United States by a system similar in some ways to that governing the Reichsbank of Germany, whereby all note issues above a certain amount are subject to a special tax. This should be coupled, however, with a more ade- quate mechanism for redeeming the notes than the present one, and it would be desirable to graduate the tax according to the amount of the excess note issues outstanding. The first tangible result of years of discussion of this subject in Congress and elsewhere was the Aldrich act of 1908. This measure supplements the existing system by permitting banks which have outstanding notes secured by government bonds equal in amount to 40 per cent of their capital to in- crease their circulation in one or both of two ways. First, on the security of approved state, county, or municipal bonds deposited with the treasurer at Washington, such note issues being restricted to 90 per cent of the par value of the bonds. Second, through the voluntary organization of "Na- tional Currency Associations," which are to be composed of not less than ten banks in contiguous territory whose combined capital is not less than 262 OUTLINES OF ECONOMICS $5,000,000. Banks in such associations can issue notes to an amount not exceeding 30 per cent of their capital and surplus on the basis of securities deposited with the association, if the securities are approved by the associ- ation and by the comptroller of the currency. Such securities may be (i) bonds of the kind that may be used for the extension of note issue under the alternative plan already mentioned, in which case the issue may be 95 per cent of the par value of the bonds, or (2) two-name commercial paper of not over four months' duration, or the bonds or other securities of corpora- tions, in which case the issue must not exceed 75 per cent of the face value of the securities. The association is responsible for the maintenance of the redemption fund of each of its members. A bank's entire note issue must not exceed its capital and surplus. The extra note issues authorized by the Aldrich act must not at any time exceed $500,000,000 in the aggregate, and are taxed at the heavy rate of 5 per cent per month for the first month and i per cent for each additional month up to a maximum of 10 per cent. Very little can be expected from the Aldrich act in the way of securing elasticity of the currency. The first of the two alternative methods may possibly be helpful, but the excessive rate of taxation will tend to prevent its extensive use save in extreme emer- gencies. It is difficult to organize national currency associations save in important financial centers, and the provision for the use of corporate securi- ties only projects into the field of note issue what is already an unfortunate tendency of deposit banking in the United States. The Aldrich act may afford some relief in periods of the most extreme stringency in the money market but it does not advance us very far toward the desired goal of a cur- rency that will automatically expand and contract with business needs. Some favor the issue of such a currency by the government instead of the banks, but this would be undesirable. There are no such points of contact between the government treasury and the needs of the business world as exist in the case of the banks. Government paper currency can be controlled in amount only by arbitrary methods. It is by very nature inelastic. A Central Bank. The great national banks of European coun- tries, such as the Bank of England, the Bank of France, and the Imperial Bank of Germany, combine the functions of our independ- ent treasury system, the general note issue functions of our national banks, and the function of the New York national banks as cus- todians of the central reserve. That is, they have a practical monopoly of the privilege of issuing notes; 1 they hold the govern- 1 In England and Germany some other banks than the central banks have a limited right to issue notes, but this is only a survival, a vested right, which in various ways is gradually being extinguished. CREDIT AND BANKING 263 ment funds and act as fiscal agents of the government, and they hold the ultimate banking reserves of their respective countries. The United States Bank (1791-1811) and the Second Bank of the United States (1816-1811) were institutions of this kind. In each case Congress refused to recharter the bank at the expiration of its original twenty-year charter. In each case, also, this oc- curred when the country was temporarily under the dominance of a strong democratic sentiment opposed to political or financial cen- tralization in any form. Jealousy on the part of state banks was, however, the immediate cause of the demise of the first United States bank, while the second succumbed to the still more potent hostility of Andrew Jackson. There are many who think that the abandonment of the independent treasury system and the re- establishment of a great central reserve bank would be the best solution of our currency difficulties. Such a bank might very properly be limited to the field of issuing notes, and receiving the deposits of and making loans to the government and other banks. The Present Position of State and Private Banks. The figures in Table IV give only a partial idea of the present position of bank- TABLE IV NUMBER OF BANKS AND AMOUNT OF DEPOSITS IN SPECIFIED KINDS OF BANKS: 1907 ' NUMBER or BANKS DEPOSITS State banks 0,067 $3,068,600,000 Savings banks i,4ic 3 . .10 . .100.000 Private banks 1,141 151,100,000 Loan and trust companies 704 3,061,600,000 National banks .... 6,420 4.722.000.000 Total 19,746 $13,099,600,000 1 From Report of Comptroller of the Currency, Finance Report, 1007, p. 418. ing in the United States, for while they are complete as to national banks, there were, in 1907, over 4000 other banks which failed to make reports to the comptroller of the currency. 264 OUTLINES OF ECONOMICS "State banks," in the narrow sense, include only corporations chartered by the individual states to conduct a general commercial banking business. In a broader sense savings banks and trust companies incorporated under state law may be said to be state banks. Savings banks do not usually do a commercial banking business ; that is, they are not engaged in the sale of bank credit in a form that can be used in making payments. Their deposit accounts are not usually transferable by means of checks. They receive deposits of small savings and invest them in long time securities, such as real estate mortgages and bonds of various sorts. They perform an important social service by stimulating saving and by increasing the financial power of small investors through concentrating and combining their resources. Savings banks are organized either as cor- porations or as mutual societies managed by a board of trustees acting for the depositors. The latter type is especially common in the eastern states. The advantages of savings banks are less available in the rural districts than in the cities, a fact which is perhaps the strongest argument for the establishment of postal savings banks by the federal government. Trust companies were at first organized to take charge of trust funds and to act as executors and administrators of estates. They have, however, developed the functions of both savings banks and commercial banks, and have even entered such specialized banking fields as foreign exchange and the underwriting of corporation securities. They have thus the character of free lances in the banking field. Their banking functions have developed so rapidly that in many states they have been put under no such rigid control as is exercised over state and savings banks. Private banks are of two very distinct types. Some are small unincor- porated banks in country towns. Others are great concerns in the financial centers which deal in investment securities, buy and sell foreign exchange, finance great corporate undertakings, and, in some cases, act as brokers in the stock market. It is impossible, in fact, to draw a definite line between "banking" and other financial undertakings. Building and loan associations, private money lenders, note brokers, life insurance companies, etc., frequently perform functions which are very much like some kinds of "banking." But banking as the institution which converts personal credit into bank credit in the form of deposit accounts and bank notes is a clearly defined thing, and has a dis- tinct economic significance of its own. QUESTIONS 1. Do you make a loan to the government when you receive greenbacks as money ? 2. Compare the history of the assignats of the French revolution with the history of the bills of credit issued by the Continental Congress. CREDIT AND BANKING 265 3. Explain the various items in the published "statement" of a national bank. 4. Because a national bank can buy interest-bearing government bonds and use them as security for its own issues of paper money, advocates of government paper money issues have alleged that it gets "double interest on its money." Is this true? 5. How should one compare the profitableness of issuing notes with the profitableness of extending deposit credit? 6. What restrictions does your state impose on state banking corporations ? 7. Why would wheat not make a satisfactory money commodity? iron? platinum ? diamonds ? 8. Would it be possible to maintain a seigniorage of 10 per cent on United States gold coinage? 9. Report on the following questions not answered in this chapter: (i) What is the "limit of tolerance"? (2) On whom does the loss due to the wear of gold coin fall ? (3) To what extent are different kinds of United States money legal tender? 10. If the United States had adopted the free and unlimited coinage of silver in 1896, how would prices have been affected? 11. Is the actual standard of value pure gold or gold of standard fineness? 12. What elements of truth are there in the statement that "coins get their value from the government stamp" ? 13. Would it be possible to have a standard of value that could not be used as a medium of exchange? REFERENCES BULLOCK, C. J. Essays in the Monetary History of the United States. CLEVELAND, F. A. Funds and Their Uses. Comptroller of the Currency, Annual Report. CONANT, C. A. History of Modern Banks of Issue. DEWEY, D. R. Financial History of the United States. (See index.) Director of the Mint, Annual Report. DUNBAR. Chapters on the Theory and History of Banking. HEPBURN, A. B. The Contest for Sound Money. Indianapolis Monetary Commission, 1898 Report. JEVONS, W. S. Money and the Mechanism of Exchange. JOHNSON, J. F. Money and Currency. KIXLEY, DAVID. The Independent Treasury System; also, Money. KNOX, J. J. History of Banking in the United States, and United States Notes. LAUGHLIN, J. L. History of Bimetallism in the United States, and The Principles of Money. MITCHELL, W. C. History of the Greenbacks, and Gold, Prices, and Wages under the Greenback Standard. (University of California Publications, Economics, Vol. I.) 266 OUTLINES OF ECONOMICS No YES, A. D. Thirty Years of Arnerican Finance. PRATT, S. S. The Work of Watt Street. SCOTT, W. A. Money and Banking. SUMNER, W. G. History of Banking in the United States. Treasurer of the United States, Annual Report. (This, together with abbreviated forms of the reports of the Director of the Mint and the Comptroller of the Currency, are printed as appendices to the Report of the Secretary of the Treasury in the bound edition of the annual Finance Report.) WALKER, F. A. Money, and Money in its Relation to Trade and Industry. WATSON, D. K. History of American Coinage. WHITE, HORACE. Money and Banking. CHAPTER XVI OTHER PROBLEMS IN MONEY AND BANKING Crises. Crises are frequently recurring phenomena of current economic life. They are of all degrees of severity, but are generally characterized by a scarcity of bank credit, a sudden drop in prices, industrial depression, lack of employment for wage earners, and kindred symptoms. Crises are frequently attributed to "over production, " or, when that expression is criticised (because human wants are never fully satisfied) to "under consumption." The two expressions are dif- ferent ways of describing the same thing, and both are misleading because they put the emphasis in the wrong place. Production and consumption have to do with quantities of things and their fitness to satisfy human wants. Crises spring from mishaps in the valuation of things; they relate to what might be called the dollars and cents aspect of economic life. It is difficult, even impossible, for observers to analyze all the factors entering into a particular crisis, and it is even more difficult to formulate a theory of crises that will be of general applicability. There are some important things about crises, however, that are relatively well known, and these will form the basis of our discussion. It is a significant fact that crises generally occur only as sharp interruptions of periods of business prosperity, when credit is abun- dant, prices relatively high, and employment plentiful. What- ever may be the cause of a period of exceptional business prosperity, it is apt to contain within itself the seeds of its own destruction. The point will appear clearly if we put together two conclusions that were reached in the preceding chapter: first, that the supply of loanable funds in the form of bank credit is a function of two variables, the supply of personal credit and the supply of money 267 268 OUTLINES OF ECONOMICS available for bank reserves; second, that personal credit is based on the probable amount of future incomes and probable future value of property. Suppose, for example, that business conditions are prosperous and promise to continue so, and that there is a plentiful supply of money in the bank reserves. Expected prices and expected profits are large, expected interest payments seem certain. The power to get this future income depends, however, upon the possession of land, capital goods, franchises and other privileges, the estab- lished business relations that give rise to " good-will values," or upon the possession of income-yielding securities, such as mortgages, bonds, stocks, etc. Under such conditions, these things command good prices in the market and may easily be hypothecated, either formally or implicitly, in order to secure purchasing power, bank credit. The bank credit thus created is put into further in- vestments of capital and into the creation of further business opportunities. These things serve in turn, so long as their income- yielding power seems certain, as the basis of further extensions of bank credit, and thus the process of business expansion continues in a cumulative fashion. An extensive period of increasing pros- perity of this kind is, however, scarcely possible unless the supply of money is increasing; for bank reserves as well as the amount of expected personal incomes condition the supply of purchasing power. Any one of a number of things may be sufficient to precipitate a panic under such conditions. The whole business structure may fall to pieces through sheer topheaviness. That is, so much pro- duction to-day is indirect, so large a share of productive effort is devoted to forwarding in indirect ways the production of goods that will be ripe for human use only in the comparatively distant future, that the mere operations of supply and demand among business men themselves may maintain prosperous business conditions for some time. But in the long run the maintenance of the values of producers' goods and privileges depends on the demand, and hence on the income, of ultimate consumers. Wages do not usually rise as rapidly as prices in periods of business expansion. This simple fact may in itself keep the average purchasing power of consumers PROBLEMS IN MONEY AND BANKING 269 from expanding rapidly enough to furnish a solid support for the growing structure of capital values. Crop failures may precipitate a panic by diminishing the pur- chasing power of those engaged in agriculture, and, possibly, by reducing exports and thus necessitating the taking of gold from the bank reserves to ship to Europe in payment for our imports. When the credit situation is at all strained the failure of one im- portant bank may be enough to precipitate a panic. The bank's creditors are prevented from meeting their own obligations; the solvency of others is in turn dependent upon them, and thus losses in expected and often already hypothecated income are transmitted from firm to firm and from industry to industry in a constantly widening circle. In fact, whatever may be the immediate cause of a panic, it is bound to grow, in a condition of inflated capital values, with tre- mendous rapidity. The collapse of credit leads to forced sales of property in order that credit obligations may be met. These lower property values, lessen the security on which credit is founded, and render banks less able and less willing to make loans. Moreover, the hoarding of money, which is apt to be a feature of a panic, has a destructive effect on bank reserves. In a serious panic the liquidation of obligations has to work itself out. Then the indus- trial process starts afresh, with lowered values, and with property rights shifted, in some measure, to creditors. Crises seem to be unpreventable so long as competition and the credit system dominate in industry. Yet there are some recent developments that may make them less frequent, and possibly less serious. The "integration of industry," whereby a whole series of pro- ductive processes, from the production of the raw material to the sale of the finished product, are brought together under one man- agement, decreases the number and complexity of credit relations between producers, and tends to prevent the undue expansion of those parts of the productive process that are farthest removed from the consumer. The strong position of the steel industry in the United States is a case in point. The improvements in the bargaining power of wage earners resulting from their organization 270 OUTLINES OF ECONOMICS have enabled them partly to prevent the widening of the gap be- tween wages and prices in prosperous times, as recent American statistics show. On the other hand, crop failures are and always will be a factor of uncertainty. The lack of an elastic currency is also an element of danger, but this can and should be remedied. The Economic Effects of Changes in the Value of Money. It has already been suggested that an increase in the amount of money available for bank reserves leads to the expansion of credit, stimulates business, and as a result usually increases prices, temporarily, at least. The same results are achieved, although in not the same way, by a depreciation in the value of money, such as comes from a sudden change in the standard of value, or from the introduction of irredeemable paper money as the medium of ex- cMange. Without understanding the exact process we know that prices are gradually increased under such conditions, there being an unmistakable tendency to adjust them to the change in the "dollar" or other unit of the medium of exchange. 1 The rising prices stimulate business by increasing profits. Profits are in- creased because most of the expenses of production are incurred before the goods are sold, so that the rise in prices increases the margin between prices and the expenses of production, and be- cause, moreover, some of the expenses of production do not usually rise as rapidly as do prices. An expansion of business activity of the kind already described is apt to be the result, and this is not generally soon restrained by insufficient bank reserves, for de- preciated money is usually, though not always, money that is coined or issued in large quantities. That periods of prosperity induced in this way are inevitably short-lived and usually end in severe crises does not make them any the less real. Nor should the fact that such artificial conditions of business enterprise are apt to be accompanied by excessive 1 Possibly the effect upon other prices of the increased prices (measured in the depreciated money) that have to be paid for imported commodities and that are received for exported commodities is the key to this problem, just as it was undoubtedly the chief cause of the rise of prices to fit the bullion value of coins from which seigniorage had been taken. This is the explanation of the rise of prices under the greenbacks suggested by Professor W. C. Mitchell, the historian of that movement. PROBLEMS IN MONEY AND BANKING 271 speculation and other unhealthy features blind us to the fact that they accomplish some good. The encouragement given to ven- turesome undertakings leads to the trial of new methods of production, to the development of new natural resources, to under- takings of vast proportion, to a general freeing of industrial organi- zation and methods from the restraints of habit and tradition. The foundations of modern large-scale industry in the United States were laid in the period between the Civil War and the panic of 1873. The period of state bank note inflation preceding the panic of 1837 was a period in which the industrial map of the United States was almost wholly changed, and, in the long run, for the better. A rapid increase in the supply of standard money may have a similar effect. A tremendous expansion of international trade followed the gold discoveries in California and Australia. In the sixteenth century, increases in the supply of the money metals, economic writers are agreed, hastened the fall of the medizeval economic system. The almost unparalleled development of in- dustry and industrial organization in the United States since 1897, must, with its good features as well as its bad, be attributed in part to the increased supply of gold. Business prosperity, however, does not always coincide with the real economic welfare of the masses of the people. If prices are rising faster than money wages, real wages are obviously declining. A period of falling prices is very apt to be a period of increasing well-being for those whose incomes are wages or salaries, although here we have to remember that even if daily or weekly wages do not fall so rapidly as prices, an increase of unemployment may affect total yearly incomes adversely. The Standard of Deferred Payments. The relation of changes in the purchasing power of money to long-time debts and credits has been suggested in another connection. If prices increase, the principal of a loan represents less purchasing power at time of re- payment than at the time the loan was made. If prices decrease, the reverse is, of course, true. In periods of cheap money agita- tions the additional burdens imposed upon debtors in a period of decreasing prices are emphasized. An important function of 272 OUTLINES OF ECONOMICS money, then, is found in its use as a standard of deferred payments. 1 As Professor Irving Fisher has shown, there is a partial com- pensation for the injustice worked to debtors or creditors by chang- ing money values in the fact that the interest rate varies inversely with the value of money. If the value of money is increasing and promises to continue to increase, money lenders are forced by com- petition to offset the expected increase in the value of a loan by accepting a lower interest rate. When the value of money is de- creasing, the expected decline in the value of the principal causes a higher rate of interest to be charged. So far then as the increase in the value of the principal is discounted in the interest rate at the time when a loan is made, to that extent is the debtor's claim of in- justice unfounded. The decline in the interest rate as prices de- crease makes it possible, moreover, for debtors to pay off their old obligations with money funds borrowed on more favorable terms. We may expect that less emphasis will be given to the question of the standard of deferred payments in future periods of declining prices, because American farmers are becoming in increasing numbers lenders rather than borrowers of money. Corporation bonds are taking the place of farm mortgages as the most significant form of long-time credit instruments. Index Numbers. Changes in the purchasing power of money are indicated statistically by the use of index numbers. 2 The prices of a number of important commodities in some one year, or their average prices for a term of years, are taken as the basis of the computation. The price of each commodity in each year covered 1 From the analysis in the preceding chapters it should be clear that money serves also as (i) the medium of exchange and measure or denominator of value, (2) the standard of value, (3) the basis of bank credit. The first of these functions is performed by all money; the second function only by standard money and bullion; the third by all money that can be lawfully used in bank reserves. Legal tender money, and, if there are differences in the value of different kinds of money, the cheapest legal tender money, serves as the standard of deferred payments. Before the development of credit facilities one's purchasing power did not depend so much on his property as on his own stock of ready cash. An important early function of money was, accordingly, that of a store or reserve of value or purchasing power. * Cf. the table on p. 240. PROBLEMS IN MONEY AND BANKING 2 73 by the statistics is then stated as a per cent of its price in the basing year or years. The series of per cents thus obtained are called relative prices. These relative prices are then combined into typi- cal prices, or index numbers for each year. Most frequently a simple arithmetic average of the various relative prices for a given year is used as the relative typical relative price. Sometimes a weighted arithmetic average is used. This differs from the simple average in that the relative prices of the more important com- modities are counted more than once in making up the average, the precise amount of weight given to them being fixed according to the importance of the commodities to which they relate. Weight- ing is not of great practical importance unless the list of commodi- ties used is very small, or unless the index number is to be used for some special purpose, such as to show changes in the cost of living, where relative prices are weighted according to the average distribution of the expenditures of families in the wage-earning classes. A simple and useful way of obtaining a typical price is to find the median. The median is the relative price which divides all of the relative prices for a given date into halves, one half being lower and one half being higher than the median. Less used are the mode, the relative price that occurs most frequently in a given year, and the geometric average, the wth root of the prod- uct of the relative prices of n commodities. Much has been written about the relative advantages of the different kinds of averages, but the questions involved are highly technical. Whether one kind of average is better than another usually depends upon the character of the data and the use that is to be made of the re- sults. Statisticians now emphasize the importance of knowing the distribution as well as the trend of price changes. That is, in order to know whether the average is really typical of the different relative prices we should know how closely most of them approxi- mate to it. The range of the variation of the different relative prices from the average might, for example, be comparatively small below the average and comparatively large above it. There are various ways of measuring and stating the distribution of prices. 274 OUTLINES OF ECONOMICS Wage changes as well as price changes can be measured in index numbers. Weighting is of more importance in the case of relative wages than in the case of relative prices, because the number of men represented in the data for single series of relative wages (such as those in a given occupation in a given establishment) is con- stantly changing. Index numbers are available for the United States for the period since 1860. For the period 1860-1880 Mitchell's 1 are the best; the period from 1890 to the present is covered by the United States Bureau of Labor, 2 and for the gap from 1880 to 1890 Falkner's are available. 3 Dun's Review and Bradstreei's also publish tables of price changes. 4 Some writers have suggested the possibility of a tabular standard of value, to be maintained by frequently changing the value of the money unit in accordance with the showings of an officially kept system of index numbers. To do this by periodically altering the amount of bullion in standard money would be impracticable, while to abandon the use of a standard commodity and to attempt to regulate prices by issuing fiat money and controlling the amount in circulation would be, as we have seen, chimerical. A tabular standard of deferred payments might be put in operation by laws providing for the increase or diminution of the principal of debts according to changes in prices. It is probable, however, that this would be satisfactory to neither debtors nor creditors. The really essential thing is to have a commodity standard of value that shall be as stable as possible, and to maintain the convertibility of all other forms of money with it. With gold as the standard of value, and with all other forms of money redeemable in gold, changes in prices are not apt to be rapid enough to work much injustice to either debtor or creditor. The compensating influence of changes in the interest rate must also be taken into account. The question of the grievances of debtors and creditors has been overemphasized 1 In his Gold, Prices, and Wages under the Greenback Standard. 3 In various numbers of the Bulletin of the Bureau of Labor. "In "Aldrich Report" on Wholesale Prices, Wages, and Transportation, Senate Doc., 32d Cong., ad Session, No. 1394. * For an exhaustive account of various index numbers and other price statistics see Laughlin, The Principles of Money, pp. 171-211. PROBLEMS IN MONEY AND BANKING 275 as compared with the really important economic problems growing out of changes in the value of money. These are, as we have seen, first, the effect on business enterprise, and second, the effect on real incomes as distinguished from money incomes. Value of Money. We have not as yet answered one very important question, and that is, "What determines the value of money?" Now by the " value of money" we cannot mean any- thing but the purchasing power of money. There is no such thing in fact as "the general purchasing power of money," although we have found it convenient to use that and similar expressions. Money has, in reality, a large number of different values, measured by the different quantities of different things that it will purchase. If the price of wheat is one dollar per bushel, then one value the wheat value of money is a bushel per dollar. Similarly, the purchasing power of money in sirloin steaks may be four pounds per dollar. But how are we to blend sirloin steaks, wheat, and other things into one concept ? Index numbers do not tell us what the general value of money is; they simply reveal average varia- tions in the different values of money. The concept of the general value of money is simply a useful abstraction, based on a broad view of all its different specific values. When we fix our attention upon changes in the various purchas- ing powers of money, however, we are able to make a distinction between changes that are widespread and fairly uniform, and changes that affect only one or two commodities. For example, a new invention may decrease the price of a particular commodity, without affecting the prices of other things except through the shifting of demand from other things to the commodity in question, an effect which would usually be slight so far as the price of any one of these other things is concerned, as the demand would prob- ably be shifted from many different lines of consumption. Or, if the demand for the commodity in question is relatively inelastic, a diminution in its price may increase the demand for other things. But there are, on the other hand, price fluctuations which are wide- spread and fairly uniform, and these we call, with substantial accuracy, changes in the value of money. We have already discussed the nature of price fluctuations due 276 OUTLINES OF ECONOMICS to the use of a discounted medium of exchange, like the greenbacks, as well as the temporary fluctuations in values, especially capital values, that spring from alternating periods of prosperity and depression in business. But what are the underlying causes of general changes in the value of money ? the kind of changes we referred to when we mentioned the decreasing value of the mone- tary standard itself as a stimulus to business enterprises ? Leaving theory aside, we know from experience that, other things being equal, the value of money will decrease when the supply of the standard commodity increases rapidly. 1 We know that the value of money units sometimes increases when the world's supply of the standard metal is being increased only slowly. We then say, and it is only a reasonable inference, that the value of money depends, other things being equal, on the supply and demand of the standard commodity. But this is only an empirical generalization. It leaves us ignorant of the way in which a value equilibrium is really struck between a certain amount of gold and a certain amount of another commodity. In analyzing the relation of the supply and demand of other com- modities to their prices, we assumed, for simplicity of the analysis, that the value of gold was not changing. That is, we assumed that the general level of prices was not changing, and so really limited our analysis to the way in which the values of all commodities except gold vary as compared with one another. The marginal utility analysis, which formed the basis of our ex- planation of the shifting of demand from one commodity to another, does not help us to explain the demand for gold as money. Mar- ginal utility springs from the capacity of things to satisfy individual wants, and money does not directly satisfy a single human want, except the abnormal wants of the miser. The subjective values we set upon money units are only the reflected values of the things that money will buy for us. 2 Our standard money commodity is, however, a commodity that 1 We refer here to a more permanent and thoroughgoing change in the prices than that resulting from the business expansion following an increase in the supply of money available for bank reserves. 2 When we speak of the utility of money we use the word "utility" in the sense of usefulness, rather than of want-satisfying capacity. PROBLEMS IN MONEY AND BANKING 2 77 has other than monetary uses. Gold ornaments and other articles made from gold are subject to the law of diminishing utility just as other things are. From the estimates of the director of the mint, it appears that in recent years from one fourth to one third of the world's annual production of gold finds its way into industrial uses. The United States mints and assay offices refine nearly all the crude gold bullion produced in or brought to this country, and allow the depositor to take the proceeds in money or in bars of gold for indus- trial use, as he prefers. There is thus a constant balancing between the industrial and monetary uses of gold. In effect the monetary units which can be got by the sale of gold jewelry, etc., for money are balanced against the monetary units which can be got by the simple conversion of bullion into coin. 1 Consumers, on the one hand, are balancing the marginal utility of gold jewelry, etc., against the marginal utility of other things that they can buy with the same number of money units. Producers, on the other hand, are balancing the relative profitableness of pro- ducing articles made from gold and articles made from other materials. The valuations placed on gold in its industrial uses, where a direct comparison with the values of other commodities is possible, in this way fix a standard to which the value of gold as money must approximate. There is another way in which society makes direct comparisons between the value of gold and the value of other things. Mining, like agriculture, is subject to the law of increasing expenses, and the tendencies of prices to equal marginal expenses is true for both industries. Not only are there marginal mines, mines which it just pays to operate, but in the most productive mines there are mar- gins, certain depths, for example, beyond which the expense of mining more than eats up the value of the product. Through the operators of mines, society is continually comparing the values of the labor and the capital goods used up in the production of gold with the value of the things that can be bought with the produced gold. If the gold produced at the margin will purchase things which consumers value less than they value other things which 1 The expense of transforming bullion into jewelry, etc., is left out of account, as it does not affect the real point under consideration. 278 OUTLINES OF ECONOMICS could have been produced with the use of the same amount of capi- tal and labor, capital and labor will gradually be shifted from its marginal use in gold mining to the production of other things. Here, then, as in the case of the balancing between the monetary and industrial uses of gold, we have a comparative valuation of gold and other things. Several years ago the Bureau of the Mint undertook an investi- gation into the relation of the expense of gold mining to the amount of gold produced. Some of the conclusions reached are worth quoting in this connection : In every mining district there are mines producing at good profits, mines producing at small profits, mines barely paying expenses, and mines operated at a loss, but with the hope that they will do better. Every increase in costs would submerge the latter more deeply, add to the list of the un- profitable, and probably close some of them. ... A higher scale of working costs will bring losing experiments to an earlier conclusion, reduce profits, and make mining ventures generally less attractive, and thus diminish the output. 1 To summarize our conclusions: The law of marginal utility ap- plies in the industrial uses of gold. The particular form of the law of normal value that is operative in agriculture also holds true in gold mining (although it has to be stated in a somewhat different way.) An increase in the supply of gold diminishes its marginal utility in industrial uses, that is, diminishes the valuation put on gold as compared with other commodities. This is bound to affect the value of gold as money, on account of the ease with which the supply of gold can be shifted to one use or the other. The resulting increase in prices may be slow and irregular, but it is none the less certain. The rise of prices, however, cannot continue indefinitely. The increase of prices and wages brings increasing expenses in gold mining. The marginal part of the supply of gold will nor- mally be cut off, a process which will continue until a rise in the value of gold diminishes the expense of producing it. These suggestions are not put forward as an exhaustive state- ment of all the relations between the supply of gold and its value, although they are possibly the most important ones. Increases in 1 Report on the Production of the Precious Metals,* 1904, p. 41. PROBLEMS IN MONEY AND BANKING 279 the quantity of other kinds of money and improvements in the mechanism of credit, for example, probably have an effect on prices similar to that of an increase in the quantity of gold, in that they economize the use of that metal. Silver and paper money do not TABLE I PRODUCTION OF GOLD IN THE WORLD SINCE 1841 (From 1841 to 1885 the estimate is from a table of averages for certain periods, compiled by Dr. Adolph Soetbeer; for the years 1886 to 1006 the production is the annual estimate of the Bureau of the Mint.) PERIOD ANNUAL AVERAGE FOR PERIOD FINE OUNCES VALUE 1841-1850 1,760,502 $3 6 >393> 000 1851-1855 6,410,324 132,513,000 1856-1860 6,486,262 134,083,000 1861-1865 5.949.582 122,989,000 1866-1870 6,270,086 129,614,000 1871-1875 5,591,014 115,577,000 1876-1880 5.543." 114,586,000 1881-1885 4,794,755 99,116,000 1886-1890 5,461,282 112,895,000 1891-1895 7,882,565 162,947,000 1896-1900 12,446,939 257,301,100 1901 12,625,527 260,992,900 1902 i4,354,68o 296,737,600 1903 15,852,620 327,702,700 1904 16,804,372 347,377,200 I90S 18,268,696 377,647, 7 1906 i9,3 66 .55 400,342,100 take the place of an equivalent amount of gold, however, because some gold has to be held in reserve to maintain their convertibility. The so-called "quantity theory" of the value of gold money has been much discussed in recent years. This is the doctrine that, other things being equal, prices vary inversely as the amount of money in circulation. In reality many different theories of the value of money have been put forward under the name of the quantity theory. The theory just outlined, for example, may be called a conservative form of the quantity theory. Some statements of the theory are open to objection because they (i) place too 280 OUTLINES OF ECONOMICS much stress on the very doubtful problem of the exact mathematical ratio between variations in the quantity of money and variations in prices, or (2) confuse the "measure" or "denominator" of value with the standard of value, or (3) fail to recognize the necessity of a commodity standard of value, and consequently attach no significance to the influence of the industrial use of the standard commodity on its value. The most extreme form of the quantity theory is that which forms the foundation of the argument for the possibility of fiat money. The Increase in the Production of Gold. Although probably more gold was produced between 1850 and 1875 than from 1492 to 1850, yet, as Table I shows, the production of gold in any three TABLE II RECENT PRODUCTION OF GOLD IN DIFFERENT COUNTRIES l (In thousands of kilograms) COUNTRY 1897 IQOO 1904 Africa 88 I 7. 1 20 Australia 07 Ill 132 United States and Alaska 86 no 121 Russia 3=; 7T 77 Canada 42 2C British India 12 18 Mexico II 17 10 China 8 7 All others 26 7.C 7C Total . . 2CC ^s? Ml 1 From Journal of Political Economy, Vol. X, p. 580, and Finance Report, 1007, p. 363. years since 1896 or in any two years since 1902 was as great as the total production in the period first mentioned. Most of this great output of gold, as Table II indicates, comes from relatively few countries. At present the British empire supplies over one half and the United States (including Alaska) nearly one fourth of the total product. The causes of this enormous increase were, in part, the opening up of new gold fields in South Africa, Canada, Alaska, and Colorado, and in part the improvements in methods of extract- ing gold from low grade and refractory ores, in which connection PROBLEMS IN MONEY AND BANKING 28l M tt M 00 VO (N t^ 00 M f*5 O M O N to CO NO Q *^ M O NO o o NO "5 CO -0 o< CO 10 J i oo co oo o <* 00 9 *O v V) M *O t^ N tj- o CO fo HI CO 1^ 00 CO 00 ON T vC I/-, <*5 Tf U1 H !>. O CO CO O ro W \O ro M CO 10 H W M" M t^ M oT >O IO w * Q fO O -t 10 o* 10 M PO x z z < Tt t^ P t-~ M \O . \o f5 r<0 fp O rr> NO to OO HI tr> -t- CO to M o o> -r Ch t^. CO oo in ^ ^0 -r s, WJ g P S e 1 to M O : o\ w co . O -t O 1 w to NO ON f Cl ro O NO ON t~* OO f-J N CO CO >0 S * t^ < s ! a iC^ ro w ^ t- IO to >O *5 CO IO IH \O O -T t^. N t^ vO 00 ro f*5 xr> cs O\ (*J O vO N ro t "?. -0 i/-. M O z 8 6 II z hH 8Ch ON CS t~ . VO~ fT N" CO IH H . . M <& o M CN1 r^ M 00^ c^ o" ^> >O ro M . 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CO \ * z fc 2 N 111 o- 3, S^^O^OOOO^^O o o 10 " a fc S5 | M N ^ 1**. l-t M \S) O ^J" *O "**" OO 00 f- w | k. tn & ^cocow^fTw 1 c^cow'co? ^ co s 1 M S g | g lit S.O^w^J?^ ^(^^-^ ^ OO .. 3 o S a 3 y cpO^OOOJOt-.Mcojow w H ^ 1 * &| ON ^* ON M w ^* *^ **** w *""" 00 ^* Tj- < PH " ^^^^^K^-^-^i-c^^- K a o * W D a f- z < z O H W rt-ioO %%%%% 00 H C/3 i. ?Sil5'J1 < l'S & o 1 I 1 OO*O *OOO ro - ON "^"O OOO M M M C4 M w 00 g B to w O O O *"** *"" ON w ^ *"O O 1 HMMMWWWNCOCONO) CO i Ttio>O r^oo OO w ci co-*io ooooooo o o o o o 000000000000 OOOOOO 1 . LABOR PROBLEMS 399 standpoint the strike is an evil, and all justifiable means should be employed to prevent its occurrence. We must not conclude, however, that workingmen and labor organizations are wholly or even mainly responsible for strikes. Indeed there are reasons to believe that the employers are more often responsible for strikes than the employees. If a body of men agree not to work for a given employer unless that employer complies with certain conditions, whose fault is it if the employer refuses to comply and a strike follows? Very evidently the fault may lie with either the master or the men, or with both. The fault lies with the men if the conditions which they demand are, in view of all the circumstances, unreasonable and extortionate. The fault lies with the employer if he refuses to grant reasonable conditions of employment. Sometimes the fault is with one, some- times with the other ; sometimes the one gains by the strike, some- times the other; but the public, which is never at fault, stands always to lose. The greatest lesson to be derived from a consid- eration of strikes is the necessity of their suppression in the inter- est of the general public. One of the greatest evils attendant upon the strike is the violence emanating from both sides from employers' associations as well as from labor unions. It is frequently said that labor vio- lence is diminishing with the passage of years. The statement is both true and untrue. A close study of labor disputes in the early period of the modern labor movement makes it very plain that the average strike of that period was attended with much more violence than the average strike of to-day. Most labor leaders have thoroughly learned the lesson that violence does not pay, and they exert every effort to suppress it. But at the same time the average strike of the present time is attended with some vio- lence or coercion, and the steady increase in the number of strikes makes the aggregate volume of violence now greater than it was in the past. Historically, also, a marked change has shown itself in the char- acter of the violence employed. In the past, labor lawlessness was more or less sporadic; brutal, it is true, but frank and unpre- meditated. The lawlessness of to-day, however, has taken on a 400 OUTLINES OF ECONOMICS far more sinister form ; it has become deliberate, premeditated, in many cases official. No disinterested person can sift the testi- mony in the labor troubles in the mining industry of Idaho and Colorado without admitting that there has been a certain amount of carefully planned violence perpetrated with the passive consent, if not with the active encouragement, of union officials. There can be no doubt, also, that individual employers and employer associations have stooped to equally reprehensible practices. They have employed as watchmen or detectives ex-convicts, thugs, arid professional bad men, who unquestionably have not refrained at times from perpetrating violence in order to cast discredit upon the unions. It is impossible to say who began the trouble, and just as impossible to conclude which side is the most to blame ; the lesson to be drawn is the public necessity of suppressing and punishing violence or intimidation, when practiced by either side of the controversy. Employers' Associations. The development of modern em- ployers' associations has been briefly described in an earlier chapter. Their activities give rise to a movement which may be briefly described as an anti-labor movement. They are, in almost every respect, the natural foil and counterpoise of the labor organization. They resemble the association of laborers even in structure. Thus we have employers' associations recruited en- tirely from one industry, such as the Stove Founders' National Defense Association ; associations of employers in distinct but related industries, such as the national Metal Trade Association ; and mixed associations in which all kinds of employers are united, such as the Citizens' Alliances, so common now in many of the Western cities. To complete the analogy, these associations are combined in city, state, and national federations; thus forming large confederacies, similar in scope and activity to the state and national federation of labor. We find the same resemblances between employers' associa- tions and labor organizations when we examine the policies and aims of the former. Thus they make frequent use of the lock- out ; the Stove Founders' National Defense Association, for example, began its interesting career with a lockout of the iron LABOR PROBLEMS 40! molders in the employ of its members. Like the trades unions, also, they have their legislative committees or lobbies, and are credited, for instance, with having played an important part in defeating the eight-hour and anti-injunction bills which have been before Congress several times. Some of these or- ganizations also maintain so-called labor bureaus, whose func- tion it is to secure accurate information of the workmen in the trade, so that troublesome agitators may be refused em- ployment ; and the methods employed in this branch of the work gives rise to something closely akin to the "unfair list " pub- lished by the American Federation of Labor and many national unions. Some of the more radical associations have stooped at times to violence and coercion, as was illustrated in 1904 by the employers' associations of the Cripple Creek district which boy- cotted business firms, forced public officials to resign by threats or violence, and filled the vacant places with their own adherents. Some of the employers' associations, like the Stove Founders' National Defense Association, are conservative in tone and policy, working harmoniously with the labor organizations in the industry, and going no farther than to endeavor by every legitimate meas- ure to further the interest of the affiliated employers. Such asso- ciations are exceedingly helpful in furthering that regime of peace- able collective bargaining to which most students of this subject look forward as the ultimate outcome of present-day tendencies. They are thus doing in an effective way the work of industrial peace. Another group, however, illustrated by the National Metal Trades Association, while they are temperate in tone and wage no warfare on the labor organization as such, nevertheless maintain certain fundamental principles which are directly in conflict with the fundamental tenets of trades unionism. These associations, for instance, maintain that the method of wage payment i.e. whether wages shall be reckoned by the hour, the piece, or the premium system is a matter which concerns the employer alone, and they refuse to submit such questions to collective bargaining or arbitration. Associations in the second group do not needlessly foment strifes with the unions, but they regard industrial peace as a consideration secondary to the maintenance of their funda- 2D 402 OUTLINES OF ECONOMICS mental principles, and accordingly they have been involved in a number of protracted strikes and disputes. Finally, there is a third group of employers' associations, of which the average citi- zens' alliance is a good example, which may be correctly described as " union smashers." Such associations have little regard for the establishment of sound principles of collective bargaining, and they are usually violently opposed to any recognition of organized labor ; their aim is to weaken and harass their enemy, the labor organization, whenever possible. Owing to this difference of policy among the various employers' associations, it is difficult to predict how the anti-labor movement will affect that question in which the public interest is greatest the question of industrial peace. For some little time, perhaps, the militant enthusiasm of the more belligerent associations will probably result in multiplying strikes and lockouts. In the end, however, they will probably contribute effectively to the mainte- nance of industrial peace by checking the more extortionate de- mands of the unions and by securing that degree of organization among employers which is necessary for the successful operation of collective bargaining. If wage earners are to act in concert by common or standard rules, it is evident that eventually they will have to deal with an organized body of employers ; and the sooner such organization of employers is perfected, the sooner will col- lective bargaining be established as the regular method of deter- mining conditions of employment. The Agencies of Industrial Peace. Although collective bar- gaining does not necessarily and in every instance operate to dis- courage strikes, its net influence is unquestionably favorable to the maintenance of industrial peace. Where a powerful trades union exists, and the employers resolutely refuse to deal with it, strikes are frequent. Where the opposite policy is pursued, and the employers frankly recognize the union, strikes are infrequent. Thus, there has been no great trouble for years in the stove foundry, bituminous mining, and newspaper publishing industries, in which general conventions between the respective labor and employers' organizations are regularly held for the adoption of terms of em- ployment for the ensuing year. LABOR PROBLEMS 403 Trade Arbitration. In England, many, if not most, of these recurrent conferences are based upon formal treaties, which pro- vide for arbitration in case the two parties cannot come to an agreement concerning terms. This is frequently referred to as trade arbitration. But in the United States most of the general conferences are based upon agreements which do not provide for arbitration at all. Peace is maintained, although neither side promises in any way to refrain from strikes or lockouts. Mutual respect and free discussion prevent actual warfare. Indeed, many authorities upon this subject are inclined to think that the intro- duction of arbitration, even as a last resort, weakens the efficiency of collective bargaining. It is almost always necessary for both sides in collective bargaining to make some compromises ; and this necessity imposes upon the representatives of the trades unions the disagreeable duty of reporting to their constituents that they have not secured the exact terms which they were instructed in the beginning to demand. Because of this fact, if a provision for arbitration exists, the union representatives are disposed to throw the responsibility of disappointing their followers upon the shoul- ders of the arbitrators. Moreover, it has been pointed out that collective bargaining is essentially inconsistent with arbitration. Collective bargaining is commercial and elastic; it deals with the formulation of future terms of employment; it looks to securing the best results possible; it has no rational foundation save the willingness of the parties concerned to get the most possible for their labor or their money, as the case may be ; whereas arbitration is judicial in essence, and its successful application implies the acceptance of some estab- lished principle of wage adjustment, in the justice of which both parties acquiesce. It is unfortunate but true that up to the pres- ent time no one has ever formulated a doctrine of wage adjust- ment which is at once workable and acceptable to a majority of the people. Arbitration is a perfectly logical device, and works successfully in the interpretation of minor difficulties growing out of a broad agreement which has already been accepted. Or, if both sides adopt some governing principle, it is perfectly possible for a disinterested arbitrator to decide what this principle demands 404 OUTLINES OF ECONOMICS in a given situation. But as a helpful device in securing the ini- tial adoption of a fundamental agreement, trade arbitration is be- lieved to be illogical in principle and foredoomed in practice to failure. Voluntary Arbitration. There are, of course, many other kinds of arbitration which have proved helpful in maintaining the in- dustrial peace. Most advanced states now maintain boards of conciliation and arbitration, whose business it is to prevent strikes if possible, and to adjust or settle them after they occur. And the Conciliation Department of the National Civic Federation has also to its credit the prevention and settlement of a large number of important strikes. But, for the most part, these voluntary boards of conciliation and arbitration have shown little ability to cope with the real situation. They have achieved enough to jus- tify their existence, but not enough to warrant the acceptance of voluntary arbitration as an adequate remedy for the evil. Much more could be made of voluntary conciliation and arbitration than has been made in the past. The short but very promising history of the Canadian Industrial Disputes Investigation Act of 1907 suggests that a law which, like the Canadian Act, forbade strikes and lockouts in important in- dustries until an impartial board of conciliators had had time to investigate the dispute and publish their recommendations and findings concerning the equities of the case, would go far toward delivering us from the more injurious industrial conflicts. The vital provisions of such a method of conciliation are: (i) the prohibition of strikes and lockouts before and during the investigation; (2) widespread publication of the findings of the board of in- vestigation and conciliation; and (3) full permission to strike or lock out after the publication of the findings. 1 Compulsory Arbitration. In New Zealand an even more radi- cal remedy " compulsory arbitration " has been tried. Seven workingmen in any industry may organize a union and lodge a demand for better conditions of employment before arbitration boards, whose decisions, when ratified by the supreme or central court of arbitration, are absolute and binding. Similarly, any em- ployer whose workmen are organized in a union may take a case to the arbitration tribunals for settlement. An award of the cen- 1 An admirable description of the Canadian Act, from the pen of President Eliot, may be found in McClwfs Magazine for December, 1907. LABOR PROBLEMS 405 tral court of arbitration may be extended by the court to all com- petitors of the original employer in the colony. In this way, com- pulsory arbitration brings about the introduction of minimum wages and other conditions of employment, established by the au- thority of the state and enforced, not only by the watchful eyes oj the parties concerned, but by the factory inspectors themselves. In Victoria and South Australia much the same results are reached through the agency of wage boards, containing representatives of both the employers and their employees with a chairman se- lected by these representatives or appointed by the government, which are empowered to prescribe minimum wages and other conditions of employment, that are enforced, as in New Zealand, by the factory inspectors. Strikes, however, are not prohibited under this system. It is impossible to enter into a detailed discussion of either the New Zealand or the Victoria system at this place. Both systems have been in operation since 1896, both have been extended to other Australian colonies, and both have been partially successful. But the probability that either system will be introduced into this country is so small as to make their discussion unnecessary here. Both systems would conflict with our constitutional law, and both would at the present time be regarded as entirely too radical by the American people. Moreover, a large majority of trades union- ists in this country are strongly opposed to compulsory arbitra- tion. The significance of the New Zealand and Australian move- ment is found in the regulation by the state of the rate of wages. The Ultimate Solution. In arriving at a decision concerning the measures which ought to be taken to maintain industrial peace, it should be remembered that strikes are much more destructive and dangerous in some industries than in others, and that here, as in most other economic problems, it is dangerous to proceed on general principles. In most industries, in our opinion, the strike question may safely be left to the enlightened self-interest of the parties concerned, trusting to collective bargaining and the work of voluntary arbitration to prevent an excessive amount of war. In small competitive industries the peaceful strike is not neces- sarily an alarming phenomenon. 406 OUTLINES OF ECONOMICS Slowly and surely, however, the opinion is gathering force that in those industries which vitally touch the public welfare (such as the anthracite coal industry, railway transportation, and the like) the public ought, and by an exercise of legal ingenuity might, find means to preserve the peace whether the two parties immediately concerned desire peace or not. Compulsory arbitration in com- petitive industries would unquestionably be unconstitutional in this country. But with quasi-public industries, " industries af fected by a public interest," the question is entirely different. If, because of their monopolistic character and their intimate connec- tion with the convenience of the public, the legislature may regu- late the service and the rates of such industries, it would seem to follow even more clearly that the legislature may adopt any meas- ure necessary to prevent the utter cessation of such industries by strikes and lockouts. If, for instance, the fare charged by a street railway may be regulated by the state, in order to prevent monopolistic extortion, how much more justifiable would be the action of the state in preventing the complete interruption of the traffic of the railway by means of a strike or lockout ! We cannot pursue this topic in detail, but must close the discussion with a simple expression of belief that compulsory arbitration for indus- tries affected by a public use would be constitutional and prac- ticable. Profit Sharing. Profit sharing attempts, not to provide a remedy for industrial disputes, but to anticipate and prevent them by assigning to the employees a share of the profits fixed in ad- vance. It is held that this arrangement enlists the employees' inter- est in the success of the business, makes them more economical, and so increases their zeal and efficiency that the share of profits which they receive does not reduce in the long run the earnings of the employer. In other words, the employees create the fund from which their bonus is paid. This bonus may be paid in many different ways : either in cash at the end of the business year, or in shares of stock in the company in question, thus making the workman partial owner of the business; or it may be amassed in a savings or insurance fund, from which in his old age the work- man receives a pension, or his family an annuity or cash premium LABOR PROBLEMS 407 at the time of his death. The last method of profit sharing is usually spoken of as deferred participation. Neither historical study nor theoretical analysis of profit shar- ing furnishes reasonable ground for the belief that this method of industrial remuneration will ever play an important part in solv- ing the modern labor problem. The principle of profit sharing was recognized by the French economist and statesman, Turgot, in 1775, but the first permanently successful experiment in profit sharing was begun by the celebrated French firm of Leclaire in 1842. By 1878, 120 cases were known to be in existence; in 1891, about 300; in 1900, probably no more were in existence than in 1891, although one authority fixes the number at 400. In the United States, at the present time, the system is employed in probably no more than twenty establishments. Since 1896, more- over, and particularly in England, the number of firms which regularly share profits with their employees has fallen off ; and con- fidence in the system as a method of solving the labor problem is unquestionably diminishing. The reasons why profit sharing has not proved more successful are various. In the first place, it has incurred the enmity of most labor leaders, who oppose it because it has often been introduced after a disastrous strike as an antidote to trades unionism, and be- cause they believe that it stimulates the men to work beyond their strength, and eventually results as overspeeding always re- sults in reduced wages. In the second place, it is illogical and inconsistent as explained by most of its advocates. The latter assert that the workmen create the fund from which their dividends are paid by increased care, zeal, and speed. If this be true, and the system can hardly prove a permanent success unless it is true, the end which profit sharing seeks would be better achieved by the piece rate or gain- sharing methods of wage payment. By both of these methods the worker gets his premium for extra zeal and efficiency as part of his wage, not as a gift; gets it on pay day, not at the end of the year; and feels as free to bargain and higgle about the size of the premium as he does about the size of the wage. Moreover, his premium cannot be dissipated by unwise management or dishon- 408 OUTLINES OF ECONOMICS esty on the part of the employer, and it cannot be lost by reason of his death, discharge, or change of employment. Profit sharing has failed because it is unbusinesslike and smacks of philanthropy. The average employer consciously or uncon- sciously expects something in return for the dividends which he distributes. And if he does expect a return, it is far better that he should pay for it by a method which is certain, fixed by contract or bargain in advance, and paid, not at long intervals, during which it is threatened by the varying fortunes of the business, but at the end of the week or month when ordinary wages are paid. Of course, if in addition to fair wages the employer wishes to distribute a gratuitous dividend at the end of the year, for which he expects nothing in return, the employee is not likely to object, and the generosity of the employer will probably do no harm. But such a system of profit sharing cannot be expected to become prevalent throughout a competitive commercial system in which most employers cannot be philanthropists, even if they desire. Moreover, human nature is so constituted that gifts of this kind create in the mind of the giver an inevitable expectation of recompense. Industrial Democracy. The industrial organization of the past was despotic. The despotic principle, the one-man power, is an excellent thing in its own time and place. It gives to indus- try the elasticity, celerity, and general efficiency which come from singleness of aim; and in industry, despotism has continued longer than in the political sphere. But it is merely a phase of develop- ment and ought not to be regarded as final. Elsewhere the des- potic principle has been softened or dissipated, in politics, in religion, in the family, and eventually this discordant element is bound to disappear or undergo serious modification in industry. The whole labor movement is a concerted and united effort to achieve industrial democracy, which means self-rule, self-control, the self -direction of the masses in their efforts to gain a livelihood. It is primarily because profit sharing means a departure from, and not an approach toward, industrial democracy that we are forced to reject it as a progressive step in accomplishing those ends which the labor movement is inaugurated to achieve. A LABOR PROBLEMS 409 far more consistent method of securing self-government is found in cooperation. Cooperation is of two kinds, coercive and voluntary. Coer cive cooperation, which implies a partial or complete application of socialism, is discussed in another chapter. Voluntary cooperation takes many different forms, among which we may distinguish: (i) distributive or consumers' coop- eration, sometimes spoken of as cooperative buying; (2) coopera- tive borrowing or cooperative credit; (3) cooperative marketing; and (4) producers' or pure cooperation. Consumers' or distributive cooperation has no necessary con- nection with the transportation of goods, but refers merely to a method of retail or wholesale exchange. Purchasers of groceries, dry goods, and the like come together to purchase what they need, and thus eliminate profits. They form a stock company, subscribe for shares, employ a manager and clerks, who often do not even share in the profits, and start a business. Divi- dends are sometimes paid only on shares, but the approved way is to pay a moderate interest on capital and to divide profits among the customers in proportion to their purchases, the division being made at the end of stated intervals. Usually a larger divi- dend is distributed to shareholders than to ordinary customers; and in some cases the employees receive as large a bonus as the shareholders. Profits are thus said to be divided among capital, custom, and labor. But so far as labor is concerned, the most that can be said is that it receives a small share of the earnings; labor does not cooperate in the sense that it has an important voice in the management of the business. The scheme is one of distributive cooperation plus profit sharing, not one of pure cooperation. Cooperative credit and cooperative marketing are familiar phenomena in the United States the first in the form of the well-known building and loan association; the second in the form of fruit growers' association, cooperative elevator companies, and the like, formed for the purpose of securing better terms and facili- ties from railroads, commission houses, and middlemen in general. In 1902-1903, for instance, there were 5299 building and loan 410 OUTLINES OF ECONOMICS associations in the United States, with a membership of 1,530,707, and total assets of $577,228,014. About the same time (1902) there were also 994 cooperative telephone companies, operating 89,300 instruments. The good which these cooperative associations have accom- plished is enormous, and there can be no doubt of their practi- cability. They have not only proved commercially profitable to the participators, but they have trained them to "team work" and inculcated the spirit of mutual concession, the give and take of concerted endeavor, which makes for social solidarity and con- stitutes such an indispensable element of good citizenship in a democratic state. But they have done little and promised to do little in solving the labor problem or in essentially improving the distribution of wealth. They are, for the most part, composed of small capi- talists, farmers, or salaried men, not wage earners, and in organization differ little from democratically managed stock companies of the usual type. Many, if not most, of the market- ing associations are profit-making concerns whose employees have no more voice in the selection of their bosses, and no more share in the management of the business, than the employees of an ordinary corporation. Even in the British cooperative socie- ties the employees have no share in the management, and though some of the associations notably the Scottish Wholesale So- ciety indulge in a mild species of profit sharing with their employees, the result is not industrial democracy, not self-govern- ment, but merely joint-buying plus a paternalistic scheme of profit sharing. The limits of the success of the British cooperative movement are suggested by the fact that the employees of the cooperative societies have formed themselves into a trades union for the betterment of their condition of employment. While consumers' cooperation and cooperative marketing both designed to abolish the profits of the middleman are important and praiseworthy forms of economic association, they have little effect upon the wage-earning classes, and offer no remedy for the antagonism between capital and labor in manu- facturing industries. The variety of cooperation which really LABOR PROBLEMS 411 copes with these questions and seriously attempts to regenerate the wage system is producers' cooperation. The essential fea- tures of this form of cooperation are (i) that each group of workers is to be associated by their own free choice; (2) that these asso- ciates shall work under a leader elected and removable by them- selves ; and (3) that the collective remuneration of the labor per- formed by the group shall be divided among all its members (including the leader) in such a manner as shall be arranged, upon principles recognized as equitable by the society them- selves. 1 Successful cooperative experiments fulfilling the above con- ditions are seldom met with. They are not unknown. Here and there a man of transcendent commercial genius and extraordi- nary sympathy has succeeded in democratizing his business, turning it over to his employees and so impressing his spirit and his methods upon his successors that the business continues to prosper under the regime of self-government. An illustration is found in the Godin Famttistere of Guise, France, which, begin- ning with a scheme of profit sharing in 1877, has finally resulted in the establishment not only of a cooperative manufacturing enterprise, but in the successful conduct of what practically amounts to a cooperative community. But such cases are rare. Most experiments in producers' co- operation have failed, and we fear they must continue to fail. They simply cannot meet the competition of businesses organized in the ordinary way, directed by one man or set of men with all the efficiency, mobility, and adaptability that come from single- ness of aim and undivided management. Industrial democracy, as achieved in the cooperative form of industrial organization, is too unwieldy, too slow, too mechanical. Multitudinous manage- ment means relatively uncertain, indecisive, and inefficient man- agement. A modified form of producers' cooperation is not unknown among the manufacturing industries of this country. An approximate idea of the extent of this form of industrial organization may be gathered from recent census statistics. In 1905 the statistics of manufactures relating to form of busi- 1 Schloss, Methods of Industrial Remuneration, p. 228. 4 I2 OUTLINES OF ECONOMICS ness organization show a separate class of " miscellaneous business organiza- tions" which we are told consists almost entirely of cooperative manufactur- ing concerns. There were in this group 3203 establishments (constitut- ing 1.5 per cent of all manufacturing establishments) with a capital of $20,729,744 (0.2 per cent of the aggregate capital), employing 8520 persons (0.2 per cent of all wage earners), producing goods with an annual value of $54,466,028 (0.4 per cent of the aggregate product). Most of these associa- tions are cooperative creameries ; and it is interesting to note that in this great industry which was cooperative in origin the proportion of cooperative concerns is steadily diminishing. These figures furnish a maximum estimate of producers' cooperation in the United States, and a large majority of the concerns credited to cooperation in this enumeration would fail to satisfy a strict definition of producers' cooperation. For the most part they rep- resent a form of cooperation among farmers and small capitalists who stand on an equality as among themselves, but give their employees no real share in the management of the business. The wage system, whatever its defects, has one striking virtue certainty. The wage earner knows what to expect and gets what he expects. He is insured against risk of loss, and although he may pay too high a price for his insurance, the insurance itself is a highly desirable thing. It is one of the weaknesses of pro- ducers' cooperation that the workman is encouraged to invest his savings in the hazardous competitive experiments in which he is engaged. He becomes part owner of the enterprise, to be sure, but by doing so he assumes the risk of failure, a risk which, other things being equal, it is desirable to eliminate. It is probable that the ultimate method by which industrial democracy is achieved will retain that feature of the present wage system by which most of the workers are insured against business losses. Indeed, we expect to see industrial democracy achieved through the labor organization. Since the formation of the trades union and the introduction of collective bargaining, the range of this bargaining has constantly widened. Beginning with questions of wages, hours of labor, and apprenticeship, it has gradually spread, until at the present time some unions bargain about the sanitary conditions of the work, the introduction of safety devices, the em- ployment of women, the use of machinery, and the status of the men with whom their members work. A very few powerful unions insist that the foreman under whom their members work LABOR PROBLEMS 413 shall belong to the union, demand a voice in the discharge of em- ployees, and try to force the employer, when taking on new men, to select them in order from lists of unemployed journeymen prepared by the union. These demands, of course, may be harm- ful; the working classes will have to learn by experience what measure of control it is best to have in the hands of the employer. The fact that power may be abused, however, is really beside the point. The point lies in the possibility, and in general the desira- bility, of extending the range of collective bargaining until the employees shall have a voice and it is to be hoped a prevailing voice in determining all the conditions of employment. Through collective bargaining the control of the employees over the busi- ness may be indefinitely expanded. Once having secured control, the majority will learn, as they have in political life, to leave certain particularly delicate questions to their industrial captains. In the past, labor has had to seek capital and serve it. In the future, capital may have to seek arid serve labor. The past may be pictured by the single entrepreneur with his capital hiring a thou- sand men to do his bidding. The future may behold the thou- sand hiring the entrepreneur and his capital to do their bidding. And the latter is the more pleasing, the more democratic, and altogether the more wholesome picture. These words are written in no spirit of advocacy, and with no intention of palliating the obvious shortcomings of the trades union. But the fact remains whether we like it or not that economic theory and economic history unite in the conclusion that the union has come to stay as long as the system of capi- talistic production. The union must be improved, it cannot be extirpated; and the most urgent task of the present is to con- vince employers and unionists that there will be no real peace until employers acknowledge the inevitableness of the union, and unions acknowledge sympathetically and in practical ways the social serviceableness of the employer. Trades unions have been guilty of many sins violence, monopoly, political corruption. But their gravest danger at the present time is a false philosophy, in accordance with which many unionists have come to believe that the best way to help the union is to oppose 414 OUTLINES OF ECONOMICS the employer. This is not true of the more wisely conducted unions. The railway brotherhoods frequently unite with the rail- way managers in securing legislation favorable to the railway industry; and the history of the National Civic Federation, for example, proves that a number of the opposing leaders are keenly aware that capital and labor have interests in common as well as in opposition. In some way, however, united labor as a whole has got to learn this lesson how to drive just as favorable a bargain as possible with the employers in the first instance, and then, the bargain having been made, to bend every effort in loyal cooperation with the employer to make the business the greatest possible success. This is not mere platitude. In the long run, and whether we like the fact or not, productive efficiency is the supreme economic virtue; and the institution that stands in its way will perish. The trades union must bring into industry something besides conflict, or it will disappear. The union that so conducts itself as to make the non-union man or the non-union shop more efficient than the union man or the union shop, in the long run, simply puts a premium upon the suppression of union- ism. QUESTIONS 1. Is the industrial or the trades union the more logical form of organiza- tion ? Can the two be reconciled ? Mention as many kinds of jurisdiction disputes as you can. 2. Does the trades union rest upon a sound economic basis? Is it likely to endure? Is it in any large degree responsible for the conflict between labor and capital? 3. Are all attempts to achieve a monopoly illegitimate? Is there more justification for labor monopolies than industrial monopolies ? 4. Is the policy of the closed shop ever justifiable ? Intimidation of non- union men ? restriction of apprenticeship ? regulation of output ? 5. The strike has been defined as a " concerted cessation of work " ; is this definition correct? Have men a "right" to strike whenever they wish? Are employers justified in "locking out" their men at pleasure? 6. Are "organized" strikes more successful than "unorganized" strikes? Are strikes more or less successful than formerly ? Do they last longer ? 7. Is the "blacklist" more justifiable than the boycott? Can either the " blacklist " or the boycott be conducted in a lawful manner ? 8. Distinguish between trade arbitration, voluntary arbitration, "com- LABOR PROBLEMS 415 pulsory investigation," and compulsory arbitration. What are the defects of arbitration as a method of settling labor disputes? 9. Why do labor leaders oppose compulsory arbitration? Is their op- position a sufficient reason for rejecting it ? Why is the plea for compulsory arbitration particularly strong in the case of monopolistic industries ? 10. How does "gain sharing" differ from "profit sharing"? Is profit sharing necessarily paternalistic ? If so, is this a defect ? 11. Does consumers' cooperation materially advance industrial democ- racy ? Is producers' cooperation likely to grow and expand ? 12. How can a large measure of industrial control be secured for the wage earner through the trades union ? Other things being equal, is it desirable that the wage earner should secure a large measure of control ? Is it per- missible to assume that other things will be "equal"? LITERATURE ADAMS, T. S., and SUMNER, H. L. Labor Problems. BOOTH, CHARLES. Life and Labor of the People in London. BROOKS, JOHN GRAHAM. The Social Unrest. Bureau of Labor (U.S.). Bulletin Annual and Special Reports of the Commission of Labor. COMMONS, JOHN R. Trade Unionism and Labor Problems. ELY, RICHARD T. The Labor Movement in America. OILMAN, N. P. Methods of Industrial Peace; A Dividend to Labor. HALL, P. F. Immigration. Industrial Commission (U.S.). Report, Vols., XVII and XIX. LEVASSEUR, E. The American Workman. MITCHELL, JOHN. Organized Labor. ROWNTREE, B. SEEBOHM. Poverty: A Study of Town Life. SCHLOSS, D. F. Methods of Industrial Remuneration. WEBB, CATHERINE. Industrial Cooperation. WEBB, BEATRICE and SIDNEY. History of Trade Unionism; Industrial Democracy. CHAPTER XXIV INTEREST INTEREST is the price paid for the services of capital. It appears in two forms: loan interest, the amount paid by one man to another for the use of money or goods owned by the latter, and imputed interest, that portion of the value of the products of industry which is attributed or imputed to the services of capital, as distinct from the services of land and labor. Interest is usually measured as a percentage of the money value of capital, and this, coupled with the fact that capital is often lent in the form of money, has led to the prevalence of the idea that interest is a payment for the use of money. This is only a partial description of interest, however, for it does not include imputed interest nor the loan interest paid for the use of many forms of capital buildings, for example. Objections to Interest Taking. It is only in modern times that interest has been generally considered a legitimate and necessary form of income. The strong denunciations of usury contained in both the Old and New Testa- ments are denunciations of interest taking, for the word "usury" formerly meant any kind of interest, and not merely excessive interest, as at present. The opinion of many classical writers is illustrated by Aristotle's dictum that " money was intended to be used in exchange, but not to increase at interest." During the greater part of the middle ages the authority and teaching of the church was set definitely against the taking of interest in any form. In the middle of the fourteenth century the prohibition of usury was incorporated in the civil law. These objections, however, had reference chiefly to loan interest, and interest on money lent for personal use at that ; for capital was not thought of as one of the factors in production until comparatively modern times. In fact, by the fifteenth century, when opportunities for the profitable use of money had appeared in such forms as the purchase of rights to receive land rents, or partnership ventures in trade (where interest was held to be justified by the risk incurred), the canonists (the writers on church law) admitted the legitimacy not only of such gainful employments of money, 416 INTEREST 417 but also, in many cases, of interest on loans. The justification of loan inter- est took on at first many curious forms. It was regarded in some cases as a fine for delay in the repayment of the loan, so that lenders often resorted to the subterfuge of lending money gratuitously for a nominal period, the real agreement being that they were to get back their money principal, with a fine for the delay added, at a later date. In other cases loan interest was justified as a payment for the loss of the possible gains which the lender might have got by using his money himself. Usury, which at first meant any kind of loan interest, came to mean interest on money loans to relieve per- sonal needs, rather than for gainful employment, then interest on loans in which the element of risk was lacking, and finally, excessively high interest. To-day the use of capital is so prominent a feature of our productive meth- ods that the legitimacy of interest is not generally questioned. Socialistic writers, however, insist that interest is only a result of the system of the private ownership of capital, and that with the abolition of private property in pro- duction goods what is now counted as interest would become part of the wages of labor. It is accordingly important that we should understand clearly why interest has to be paid, as well as that we should study the factors de- termining the rate of interest. We shall find, however, that the explanation of the necessity of interest is really a part of the explanation of the rate of interest. Inadequate Explanations of Interest. An idea that naturally suggests itself is that interest has to be paid for the use of money because "money can be profitably employed in business." This explanation, which is very much like one of the ways in which the canonists finally came to justify interest, is obviously inadequate. It is only an attempt to explain loan interest by assuming the exist- ence of imputed interest. What we want to know is why " money can be profitably employed in business." A similar, but somewhat more definite, attempt at an explanation is contained in the statement that interest is paid because capital is productive. It is pointed out that by the use of capital goods the product of industry is greatly increased over what could be produced by labor and land alone. This is, of course, true, but taken alone it does not explain interest. The problem of interest relates to the value of the product, not to the amount of the product. There is nothing in the mere quantity of the product that gives value to it. The farmers of this country have found more than once that a large wheat crop has sold for less .in the aggregate than a small one. The real problem of interest is this: Why 2E 418 OUTLINES OF ECONOMICS can an entrepreneur, by the use of capital, increase the selling value of his product enough to not only pay for the capital actually used up in production, but also to pay in addition a surplus in the form of interest upon the capital employed? Nor can we say that " capital produces interest." It cannot be too strongly em- phasized that neither land, nor labor, nor capital produces value. They are simply the instruments used in the production of things that are valuable because they satisfy human wants, and hence command a price in the market. Part of the value of the product is imputed or attributed to capital in the form of interest, and it is because of its capacity to earn interest that capital is valued. To say that capital produces value is to reverse the true process. Capital goods produce (or aid in the production of) other goods, and the value of these produced goods is the cause of capital value. Why Interest can be Paid. We shall find the analysis of our problem somewhat simpler if we divide it into two parts: first, why interest is possible; and second, why interest must be paid. In discussing why interest can be paid, we shall assume that in- terest must be paid if capital is to be used in production, reserving the discussion of the legitimacy of this assumption for the follow- ing section. It is the physical productivity of capital the fact that capital can be used in cooperation with land and labor in the production of goods that makes it possible for the entrepreneur to look upon part of his total money income as interest on his investment of capital. Now, as we have seen, the mere fact that capital is pro- ductive in the physical sense does not explain interest, but the fact that capital is used under the guidance of entrepreneurs in the pro- duction of wealth does explain the possibility of interest. The mere physical productivity of land does not explain rent land will grow weeds as well as wheat; nor does the mere physical productivity of labor explain wages some men have put years into the construction of perpetual-motion machines that are abso- lutely worthless. But it is the business of the entrepreneur to see that land and labor are used wisely; and from his point of view they are used wisely if they are used in the production of things INTEREST 419 that consumers want, and want intensely enough to pay such prices as will enable the entrepreneur to pay the rent of the land and the wages of the labor employed. Similarly, an entrepreneur will not employ capital in any kind of production unless the prices he expects to get for his products are such as to cover the expenses incurred in the use of capital. Nor will he knowingly use so much capital that his product will sell for less than a smaller product would have sold for, any more than he will knowingly produce an unprofitably large quantity of goods by the use of too much labor or too much land. On the one hand, the entrepreneur has to estimate the prices he will get for his products; on the other hand, he has to estimate the productivity and the expense of land, labor, and capital. The expense of capital includes, first, the cost of the capital actually used up in production; and second, interest on all of the capital used, whether " used up " or not (assuming, as previously ex- plained, the necessity of interest). The principles that will guide the entrepreneur as to the relative proportions of labor, land, and capital he will use have already been discussed in connection with the general subject of diminishing productivity. We may, how- ever, emphasize again the fact that productivity must be attributed, not to " capital in general," but to specific units of specific kinds of capital, used in connection with a definite amount of land and labor; the productivity imputed to any particular unit of capital being the precise amount of product actually dependent upon the use of that particular unit the amount by which the total prod- uct would be decreased if the unit in question were not used. An entrepreneur will increase his use of capital rather than of labor or land, when a given expense for any kind of capital will add more to his product than would a similar expense for labor or land. The Necessity of Interest. Free goods, such as air or the force of gravitation, are productive in the physical sense, in that they are absolutely necessary to most forms of production. The surface of Lake Michigan is used in producing the service of transporta- tion in essentially the same way as is capital in the form of a rail- way roadbed and track. But we cannot impute productivity to specific units of free goods, for the simple reason that the amount 420 OUTLINES OF ECONOMICS of the product is not dependent on the utilization of any one unit of them. Any one cubic foot of air could be dispensed with; we cannot even conceive of the force of gravitation as limited in quan- tity; the great lakes furnish pathways that are more than sufficient for all the vessels that traverse them. We do impute productivity to the better lands that are used in production, because any one acre of them could not be withdrawn from use without a diminu- tion in the product. The controlling reason for this difference Is that the spontaneous supply of free goods is in excess of the use that is made of them; while the supply of the better lands is lim- ited as compared with the demand for them. This suggests at once why productivity has to be imputed to specific units of capi- tal, and that is, that the supply of capital is limited. Why is the supply of capital limited ? This question leads us to examine the nature of the supply of capital. Imagine a society without capital carrying on its productive processes by the use of labor and land only. So long as the members of this community produce only what they consume directly, or (if, despite the ab- sence of capital, money economy and a system of exchange may be imagined to prevail) so long as they spend all their money in- comes for things used up immediately in the satisfaction of their wants, there will be no accumulation of capital. In order that capital shall be furnished, it is necessary that some members of the community turn aside from the production of things that are used in the immediate satisfaction of their wants and devote their time to the production of goods that will be used in further production. Whether they do this on their own account, or whether they are paid for their work while they are doing it by others, some post- ponement of the satisfaction of wants is necessary. In the one case those who produce the capital goods give up temporarily the satisfactions which they might have derived from the consump- tion goods they could have produced. In the other case, those who are devoting part of their money incomes to the payment of those who are producing capital goods are giving up the immediate satisfactions which they might have secured with the money. In either case the production of capital involves the sacrifice of wait- ing on the part of some members of the community. But why INTEREST 421 should waiting be called a sacrifice? Do not those who give up present satisfactions in order that capital goods may be produced get a full repayment if they get back in the form of the products of their capital goods as much as they, for the time being, give up? In other words, why should capital not be furnished for produc- tive purposes if those who furnish the capital get back an exact equivalent (in value) for the amount of capital they have supplied ? Why should an extra payment, in the form of interest, be necessary to induce saving? The answer to these questions is found in the difference between present and future values. Our present wants are more intense than our present estimates of our future wants of a similar kind. We visualize the present more vividly than we do the future; we yield sometimes to the temptation of satisfying the more trivial wants of the present, even when we know that we are thereby ren- dering uncertain the satisfaction of more important wants in the future; and when we take considerable periods of time into ac- count, we may reasonably say that the uncertainty of life itself gives us some ground for preferring present to possible future satisfactions. Notwithstanding the vast difference between civ- ilized men and savages in this respect, for many of the latter seem to have absolutely no regard for future needs, the fact still remains that waiting is a sacrifice, and in order to induce the sav- ing that is a prerequisite to the use of capital in industry, a pre- mium or reward for waiting has to be paid in the form of interest. This fact is the most fundamental thing in the explanation of interest. It must not be inferred that, in the actual economic life of to-day, no capital would be supplied if interest were not paid. There are other motives that induce men to save parts of their incomes. The desire to provide for old age and for such contingencies as sickness and accident, or to make provision for one's family in case of death, would result in a considerable amount of saving. The mere pride of accumulation, and the fact that the satisfaction of many important wants, such as the desire to own a house, or the desire for foreign travel, necessitate the gradual accumulation of what is to most persons a considerable sum of money, must also 422 OUTLINES OF ECONOMICS be given due weight. None of these motives would in themselves induce men to invest or lend their saved funds in productive under- takings if no interest at all were paid. In fact, this would be a matter of indifference, for savings might just as well be hoarded. But a very low interest premium would suffice to overcome this indifference and to bring about their investment in productive undertakings. Even this low interest rate, however, would be sufficient to balance, in some additional cases, the difference be- tween the intensity of present wants and the intensity of future wants, so that in these cases, in turn, spending or saving would be a matter of indifference an indifference that would in its turn be overcome by a slight increase in the interest rate. In a similar way every increase in the interest rate would induce more persons to save and would induce many of those who were already saving a part of their incomes to save a larger proportion of them. At any given time, accordingly, the interest rate is considerably higher than would be necessary to compensate for a large part of the wait- ing that devolves upon those who furnish capital funds for pro- ductive purposes. It is just high enough, however, to be a recom- pense for marginal waiting, which is the waiting that would not take place if the interest rate were any lower. If the interest rate is 5 per cent, a dollar to-day is worth a dollar and five cents a year from to-day, not to all savers, but to the marginal savers. The Investment of Capital. We have seen that the supply of capital originates in the fact that some people save part of their money incomes, and that interest has to be paid in order to induce this saving. Such persons are said to get an " income from their capital." Strictly speaking, their savings are not productive capi- ital at all, in the sense in which the word " productive " is used in this book. Productive capital consists of the concrete material instruments of production, such as factory buildings, machines, raw materials, merchants' stocks of finished products, and the like. Savings are not productive capital in this sense, but the process by which they are transmuted into productive capital is a simple and familiar one. The simplest case is where the entre- preneur saves part of his own money income and uses his savings in the purchase of additional capital goods, the value of the prod- INTEREST 423 ucts of which he estimates will be large enough to repay him for his waiting, as well as to replace his capital as it is used up, that is, to earn interest for him as well as repay the principal. Or, the entrepreneur may borrow money directly from others who have saved it, agreeing to pay annual interest, and in addition to repay the amount of the loan the principal at some specified time. In the complex economy of the present, however, it very often happens that the entrepreneur who can use money profitably and the man who has surplus funds to invest do not arrange the trans- action directly. Savings are " placed at interest " in savings banks, insurance companies, or other financial institutions, and it is to such institutions that the entrepreneur who thinks that he can use more capital profitably applies for loans. Very often the entrepreneur is a corporation rather than an in- dividual, but the same three methods of obtaining capital are open to it. The corporation may choose to reinvest some of its net earnings in productive forms of capital rather than to pay them all out in dividends to its stockholders. In the bookkeeping of many corporations, such savings on the part of the corporation are rep- resented by the item called " surplus " on the balance sheet; in other cases, especially with railways, it may happen that these reinvestments of earnings are hidden by unduly enlarging the ac- counting item of " maintenance " or upkeep of the plant, so that it includes the expense of new additions of capital. When in need of money to meet a temporary emergency, the corporation may borrow from banks just as the individual entrepreneur does. When in need of money for more permanent investment in the durable forms of capital goods, the corporation usually issues its own interest-bearing obligations in the form of bonds, which it sells to banks, insurance companies, and other financial institu- tions, as well as to individuals. Bond issues are only one way of borrowing money. But whether the money funds are furnished by the entrepreneur or by others, the formation of capital necessi- tates, first, the saving of parts of money incomes, and second, the use of the funds thus secured in the purchase of capital goods. The expression " investment of capital " is used as a short way of describing this twofold process. 424 OUTLINES OF ECONOMICS The Replacement of Capital. It is clear, then, that saving, which necessitates waiting, is a prerequisite to the formation of neio capital, that is, to an increase of the supply of capital already in existence. But at any given time the capital already in exist- ence forms a very large proportion of the total supply of capital, and it may be thought that the present interest rate does not affect this portion of the supply. We must, however, take into consid- eration the fact that almost all kinds of capital are being continu- ally used up in production. This using up may be a matter of a single use, as in the case of fuel or raw materials, or it may be a gradual wearing out, as in the case of a machine, but such differ- ences are differences in degree of durability rather than differ- ences in kind. As we have seen, the entrepreneur will not normally employ any given additional unit of capital unless he expects to get enough from the value of the added product to replace the capital actually used up in production as well as to pay interest. This means that if the entrepreneur's estimates prove correct, part of the money income he gets for his product may be regarded as a replacement fund, sufficient in amount to replace the capital used up in pro- duction. We must not, however, make the error of thinking of the replacement fund as definite in quantity. Whether or not any unit of capital produces enough to furnish a replacement fund, depends on whether the entrepreneur's estimate is a correct one. There is no reason why unproductive forms of capital should be kept intact in amount. He would be a foolish business man, for instance, who would keep reinvesting a certain amount of money in raw materials in the face of a diminishing demand for the fin- ished product. Even if enough income is earned to form a re- placement fund, the capital used up need not be replaced unless the entrepreneur so chooses. A farmer may have saved for years in order to buy a reaper. The reaper will enable him to raise more wheat, or, possibly, to produce the same amount of wheat at less expense. In either case it will mean an increase in his net money income. He can, if he chooses, set aside enough of this added income so that, when the first reaper wears out, his accumu- lated funds will replace it. From one point of view we may say INTEREST 425 that in this way the reaper "replaces itself." But the farmer can, if he prefers, use all of his increased income in the purchase of additional comforts and luxuries for himself and his family. In deciding whether he will replace his capital or increase his present consumption, he will be guided by the same kind of an estimate of the relative importance of present and future wants on the one hand, and of the amount which the capital will add to his income, on the other hand, that guided him in the original saving which led to the purchase of the first reaper. Similar illustrations can be found in other kinds of undertak- ings. Many business enterprises have failed because business men have "lived beyond their incomes" which often means simply that they have not replaced their capital so rapidly as they have used it up. Many American railways have maintained a specious prosperity for many years by paying "unearned divi- dends " ; that is, by letting their capital (roadbed, rolling stock, buildings, etc.) deteriorate through not expending enough of their gross income in the maintenance of their way and equipment. The stock of capital in existence at any one time is the result of past saving. But this stock of capital cannot be maintained intact without more saving. From this point of view we may say that the sacrifice of present goods for future goods which society un- dergoes in order to reap the advantages of capitalistic production is not something that is done "once for all," but is a continuous sacrifice. The Shifting of Investment. As a matter of fact, a large amount of the capital that is used up in production is not replaced, for the simple reason that entrepreneurs find that some particular kinds of capital are not profitable; that is, they do not add enough to the value of the entrepreneurs' total product to repay them for their cost (including interest and replacement). It may happen that the entrepreneur has been mistaken as to the technical effi- ciency (or productivity) of his capital, or that he has overestimated the demand for his products. New inventions or new methods of production may lessen the income yielding power of part of the existing stock of capital, or capricious changes in demand may have a similar effect. On the other hand, these new methods of 426 OUTLINES OF ECONOMICS production and these changes in demand are making new forms of capital profitable. Even if the "replacement fund" were a definite and rigid annual sum, it would not be entirely devoted to replacing the particular kinds of capital that had been used up in production. There would be a continual shifting from the less profitable to the more profitable forms of capital. We often hear it said that capital is transferred from one indus- try to another, or from one locality to another, or from one country to another. Such expressions are misleading. Capital goods are not usually transferred in this fashion, although in exceptional cases it may happen. 1 These statements often mean that the ownership of capital changes, as when a capitalist sells his holdings in one industry to another capitalist and invests his own funds in another undertaking. The most important way in which "capi- tal is transferred " is through that gradual shifting in the forms of investment which has just been described. The Relation of the Durability of Capital Goods to Investment. The ease with which investments of capital may be shifted varies for different forms of capital. Especially important in this connection is the durability of capital. As has been already sug- gested, some forms of capital are destroyed as capital by a single use. The fuel and raw materials used in a manufacturing estab- lishment and the merchant's stock in trade belong to this category. The merchant's stock in trade becomes consumption goods in the hands of consumers: raw materials reappear in the finished prod- uct, as do other forms of capital for that matter, although in a less obvious sense. But the fact remains that these particular forms of capital investments yield their services only once, and when they are once used by the entrepreneur for the purpose for which they were intended, they cease to be capital. From such transient forms of capital we may pass by insensible gradations to capital goods which yield a long succession of serv- ices, the series culminating in such durable forms of capital as 1 For example, some generally used kinds of machinery (such as lathes, milling or planing machines, engines, or motors) may be transferred from one establishment in one industry to an establishment in another industry, or draft horses may be sold by farmers to merchants. INTEREST 427 buildings used for productive purposes, or railway roadbeds. If a particular form of capital lasts for exactly a year, the period of time usually taken as a unit in the computation of the rate of inter- est, estimating the expense of employing such capital is a very simple matter. If, for example, the rate of interest is 6 per cent, an entrepreneur would not invest $1000 in such capital unless he estimated that it would increase his product by an amount that would sell for at least $1060. In the case of the more transient forms of capital, however, the computation is usually made by taking into account the "rate of turnover." A manufacturer may be continually buying raw materials and making them into fin- ished products. If the raw materials purchased during a year cost $3000, but if, on the average, only $1000 is invested in raw ma- terials at any one time, the capital is said to be "turned over" three times during the course of the year. The interest rate is computed only on the average amount of capital "tied up," so that interest of 2 per cent on each turnover would amount to 6 per cent on the actual investment of capital. In the case of the more durable forms of capital the computa- tion is more complicated. Here the entrepreneur has to take into account not only the original expense of the capital good and the amounts which it will add to his annual product, but also its dura- bility, and the fact that a large part of the income which it will earn for him is future income. This future income, as we have seen, will not be valued so highly as the same amount of present income would be. Suppose, for example, that the entrepreneur is considering the purchase of a machine which will be worn out in ten years, and the price of which is $1000. If he wishes to get 6 per cent interest on his investment (possibly because he has to pay that much for the money funds he uses), he cannot afford to purchase the machine unless it will increase his annual product during those ten years by an account that will sell for at least $136. For $1000 is the present value of an annual payment of $136 for ten years, com- puted on the basis of an annual interest rate of 6 per cent, compounded annually. If he is satisfied with 5 per cent interest, a probable increase of $130 in the annual value of his product would justify the investment. From this point of view the investment of capital is, so far as the entrepreneur's estimates prove correct, equivalent to the purchase of an annuity for a term of years corresponding to the life of the capital good. Of course, as the capital 428 OUTLINES OF ECONOMICS wears out, its productivity is apt to decrease. Such things, together with any probable changes on the salability of the product, as well as all other contingencies that can be foreseen, have also to be taken into account by the entrepreneur, and still further complicate the problem. It is obvious that the entrepreneur does not usually make an elaborate mathematical calculation of the kind suggested here. His business experi- ence and knowledge of market conditions afford the basis for a more or lest accurate guess as to the profitableness of a proposed investment of capital. He estimates that a certain machine will or will not "earn its cost" (including interest) because he knows something about the profitableness of the use of similar machines in his own or other establishments. The concrete problem that continually presents itself to the entrepreneur is simply that of getting the maximum of salable product at the minimum cost. An investment in a particular machine is usually judged (except in the case of new under- takings), not by its profitableness as measured by an absolute standard, but, its technical efficiency being known, by its profitableness (as to product and costs) as inferred from the experience of the entrepreneur with his present appliances and methods. The same considerations hold true for investments in most other kinds of capital goods. Nevertheless, a scientific and accurate analysis of the real profitableness of an investment has to follow the lines that have been indicated above. In fact, in the most scientific forms of investment (such as the pur- chase and sale of large blocks of corporation bonds by dealers in such se- curities), the results of elaborate actuarial calculations are utilized. That such calculations are made by those who supply capital rather than by the users of capital, comes from the fact that the supply of capital (so far as it is not furnished by the entrepreneur himself) is under a definite contract on the part of the entrepreneur as to the amount of interest to be paid and as to the time when the principal is to be paid. In many such loans the element of risk to the capitalist is almost entirely eliminated, and the calculation of the present values of such investments becomes accordingly a simple matter of mathematics. The Expense and Value of Capital. When we speak of the cost or expense of capital, we may have in mind either one of two dis- tinct things. We may mean the price paid by the entrepreneur for the loan of the money funds which he invests in specific kinds of capital goods, or we may mean the prices paid for the capital goods themselves. The first thing is, of course, loan interest; the second is simply a matter of the market prices of commodities. It is this second thing the market price of capital goods that we wish to consider at this point. As commodities, these capital goods come under the general laws of value and price, and most of INTEREST 429 what has been said in earlier chapters about the valuation of con- sumption goods holds just as true in respect to the valuation of these production goods. Their price at any given time is apt to be fixed rather close to the point where demand and supply would be in equilibrium. In the long run their values if they are not patented products, but are competitively produced cannot get very far away from the expenses of producing them. But there is one fundamental difference which has been sug- gested in other connections. Consumption goods are valued be- cause they satisfy human wants, and the intensity of the wants which particular units of goods satisfy have, through the law of marginal utility, a very direct relation to their market values. Capital goods do not satisfy human wants directly; they are val- ued simply because they aid in the production of goods that do satisfy human wants directly. 1 The demand for them, as we have seen, is the entrepreneurs' interpretation of the demand for their products. The law of diminishing productivity bears about the same relation to the determination of their values that the law of diminishing utility does to the determination of the values of con- sumption goods. As in the case of the demand for labor, the elasticity of the demand for a particular sort of capital goods is affected not only by the fact that the higher the cost of the capital, the higher will have to be the price of the product, and, conse- quently, the smaller will be the quantity of the product, that can be sold, but also by the fact that when the cost of any variety of capi- tal goods is relatively high, the entrepreneurs will economize in the use of that particular kind of capital and will use relatively more labor, relatively more land, and relatively more of the other forms of capital. The first of these facts is a corollary of the law 1 Here as elsewhere in the present discussion of interest, no account is taken of the obvious fact that many kinds of capital goods are used in the production of other capital goods, rather than in the production of consumption goods directly. There may be in many cases a large number of steps in the productive process before the final goal the satisfaction of human wants is reached. A consideration of these facts would only make the analysis more involved, without changing in the slightest degree the conclusions reached. They are, however, taken into account in the discussion of the "social dividend," in Chapter XXV. 430 OUTLINES OF ECONOMICS of diminishing utility, the second, a corollary of the law of dimin- ishing productivity. This analysis of the value of capital goods relates, however, only to the supply of new capital goods. After capital is once definitely invested in industry, its value is determined solely by its ability to earn an income for its owner. If the entrepreneur has overesti- mated the technical efficiency of a machine or the salability of its products, that is, if he has overestimated its income-yielding power, he may find that its value is less than the price he held for it. Here, however, we have to note an important distinction be- tween free capital and specialized capital. By free capital we mean capital that has a number of different possible uses, or that can be transferred from one industry or one establishment to another. Specialized capital is capital that can be used for only one purpose, and that cannot be transferred from one establishment or industry to another. The capital invested in the construction of a railway roadbed, or in the digging of an irrigation ditch, is absolutely specialized. The roadbed and the irrigation ditch are of use only in connection with the particular transportation or agricultural undertakings for which they were constructed. If the undertakings should fail, the value of these specialized forms of capital would be absolutely wiped out. A manufacturing firm may invest a large amount of money in new models of specially designed machinery. If the new machines prove unsuccessful, their value may sink to what they will sell for as scrap iron. On the other hand, we have free capital in such forms as tools, machines of the standard models that are used in different establishments in the same industry, or even in different industries ; raw materials that can be made up into different kinds of finished products and the like. A farmer who stocks his farm with dairy cattle, but finds his land unsuited for a dairy farm, does not incur a total loss on his investment, for he can sell his cattle to some farmer who can make profitable use of them. The distinction here emphasized is only one of degree. We have capital in a considerable variety of forms that are partly free and partly specialized. Such capital is capital that is best adapted to one specific purpose, but which may also be put to INTEREST 431 other uses. One frequently sees buildings, originally erected for office purposes on a badly chosen site, that have been given over to small manufacturing concerns. A building intended for a fac- tory may serve fairly well as a warehouse. The importance of these distinctions lies in the fact that the pos- sibility of alternative uses forms a barrier to the depreciation of the value of the free capital that is found to yield less income in some particular use than was expected by the entrepreneur. If such goods can yield a larger income in some other use, they can be trans- ferred (through a change in the nature of the entrepreneur's busi- ness or through sale or lease to other entrepreneurs) to this more profitable use. Such transfers are continually taking place in actual business. Capital and Land. The analysis of the process by which capital is valued opens the way for a consideration of a problem that has been suggested in earlier pages, the reason for the economic distinction between capital and land. Some points of similarity are obvious: land and capital are both valued according to their income-yielding power. The selling value of land, like the selling value of capital, is simply the capitalization of the pro- spective income to be derived from it. From the point of view of the individ- ual investor the purchase of land for productive purposes is an investment of capital just as truly as is the purchase of capital goods. Yet there are equally obvious differences : land is given by nature ; capital is "man-made." The amount of land is limited a statement that holds true whether we have in mind the land actually available for productive uses under existing conditions, or whether we have in mind the whole surface of the earth. The supply of capital, on the other hand, is capable of indefinite extension. It may be said, of course, that an extension of transportation facilities, by which the available supply of land is increased, is a " production of land." This is, however, only a figurative use of the word "production." In this figurative sense the growth of a city, by which barren areas become desirable building lots or factory sites, is likewise a " production of land." The recent opening up of the Canadian Northwest has been due to the production of capital in the form of railroads. The land was already there, but the necessary form of capital was lacking. Another distinction is found in the fact that land, in its most essential qualities, is a permanent thing, while capital is of all possible degrees of durability. These obvious physical differences between land and capital would hardly justify us in drawing a line between them in a discussion of the distribution of wealth unless these physical differences were the causes of differences in 432 OUTLINES OF ECONOMICS the ways in which the incomes from land and capital are determined dif- ferences, that is, between rent and interest. Here, again, we find points of similiarity and points of difference. The points of likeness become promi- nent when we view the mechanism of wealth production as it exists at any given time, but become less significant as we shift our view to the forces at work through a considerable period of time. If, for example, we could take something like an instantaneous photograph of the processes of the production and distribution of wealth, we would see no important differences between the capital and the land used in production. We would see that society is equipped with a stock of capital goods, in all stages of wear, of all possible degrees of technical efficiency, and varying greatly in fitness or adaptability to the work of producing the particular products that consumers are demanding. Not all of these capital goods are yielding an income that is sufficient to provide for their replacement as they wear out, and in addition to pay a surplus, or premium, in the term of in- terest. Some, it is true, may be yielding even more than the amount neces- sary for these purposes. Machinery of new and exceptionally efficient sorts, but not as yet of widespread or general use; raw materials or dealers' stocks of goods that, by reason of a sudden increase in demand, are selling at an exceptionally high price, such capital goods may be earning consider- ably more than interest and replacement. On the other hand, we see a large amount of capital in such forms as obso- lete kinds of machines, ill-planned factory buildings, raw materials or dealers' stocks in trade that were bought in expectation of a demand that did not materialize. Such capital goods may earn considerably less than interest and replacement. When capital is once fixed in definite forms, the question of the original money cost of the capital does not enter into the question of the profitableness of using it. An entrepreneur who borrows money to invest in capital goods has to repay the interest and ultimately the principal of the loan, whether this particular investment of capital proves sufficiently remuner- ative or not. In accounting practice such expenses are called " fixed charges," because they go on whether the capital is used profitably or not. In fact, the entrepreneur will find it to his advantage to use the capital, rather than to let it lie idle, so long as its use adds anything to his total net income. A ma- chine may thus be worth using, even if not worth replacing; dealers can better afford to sell their goods for less than they paid for them than not to sell them at all; a landlord will prefer to rent a building at a very low cost, rather than to let it remain vacant. Capital goods that are just barely worth using may be called "marginal capital goods," and are, from our present viewpoint, analogous to marginal land. At any given time, then, the exist- ing capital goods which it does not pay to use may be thought of as " below the margin," while the income yielded by the better capital goods may be thought of as a rent of capital, analogous in many ways to the rent of land. For this reason Professor Marshall has called the income from capital goods, INTEREST 433 when the point of view takes into account only a short period of time, quasi-rent. When, however, we shift our point of view so as to take into account a longer period of time, we see an important difference between the income from land and the income from capital. We see, then, that society's stock of capital is a shifting thing. On the one hand, it is being continually depleted on account of the fact that, in the process of production, capital goods are being used up, worn out, or because they are in some cases passing for other reasons below the margin of profitable use. On the other hand, the stock of capital is being continually replenished by the investment of savings in new forms of capital goods. Most of these investments merely replace capi- tal that has been worn out or used up, but some, and in a progressive society, a considerable proportion, represent the creation of new forms of capital. Now, as we have seen, the investment of savings in capital goods is guided by the estimates that entrepreneurs make of the profitableness of these invest- ments, the criterion of the profitableness of any possible investment being its ability to replace the principal and provide for the interest on the money invested. When experience has shown that particular forms of capital will not measure up to this standard of profitableness, these forms will not be replaced as they wear out. When certain forms of capital enable entrepre- neurs to get any considerable surplus over and above interest and replacement, the tendency will be, so far as competition rules (that is, so far as monopoly, as in the case of patented machinery, does not prevent), to increase the investments in these forms of capital, and in this way to force the earnings of these specially advantageous forms of capital down to the common level of interest and replacement. Just as the expense of producing consumption goods forms a " normal value," to which their actual prices (under competitive condition) continually tend to approximate, so the expenses incurred in in- vestments of capital form a "normal remuneration of capital," toward which its actual earnings continually tend. Similarly, the value of capital, although actually determined at any one time, like the value of land, by its ability to earn an income for its possessor, tends in the long run to approximate the expense of producing capital. This expense includes, it must be remembered, both the actual money cost of new capital goods and the expense of interest on this money cost. Normal interest is the interest on absolutely free capital in the form of loanable funds. Land, of course, has no normal value, because it has no cost of production. This difference is not of mere theoretical importance, but has an important bearing upon many social problems. For example, when we take a long period of time into account, no such thing as an "unearned increment" appears in the value of capital. Moreover, while both rent and interest are alike in the sense that they are payments for productive services, interest is more clearly an earned income than is rent. For productivity has to be imputed to capital because its supply is limited on account of its expenses 2 F 434 OUTLINES OF ECONOMICS of production and on account of the sacrifices involved in waiting, while productivity is imputed to the better lands simply because the supply of them is limited by nature. When we measure rent as a return per acre (or other unit) of land, and interest as a percentage on the money invested, we recognize this fundamental distinction between rent and interest. That rent may be viewed for some purposes as interest on the value of the land, and that in- terest (and replacement) may similarly be viewed (at any given time) as a "quasi-rent" of capital goods, does not alter the fundamental nature of the distinction. We have seen in another connection that the shifting of investment by which the earnings of capital are made to tend toward a normal standard is easier in the case of the more transient forms of capital than in the case of the more durable forms. The more durable a capital good the more nearly is the income derived from it analogous to the rent of land. As was suggested in the discussion of rent, it is not necessary or advisable to draw a hard and fast line between capital and land. Permanent investments of capital in the form of improvements to land may very properly be regarded as land. The farmer who is contemplating installing a drainage system or an irrigation system for his land views such an investment, at the time, as an investment of capital. But when the capital is definitely incorporated with the land in these permanent forms, there is no reason why it should be called capital rather than land. The total income yielded by the improved acres will, in all essential particulars, be land rent. Capital and Consumption Goods. There arc also some points of like- ness between capital and the more durable forms of consumption goods. The person who buys a piano is not only satisfying his present wants, but expects to get from it a long period of use, extending into the future. The purchase of any durable consumption good is in this way one form of saving for the future. Moreover, such provisions for future wants will not be made unless we feel that these future wants are important enough to justify us in giving up some possible present satisfaction. In other words, we will not substitute future utilities for present utilities by the purchase of durable consumption goods unless the future utilities are enough greater than the present utilities to compensate us for the necessary waiting. This compensation for the dif- ference between present satisfactions and future satisfactions is obviously analogous to interest. These facts must be taken into account in any full analysis of the valuation of consumption goods, but they do not justify us in obliterating the line be- tween capital and consumption goods. Consumption goods yield directly an income of satisfactions; capital yields a money income, but only in an indirect way does it yield an income of satisfactions. A rented house is not, from the social point of view, capital. It yields a direct income of satisfactions to its occupant ; the fact that the landlord sells the annual use of it instead of selling the permanent property rights in it is a fact of minor significance. INTEREST 435 A merchant's stock in trade is capital because it will yield a money income to its possessor ; l when sold to consumers, the same goods become consump- tion goods because they yield an income of satisfactions. In short, the dis- tinction between capital and consumption goods is based upon one of the most fundamental things in the existing economic system the fact that the income which men receive for the productive services of their capital are money incomes. Capital and Wages. In many undertakings wages are paid to workmen engaged in the production of goods before the goods are sold. A farmer, for example, has to pay his harvest hands and other workmen before he receives any money from the sale of his wheat. Whether he borrows the amount needed for wages, or whether he pays them out of his own savings, interest on the amount advanced has to be counted among the expenses of production, and the wages advanced are, for the time being, an investment of capital. In most manufacturing establishments a more or less lengthy average period of time elapses between work actually done by the workmen and the sale of the products of their work. In such establishments a con- siderable amount of capital is invested in wage advances. This does not mean that we are to consider the laborers as being in any sense capital. For the gradual process by which the raw material becomes the finished product is itself a continuous investment of capital. All of the various expenses of production are really different ways of investing money in capital goods. Add to the cost of the raw material all of the expenses (including wages and payments of rent and interest as well) incurred in order to produce the finished product of the establishment, and you have simply the total invest- ment in capital goods in the form of the finished product. A complete inventory of capital goods would include then (in addition to buildings, machinery, etc.) not only raw materials and the finished products that are ready for sale to consumers, but also the products on hand at any one time in a partly finished state. Thus, though the payment of wages is often an invest- ment of capital, it must be remembered that the payment of wages is only one of the ways in which money is invested in concrete, definite, capital goods. The Rate of Interest. Interest, as the price paid for the serv- ices of capital, is determined by the supply and demand of capital. By this we mean, not the supply and demand of concrete capital goods, a matter which comes under the general laws of price, 2 but the supply and demand of the loanable funds, the money capital which is available for investment in concrete capital goods. 1 The relation of goods to their possessors, rather than to their owners, gives the more satisfactory basis for the distinction between capital goods and corn- sumption goods. The example of the rented house makes this clear. a See discussion of the expense and value of capital on page 428. 436 OUTLINES OF ECONOMICS The demand for capital, as we have seen, is based ultimately on the demand for the products of capital; that is, on the demand for consumption goods. The entrepreneur bases his demand for capi- tal upon his estimate of the demand for his products, together with his estimate of the relative economy of the use of different amounts of capital. In combining labor, capital, and land for productive purposes, he will be guided consciously or unconsciously by the law of diminishing productivity. He has to take into ac- count in this connection both the technical efficiency (that is, the real productive efficiency) and the expense of land, labor, and dif- ferent kinds of capital. This latter consideration means that the interest rate is itself one of the factors determining the demand for capital. The higher '"he rate of interest, the greater will be the expenses of production, and the smaller, in general, will be the de- mand for those goods, in the production of which the use of capital plays an especially important part. Moreover, the higher the in- terest rate, the smaller, other things being equal, will be the rela- tive proportions of capital, and the larger will be the relative pro- portions of labor and land which it will pay entrepreneurs to use. As the technical efficiency of capital is increased through the progress of science and invention, the more profitable does its use become. For the demand for it increases not only because the consequent reduction in the prices of goods means larger sales, but also because the use of larger proportions of capi- tal in production becomes advisable. The entrepreneur wants simply the maximum productive efficiency at the least cost. A unit of productive efficiency in the form of capital becomes cheaper, first, as the interest rate decreases, and second, as a given outlay will purchase more efficient forms of capital goods. The supply of capital depends ultimately upon the supply of waiting. This, as we have seen in the discussion of the necessity of interest, is something which varies with the interest rate. Other things being equal, the higher the interest rate, the larger will be the parts of money incomes that will be saved rather than spent immediately in the satisfaction of wants. It has sometimes been said that saving increases as wealth increases. If this is taken to mean that the larger the income of the individual, the larger, other INTEREST 437 things being equal, will be the amount he will save, the statement probably expresses a general truth. The larger the income, the less important are the immediate wants dependent for their satis- faction on a given amount of money. It does not follow that the proportion of the income that is saved is apt to be any larger in the case of a large income than a small income. If, on the other hand, the statement is taken to refer to the increase of wealth in society at large, we have to take account of the fact that as wealth increases new wants develop, and the net effect on saving is apt to depend on the character of the new wants, whether they call for increased current expenditures or whether they involve the accumulation of considerable sums. Convenient opportunities for saving, such as those afforded by savings banks, insurance companies, and the supply of convenient forms of investment securities have (apart from the rate of interest they offer) an important effect upon the amount of saving. Gross Interest and Net Interest. Net interest is pure interest the amount actually necessary to recompense marginal waiting. Gross interest the interest actually paid on loans includes payments for other things. In the first place, actual interest often includes some payment for the supervision which the capitalist has to maintain over his investment. Even the man who "lives on his income" usually has to devote a certain amount of time to the investigation of the safety of different possible investments, to the collection of interest and principal and similar things. The net earnings of a savings bank the difference between the in- terest they get on their investments and the interest they pay their depositors are partly a payment for this element of supervision. A second element in gross interest is the payment for the risk the lender undergoes of losing all or part of his expected income (including principal and interest). This does not mean, as some writers have said, that the interest rate contains an element of insurance, for insurance means the elimination of individual risk through the combination of risks. The fact is simply that, as every one knows, lenders will not take greater risks without the prospect of greater gains. There is some element of speculation in all loans but the very safest, and the extra income received on 438 OUTLINES OF ECONOMICS the more legitimate loans is more akin to speculative profits than to insurance. Usury Laws. Interest is one form of price in regard to which society still expresses some distrust of the operation of unhindered competitive forces. Only nine American states do not provide a legal maximum above which the interest rate cannot legally be fixed. Such laws are based on the justifiable assumption that the borrower is in many cases the weaker bargainer, pressed often by that necessity which "never drove a good bargain." In many cases the laws are not enforced, but in other cases they do have an important effect on some kinds of loans, especially bank loans in the rural districts, farm mortgages and overdue book credits. It is to be feared, however, that their result is often not so much to lower the rate of interest as to cut off many loans which lenders would not be justified in making except at high rates of interest. In the case of many loans on fairly good security, however, usury laws have probably operated to the advantage of the borrowers. QUESTIONS AND EXERCISES 1. Could a socialist state dispense with interest? with waiting? 2. How has the rate of interest been affected by the opening up of new and fertile lands ? 3. Use supply and demand curves to illustrate the determination of the rate of interest. REFERENCES BOHM-BAWERK, E. VON. Capital and Interest; and Positive Theory of Capital, Books V-VII. CARVER, T. N. The Distribution of Wealth, Chap. VI. CASSELL, G. The Nature and Necessity of Interest. FISHER, IRVING. Capital and Income and The Rate of Interest. GONNER, E. C. K. Interest and Saving. MARSHALL, ALFRED. Principles of Economics, 4th ed., Vol. I, Book II, Chap. IV; Book IV, Chap. VII; Book V, Chap. IX; Book VI, Chap. VI. CHAPTER XXV PROFITS THE difference between the total money income which an en- trepreneur receives and his expenses of production constitutes his profits. Profits, then, are a surplus over and above the expenses of production. There are two ways of measuring profits: first, with reference to some unit of time, such as a year; and, second, with reference to particular units of product. Thus, when a manu- facturer speaks of his profits during a year, he has in mind the difference between his total expenditures and total receipts for that year. But when he speaks of his profits on a particular sale, he has in mind the difference between the expense of producing the particular goods sold and the prices received for them. The two ways of measuring profits are not alike, because a large part of the expenses incurred by an entrepreneur in any given year may be payments for work done in connection with the production of goods that will not be marketed until some later time. In the long run, however, the amount of annual profits will be determined by the profits on particular transactions or on particular products, so that for present purposes it is not necessary to press the dis- tinction any farther. It is sometimes more convenient to use the word " profits " in one sense, and sometimes in the other sense. Profits, being a surplus, do not constitute a homogeneous in- come determined by any one principle or set of principles. They are the resultant of all the forces that tend to bring about inequali- ties between the prices paid for things and the expenses of produc- ing them. It is not possible in a brief analysis even to attempt to break up this mixed form of income into all of its constituent parts. Attention may be called, however, to some of the more important and obvious elements in profits. These are: entre- 439 440 OUTLINES OF ECONOMICS preneurs' wages, speculative gains, chance gains, and gains of bargaining. Entrepreneur's Wage. This element in profits is sometimes called the " wages of management," and constitutes the payment received by the entrepreneur for his services as manager or super- visor of his business. It is not easy to draw a line between this element in profits and wages. In fact, " entrepreneur's wage " could be discussed just as appropriately under the general head of wages as in connection with the general subject of profits. The only distinguishing things about this particular kind of wages are that, unless the entrepreneur adopts the bookkeeping form of paying wages to himself, they come out of the general surplus or residuum commonly called profits in actual business, and that they are the wages paid for a particular kind of labor. The average American farmer usually does a certain amount of work himself that might be done by hired laborers, and so far as his income represents the amount he saves by doing such work himself, it is to be regarded as ordinary wages. But in addition, he does other work of a more purely managerial quality, including the general direction of the time and methods of tillage and harvesting, the organization of the working force; in fact, the determination of what may be succinctly described as the general coordination of labor, capital, and land. The reader may ask: Could not this part of the work be [turned over to a salaried foreman ? Certainly, and in some cases, as on the estates of so-called " gentlemen farmers," all of it. In fact, the amount of the managerial work actually done by the entrepreneur himself in any kind of under- taking is a variable quantity, depending upon the extent to which managerial authority is delegated to foremen, superintendents, and salaried managers. In any case the " wages of management " exist, although they do not always exist as " entrepreneur's wage," nor do they always constitute a part of profits. Even in cases where the entrepreneur is in all respects his own manager (which is, after all, the most frequent case in a host of small business undertakings), the entrepreneur's wage constitutes a kind of minimum profits, and may very properly be added to the real expenses of production. Minimum profits are necessary PROFITS 441 profits, the profits needed to induce the entrepreneur to continue his productive work. In many cases they can be measured roughly by the salary which the entrepreneur could get by working for some one else. Some men would prefer to be their own masters even at a smaller income, while others would shrink from the responsibilities of independent business life, even if a larger income were attached to it, so this method of measuring minimum profits is only approximate. Minimum profits will vary with managerial efficiency. The more efficient farmer will get a larger product with a given equip- ment of land, labor, and capital than will the less efficient farmer. 1 So will the more efficient manufacturer. Managerial efficiency really means productive efficiency, and differences in managerial efficiency will cause corresponding differences in minimum profits. Speculative Gains. Modern business, based as it is on ex- change economy, and production " for the market," is of necessity speculative in character, and the entrepreneur is of necessity a speculator. A speculator is a man who buys things in the hope of selling them later at a higher price, or who sells things which he does not own, hoping to buy them at a lower price. The en- trepreneur buys labor, capital, and land, and uses them in the production of things which he hopes to sell for more than the expenses of production. The farmer who decides to devote more land to certain crops and less land to other crops than he did in the preceding year is guided mainly by his estimate of the prices which the different crops will sell for. The merchant purchases his stock according to the best estimates he can make of the kind of goods he will find customers for. Even when goods are sold before they are produced, as when a contracter agrees to build a house for a certain price, the entrepreneur still runs the risk that 1 It has been suggested that the difference between the product of the better farmers and of the poorer farmers is not only absolutely but relatively greater in the case of good land than in the case of poor lands. If this is so, it helps to ex- plain the observed fact that the best farmers generally have the best lands. That is, they would be able to pay a higher rent or a higher price for the good lands than the poor farmers could. In this case some of the higher efficiency of the better farmers might result in higher rents rather than higher profits. (See Taylor, Agricultural Economics, Chap. IX.) 442 OUTLINES OF ECONOMICS his expenses of production will be greater than the price agreed upon. If he attempts to eliminate the element of uncertainty by contracting for his materials in advance, he simply shifts some of the risk to lumber dealers, hardware merchants, etc., while he himself still assumes some risk, although of a different kind. That is, he guards himself against possible loss, but by the same process he gives up the chance of the higher profits he would have got for himself if the prices of materials had been lower at the actual time of construction than they were when he made the contract. This element of risk taking is the very essence of modern busi- ness, and the most successful entrepreneurs are, in general, those who are the most successful risk takers. Risk taking, in this sense, does not mean a blind dependence upon chance. If this were so, there would be no reason why business failure should not be about as common as business success. Risk taking is nearly synonymous with business enterprise. It involves careful estimates of the amounts of product that can be got from different combinations of labor, capital, and land, and equally careful estimates of the salability of such products. It is in this latter field, which involves the diagnosis of market conditions with a view to ascertaining their probable trend, that the entrepreneur's skill finds its chief opportunity. This kind of skill means knowl- edge and foresight very different things from mere willingness to " take a chance." Yet, though the efficient entrepreneur deals with probabilities rather than possibilities in his estimates, he is nevertheless a risk taker, a speculator, for his estimates have to do with market conditions that are beyond his personal control. While his success may be probable, it is very far from being certain. The functions of the entrepreneur as a risk taker are clearly distinguishable from his functions as a manager. Managerial efficiency, as we have seen, is the ability to combine and direct labor, capital, and land in such a way as to get the maximum prod- uct. Risk-taking efficiency means the ability to get the largest receipts from a given expenditure. When we speak of managerial efficiency, we have especially in mind the technical side of produc- PROFITS 443 tion the manner in which the factors in production are utilized; risk-taking efficiency refers to the value side of production the way in which the use of capital, labor, and land is directed into the most remunerative channels. Managerial duties may be dele- gated to salaried employees; the risk-taking function is one which the entrepreneur cannot shift to another. 1 This part of competitive profits is in its very nature a shifting and even transient thing. To anticipate consumers' demands correctly is not in itself a guarantee of profits to any entrepreneur. If other entrepreneurs have counted on the same demand, it may easily happen that the total product cannot be sold at a profitable price. In fact, the " market conditions " which the entrepreneur has to forecast include the conditions of supply as well as of de- mand. But even in case a given entrepreneur has succeeded in producing the precise things that consumers are demanding and that other entrepreneurs are not producing, and has thus been able to get large profits, he cannot count on their permanence. De- mand may change, but even if demand remains constant or in- creases, his large profits will be a standing invitation to other entrepreneurs to enter the same field a condition which will continue until competition forces the profits of this particular kind of business down to where they just suffice to pay the wages of management. If profits in any establishment or any industry go below this minimum point, the tendency will be for entrepre- neurs to shift their investments to more profitable undertakings. The kind of profits which we are now discussing constitute the guiding principle, the incentive, in modern economic life. It is the desire to get money profits that leads entrepreneurs to produce particular things and to produce them in particular ways. It is for this reason that old channels of productive effort are con- tinually being abandoned and that the use of labor, capital, and land is continually being guided into new channels. The shifting 1 This statement may seem open to the qualification implied in the fact that in some cases the foresight and skill utilized are those of employees (the " buyers " for a large retail store, for example). Yet while the entrepreneur may thus depend in part upon others' knowledge of market conditions, the risk involved is neces- sarily assumed by himself. 444 OUTLINES OF ECONOMICS of productive effort which the pursuit of money profits involves consists, for the most part, of efforts on the part of entrepreneurs to meet the shifting wants of consumers. One of the strongest arguments for the superiority of the competi- tive system over any possible substitute for it lies in the fact that, under competition, the guiding of production into the channels indicated by the search for money profits will result in the maxi- mum satisfaction of human wants. This follows from the fact that the prices people are willing to pay for certain commodities measure the importance which they attach to the possession of those commodities. The shifting of labor and capital from less profitable to more profitable uses means, in general, that more intense wants will be satisfied with the same expenditure of pro- ductive energy. All this is implied in the statement made above that the shifting of productive effort is mainly in response to the shifting wants of consumers. This argument, that under free competition the pursuit of money profits leads to the best adapta- tion of productive efforts to the satisfaction of the wants of con- sumers, is one that has rarely been met squarely by those who attack the competitive system. There are, however, several im- portant considerations that lessen to some extent its force. In the first place, the extent to which the wants of any individual affect the ordering of the productive processes depends upon his purchasing power, that is, primarily, upon his income. It is mani- festly absurd to say that the shifting of labor and capital from the production of necessities for the poor to the production of luxuries for the rich, simply because it may be more profitable, necessarily means a better satisfaction of human wants. The extent to which wants are satisfied depends on the way wealth is distributed as well as upon the amount and kinds of things produced. Moreover, even granting that the stimulus of money profits leads to the best practicable satisfaction of the wants of present consumers, this may sometimes be achieved by imposing added difficulties in want-satisfaction on future generations. The lines of procedure that will bring maximum profits to entrepreneurs sometimes run counter to the more permanent interests of society. We all recognize, for example, that there may be such a thing as a PROFITS 445 too rapid exploitation of natural resources. The history of timber lands in America furnishes an instructive example. A still more important qualification of the statement that com- petitive profit seeking works for the best interests of society, viewed as a body of consumers, is found in the fact that when we begin to speak of the interests of society, we introduce, of necessity, the ethical point of view. This means that we must consider not only the quantity, but also the quality of want-satisfactions. For purposes of the economic analysis of market forces, we make no distinction between different kinds of utilities, but it is impossible to discuss social well-being without taking into account the fact that from the point of view of the interests of society some kinds of " utilities " are good and some are bad, and that even the better kinds of want-satisfactions vary greatly in their importance, when measured by any criterion of social welfare. The production of socially undesirable things, such as intoxicating liquors, adulterated foods, ill-ventilated tenements, etc., is often prohibited, while, on the other hand, society has found that certain socially desirable things, such as schools, parks, libraries, clean streets, etc., will not be supplied at all, or will not be supplied in sufficient quantities by private business enterprise. All indications point to a very considerable extension of organized social activity at pre- cisely those points where the private pursuit of money profits has proven itself inadequate. Chance Gains. It often happens that an entrepreneur is able to get profits on account of some unforeseen and purely fortuitous circumstances. Such profits should not be confused with the kind that have just been discussed, which vary with the foresight and enterprise of the entrepreneur. Capricious changes in fashion often bring temporarily high profits to dealers who happen to have the right kinds of goods in stock, or to manufacturers who happen to have the equipment needed to produce the right kinds of goods. American farmers have profited at different times by the failure of the European grain crop. Other examples will suggest themselves to the reader. There are chance losses as well as chance gains, and they are probably quite as numerous and important. Chance gains, therefore, do not constitute any important part of the income 446 OUTLINES OF ECONOMICS going to entrepreneurs as a class, but they are often a considerable element in the profits of particular entrepreneurs. Gains of Bargaining. We have seen in other connections that the prices of commodities and services are in many cases fixed only loosely by the forces of supply and demand. In the actual process of bargaining, the shrewder party to the bargain may very often sell for more than his minimum selling price, or buy for less than his maximum buying price. Skillful bargaining swells the entrepreneur's profits, first, by increasing the prices he gets for things, and second, by decreasing his expenses of production. We have seen that in bargaining with an individual laborer the entrepreneur usually has an advantage that tends to increase profits at the expense of wages an advantage which is at least partly lost when the laborers resort to collective bargaining. In bargaining for the use of capital funds, the entrepreneur is apt to know what the loan is worth to him better than the lender does; but, on the other hand, it often happens that the entrepreneur is put at a disadvantage when the loan is a matter of necessity to him, but relatively a matter of indifference to the lender. Non- competitive Profits. All of the sources of profits men- tioned above are based on circumstances which arise in the course of ordinary competitive business. In any particular case their magnitude depends on the managing ability, foresight, bargain- ing skill, or good fortune of the entrepreneur. Moreover, of the tendency of competition to eliminate all but minimum profits, the continuance of surplus profits is only achieved, in general, by continued endeavor on the part of the entrepreneur. In the case of monopoly, however, the existence of profits rests upon a very different ground the ability of the monopolist to control the supply. This results normally, as we have seen, in a fixing of monopoly price at the point that will yield the largest net profits. Monopoly profits are not only apt to be higher than competitive profits, but they are also apt to be more stable and permanent in character. It very often happens in non-monopolistic undertakings that the entrepreneur who has developed his business to a profitable point is able to attach some degree of permanency to his profits. A PROFITS 447 merchant often relies to a very large extent upon the patronage of an established clientele of customers, and in turn he may prefer, other things being equal, to purchase his goods from particular wholesale houses. When a business undertaking is sold as a whole, its established connections of this sort enter into the deter- mination of the price paid for it, under the head of " good-will." This " good-will " element is generally measured by the difference between the valuation of a business establishment and the valua- tion of the specific assets (minus the specific liabilities) of the business. In the sale of a newspaper it often happens that the " good-will " of the enterprise (its established advertising and subscription patronage) is the only thing actually transferred by one entrepreneur to the other. Those more or less definitely established kinds of profits which give rise to " good -will " values must not be confused with monopoly profits. Monopoly implies the absence of competition. " Good-will " profits are to be attrib- uted rather to the imperfect working of competition, to the eco- nomic inertia and friction which result from the fact that buyers are guided to a very large extent by custom and habit rather than by conscious choice. Moreover, in many small transactions, for cus- tomers to attempt to buy always at the lowest price would result in a waste of time and energy disproportionate to the gain. Hence, aside from the influence of custom and habit, there may often be rational ground for the continued patronage of particular establish- ments which customers have found to be trustworthy. " Good-will " is, in general, of most importance in retail estab- lishments, where annual profits are apt to be made up of the specific profits on a large number of relatively small transactions. In the larger transactions of wholesale, jobbing, and manufacturing establishments, the element of " good -will " is not entirely absent, but the vigilance of expert buyers and the mere size of the ordinary transaction (making even small differences in prices important) tend to reduce it to a minimum. A noteworthy feature of modern business, however, is the attempt on the part of manufacturers and wholesalers to influence the demand of the ultimate consumers of their products through the use of advertising. The trade-mark privilege, which enables particular brands of competitively pro- 448 OUTLINES OF ECONOMICS duced goods to be distinguished, is an important factor in the efforts of such producers to gain and hold the patronage of the ultimate consumers. The " good-will " of a large manufacturing establish- ment thus comes to be in some cases as valuable a possession as a monopoly franchise. Farmers, and other producers of standard kinds and classes of goods, have small opportunity to acquire " good -will " profits. The Social Dividend. The significance of the statement made in an earlier chapter, that the distribution of wealth is a matter of valuation, should now be clear to the reader. But since the detailed character of the analysis may make a broad and inclusive view of this valuation process somewhat difficult, it will be worth our while to bring together the more important conclusions we have reached, and to try to see them from a somewhat different point of view. The social dividend is made up of the scarce and valuable things (com- modities and services) that are of direct use in the satisfaction of human wants. The process by which the claims of different individuals against the social dividend are adjudicated is the process of the distribution of wealth. We have seen that these claims rest upon various grounds. Some men give of their own time and energy to the production of goods. Others permit the use of the scarce and valuable natural agents (especially land) which they own. Still others exchange part of their present claims against the social dividend for future claims, thereby permitting part of the productive work of society to be turned toward the creation of indirect goods, the use of which operates, in the long run, to greatly increase the social dividend. A unifying characteristic of these three different kinds of claims is the fact that the wages of labor, the rent of land, and the interest on capital are simply different forms of money income, paid for the services of land, labor, and capital in the production of valuable things. The valuations which society puts on the productive services of its members or of their productive goods are determined through the activities of entrepreneurs. The relation of the activities of entrepreneurs to the money incomes of the members of society is twofold. On the one hand, the purchasing power of consumers is derived from their money incomes, which in this way constitute the means by which the demand for the entrepreneur's products expresses itself. On the other hand, the money incomes received by laborers and by those who supply capital and land are paid by entrepreneurs in return for pro- ductive services. The wages, rent, and interest expended by any one entre- preneur for these productive services are in turn paid over by the individuals who receive them to other entrepreneurs in return for their products. There PROFITS 449 is thus a continuous flow of money income through the hands of entrepre- neurs, appearing first in the form of the prices that are paid for an entre- preneur's goods, then emerging in the form of the rent, wages, and interest that the entrepreneur pays for the service of the factors in production, then reappearing in the prices paid for other goods, and so on in a continually recurring cycle of income and outgo. 1 This process is made more complicated, however, by the fact that not all of the entrepreneur's expenses appear directly as rent, wages, or interest. A con- siderable part, and in many cases (as in mercantile establishments), the largest part of such expenditures are for various concrete forms of capital, raw materials, dealers' stocks of goods, machines, and the like. Here a part of the money income received by the entrepreneur in the form of the prices paid for his own goods emerges in the prices which he pays for the goods sold by other entrepreneurs, and which, in turn, make up a part of their money in- comes. But this other class of entrepreneurs who supply capital goods rather than consumption goods are subject to the same necessity of ex- pending their money incomes in the payment of wages, rent, and interest, and in the purchase of different kinds of capital goods. To push the analysis still further would obviously lead us only into needless repetition. One important fact, however, appears clearly : If we could trace the expense of producing any consumption good back through all the long series of services and of production goods that have contributed to its making we would find that this expense reduces itself, ultimately, to rent, wages, and interest, not counting what remains in the entrepreneur's hands as profits. Part of the "flow of money income" passes through the hands of a chain of entrepreneurs, but it nevertheless originates in the prices that consumers pay for the things that satisfy their wants and emerges in the form of the pay- ments made for the productive services of land, labor, and capital. Yet another correction must be made, however, to fit this picture of part of the economic process more closely to the facts. The money which con- sumers pay for particular commodities does not usually constitute the actual fund with which the entrepreneur pays for the labor, the land, and the capital goods used in the production of those commodities. Still less does it con- stitute the actual fund from which the entrepreneurs who supply the neces- sary capital goods pay their expenses, or from which the expenses of still more remote stages in the process of production are paid. The roundabout, indirect methods which characterize modern production, and which in- volve the division of the productive process among countless different under- takings, take time. The goods which consumers buy to-day are the result of a long series of productive efforts extending back indefinitely into the past. Similarly the productive efforts of to-day avail but relatively little toward the 1 To a very large extent, this "flow of money income" does not take the form of the actual circulation of concrete forms of money. For the most part it takes place through the creation and cancellation of credit obligations. 2 G 450 OUTLINES OF ECONOMICS satisfaction of present wants, for they are in large part directed to forwarding, often in the most indirect ways, the production of things that will come to a final fruition in the satisfaction of human wants only in the more or less re- mote future. Viewed in this way the annual product of society is something very different from the social dividend. The year's work is begun with an equipment of economic goods of all kinds, finished goods in the hands of dealers and manufacturers, goods in all stages of completion, growing crops, factory and mercantile buildings, machines, and all the auxiliary apparatus of production in a finished or unfinished state. The annual product includes all the ad- ditions made to this stock of goods, and all that is accomplished in forwarding such goods as are destined for human consumption towards the form, place, and time in which and at which they are wanted. It includes all that is done in a similar way to forward, replenish, and increase the stock of pro- duction goods. It includes also all the personal services that command a money payment which are not embodied in concrete goods, but which con- fer their benefits in the very instance of their performance. But while the productive efforts of society are thus constantly building up and modifying the stock of economic goods, this stock is continually being depleted in various ways. The instruments of production are constantly wearing out, or are being cast aside on account of the introduction of either more efficient appliances or more efficient methods which utilize other kinds of appliances. Then, too, as the final outcome of this productive process there is a constant stream of finished consumption goods passing into the hands of consumers. The social dividend consists of this flow of consumption goods, together with those direct personal services which do not have to do directly or indirectly with the fitting of goods for human consumption, but which nevertheless satisfy wants and command a money payment. While the social dividend is to a large extent the outcome of past work and effort, the annual product is very largely a provision for future wants. What is the effect of all these considerations upon our analysis of the flow of money income? It still remains true that the money which consumers pay to entrepreneurs is in turn used by them in the payment of their expenses of production, and that the money which they in turn pay to other entrepre- neurs for various forms of capital goods are used in the payment of expenses of production. But the prices consumers are paying are for goods, the ex- penses of producing which have (at least in greater part) already been paid, and some of them (such as the prices paid for some kinds of capital instru- ments) may have been paid some considerable period of time back in the past. If in turn we should trace back the expenses of producing the capital goods used in producing these consumption goods our search would lead us into the more remote past, while still further analysis of the expenses of pro- duction would discover an increasing number of ramifications running back into the still more distant past. The present flow of money income, original PROFITS 451 ing in the prices paid by consumers, passes, as we have seen, through the hands of a chain of entrepreneurs and in this process gets ultimately into the hands of laborers, capitalists, and landlords. But most of the productive services which are thus remunerated are services which will avail toward the satisfaction of future rather than of present wants. In other words, the prices paid for consumers' shares in the social dividend constitute (save for an important exception to be noted presently) the fund which pays for the annual product. The productive efforts of the past, which satisfy the wants of to-day, were paid for out of past income, while the present work of producing goods that will be ripe for consumption only in the future is paid for out of present income. In this fact lies the explanation of the nature and necessity of one of the various kinds of claims against the social dividend interest. The outlays which entrepreneurs make in producing goods, so far as they are paid before they receive an income from the sale of the goods, are commonly called investments of capital. Not only, as we have seen, does the entrepreneur invest capital in production goods such as machines and buildings, but his purchases of raw materials, his advances of wages to laborers, the interest which he pays on borrowed capital, and the rent or the purchase price which he pays for land, are usually investments of capi- tal. No such investments can be regarded as remunerative unless the entrepreneur gets in the selling prices of his products enough to provide interest upon such outlays as well as to cover the outlays themselves. These facts were noted in connection with the discussion of interest in an earlier chapter, but there, for simplicity's sake, the analysis was confined to the capital expenditures of the individual entrepreneur. The full signifi- cance of the r61e which capital plays in production does not appear until we view the activities of the individual entrepreneur as only a link in the continuous chain of activities that make up the productive process. The point of special significance in this connection is the fact that the finished products sold by some entrepreneurs constitute the capital goods (raw materials, productive appliances, etc.) bought by other entrepreneurs. When one entrepreneur sells his products to another entrepreneur his period of "waiting" is completed, so far as his advances of capital funds in the pro- duction of these particular units of goods are concerned. But the "waiting" is only transferred to the other entrepreneur, who adds further expenditures of capital and, in turn, gets his remuneration from the sale of his product. The important conclusion to which this analysis leads is that (so far as the entrepreneurs have been accurate in their estimates) the prices which con- sumers are paying to-day for finished goods cover not only all the actual money expenditures which have been made in the past in the production of these goods, but also the interest on all such expenditures from the time they were made up to the time of the sale of the finished goods to the ultimate consumer. Similarly the expenditures made by entrepreneurs to-day in the production of goods that will directly or indirectly satisfy future wants will (so far as 452 OUTLINES OF ECONOMICS these entrepreneurs and those who will control the remaining steps in the productive process are accurate in their estimates) be covered, together with accrued interest, by the prices which consumers will pay in the future. Present wants are satisfied by means of the productive efforts of the past. These productive efforts were paid for out of past income, but the outlays were made in the expectation that present prices would suffice to repay them, with interest. A particular entrepreneur may be interested only in disposing of his products at remunerative prices to the entrepreneurs who stand next to him in the productive series, but this does not alter the essential nature of capital investment, which, from the social point of view, is a cumulative pro- cess. The flow of money income which originates in the prices consumers pay to the entrepreneurs with whom they deal emerges in the form of capital expenditures, and so far as these take the form of the purchase of capita) goods they constitute the fund from which other capital expenditures are made by other entrepreneurs. The gross money income of entrepreneurs, then, furnishes by far the most important part of the current supply of capital funds, and the most important form of capital investment is the entrepreneur's customary practice of "putting money back into the business." That this way of investing capital is customary, even habitual, does not mean that the amount as well as the particular forms of such investments is not a matter subject to the discretion of the entrepreneur. So far as the entrepreneur is not hampered by contracts (with customers, other entrepreneurs, money lenders, landlords, or laborers) he is free to do as he pleases with his income. As a matter of fact he is apt to devote a fairly constant proportion of it to the replacement of the capital goods that are being used up or worn out and to the other necessary expenses of continued production. It rarely happens, however, in any undertaking, that income and ex- penditure are so nicely adjusted and so evenly distributed through the year that the one always suffices to provide for the other. A temporary surplus may be followed by a temporary deficit. Transfers of goods on credit smooth over some of these irregularities, while the institution of banking provides a mechanism whereby the temporary surpluses of some entrepreneurs are made use of in meeting the temporary deficits of others. Moreover, while the entrepreneur need not continue to renew his capital investments unless he chooses, he is at liberty to do even more than this if he deems it advisable. That is, his profits the excess of his gross income over and above his current and normal capital expenditures may be used for ad- ditional capital expenditures. Still another source of capital funds is found in the rent, wages, and interest into which, as we have seen, the expenses of production ultimately resolve themselves. For so far as these forms of income are saved, rather than ex- pended immediately for consumption goods, they may be loaned directly or through savings institutions to entrepreneurs for productive employment. PROFITS 453 This is the important exception, previously mentioned, to the statement that " the prices paid for consumers' shares in the social dividend constitute the fund which pays for the annual product." The truth is that as the flow of money income passes from entrepreneur to entrepreneur, a part only, although the larger part, is put into productive expenditures. The residuum is used by entrepreneurs in paying for their own shares in the social dividend. In much the same way the money incomes received by those who furnish labor, land, or capital is only in part paid back to entrepreneurs in return for consumption goods, the residuum being put (through loans to entrepreneurs) into productive expenditures. It will be seen, then, that as the flow of money income passes through the hands of entrepreneurs, laborers, capitalists, and landowners, it is divided into two streams, one of which goes to pay for the present goods that have been produced in the past, while the other goes to pay for the present expenses of forwarding the production of goods for future consumption. This division represents a kind of social balancing of possible present satisfactions over against the larger future satisfactions which the productive use of capital makes possible. On the one hand we have the entrepreneurs' estimates of how much specific amounts of capital funds are worth to them, estimates which involve judgments as to the amount of product dependent upon the use of these specific amounts of capital funds, the prices that can be got for such products, and the period of time that will elapse before they will be re- munerated for such investments. On the other hand we have the estimates of those who supply capital funds as to the relative importance of future and present wants. The interest rate will normally be fixed, of course, at a point where the supply and demand of money capital will be in equi- librium. In dividing his capital expenses between labor, land, and capital goods the entrepreneur will again be influenced by his estimates of how much the use of specific quantities of each of these factors in production will add to his money income. Here he has to reckon with the fact of diminishing produc- tivity. He can get the same amount of product from different combinations of land, capital goods, and labor, but the larger the proportion of his expendi- tures he devotes to any one of these things (labor, for example), the smaller will be the increment of product dependent upon any one unit of it (any one laborer, for example). The most economical combination of labor, capital goods, and land is reached, of course, when the marginal expenditures for each add equal quantities to his product. All this, however, was discussed in detail when the activities of the individual entrepreneur were taken as the point of departure for the analysis of distribution in an earlier chapter. When we take the social point of view, so that production is made to appear as a cumulative process of capital investment, the expenses for capital goods become reduced to the more fundamental expenditures of rent, wages, and interest, involved in the production of such goods. In this view capital goods 454 OUTLINES OF ECONOMICS might, by a legitimate figure of speech, be said to be embodied rent, wages, and interest. The social process of production involves the expenditure of rent, wages, and interest for returns of all possible degrees of futurity, and a consequent comparison and balancing of the productivity of investments for shorter and longer periods of time. That is, social estimates of productivity are estimates of the value of the amounts of the ultimate products, realizable at different periods of time in the future, that are dependent upon specific present ex- penditures in the form of rent, wages, or interest. Or, in other words, there is a continuous effort to make the most profitable of all the various possible combinations of land, labor, and waiting. For just as rent, wages, and interest are the ultimate expenses of production, so the ultimate factors in production may be said to be land, labor, and waiting. The money incomes which individual laborers, landlords, and capitalists receive, and which constitute the claims (or, more accurately, the potential claims) against the social dividend, are determined by this social estimate of the specific amounts which they add to the value of the annual product, or, ultimately, to the value of finished products. Here again, on account of the law of diminishing productivity, the marginal product of land, labor, or waiting is the measure of the specific product attributed to a unit of land, labor, or waiting. It must be remembered, however, that marginal productivity does not depend alone on the technical efficiency of labor, the fertility and accessi- bility of land, and the greater technical or physical productivity of the roundabout, indirect methods which waiting makes possible. 1 It also depends, just as fundamentally, upon the amount and elasticity of the supply of land, labor, and waiting. It has been shown in earlier chapters that the conditions of supply are very different in the case of each of the three factors in production. No account of the distributive process can be complete that does not lay special stress on these differences, for these are the things that become of most importance when economic theory is utilized in the untan- gling of the practical social problems growing out of the distribution of wealth. Moreover, we cannot insist too strongly that the statement of the tendency toward an equality of the specific product attributable to a unit of land, labor, or capital funds and the price paid for its use is, after all, only an illuminating way of stating the real problem of distribution. Just as marginal 1 Whether roundabout, indirect methods of production are inherently more efficient (that is, whether they necessarily yield a larger product with the use of a given amount of labor and land) has been recently a matter of debate among economic writers. The fact that a process is roundabout does not in itself make it more economical. But that many roundabout processes are economical is proved by the simple fact that entrepreneurs find it profitable to use them. This fact is all that is needed to establish the importance of the greater technical produc- tivity of indirect, time using methods of production for the theory of interest. PROFITS 455 utility is at the same time the cause and effect of price, so marginal produc- tivity is at the same time the cause and effect of wages, rent, and interest. From one point of view it is seen that the competition of producers makes it necessary that specific units of land, labor, and capital should get a reward proportionate to the value of the amounts which they contribute to the social dividend; from another point of view it is equally clear that the necessary expenditures for land, labor, and capital are, in the long run, potent factors in determining the value of the things that make up the social dividend. Furthermore, we are apt to forget that the word "productivity" as used in economics (and generally in current discussions of economic topics) has a distinctly limited meaning. To digress for a moment in order to make the point clearer : In the theory of consumption we emphasize the fact that many of the most important human wants are satisfied by "free goods," which, simply because they are free, lie outside the proper field of economic * investigation. But the enjoyment of these free goods is usually dependent upon the possession of economic goods. Air is a free good, to any one who can demand the economic goods necessary to life. The glorious scenery of the Alps is a free good, to any one who can afford traveling expenses and hotel bills. In general, the enjoyment of many of the finer pleasures of life, involved in the common human relations of an individual to his physical and social environment, are "free," but free only to the individual who can afford the leisure and the economic goods without which many of these "free" pleasures are impossible. For present purposes, however, the important point is that there are free production goods as well as free consumption goods. Nature furnishes some of these. The oceans and lakes furnish free pathways for commerce ; natural forces of all kinds are freely utilized by men in the work of production. As was pointed out in an earlier chapter, we do not call these things productive, because no part of the annual product is dependent on the utilization of any particular unit of them. In this technical sense the wind is not productive, but win dmills are. In order to utilize the ocean we have to invest capital in vessels and docks. We have to impute productivity to these things be- cause they will not be furnished unless it is estimated that they will yield a remunerative income, and because the annual product will obviously be reduced if they are not furnished. But we would have to impute productivity to the Strait of Gibraltar if England were able to charge a toll for its use ! Somewhat analogous to these "free productive goods" is society's fund of accumulated knowledge of productive methods, the heritage of centuries " of economic evolution. This accumulated industrial experience is an in- finitely more precious possession than the existing store of productive goods. Compare the productive possibilities of a community of men possessing this knowledge, but forced to begin work absolutely without a ready-made stock of capital goods, with those of a tribe of savages suddenly and miraculously equipped with all the productive appliances of modern civilization. Yet this 456 OUTLINES OF ECONOMICS vast fund of productive knowledge, so far as it is common property, is not thought of as "productive." The social dividend is continually being in- creased as a result of the discovery of new natural forces, or new ways of harnessing and utilizing natural forces. Secrecy or government patents make it possible for those who first introduce these new methods of production to reap an income from the temporary advantage it gives to them as producers. For the time being these new methods themselves have to be regarded as "productive," although they contribute much more to the increase of the social dividend after they have become matters of common knowledge and use, and hence have ceased to be called " productive." * Disinterested scien- tists, especially those in the employment of the government or of universities, have often given the results of their improvements in industrial methods freely to the world, thereby swelling the social dividend, but not reaping for themselves the pecuniary reward which goes to those who patent their improvements and thereby render them "productive." Moreover, many of the world's greatest advances in the technique of production have been made possible only by the patient researches of investigators in the " unpro- ductive" field of pure science, working solely for love of the work, and with- out hope of pecuniary reward. 2 We impute productivity, in the technical economic sense, only to goods or services which are the objects of property rights or of analogous rights of con- trol, such as a man's power to dispose of his own labor. The fact is that just as the benefits of free consumption goods are bound up with the posses- sion of larger or smaller quantities of economic goods, so the utilization of free productive agencies is possible only in combination with labor, waiting, and scarce and appropriable natural objects, and these have to be paid for. We harness natural forces for the work of production, but we impute prod- uctivity only to the harness. We continually learn better and better methods of doing our productive work, but we impute productivity only to the ex- penses involved in utilizing these methods, not to the methods themselves. It is important that the reader should see the truth in the statement that the laborer, the landlord, and the capitalist get paid in proportion to their respective products. It is equally important that he should see clearly that there are definite limitations to the meaning and significance of the statement. QUESTIONS i. Is there a sense in which speculative profits can be said to be a reward for productive services? If so, should they be counted among the expenses of production? 1 The discussion of the social dividend in the preceding page relates only to " normal " or purely competitive production and distribution, and no account has been taken of the "productivity" of monopoly rights. * See a note on this point in Merz, History of European Thought in the Nine- teenth Century, Vol. I, p. 92. The list there given could be greatly extended. PROFITS 457 2. Is good- will capital? 3. Analyze the effect of an increase of expenditures for present goods upon present and future social dividends. 4. If money wages could be suddenly increased 10 per cent would there be a corresponding increase in real wages ? 5. Monopolists sometimes curtail their output in order to increase its total value. Should this be called productive? REFERENCES CARVER, T. N. Distribution of Wealth, Chap. VII. MARSHALL, ALFRED. Principles of Economics, 4th ed., Book VI, Chaps. VII and VIII. HAWLEY, F. B. Enterprise and tfte Productive Process. TAUSSIG, F. W. Wages and Capital, especially Chap. III. VEBLEN, THORSTEIN. Theory of Business Enterprise, Chap. III. PART VI THE RELATION OF THE STATE TO INDUSTRY CHAPTER XXVI NECESSITY OF STATE ACTIVITY The State and the Meaning of State Activity. Without going into the question of what constitutes a State, it will answer our purpose here to notice the extent of the conception as we use it. We in the United States are familiar with many kinds of govern- ment. When we speak of " the government," we generally mean the federal government, with its seat at Washington. Then comes the state government, then the city, the county, the township, and the school district. Each of these has its own governing to do, and is backed up in the doing of it by all the governments superior to it. Now, it is entirely an accident with us that out of these half dozen forms of government only one, and that not the highest, is known as the state. In most countries the govern- mental divisions most nearly corresponding to our states are known by some other name departments, provinces, etc. When we use the term in the present work we never mean a state in our American sense unless that meaning is specified, but any society acting through government. Local governments are, of course, only branches of the main government. So, when a school district hires a school-teacher, or a township mends a road, or a city builds waterworks, or a " state " builds a penitentiary, or the federal government builds a post office, all these are State activities in the scientific sense of the word. So, too, when we speak of State intervention we may be talking about the township or the city or the general government. These are only different ways of 458 NECESSITY OF STATE ACTIVITY 459 exercising one and the same kind of power that of organized government. State and Government. We use the word " State " then, in its generic sense. The term " governmental activity " is some- times employed but it is less desirable. The word "government" suggests to the ordinary mind a power apart from and superior to the people a restraining, repressing, punishing power; whereas the modern concept of the State is that of a cooperative institution. To those not still bound by eighteenth century tra- ditions, the modern State signifies people working together. The laissez-faire theory of the State is compatible with the idea of State merely as government. Those under the influence of this theory oppose the economic activity of the State on account of the educa- tional value of private activity, not stopping to reflect that in democracy the things that are done are done by the people and not by an external power. It is not to be assumed without exami- nation that the management of a public waterworks has an educa- tional value to the people at large inferior to the educational value of the management of a private waterworks. Critical examination and observation will show that the advantage is not wholly with either side, but that each form of enterprise has its own educa- tional value. Public enterprise educates in economic affairs more extensively; private enterprise more intensively. Purity and Efficiency of the State in Relation to its Economic Activities. The distinction that we have made between repres- sive government and the cooperative State is especially important to us, as it is in the economic sphere that the State becomes most prominent as a cooperative concern. When our forefathers in the eighteenth century looked upon the State as a repressive agency and at the same time had an exaggerated belief in human per- fectibility, they thought of the State as gradually dwindling away. They entertained what is called the night-watchman theory of the State. It is now clear, however, that if the repressive powers of the State dwindle, its cooperative features must increase precisely in the same proportion. As men improve in character their fitness to act together, increases. The French philosopher, Montes- quieu, more than one hundred and fifty years ago, laid down as 460 OUTLINES OF ECONOMICS a general principle that liberty invariably increases taxes. For a similar reason the purity and efficiency of the State always increase its economic activities. We are not considering here primarily the political functions of the State. The importance of preserving law and order in the old restricted meaning of those terms is taken for granted. All the activities of the State naturally have their economic side; and, when there is a marked disturbance of law and order we appreciate the fact that its maintenance is, after all, fundamental in economic life, as it is in other departments of social life. All this, however, is treated in political science, and need not detain us here. General Statement of the Necessity of State Activity. The experience of the last century throughout the entire civilized world has convinced men that oppression and restriction are found, not only within the framework of government and because of government, but outside of government and in spite of govern- ment. World-wide experience has shown that to secure freedom it is necessary to regulate those economic relations upon which our very life depends. Production has become a social process and so has distribution; and social processes can be controlled only socially. But " social " in this sense does not necessarily mean state or governmental agencies. A great corporation is a social agency, so is a trade union, a consumers' league, or a charity organization society. But the supreme control is State control, and this alone is all-pervasive and in its very nature' acts in the interest of all. It is a perversion of a private corporation when it does not act in the interest of the few who form it; it is per- version of the State when it acts in the interest of the few and not of the many. Thus we see in broad, general outlines the neces- sity for State activity in the economic life. The State and the Fundamental Economic Institutions of Society. We may trace out the necessity for State activity very briefly along a few lines. First, we will take up the institutional field. The State establishes great fundamental institutions of society, such as property and contract, already discussed in Chapter II. Without the State we may have possession; it is only through the State that possession becomes property. Without the State NECESSITY OF STATE ACTIVITY 461 we may have agreement enforceable by the strong right arm of an interested party. The State steps in and makes agreements enforceable by its authority and they become contracts. The fundamental institutions of society are a matter of growth and are in a state of flux. They change more or less from time to time and from place to place. The inheritance of property has as many different regulations as there are States in the world. Every modification of any one of the fundamental institutions modifies economic life in general and the distribution of wealth in particular. As society becomes closely knitted and compact, the necessity of understanding the significance of the regulation of the funda- mental institutions becomes increasingly apparent. If society is to be prosperous in all its members, we must have before us clearly a goal which we wish to reach and so shape our institu- tions as to enable us to reach the desired end. This does not mean any acceptance or arbitrary construction of Utopias, inasmuch as human nature has to be taken account of and the fact that it has been molded by past institutions and the past modes of pro- duction and exchange. It does mean, however, that we must use the same intelligence in constructing our economic policies that we do in constructing our private business policies. Property, Private and Public. The right of private property is one so fundamental in our modern life that we scarcely think of it as a creation of man maintained by constant vigilance on the part of the State and subject to human modification. Still less, perhaps, does it seem to us a right open to question. It seems like bed rock, an ultimate right, needing no other justifi- cation than its own obviousness. It we feel thus, however, about the right of private property or ownership it is only because we are dominated by present and local customs rather than by the facts of history or reason. We do not intend to impeach the right of private ownership, but it is a right which may as fairly be called in question as any other and must justify itself in the same manner. When a custom has obtained very widely and is deeply rooted in human life there is often a tendency to claim it as a " natural right." By a natural right men usually mean a right which is arbitrary, which is a right because it is a right, and " That's all 462 OUTLINES OF ECONOMICS there is about it." There are no such rights. All true rights are rational rights, rights which can show good reason for their claims and can justify their existence on the ground that they promote human welfare. There is no possible basis of human right except human welfare. To claim that certain rights are ultimate without refer- ence to their effect on society is to beg the question, and has been well characterized as " dogmatism in disguise." It is characteristic of unscientific and superficial thought to talk much of natural rights, and it is an encouraging sign that in our day such rights are subjected more and more to searching scrutiny. It is, therefore, as scientists rather than as iconoclasts that we should inquire into this time-honored right of private property. 1. Beginning of the Right. Looking back into history we discover first that private property did not always exist. The savage at first owned nothing. Doubtless when he had caught or killed an animal he considered it more or less his, though even here it was the common property of the family or tribe rather than his own. Beyond this there were no property rights as we now understand them. Doubtless there were struggles for the pos- session of hunting grounds, but the victor's sense of ownership or right was little better developed than that of a victorious lion or buffalo. From these insignificant beginnings the right or sense of ownership has grown, including more and more articles and dividing up the ownership more and more, until at last nearly everything is owned and nearly everybody owns something. Not until the agricultural stage did land become property, and the last forms of tribal ownership have not yet everywhere disappeared before individual ownership. 2. Strengthening of the Right. The next thing that impresses us is that private ownership has not always been so extensive or so exclusive as at present. We have seen already that the insti- tution of private property has been extended to many things which were at first free goods. It is equally noticeable that the right of ownership has grown in intensity and exclusiveness. This is especially marked in the case of individuals whose claims as op- posed to those of the tribe were at first slight and vague; but they NECESSITY OF STATE ACTIVITY 463 gradually grew, especially in the case of the chieftain, until tribal or communal rights broke down before them. The time was when a Scottish clan had absolute right to the territory they occupied, and no chieftain, however powerful, could have abridged that right. Now there are beautiful tracts of country in Scotland which are almost denuded of their agricultural population because the owners, the descendants of these same chieftains, have pre- ferred to raise game rather than men on their estates. All are familiar with the general liberty allowed in this country of hunting and fishing on private estates, which in Europe is unheard of. Slowly, however, we are beginning to extend our claim to game and fish also, and this leniency of ownership is disappearing. The nature and extent of these changes in private property must be controlled by the State in the public interest. How far inter- ference with the right is justified cannot be discussed in general terms: such a discussion must deal with the specific problems of municipal ownership, railway regulation, and innumerable others. The point to be emphasized here is that in solving such problems the mere fact that a proposed solution restricts or enlarges the right of private property cannot itself be given much weight. Trade-Marks, Copyrights, and Patents. Closely connected with the general subject of property is a legal arrangement whereby exclusive privileges are awarded in return for ser- vices to society. These privileges become a special form of pri- vate property, and have particular significance in the distribution of wealth, although they are not without importance in the pro- duction of wealth on account of the stimulus which they give to improvement. Trade-marks come under this head. They give property in a design which characterizes the product of a single undertaking, as an individual manufacturer, a firm, or a company. It is alto- gether desirable that those who, by the superiority of their wares, establish a reputation should be protected from that contemptible class who, without energy or initiative of their own, attempt to steal the fruits of the exertions of others. It encourages a pro- ducer to establish a reputation to know that he can distinguish his goods by a design which others may not imitate. 464 OUTLINES OF ECONOMICS Copyrights and Patents. Government creates exclusive privi- leges by copyright and patent laws; but this is done professedly in the interest of the general public, and not of any favored class. Authors and inventors are granted exclusive rights in their pro- ductions for a limited period. This monopoly is considered a fit reward for valuable public services. Copyrights and patents have been objected to as interferences with natural liberty, but they appear to have justified themselves in the stimulus which they have given to authorship and invention. It must, however, be remem- bered that all intellectual effort is an historical product. The telephone, for example, did not spring from the mind of one man, as Minerva from the head of Jupiter. The telephone was preceded by a century of scientific invention and discovery, most of it poorly enough remunerated. The telegraph was, similarly, the result of generations of careful, plodding industry of scores of men. Professor Henry, of Princeton College, whose services in connection with the completion of the telegraph were most distinguished, con- scientiously refused to take out any patent. It also happens that several persons almost simultaneously and independently made the same discoveries and inventions. Now, if the man who makes the finishing touches which lead to utilization of a long line of work alone is rewarded, it is like paying only the workman who put the roof on the house. It is not generally understood how serious an interference with liberty patents are. A man who has a patent is allowed to say to all the rest of the world, " Because I have first done such and such things you must not do them." Yet there may be those who, about the same time, without any knowledge of him, had found out how to do them. When a prin- ciple existing in nature is allowed to be patented, and not merely the application of the principle, the interference with liberty be- comes still stronger. The practical conclusion is somewhat like this: Patents, like copyrights, are beneficial. Experience seems to warrant this assertion. Patents do not, however, rest on so strong a basis as copyrights, because no two persons could ever write precisely the same book, and the fact that I have written a book in no wise keeps you from writing any book you please. Yet even intellectual effort is largely a social product. No great NECESSITY OF STATE ACTIVITY 465 author gives the world what was merely evolved out of himself. On the contrary, such a one lets an age speak through him. The principle which should govern copyrights is a clear one. It is to give an author reward for his services, not to give persons a reward for services which others have performed. As has been well said, were not copyrights limited we might now have a " Duke of Shake- speare," deriving a large income from the services of a man who lived three hundred years ago. Patents should not be granted on light and trivial grounds, and the period for which they are granted ought to be strictly limited, and subterfuges for the evasion of this limitation ought not to be suffered to succeed as at present. Moreover, owners of patents ought .to receive their patents on conditions which will compel them to use them or allow them to lapse; also, to grant to others the right to use the patent on payment of a reasonable royalty. It has also been found beneficial in some countries to lay an annual and perhaps slightly progressive tax on patents, so that those which are not important or not used may not interfere with indus- trial progress, for it is a condition that non-payment of the tax works forfeiture of the patent. Laws ought also to be changed so as to prevent such an abuse of patents as we have frequently wit- nessed in our rural districts, where farmers have been induced to infringe patents unwittingly in order that damages might be collected from them. The suggestion of a former commissioner of patents, that the right of purchase of a patent be reserved by the United States, is to be commended. Our patents at the present time promote monopoly, and in some cases interfere seriously, it is to be feared, with manufactures. The patent laws require to be simplified and amended and their abuses re- moved. At the same time reward should in some way always be provided for those who make valuable inventions. Public Property. Public property operates to diffuse wealth; this is in its very nature. We may contrast, for example, the post office in the United States, which has given rise to no large fortunes, with the railways in the United States, which have been the source of many mammoth fortunes. On the other hand, when the post office has been a private institution, as it was for centuries on the 2 H 466 OUTLINES OF ECONOMICS Continent of Europe, it was a source of enormous fortunes. There are very many aspects of public and private ownership, but their respective influence upon the distribution of wealth is of growing importance and is destined to occupy the increasing attention of economists and publicists. The relations of public to private property will be shaped with reference to the prevailing ideas of wealth distribution. Inheritance of Property. As Blackstone stated so clearly in his Commentaries on the Laws of England, and as we have already seen in Chapter II, the inheritance of property is a different fundamental institution from the right of property. The laws governing the inheritance of property determine to whom the right of property shall pass. 1 These laws of inheritance, as already stated, are constantly undergoing change, and have as many dif- ferent forms as there are authorities regulating inheritance of property. That which seems a mere natural right at one time seems a natural wrong at another, as illustrated in the changing ideas and practice concerning the share of a father's estate to be inherited by the oldest son. The laws of inheritance are of prime force in the distribution of wealth, and every change in them modi- fies the distribution of wealth. In a society becoming increasingly self-conscious, it is necessary to regulate inheritance in accordance with those ideas concerning the diffusion of property which are accepted as the best. Contract. Unregulated contract cannot be free in any real sense of the term because back of contract lie all the inequalities and injustices found in human society. Contract can be free and equal only when the men making it are free and equal. We have in consequence the necessity of regulating contract in the general interest; and this is recognized in every country in the civilized world. It is especially marked in labor legislation, where the lais- sez-faire theory has utterly broken down. Where the processes of production are social, an individual cannot regulate individually those relations which are determined by contract. The hours of 1 We use the term "inheritance" in its broadest sense, not distinguishing it from "bequest." It includes all those arrangements which determine how property shall pass from one generation to another. NECESSITY OF STATE ACTIVITY 467 labor, for example, are socially determined. An employee in a great manufacturing establishment has his hours determined first of all by his immediate employer. If he does not accept these hours, he must quit work. The employer may be a great corpora- don, but even in that case the employer himself has only a limited power in determining the length of the working day, inasmuch as he has to produce goods and services in competition with others, and he likewise must have regard for general conditions. These general conditions must be determined legislatively and admin- istratively. Even a modern nation like France does not find itself wholly free, and has thought it necessary to make an international treaty with Italy to determine conditions of toil both in Italy and in France. This treaty, dated April 15, 1905, marks a great epoch in the history of labor legislation. It was the first of its kind in the world's history, but has been followed by others. It shows the anachronism of those who say that men, women, and children must be allowed to work as many hours as they please. They can do what they please only as they work socially and bring their social will to bear upon individual conditions. This was conceded first of all with respect to children. Later, after much resistance, it found recognition in the case of women. Men, on account of their greater physical strength and their superior economic effi- ciency, especially in organization, are better able to regulate their conditions of toil individually and through organizations, but all the best authorities now recognize that there are many cases in which it is necessary to regulate the labor contract of adult men. Ethical Level of Competition. One of the main lines of activ- ity of the State in economic life consists in regulating the ethical level of competition. One of the great morements of our times consists in the effort to remove the evils of competition, not by its abolition, but by its ethical regulation. When it is forbidden manufacturers to employ children, competition exists, but the ethi- cal level is raised. An almost endless number of illustrations is afforded by the legislation in our own and other countries during the past generation. Pure food laws afford the most marked recent illustration. The Consumer. John Stuart Mill recognized that there were 468 OUTLINES OF ECONOMICS many cases in which the consumer could not determine the qual- ity of the commodities offered him by the producer, and this was treated by him as one of the exceptions to the general rule of governmental non-interference. He instanced education as a case in which the greater the need of the consumer the less his capacity to pass judgment upon the kind of education offered. We have seen during the past fifty years a continually widening field of State activity to protect the consumer in these cases in which he cannot protect himself. This growing activity of the State is recognized by modern civilization as a necessity. It now embraces the inspection of food products, and it has been demon- strated conclusively that very generally the consumer is unable to pass judgment upon the quality of the food which he purchases. He is unable to detect the presence of even most injurious poisons. It is seen that the public health is involved in this sort of economic activity. After long resistance to food inspection and certification in the United States, the first concession was made on account of foreign pressure. Germany, in particular, was unwilling to receive our meats until they had been inspected. A growing movement in favor of protecting the consumer has found its culmination in the Pure Food Act passed by Congress in 1906. As John Stuart Mill so well said long ago, we can draw no arbi- trary line or ring fence around the activity of government. In every case it has to be determined by considerations of public utility. Monopolies, Government Ownership, etc. Wherever competi- tion is absent, there is necessity for State activity which must take the form of public ownership and operation or of control of cor- porations. This subject, however, has been discussed in another chapter. The State the Guardian of the Permanent Economic In- terests of Society. The State is conceived of as having im- mortality. No definite limit can be placed to its life, and all its plans must be made with reference to perpetuity of existence. Were any public policies to be framed on the hypothesis of the decay and death of the State, it would indicate in itself an almost inconceivably deplorable condition of society. It is therefore NECESSITY OF STATE ACTIVITY 469 necessary that the State, as the representative of all the members of the body politic and of all generations, should particularly care for permanent interests. It alone has the nature and the power equal to this task. This proposition finds most clear illustration in forestry. With- out going into other technical details, the mere fact that rational forestry requires plans to be made for perhaps one hundred years in advance makes it difficult for private persons to safeguard our interests in this particular. The experience of the civilized world, that of the United States included, shows conclusively that only large State activity, including a great deal of public ownership and management, can provide adequately for our varied forestry needs. Federal government as well as our separate common- wealths have made a good beginning, but it is only a beginning; and in floods and drought we suffer average annual losses of many millions which would have been obviated had we begun our activity earlier and carried it on more extensively. The same principles apply in large measure to our great natural resources, such as coal and iron, and our vast water power. The conservation of our natural resources for the general good " for and by the people " is one of the greatest economic problems of the day. QUESTIONS AND EXERCISES 1. Why do we speak of the economic functions of the State rather than of government ? Is this distinction merely convenient, or is it absolute ? Do you feel that you are governed by the post office ? How do you help make it a cooperative institution? 2. Mention any illustrations of the propositions that purity and efficiency of the State increase its functions. 3. Would your personal freedom be increased if the economic activities of the state, city, or town in which you live were decreased ? 4. Why is it necessary that the State should be active with respect to prop- erty and contract? Does unregulated labor contract mean servitude and oppression ? If so, why ? If not, why not ? What is the significance of the fact that modern approximations to slavery rest upon contract nominally free? Discuss this proposition: "There is no greater inequality than the equal treatment of unequals." If a woman works fourteen hours a day in a sweat shop, is her contract to do so an expression of her freedom ? 470 OUTLINES OF ECONOMICS 5. Do copyrights interfere less with industrial liberty than patents? If so, why ? Would it be unjust to refuse to grant patents hereafter ? Would it be inexpedient ? Why ? 6. Contrast public property with private property in its effects (a) on the production, (b) on the diffusion, of wealth. 7. Explain the reasons for the increase in public activity in the inspection of food products. What evils and what benefits of this public activity have fallen under your observation? 8. What other kinds of State activity are discussed in this chapter ? Give the reasons for each. REFERENCES ADAMS, H. C. " Relation of the State to Industrial Action." American Economic Association Publication, 1887. Agricultural Department. Year Book. Annual Reports of the United States Commissioner of Patents, especially the Report for 1888. Reports of the Wisconsin Dairy and Food Commission. CHAPTER XXVII TRANSPORTATION Scope and Significance. A complete study of transportation would include a variety of subjects, as is seen from the following outline: I. Transmission of Ideas. (1) The Post Office. (2) The Telegraph. (3) The Telephone. II. Land Transportation. (1) Steam Railways. (2) Interurban and City Railways. (3) Vehicles on the Common Roads. III. Water Transportation. (1) Ocean. (2) Inland. a. Canals. b. Rivers. c. Lakes. Transportation may be studied from a number of points of view, all of them closely related. It presents its peculiar problems to the engineer, to the lawyer, to the accountant, to the business manager, to the historian, and finally to the economist. The economist studies the relations of transportation to other indus- tries and to the public welfare. The heart of the subject from this point of view is the question of rates and fares. Transportation is most intimately related to the other branches of industry. Hardly anything can be produced without the 472 OUTLINES OF ECONOMICS participation of some transportation agent. Modern industrial civilization would be impossible without an efficient system of com- mercial intercourse, although to be sure the dependence is not one- sided, but is mutual, for present methods of transportation clearly would be impossible without our industrial progress. The in- fluence of cheap carriage is especially important in the fact that it promotes an extensive division of labor by widening the market. It permits each region to devote itself to that line of production for which it is best adapted. In the present chapter, railway transportation alone will be considered, although the subject of water transportation is as- suming increasing importance in the United States. We are beginning to realize that the reaction against the early canal mania has been too great. Canal and river improvement, how- ever, should be urged, not on the general ground that water transportation is cheap, but only where in specific instances it can be proved to be as advantageous as rail transportation when all of the elements of expense are taken into consideration. Nor should canal building be advocated as a means of controlling railway rates. If we wish to regulate the charges of private carriers, a commission of trained men is the best device we have yet discovered. The Railway System of the United States. The aggregate length of railway mileage on June 30, 1906, was 224,363 miles. The most important states with respect to length of line were Texas, Illinois, Pennsylvania, Iowa, and Ohio. In number of miles of line per 10,000 inhabitants, the leading states or territories were: Nevada, Arizona, Wyoming, New Mexico, and Montana, but in number of miles of line per 100 square miles of territory, the lead was taken by the District of Columbia, New Jersey, Massachusetts, Pennsylvania, and Ohio. The foregoing refers to the length of road without regard to the second, third, or fourth tracks. To operate this mileage the railway companies employ about 3^ per cent of the persons engaged in gainful occupations in the United States. The numerical strength and average daily wages of each class of employees is given in the following table : TRANSPORTATION 473 TABLE I CLASSIFICATION or EMPLOYEES 1906 CLASS NUMBER AVERAGE DAILY COMPENSATION General officers 6,090 Other officers 6,705 General office clerks 57i2io Station agents 34,940 Other station men 138,778 Enginemen 59,855 Firemen 62,678 Conductors 43,93^ Other trainmen 119,087 Machinists 5 X 2 53 Carpenters 63,830 Other shopmen 199,940 Section foremen 40,463 Other trackmen 343,791 Switch tenders, crossing tenders, and watch- men 49,659 Telegraph operators and dispatchers 36,090 Employees account floating equipment. .. . 8,314 All other employees and laborers 198,736 Total 1,521,355 Sn.8i 5-82 2.24 1.94 1.69 4.12 2.42 3-5i 2-35 2.69 2.28 1.92 i. 80 1.36 1.80 2-!3 2.IO 1.83 The amount of passenger service in a year is sufficient to give every man, woman, and child in the United States a journey of over two hundred miles, and the amount of freight reported as carried (originating on line) is more than ten tons for each inhab- itant (1900). The mileage of empty freight cars is nearly half as large as the mileage of loaded freight cars. In 1906 there were 1287 operating roads in the United States, of which 1007 were nominally independent. Nine tenths of these lines are less than 250 miles in length, and represent less than a fifth of the total mileage. On the other hand, the fifty largest roads control about two thirds of the total mileage. Railway Competition. The early roads were short, independ- 474 OUTLINES OF ECONOMICS ent lines largely for local traffic or to serve as feeders to canals. The first movement toward the efficiency of the present system was the welding together of separate links into through lines. The New York Central, for example, was formed in 1853 out of ten previously independent lines between Albany and Buffalo. The development of parallel through lines introduced an era of sharp competition. In the seventies the lines connecting Chicago and the Atlantic seaboard engaged in a series of rate wars. The experience of this decade showed clearly the tempo rary and un- stable character of competition among parallel lines. The rule seemed to be that a railway war must be followed by a rate agree- ment of some sort, so that, instead of the maintenance of a suppos- edly fair level of rates by the steady pressure of competition, we find there was an alternation of high and low rates. The inevi- table annihilation of direct competition in rates between railways is clearly portrayed in a congressional report in 1874, where the following prediction was made: " But when the natural tendencies of corporate power have wrought out their inevitable conclusions, the magnitude of our combinations will probably be in proportion to the extent of the field in which they operate." But so strong was the feeling at that time that competition is the life of trade, that it was recommended by the committee who made this report that the government build a line of its own simply to maintain competition with the private roads, for it was thought that the government could resist the great temptation to combine with the other roads. The history of Belgium affords an instructive illustration of the effect of a mixed system of public and private ownership. Belgium began in 1837 with a carefully worked-out system of public railways. Ten years later it was decided to grant charters to private companies. A large number of private roads were organized, some with the purpose of competing with the state system. It was thought that competition between the state and private roads would be beneficial. The Massachusetts Railroad Commission, in its report of 1871, recommended a trial of this plan in Massachusetts But in Belgium the private lines were soon merged into four systems, which com- peted so vigorously with the state roads that the government adopted the policy of purchasing them. The mixed system was also tried in Prussia with unfavorable results. The advantages of government management cannot show themselves fully under such conditions. TRANSPORTATION 475 Pooling and Consolidation. As a result of the intense struggle for business among the roads, there was a widespread resort to the practice of pooling, that is, a division of the earnings or tonnage of the competitive business. This form of combination, however, was at least nominally abandoned after it was declared illegal by the Interstate Commerce Act of 1887, but organizations for the purpose of making rates continued to exist. In 1894 these were also declared illegal by the Supreme Court of the United States on the ground that they were in violation of the Anti-Trust Act of 1890. The court, however, did not seem to prohibit the enlarge- ment of the various systems by the purchase and lease of other lines, or controlling them indirectly by the purchase of the ma- jority of their stock. But in 1903 the Supreme Court again applied the Anti-Trust Act of 1890 in a case against the Northern Securities Company, a corporation formed, not for the purpose of engaging in the railway business directly, but for the purpose of holding the capital stock of the Great Northern, Northern Pacific, and Burlington systems. But the legal prohibitions have had little effect upon the tendency to eliminate competition from the railway business. The present organization of any one of our large systems, like a geological record, reveals the nature of the changes that have been going on. The consolidated company controls a number of large lines, perhaps by stock ownership, and each one of these is made up of a number of subsidiary roads united as a result of purchase, partial-stock ownership, or lease. But the extent of consolidation is not shown by the growth of the large systems, for these are not wholly independent. A number of the large systems may be under the control of the same group of financiers. While the actual extent of this centralization in ownership is difficult to state, the well-known illustrations are striking: the Harriman group includes the Union Pacific, the Southern Pacific, the Illinois Central, and the Chicago and Alton systems, with partial control of the Baltimore and Ohio. In the Gould group are: the Missouri Pacific, Wabash, Denver and Rio Grande, Western Pacific, Texas and Pacific, and the St. Louis and Southwestern systems. The Great Northern, Northern Pa- 476 OUTLINES OF ECONOMICS cific, and Burlington systems are under one control. The Penn- sylvania until recently controlled the Baltimore and Ohio and Norfolk and Western systems. The Vanderbilt interests domi- nate the New York Central, the Chicago and Northwestern, and the Cleveland, Cincinnati, Chicago, and St. Louis systems. In spite of the progress of consolidation, competition has not entirely disappeared. Even where there is no active cutting of rates by parallel lines, there may be rivalry in service, but this also has its limitations, as is seen in the agreements that the shorter lines between New York and Chicago and between Chicago and Minneapolis shall not utilize their natural advantage in speed. Again, alternative routes may lead to competition among railways that are not parallel. Thus the roads serving the North Atlantic ports compete in the carriage of grain with those extending to Galveston and New Orleans. Much has recently been said about the influence of market competition as a force affecting rates, even when the roads have been consolidated. To illustrate, the farmers and railways of North Dakota are joint producers of wheat, and they are both desirous that it shall be sold in competition with other wheat in the London market. It would be ruinous to the roads to make such high rates that the farmers could not afford to sell their grain. The railways cannot be prosperous if the farmers, merchants, and manufacturers along their lines are not prosperous. This partnership, however, has its limits, for a rate which would enable the producer to continue in business may yield the railway a sur- plus which could be shared with the producer. The MoTement of Rates. The average revenue per ton-mile of railways in the United States fell from i.ooi cents in 1888 to .729 cents in 1900, rising again to .780 in 1904, .766 in 1905, and .748 in 1906. Average ton-mile receipts, however, are not an accurate index of changes in rates, for such an index is affected by the changes in the nature of the traffic as well as by changes in rates charged. If the proportion of low-grade freight increases, there will be a fall in ton-mile receipts without any change in rates. But if we also take into consideration rates on specific commodities, such as wheat, stoves, etc., no doubt remains but that a large TRANSPORTATION 477 decrease has taken place. In the last forty years there has prob- ably been a fall of one half in rates on through traffic, but the fall was mostly in the first half of that period; in the second half there has been only a slight fall, with possibly some increase since 1900. In local rates the decline has been less marked. The decline in passenger rates before the recent reductions by government au- thority was less than in freight rates. Improvement in service should, however, be considered in this connection. But what- ever the actual movement of rates, the question will inevitably be asked whether they have declined as much as they should have done, and whether the growth in consolidation which we have noted will not prevent such a decline in the future as may be warranted by the growth in traffic and attendant economies in operation. The question is, how shall a "reasonable" freight rate be determined? The Level of Rates. If, owing to the monopolistic nature of the railway business, the determination of rates can no longer be left to the automatic working of competitive forces, they must be consciously determined according to fundamental principles. Competition was supposed to do justice by limiting the aggregate earnings of an establishment approximately to the expenses of doing the business, and it seems most natural that we should apply the same guide in our conscious rate making. There can be no doubt but that expense is a safe guide so far as it can be accurately determined. It needs but a slight analysis of railway expenditure, however, to reveal the difficulty of using expense as a criterion of a fair rate. In 1906 the railways reported to the Interstate Com- merce Commission gross income amounting to $2,386,285,473 (from operation and investments), and in this same year the interest and dividends amounted to $530,545,911, or 22.2 per cent of the gross income. This represents the amount accruing to the stock and bondholders as joint owners of the business, if we ignore the increase in the value of the plant that results from charging im- provements to operating expenses. Is this a proper payment to such owners? That some compensation of this sort is necessary under the regime of private capitalism is clear, for if none were made, new roads would not be built nor would old ones be main' 478 OUTLINES OF ECONOMICS tained. A common answer is that the owners should be allowed a fair return upon their investment, but it is difficult to say what is a fair return and what is the actual investment. Inasmuch as the institution of private capitalism is maintained for the benefit of the community and not the community for the benefit of private capitalism, that payment to owners of the railways is proper which is necessary to evoke their services, that is, the service of main taining and extending the railway system in accordance with the public needs. This basis suggests the application of the current rate of interest to the cost of reproducing the physical property in its present condition as a general guide, although doubtless our regard for vested interests would compel us to take account of the fact that present holders of stocks and bonds have in many cases paid high prices for them in anticipation of the continuance of the present monopoly earnings of the railways. It should also be remembered that to guarantee to every dollar invested in railways the current rate of interest would be to create a privi- leged class of investors. 1 The attempt to find a valuation upon which to reckon earnings has been sharply criticised, but no other solution for the problem of finding a reasonable level of rates has been offered. Reject this, and we have the alternative of letting the railways charge what they please, or of adopting government ownership. Relative Rates. When the level of rates has been determined we are confronted by the further question of what should be charged for each particular shipment, and here we find the applica- tion of the principle of expense of still greater difficulty and un- certainty. In attempting to say what it costs to carry a ton of coal a mile, we find that a large part of the expenditure is incurred, not for one specific kind of commodity, but jointly for many kinds. The roadbed, ties, and rails are maintained, not for coal cars alone, but for passenger trains as well. Even with the most care- ful bookkeeping it is possible to trace a causal connection between only a part of the expenses and specific portions of the traffic. 1 This principle has been recognized by the Supreme Court of the United States in County of Stanislaus (California) vs. San Joaquin and King's River C. & I. Co., 1903, 193 U.S. 201. Compare also page an, above. TRANSPORTATION 479 It is possible to say that a certain traffic requires a certain amount of extra labor and fuel, and causes a certain amount of wear and tear, and clearly such traffic should normally pay enough to meet these expenses, at least, if we wish to prevent waste. But what shall be done with such joint expenditures as fall under the head of maintenance of way? Shall they be charged to the freight or to the passenger departments? If partly to both, on what basis shall they be divided ? A full discussion of the matter cannot be given here. Some writers think that the attempt to discover the exact cost of carrying a commodity cannot be determined. They would charge these common expenses to those shipments which can most easily bear them. This principle is followed in part in all freight classifications. But recently the view that the cost of transporting a commodity can be determined has received support in a decision of the Railroad Commission of Wisconsin. Follow- ing the practice of manufacturing corporations, the commission made a complete apportionment to the freight and passenger de- partments of the expenditures of one railway system, using an arbi- trary basis that seemed fair where no direct connection could be found between the expense and each branch of the traffic. To illustrate the nature of the problem, we may note the Commission's method of dealing with one class of expenditure maintenance of way. It was necessary first to apportion expenditures between that part of the road lying in Wisconsin and that part lying in other states. For this purpose the cost of maintaining the way was first divided into two parts: (a) that depending on natural depreciation, and (b) that due to the movement of trains. The first was apportioned to Wisconsin on the basis of the road mileage, and the second according to the revenue train mileage in Wisconsin. The Commission then proceeded to separate the Wisconsin expenditure between the passenger and freight departments. That part of the expense due to the movement of trains was divided between passenger and freight traffic according to the amount of passenger train mileage and freight train mileage respectively, switching mileage being taken as freight train mileage. That part due to natural depreciation was apportioned according to the gross earnings of the two departments. This last procedure is perhaps open to criticism because gross earnings depend in part on prices charged, and it was the reasonableness of existing prices that it was sought to determine. In the long run the natural depreciation depends on how costly a plant is exposed to wind and weather; in the long run the size of the plant grows with the traffic; and as traffic is roughly measured by train mileage, we may say 480 OUTLINES OF ECONOMICS that train mileage would be a more reasonable basis for the division of expenses due to natural depreciation. 1 Distance. The most perplexing factor in rate making is that of distance. In actual practice, distance has been ignored to a very large degree. For example, in group rates, the same charge is made to a common market from any point within a certain area, irrespective of the length of the haul. In the basing-point system, the rates to small towns in a certain region will not vary according to the distance from the point of shipment, but are found by adding together the rate to a railway center, called a basing point, and the local rate from this basing point to the small town, even though the town be nearer than the basing point to the original point of shipment. Again, goods brought from a foreign country to a point in the interior may be charged a less rate than the domestic rate from the point of entry to the same point in the interior. Again, goods intended for export sent from Chicago to New York may pay less than those intended for use in New York. Goods are sent to San Francisco from New York for less than the rate from many points west of the Mississippi River to San Francisco. These conditions have arisen largely from competition of rail- ways among themselves and with waterways, and do not seem to be necessary from the standpoint of the welfare of the country as a whole. The fact that distance is one element in the expense of carriage suggests that it should be taken account of in making rates, although there are many circumstances which necessitate a departure from the rule of a strict mileage rate. The fact that terminal charges, for example, are the same for a long as for a short haul justifies a decline in the total charge per ton-mile as distance grows. The great advantage of following a schedule of rates based on distance is that it affords some basis, although not an absolute guide, for settling sectional disputes concerning rail- way charges. Government Ownership or Government Regulation? With the decline of competition in the railway business, the alternative lies between private operation with government supervision on 1 In Buel vs. C. M. and St. P. Ry. Co., Wisconsin Railroad Commission Reports, Vol. I, pp. 334 and 508. TRANSPORTATION 481 the one hand, and government ownership and operation on the other. The important arguments in favor of private operation are: (i) efficiency in management; (2) greater elasticity in meeting the varying demands of business; (3) the danger in government operation of throwing sectional disputes as to rates into politics. The important arguments in favor of government operation are: (i) the essential conflict between private and public interests in the conduct of the business, the aim of the one being profit, the aim of the other being service; (2) the elimination of the rail- way interests from politics; (3) the unearned increment would accrue to society; (4) the elimination of personal discrimination. On whichever side the weight of the argument may lie, we in the United States are likely to make a more thorough experi- ment with private operation under government regulation. Government Regulation of Railways in the United States. Railway corporations in the United States are almost all organized under the laws of the separate states. Formerly special laws were passed when a railway company was to be formed, but at the pres- ent time there are general laws specifying what conditions must be complied with in order that a number of persons may organize a railway corporation. The separate states have imposed a number of regulations and restrictions not only on the companies which they have chartered but also on others doing business within their borders. These relate to the safety and comfort of passengers, the train service, consolidations, pooling, ticket-scalping, discrimi- nations between shippers and places, and finally the reasonable- ness of charges. Railway commissions are found in a majority of the states. One type, exemplified by the Massachusetts com- mission, has simply advisory and investigative powers with respect to rates, but it cannot name reasonable rates and enforce them, although it can recommend such action to the legislature. An- other type has power to name a reasonable rate in place of one that has been found unreasonable. Such is the Wisconsin commission, and the tendency is for the latter type to prevail. That a railway corporation is subject to government regulation in the interest of the public welfare has been clearly established by a long line of judicial decisions beginning with the leading 482 OUTLINES OF ECONOMICS " Granger " case of Munn vs. Illinois. 1 But the authority of the state governments has been greatly limited by two provisions in the federal Constitution. Congress having been given control over interstate commerce, the states must confine themselves in their regulations to commerce wholly within the state. Again, the Fourteenth Amendment declares that no state shall deprive any person of life, liberty, or property without due process of law nor deny to any person within its jurisdiction the equal protection of the law. The courts have interpreted this provision to mean that neither a state legislature nor a commission created by it can fix rates even on iw/ra-state traffic without a review by the courts. The courts have in some cases declared rate legislation void on the ground that it confiscated the property of the stockholders. The activity of the federal government may be summarized as follows : (i) As to rates: All charges made for the transportation of passengers or property must be " just and reasonable," but no standard of reasonableness or justice has been given by Congress. This question is left largely to the judgment of the Interstate Commerce Commission, a body of seven men appointed by the President with the " advice and consent " of the Senate. When a complaint has been made, the commission, if it finds upon investigation that the rate complained of is unreasonable, may prescribe what shall be the maximum charge in that case in the future. Its order may be set aside by the courts, for the Fifth Amendment restrains the federal government as the Fourteenth does the state governments. Rates must be published and filed with the Commission, and the railway must not under penalty depart from the published rate, nor make any change without thirty days' notice. There shall be no "unjust discrimination" or " unreasonable preference " in the making of rates. In particular, the giving or accepting of rebates is punishable. Also, no greater charge shall be made for a short than for a long haul on goods going in the same direction on the same line under " substantially similar circumstances and conditions." This last provision has been much weakened by the interpretation placed upon it by the 1 1876, 94 U.S. 113. TRANSPORTATION 483 United States Supreme Court, which has held that competition of railways at one point might constitute a dissimilar circumstance justifying a lower charge for the longer haul. (2) As to publicity of accounts: The carriers are required to report to the Interstate Commerce Commission regarding their finances and traffic. The Commission has access to the records and may prescribe the form in which they shall be kept. (3) As to combinations: It is unlawful for railways to enter into an agreement for the pooling of freights or earnings. Agree- ments to maintain freight rates are also unlawful as coming under the Anti-Trust Act of 1890 which prohibits " every contract, com- bination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations." (4) As to safety appliances: Carriers must equip their cars with automatic couplers, train brakes, grab irons and hand holds. The law does not require the introduction of block signal systems. The Work of the Interstate Commerce Commission. Since its creation in 1887 the Interstate Commerce Commission has done much good work in promoting an understanding of the relations between the public and the railways, but in the actual removal of abuses its powers proved utterly inadequate. As a result of a wave of popular indignation, Congress in 1906 extended the Com- mission's power of investigation and increased somewhat its power over rates. Nothing, however, was done to give definiteness to the long and short haul provision, nor were steps taken to settle the fundamental question of the level of rates. QUESTIONS AND EXERCISES i. Write a description of some railway system, giving its organization, capitalization, earnings, dividends, nature of traffic and territory covered, etc. 2. Make a digest of the opinions in the Northern Securities case, 193 U.S. 197. 3. If you have paid $200 for a share of stock in a monopolistic enterprise, have you a right to complain if government regulation so affects its earnings, that the price of the share falls to $100? 4. Should the large shipper get lower rates than the small shipper? 5. Compare the powers of the Interstate Commerce Commission with those of the Canadian Commission. 484 OUTLINES OF ECONOMICS REFERENCES ACWORTH, W. M. Elements of Railway Economics, Chaps. I and II. (Not favorable to cost theory.) " American Waterways." (Twenty articles on various phases of the subject.) Annals of the American Academy of Political and Social Science, Jan- uary, 1908, Vol. XXXI. DEWSNUP, E. R. (Editor). Railway Organization and Working. (De- scriptive.) Hearings before the Committee on Interstate Commerce, United States Senate, 1905-6 (including Digest). Digest, pp. 57-75; and Vol. Ill, pp. 2310 to 2360. Interstate Commerce Commission, Annual Reports, Decisions, and Statistics of Railways in the United States. JOHNSON, E. R. American Railway Transportation, and Ocean and Inland Water Transportation. (Elementary Text-books.) McPnERSON, L. G. The Working of the Railroads, Chap. III. MERRITT, A. N. Federal Regulation of Railway Rates. MEYER, B. H. Railway Legislation in the United States, Part II ; also "History of the Northern Securities Case," Bulletins of the University of Wisconsin, No. 142. MEYER, H. R. Government Regulation of Railway Rates. (Severely critical of the work of government officials.) Munn vs. Illinois, 94 U.S. 113. NOYES, W. C. American Railroad Rates, Chap. IV. RIPLEY, W. Z. Railway Problems. (A collection of supplementary reading.) " Railroad Valuation," Political Science Quarterly, December, 1907, Vol. XXII. United States vs. Trans-Missouri Freight Association, 166 U.S. 290. WEBB. Economics of Railroad Construction, Part I. CHAPTER XXVIII INSURANCE Nature of Insurance. The essential idea of the modern in- stitution of insurance is cooperation in the bearing of losses which are likely to happen to any one of a large group of persons but which will actually fall upon but few members of the group. It is thus directly opposed to gambling, although wagers have fre- quently been made in the form of the insurance contract. It may appear at first that the man who insures his house is making a wager with the insurance company that his house will burn, but this is in fact like betting on both sides of an event. If the man does not insure, he may be regarded as betting that his house will not burn, and by wagering with the insurance company that it will burn, he relieves himself of risk. For this relief he is willing to incur the certain loss of his premium. Insurance means cer- tain loss for the policy holders, but it implies many small losses in place of a few unbearable ones. In well-developed forms of insurance there is also no risk for the insurance company because the amount of loss is approximately known in advance, as will be explained presently. The question is sometimes asked whether insurance is pro- ductive in the sense that other economic activities are productive. The answer is decidedly in the affirmative, for the feeling of security that it makes possible is a real satisfaction which we are willing to purchase. Furthermore, the relief of distress among the un- fortunate without compelling them to accept charity is a distinct social gain, and finally, many of our business operations are facilitated by the existence of a system of insurance. Prevention of loss is not properly a part of the idea of insurance, but never- theless, insurance as it exists to-day does have many tendencies in that direction, especially in such forms as fire and steam-boiler 485 486 OUTLINES OF ECONOMICS insurance. On the other hand, insurance causes a certain amount of loss by provoking to some extent incendiarism, self-mutilation, or suicide, and even normal persons are likely to be less careful when they know they are insured. On the whole, however, we can scarcely overestimate the importance to society of an in- stitution which equalizes the shocks and multiplies the incentives to thrift and wholesome economic activity. The Law of Probabilities. A special profession (that of the actuary) and a special branch of mathematics have grown up as a basis of the institution of insurance. It is a knowledge of the law of large numbers that changes the insurance business from a wager to a legitimate business. If a coin is tossed a large number of times, heads will appear about as often as tails. This may be counted upon as practically certain, but with respect to any particular throw taken by itself, there is no way of telling in ad- vance whether heads or tails will appear. This truth has been worked out and applied most definitely to life insurance, but in other branches also an effort is made to gather sufficient data that will make possible the formulation of statistical laws as a guide for future business. Origin and Development. Arrangements embodying the idea of insurance are found among the ancients, but the modern in- stitution of insurance, although its origin is obscure, first becomes prominent in the loans on bottomry which became common during the thirteenth and fourteenth centuries. A loan on bottomry meant that money was borrowed by the owner of a ship and was to be repaid with interest at the termination of the voyage, but the principal and interest were not to be repaid if the ship was lost. Sometimes this took the form of insuring the captain's life, but no scientific system of life insurance appeared until the compilation of life tables. Fire insurance received an impetus from the Great Fire of London in 1666, the first company organized upon strict mer- cantile principles being the Fire Office, organized in 1680. It had a brigade of its own to prevent and extinguish fires. In 1693 Edmund Halley made a report to the Royal Society regard- ing the mortality at various ages upon the basis of tables of births INSURANCE 487 and funerals at the city of Breslau, but practically, life insurance as a business dates from the organization of the " Old Equitable" in 1762. Before this, however, there were many associations for conducting in- surance upon a speculative basis, which entered into wagers of every con- ceivable description. "Even the morality of the newspapers of that day was shocked by such proceedings: we find the London Chronicle of 1768 thus declaiming, ' The introduction and amazing progress of illicit gaming at Lloyd's Coffee-house is, among others, a powerful and very melancholy proof of the degeneracy of the time. Though gaming in any degree is per- verting the original and useful design of that Coffee-house, it may in some measure be excusable to speculate on the following subjects: Mr. Wilkes being elected member for London; -which was done from 5 to 50 guineas per cent. ; Mr. Wilkes being elected member for Middlesex, from 20 to 70 guineas per cent; Alderman Bond's life/or one year, now doing at 7 per cent; On Sir J. H. [mark the modesty] being turned out in one year, now doing at 12 guineas per cent; On John Wilkes' life for one year, now doing at five per cent. N.B. Warranted to remain in prison during that period; On a declaration of war with France or Spain in one year, 8 guineas per cent. But,' continues the sensitive journalist, 'when policies come to be opened on two of the first peers in Britain losing their heads at IQS. 6d. per cent, or on the dissolution of the present parliament within one year at 5 guineas per cent., which are now actually doing, and under- written chiefly by Scotsmen, at the above Coffee-house, it is surely high time to interfere.' " l In the United States, fire insurance was fairly well begun even in pre-revolutionary days. In 1830 was organized the New York Life and Trust Company, and twelve years later appeared the Mutual Life Insurance Company of New York, which is the oldest of the existing life insurance companies which insure more than a restricted class of individuals. Tables I and II show the growth of life, fire, and marine insurance in the United States. A decline in the number and importance of life companies appears in the seventies. The numerous failures of this period brought the "old line" life insurance into discredit, and in the following years this fact, together with the desire for cheap insurance, caused a marked development of assessment insurance, against which there has in turn been a reaction because of its unscientific basis. Recently the "old line" companies have again suffered a loss of 1 Walford, The Insurance Guide and Handbook, 4th ed., p. 27. 488 OUTLINES OF ECONOMICS TABLE I NUMBER OF POLICIES AND AMOUNT OF INSURANCE IN FORCE IN ORDI- NARY AND INDUSTRIAL COMPANIES, 1850 TO 1905 l ORDINARY INDUSTRIAL Year Number of Policies Amount (Dollars) Number of Policies Amount (Dollars) i8 I 55>33,627 3,620,057,439 4,917,694,131 7,093,152,380 11,054,255,524 i860 1870 . 1880 236,674 I ,377> 1 5 3,883,529 6,952-757 11,219,296 16,872,583 20,533,469 145,938,241 429,521,128 820,740,641 1,468,986,366 2,309,754,253 188-; . 1890 iSot; . IOOC TABLE II FIRE, MARINE, AND CASUALTY INSURANCE, 1890-1905 l FIRE AND MARINE (STOCK AND MUTUAL) Year Number of com- panies Total income Payments to policy holders Number of com- panies Total income Payments to policy holders Dollars Dollars Dollars Dollars 1890 . . . 580 I57, 8 57,983 80,768,012 34 9,758,413 2,933,306 1892 . . . 491 179,044,675 104,864,902 49 12,727,576 4,063,374 1893 . . . 489 178,971,022 114,652,625 46 15,140,830 4,815,298 1894 . . . 558 176,364,638 100,919,134 41 14,238,564 4,601,207 1895 . . . 583 176,300,042 97,379.026 47 18,077,146 5,430,607 1896 . . . 541 172,945,625 89,903,460 5 20,154,235 6,494,944 1897 . . . 53 i7 6 ,75 I - I2 4 87,165,252 53 22,859,866 7,113,818 1898 . . . 54 178,320,217 97,974,682 54 23,478,642 7,5 8 3>54i 1899 . . . 484 184,142,217 114,619,372 59 27, II 7>449 8,802,777 1900 . . . 493 198,312,577 116,753,281 62 32,309,619 10,166,796 1901 . . . 482 216,452,381 121,020,924 67 39,844,427 12,966,145 1902 . . . 489 239,468,206 123,332,012 67 43,980,061 14,952,568 1903 . . . 563 261,431,401 125,434,065 73 49,716,644 16,679,975 1904 . . . 55 281,228,402 165,658,558 82 55,685,447 I 9.332,539 1905 . . . 612 296,562,588 140,825,191 95 63,190,680 21,646,844 CASUALTY AND MISCELLANEOUS 1 See Statistical Abstract of the United States (annual) and The Insurance Year Books published annually by the Spectator Company, New York, N.Y. INSURANCE 489 prestige on account of the scandalous extravagance and corrup- tion revealed by official investigations. The evil practices had to do chiefly with the management of the surplus, which was not under legal control as was the reserve. These terms will be ex- plained presently. It is probable that they will now learn the lesson of economy, just as they have learned from their experience a generation ago the supreme need of being solvent. Insurance has grown until the insurance companies rival the banks in financial importance. The assets of the leading life insurance companies are nearly equal to the capital and deposits of all national banks. Forms of Insurance Organization. Fire insurance may be written by stock companies, by mutual companies, or by associa- tions of individual insurers, known as underwriters and Lloyds. Mutual companies, again, may be either local county or town* mutuals, state or general mutuals, or the manufacturers' mutuals. The local town mutuals have the advantage that they can be conducted with a very low cost of administration, but the business of fire insurance seems best adapted to the stock companies, since it is desirable that the risk of a conflagration should be spread over a very wide territory. Life companies are also found both in the stock and mutual form. Theoretically the management of the latter is in the hands of the policy holders themselves, but in actual practice they must be managed by a small group of financiers. Attempts have been made by recent legislation in some states to make the manage- ment more nearly representative of the interests of the policy holders by providing for election of officers by mail. Life in- surance companies are also classified according to the plans of premium payments: (i) "old line" level premium, (2) assessment, (3) stipulated premium, and (4) fraternal orders. Wherever risk enters in modern life, companies are organized to offer an escape from it through insurance even before enough data have been collected to make possible the accurate prediction of the amount of loss. In addition to life insurance we have indemnity in case of sickness, accident, destruction by fire, wind, hail, explosions of boilers or fly wheels, broken windows, 490 OUTLINES OF ECONOMICS and loss from burglary or the unfaithfulness of employees. Li- ability insurance in over a dozen different forms guards against loss from damage suits. It is impossible to take up the problems that are peculiar to each one of these branches, but we note the leading features of the most important branch in life insurance. LIFE INSURANCE Life Tables. A life table or mortality table shows how many of a large group of persons of the same age will survive to each higher age. A number of these tables have been calculated, but the one generally used in this country is the American Ex- perience Mortality table, a portion of which is here reproduced : AGE LIVING AT BEGINNING OF YEAR DYING DURING THE YEAR 10 IOO,OOO 749 it 99.251 746 12 98,505 743 13 97,762 740 14 97,022 737 15 96,285 735 16 95.55 732 17 94,818 729 18 94,089 727 J 9 93,362 725 * * * 90 847 385 9 1 462 246 92 216 137 93 79 58 94 21 18 95 3 3 With such data and with an assumed rate of interest and ex- penses, it is possible to say with considerable certainty how much money must be collected from the policy holders in order to pay each one $1000 or other sum at death. Premium Plans. It would be possible to collect from those surviving at each age enough money to pay for the deaths that INSURANCE 491 would happen during the ensuing year. This step rate plan would mean in the later years of the table a larger and larger assessment ; that is, at the time when the earning power of the insured was declining. It has become customary to arrange the payments on what is known as the level premium plan, the same annual payment being made throughout the life of the policy. This payment may be on the ordinary life plan, that is, the pay- ments continue throughout life; or ten, fifteen, or twenty limited payments may be made, the policy continuing in force for life; or the insurance may be for only a term of years during which the premiums are paid, the insurance ceasing entirely at the end of the term. This is the cheapest kind of insurance, for the insurance company knows that many of the insured will survive beyond the term, and to them no payment need be made, but when the in- surance continues for life, the payment becomes a certainty in every case. The Reserve. If a level premium is charged, the income of the company in the earlier years exceeds its current mortality requirements. The portions of the premium not currently used must be held for the credit of the policy holders until the later years, a certain rate of interest being allowed. This accumulating fund is known as the reserve. Surplus. If the insured die less rapidly than was assumed by the company in calculating its premiums, more money will be collected than is necessary to meet the obligations of the in- surance contracts. This is one source of surplus. Again, the funds held in trust by the company may be invested at a higher rate of interest than was assumed in the calculations, and this is a second source of surplus. A third source of surplus is in keep- ing expenses below what was assumed in the calculations. (The addition which is made to the net premium to cover expenses is called "loading," and is commonly not far from a third of the net premium.) The amounts paid in by those who lapse or surrender their policies do not all go to the surplus, for it is customary now to allow surrender values and paid-up insurance, but as these values are subject to a surrender charge, there is an addition to the surplus from the surrendered or lapsed policies, although the 492 OUTLINES OF ECONOMICS companies try to discourage lapsing. Out of this surplus are paid the dividends on the capital stock, if there be any, and the dividends to each policy holder, which in some cases are credited or paid annually to each policy holder, or in other cases not until the expiration of a period of years. Endowments. What is ordinarily called an endowment policy is a combination of two distinct forms of contract. A simple life insurance contract promises to pay the insured a certain sum in the event of death; a pure endowment contract would pay a certain sum if the holder of the policy survives after a period of years. A twenty-year so-called "endowment" policy com- bining these two features means that payment would be made at death if that occurred within the twenty years, or at the expira- tion of twenty years if the policy holder survives. This form of policy has been declining in popularity because in its ordinary form it is disadvantageous to the policy holder, unless he be so thriftless that he cannot be induced to save in any other way; also, if insurance could not be obtained in any other way, it might be wise to purchase such a policy, but the objects of saving and insuring can be more cheaply accomplished by separating the two features. If, instead of paying $50 for an endowment policy, the holder paid part of this for term insurance and put the remainder in a savings bank at three or four per cent compound interest, there might be more to his credit whether he lived or died. But when the loading is properly arranged, and with an annual distribution of surplus, the endowment policy performs a useful function as an encouragement of thrift. In fact, a very long term endowment maturing at, say, age sixty-five, would best meet the needs of a great many persons. These points will be made clearer by the following illustration of what becomes of the premium in the case of a ten-year endow- ment policy at age thirty-five with a premium of $107.70, when it is assumed that the mortality will be in accordance with the American Experience Table, that the company will earn three per cent on its funds, and that the expense charged each year to this policy will be as given in the following table : l 1 Report of the Wisconsin Joint Legislative Investigating Committee, 1906, P- iS3- INSURANCE 493 POLICY YEAR EXPENSE CHARGE MORTALITY CHARGE DEPOSIT I $18.40 $7.96 $81.34 2 18.40 7-31 165.77 3 18.40 6.62 253-42 4 18.40 S-89 344-43 5 18.40 5.10 438.96 6 18.40 4.26 537-17 7 18.40 3-32 639.27 8 18.40 2.32 745-43 9 18.40 1. 21 855-89 10 18.40 970.87 Totals 184.00 43-99 Industrial Insurance. The business of insuring the lives of workingmen in this country is characterized by the small amount of the average policy, the large number of lapses, and the heavy expense of solicitation. These companies say the workingman is so thriftless that it is necessary to collect the premiums through a house to house canvass by agents. The hesitancy shown by workingmen to insure in these companies is considered by some persons, however, as an evidence of their thrift. Which is the correct view will be shown by the results of an experiment which is now being tried in the state of Massachusetts. Savings banks have been authorized to organize insurance departments and to sell life insurance, but without employing paid agents or solicitors. The workingman is expected to go to the bank of his own accord. The whole system is supervised by a State Actuary and a State Medical Director, and the safety of the plan is assured by a guaran- tee fund. Three forms of policies, limited to $500, are provided for: ordinary life insurance, endowment, and a combination of life insurance and old-age annuity. This plan may prove to be a solution of the problem of old age pensions. State Insurance. Insurance is well adapted to direct manage- ment by the State because the actual conduct of the business is of a relatively simple and routine character and because the State can offer greater security and can command greater confidence 494 OUTLINES OF ECONOMICS than is possible in the case of a private corporation. Competi- tion has had the effect of causing rival companies to invent many outwardly attractive combinations of policy conditions, but on the whole it has increased rather than decreased the expense of doing the business. When the State enters the field simply as an additional competitor, as in New Zealand, its full advantage is not apparent ; but if it has a monopoly of the business and com- pels every one to insure, it perhaps can, without any selection of risks, effect the insurance at a lower price than is asked by any existing private company. 1 These considerations, however, can hardly be taken as sufficient arguments for the present assump- tion of insurance functions by the State. State Regulation. Following the example of Massachusetts in 1858, other states have appointed insurance commissioners for the supervision of this business, and the insurance laws of a single one of these states are now sufficient to make a good- sized volume. Insurance companies have found this variety of control irksome and have generally advocated federal control of insurance. Although something would be gained, it cannot be said that there is any great need of federal control of life insurance, not to mention the constitutional difficulties, because it is not absolutely necessary, as in transportation or fire insurance, that one life company do business in many states, and the people of each state should have the right to say what kind of insurance institutions they desire to have. An enumeration of the requirements in the state of New York will illustrate the nature of state regulation: A certificate of authorization must be obtained from the Superintendent of Insurance and a deposit of securities must be made. A minimum capital stock is prescribed and regulations are made concerning the investment of stock and surplus. There are also provisions relating to standard of solvency, reinsurance, limitation of risks, admission of foreign companies, examination of accounts, and annual reports. The policy must contain the entire contract, and the statements are to be taken as representations and not 1 Consult the article by M. M. Dawson in Bliss, Encyclopedia of Social Reform, new ed. INSURANCE 495 warranties. No misleading estimates and deceptive statements are to be issued for the purpose of getting business. Life insur- ance companies are to do either a participating or non-par- ticipating business, and in the former case the surplus must be annually apportioned and paid to each policy. There are further provisions regarding the valuation of policies, surrender values, discrimination, election of directors, limitation of the amount of new business each year, limitations as to expenses and salaries of officers, and standard forms of policies are prescribed for both life and fire insurance. 1 QUESTIONS 1. How do you define insurance? 2. What is a mortality table? 3. How would you find the premium for insuring a group of persons for one year for $1000 each? 4. Distinguish between reserve and surplus. 5. What is a "pure" endowment policy? 6. What are the advantages and objections of assessment insurance? 7. What has been New Zealand's experience with State insurance? 8. What is meant by the " moral hazard " ? 9. What are tontine policies? 10. Discuss life insurance investments. REFERENCES ALEXANDER, WILLIAM. The Life Insurance Company. Annals of the American Academy of Political and Social Science (a series of articles), Vol. XXVI. DAWSON, M. M. The Elements of Life Insurance and The Business of Life Insurance. FRICKE, WILLIAM A. (Compiler). Insurance A Text-book. Gow, WILLIAM. Marine Insurance. Institute of Actuaries, Text-book. KITCHIN, F. H. The Principles and Finance of Fire Insurance. MOIR, HENRY. Life Assurance Primer. New York Insurance Investigating Committee, Report, 1905, 6 vols. " Q. P." How to buy Life Insurance. WAMBAUGH, EUGENE. A Selection of Cases on Insurance. Yale Insurance Lectures, 1903-1904, 2 vols. WALFORD, CORNELIUS. The Insurance Guide and Handbook. Wisconsin Insurance Investigating Committee, Report, 1906. ZARTMAN, L. W. The Investments of Life Insurance Companies. 1 See Parker, A. J., Jr., The Insurance Law of New York, New York, 1907. CHAPTER XXIX ECONOMIC ACTIVITIES OF MUNICIPALITIES Importance of Municipal Activity. Far reaching as are the economic activities of the state and federal governments, they are surpassed in magnitude, if not in importance, by the similar ac- tivities of the municipal governments. Finance statistics furnish a rough measure of the scope of such functions. In 1902, for ex- ample, the public debt of the cities, villages, and towns ($1,387,- 316,976) was greater than the public debt of the county, territo- rial, state, and national governments combined ($1,356,485,129). The local administrative divisions, moreover, including counties, collect and spend more money year by year than the state and na- tional governments; and taking into account the fact that munici- pal functions are to a much greater degree economic than the functions of the national government, it is probable that the cities having more than 8000 inhabitants in 1902, with their current expenditures of $551,234,172, really spent more for distinctively economic purposes than the national government, with current expenditures of $617,530,137. By the use of financial statistics, moreover, we may obtain a rough idea of the relative importance of the economic as compared with the political or social activities of the cities themselves. Re- cent census bulletins have distinguished the commercial or quasi- economic receipts of cities from the general revenue receipts. In 1902 these commercial receipts constituted 22 per cent of all the revenues in cities containing over 25,000 inhabitants, and 20.7 per cent of the total revenues in cities containing over 8000 but less than 25,000 inhabitants. These figures establish a fair inference that as municipalities increase in size, a larger and larger share of the public activity is devoted to economic services. The same 496 ECONOMIC ACTIVITIES OF MUNICIPALITIES 497 phenomenon appears in the total state, county, and municipal finances of the different sections of the country. Taking the coun- try as a whole and considering all revenues except those received by the national government, 15.6 per cent are derived from com- mercial sources. In New England, with its high proportion of urban residents, 20.6 per cent of the aggregate revenues are com- mercial; in the South Central division, with its low percentage of urban population, only 13.3 per cent are commercial. Generally speaking, the economic activities of the State vary directly as the density of the population. Commonplace as such a conclusion may be, it carries with it, nevertheless, a profound significance. City life means crowding, and crowding means greater social friction or greater social soli- darity, according as the State fails or succeeds in its task of devis- ing rules by which the swarming city masses may live together, not only in peace and concord, but to better advantage and with greater profit. In the preceding pages we have emphasized again and again the necessity for increased regulation on the part of the State. Many factors cooperate to justify this thesis. But the most powerful factor of all is created by the simple interplay of two economic facts, whose importance can never be overestimated the growth of urban or semi-urban populations, and the com- parative fixity of the territory upon which those populations must dwell and work. If the position taken above be correct, we have only to glance at the steadily swelling population of our cities to understand why State control either through regulation or ownership must increase. In 1800, four inhabitants out of every one hundred dwelt in a city containing 8000 inhabitants or more. In 1900, thirty-three out of ever)' one hundred inhabitants dwelt in cities of this descrip- tion. And the movement to the cities still continues. In the states taking an interdecennial census, in 1905, 48.5 per cent of the total population dwelt in the incorporated places having 8000 inhabitants or more (in 1900), while only 45.8 percent of the popu- lation dwelt in the same places in 1900. The increase of the gen- eral population of these states between 1900 and 1905 was 9.2 per cent; the increase of their urban population as above defined 498 OUTLINES OF ECONOMICS was 15.2 per cent. In some states, and these perhaps most typical of present tendencies, a large majority of the entire population dwelt in cities of 8000 inhabitants or more, the proportion in 1905 reaching 71.7 per cent in New York, 67.4 per cent in Massachusetts, and 66.4 per cent in Rhode Island. Even in Illinois, a typical state of our greatest agricultural region, more than half the popu- lation dwelt in such cities, according to census estimates, in 1906. To-day the city of New York contains a larger population than did the whole United States at the beginning of Washington's first administration; it spends more money than the national govern- ment did at any time previous to the Civil War; and its annual budget largely surpasses in amount that of Turkey, Portugal, Aus- tria-Hungary, China, Holland, Norway, or Sweden. Character of Municipal Activities. But there is another and a more important reason why the activities of the State must multi- ply and become increasingly economic as a larger and larger pro- portion of the population make their homes in the cities. The mere agglomeration of people in a restricted locality creates a vast fund of wealth, which occupies, as it increases, a larger and larger share of the public attention. Land values go up, the streets of the city acquire enormous value, the opportunities of serving the dense city population in a variety of ways multiply; in short, the public domain of the city is enormously enhanced in value, and the city government is forced to give more and more thought to its proper exploitation and development. The typical economic problem of the modern city is summed up in the one word " franchise "; and the municipal franchise is largely a product of mere agglomera- tion. This fund of franchise values has perhaps done more than any- thing else to transform the character of city government. Where the people in their collective capacity have little or no property and are forced to raise all public revenue by taxation, there is likely to be not only a passive and fitful interest in public affairs, but the activity of the government is equally apt to be comprised within very narrow limits. Give the people, however, a public treasure to preserve, a patrimony to protect, valuable franchises to guard from pillage, and exploit for the public profit, and their ECONOMIC ACTIVITIES OF MUNICIPALITIES 499 interest is aroused. The public by very necessity is forced to abandon its old attitude of laissez-faire, and do something more than maintain a balance between private interests through its police and courts. It becomes a proprietor; its household, its property, its bank account grow; its interests become more and more economic. " In earlier days, even the most elementary public functions were performed by the individual. He paved, cleaned, and lighted the street before his door. He was his own constable. Such health protection as he enjoyed was the result of his own vigilance. Education was conducted at home or by the church. The library was a priestly possession, as was all learning. His house was his castle, even in the midst of the city, and society offered him little save the administration of justice and protection from foreign foes. "To-day the city protects his life and his property from injury. It safe- guards his health in countless ways. It cleans and lights his streets, collects his garbage, supplies him with employees through free employment bureaus. It educates his children, supplies them with books, and in many instances with food. It offers him a library, and through the opening of branches almost brings it to his door. It offers nature in the parks ; supplies him with opportunities for recreation and pleasure through concerts, lectures, and the like. It maintains a public market; administers justice; supplies nurses, physicians, and hospital service, as well as a cemetery for burial. It takes the refuse from his door and brings back water, gas, and frequently heat and power at the same time. It inspects his food, protects his life and that of his children through public oversight of the conditions of factory labor. It safeguards him from contagious disease, facilitates communication upon the streets, and in some instances offers opportunities for higher technical and professional education." * We have cited this striking passage in order to bring home viv- idly to the mind of the reader the fact that the modern city is a vast household, with human wants and interests similar to those which on a more restricted scale absorb the interests of the ordi- nary householder. It is important, however, to look briefly at municipal activities in a somewhat more prosaic way. If we classify the functions commonly assumed by municipalities either in this country or Europe, paying more attention to the newer and more debatable functions, because it is these which give rise to real problems, we find that they fall naturally into the following groups: I. First, the protective Junctions, brought to 1 Frederic C. Howe, The City the Hope of Democracy, pp. 28, 29. 500 OUTLINES OF ECONOMICS mind by the police, the courts, the fire department. II. Secondly, those activities devoted to sanitation and the public health. These functions, which are exceedingly various, are represented by mu- nicipal ownership of slaughterhouses, ice factories, baths, laun- dries, model tenements, cemeteries, sewers, by municipal garbage removal, street cleaning, hospitals, nurses and doctors, and in a few cities even by the ownership and control of taverns and sa- loons. III. Charities and corrections. This group comprehends not only the almshouses and jails, but the labor colonies and pawn shops which are maintained in a few European cities. IV. Educational and cultural; for example, schools, parks, li- braries, and museums. V. The activities included in this group are commercial and developmental. The educational functions are of course developmental; but the markets, docks, harbors, streets, bridges, employment and statistical bureaus included in this group are maintained more for the purpose of developing industry and trade than the human mind and faculties. VI. Municipal monopolies; e.g. water, gas, electric lighting, street railway, telephone companies, and the like. Before considering the unsettled municipal problems which center chiefly around the activities classified in V and VI, let us examine briefly the characteristics of the more economic and com- mercial functions which have been generally assumed by Ameri- can municipalities. Wharves and docks, ferries and quays, have been acquired and their operation undertaken by the public, be- cause trade and commerce, in general, the whole business of the city, are intimately dependent upon their proper management in the public interest, while at the same time they give rise to no intricate technical or administrative problems. Much the same characteristics mark highways, bridges, and canals. A few years ago many of the highways were privately owned. The State took them over, because the payment of tolls was exceedingly incon- venient and hampered commerce, because the question of price or profit was insignificant in comparison with the general public importance of free communication, and because the management of highways and bridges is comparatively easy and simple. Water- works likewise are owned and satisfactorily managed by most of ECONOMIC ACTIVITIES OF MUNICIPALITIES 50! the larger American municipalities. Here again the reasons are clear. As in the case of streets and roads, the public health and convenience are so overwhelmingly important in this connection that the question of price and profit becomes of secondary impor- tance, while the operation of the industry itself is simple and easy, although the installation of the plant may acquire enormous capi- tal and great engineering skill. All these quasi-commercial undertakings, then, which have been generally assumed by American municipalities are characterized by five important qualities: (a) all of them are natural monopo- lies ; (b) the interest of practically the whole community is vi- tally dependent upon their proper operation ; (c) because they touch the consumer and taxpayer so constantly, the quality of the service is incessantly subjected to the criticism of taxpayers and voters; (d) in all of them profit and price per unit of service are secondary considerations, wholly outweighed by larger con- siderations of public health or convenience, and (e) all of them possess the " invariable routine-like character " which Jevons mentions, and are capable of operation by simple, general rules. The Present Problem. These five criteria of public industries may be used affirmatively, but not negatively; i.e. it is logical to conclude that any industry which possesses these qualifications may with safety be assumed by the public, but it is illogical to infer that any industry which does not possess all of them must be left to private management. Indeed, the burning question of to-day is just this: whether street railways which are not easily managed, and lighting plants or telephone systems which are nei- ther capable of operation by simple rules nor so vitally connected with the public welfare as water companies or streets and bridges, should be municipalized. Before discussing municipal owner- ship and management, however, it is necessary to consider the alternatives which have been suggested. Protection through Competition. We mention the discarded idea that good service and reasonable prices will be secured by the pressure of competition, merely to emphasize the progress that has been made in the past few years. A generation ago, the be- lief was still prevalent that competition would protect the public 502 OUTLINES OF ECONOMICS from extortion. To-day, it is everywhere admitted that the public industries which we are discussing are municipal monopolies above and beyond competitive control. Consolidation of competing companies is the recognized rule. Practically all the street rail- way lines have been brought under one control in Brooklyn, Balti- more, Boston, Philadelphia, Buffalo, Cincinnati, Pittsburg; and in other cities where the control is not absolutely unified, there are likely to be only two or three systems and these working in harmony and cooperation. In 1890 more than three fourths of the street railway companies had less than ten miles of line, and together such small lines represented more than two fifths of the total mileage of the country. In 1902, however, less than half of the companies operated less than ten miles of line, and in all, such small lines represented less than one eighth of the total mileage. In 1890, moreover, only two companies had lines ex- ceeding one hundred miles in length, and their combined mileage was less than one twentieth of the total. In 1892, twenty -five railways exceeded this limit, and together they embraced more than one fourth of the total mileage of the country. 1 Moreover, there has been a consolidation of ownership similar to the consolidation of plants. Great syndicates have been formed, which operate in many cities and often control the gas and electric plants as well as the street railway systems. Such combinations exist in Pittsburg, Baltimore, and many other cities. "The Interstate Railways Company, which succeeded the United Power and Transportation Company in 1902, controls about fifteen street railway systems in Pennsylvania, New Jersey, and Delaware, together with two electric light companies. It has also acquired the stock and franchises of numerous new railway companies. Some of the lines controlled are more or less closely connected, and others may be brought into connec- tion later, but the primary purpose has been, apparently, not so much to make a single great system as to provide a convenient form of investment. The American Railways Company of Phil- adelphia controls eight or nine widely separated street railways and lighting plants in Ohio, Illinois, New Jersey, and Penn- 1 Special Census Report, Street and Electric Railways, p. 121. ECONOMIC ACTIVITIES OF MUNICIPALITIES 503 sylvania, and also a minority interest in the stock of the Chicago Union Traction Company. The Railways Company General con- trols stocks of seven railway lines, and lighting plants in New York, Pennsylvania, and Michigan." l The franchises now in the possession of these large combina- tions are of enormous value. In the early part of this chapter attention was called to the stupendous size of the American mu- nicipal debt, amounting in 1902 to $1,387,316,976. The munici- pal franchises now in possession of private corporations, accord- ing to trustworthy computations, exceed in value the enormous debt of our cities; so that if the latter had undertaken these serv- ices themselves, managed them as efficiently as the private com- panies, and charged the same prices, they would now possess assets in excess of their fiscal obligations. Indeed, in many of the larger cities of this country, the franchises of the street rail- way companies alone exceed in value the whole municipal debt. So rapid has the movement of monopoly been in the industries under consideration, so deeply has the eager struggle for these great franchise values corrupted city government, that one no longer hears of regulation through competition. The private cor- porations themselves admit to-day not only that services and prices must be regulated by the public, but that their business must be taken out of politics. The question has ceased to be: Shall pub- lic utilities be controlled? It has become: Can they be controlled by anything short of municipal ownership and management? Methods of Public Regulation. The alternative most fre- quently suggested is public regulation. There are many kinds of regulation, and one of these we have had, potentially at least, during the entire period in which our cities have been pillaged and our municipal councils corrupted. All the time this has been going on, the state legislatures have had the right to regulate, if they saw fit; but they seldom saw fit. General regulation thus amounts to nothing. Special methods and special machinery must be devised, if regulation is to be made effective. 1 A description of the extent of such combinations together with other suggestive details may be found in Chapter VIII of the Census Report, Street and Electric Railways, from which the above quotation is taken. 504 OUTLINES OF ECONOMICS The second method we may for brevity call the Commission Method, although the mere fact that there is to be a commission amounts to little, while the character of the men on the commis- sion and the manner in which they are to conduct their regulation amounts to a very great deal. Adequate regulation through a commission, to our mind, contemplates the following specific pro- visions: (a) That cities, at least of the larger size, shall be per- mitted either to undertake and manage public utilities on their own account, to sell or rent franchises on the best terms, or con- demn and purchase under the power of eminent domain the existing franchises and property of public utility companies pos- sessing perpetual franchises; (b) that, whether under public or private management, public utilities shall, so far as possible, be strictly monopolized, or in other words, there shall hereafter be no unnecessary duplication of plant for which consumers are forced to pay; (c) that the service and charges of both public and pri- vate plants shall be reasonable, any group (say of twenty-five con- sumers) having the right to test such reasonableness before the commission; (d) that to secure the necessary basis for a judg- ment of what constitutes reasonableness, the commission shall make a valuation of all public utilities; (e) and thereafter exer- cise a strict control over extensions, improvements, and the issue of new securities; (/) that the commission shall inspect the serv- ice or products of public utility companies and shall introduce a system of uniform accounting in both public and private com- panies; (g) and publish annually, or at shorter periods, compara- tive statistics of revenue, cost, and service, in order that the efficiency of public and private service may be contrasted. This last provision of publicity is exceedingly important. It will not only spur both private and public companies to make as good a record as possible, but will exercise a most wholesome influence upon the commission itself. In Massachusetts, for ex- ample, the Board of Gas and Electric Light Commissioners has been severely censured in the past for its secrecy and failure to publish the data by which a judgment could be rendered concern- ing the reasonableness of the charges of private companies. " If the Board," a prominent newspaper once said, '' is empowered to ECONOMIC ACTIVITIES OF MUNICIPALITIES 505 keep secret what information it is pleased to, how are people to know that they may not become a mere agency of the monopolies to cover up and justify their possible undue exactions." With publicity of a really adequate kind, this criticism never would have been made. An exceedingly important part of the scheme of regulation is that just as many difficulties as possible shall be anticipated and specifically arranged for in the original charter. Regulation thus becomes largely an interpretation of accepted principles, not the formulation of principles de novo. New York City, for instance, used its credit to secure the construction of the subway and then leased it to the Interborough Rapid Transit Company on such terms that in fifty years the principal and interest of the debt will have been paid, and the city will own the subway practically without expense. Another illustration of the favorable terms which a city may secure by careful bargaining is found in the arrangement which the city of Chicago made in 1907 with the Chicago City Railway and the Chicago Union Traction Company. The companies not only agreed to rebuild and improve the whole street railway system, to provide new through routes and addi- tional transfers, and to operate under a license revocable at any time by the city upon payment of the agreed value of the roads plus the cost of improvements, but the city is to exercise a large degree of control over the frequency of the service and supervise rigidly the accounts of the company, while all profits above 5 per cent on the actual investment are to be shared between the city and the railways, 55 per cent to the former and 45 per cent to the latter. 1 We cite these examples partially to show that our cities are gradually learning to drive better bargains with the corporations than in the past, but principally to emphasize the fact that such freedom of contract would be perfectly possible under the com- mission form of regulation, and would at the same time facilitate 1 In speaking of these terms as "favorable," we merely mean more advanta- geous to the city than has usually characterized the franchise grants of the past. In this particular case it is possible that Chicago might have obtained even better terms, or that municipal ownership and management might have been the wisest solution of the problem. i a& JaxtmBiE tflai Ac I.' . .-,">'. -v ;:; : >- .. '.""-_ ::.: -,:- 19 'HEEL :-:i viiu-i vi .HUT" di ; i. i nm rr TWRH rmnaMBBBaE^n A DBS sft gmran nTfSirfefniiinT r-L L-- i rr.' :; -v:.-. : - -..:-. . ; ::_-.-:: :: R die T?sute nasEcntsTT UllHTQlTIT. V-- .;-- :- -- in lafK,, 508 OUTLINES OF ECONOMICS cities supplied more consumers and charged on the average lower rates than the private companies. Similarly, in the United States, a large majority of the water works are now owned by municipali- ties, while in 1902 the municipalities owned 815 out of the 3620 central electrical stations, employing 2467 out of the 23,330 wage earners employed, and supplying 195,904,439 out of the aggre- gate 2,507,051,115 kilowatt hours of power. At first blush, it would appear that the safest arguments for or against municipal ownership might be derived from a comparative study of munici- pal and private operation. Such, however, is not the case. Owing to the predominating importance of technical questions in such comparisons, none but expert engineers or accountants are com- petent to draw conclusions, and unfortunately the conclusions of the experts are in hopeless conflict. The expert representatives of the private companies return from their study of public manage- ment with their opinions unchanged; while the expert defendants of municipal ownership find in the results of English or American municipalization little but confirmation of their existing opin- ions. In fact, we are forced back upon more or less general considerations. If we carefully examine the important arguments in favor of municipal management, we shall find that many of them assume that regulation of the character previously described is impossible, (a) The most emphasis is placed by defendants of municipal management upon the fact that private ownership in the past has resulted in widespread political corruption. No one, to-day, de- nies this truth. But never in the past have we attempted the kind of regulation which we may expect in the future, and which has already been started, though not perfected, in the states of New York and Wisconsin. This species of regulation contemplates a valuation of public and private plants, with prevention of stock watering and reduction of profits to a reasonable level. If we can sell or rent franchises (not give them away), prevent the capi- talization of excessive profits, and keep dividends on a rational basis, the raison d'etre of bribery and corruption disappears. Corporations cannot afford to pay bribes for the opportunity of earning reasonable profits. ECONOMIC ACTIVITIES OF MUNICIPALITIES 509 (6) The second great argument for municipal management is that it will improve the public service by increasing its extent, dignity, and importance. This position is probably well taken. The supreme necessity for judicial purity has given us pure courts. The supreme necessity for decent management of public utilities, if they were undertaken by our municipal governments, would, it is probable, give us decent management. Certainly, at least, every one agrees that it would be suicidal to introduce municipal management without putting it on a civil service basis. (c) The next characteristic of public industry is as often cited against as in favor of municipal management. Except for high- class salaried men, where the reverse is true, the State treats its employees unusually well, paying larger wages for shorter hours of labor than most private employers. This will appear as a vir- tue or defect, according to our viewpoint. If we believe that the State should be a model employer, and pay fair living wages whether private employers do so or not, this characteristic of municipal management will appear as a strong reason for its introduction. If, on the other hand, we concentrate our thoughts on cheapness of production, and neglect all considerations of the welfare of the producers, we must score a point under this head in favor of private operation. (d) One of the strongest charges against municipal ownership is based upon the fairness and humanity which the State shows in dealing with its employees. It is charged that such treatment tends to corrupt the public servant, and to destroy his political independence, making him a subservient henchman and sup- porter of the administration under which he happens to be work- ing. That there is danger of such "pernicious activity" on the part of office holders, no reasonable student of public affairs will deny. In the recent Chicago city campaign, when, as it happened, municipal ownership was the burning issue, the head of the police department attempted, and partially succeeded, in forcing almost the entire police force to work for the election of one of the can- didates. But this candidate was defeated, despite the police, and the police official is at the present writing under criminal indictment. 510 OUTLINES OF ECONOMICS This rebuke of police interference is of crucial import. It calls attention to the fact that American voters have learned to resent such interference. In scores of city elections in the last five years the independent political sense of the people has triumphed over office-holding cliques who attempted to perpetuate their sway; and not only has the electorate shown its ability to control the office holders, but with every year it has become more and more difficult for political bosses to dictate to the office holders them- selves. Without civil service, of course, municipal management is unworthy of consideration. With it, however, the whole sting of this criticism vanishes. Not only will public employees cease to be of one political faith, but the better conditions of employment offered by the State will probably cease to make a petty grafter of the public employee. The reason for the last statement is plain. If the State pays $4.00 a day for carpenters, while private employers offer but $3.00, the $1.00 difference may have either of two effects: under the spoils system, it will go to indifferent or average workmen in the form of a pauperizing bounty; but under the merit system, it will bring to the State the best skill in the occupation. Better conditions of employment, where the merit system prevails, merely "concentrate competition upon efficiency." Moreover, it may be remarked that it is not open to opponents of municipal ownership to assert that: "all this argument pre- supposes appointment by merit, but we have not yet succeeded in introducing the merit system." Such an argument may be turned against its supporters by the countercharge, which is equally true, that we have not yet succeeded in introducing the advanced form of public regulation which is the only salvation and the last defense of the adherents of private management. In point of fact, the whole discussion of municipal management pre- supposes certain reasonable improvements both in the character of public regulation and the character of the public service; for unless we can regulate public utility companies far more satisfac- torily than we have done in the past, we shall unquestionably and inevitably come to municipal management. (e) Finally, there is another fundamental characteristic of pub- ECONOMIC ACTIVITIES OF MUNICIPALITIES 511 lie management which we shall regard as a virtue or defect accord- ing to our political philosophy. Under private ownership, prices are determined by considerations of profit; and persons who can- not afford to pay the price of the service must go without it, although they may be sadly in need of it. Under public manage- ment, however, rates are determined by general social utility and are frequently placed at less than the cost of services. Where this happens, part of the expense of maintaining the industry falls upon the general body of taxpayers, and it must be remembered in this connection that probably a majority of the voters of the present time pay no direct taxes. To persons of broad social sym- pathies, confident of the honesty of democracy and anxious to turn the powers of the State to ameliorating the lot of the poor and unfortunate, this prospect of modifying charges by considerations of social policy offers no terrors. To reduce street-car fares, for instance, during the hours when our poorly paid workmen are riding to their work, and in general to adjust prices so as to sub- serve the highest social welfare, appears as an honorable oppor- tunity, not as a dishonorable temptation. To persons of a harsher social creed and a more pessimistic social philosophy, however, the adjustment of rates to the greatest good of the greatest number seems pernicious and dangerous. Whether public management can fairly be expected to be as efficient and progressive as private management is a question which does not lend itself to brief discussion. At present, however, we are unquestionably in an experimental stage; and it is desirable not only that the commission plan shall be given a thorough trial, but that public ownership and operation shall be tested under such conditions as to enable an intelligent compari- son to be made with the results of private management. States having a commission empowered to enforce uniform accounting will constitute great economic laboratories in this connection during the next quarter of a century. In the end, however, it may be that less emphasis will be placed upon cost of service and more emphasis upon considerations of general social welfare than is now done. Even if it shall transpire that private management under a state commission is cheaper and more progressive than 512 OUTLINES OF ECONOMICS public management, the latter will still have a strong case in the plea that it adapts the service to the greatest social welfare, abol- ishes the struggle between the franchise corporations and the pub- lic, dignifies municipal government, and, by enlarging the public interests of the people, breeds in them a finer spirit of cooperation and a deeper sense of social solidarity. At bottom this question is not so much economic as social; and in the end that method of management will prevail that best subserves the social well- being, not that method of management which is cheapest. Municipal Home Rule. The problem of municipal ownership, as has been suggested, presents a contest between the highest form of regulation which we can reasonably expect versus the best spe- cies of municipal management which we are justified in anticipat- ing. It is a conflict of potentialities. Whatever its outcome, there is one important step which should be taken at once : cities should be endowed with the power of introducing municipal manage- ment, if they wish to try the experiment. In many cities to-day private corporations have secured, often by bribery, perpetual franchises in which rates and other conditions are authorized that are manifestly unjust to the public. In such a situation the city can do nothing but condemn, or threaten to condemn, the fran- chise and property under its powers of eminent domain. Munici- pal ownership, or the threat of municipal ownership, under which the corporation might possibly acquiesce in reasonable regulation offers the only remedy for this condition of affairs. Worse than the above situation, however, is the utter helplessness of those city governments which can neither undertake the opera- tion of public utilities themselves, nor regulate the rates and serv- ice of the private companies which control them; while the state legislature, which has retained the power of regulation, does noth- ing. This deadlock delivers over the city bound and captive into the hands of the corporations. Even if the city decides to sell or rent its new franchises, even if it prefers the conservative policy of private management, it cannot dispose of its valuable rights to the best advantage, unless it possesses the alternative of public management with which to force the hand of the corporation. It is sometimes thought that by offering franchises to the highest ECONOMIC ACTIVITIES OF MUNICIPALITIES 513 bidder, competition among private corporations will bring reason- able and remunerative offers. This, however, is not the case. The only bidder in most instances is the corporation already in power, and where competitive bidding is required by law, "the local governments have obtained no more favorable terms than were prescribed as a minimum by state or local legislation. The reason is obvious. The proposed franchise is almost invariably petitioned for in the first instance by a duly organized corpora- tion, which asks the right to occupy specifically named streets, and which has carefully considered, in advance, construction plans and probably financial results. Even when a considerable period of time is allowed for others to investigate the proposed plan and to estimate the value of the franchise, these possible competitors are at a great disadvantage as compared with the original pro- moters. It often happens that there are few people in a city who are familiar with the street-railway business and at the same time in command of the necessary capital. Effective competition is still less likely when the proposed railway is in the nature of an extension or outlying line, the success of which will depend almost wholly upon cooperation with existing lines. The process of con- solidation among street railways has gone so far in most large cities that there is only one important system in existence with which a new railway can be connected." l QUESTIONS 1. What connection is there between governmental activity and popula- tion ? Explain. 2. What is the essential characteristic of municipal government ? 3. Classify the functions commonly exercised by cities, and enumerate the most significant characteristics which they possess in common. 4. What has been the most fertile source of political corruption in cities? Would it disappear with adequate regulation ? 5. Why has general regulation been ineffective? 6. Under a system of adequate regulation, would it be desirable to en- courage monopoly by chartering only one company with an indeterminate franchise ? Why ? 7. Is it desirable that charters should contain specific provisions respect- ing taxes, rates, and quality of service? Why? 1 Census Report, "Street and Electric Railways, 1902," p. 128. 2L 514 OUTLINES OF ECONOMICS 8. Under a proper system of regulation, would the increase in franchise values owing to growth of population and wealth (the unearned increment) benefit the public or the private company ? 9. Would municipal plants pay taxes under existing tax laws? Should they pay such taxes? 10. Assuming that the poorer classes pay a larger share of their income for street-railway transportation than the wealthier classes, would it be de- sirable for private companies to earn large profits, even if such profits were turned over in whole or part to the city government ? n. Under the same hypothesis, would it be legitimate for a municipal street railway to charge passengers less than cost, meeting the deficit by tax levies ? 12. What advantages are possible from municipal management that can- not be secured from private operation under good regulation ? 13. Why should municipalities be granted the option of acquiring and managing the public utilities? REFERENCES BEMIS, E. W., and others. Municipal Monopolies. DARWIN, L. Municipal Trade, passim. ELY, R. T. Evolution of Industrial Society, Part II, Chap. V, "Municipal Ownership of Natural Monopolies," pp. 225-254. FOOTE, A. R. Municipal Public Service Industries. HOWE, F. C. The City the Hope of Democracy, passim. "Municipal Ownership in Great Britain," Bulletin of the [U.S.] Bureau of Labor No. 62, January, 1906. JOHNSON, E. R. "Public Regulation of Street Railway Transportation," Annals of the American Academy of Political and Social Science, March, 1907, pp. 31-47. Municipal A/airs, Vol. IV, No. i, 1900; and Vol. VI, No. 4, 1002-1903. POND, O. L. "Municipal Control of Public Utilities," Columbia Studies in History, Economics, and Public Law, Vol. XXV. Proceedings of the Annual Meetings of the National Municipal League. Report of the London Commission on London Traffic, 1905. Report of the Special Committee of the State of Massachusetts, 1898 : " The Relations between Cities and Towns and Street Railway Companies." Special Census Report, Street and Electric Railways, 1002. Special Census Report, Telephones and Telegraphs, 1002. Special Census Report, Central Electric Light and Power Stations, 1902. United States Supreme Court Reports, Vol. 143, p. 339. San Diego Land Co. vs. National City, etc. CHAPTER XXX SOCIALISM Socialism Defined. Socialists seek the establishment of in- dustrial democracy through the instrumentality of the State. Our political organization is to become also an economic industrial organization. Socialism contemplates an expansion of the busi- ness functions of government until the more important businesses are absorbed. Private property in profit-producing capital and rent-producing land is to be abolished. Socialists make no war upon capital; what they object to is the private capitalist. They desire to socialize capital and to abolish capitalists as a distinct class. Their ideal, then, is not, as is supposed by the uninformed, an equal division of existing wealth, but a change in the funda- mental conditions governing the acquisition of incomes. Socialists usually say that labor creates all wealth. No rational socialist means thereby to deny that land and capital are factors of production, but as these are passive factors, they hold that their owners ought not to receive a share of the product unless they personally are useful members of the community. Labor is. the active factor, and all production is carried on for the sake of man. Land and capital are simply the tools of man. Socialists admit that the owners of these tools must receive a return for them when industry is organized as it is now; hence they desire that these tools should become public property. They wish to make of uni- versal application the command of the Apostle Paul, " If a man will not work, neither let him eat." Distributive Justice. Socialists, in common with a great many other people who do not accept their attitude toward the organiza- tion of industry, desire distributive justice. As to what constitutes justice they are not wholly agreed, but there is among them a tendency to accept equality or needs as a basis rather than produc- 5*5 516 OUTLINES OF ECONOMICS tivity. Some, it is true, have advocated an almost mechanical equality, but most socialists to-day would regard the question of a precise standard for the distribution of income as not of present importance. They are simply agreed in this, that the distribution of the present day is wholly unjust. They think that men to-day do not have equal chances in life, that there is too much privilege. The big rewards, they think, to-day go to those who are shrewd and cunning, who are skillful in manipulating stocks and bonds, or who are favored by inheritance with a good start, rather than to those who render great social service. The inventors, poets, authors, scientists, skilled mechanics, and factory managers, they allege, are the large producers, but they do not get the big prizes. Varieties of Socialism. The foregoing characterization ap- plies to most persons who have been called socialists, but the genus contains a number of species which should be distinguished. (i) One group has been called " Utopian." There are those who might object to this term on the ground that all of them are Utopian. Nevertheless, some are more so than others. This first group contains those who have become impressed with the evils of the present competitive system and propose the collective owner- ship of the means of production as a remedy, in much the same spirit with which a physician writes a prescription to cure his patient. There have been many attempts to picture to us how smoothly things would proceed if men could only be persuaded to try the collective ownership of land and capital. As a type of this class we may take Robert Owen. His life was contemporane- ous with the Industrial Revolution in England, he himself being a successful manufacturer. He saw with his own eyes the evils of unrestricted competition, and was filled with an earnest desire to better the condition of the working classes. He is remembered as a factory reformer and promoter of voluntary cooperation, but yet he regarded these efforts as not sufficiently radical. He thought human nature must be reformed by careful training from child- hood in an atmosphere of association, instead of the self-seeking, commercial atmosphere which surrounded him. He spent his large fortune in an attempt to carry out his ideas regarding the reconstruction of society. Among his projects was the founding SOCIALISM 517 of a colony at New Harmony, Indiana, where no private property or competition should exist. After a continuance of two years, the experiment ended, as most other similar enterprises have, a complete failure. In this group would also be placed Saint- Simon, Fourier, Cabet, Blanc, 1 and Bellamy. (2) The " Marxian " socialists call themselves " scientific," as distinguished from the idealistic writers just mentioned. They insist that they have no cure-all for the ills of society. Socialism in their eyes is, in the main, only an explanation of what is happen- ing. The private capitalistic system is breaking down, they say, and the logical result must be the collective ownership of the means of production as the next stage in social evolution. They say that setting aside all question of " ought " or " desirability," collective ownership is coming, and we might as well adjust our- selves to it. The four leading features of the Marxian philoso- phy are: (a) the study of society as an evolutionary product ; (b) the economic interpretation of history, according to which our whole social life, including our ideas concerning religion, art, marriage, etc., are but a reflex of past and present economic conditions; (c) the doctrine of surplus value, according to which the income of the capitalist class does not represent a return for abstinence, but results from the fact that through their ownership of the means of production they can compel the laboring class to work for them a longer number of hours than is necessary to pro- duce the wages which the laborers receive. What is produced in this additional number of hours is the source of capitalist income; and (d) the doctrine of the class struggle, which finds a deep antag- onism between the capitalist class and the laboring class, that can only result in the overthrow of the capitalist class and the tri- umph of the laboring class. Most socialists now believe that this victory will be won without bloodshed, as a result of a gradual increase in the strength of the socialist party as a political organiza- tion. (3) The Fabian Socialists, of whom the members of the Fabian Society of England are types, have disapproved both of the 1 Louis Blanc was less " Utopian " than the others. He was transitional and in reality paved the way for the German and later "scientific" movement. 518 OUTLINES OF ECONOMICS founding of Utopian settlements and of the philosophy of Marx. The aim of this society has been to spread socialistic ideas by the dissemination of knowledge on the subject, rather than by an organized political movement, advocating this or that reform as opportunity indicated. The membership has come largely from the educated middle class, and has never been very large, although the society has exercised considerable influence. Practically, some of the conservative members of the Marxian school, such as Bernstein, in Germany, and Jaur^s, in France, do not differ greatly from the Fabians. The following words of Jaures on the method of realizing the socialist ideal are of interest in this connection : "All Socialists, indeed, some openly, others with infinite precautions, some with a mischievous Viennese good-nature, declare it to be untrue that, taken as a whole, the economic material condition of the proletariat is getting worse and worse. It must be conceded, after taking account of the tendency to sink and the tendency to rise, that in the immediate reality of life, the tendency to sink is not the stronger. Once this has been granted, it is no longer pos- sible to repeat after Marx and Engels that the capitalist system will perish because it does not insure to those whom it exploits the minimum necessities of life. It follows from the same admission that it has also become puerile to expect that an economic cataclysm, menacing the proletariat in its very existence, will bring about, by the revolt of the instinct of self-perservation, the ' violent overthrow of the bourgeoisie.' "It is not by an unexpected counter-stroke of political agitation that the proletariat will gain supreme power, but by the methodical and legal organi- zation of its own forces under the law of the democracy and universal suffrage. It is not by the collapse of the capitalistic bourgeoisie, but by the growth of the proletariat, that the Communist order will gradually install itself in our society." l (4) The Christian socialists. About the middle of the nine- teenth century, such men as Kingsley, Maurice, and Hughes in England were much impressed by the misery of the poor, arid they attacked the competitive system as being responsible for the evils which they saw. Voluntary cooperation and the elevation of the workingman's character seemed to them the proper remedies. Thus their theories hardly fall under the head of socialism as we have defined the term. In Germany and France, also, social 1 Studies in Socialism (trans, by M. Minturn), pp. 167-169. SOCIALISM 519 movements have been organized by adherents of both Protestant and Catholic Churches. In the United States all shades of opinion have been included under Christian socialism, but the term should apply only to those who advocate the collective ownership of the means of production on the ground primarily that this is required by the teaching of the Christian religion. (5) State socialism is a term frequently used in German dis- cussion to designate those who favor an extension of the economic functions of government without any great change in existing class relations. (6) " Socialists of the chair " (Kathedersozialismus) refers to the university professors who have advocated State interference with property rights to any extent demanded by public welfare, and have opposed the extreme laissez-faire doctrines of the older economists. These men are not to be classed as socialists, the term being used as a reproach by their conservative opponents, and the designation has now chiefly historical significance. Communism. Communism was the term employed by Karl Marx to distinguish his own philosophy from the " Utopian" schemes of such men as Owen, which he termed socialistic. But to-day the reverse has become the common usage. Communism now very generally signifies the abolition of private property not only in production goods, but also in consumption goods, whereas socialists contemplate the retention of private property in income. In this case there would be provision of private property for every one, and in this respect socialists emphasize and extend the idea of private property. Socialism an Extension of Existing Institutions. Our govern- ment owns the post office; most governments the telegraph. Nearly all own the wagon roads. Some own the canals and rail- ways. Many governments own factories. Probably every na- tional government does at least a little manufacturing. Most governments cultivate forests, and some cultivate arable land. We have only to imagine an extension of what already exists until government enterprise dominates in manufactures, mining, trans- portation, commerce, and carries on, in short, most productive enterprises, and we have socialism pure and simple. 520 OUTLINES OF ECONOMICS But saying that socialism is an extension of existing institutions may lead to a misconception. The elimination of private capital- ism is supposed to work a most radical change in many branches of our social life. The commercial spirit would be abolished, and with it all that is dependent upon it. We are trained, it is alleged, to-day from childhood up to try to "make money," and this ac- centuates the selfish elements in our nature; and it is therefore maintained that our present system does nothing to promote, and does much to hinder, the development of the brotherly spirit. The Strength of Socialism. Socialism makes perhaps its strongest claim in its plea, first, for a scientific organization of the productive forces of society, and second, for a just distribution of the annual social income. It is said that the present production of economic goods is small in proportion to population, but the socialist replies, "Naturally enough. Competition is wasteful. Two railways are built where one would suffice. Two trains run parallel between two cities where one would serve the public equally well. Three times as many milk wagons, horses, and drivers are required to serve the people with milk as would suffice if the milk business were organized like the mail distribution in cities. Look at the shops, wholesale and retail, and see the waste of human force. Without competition, the whole dry goods and grocery business could be carried on with a third of the present economic expenditure of force. Reflect on all the idle classes in modern society. Socialism would set everybody to work, and, making each one dependent on his own exertions for success, would stimu- late all energies." The argument is a telling one, but it does not prove its point unless we grant that the present waste and idle- ness cannot be suppressed or greatly diminished without a depar- ture from the fundamental principles of our present industrial order, or that the waste and idleness are not counterbalanced by advantages. Justice is a strong plea in the socialist philosophy. It cannot be for one moment claimed that each one's income is at present in proportion to his services to humanity. Income in proportion to industrial merit is attractive to an ethical sentiment. But can- not we approximate justice in distribution on the basis of the exist- SOCIALISM 521 ing order? There is nothing distinctively socialistic about the desire for distributive justice. It is a feeling that actuates those who work for the control of monopolies and corporations, for tax reform, regulation of inheritances, etc. The socialist simply differs from these people in his method of attaining his ideal. The socialist criticism of the present regime is especially severe in the matter of unemployment. There are always some men who are able and willing to work, who are out of jobs, and periodic- ally, with the coming of crises and depressions, the lack of em- ployment becomes widespread. There is, of course, no lack of need for additional goods; the difficulty is entirely a matter of business organization. Again, it is urged that to-day goods are made for sale, not for use, as they would be under the socialistic regime. Adulteration, deception, and "cheap and nasty" goods are the direct outcome of a system of private capitalism. In the socialistic state we are told the business of the shopkeeper is to help you find what you really need; at the present time it is to his interest to persuade you to buy what you do not need or what will give him the greatest profit. The spirit of competition is to the socialist simply warfare. In every business establishment a good deal of the most highly paid labor is devoted, not to the pro- duction of goods, but to finding a market. Ability to fight one's competitor is quite as essential in business as is the ability to turn out good products. The Weakness of Socialism. (i) Strong as may be the fore- going indictment of the existing industrial system, it is not sufficient to indicate that socialism is to be the necessary or the desirable outcome. The modern machine age is little more than a century old, and some of its most important phases are very recent. The dire predictions made by Karl Marx and his followers on the strength of some of the earliest phenomena of the factory system have not been borne out, and similarly the evils of to-day may possibly be very largely eliminated without departing from our fundamental institutions. In short, the first weak point in the socialist's position is that he attempts to predict the course of economic evolution too far in advance. That we shall have a juster distribution of wealth in the future, and that we shall elimi- 522 OUTLINES OF ECONOMICS nate many of the present wastes of production seems probable, but whether this will be accomplished by a socialistic organization or not, it would be hazardous to predict. It is desirable to have ideals to work toward, but we should not pin our faith now to a future method for attaining them, for no one can say that the collective ownership of all of the important means of production presents a question that needs to be decided now. (2) The socialist underestimates the efficiency of the present system. To-day there is a premium on energy and thrift. Much may be wasted, but much is also produced. That socialism would result in a larger sum total of goods for consumption has never been proved. But on the other hand, we can say that the present regime is continually offering more and more to the mass of the people. Their standard of life is continually rising. Our economic world is a bettering world. (3) The socialist is also in other respects too pessimistic with respect to the present. He sees all of the starvation, misery, luxury, and extravagance, but he passes by the millions of happy homes scattered throughout the land. He does not see that the world is full of opportunity for the rising generation, that even if the chance for the ownership of an independent business for the ordinary man is smaller, the things which he can enjoy, if he is of average intelligence and energy, are much greater than ever before in the world's history. (4) The socialist underestimates the importance of individual responsibility. To-day a man is confronted by the stern necessity of making his own way, and this must have some good effect upon character. On the whole, the lazy and incompetent are sifted out. Bad heredity and a lack of proper training are the cause of a good deal of economic misfortune. It is well to distinguish the criticism here made from the common error of supposing that socialism would necessarily crush individuality, that we must all dress and eat alike, etc. (5) The socialist underestimates the importance of free enter- prise in industry. If a man now believes that he can develop a certain industry that will satisfy important wants of the people in the future, he does not need to secure the consent of some gov- SOCIALISM 523 ernment official to make the experiment. The possibilities of a free and spontaneous development should be safeguarded from governmental routine to every possible extent. (6) Perhaps the most frequently mentioned objection to social- ism is the danger to liberty. Under socialism there would be simply the public sphere of employment, and there is reason to fear that the inability to escape from the public sphere would com- pel the submission to onerous and tyrannical conditions imposed by the administrative heads of the business in which one might be engaged. The socialists, it is true, have a rejoinder in the fact that this objection refers to liberty in the negative sense rather than in the positive sense of the power to enjoy goods, and yet there are many persons who fear the tyranny of the majority. Those in whose hands centered political and economic control would have tremendous power, however they might be selected or appointed. As in the religious sphere in the past, so in the economic sphere in the future, we may find that compulsory cooperation is incom- patible with human nature. (7) The Marxian socialists may be criticised for the importance which they attach to the economic interpretation of history, for the validity of that proposition does not establish the validity of the socialist contention. If it be true that our social life is a reflex of our economic activity, it still does not necessarily follow that our economic development is going to be such as will land us in socialism. Their doctrine of the class struggle also does not give an accurate account of existing conditions. We have a laboring class and a capitalist class, it is true, but there is also a considerable class, perhaps large enough to hold the balance of power between the other two, which does not sympathize exclusively with either labor or capital. Social Reform. There are those who recognize the strength of the socialist's criticism of the existing economic and social order, but who believe it wise to attack the various problems confronting us one at a time. Social reform seems likely to accomplish more valuable results than socialism. We have a monopoly problem before us now. Its solution may involve a considerable extension of government enterprise. Why not concentrate our efforts upon 5 2 4 OUTLINES OF ECONOMICS that problem instead of making up our minds now whether some day the greater proportion of the industrial field must be collect- ively owned and managed ? The Socialist Movement. In every country of importance at the present time there is an organized socialist movement, and while it may never attain its ideals, it is exercising an important influence on present-day affairs. This is most marked in the case of Germany. Its voting strength has been steadily increasing, although in the last election its representation in the Reichstag was considerably reduced, as shown in the following table: VOTES REPRESENTATIVES 1878 437. I0 9 1881 312,000 12 1884 550,000 24 1887 763,100 II 1890 1,427,300 35 i893 1,786,700 44 1898 2,107,100 56 J 93 3,010,800 77 l 1907 3,251,000 43 1 The membership later rose to 81. The total number of seats in the Reichstag is 397. Although the official platform of the party adheres strictly to the orthodox Marxian faith, the party itself has worked for many reforms tending to favor the lower classes, and a large element of the party (the " revisionist " wing) is in favor of putting the doc- trine of the class struggle and complete collectivism in the back- ground, and laying main emphasis for the present upon social reform. In France there are a number of socialist factions, or various degrees of radicalism, nominally united in one party, the factional strife being one of the prominent characteristics of the movement in that country. Their combined representation in the chamber of deputies is about one seventh of the total membership. A member of the moderate group, Millerand, was made Minister of Commerce (1899) in the Waldeck -Rousseau cabinet. In a num- ber of French municipalities the government is almost completely SOCIALISM 525 socialistic in personnel. The result in these cases has been an increased public activity in behalf of workingmen, the poor, and the unfortunate. In Belgium the success of the socialist party in promoting the cooperative movement has been striking. In England the or- ganized socialistic party had small influence in political affairs until recently, when a " labor group " was organized in Parlia- ment. The Collectivist activity of the London County Council may also be mentioned in this connection. In the United States there afe two rival parties, the Socialist party of America and the Socialist Labor party (of declining importance) both having platforms based upon the Marxian philosophy. A number of mayors and state legislators have been elected, but there are no socialist representatives in Congress. In 1904 the Presidential Socialist vote was about 3 per cent of the total votes cast. Socialists have rendered good service by calling attention to social problems, by forcing us to reflect on the condition of the less fortunate classes, by quickening our consciences; also by helping us to form the habit, acquired by few as yet, of looking at all ques- tions from the standpoint of the public welfare and not merely of individual gain; finally, by calling our attention to the nature of the industrial functions of government and helping us to sepa- rate rationally the private industrial sphere from the public indus- trial sphere. A number of questions having no connection with socialism have been, even by socialists, not infrequently associated with it. Atheism and free love may be mentioned. Socialists generally, however, regard religion and marriage as changing institutions. Anarchism. In contrast with the socialist, the anarchist holds that the ideal social arrangement is that men should freely and spontaneously form cooperative groups. The anarchists attack government and deny the right of one man to exercise authority over another. Freedom, independence, self-reliance, non-com- pulsion is what appeals to them. Such an ideal contains nothing reprehensible, but its complete attainment is impossible. Some governmental compulsion seems necessary with human nature as it is or is ever likely to be. The anarchist is not opposed to 526 OUTLINES OF ECONOMICS the principle of association; he simply asks that the association be voluntary. The anarchist ideal is thus portrayed by Kropot- kin: "This society will be composed of a multitude of associations federated for all the purposes which require federation; trade federations for produc- tions of all sorts, agricultural, industrial, intellectual, artistic; communes for consumption, making provision for dwellings, gas-works, supplies of food, sanitary arrangements, etc.; federations of communes, among themselves, and federations of communes with trade organizations; and finally, wider groups covering all the country, or several countries, composed of men who collaborate for the satisfaction of such economic, intellectual, artistic, and moral needs as are not limited to a given territory. All these will combine directly by means of free agreements between them, just as the railway companies or the postal departments of different countries cooperate now, without having a central railway or postal government, even though the former are actuated by merely egotistic aims, and the latter belong to different and often hostile states; or as meteorologists, the Alpine clubs, the lifeboat stations in Great Britain, the cyclists, the teachers, and so on, combine for all sorts of work in common, for intellectual pursuits or simply for pleasure." 1 Many persons class anarchists and socialists together as simply dangerous persons. One thing they do have in common, and that is, discontent with existing conditions. Othenvise their views are radically divergent. Anarchists differ among themselves. The leading " Commun- ist-Anarchist " is Kropotkin, who advocates revolutionary tactics. Bakunine and Stirner have also stood for violence. The " in- dividualistic anarchists," such as Tolstoi and Tucker, pursue a peaceful policy of non-resistance. Godwin and Proudhon may be called anarchistic reformers. QUESTIONS AND EXERCISES 1. Is the public purchase of a street-railway system socialistic ? 2. Does William Morris, in his News from Nowhere, picture socialism or anarchism ? 3. Compare the Amana Society with the New Harmony Community. 4. What is meant by the economic interpretation of history? Is it ac- cepted by thinkers who are not socialists ? 5. What thoughts are common to the various platforms given in the ap- pendices to Ely's Socialism and Social Reform ? 6. Write a sketch of the life of Josiah Warren. 1 Memoirs of a Revolutionist, pp- 39 8 ~399- SOCIALISM 527 REFERENCES BAX, E. B. Essays in Socialism, New and Old. (From a socialist point of view.) BROOKS, J. G. The Social Unrest, Chaps. VII-X. (Sympathetic critic of socialism.) COMMONS, J. R. "The Class Conflict," American Journal of Archaeology, May, 1906. ELY, R. T. Socialism and Social Reform, and French and German Social- ism, and the articles on Socialism and Socialist Parties in the new International Encyclopaedia. ELTZBACHER, PAUL. Anarchism. (Trans, by S. T. Byington.) ENSOR, R. C. K. (Editor). Modern Socialism, ad ed. (A collection of essays by leading socialists.) HILLQUTT, MORRIS. History of Socialism in the United States. (By a socialist.) HINDS, W. A. American Communities. (Descriptive.) JAURES, JEAN. Studies in Socialism. (Trans, by M. Minturn.) (By a conservative French socialist.) KlRKUP, T. History of Socialism. LE ROSSIGNOL. Orthodox Socialism. (Criticism of leading doctrines.) MALLOCK, W. H. Aristocracy and Evolution. (Opposed to socialism.) MORRIS, WILLIAM. News from Nowhere. RAE, J. Contemporary Socialism, ad ed. (Opposed to socialism.) SPENCER, HERBERT. Man versus the State. (Opposed to socialism.) SELIGMAN, E. R. A. The Economic Interpretation of History. TUCKER, BENJAMIN. Instead of a Book, ad ed. (By a leading anarchist.) VEBLEN, T. B. The Theory of Business Enterprise, Chap. IX. (Severely critical of existing conditions, but not accepting socialism.) WELLS, H. G. A Modern Utopia. ZENKER, E. V. Anarchism. (Attempts to give an exposition of anarchism without taking sides.) CHAPTER XXXI AGRICULTURAL PROBLEMS THE socialistic ideal of a highly centralized and delicately co- ordinated industrial system, discussed in the preceding chapter, is confronted with a sharp contrast in the agricultural industry as it exists to-day. Even in the most advanced countries, agri- culture is still strikingly decentralized, and furnishes at once the best illustration and the most fertile source of economic individu- alism. Size of Farms. Agriculture has never been, and shows no disposition to become, a large-scale industry in the United States. The statistical evidence upon which this assertion rests is pre- sented in compressed form in Table I upon the following page. A comparison of columns 2 and 3 brings out the interesting fact that, in every decade except one since 1850, the number of farms has increased more rapidly than the general population. In 1850 there was one farm for every 16 persons; but one for every 13.3 persons in 1900; 1 one farm for every 14 rural residents (persons outside of cities containing 8000 inhabitants or more) in 1850, but one for every 9 rural residents in 1900. Moreover, there was in 1900 one farm of 50 acres or more for every 13.4 rural residents, thus indicating that the proportionate increase in the number of farms is due " not to the addition of mere potato patches or small tracts of land used incidentally for agricultural purposes, but to a marked increase in the number of real farms. This growth marks an increase among tne rural population in the number of farmers whose head members are their own masters, and is a movement toward economic individualism as distinct as the opposite tend- 1 The increasing proportion of adult males in the general population somewhat reduces the significance of this statement. 528 AGRICULTURAL PROBLEMS 529 HH W < t-1 W pq f 8 o a u S v 52 u v E 8i{ 250 M *?*!*? pi ci M gi ^ < W 3 S |8| m M vr> Tl- to <** ** **) ; ; ; M M M * u b< 2 b s 8|| & s g < * n M O in ro M t^ PO O w 3 ~ 51 M M O f*5 O OO O r^ >0 TJ- ro *) rO *} * x * O ft. H is O 3 < CL, U ?" _ i | 1 s 5 til O M *> 1 ^9 " *J (4 > O *9 *O 40 "B 3 "2 "^ a ro >O t^ N ro "1 H fc, Jsjj M M tf) eo 00 00 00 00 00 00 H m < ^ i s ^ c c CO CO OO M M O 10 ro O O O M O s 111! 6) P < elh S _, fc u h ll fl r >O O> * O M CO O O ^ ^ to 10 O O >0 t^ N cT cT N N" ro cf O < 1 < gs cS g^ it IO rj- ro oo fo * oo t>. N ro >O O *5 o m O ro ^ f- PO tO ro <*5 O fT h. ./ . "S *> to O O 00 O HOD J S m M OO M M O* OO 3 M M 8 S. Me- 2 *|S 3 E2 * \O O PO M >O vd <3 ro to <> TJ- PO PO >o o\ o H M M M H C1 K S3 : H < c I S g l- O\ M *O vO * g .2' !|| L1S n S'f 6 w >o : ro N fO s g H < n < a r^ O\ t^ M w a. u Sa fe Q fc< M O H K >o PO o o M w to PO * Hi Id ll in ! l M M r^. M t>- 10 r^- PO o rf o oo r~ t^ \O_ O n ON ON O, O, o^ ^f oo o^ ^* o\ PO vO O 10 *T * t^. 10 q^ vq^ q * 10 'f ^? cT ci i-T en B > 'a a"" Q O O O O ON CO *>. vO 10 O\ 00 00 OO OO OO U w 530 OUTLINES OF ECONOMICS ency in cities toward wage service and dependence upon em- ployers." 1 Coming back to Table I, we find additional evidence in support of the generalization just quoted. Columns 4 and 5 make it plain that the bonanza farm which once occupied such a prominent place in foreign and socialistic discussions of American agriculture, is an exception which promises to become rarer and not more frequent with the passage of time. Columns 6, 7, and 8 show that the increase in the value of the average farm is trivial far less than the increase in the wealth of the average member of the agricultural class. Columns q, 10, and n furnish surprising evidence to the effect that the land itself is not absorbing a larger and larger share of the farmer's capital as time passes. Prac- tically the only noticeable change is the increasing importance of live stock on the farm a change which is regarded by practically every authority as wholesome and encouraging. Finally, columns 12, 13, and 14 reflect in statistical form the growing scarcity of farm labor and the increasing use of farm machinery in the culti- vation of the staple crops. The foregoing statistics are only approximately correct, and conceal a great variety of conflicting movements in different parts of the country. But they represent the true average condition, the real resultant movement; and study of the details furnishes no reason to question the general accuracy of their showing. American agriculture shows no tendency to become either a large scale or a highly capitalized form of industry. Even Mr. Prothero, as the following quotation shows, has been led into error on this point. "Statistics show that, in a country [the United States] where estates in fee tail are obsolete or abolished by law, where there is no feudal tenure, no primogeniture, no privileged class, in a country, finally, where the transfer of land is simple, easy, and cheap, large estates and large farms have become the rule. The United States contain more tenant farmers than any other country in the world, and, where this class exists, those who do the drudgery do not own the land. Land monopoly is becoming the system of America." * 1 Twelfth Census, " Agriculture," Part I, p. xxxiv. 'Prothero, R. E. The Pioneers and Progress of English Farming (1888), p. 146. AGRICULTURAL PROBLEMS 531 So much for the size of the farm as it is; the next question con- cerns the size of the farm as it should be. Would the prosperity of the agricultural classes and the general welfare be increased by expanding or reducing the farm unit, by more or less intensive farming? Obviously no simple answer can be given to this question. The value of the land or the rent it will bring is perhaps the most important factor: high rental value indicates that the margin of cultivation has been forced to a comparatively low point, and makes it both necessary and profitable to work the land intensively, for the same reason that the owner of a very valuable manufacturing plant is inclined to run it night and day, if possible, in order to reduce that part of the cost of production which represents fixed charges or interest on the capital that is sunk in the enterprise. In addition to the factor of rent, the amount of capital that he can command, the kind of farming in which he is most skilled, the character of the labor he can secure, the proximity of markets, and the adequacy of transportation facilities, all must be taken into account by the individual farmer in determining how large a farm he will attempt to manage and how intensively he will farm it. Speaking generally, however, two powerful but counteracting forces can be detected in the agricultural industry, which prevent the industry from becoming either predominantly intensive or predominantly extensive. On the one hand, machinery can be employed most advantageously on a comparatively large farm, and, other things being equal, the use of labor-saving machinery is desirable. On the other hand, the importance of labor is greater, and the importance of the manager or entrepreneur is less, in agri- culture than in manufactures; and on this account the stimulus given to the individual laborer by the sense of proprietorship is a far more potent factor in agriculture than in other industries. Large factories controlled by one entrepreneur employing hundreds of dependent workmen have proved economically superior in the manufacturing industry, because of the possibility of supervising the labor, checking and measuring its efficiency automatically. In agriculture, however, technical skill remains far more important relatively to those commercial or financial talents which distin- 532 OUTLINES OF ECONOMICS guish the successful employer than in any other great division of production. This question is primarily one of private profit, which the indi- vidual must decide for himself, but the legislator and the scientific student can be of some assistance in helping to develop that most difficult branch of commercial science farm accounting and in keeping the farmer alive to those changes in prices, wages, and transportation charges to which the farm organization must adjust itself. On the whole, however, the emphasis is wisely placed by the average educator, at the present time, upon the possibilities and opportunities of more intensive farming. In the past, exten- sive farming has been, and justifiably so, the rule in this country, and the force of inertia is all directed that way. But the demands of the future will be in the opposite direction. As cities multiply and the market approaches the farm, intensive farming will be forced upon the people, and the readier we are to adapt ourselves to this change, the less will be the friction and loss. Moreover, the ability to earn a living by intensive farming makes it easier to acquire a farm; and we are strongly of the opinion, as will ap- pear hereafter, that widely diffused ownership is better than a general system of tenancy, even where land values are high. Finally, it may be noted that practically every European country attempts by legislation to increase the number of small holdings; and in a mixed problem of this kind, which is as much psycholog- ical and social as strictly economic, the instincts of the majority are likely to have a sound social basis. Even in England, where comparatively large farming has had the greatest opportunity and the most favorable environment, the consensus of opinion seems to favor the encouragement of small holdings. English authorities maintain, as a rule, that a mixed system of large and small farms is the ideal condition, but that at present the emphasis should be placed on intensive farming. In 1889 a Select (British) Committee on the subject recommended unanimously that " the extension of a system of small holdings is a matter of national importance;" and in 1892 Parliament passed the Small Holdings Act which empowers county councils to purchase land and sell or lease it in small holdings. Purchasers were required to pay AGRICULTURAL PROBLEMS 533 one fifth of the price on taking possession, and the remainder in fifty years. In the beginning the Act does not appear to have been a glowing success, and by 1903 only 62 small holdings, covering 248 acres, had been sold, and 166 holdings, covering 373 acres, let. Recent amendments of the Act, however, appear to have aroused more interest, and it is now asserted that, " since the pass- ing of the Small Holdings Act, upwards of 47,000 small holdings have been applied for in various parts of the country." * We would not be misunderstood. A universal system of small holdings would be good for no country, as a certain number of large farms, assisted by abundant capital, are needed to set the pace in the improvement of agricultural methods. And in the United States, it is hoped, small holdings on the British scale will not have to be considered for many generations, while we never want the peasant farmer. But we do want the cultivation of that spirit which has made Danish agriculture, in spite of great obstacles, such a marvelous success; and it is imperative to avoid, if we can, the growth of those conditions which have drawn so much of the best rural blood of England to the cities. Both of these objects, we believe, will be measurably advanced by the encouragement of intensive farming. Ownership and Tenancy. The essential facts bearing upon the subject of farm ownership and tenure are summarized in Table II, which is presented on the following page. Section A of the table shows that cash and share tenancy are increasing in the United States, and that the proportion of farms operated by their owners was smaller in 1900 than in either 1890 or 1880. Two interpretations of this phenomenon have been advanced. According to the first, which is based partially upon the statistics cited in Section B of the table, the growth of tenancy is due primarily to the increasingly rapid rise of farm laborers from the position of wage earner to that of tenant. In this view, accord- ingly, the increase of tenancy is encouraging. According to the second interpretation, based partially upon the facts presented in Sections C and E, the growth of tenancy is not an encouraging 1 The Westminster Review, May, 1908, p. 516. For the history of the legisla- tion, see L. Jebb, The Small Holdings of England, Chap. IX. 534 OUTLINES OF ECONOMICS TABLE II STATISTICS OF FARM OWNERSHIP AND FARM TENURE IN THE UNITED STATES : 1880-1900 1900 1890 1880 (Per cent of farms operated by owners 64 7 71.6 74. e A Per cent of farms operated by cash tenants . . . Per cent of farms operated by share tenants . . I3-I 22.2 IO.O 18.4 8.0 17-5 [Per cent of males employed in agriculture : Who are owners 42.3 42.0 42.2 Who are tenants 23 I 16.6 14. C Who are laborers and others 34 6 4.1.4. 43 3. Per cent of persons owning farm homes: All ages . . 64 4 6s o Under 25 vears 27.8 32.6 C H 25 to 34 years 4 M to 00 O MM^MMOPtttVOOk V) ir>^fobfO'OMOOOtH ro V 3 JJ. O M^fOrooO^OO* *^- O 1 ^ O^ ^O iy> M Q\ O O OO *-" t^* w O fr > *** t> M M IO O ^O Ov t"* O M ^ ^ o\ M M O^ ^o *O V O t^- ^H o^ O ^> O ^ O^ OO M \o M IH 10 ^ ro OO t^- O ; M " : ::::: : : : a 2 r o. : ^c, . u , . w ; ; ; ; ; ;i ; ; ;| u o c * IT o 3 1 8 CX, * u co o> s i i l :{j 8 3 M o- I 8 S i v -M .S b gills. -2 E -S -g S w vU o Si s - |l en 2 C C s 8 a. s 3 s c < **! e^^.si g ^181-S | s *-~ * S | =3 M ySSSg 3 a g^333 - oS^CCCu 41 8 S v e^uucix-icnG^ . a S_,>>>_,SjbT3 J | ll^^^l^c^E^ G ^ 'C . . . 'C . . . tj "O A. Temporary R 3 3 3 ~ - H-t ft^ H O ?J ^O vo 1> Q *O v\i rt ^ Q 3 rt 7; 3 OO 1- i 8P M ci i <3 3 K A 5 . i ~ 05 582 OUTLINES OF ECONOMICS value of the fixed possessions of the government. The justice of this treat- ment is plain in the case of municipal buildings and other real estate forming part of the fixed plant of the municipality, but it is not so clear in the case of the public lands of the state and national governments which for the most part yield no revenue and resemble the merchandise or stock rather than the capital or plant of the private business. In the figures given in the table, ineradicable duplications to the amount of about $70,000,000 occur, although most of the common duplications such as transfers and refunding operations generally have been eliminated by the excellent classification employed in the Census Report. It should be added, also, that in practice it is im- possible to differentiate clearly among taxes, fees, revenues from public domains, and revenues from public industries, and that the assignment of the detailed items to these classes is in some cases quite arbitrary. Temporary Revenues and Public Debts. The modern State follows a policy of deficit financiering. The great and increasing expenditures, which have been described in the preceding chapter, entail burdens too heavy to be borne, at least in the first instance, by taxation alone, and recourse must constantly be had to the public credit. One year with another, about one fourth of the annual revenue of England is used in the payment of debt or interest upon debt; and as was shown in the French budgets for 1906 and 1907, given on page 570, almost one third of the total expenditures of France is devoted to the same purpose. In the last half of the nineteenth century, the aggregate public debt of the civilized world increased enormously. According to the best estimates, the indebtedness of the national governments of the world, which amounted to $7,627,692,215 in 1848, had risen to $27,524,976,915 in 1890, and since that time it has probably increased. Figures showing the total and per capita debt of all governmental divisions of this country are given in Table II. From this statement it appears that between 1890 and 1902 the aggregate public debt of this country increased over $800,000,000, the greater part of the increase being ascribable to the astonish- ing growth of municipal and local indebtedness, which increased nearly 90 per cent in the interval. It is true that the total public debt has diminished since 1880, that the per capita debt has fallen from $82.99 m ^7 to $35-5 m 1902, and that accord- ing to Census estimates of national wealth (not very trustworthy), the public debt covered only $2.85 of each one hundred dollars of PUBLIC REVENUES 583 national wealth in 1902, as against $3.06 in 1890, $6.97 in 1880, and $10.64 in 1870. But this diminution of the aggregate debt is due to the extraordinary progress which our tariff surpluses have enabled us to make in reducing the debt contracted during the Civil War; and the normal movement in the long run is probably toward an increase of the public debt, at least absolutely and per capita, if not in proportion to the national wealth. 1 TABLE II PUBLIC DEBT OF THE UNITED STATES Net Debt Outstanding TOTAL IN MILLIONS OF DOLLARS PER CAPITA 1902 1890 1880 1870 1902 1890 1880 1870 Total $2790 925 235 197 1387 46 $1989 852 211 MS 744 37 $343 1919 275 124 707 1 i8f $3200 2 33 * 353 188 328 $35 -5 11.77 2.99 2.50 17-65 o-59 $31.76 13.60 3-37 2.32 11.88 o-59 $60.66 38-27 5-48 2-47 14.09! o-35 J $82.99 60.46 9-i5 4-87 8.51 National gov't. . States and terri- tories Counties Cities, villages, etc School districts . The great increase of public debts is due principally to two causes, wars and public works. The former are misfortunes, losses, how- ever the result is expressed. The loss comes, not in contracting a debt, but in spending and destroying the property consumed by war. This loss cannot be postponed by a debt. It comes out of wealth existing at the time, no matter what arrangement is made. In former times each man bore the loss as it happened to fall on him. The modern method differs in just this, that the loss is transferred to the whole public. This, again, may be done in two ways. A tax may be levied at the time sufficient to pay all 1 According to Census estimates, the per capita debt of the United Kingdom in 1904-1905 was 3.93, that of France 4.86, and that of Italy 2.25 times as great as the per capita debt of the United States in 1902, while that of Sweden was a trifle less than the per capita debt of the United States. 584 OUTLINES OF ECONOMICS expenses, or a debt may be incurred and the necessary taxation spread over a longer period of time. In practice the latter proves far the best, for at least a part of the expenses. It gives capital time to adjust itself to the extraordinary demands. A war debt is, therefore, not a misfortune, though it stands for a previous misfortune war. The case is clearer when we consider debts contracted for public works. Under this head we include primarily productive enter- prises like railways, canals, forests, gas works. These, when pur- chased or constructed by the government, are the occasion of debts, sometimes enormous in amount. It might seem possible to pay for them by immediate and heavy taxation, since no more is taken out of the people than when the money is borrowed. But the national wealth is not like an ocean, alike in all its parts and instantly filling up where water is dipped out. It makes all the difference in the world where you dip. Here are men who have capital invested in a productive business; here are others who have capital lying idle. The State decides to make a public investment, and calls for capital. If it collects it by an immediate and heavy tax, the first class have a part of their employed capital withdrawn, and their business is crippled or ruined. The others have some of their capital withdrawn, but the most still lies idle. The best that can be done in such a case is for the first class to borrow of the second, which only makes private debts instead of public ones a much more burdensome condition of things for the national industry. The wiser modern method is for the State to borrow the unemployed capital and leave the employed capital intact, then imposing a moderate tax which can be paid out of annual income. If the expenditure in question is an investment, it pre- sumably pays for itself in time without requiring taxation. This brings us to the relation between taxes and debts. Taxes should never be so heavy that they cannot be paid easily out of annual income. If they trench upon national capital, they derange private industries disastrously because they are imposed upon all without regard to the nature of their investments. But while taxes cannot safely exceed the national disposable surplus for each year, it does not follow that the State may not take capital as well PUBLIC REVENUES 585 as surplus for its undertakings; only this capital must be taken from those who have uninvested capital. This cannot be done by any method of general contribution like taxation. It can only be done by public loans. Whether the loan is a wise thing or not depends altogether on the nature of the State's investment. If the State takes this capital ever so wisely and wastes it, the people have lost just so much capital. If, on the other hand, the State takes capital which was uninvested and therefore unproductive, and invests it in a profitable undertaking, the net result to society is an additional profit. Public debts are no indication of national poverty. Whether a nation is growing poorer or not depends not on its indebtedness, but on its productiveness relatively to its ex- penditures. Public debts are not a good thing in and of them- selves, but they have incidental advantages which offset some of their disadvantages. Having noticed the natural limits of both taxation and borrow- ing, we have now to ask, What kind of expenditures should be pro- vided for by each ? In general the answer is easy, though details are troublesome at times. Ordinary expenditures, that is, those which recur with sufficient regularity so that they can be foreseen and estimated in advance, if not provided for by receipts from domains and industries, must be met by taxation. If the State cannot do this, it is a confession that ordinary expenditures are in excess of the disposable income surplus of the nation, a state of things which means bankruptcy if continued long enough. Extraordinary expenditures, such as national misfortunes war, flood, etc., and public investments, railways, city gas works, etc., should be met by loans. The function of loans thus becomes a double one: (i) the distribution of unavoidable losses, so that industry is as little disturbed as possible; and (2) the investment of national uninvested capital in productive public enterprises. There is a tendency, springing out of fright partly premature, to place undue constitutional restrictions upon the power to create debts. This tendency ought to be checked. It places states and cities at a disadvantage as compared with private corporations. It also tends to throw into the hands of private corporations enterprises which cannot be paid for out of cue 586 OUTLINES OF ECONOMICS year's revenues, and yet might advantageously be acquired by the public. At the present time excessive limitations, unworthy of a free people, make it impossible for some cities to carry out necessary public improvements, although these improvements would not impose the slightest real burden upon the taxpayers. In Chicago recently, to take one of many examples which might be cited, after a prolonged and exceedingly expensive campaign for the improvement of the street-car service, the city was prevented from carry- ing out a carefully devised plan of reform by a court decision which held that an issue of street railway certificates increased the indebtedness of the city beyond the limitations prescribed by the constitution. Provision should be made for the extinction of all debts within thirty-five years, or say forty as a maximum, that the present may not unduly burden the future; and especial precaution should be taken against hasty action in incurring in- debtedness. But rigid limitations which prevent municipalities from off- setting part of their debt by the value of waterworks, lighting plants, and other assets which yield a monetary return, have no place in a scientific sys- tem of public finance. PERMANENT REGULAR REVENUES The Public Domain. By domains we usually mean agricul- tural and mineral land and forests owned by the State and man- aged in the interest of the public revenue, although we might logically subsume under the term the streets and other public property of cities, with all those valuable franchises and privileges which go with them. As appears from Table I, the revenues from this source constituted less than i per cent of the total receipts in 1902, and if the corresponding expenditures were shown, the net earnings of the public domain would appear even smaller, possibly a minus quantity. Taxation is the great source of public revenue to-day. Until a comparatively recent date this was not the case. In early feudal times the king had large estates of his own from the produce of which the government was largely supported, and although he had certain military rights over his subjects, he had very limited rights over their property. Later, the king became a public rather than a private person, and a large part of the crown estate became the property of the public; but even then taxation was relatively unimportant, and the State relied principally in times of peace upon fines, escheats, fees, crown prerogatives, or certain dues which the king was entitled to collect as of his own right, PUBLIC REVENUES 587 and upon the proceeds of the public domain. Blackstone, the great English jurist, writing in 1765, classified taxation among the "extraordinary" revenues of the sovereign; and in some of the German principalities the government was enabled to get along without taxation in times of peace, down to the close of the eight- eenth century. Real democracy not yet having been achieved, the people distrusted taxation and resented its imposition, while the sovereign wisely clung to that species of revenue which was independent of the people's caprice. " The public domains," said Bodin, the great political philosopher of France in the latter part of the sixteenth century, "should be holy, sacred, and in- alienable either by grant or by prescription." But as democracy developed and the representatives of the people gained control of the finances, a new policy was everywhere adopted. If State management was uneconomical and wasteful, and if the government could obtain all the revenue needed by taxa- tion, why preserve the wasteful methods of management, why not turn public property into private property, to be developed and multiplied through the vitalizing force of individual self-interest? The great truth was realized that the property of individuals when su bject to taxation and regulation is no less part of tlie great patri- mony of the State than those lands and forests whose title is retained by the government itself. This doctrine was generally accepted by the greater countries of the world during the eighteenth century, so that Adam Smith, in defending it in 1776, was able to write that "there is not at present, in Europe, any civilized state of any kind which derives the greater part of its public revenue from the rent of lands which are the property of the state. ..." This philosophy was dominant when our national goveri ment was created in 1 789, and has guided our national policy ever since. Land Policy of the United States. By exploration and occu- pancy, war, and various cessions, the federal government has acquired, since the Revolutionary War, a magnificent domain of 2,252,244 square miles, details concerning whose disposition may be found in Table III, p. 589. Now, while we have consistently followed the doctrine of alienation until very recent years, trying, apparently, to get rid of the public domain as rapidly as possible, 588 OUTLINES OF ECONOMICS one observes historically a very important change in the manner of development. In the early years of the Republic, large reve- nues were expected from the sale of public lands; it was the finan- cial side which, according to Alexander Hamilton, claimed ''pri- mary attention." l Until about 1800, the policy was to sell the land in large blocks, even though it went to speculators; this was followed by an attempt to sell small holdings to actual settlers, the credit system being used with disastrous results; later (1830), the preemption policy was introduced by which bona fide home makers were given certain advantages in purchase; and finally came the Homestead Act of 1862, the Timber Culture Act of 1873 (now repealed), and the other less important laws by which actual settlers can obtain homes practically free of cost. Our original aim was to develop the country as rapidly as possible, and secure as much revenue as possible from the sale of public lands. We still aim to develop the country, but the idea of profit has been replaced by the more humanitarian policy of giving land to the landless. To exaggerate the evolution of policy for the sake of emphasis, it may be said that we began with a productive policy, and modified it with a distributive policy; that in the beginning our object was the greatest good, while now it is the greatest good to the greatest number, or, in terms more appropriate to the exact case in hand, the greatest possible use of the public domain con- sistent with widespread participation in that use. The policy of national development regardless of immediate revenue to the government has been also carried out by enormous grants of lands for the endowment of education and the subsidiza- tion of canal, railway, and internal improvement companies. Our public lands have been used for expenditure rather than revenue, for bounties rather than profits. Just what has been done with the public domain is shown in Table III, which should be care- fully studied. On the mainland of the United States we still (1007) have left nearly one hah 5 as much land as we have disposed of, unreserved, and still unappropriated; while if we take account of Alaska and public reservations, the government might yet, as was said some years ago, "repeat its sales and gratuities acre for 1 Quoted by Donaldson in The Public Domain, p. 198. PUBLIC REVENUES 589 acre, without exhausting its reserves of land." But, of course, the best of the lands have gone. On June 30, 1907, there still were left unappropriated and unreserved 774,438,420 acres, although 368,028,850 acres of this area were situated in Alaska, unsurveyed and of very doubtful value. TABLE III DISPOSITION OF PUBLIC DOMAIN: JUNE 30, 1904 DISPOSITION ACRES 1. Homestead and timber culture entries final 106,240,464.25 2. Pending homestead entries final and commuted . 39,525,840.00 3. Private land claims scrip and other 34,604,827.84 4. Allotment to individual Indians, and half-breed scrip 14,408,079.86 5. School and agricultural college grants 76,731,243.00 6. Miscellaneous grants to states and territories (partly educational) 87,305,203.05 7. Wagon-road construction grants 2,867,474.49 8. Canal construction grants 4,598,698.32 9. River improvement grants 2,246,251.91 10. Railroad construction grants 117,550,292.37 11. Cash sales Indian cessions, mineral lands, timber and stone claims, and miscellaneous cash sales. . 287,001,612.29 Total alienated, excluding Alaska 773>79>987-38 12. Reservations forest, reclamation, parks, military, Indian 194,587,475.62 Total alienated and reserved, excluding Alaska. 967,667,463.00 13. Area unappropriated and unreserved, excluding Alaska 473,836,402.00 14. Area unappropriated and unreserved in Alaska . . . 368,035, 975 .00 Total unappropriated and unreserved 841,872,377.00 15. Total land surface in public domain, including Alaska 1,809,539,840.00 16. Total land and water surface in public domain, in- cluding Alaska 1,884,021,760.00 Forest Lands. The policy of alienation, while on the whole sound, is subject to certain limitations which it is very important 590 OUTLINES OF ECONOMICS to note. First of these is the case of forests. The ruthless denuda- tion of our timber lands, the striking advance in the price of lumber indicating that the supply has not kept pace with the demand, and the meteoric development and rapid decline of the lumber industry in many localities of the Northwest, all combine to demonstrate that alienation and private ownership have failed to produce that careful industrial management which conduces to the greatest use and the greatest good in the long run. More important still, we have come to realize that the most productive use of other great natural resources has not been subserved by the private ownership of the forests. Climate and rainfall, the regular flow of streams, the success of the great irrigation works which we are buildingj and the proper development of our mines, all depend more or less upon the permanent preservation of our forests; but private ownership and management in the past has led to destruction, not preservation. The United States awoke very slowly to these truths. Prussia abandoned the policy of disposing of forest lands in 1 83 1 . France and Austria began to increase their forest holdings about 1870. But it was not until 1876, in the United States, that an awakened interest showed itself in a congressional appropriation of two thou- sand dollars for the purpose of employing "a competent man to investigate timber conditions in the United States." In 1881 a Division of Forestry was created in the Department of Agri- culture which expanded into the Bureau of Forestry in 1901, and into the Forest Service in 1905. In 1891 a forward step was taken by the passage of an act authorizing the President to establish forest reserves; and in the same year the first forest reserve was established. In November, 1907, the area of the national forest reserves had increased to 159,439,979 acres; the forest service had developed to a point where it was able to care for the management of this vast national industry, and to cooperate further with private owners in establishing the principles of scientific forestry, while the policy of alienation has been modified to an extent amounting almost to reversal. Instead of selling forests, tJie government is now permitting timber to be cut in a way to preserve the forests. The revenue from this source at the PUBLIC REVENUES 591 present time is nearly $2,000,000, but that is a secondary con- sideration. The important point is that the government has demonstrated its ability to manage the forests along lines at once scientific and commercial. In many European countries, how- ever, a greater revenue is secured from the forests. In France, for example, the public forests cover nearly 18 per cent of the entire land surface of the country, and yield approximately, it is reported, $2.50 per acre annually, giving a revenue of about $59,000,000 a year. "The Prussian budget for 1903 estimated the gross receipts from forests at 106,854,000 marks, and the net receipts at 60,000,000 marks." In the United States at present 25 per cent of what is received, according to law, goes to the states and territories in which the reserves are situated for public roads and schools? It is estimated that in a few years the reserves will yield not less than $5,000,000 a year. Experience has shown that the public ownership and manage- ment of forests is far more efficient than private ownership and management. This is due to the length of time required to realize upon investments in this industry, its routine character, the large area one man can supervise, and, perhaps chiefly to the fact that the government in its management takes into account the interests of the community as a whole. Although private corporations may make plans for a long period of time, they are less desirable owners and managers, especially in the last particular. The property tax, as now levied, is one of the greatest enemies of rational forestry by private owners. The State spends millions of dollars to pre- serve the forests, and yet enforces a tax that puts a premium upon their destruction. Mineral Lands. Our experience with timber lands is im- portant as showing that private ownership of some kinds of land has not resulted in the greatest or wisest use of that land. Our experience with mineral lands demonstrates that the policy of disposing of public lands in small holdings, free of cost or at prices far below their real value, has not led to a widespread partici- pation in the use and profit of those lands. The reason for this, broadly speaking, is that our policy of alienation in small hold- ings conflicts with the requirements and necessities of modern industry. In disposing of our lands we have tried to balk the 592 OUTLINES OF ECONOMICS corporation and the speculator in order to subsidize the settler and home builder. For instance, we have made the recipients of homesteads and mineral claims swear that they are not acting as agents "for any person, corporation, or syndicate" or "in collusion with any person, corporation, or syndicate, to give them the benefit of the land entered," and that the land is not being secured "for the purpose of speculation." Yet for purposes of grazing and in less degree for mining and lumbering, modern industrial methods require that large tracts of land shall be worked together, and that individual claims shall be consolidated. The core of the difficulty has been well described by President Roosevelt in these words: "It is a scandal to maintain laws which sound well but which make fraud the key without which great natural resources must remain closed. The law should give individuals and corporations, under proper government regulation and control, the right to work bodies of coal lands large enough for profitable development." And the President thereafter recommends that laws shall be passed which shall authorize the leasing, instead of the complete alienation, of coal, oil, and gas rights, as well as grazing rights on the public domain. Bills are now pending in Congress which look to the leasing of mineral lands rather than their sale, and there is little doubt that the policy of complete alienation will be sooner or later followed by a royalty or rental system. Already the royalty system has been adopted by some of the commonwealth governments, and year by year the policy of com- plete alienation is more and more restricted. In a few years, in some of the Western states, these leases will probably provide enormous revenues. The state of Minnesota, for instance, in which the royalty system has been inaugurated, received $163,833 from royalties, and $31,985 from prospecting permits and fifty-year leases in the fiscal year ending July 31, 1907. The auditor of the state, in speaking of the Vermilion and Messabe iron ranges, says that on contracts now in existence perhaps one hundred million dollars will be realized for the school and university funds. 1 Auditor's Report for 1905-1906, p. liv. Data given in the Preliminary Re- port of the Minnesota Tax Commission for 1907, Chap. V, however, seem to indicate that $50,000,000 would be a safer estimate. PUBLIC REVENUES 593 The Success of our Land Policy. In a rough, general way, our land policy has been a success, as is shown by the unprece- dented and almost feverish development of the country in the last century, with the creation of a fund of taxable values which makes it an easy matter for the state governments to raise all the revenue which they need. But in some respects it has signally failed. In the first place it has not paid : more money has been spent for the purchase, survey, and care of the public lands than has been re- ceived from their sale and lease. In the second place, certain kinds of lands, as we have shown, should not have been alienated. And in the third place, our efforts to give land to the landless have bred an immense amount of corruption, fostered speculation, en- dowed private monopoly with public wealth, and pauperized whole communities. One has only to recall the recent convictions of public officers for land frauds, and to read the report of the Com- mission on Public Lands, to which specific reference is given at the end of the chapter, to appreciate the truth of all these charges. The desert land law and the commutation clause of the Homestead Act, they tell us, operate far too often "to bring about land mo- nopoly rather than to multiply small holdings by actual settlers." ... "In many localities, and perhaps in general, a larger pro- portion of the public land is passing into the hands of speculators and corporations than into those of actual settlers who are making homes." . . . "Nearly everywhere the large landowner has suc- ceeded in monopolizing the best tracts, whether of timber or of agricultural land." . . . "Your commission has had inquiries made as to how a number of estates, selected haphazard, have been acquired. Almost without exception, collusion or evasion of the letter and spirit of the land laws was involved." . . . "The fundamental fact that characterizes the present situation is this: that the number of patents issued is increasing out of all propor- tion to the number of new homes." Possibly the most important lesson to be derived from the his- tory of our landed domain is the vital truth that the government cannot give away valuable lands or sell them at prices far below their real value without subsidizing the speculator, endowing monopoly, and pauperizing the people. The poorer classes derive 594 OUTLINES OF ECONOMICS no real benefit from this indiscriminate public charity. As Secretary of the Interior Hitchcock said in 1905, in discussing the Timber and Stone Act: 1 "Many transfers of land patented under this law are made immediately upon completion of title to individuals and companies. In this way a monopoly of the timber supplies of the public-land states is being created by systematic collusion. ... It has been urged in behalf of this act that it enables poor men to enjoy the bounty of the government by ob- taining tracts of land which they can afterwards sell with advan- tage. A careful study seems to show, on the contrary, that the original entrymen rarely realize more than ordinary wages for the time spent in making the entry and completing the transfer. The corporations which ultimately secure title usually absorb by far the greater part of the profit." When Uncle Sam was rich enough or was supposed to be rich enough to provide us all with a farm, the policy of giving avray the public domain appeared to be in harmony with the principle of equality of opportunity. But when the supply is far below the demand, those who receive gifts by lot or similar methods are in receipt of special privileges. What once seemed fair has, in the course of economic evolution, become unfair and demoralizing. Our conclusion may be formulated in the following general rule : only those lands should be wholly alienated whose use and devel- opment under private ownership lead neither to monopoly nor to exhaustion and waste. Or, in more concrete terms, remem- bering that the maxim applies only to those lands left to the gov- ernment, and to the majority of cases, not to every specific case, the rule for agricultural lands should be private ownership and management, for forest lands State ownership and management, for mining and grazing lands State ownership and private man- agement under a lease or royalty system, by which the State shall secure a share of the profits and retain a large amount of regulation and control. In disposing of its lands the government should endeavor to charge value received, as gifts of valuable land, or sale at inelastic tariffs of prices which place an extreme valuation upon some tracts and an utterly inadequate valuation upon others, lead 1 Report of the Secretary of the Interior, 1905, p. 331. PUBLIC REVENUES 595 to speculation and monopoly, having most of the demoralizing features of a public lottery in which the prizes are distributed partly by chance and partly in accordance with the cunning, chicanery, and unscrupulousness of the participators. Under existing conditions the poorer classes of society get almost none of the valuable lands. Charge value received, and the people, the masses, get their share in the revenues flowing to the public treas- ury, in reduced taxes, and more generous expenditures for educa- tional, protective, and developmental purposes. Land Nationalization and Municipalization. In recent years both state and national legislation has shown a decided trend toward the adoption of methods which will yield both greater revenue and greater control of those varied forms of national wealth which we collectively designate "land." The object of this legislation is to prevent monopoly and give to society a share in the land values created by social growth. One of the most in- genious plans for securing this end ever proposed is the single-tax scheme defended with great eloquence and earnestness by the late Henry George. His scheme, usually called "the single tax," is stated thus in his own words, printed in his organ, The Standard: " The Standard advocates the abolition of al! taxes upon industry and the products of industry, and the taking, by taxation upon land values, irrespec- tive of improvements, of the annual rental value of all those various forms of natural opportunities embraced under the general term 'land.' "We hold that to tax labor or its products is to discourage industry. We hold that to tax land values to their full amount will render it impossible for any man to exact from others a price for the privilege of using those bounties of nature in which all living men have an equal right of use; that it will compel every individual controlling natural opportunities to utilize them by employment of labor or abandon them to others; that it will thus provide opportunities of work for all men and secure to each the full reward of his labor; and that as a result involuntary poverty will be abolished, and the greed, intemperance, and vice that spring from poverty and the dread of poverty will be swept away." Mr. George's proposition rests upon an extreme application of the doctrines of individualism and natural rights. Man, he holds, has an inalienable and equal right to live, and consequently an inalienable and equal right to those natural agents which we call 596 OUTLINES OF ECONOMICS land, and without which human life cannot exist. This right which attaches to the individual cannot be abrogated by law or custom, nor can it be alienated by one generation or set of law givers. Moreover, it is an equal right. A, B, and C each have a right to the soil, but A has no right to better soil than B or C ; in consequence of which that part of land values which arises from the differential qualities of land belongs to society as a whole, and not to particular individuals. But the differential value of land expresses itself in the economic rent which it yields, and conse- quently, if society seizes this rent by taxation, it will satisfy the demands of the doctrine of natural rights, while leaving the actual management and exploitation of land in the hands of individual occupiers, thus avoiding the perils of direct public management. Man also has an unalienable right, Mr. George held, to the fruits of his own labor. As the outcome of this right, Mr. George con- cluded that ordinary taxation upon property other than land, upon the product of labor as distinguished from land, the gift of God, is robbery. In his view it is as immoral to levy an ordinary tax as it is criminal to fail to tax that surplus which attaches to the better classes of lands, and which we call economic rent. The policy embodied in Mr. George's scheme differs funda- mentally from the policy which we have seen creeping into recent legislation. The latter purposes to reserve only a part of the value given to some forms of land by social development. Mr. George proposes to confiscate all of "the unearned increment." Most important of all, the former proposition applies only to the future unearned increment, and purposes only to take a part, and that only after fair notice is given. Mr. George proposes to take all the unearned increment, past and present, and that whether the present owners have been encouraged to believe that they might be permitted to appropriate the whole unearned increment or not. Herein lies the essential injustice of Mr. George's scheme. As a nation we have induced immigrants and settlers to take up lands, clear them, and develop them with their labor and toil, with the promise that the values thus created by themselves and their neighbors should belong to them. Their risks and their sacrifices have been great. Even if we assume that the State made a mistake PUBLIC REVENUES 597 in pursuing this policy, the results of the mistake must be cheer- fully borne by the party at fault, the State itself. Mr. George not only proposes to confiscate all economic rent without compensation, and to abolish all other forms of taxation, but the assertion is made in explanation and justification of the policy that it will abolish poverty. Such a policy might, indeed, prevent landowners, who do not care to use their land, from keep- ing it out of the hands of those who would use it; but how it would effect all the other predicted blessings is difficult for most people to comprehend. In the first place, it is difficult to imagine how pure economic rent of agricultural land can be separated in practice from the annual value of the separable improvements on the land. But apart from this difficulty, the appropriation of economic rent by the public without compensation to the owners will probably never appeal to the conscience of the American public as a just thing to do. No abstract reasoning, based on "natural rights," will persuade a modern nation to so radical a step. This honestly and earnestly advocated policy is only one more illustration of the danger of basing social reasoning on any theory of "natural rights." In cities it is easier to separate the pure economic rent from the earnings of improvements, such as buildings. Moreover, it is in cities that the principal evils attendant on private landholding are discoverable. Therefore the objections to land nationalization do not in the same degree apply to land municipalization. Many who will reject the one will favor the other. Even here, however, it is well to proceed very cautiously. Confiscation, at any rate, should not be tolerated. If great and expensive changes along this line should approve themselves to the people, the burden of the changes should be widely diffused throughout the community by means of inheritance and other taxes. 1 Public Industries. In the beginning, let us briefly pass in review the principal classes of industrial enterprise in which the modern State engages for the satisfaction of other than State wants; because, obviously, we are not concerned with enterprises like the government printing office, the government navy yards. 1 See pp. 364 and 365 for further discussion of the single tax. 598 OUTLINES OF ECONOMICS and in general, those incidental industries whose products the government consumes but does not regularly sell. I. First, we find States like Switzerland monopolizing the manu- facture of alcohol and certain alcoholic beverages, Japan monopo- lizing the opium traffic in Formosa, or commonwealths like South Carolina engaging in the retail distribution of intoxicating bever- ages. 1 The purpose of the State in engaging in such industries is primarily sumptuary; it is desired to regulate the traffic almost to the point of suppression, perhaps. Ordinarily a good revenue would be secured, but revenue is a very secondary consideration. Prices will be placed above the level of highest net profit, and not improbably the ideal of regulating consumption will be so vigor- ously pursued that profits will disappear altogether. II. Secondly, we have the group of so-called "fiscal monopolies." France, for instance, monopolizes the manufacture of matches, cigarettes, and tobacco in general; Japan 2 has recently gone farther than any other country in the creation of fiscal monopolies ; while Prussia, Austria, Italy, Spain, and other European countries maintain public lotteries as did many of the American colonies during the eighteenth century. The primary object of the State in undertaking these enterprises is public revenue, gain; and naturally a monopoly price is charged, the price which will yield the greatest net revenue. III. Next, we have a group of enterprises consisting principally of the so-called "natural monopolies," which the State undertakes not for suppression, not for profit, but primarily for regulation to regulate the quality of the product, as in the case of water; to maintain effectively what have been called "equitable conditions for the prosecution of private business," as in the case of railways; to prevent monopolistic extortion and corporate abuse, as in the case of lighting companies, the post office, the telegraph, and the telephone; or to prevent crime and preserve intact the foundations of commercial prosperity, as in the monopoly of coinage. The charges here are ordinarily adjusted to either the "revenue" or the 1 Since writing the above, South Carolina has abandoned the dispensary system. * Cf. recent magazine articles. PUBLIC REVENUES 599 "cost" principle, that is to say, the State will either aim to make a fair business profit such as is secured in competitive private enter- prises, or it will endeavor approximately to meet expenses by adjusting its charges to the cost of production. England, France, and Germany, in ordinary years, obtain handsome revenues from their respective postal departments, but in the United States the accounts of the Post Office Department show a regular annual deficit ($6,653,282 in the fiscal year 1906-1907), and taking the world over, the cost principle in this group of industries is probably more common than the revenue principle, and deficits more com- mon than net profits. In the United States the post office has always been regarded as a developmental agency rather than a business enterprise, and might more logically, perhaps, be included in the next category. IV. Finally, we have a large and heterogeneous group of in- dustries which are maintained principally for service, for their edu- cational and developmental influence, not primarily for regulation, and not at all for profit, but "for the public good." We include here not only schools and educational institutions of all kinds, but roads and canals; the savings banks and public pawn shops main- tained in several countries of continental Europe; workingmen's insurance as developed by Germany, Austria, and several of the Australian colonies; and the model manufacturing establishments such as France maintains for the production of tapestries and fine porcelains. In this group charges will sink to a minimum, and in some lines of enterprise, such as education, practically disappear. Revenue here is not only a minor, but is almost a negligible, consideration. A brief consideration of the incomplete list of State industries given above brings out several important truths. In the first place, it is evident that only a few of these industries, the fiscal monopo- lies, have been taken over by the State for the purpose of revenue, and fiscal monopolies are decreasing rather than increasing in relative importance. In the second place, it is equally as clear that, on the whole, public industries are sources of expense and not of profit. When Professor Bastable, for example, tells us that in England, in the fiscal year 1893-1894, only 6 per cent of the 600 OUTLINES OF ECONOMICS national revenue came from public industries and other non-tax sources, that in the local revenues of England and Wales (1891- 1892) taxation stood to other sources of revenue in the ratio of five to one, that in Prussia about 20 per cent of the national reve- nue comes from the domain and industrial enterprises, and in India something less than 50 per cent from "quasi-private sources of revenue," he is careful to warn us that the statistics take no cognizance of interest payments chargeable to the several indus- tries, or of depreciation, or of related industries in which deficits and not profits were secured. When estimating the importance of railway earnings in the revenue account, no cognizance is ordi- narily taken of the canal deficit. In the third place, we perceive from the nature of the industries that they cannot wisely be oper- ated for profit in many cases. Education, for instance, has been taken over by the State for the very purpose of charging less than the cost of the service. The unquestionable tendency is for the prices of goods and services supplied by a democratic State to sink below the cost of production, and this, in itself, is neither good nor bad, fortunate nor unfortunate. The public financier, in adjusting the charges, must not look to profit. His only aim is the solus populi, and this policy requires here a prohibitive price, there a cost price, and again free service. Finally, it appears, the problem of public charges can be settled only with reference to a particular time, place, and industry. England finds it expedient to raise a handsome revenue from her post office, while the United States manages our post office at a loss. Waterworks are successfully conducted by most of the large American municipalities, but public lighting experiments in this country have not been equally suc- cessful. India raises half of her revenues from non-tax sources largely because heavy taxation of the ordinary kind would be im- possible. The French tobacco monopoly succeeds because the French government can supervise and trace almost every pound of tobacco grown in France. In the United States this would be impossible. Although we cannot decide in a general way what theory of charges should be followed in particular public industries, it is possible to lay down general rules which will assist in reaching a PUBLIC REVENUES 6oi correct conclusion in specific cases. Assuming that the industry in question supplies a service rather than a commodity, merely to save words in the discussion, we must first of all inquire: (a) Is the service helpful or harmful in its net social effect ? According as it is one or the other, we will incline in our charges toward the gratuity principle or the prohibitive principle. If harmful, how- ever, it is plain that we must not make the charges high enough to encourage smuggling or illicit manufacture. If helpful, on the other hand, we cannot at once decide upon the gratuity principle, but must inquire farther, (6) How, generally, is the service en- joyed ? If only a small portion of the community enjoys the serv- ice, it would usually be unjust to charge less than cost, because the deficit would be borne by general taxation falling upon the entire community, unless, indeed, the benefit to one restricted class is seen to be of advantage to the whole community, in such a degree that the rest of the community is willing to bear the deficit, as in the case of public charity. (c) Assuming that the service benefits the whole community, this is still not sufficient to justify a charge less than the cost of pro- duction. The problem is one of comparative costs. We must in- quire whether greater benefit would not be secured by charging enough to raise a profit and then distributing that profit through the maintenance of some other gratuitous enterprise, or, if the tax system weighs heavily on the poor, by remitting taxation to the extent of the profit, (d) If all these questions are answered in favor of the gratuity principle, we still must consider, What effect will gratuitous service have upon the cost of the service ? Will it encourage wastefulness? Free city water, for example, would probably prove impracticable because of waste, but free parks or free education do not lead to inordinate or unnecessary consump- tion. The question is a vital one, but it is not always to be an- swered one way, as some critics of government ownership seem to believe, (e) Closely related to the above, is the question of pauper- ization. Some things the State may safely give away, and some not. The modern city, for example, may give band concerts free, in our view, to the undoubted edification of the community; but in Rome the public games demoralized the populace. (/) Finally, 602 OUTLINES OF ECONOMICS we have to ask, What effect will gratuitous service have on in- comes ? Henry George proposed that our cities should operate the street car lines gratuitously, and the argument in its favor is far stronger than might be expected on first thought. But what effect would this gratuitous service have upon the incomes of the laboring classes ? Take the case of the worker in New York City earning $3.00 a day. Will his wages remain at $3.00, if street car service is offered free of charge ? Will not the migration to New York be increased, so that wages will fall? And may not the gain ulti- mately fall to owners of house property in the form of enhanced rents ? All these questions must be answered before the tariff of charges can be adopted, and it is plain that the answers will be determined by the particular conditions of time, industry, and place, particu- larly by the character of the industry. The nearest approach to a general rule which can be formulated, may be stated as follows: In proportion as a service or commodity tends to the upbuilding of character and personality, we should, so far as fiscal conditions per- mit, gradually move in the direction of the principle of gratuitous service. If the service or commodity itself is widely consumed and is as desirable as anything among vendible commodities, particularly if large consumption is desirable and waste in consumption does not become excessive, the principle of gratuitous service may be recom- mended. Limitations of space prevent further treatment of the subject of public industries. The important thing to understand is that the moment an industry is taken over by the government, that moment the question of profit which is the vital consideration under private management becomes of secondary importance, sub- ordinate to questions of public policy; and the interjection of public policy into the determination of prices or charges, creates a problem whose complexity and difficulty can scarcely be exag- gerated. At the present time, for instance, we do not even know whether our second class postal rates pay for the cost of carriage and delivery of second class matter, to say nothing of the question whether such matter ought to be carried at less than cost. Just now the indications are that the State will take over an increasing PUBLIC REVENUES 603 number of industries, or at least exert a constantly increasing in- fluence upon the rates and charges of quasi-public industries. Under these circumstances our present duty is to institute, both in public and quasi-public industries, a thoroughgoing system of cost accounting, so that we shall understand upon what footing each branch of the industry rests. Our second duty, which falls pri- marily upon economists and statesmen, is to develop a far more satisfactory theory of public charges, for at the present time we hardly understand the many factors that must be considered in this problem, much less the net meaning or resultant of these factors. QUESTIONS 1. What proportion of the public receipts comes from the public domains? What gives importance to the question of revenue from government owner- ship? 2. Are public debts a burden when represented by paying investments? by non-revenue-bearing investments ? 3. Do State debts indicate impoverishment of the people? Why? 4. What expenditures should be met by taxation? by loans? What is the natural limit of each? 5. How was the State supported in primitive times? What connection is there between taxation and representative government? 6. What has been the principal aim of the United States in the manage- ment of public lands? How has this aim changed? 7. Why do the poorer classes benefit least by the homestead acts and by the sale of the public lands at prices below their real value ? 8. Have as many acres of land been given to individuals by the homestead and similar acts as to the railways? 9. What kinds of land should be both owned and managed by govern- ment? Why? 10. What are the advantages and disadvantages of the royalty or lease system ? To what kinds of land should it be applied ? n. What conflict is there between modern industrial methods and the project of giving land to the landless? 12. What connection is there between "natural right" and the single- tax scheme? 13. Is there any absolute, inalienable right to life? to anything? 14. Should State industries be managed so as to yield a profit? Is a profit inconsistent with good State management? Is any general tendency, with respect to profits, discernible in the management of particular public industries ? 604 OUTLINES OF ECONOMICS REFERENCES ADAMS, H. C. Public Debts, and The Science of Finance, Part II, Book II, Chap. I, "Revenue from Public Domains," pp. 237-260; Chap. II, "Revenue from Public Industries," pp. 261-282. BASTABLE, C. F. Public Finance, Book II and Book V, Chap. II, "The State Domain, Lands and Forests," pp. 157-178; Chap. Ill, "The Industrial Domain," pp. 179-218; Chap. IV, "The State as Capitalist, Administrative Revenue," pp. 219-232. BULLOCK, C. J. Selected Readings in Public Finance, Chap. IV, "The Views of Bodin and Smith," pp. 50-60; Chap. V, "Revenues from Domains," pp. 61-72; Chap. VI, "Revenues from Public Industries," pp. 80-116. Census Bulletins, Nos. 20, 45, 50. " Statistics of Cities," passim. Census Report. Wealth, Debt, and Taxation, Part II and Part IV, pp. 953- 963- COHN, GUSTAV. The Science of Finance, Book I, Chap. II, " The Public Economy in Process of Growth," pp. 82-103. DANIELS, W. M. The Elements of Public Finance, Part III, Chap. I, pp. 285-314; Part II, Chap. IX, "Public Income from Quasi-economic Sources," pp. 207-223. PLEHN, C. C. Introduction to Public Finance, Part III, pp. 278-324. SELIGMAN, E. R. A. Essays in Taxatiott, Chap. IX, "Classification of Public Revenues." Senate Document No. 189, 58th Congress, 3d Session. Report of the Public Lands Commission, pp. iii-xxiv. SCOTT, W. A. The Repudiation of State Debts. U. S. Department of Agriculture, Forest Service. The Use Book, 1906, passim. CHAPTER XXXIV PUBLIC REVENUES: DERIVATIVE REVENUES, FEES, SPECIAL ASSESSMENTS, AND TAXES Definitions. If the reader will run over the classification of public industries given in the preceding chapter (page 598), he will notice that the corresponding payments which descend, it will be remembered, from prohibitive to gratuity charges fall into two main classes: those imposed upon the consumer or purchaser who specially benefits by the service, and those like the revenues devoted to the maintenance of education and public parks imposed upon the tax-paying public generally, irrespective of the benefits conferred by the service. Moreover, as we move from the prohibitive to the gratuity group, there is a general though not regular change in the degree and kind of compulsion exercised by the State in collecting the contribution. The State does not encourage the purchase of intoxicating liquors under the Gothenburg system in order that the revenue may be as large as possible ; it actually discourages their sale : the use of the postal money order is mildly encouraged, but you may send your money by express if you desire; one is not forced to marry, but if one marries one is compelled to take out a marriage license; and whether one uses the public schools or not, one must help pay for their maintenance. Finally, it will be noticed that as the element of compulsion increases, the public interest in the service changes, and generally though not always increases. The wood sold from the government forests is merely a commercial by- product of an enterprise maintained by the government for other purposes; the marriage license fee benefits the individual, but is imposed primarily to protect the morals of the community; while the tax to maintain the public schools is paid solely for the purpose of benefiting the general public. 605 606 OUTLINES OF ECONOMICS There are, then, three general principles of classification: (a) the assignability of the benefit of the service to an individual; (6) the degree of compulsion exercised by the State; (c) the degree and kind of public interest involved in the service. The more voluntary payments for the more commercial services made by persons who receive a special benefit from these services, are called public prices; the less voluntary payments for services in which the public interest is less commercial in character, made by persons who receive a special benefit from the services, are called fees. Compulsory contributions, "levied in proportion to the special benefits derived, to defray the cost of a specific improvement to property, undertaken in the public in- terest," are, in the United States, called special assessments; and compulsory contributions, exacted by public authority ac- cording to some general rule, without reference to the special benefit conferred by the services to whose maintenance the con- tributions are devoted, are called taxes. The student is warned that little regard is paid to these distinc- tions in everyday usage. The words "fees," "taxes," "licenses," " tariffs," " rates," " charges," and the like are hopelessly confused; and even the trained economist finds it impossible to distinguish with complete success between prices, fees, and some kinds of taxes. The utility of the terms is in emphasizing the important truth that these great categories of public contributions must be dis- tinguished and differently treated by the legislator and student, by whatever terms the different categories are designated. Fees. 1 In the exercise of its most fundamental and general functions, the government frequently confers, in an incidental way, special benefits upon particular individuals. Thus the courts, whose function it is to administer justice in general, find that this function must be performed by deciding disputes between partic- ular litigants, one of whom usually benefits by the decision. Now if the government is disposed to take advantage of the op- 1 Public prices have been discussed in the preceding chapter. The small tuition charges paid by students in state universities offer a good illustration of fees; they are non-commercial in character, semi-voluntary, and in amount fall considerably short of the cost of the service. PUBLIC REVENUES 607 portunity, it is evident that much revenue may be raised from the individuals who, in a more or less adventitious way, benefit from the government activities; and where the nation is poor or the people averse to taxation, much dependence will be placed upon fees. As wealth increases, however, and the government becomes more democratic, there is a growing disposition to support general functions by general contributions taxes and the relative importance of fees is likely to decline. On the other hand, there is no likelihood that fees will wholly disappear, as they exercise a wholesome influence in preventing waste. Court fees, for instance, would probably have been abolished before this, if they did not serve to prevent litigous persons from carrying their quarrels to the courts for settlements. Because of this restrictive and economical influence exercised by fees, they will undoubtedly retain a permanent place in the public revenues of even the more advanced and democratic states; but their fiscal importance will probably decline. During the colonial epoch, the fee system was much abused in America, many offices being wholly maintained by fees, which should have been abolished or supported by taxation. At the present time, however, the evils of the system arise not from the number or amount of fees, but from their connection with the sala- ries of certain public officials. Many officials are allowed to keep the fees which they collect in lieu of fixed salaries, and this practice results in very serious evils. In the first place, some fee-paid offices, particularly those of sheriff and register of deeds in popu- lous districts, have come to yield princely incomes, and the scramble for these rich offices constitutes a prolific source of political corruption. In the second place, fee payment of public officials often impels them to an excessive and pernicious activity, in which their own interests and those of the commonwealth are placed in direct conflict. In a few states, for instance, prosecuting at- torneys are paid so much per conviction, the fee increasing with the heinousness of the offense, while in many cities and villages the police force and city courts are supported partially by fees and fines. Under these circumstances, officials bend their activity to the conviction of offenders, not to the prevention of crime and 608 OUTLINES OF ECONOMICS the reform of the criminal; they frequently set traps for persons who are likely to break the law, creating the temptation and the opportunity in order that they may increase their emoluments. In Wisconsin, sheriffs were for many years paid so much per head for the tramps whom they fed and lodged. The system, as has been said, placed a "direct premium upon vagrancy." 1 During the existence of this system in Wisconsin, tramps were "often furnished with liquor, tobacco, and newspapers, to induce them to return." Finally, the fee system has been a constant and shameful corrupter of justice as dispensed by justices of the peace in "the people's courts." In most states there are several justice's courts open to the plaintiff who desires to bring suit. In consequence, a disgraceful competition springs up, each justice endeavoring to swell his business and multiply his fees by con- stantly finding for the plaintiff, with the result that our judicial system is thoroughly vicious at the point where perhaps it comes in closest contact with the masses of the people. The remedy is in the substitution, wherever possible, of regular salaries for fee stipends, and in the institution of methods of accounting which will hold public officials to strict accountability for every fee collected. Fortunately, the movement of legislation, while slow and obstinately fought by the politicians, is in the right direction ; and in almost every state, public officials are befi^g required to turn their fees into the general treasury and accept instead a fixed compensation. Special Assessments. Where the operations of the govern- ment confer a special benefit upon some restricted group of in- dividuals, those individuals are often led to exercise undue in- fluence upon the government to secure that service, if the latter is supported by appropriations from the general funds. Jobbery and graft are encouraged. On the other hand, if the only way the group of individuals can secure the service is by expenditure of the common funds, the government or legislature often delays the expenditure unduly for fear of criticism or because of unwise parsimony. Thus in cities where the method of special assess- 1 T. K. Urdahl, The Fee System in the United States, p. an, et passim, from which the other quotations cited in this section are taken. PUBLIC REVENUES 609 ment is not used, it often happens that the opening of a street is delayed long after the time when it would be desirable for the citizens most interested, although perhaps the latter would be willing to defray the cost from their own pockets, were this permitted. A recognition of these facts in recent years has led to a striking development in the United States, of the benefit principle as ex- emplified in the method of special assessments. The special assessment has been used sporadically in many countries for several centuries, but it was first regularly used on a wide scale in the United States, in the latter half of the nineteenth century. Its place and importance among the regular derivative revenues is shown in Table I, page 611, from which it appears that special assessments aggregating nearly $40,000,000 were collected in 1902. This amount constituted less than 3 per cent of all the derivative revenues; but as the national government collects no special assessments and Massachusetts is practically the only state which makes use of the special assessment in state finances, the real importance of the special assessment appears more clearly from an examination of its place among municipal revenues. Among cities of more than 8000 inhabitants in 1903 special assess- ments constituted nearly 8 per cent of the derivative revenues and yielded almost one tenth as much revenue as all kinds of taxation. The special assessment has been approved by the American courts because it places at least a part of the cost of the service upon the beneficiaries of the service, a rule which can sometimes, but not often, be violated without subjecting the government to excessive and corrupting private influence. The special assess- ment has appealed to the people, however, because it permits public improvements to go ahead at a pace which would be im- possible if taxation were the only fund for defraying the cost of the improvements. Needless to say, the special assessment has occasionally stimulated extravagance and premature development. Thus, in New Jersey, in the last quarter of the nineteenth century, several large cities were practically thrown into bankruptcy by undertaking ambitious public works, in which the special assess- 6 10 OUTLINES OF ECONOMICS ment played an important part. And in New York, under the Tweed regime, the system of special assessments furnished an excuse for undertaking public works in which corruption flourished, and which probably would never have been undertaken, had it been known in the beginning that their cost would have to be partially defrayed by taxation. " The works had been carried on upon a scale of audacious extravagance, and in portions of the city where they were not at the time justified. Great avenues were laid out and improved largely for the purpose of giving fat jobs to favorite contractors, and to provide fine drives for the pleasure and convenience of others than the abutting property owners " * * On the whole, however, the special assessment has been an unusual success as a fiscal expedient, and has proved an im- portant, if not an indispensable, factor in the development of American cities. Where its use has been followed by extrava- gance, speculation, or jobbery, these evils are to be attributed almost wholly to political corruption of the government, and only in a very small measure to the special assessment itself. Most of the evils, moreover, have arisen where the city government, or some department of the city government like that of public works, has been given the power to order the improvements against the will of the property owners involved; or where as was the case in the example cited above assessments upon particular lots were permitted to exceed the value of the property. Special assess- ments should not be levied against the will of a majority of the property holders subject to assessment, except by a two thirds or three fourths vote of the city council, and in no case should the assessment exceed a small fraction of the value of the property against which the assessment is laid. Where these rules are observed, the special assessment is unlikely to lead either to pre- mature development or hardship upon the property holder. Taxes. More than 70 per cent of all the public revenues, and nearly 95 per cent of the regular derivative revenues, are obtained from taxes, so the problems of taxation are the most important with which the public financier has to deal. These 1 Rosewater, Special Assessments: a Study in Municipal Finance. PUBLIC REVENUES 8. & 2 o 2 H ^ ^ Q s s x s < H h U i S i/-, IO 1-1 OO PI -r n PO M oo i^ >0 PI PO PI 8 u * < M Pi ON IO M M T * M PO M 8 o *< u O U-, 10 S cT ~ 8 C X O\ OO O TT PI o cj M oe ^ 00 '"i H ^O O H Os j^ c> t> r\ Q " "* ~ f>> ^3* < 5 j^ r< o 2 js ^ 'X t ^t oo M B !" O N PO 00 o r*~. Ifl PI 00 f Oj 3 1 $ M IO O OO PO -c * - to O M to t M > in to H 8 >/-, 8 H o M U o PI M dv S :> CI* 'X to o" 10 <*; O0~ o M p n w > t M 2 ^ ~~^ PI Ov M I 5 X * oo M 10 - M ir. ^ M 00~ 00 M o *" H Z H 8 r- 3D X | oc l ^' 'Z O 00 00 | * 1 00_ M IO ON CC r- U', M & a/ 9 *^> CC ^ M o- 9. oO PO ll oo" 9 ^ o" >- Pi ** IO to i 00 8 1r 10 C ~* H X c-^ 00 PI IO J to H ^^ ~ 10 f^. r-r to ^ M 5 00 ^T c aa M J> PO 00 ^. ''Is Cl r 7' ^ *i ^r u 10 -r J^ o 5o M WJ '^ O Tj- 1*1 M f. o_ 00 o ^ < i e> OC_ 10 M t^ to t^ PI 00 "5- ^ R CC M JJ. ^ M to t ^ PI r-^. r* f"; M C4 t^. 00 PI S H e/5 (-1 * PO tP, uo 00 (N 10 r* ON oo" to M J W 00 M 00 M . : R N? 1 1 00 LT. t^ o" 10 M ^ IO H U T PO 00 ^ o^ !7 o .- GV IO O ro "T 5 ^^ H PI * W~, PI PI to t; (- ri rt x a J/j v i' >. c a ; 3 1 1. a\ QJ en in C C : 3 & i 'f~ ' cu u P -r U V * W C/3 [/j r hi ^. | y .y 2 c - ?* V r d I c u ^ '7: 13 u 11 i; -* en | i "Si fe J 'u I; ^ 2 3 ~ 3 j W B, J i T! v 2 en O ft, ^" ^ h 6l2 OUTLINES OF ECONOMICS problems are of two varieties; those dealing with the nature of taxation in general, and those dealing with specific taxes. The remainder of this chapter will be devoted to the general questions. Chapter XXXV will be given over to the more specific problems of American taxation. Justice in Taxation. By far the most important lesson which the student of fiscal questions has to learn is the supreme necessity for tolerance and breadth of view. The factors which condition justice or make for equity in taxation are exceedingly numerous; and the mistake most commonly made by superficial thinkers is to seize upon some one element of justice, build a philosophy upon that alone, and vigorously condemn everything that does not harmonize with their petty and bigoted little system. No maxim less comprehensive than the greatest good of the greatest number, and no rule less sweeping than that of the general welfare, can serve as a safe guide for the financier. 1. Some writers go so far as wholly to deny the right of the State to take private property by taxation. These writers forget that there is no such thing as absolutely private property. As the State determines what shall be private property, so also it determines the conditions of its existence, and the most funda- mental condition of private property is the obligation to con- tribute to the support of the State. The rights of private in- dividuals have always been of a more or less limited nature, and among the rights reserved by the people in their organic capacity will be found, in every civilized state, the right to take a portion of the wealth produced for such purposes as the law-making power may deem fit. 2. However, the State must exercise this power over private property in an equitable manner, or as this maxim is ordinarily expressed in the terminology of constitutional law, taxation must be equal and uniform. Thus, for example, Section i, Article 10 of the Constitution of West Virginia provides that: "taxation shall be equal and uniform throughout this state, and all property, real and personal, shall be taxed in proportion to its value, to be ascertained as directed by law." Now, if we examine the way in which these requirements of equality and uniformity have PUBLIC REVENUES 613 been interpreted in the administration of practical justice and it is the kind of justice that will stand the wear and tear of practical application with which we are concerned we find that equality and uniformity have come to mean little more than this, that taxation shall not be arbitrary, capricious, or plainly unreasonable and that within each class of persons or object the burden shall be equal, (a) Everywhere the legislature is given a wide latitude in exempting property, so that institutions and industries which are regarded as of peculiar value to the people may be encouraged by freedom from taxation. Almost every- where, poll taxes which impose an unequal burden upon the poor, liquor licenses which impose unequal obligations upon the saloon, inheritance and corporation taxes which single out partic- ular classes of society for unusual taxation, are sustained by the courts. Justice in taxation, then, does not require rigid equality or narrow uniformity of treatment, (b) Institutions which are socially harmful may be subject to peculiarly drastic and oppressive taxation; that is to say, justice may take into account sumptuary considerations, (c] Old taxes, which would not be used if they were not already intrenched in the fiscal and social system, are permitted to endure; justice takes cognizance of the fact that, other things being equal, an old tax is a good tax by very reason of its age. (d) Indirect taxes which weigh more heavily upon the poor than the rich show no signs of disappearing; that is to say, justice gives due weight to the productivity of a tax, its cheapness of collection, and convenience of payment, and balances these con- siderations against factors which we are accustomed to regard as more fundamentally ethical, (e) Taxes may be employed to sup- press state banks of issue, protect home manufactures, and in general to accomplish political and social ends other than the mere raising of revenue. Taxation is seldom the best agent of social or political reform. If there is an evil which needs eradica- tion, the best way is to suppress it directly, if possible, rather than discourage it a little by general taxation. But this does not affect the general proposition that where taxation is an efficient remedy, or the only remedy, justice sanctions its employment. (/) Finally, it is plain that, however we strive, nothing better than approxi- 614 OUTLINES OF ECONOMICS mate justice can ever be secured in taxation. A system that frankly recognizes this truth and makes for rough justice, by the imposition of taxes which are simple, stable, convenient, inex- pensive and productive, is far better than one which attempts to secure exact justice through complex and delicate schemes of taxation which cannot be definitely or efficiently administered. 3. The theory of justice most widely accepted by American courts at the present time is expressed in the maxim that taxes should be proportioned to benefits derived. Like other rules of justice, this maxim contains elements of truth and elements of error. It is a fairly helpful guide, for instance, in dealing with public revenues other than taxes. Public prices, fees, and special assessments should, as we have seen, be proportioned to benefits, unless there is strong reason for departing from the rule. And in the apportionment of taxation among districts or govern- mental sections, the rule still retains, and probably always will retain, a large measure of validity. Taxation, we say, must per- tain to the district taxed, meaning by this that under ordinary circumstances it is not wise to tax District A for the benefit of District B; although there are important exceptions to this rule. But in the apportionment of taxes among the individuals of a given district, the rule has little or no place. This conclusion follows, if for no other reason, from our definition of the word "taxes," which we confine to contributions levied without reference to special benefits received, either because no special benefit can be assigned, or because (as in the case of free schools) we specifically desire to lift the cost of the service from the shoulders of some of those who specially benefit by the service. Moreover, in general, it is impracticable to determine what proportion of the general benefits of government accrue to particular individuals. 4. At the present time a great majority of economists agree that taxes should be apportioned according to "faculty" or ability to pay. It must be confessed that the rule is not very satisfactory. For example, the faculty principle fails to explain such a generally satisfactory tax as the inheritance tax, 1 which is sometimes ad- 1 The attempt is often made to justify the inheritance tax by the ability theory, but unsuccessfully. See West, The Inheritance Tax, (Revised Edition), pp. 205- 208. PUBLIC REVENUES 615 justed to the size of the inheritance and the relationship of the heir, and sometimes to the size of the estate from which the in- heritance is taken, but never to the total property, income, or general ability of the recipient. Moreover, the ability principle is not very precise. No simple measure of ability exists, and many taxes, which under a superficial examination seem to con- form to the rule, such as the general property or income tax, are found upon closer examination to violate the rule in a thousand ways. Despite all these defects, however, the ability principle has elements of great strength. It satisfies our sense of justice, in the first place, when explicit reasons cannot be given for de- parting from a general rule; and it expresses the ideal towards which we strive in voluntary contributions to the church or other voluntary joint enterprises of a social nature. In the second place, we can frequently ascertain with certainty that the rule is being violated, when we cannot define its meaning positively, and hence it is capable of practical application in a negative way. We may therefore accept the rule in this sense, that unless other treatment is justified by the considerations cited in paragraph 2, above, or by analogous reasons, no tax which is plainly dispro- portional to the ability of the contributors, should be employed. 5. Accepting the ability principle as the best simple rule for general taxes as distinguished from the specific taxes noted in para- graph 2, we at once encounter the difficult question, how is ability to be measured ? Different writers have recommended as the basis or measure of ability, income, outgo or consumption, and property. A little consideration will convince the reader that each of these measures is marked by minor defects. The consumption of the poor, for instance, is out of all proportion to their ability to bear the burdens of the state. Property, on the other hand, differs widely in its productiveness, and, moreover, many persons with a little property have large incomes, and therefore great ability to bear taxation. Incomes, similarly, differ in permanence and security, and equal incomes are called upon to support very un- equal numbers of persons. Fortunately, it is not imperative in practice to make a decision between these measures of ability. The necessities of fiscal administration make it imperative in 616 OUTLINES OF ECONOMICS actual practice to employ all three bases of taxation. Property, consumption, and income are all employed in the United States at the present time and will unquestionably continue to be em- ployed for many generations. Progressive Taxation. After we adopt any concrete measure of ability, we soon realize that it is only approximately correct, because we are immediately confronted with the question: Does ability increase in direct proportion or more rapidly than our measure of ability; in other words, shall taxes be laid in direct proportion to income, property, etc., or shall the rate be increased as the amount of income or property increases ? The first method is called proportional taxation, the second progressive or graduated. If the rate diminishes as the income or property increases, we speak of it as regressive taxation; and if the rate increases faster than the income or property, but toward a fixed limit which it can never exceed, it is referred to as degressive taxation. 1 The last kind of rating is of course a special variety of progressive taxation, and usually results from the combination of a nominally proportional rate with the exemption of a fixed sum from all in- comes or assessed wealth. The American property tax is theo- retically a degressive tax, though it is regressive in practical effect. From the theoretical standpoint our real knowledge upon this subject is exceedingly unsatisfactory. On the whole, the argu- ments of those who approve progressive taxation are more con- vincing than those of its opponents, and a majority of economists at the present time agree in asserting that ability increases faster than income, property, or any common measure of ability. If we construe ability as ability to bear sacrifice (as John Stuart Mill and some other authorities do) and confine our attention solely to the consumer, there can be no doubt that progressive taxation is the means by which the least sacrifice will be visited upon the community as a whole. 2 This is a strong argument because one of the chief immediate effects of taxation is to deprive 1 The income tax of Hesse, German}', begins at .6 per cent on small incomes and approaches, but never quite reaches, 5 per cent, as the incomes become very large. 2 See Carver, "Ethical Basis of Distribution," Annals of the American Academy of Political and Social Science, Vol. VI, pp. 79-99. PUBLIC REVENUES 617 persons of the necessaries, conveniences, and luxuries of life, while the maxim of the greatest good to the greatest number - or as it works out in taxation, the least sacrifice to the least num- ber is one of the most widely accepted rules of social conduct. Surveying the ability theory from the positive standpoint of ability to acquire or produce property, we find the testimony almost universal, that as the fortune or income increases, the ability to earn or produce more increases at an accelerating pace. "It is the first thousand that counts," in the language of the successful man who is telling the younger generation how he succeeded. Coming to the more concrete and more practical arguments, we find that the balance of opinion also inclines to the side of those who favor progressive taxation. Let us briefly recapitulate these arguments and attempt to estimate their net resultant. Those who oppose progressive taxation charge that the proposal is socialistic, that it would discourage the accumulation of wealth, that it would not be particularly productive, meaning by this that the element of progressivity adds little to what would be produced by a proportional rate, that it would stimulate fraud and evasion, that it would interfere with the device known as "collection at the source," and that finally the whole principle is arbitrary and capricious in the sense that there is no natural limit to the increase of the rate. To these charges the defendants of progressive taxation present plans 1 by which collection at the source and progressive rating may be successfully combined in the same system; and reply, further, that terms are immaterial and questions cannot be settled by bandying epithets such as "socialistic," "anarchistic," and the like; that every tax discourages the accumulation of wealth; that whether the tax will be productive or not, it will relieve the poorer classes to the extent that the progressive rates do actually fall upon the rich; that persons capable of evading their obliga- tions to the government will attempt to evade proportional taxes as well as progressive taxes; and that all taxation is more or less arbitrary, resting upon the judgment and common sense of the 1 Report from the Select [British] Committee on Income Tax, 1906 [365], pp. iii-vii. 618 OUTLINES OF ECONOMICS legislature. The exemptions made in every tax law, the size of license fees of all kinds, the rates of excise and customs duties, are all "arbitrary" and unlimited in the sense that progressive taxation is arbitrary and unlimited. Finally, the defendant of progressive taxation points out that, owing to the great prominence of indirect taxes in our revenue system and the tendency of as- sessors to assess large properties at a lower proportion of real value than smaller properties, American taxation to-day is in practice regressive, and some progressivity is needed, if only to balance the admitted regressivity of existing taxes. While general considerations thus seem to warrant a most persistent effort to introduce a moderate measure of progress- ivity into our direct taxes, the student is warned that this should not be done in any doctrinaire or off-hand fashion. A thousand considerations of practical expediency must be taken into account in the shaping of a revenue system, and in the end we are more likely to attain the goal which the advocates of progressive taxa- tion seek by careful exemptions from taxation, by special taxes upon corporations, monopolies, inheritances, and certain forms of income, and by directing expenditures to the succor of the weak and the equalization of opportunity, than by the introduction of any far-reaching single tax such as a progressive income or prop- erty tax. No tax system, then, can be fairly judged without reference to the character of expenditures. Where the expenditures are wasteful, corrupt, and unwise, heavy taxation is a curse, although even here the rational method of reform is rather to root out the corruption and improve the administration, than to reduce taxa- tion, although temporarily it may be wise to do the latter. But where the expenditures are on the whole wisely and beneficently used, heavy taxation is a blessing. No country was ever yet ruined by large expenditures of money by the public and for the public. The true theory to be observed in levying taxes was tersely expressed in the 4ist section of the constitution adopted by Pennsylvania in 1776: "No public tax, custom or contribution shall be imposed upon, or paid by, the people of this state, except by a law for that purpose; and before any law be made for raising PUBLIC REVENUES 619 it, the purpose for which any tax is to be raised ought to appear clearly to the legislature to be of more service to the community than the money would be if not collected, which being well ob- served, taxes can never be burthens." The Shifting of Taxes. Up to this point we have been speak- ing as if a tax must remain where it is originally placed. This we know is not always the case. Excise taxes, for instance, are usually levied with the expectation that they will be passed or shifted from the business man, who first pays them, to the con- sumer or some other person. The conditions which control the shifting of taxes must evidently be considered at least in a very general way before we discuss the practical working of the American system of taxations. The word "shifting" usually refers to the increase of price by which the original payer of the tax attempts to recoup himself. This increase of price is usually accompanied by collateral economic disturbances or dislocations suggested by the phrase "re- percussion of taxes" which is frequently employed in this con- nection that are quite as important as the mere change in price. For instance, an excise tax (per unit of product) upon a monopoly may raise the price by as much or even more than the tax itself. But the monopolist nevertheless feels the burden of the tax in reduced profits. When we say that a tax is shifted, then, we do not imply that the original payer evades all the evil effects of the tax. And in any conclusive discussion of shifting, account should be taken of the incidence or benefit of governmental expenditures. A tax system which bears heavily upon the poor may be justified by expenditures which are largely employed to educate and pro- vide opportunities for the poor. Mobility is the chief factor which controls shifting; and this in turn is largely dependent upon the generality or scope of the tax, and upon the existence of monopoly or differential advan- tages. Place a tax upon a person or thing which can easily move to a jurisdiction where such taxes are not imposed, and the tax is very likely to be shifted. Local taxes upon mortgage loans offer a good example. Such taxes are very likely to raise the interest rate by as much or a little more than the tax rate, 620 OUTLINES OF ECONOMICS the "little more" being explained by the trouble imposed upon the lender in looking after the tax and the risk that the tax rate will be increased. On the other hand, if mortgage lenders are constrained by ignorance or custom or the existence of particu- larly high rates in this district to keep on supplying the old amounts of loans, the tax will not be shifted. Unless the supply can be or is reduced by the tax, shifting will not ordinarily take place. Naturally, therefore, the particular nature of the supply is of prime importance. We may illustrate by an excise tax per unit of product upon competitive industries of various kinds. In industries subject to the law of constant expense, a fixed tax per unit of product will raise the price by just the amount of the tax, in theory. In industries subject to the law of increasing expense, however, the reduction of the supply caused by the tax somewhat reduces the expenses of production per unit exclusive of the tax, and on this account prices in such industries will increase by an amount less than the tax. In industries subject to the law of diminishing expense, on the other hand, the price will be raised by an amount equal to the tax, plus an amount equal to the in- creased expense of production caused by the limitation of supply. Mobility, as has been said, is the most important factor in this connection, and it may be restricted or destroyed in a variety of ways. Monopoly limits mobility, and, as we have seen in Chapter XIII, 1 the monopolist cannot shift a fixed tax or a propor- tional tax on net profits unless the tax is so high as to reduce monopoly profits below the amount that could be earned on the same investment in a competitive industry. For somewhat similar, but not exactly the same reasons, differential gains from durable property are peculiarly susceptible to taxation. Thus, economists generally indorse the proposition that a tax on economic rent falls upon the landlord and cannot be shifted. The validity of this depends both upon the durability of land and the fact that the tax is levied upon a differential element. If land wore out and had to be replenished, the tax would reduce the future sup- ply of land and hence raise its price and its rent in the future. Similarly, if the tax were levied upon the product of marginal or 1 pp. 200, aor. PUBLIC REVENUES 621 no-rent land, it would elevate the margin, reduce the supply of those products or services which land affords, and in this way again raise prices and partially reimburse the landlord. But, by hypothesis, neither of these suppositions are true. Land, as we define it, does not wear out; and at the margin land yields no economic rent. The proposition that a tax on economic rent cannot be shifted is true, also, only of a proportional tax. A tax of so much per bushel or pound upon agricultural produce would move the margin of cultivation and thus affect prices. Indeed, the exact form of a tax whether fixed, proportional, or progressive, upon net or gross returns, upon product or upon profit is of funda- mental importance always. Generally speaking, proportional taxes upon net income are less easily shifted than other forms of taxes. If the object of taxation be durable and the tax a special or exclusive one, the value of the object is likely to be reduced by the capitalized value of the tax. Prospective purchasers of land, for instance, always take into account the taxes that are likely to be levied upon it, capitalize these, and subtract their capitalized value from the amount which they would pay for the property if it were not liable to taxation. The apparent result of this capitalization or amortization of taxes, as the process is called, is to place the burden of an endless succession of taxes upon the original owner, and relieve subsequent purchasers of any real burden. Many present-day followers of Henry George find in this prin- ciple of 'amortization at once a justification and a method of securing for society all economic rent. Under present conditions, they say, a man who buys land wholly escapes taxation upon it. Consequently, in order to make landowners pay as much as other people we should have to increase the tax upon land by a rate equal to that paid by the average tax-payer as often say every thirty years as the land of the community changes holders. In this way the State could gradually and with justice absorb all economic rent. 1 1 Sec the paper upon "The Single Tax" by C. B. Fillebrown in State and Local Taxation (the Addresses and Proceedings of the First National Conference of the National Tax Association), pp. 286-293. 622 OUTLINES OF ECONOMICS But this whole chain of reasoning is fallacious for three reasons: (a) This capitalization takes place only to the extent that the tax on land is exclusive and unequal, and modern taxes upon land are not of this nature. (6) In so far as this programme of the single taxers were anticipated and understood, it would visit the whole burden of the "reform" upon present owners, instead of being distributed over several generations. Sub- sequent purchasers would discount these periodic increases of the tax and pay to owners for their land only the present value of the rapidly vanishing income from land. Land would be valued simply as a terminable annuity, (c) This whole doctrine over- looks the inevitable consequence that, if "the selling value of land is an untaxed value" l and if "the burden of a land tax can- not be made to survive a change of ownership," 2 these facts would so increase the demand for land that the profits from its purchase and ownership would not exceed profits in other lines of invest- ment. Given plenty of time, active competition, together with a knowledge of the facts of the situation, and such inequalities of taxation are inevitably smoothed out by the natural movement of capital toward the taxless field or away from the field in which burdens are particularly severe. This inevitable reckoning of taxation among the disadvantages of industry, brings it to pass that many old taxes are diffused over the entire community. Such diffusion does not take place when the nature of the supply prevents it from varying in nice cor- respondence with the prospects of profit. A poll tax upon laborers, for instance, will in our opinion not be shifted, as it is likely to lower their standard of living, stimulate the birth rate, and in turn (other things being equal) actually reduce wages. But exclusive taxes on capital and business will be diffused; and for this reason there is a profound practical truth in the famous dictum of Canard that "every old tax is good; every new tax is bad," when sympa- thetically interpreted. Of course this doctrine assumes that in- dustrial changes are infrequent. The tax system must and should 1 See the paper upon " The Single Tax " by C. B. Fillebrown in State and Local Taxation (the Addresses and Proceedings of the First National Conference of the National Tax Association), p. 290. * Ibid., p. 290. PUBLIC REVENUES 623 vary with changes in the fortunes of business enterprise. The development of a new industry making unusual and unexpected profits offers a good opportunity of relieving an old industry that has unexpectedly fallen upon evil days. And for this reason it is highly desirable that state constitutions prescribing a rigidly uniform system of taxation should be amended so as to permit reasonable classification of property and business for purposes of taxation. All these qualifications of the diffusion theory are true and important. But the fact still remains that under ordinary conditions nothing is worse in a tax system than uncertainty, continual tinkering with rates, and capricious readjustment of methods. QUESTIONS AND EXERCISES 1. In accordance with what principles of classification do we distinguish fees, special assessments, and taxes? 2. Enumerate six distinct fees commonly employed by state governments. 3. Can a fee exceed the cost of the service to the state? Is the familiar "high liquor license" a fee or a tax? 4. What accounts for the rapid development of the special assessment in the last fifty years? Is it possible to apportion the benefits of a public im- provement with any degree of accuracy? 5. Make a table from the Census Volume on Wealth, Debt, and Taxa- tion, showing the relative importance in each governmental division, of the taxes differentiated in Table I. 6. Why are liquor licenses distinguished from other licenses and permits? 7. Has the state a greater right to tax land and natural agents than wealth which is, in large degree, a product of human labor? 8. May monopolies be equitably subjected to special taxation ? Even if the monopoly rests upon superior efficiency, or upon patent rights justly acquired ? 9. Is rigid equality of taxation a primary and fundamental desideratum? Is it possible of achievement? Is there any real distinction between the so-called ethical qualities (of equality, uniformity, etc.) and the so-called ad- ministrative qualities (convenience, elasticity, productivity, etc.) of a tax? 10. Is the benefit principle wrong or merely impossible of application? If wrong, why do we retain it in fees and special assessments? n. Is it easier to measure ability than benefits? 12. Is progressive taxation arbitrary ? Can it be satisfactorily considered apart from the effect of public expenditures ? 13. Work out the effect of an excise tax on a monopoly subject to the law of increasing cost. 624 OUTLINES OF ECONOMICS REFERENCES BASTABLE, D. F. Public Finance, Book III, Chap. Ill, "The Distribution of Taxation," pp. 281-315; Chap. V, "The Shifting and Incidence of Taxation," pp. 337-362; Chap. VII, "The Canons of Taxation," pp. 382-391. CARVER, T. N. "Ethical Basis of Distribution," Annals of the American Academy of Political and Social Science, Vol. VI, pp. 79-99. COOLEY, T. M. A Treatise on the Law of Taxation (3d ed.), Chap. II, "The Nature of the Power to Tax," pp. 43-82; Chap. VI, "Equality and Uniformity in Taxation," pp. 254-410. CROWELL, T. Y. & Co. (Pub.). Equitable Taxation, Essay by W. E. Weyl, pp. 17-31. ELY, R. T. Taxation in American States and Cities, Part I, Chap. III. GRAY, J. M. Limitation of Taxing Power on Public Indebtedness, "Equality and Uniformity," Chaps. XVIII-XXIV, pp. 642-915; "The Origin and Growth of Modern Taxation," pp. 25-54. JUDSON, F. N. A Treatise on the Pou'er of Taxation, passim. ROSEWATER, VICTOR. Special Assessments: a Study in Municipal Finance, passim. Studies in History, Economics, and Public Law, Columbia University, Vol II, No. 3. SELIGMAN, E. R. A. The Shifting and Incidence of Taxation, Part II, Chap. I, "General Principles," pp. 179-219. SELIGMAN, E. R. A. Progressive Taxation in Theory and Practice, Part II, Chap. IV, "Conclusion," pp. 190-200; Part III, "Application of the Progressive Principle to American Taxation." pp. 201-217. National Tax Association. State and Local Taxation [Addresses and Proceed- ings of the First National Conference]. URDAHL, T. K. The Fee System in the United States, Chap I, pp. 49-67; Chap. VIII, pp. 210-230. Transactions of the Wisconsin Academy of Science, Arts, and Letters, Vol. XII, Part I. WESTON, S. F. Principles of Justice in Taxation, passim. Studies in History, Economics, and Public Law, Columbia University, Vol. 17, No. a. CHAPTER XXXV PUBLIC REVENUES; FEDERAL, STATE, AND LOCAL TAXES FEDERAL TAXATION Direct and Indirect Taxes. The fundamental character of the American revenue system is determined by those clauses of the federal Constitution which provide that "direct taxes shall be apportioned among the several states . . . according to their respective numbers"; that "all duties, imposts, and excises shall be uniform throughout the United States"; and that "no state shall, without the consent of Congress, levy any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws." Just what the words duties, imposts, excises, direct and in- direct taxes signify, as used in the Constitution, has been a matter of considerable discussion. Ordinarily the word duty "means an indirect tax imposed upon the importation, exportation, or con- sumption of goods," being given "a broader meaning than cus- tom, which is a duty imposed upon imports or exports," while "the term impost also signifies any tax, tribute, or duty, but it seldom applied to any but indirect taxes. An excise duty is an inland impost levied upon articles of manufacture or sale, and also upon licenses to pursue certain trades or to deal in certain commodities." But all these definitions are made to hinge upon the meaning of direct and indirect taxes, and that meaning is exceedingly doubtful. Until 1894, it was believed by most persons that as used in the Constitution of the United States, these terms were to be given an historical interpretation, to be accepted as used in 1789, and that in this interpretation capitation and land taxes 2S 625 626 OUTLINES OF ECONOMICS were probably the only forms of direct taxes. This belief was sustained by the fact that the Federal Supreme Court at various times sanctioned the employment by Congress of income, inherit- ance, and special property or consumption taxes. But in the income tax decision of 1894 the Supreme Court reversed its earlier decisions, declared the income tax to be "direct," and interpreted the words direct and indirect in accordance with the economic rather than the historical or legal use of those terms. According to most economists, direct taxes are taxes levied by the State upon those who are expected to bear the burden of them, while indirect taxes are supposed to be shifted to other persons. In the economic sense, poll taxes, property, income, and inheritance taxes are usually called direct, while customs taxes and excise taxes are called indirect. It is plain that the economic meaning of these words is exceed- ingly vague, because it is made to turn upon the expectation of the user concerning the shifting of the tax, and upon no subject in the entire province of political economy is there more uncer- tainty than upon the shifting of taxes. Because of this uncer- tainty, economists have for years protested against the use of these terms at all in scientific analysis, although they have tried to introduce a more consistent usage, owing to their constant employment in popular discussion. Under these circumstances, it was exceedingly unfortunate that the Supreme Court turned away from the legal interpretation of the words. When the latter were placed in the Constitution, they probably had no defi- nite or accepted meaning; they had no definite or accepted meaning as used later by economists or publicists ; and the only way they could attain precision was by legal interpretation. After a number of consistent opinions which gave the words a definite connotation and promised to clear up a difficult situa- tion once for all, the Supreme Court threw everything into chaos again by revising opinions which had stood unchanged for many years. Use of Direct Taxes by the Federal Government. The effect of the constitutional provisions which we have been discussing has been to concentrate federal taxation almost wholly upon con- PUBLIC REVENUES 62; sumption, since direct taxes when apportioned according to population have shown themselves to be unjust, unproductive, and exceedingly difficult of collection. Congress has made use of direct taxes only five times during the history of the national government. Two million dollars was apportioned in 1798; $3,000,000 in 1813; $6,000,000 in 1815; $3,000,000 in 1816; and $20,000,000 in 1861. Except in the tax of 1798, Congress has always permitted any state to assume its quota and raise the money as it saw fit, although provision was always made for the collection of the amount usually by taxes on lands, houses, and slaves by federal officers, in case the quota was not as- sumed by the state government. It would be difficult to exag- gerate the unsatisfactory character of such taxation. In no case has the federal government ever collected the full amount of the tax. The taxes levied in 1814-1816 continued to be collected until 1839. The last payments on the direct tax of 1861 were not received until 1888; and in 1891 a law was passed abolishing further collections and authorizing the amounts which had been collected under the act of 1861 to be returned. Considerable scandal arose out of this refunding act owing to the enormous commissions paid to certain lobbyists for their work at Washing- ton in securing the passage of the law. Experience has thus made it amply clear that the federal government must put its dependence upon customs duties, excises, and similar taxes. Customs Duties. Among federal revenues, customs duties easily occupy the place of first importance. From the founda- tion of the federal government in 1789 until the Civil War, with the exception of a few excise taxes collected between 1791 and 1802, the federal government derived nearly all its permanent regular revenues from customs taxation, and since the Civil War considerably more than 50 per cent of the permanent revenue has, on the average, been derived from this source. From the very beginning, moreover, our customs duties have been in spirit, if not in effect, protective; and it thus becomes necessary to consider the connection between the protective and revenue principles, in addition to the more strictly fiscal aspects of customs duties. 628 OUTLINES OF ECONOMICS Protective duties are imposed in the hope of diminishing im- ports and substituting in their stead the products of home manu- facturers. To the extent, therefore, that they are successful in their purpose, they reduce the customs revenues and justify the statement that there is a fundamental antagonism between the protective and revenue principles. However, the reduction of importation does not signify that the consumers of the article in question are not taxed. So long as the price remains higher than it would be if no duty were imposed, the people are taxed to the extent of the difference, the proceeds of the tax going to home manufacturers in the form of an unmeasured, unregulated bounty, whose burden upon the taxpayers is no less real because unper- ceived. It is equally evident that no protection is given unless the price is raised. The popularity of customs duties is largely explained by the belief that the foreigner can be made to bear the burden of the tax. He can in some cases, but not in the majority of cases. For the most part it is believed that the burden must be borne by the home consumer. But whatever the extent to which the foreigner can be made to pay the tax, to that extent the tariff fails to replace foreign by home products; in short, fails to "pro- tect." We cannot save our cake and eat it. The more the protection or bounty to the home manufacturers, the greater the tax upon the consumers, the less the shifting of the tax to the foreigner, and the less the revenue to the home government. The protectionist is logically deprived of the time-worn argument that the foreigner foots the bill. The shifting of import duties may be best explained by noticing separately the immediate and ultimate incidence, (i) The immediate effect of the tax will be to discourage certain foreign producers from shipping their products to the newly restricted market, and prices will tend to rise because of dimin- ished supply. If the product is controlled by a foreign monopoly, the price may not increase; but where the foreign production takes place under competitive conditions, and in most cases where the production is monopo- lized, the price will be raised. The increase of price may be more or less or exactly equal to the tax according to the readiness with which foreign pro- ducers find a new market, but in a large majority of cases the burden of the tax will be shared by the producer and consumer, the latter according PUBLIC REVENUES 629 to the majority of authorities bearing most of the burden. That the burden, however, is partially borne by the foreign producer accords not only with the best theory, but with the great interest displayed by exporters every- where in the tariff legislation of foreign countries, and the sacrifices which protectionist governments are willing to make in reciprocity treaties for the purpose of obtaining advantageous terms for their own producers. (2) Eventually, however, the initial increase in price may stimulate home production, and this can only take place when the increase of price is less than the duty, because if the price rises by the whole amount of the tax, the foreigner will still possess his initial advantage. If the home producer totally ousts the foreigner, then the consumer bears all the difference between the existing price and the price that would rule if no duty were imposed although, of course, the treasury receives nothing. If the home producer secures only a part of the home market, it is plain that, under ordinary circumstances, the foreigner pays part of the tax, i.e. the amount per unit of product by which the duty exceeds the increase of price; whilst, as before, the home consumer pays, on every unit consumed, a tax equal to the differ- ence between the old and the new prices. When, however, we attempt to go further and take account of the indirect effects of protection, the problem becomes almost hopelessly complex. Modern economists, however, are substantially agreed that the foreign producer bears a much larger share of the average customs duty than the English economists of the first half of the nineteenth century were willing to admit. From the standpoint of revenue, American customs duties have the great virtues of high productivity, convenience of pay- ment, and cheapness of collection. Along with these important virtues are associated almost all the vices to which indirect taxes are subject, (a) The most important defects of our customs taxes are their unreliability and uncertainty. Historically, they have shown a pernicious variability, expanding when increased revenue spelt extravagance, contracting when the country sorely needed larger revenue. In 1791, for instance, the customs revenue exceeded the total ordinary expenditures by over 41 per cent, while in the very next year they fell short of the expenditures by 58 per cent. Between 1791 and 1860 inclusive, the customs receipts actually exceeded the expenditures in thirty-four years; varied between 50 and 100 per cent of the expenditures in twenty- eight years; and fell below 50 per cent in eight years. In 1860, more than 84 per cent of the expenditures were secured from this source, but in 1863 less than 10 per cent, so inadequate is 630 OUTLINES OF ECONOMICS the customs revenue in a serious war when money is most needed. In 1864, Congress made desperate attempts to increase its cus- toms revenue. In the tariff act of that year about fifteen hun- dred articles were enumerated, and the average rate approxi- mated 50 per cent; yet the receipts dropped from something over one hundred and two millions in 1864 to less than eighty- five millions in 1865, constituting only 6.5 per cent of the total expenditures in the latter year. During the history of the national government, the customs revenues have varied with the industrial condition of the country, the prospects of peace or war, the power of the tariff lobby, the prosperity and commercial policy of foreign nations, but almost never in nice accordance with the financial needs of the federal government. Where the tariff is controlled by revenue rather than protective purposes, it can be made strik- ingly stable and responsive to the control of the treasury. " The English revenue from this source has kept very near ^20,000,000 per annum for the last thirty years. In the period 1815-1895, it has only varied between ^24,000,000 and 1 9,000,000, not- withstanding the extensive remissions of taxation." i (b) From the fiscal standpoint, our tariff system is far too com- plex and cumbersome. Whether we tax many imports or few, the major part of the revenue comes from comparatively few imports, so that by extending the list of dutiable articles we merely add to the cost of collection and increase the interference with commerce, without materially augmenting the yield of the tax. Great Britain taxes less than fifty articles, and nearly all of her revenue from import taxation comes from five articles, tobacco, tea, spirits, wine, and sugar. Compared with direct taxes the cost of collecting our import duties is not high (2.55 per cent of the receipts in 1907), yet it exceeds the cost of collecting the internal revenue duties (1.72 per cent in 1907); and in some customs districts the expenses of collecting actually exceed the tax collected. In fact, the administration of the entire system is cumbersome, inquisitorial, and irritating. "There is no better illustration of a complex and incomprehensible revenue system than the tariff legislation of the United States. It levies 1 Bastable, Public Finance, p. 517 (written in 1895). PUBLIC REVENUES 631 import duties upon goods that make up the country's exports as well as upon those that constitute the normal imports of the nation's commerce; it taxes raw material as well as the manufactured product, and the manufactured product itself is taxed at many stages in the process of its manufacture; the rate imposed is determined in part by considerations of revenue, in part by the desire to grant 'incidental protection,' and in part for the purpose of prohibiting the import of selected articles; the rules of rating are numerous, overlapping each other in many cases and resulting in a confusion of instruc- tions that necessitates a board of appeal in continuous session; the text of the law makes a book of one hundred and fifty pages, while the law and its interpretation used by the officials as a guide in the performance of their duty is a volume of several hundred pages. A law of this sort cannot be comprehended." l Customs duties are either specific or ad valorem. Specific duties are laid in proportion to weight or number, without regard to value, while ad valorem duties are levied in proportion to the value of the commodities imported. Ad valorem duties are open to the objection that they offer a greater temptation to fraudulent valuations, and hence make more difficult the work of the cus- toms officers. Specific duties, on the other hand, while they can be more easily administered, are open to the serious objec- tion that they impose a relatively heavier burden upon less valu- able goods of any class. Owing to their greater ease of collec- tion, however, such specific duties now play a larger part than ever before in our tariff system. Internal Revenue Duties. Second in importance to cus- toms duties are the internal revenue duties, which consist for the most part of excises. Excise taxes are usually paid by stamps placed upon the package of sale, although both in England and the United States the tax upon the commodity is supplemented by license duties upon dealers, which are also paid by stamps publicly exposed by the dealer in his place of business. In 1907 the internal revenue duties yielded $269,666,772, more than 80 per cent as much as the customs receipts, of which 58 per cent came from the tax on spirits, 19 per cent from the tax on tobacco, 22 per cent from the tax on fermented liquors, and the remainder from the tax on oleomargarine, playing cards, back taxes of a miscellaneous character, and penalties. 1 H. C. Adams, Science of Finance, pp. 409-410. 632 OUTLINES OF ECONOMICS Excise taxes, like all taxes, have their grave defects, (a) Like import duties, they must be levied upon articles of wide con- sumption to be productive; and as they are in a large degree shifted to the consumers, they frequently weigh more heavily upon the poor than upon the rich, (b) This regressivity is in- creased by the fact that the taxes are specific, not ad valorem, so that the finer grades of domestic cigars, for instance, pay a Ipwer rate of taxation than the cheaper goods, (c) In order to prevent evasion of the tax, the government is compelled not only to watch, but partially to direct, the process of manufacturing at every step. Producers are required to give bond for the faithful observance of the law, to register raw materials which they buy, and to keep records of the stock on hand in accord- ance with book-keeping methods prescribed for them by the Internal Revenue Bureau. Such interference with private in- dustry is an unfortunate but necessary part of excise taxation. (d) Large systematized businesses bear such interference with less effort than small concerns, and in consequence our internal revenue system unquestionably exerts an influence in the direc- tion of large-scale production, and possibly in the direction of monopoly. The license taxes particularly, which are adjusted only in the roughest way to the size of the business, unquestion- ably weigh more heavily upon the small than the large dealers. (c) Finally, it seems to be the almost universal opinion of com- petent students that excise taxes exercise little influence upon the consumption of articles whose use is believed to be deleterious. An increased tax is as often followed by adulteration as by an increase of the price per unit. The advantages of the internal revenue duties, however, far outweigh their defects, (a) Like the customs duties, they yield an enormous revenue; but although they do fall off somewhat in times of industrial depression, they are in ordinary periods regular and dependable, whilst in times of war they respond readily to increased rates. The increase of old duties and the imposition of new duties during the Spanish War, for instance, raised the receipts from $170,900,641 in 1898 to $273,437,162 in 1899. Many of the taxes yield a proportional increase almost as PUBLIC REVENUES 633 great as the increase in the rate of the tax, a rare virtue in excise taxation, as the rise of the burden usually cuts down the consump- tion, (b) From the administrative standpoint they are very in- expensive to collect, give rise to comparatively little fraud or evasion, and the few industries which they affect have now be- come so habituated to public inspection and control that the latter occasion little complaint, (c) Finally, it is to be noted that although excise taxes are regressive, the burden of the tax is shared by producer and consumer not borne wholly by the latter and the share borne by the producer varies directly with the element of monopoly or differential advantage in production. "Viewed as a whole, the internal revenue system is the most satisfactory part of our entire financial structure, state or federal. Its returns are fairly steady and reliable in times of depression. Its growth is automatic. It is imposed on articles the demand for which is tolerably inelastic. Its burden is not perceptibly felt. It is honestly and economically collected ; and finally, it is abundantly capable of yielding additional revenue, should an unforeseen emergency arise." 1 Taxes on Transactions. In times of urgent need, as in the War of 1812, the Civil War, and the late war with Spain, the federal government has imposed taxes upon various sorts of transactions. Thus, the war revenue act of 1898 imposed stamp taxes on bank checks, telegrams, freight and express receipts, transfers of stocks and bonds, bills of exchange, etc. In 1899, the year after they were imposed, the stamp taxes yielded $43,837,819. The peculiar advantage of taxes on transactions is their quality of immediate productivity. As the figures just quoted show, they may be made to yield largely the very yeai they are imposed. Moreover, the government may make evasion almost impossible by lessening the legal protection and signifi- cance afforded by the documents not properly stamped. An- other advantage is that they cost almost nothing to collect, as the taxpayer buys the stamp himself and places it upon the docu- ment. On the other hand, the general effect of such taxes is to impede business ; and a check on business activity soon lessens the revenue from other sources. 1 Daniels, Public Finance, p. 148. 634 OUTLINES OF ECONOMICS Income Taxes. What shall be done to remedy the inelasticity and regressivity of federal taxation? The remedy most fre- quently advocated is that of a progressive income tax. Income taxes are not new in the United States. All through the colonial epoch earnings or produce taxes, i.e. taxes upon special forms of income, were common ; between the Revolutionary War and 1870, particularly after 1840, many trials of a general income tax were made by the state governments; and in 1863, the federal government levied a general income tax, which was retained for about ten years. In 1894, the federal government again levied an income tax of two per cent upon incomes in excess of $4000, but the constitutionality of the act was promptly assailed, and the Supreme Court, by a majority of one, and after a change in the personnel of the court during the consideration of the case, reversed the earlier findings and held that the income tax could be levied only as a direct tax apportioned among the several states in accordance with their population. An apportioned in- come tax would be so obviously unjust that no one advocates its adoption. But President Roosevelt has recently recommended the income tax to the consideration of Congress and the American people, intimating rather broadly that a reasonable and judicially framed income tax might, if presented to the Supreme Court again, receive a more friendly interpretation. The income tax as employed by the state governments has been a consistent and admitted failure, owing, it is stated by most authorities, to the inability of assessors to tax income at source and the consequent employment of self-assessment. John Smith, living in Massachusetts, receives his income from a mining com- pany situated in Colorado; and as the Massachusetts assessors have no means of ascertaining Smith's ownership of the mining stock, they are forced to depend upon his answer in declaring the amount of his income. Yet it should be noted that the suc- cessful German income taxes are State taxes, resting largely upon declarations of the taxpayer and making comparatively little use of collection at the source. The success of these taxes in Ger- many is probably due to the fact that the rate is low, and the people law-abiding, even in matters of taxation. PUBLIC REVENUES 635 A national income tax has many points of strength, (a) First of all it is to be noted that in England and Italy, in which the in- come tax has been given a trial, experience has justified this form of taxation, according to the majority opinion of those who have considered the matter. 1 (6) Moreover, it is especially noteworthy that income taxation gains in economy and productiveness, and wins increasing approbation as the years go by. This is in sharp contrast with the experience of our states in their use of the general property tax, which has grown more unjust and less workable, the longer it has been tried, (c) In the third place, income is as good, and perhaps better, than any other single measure of ability; so that income taxation seems to be peculiarly consistent with the ethical ideal that taxation should be in accord- ance with ability. (35.74 Territorial governments 261,591 Buildings and sites (outlays) 6,610,475 Military establishment 98,286,299 Naval establishment 55>95>93 Increase of the navy (outlays) 26,667,104 Life-saving service 1,746,841 Light-house establishment 4>537F3i6 Public Health and Marine-Hospital Service 1,356,456 Harbor and river improvements (outlays) 19,590,082 Indians 12,935,168 Pensions 138,425,646 Bureau of Animal Industry, Weather Bureau, and Agri- cultural Investigation 4,536,426 Interest on public debt 28,556,169 Postal service, including Post Office Department 139,134,510 Mints and assay offices 1,456,221 Bureau of Engraving and Printing 2,782,348 Public debt 605,641,539 Premiums on bonds purchased and exchanged 10,907,120 Internal revenue and customs rebates and other refunds 16,881,955 Interest on bonds of Pacific railroads 180 Grants to District of Columbia 3,415,999 District of Columbia expenditures (agency account) .. . 5,168,039 Soldiers' Home permanent fund (transfer) 743> Z 39 Miscellaneous 20,923,099 APPENDIX A S S K u W "S O oo OQ >o M ts. & t^> M O O~ 10 of S O 3 > O rg O >-Oo rj- >~, rf> 00 rf w~, 00 NO 00 O O ON O>O\OO w O O^ OO f^ CX 00_ O_ i^-, 00_ ^ *-i O; N_ tx. fO * >o I s * ^ ^ t\ ^ *O N^j ON 00 M. CK M rf) w N ** nl tf) O> ^, ^ 2; Q gw Sg Es u-oo ' ' 3 ! w 'r lllllllllllllllllll APPENDIX A 68l j eiSJ83Jl*l!l!lS|?E 1 u Q ?t 3 S^ >& 11"^ 2 > 5'1 S *" H S 3& "S^- ***<%* a il*5|5SSS-83l^?!41l8i ITURES * 9J ||!|lff|pl?!l H !"" :XPENE H lilSl5l?:f|-^^?f|* M o (X M O U J? ^" M N 1 1 AYME> 3 I 8 E 3i?^S*5?S 85^4885 D OH g J ! ^i^t^OO ^f ^ vj w O^tCvow rf rO'fvOOO s 4* v S |-2 g S o *^*V..._; : *.".! .S O < u w 1 |1 SilSf s5.?&?ggJi4l S H 8 O Jj y ST3 C E rt o >/; M * <\T M M w.-o-o H C/3 w 1 J J 1 -1 11 J S 2 : : : TJ '5 ^ -2 ~j -s -S c a . c c : DIVISIONS UNITED 682 APPENDIX A PAYMENTS FOR EXPENDITURES OTHER HIGHWAY EXPENDITURES t^ so ? 5- Tf P ^f* ON c\i 00 to GO O NO * M sO ON fM t^ , ON to ON *~" C HI Oo i~- ON Tf IO ^* w ON Tf o ^. M h*, to sO OQ r HI w^ * PO so t^ ON o, CO_ * Oo Os 00_ \j- HI Lr) so" PI PO c\j O * to ON ON P* M HI o? 2> p? ^ jf ON M 00 CO HI sO O ^" t^ so" SO 00 STREET LIGHTING M (M O IO PO ON Ix. OO PO o a GO ^ 00 to Jx. so Q s" ftf PI ci to * PO 00" Os sO (\) to PI tx* ^ W~> M to On so PI Oo Pi PI tx. 'O HI so to O o u-> \r> ^ PI so PI l~ ON sO SEWERS, DRAINAGE, AND OTHER SANITATION Ol (Nl PO o r^. to Oo M Oo * (\1 O T}- f*1 OC 00 PI t^ Pi" rf 00 rr to ON ON CS Er ; sO ON f :- Jo 00 K. ? & N - tx. HI HEALTH CONSERVATION Oo 10 Os PI to 00 M ^)" to PSI so Os M ON Oo to c\) PO IO 00 Tf t^* so Oo 1^ 10 GO to Ov HI CS) PO 00 PO HI HI 10 sO M SO ~ & * N L OQ N so ^ IN" t^* sO ON *~ K, IO SO SO ? J^R IO HI PO to ON PI ^ M HI MISCELLANEOUS PROTECTION TO LIFE AND PROPERTY o *^ 10 N, to so Ov * M OQ IO PO tO PT} SO ~ tx to PO oo O H to >t sO PO 00 Tf \O t"- OO sO 10 ^f 1-1 PI PO IO t~- to M N J^~ tx. so PI ON N -T o H '^f' H O xns t~- O O\ t^ 1 * CO PO DIVISIONS OF THE UNITED STATES Continental United States . . North Atlantic division. . . . New England Southern North Atlantic . . . South Atlantic division. . . . Northern South Atlantic... Southern South Atlantic... North Central division Eastern North Central Western North Central .... South Central division Eastern South Central i : Western South Ct Western division Rocky Mountain Basin and Plateai Pacific Hawaii ' O _u APPENDIX A 68 3 n S3|?g OOOO">/1oCTi>-if^o*<>-'*OOO 2 < |g 51 M X? Io O 5 "% M 11 lotsoooo o f oo'xa' i '>M c^oo OQOoOO^'^ctOOoOi-'OO'O SII-sS SJISSIySSS???^ 3 M -^. CO i-t l^j O^ 00 ^^ to *"O (\i ^ ITJ Qo O\ 00 O **3 CO a 3 13 H Q H i &s N PENDI 1 3 1,1 S & SS^H1,%l?s4?iS x to i CK P M v ^ f xs ^t. "2 ts. s s ^ s> S ^ & ? ^ f ^ 1 CO 1 1 1 H H 9 t* O O O ^^i N XS ^t- "i Oo 1 & ?, * M (^ * CO O~ fO rC fO vd" c\T M ^^ !*!l!|!^*--t* Jed in contin 2 n ts. M_ <5 x^ sfcsssmsigs&gs 1 1 9 1 ^ 2 ^. o\ o OQ ^ ^* ^ ^o *^ *"^ o ^ ^ o ^o in ri~ i-i * " ^ M ^ ^ N (i a t- i 5 C/3 b | ) | f- UNITED STAT Continental United Statt North Atlantic division New England Southern North Atlant South Atlantic division || 1 1 1 1 1 1 ; ; : fit fit i if 1 s -. I,- ^. f * 8 w *9 ** 5 -y 1 | 1 1 1 1|| 1 1 1| 1 1 684 APPENDIX A W " > x z W SM fc OOO 11 O ^^0 " R 5 28 O<^0 OvOOOQOOvC f^GC - O On o T<\I t^T O\O t^rOrOro M >H\O O>*-iOOXi O fa < O H S w Z Q O W oo S >g S O'UO ' ' - Illllllllllllllllll APPENDIX B SELECTED BIBLIOGRAPHY, COURSES OF READING, AND SUBJECTS FOR ESSAYS, DISCUSSIONS, AND DEBATES SOME teachers of political economy supplement text-book work by assigned reading chiefly; others rely on questions, exercises, and brief reports in connection with specific subjects taken up in the class; others again prefer that the student write one or two longer essays for the whole course. In this book specific references, questions, and exercises have been provided in connection with each chapter, and in this appendix are given subjects for the longer essays. In most cases it will be desirable to limit the topics sug- gested, and each subject will suggest a number of similar ones. Usually the teacher will desire to make his own list adapted to the needs of his students, but the list here given will in many cases be of convenience where classes are large. On methods of teaching political economy, the following refer- ences will be found of help: BULLOCK, C. J. Education, Vol. XI, p. 539. CLOW, F. Economic Studies (American Economic Association), 1899. DIXON, F. H. School Review, January, 1898. ELY, R. T. Educational Review, Vol. 20, p. 152. HOXIE, R. F. Journal of Political Economy, Vol. IX, p. 481. LAUGHLIN, J. L. The Study of Political Economy, New York, 1885; also Journal of Political Economy, Vol. 9, p. 384, and Atlantic Monthly, May, 1896. COMMONS, J. R. The Inland Educator, December, 1895. THURSTON, H. W. School Review, Vol. 4, p. 604. SUBJECTS FOR ESSAYS, DISCUSSIONS, AND DEBATES i. THEORETICAL I? the Supply of Land Limited ? Is Abstinence one of the Costs of Production ? 685 686 APPENDIX B Possible Substitutes for Competition. One Hundred Definitions of Capital. Can Mere Mass of Capital be the Basis of Monopoly Power? The Wage-fund Theory. The Balance of Trade Theory. 2. BIOGRAPHICAL AND PERSONAL John Law and his Schemes. Robert Owen. Rousseau and his Social Philosophy. Sketch of the life of Adam Smith. Sketch of the life of J. S. Mill. Richard Cobden. Ferdinand Lasalle. Josiah Warren. Types of Modern Business Men. 3. MONEY The Production of Gold since 1850. The Per capita Supply of Money in the United States. The Campaign of 1896. The Latin Monetary Union. The International Monetary Conferences. Substitutes for Gold as a Standard of Value. Illustrations of Gresham's Law. Paper Money in the Colonies. The Establishment of the United States Coinage System. French Assignats. 4. BANKING Failures among our National Banks. The New York Safety Fund System. Insurance of Bank Deposits. Branch Banking. Asset Currency. The Origin of our National Banking System. The Control of Trust Companies. The Bank of England. The Bank of France. The German Imperial Bank. The Canadian Banking System. Usury and Usury Laws. Postal Savings Banks. APPENDIX H 687 5. THE LABOR MOVEMENT Old Age Pensions. Compulsory Arbitration. Employers' Liability for Accidents. Employment Offices. Shall the Boycott be Legalized? Should Injunctions be prohibited in Labor Disputes? Should Trades Unions enter Politics? The Statistics of Strikes. The Trend of Wages. Insurance against Unemployment. Employers' Associations. The Premium System of Wage Payment. Trade Agreements. The Business Management of the . . . Union. Should Trades Unions Incorporate? The Workingman's Attitude toward Piece Work. The Present Status of Child Labor Legislation. The American Federation of Labor. Systems of Apprenticeship. Industrial Education. Eight-hour Legislation. 6. INSURANCE The Beginnings of Insurance in England. Life Insurance in the United States before 1880. Varieties of Life Insurance Policies. Mortality Tables. Joint Life Insurance. The Surplus of Life Insurance Companies. Surrender Values. Investments of Insurance Companies. Expense Loading in Life Insurance Premiums. State Insurance in New Zealand. Insurance Legislation in the State of New York. Fraternal Insurance. Industrial Insurance in the United States. Workmen's Insurance in Germany. Employers' Liability Insurance. Workmen's Collective Insurance. Rate Making in Fire Insurance. Marine Insurance. 688 APPENDIX B 7. TRANSPORTATION History of the Erie Canal. Economic Significance of the Panama Canal. The Improvement of the Mississippi River. The Granger Movement. Railroad Pools. Federal Safety Appliance Legislation. Financial History of the . . . Railway Company. Present Status of Railway Consolidation. Methods of Railway Consolidation. Uniform Freight Classifications. Rate-making Powers of State Railroad Commissions. The Interstate Commerce Act and its Amendments. The Long and Short Haul Clause. The Basing Point System. Group Rates. Expense as a Basis for Rate Making. The Northern Securities Company. 8. CORPORATIONS Varieties of Stocks and Bonds. The Prices of the Stocks and Bonds of the . . . Company since 1900 Federal License or Federal Incorporation ? History of the Standard Oil Company. The Organization of the United States Steel Corporation. The Control of Corporations in Massachusetts. The International Mercantile Marine Company. The Basis of Capitalization. 9. MONOPOLIES AND TRUSTS Monopolies in Ancient and Mediaeval Times. Monopolies in Seventeenth Century England. The History of the Whisky Trust. Control of Raw Material as a Source of Monopoly Power. The Economies of Combination. Effects of Trusts on Prices. The Tariff and the Sugar Trust. Trusts in England at the Present Time. German Cartells. Patents as a Basis of Monopoly Power. The Telegraph in England. Concentration in Banking. APPENDIX B 689 10. INTERNATIONAL TRADE Customs Duties in Colonial Times. The Dingley Tariff Act. Customs Regulations of the Treasury Department. History of the Tariff on Wool. The Australian Tariff Policy. The Revival of Protectionism in England. The Tin Plate Industry. The Civil War and the Tariff. A Tariff Commission. Reciprocity. Sources of our Leading Imports. The Destination of our Leading Exports. n. PUBLIC FINANCE Federal Income Taxes. Taxation of Inheritances in the United States. The Assessment of Real Estate. Franchise Taxes in New York. License Fees in the Southern States. Taxation of Railroads in the United States. The Taxation of Banks. The Taxation of Insurance Companies. Mortgage Taxation. Segregation of State and Local Revenues. Federal Expenditure for Army and Navy. Our Pension System. 12. MISCELLANEOUS The Attempt in Germany to Control Stock Exchange Speculation. International Sugar Conventions. Municipal Ownership in Great Britain. Famines in India. Development of Scientific Forestry in the Utiited States. Causes for the Decline in the Birth Rate. The English Cooperative Movement. Methods of Charitable Relief. Future of our Coal Supply. Shipping Subsidies. BIBLIOGRAPHY AND COURSES OF READING The first five books under each division of the bibliography are recommended as an introductory course of study in that particular 690 APPENDIX B subject. The student should become familiar with the apparatus which a modern library provides for finding what has been written upon the subject he is investigating. The card catalogue and the cumulative book and periodical indexes need hardly be mentioned. The documents of the federal government contain a vast amount of important economic material. Thorough indexes of this material have been prepared, and a monthly catalogue is issued by the Superintendent of Documents, at a price of $1.10 per year. An index of the economic material in the documents of the separate states is being prepared under the direction of the department of economics and sociology of the Carnegie Institution of Washing- ton, volumes for five states having been issued or put in press. i. GENERAL ECONOMIC THEORY MARSHALL, ALFRED. Principles of Economics, 5th ed., London and New York, 1907. CARVER, T. N. Distribution of Wealth, New York, 1904. BOHM-BAWERK, E. VON. Positive Theory of Capital (trans, by W. Smart), London, 1891. CLARK, J. B. Distribution of Wealth, New York, 1899. DAVENPORT, H. J. Value and Distribution, Chicago, 1908. HOBSON, J. A. Economics of Distribution, New York, 1900. HADLEY, A. T. Economics, New York, 1897. FISHER, IRVING. The Nature of Capital and Income, New York, 1906. The Rate of Interest, New York, 1907. FETTER, F. A. Principles of Economics, New York, 1904. BULLOCK, C. J. Selected Readings in Economics, Boston, 1907. TAUSSIG, F. W. Wages and Capital, New York, 1896. SELIGMAN, E. R. A. Principles of Economics, 3d ed., New York, 1907. SEAGER, H. R. Introduction to Economics, 3d ed., New York, 1905. HAWLEY, F. B. Enterprise and the Productive Process, New York, 1907. 2. HISTORY OF ECONOMIC THOUGHT SMITH, ADAM. A n Inquiry into the Nature and Causes of the Wealth of Nations, edited by E. Cannan, 2 vols., London, 1904. INGRAM, J. K. History of Political Economy, 2d ed., New York, 1907. RICARDO, DAVID. Principles of Political Economy and Taxation, London, 1817. MILL, J. S. Principles of Political Economy, London, 1848. CANNAN, EDWIN. History of Theories of Production and Distribution, 2d ed. r London, 1903. APPENDIX B 691 SENIOR, NASSAU. Political Economy, London, 1872. CAIRNES, J. E. Leading Principles of Political Economy, New York, 1874. MALTHUS, T. R. Principles of Political Economy, ad ed., London, 1836. JEVONS, W. S. The Theory of Political Economy, London, 3d ed., 1888. BOHM-BAWERK, E. VON. Capital and Interest (trans, by W. Smart), London, 1890. Recent Literature on Interest (trans, by Scott and Feilbogen), New York, 1903. CAREY, H. C. Principles of Political Economy, ad ed., New York, 1907. HIGGS, HENRY. The Physiocrats, London, 1897. SCHMOLLER, GUSTAV. The Mercantile System (trans, by W. J. Ashley), New York, 1896. GEORGE, HENRY. Progress and Poverty (4th ed., 1880), reprinted New York, 1904. 3. ECONOMIC HISTORY BOG ART, ERNEST L. Economic History of the United States, New York, 1908. COMAN, KATHERINE. The Industrial History of the United States, New York, 1905. CUNNINGHAM, WILLIAM. Growth of English Industry and Commerce, 3 vols., Cambridge, 1903 and 1905. TURNER, F. J. Rise of the New West, New York, 1906. UNWIN, GEORGE. Industrial Organization in the i6th and ijth Centuries, Oxford, 1904. WEEDEN, VV. B. Economic and Social History of New England, Boston and New York, 1891. BRUCE, P. H. Economic History of Virginia, 2 vols., New York, 1896. SELIGMAN, E. R. A. The Economic Interpretation of History, New York, 1902. DAY, CLIVE. History of Commerce, New York, 1908. BUCHER, C. Industrial Evolution (trans, by S. M. Wickett), New York, 1901. HOBSON, J. A. Evolution of Modern Capitalism, 2d ed., New York, 1908. ASHLEY, W. J. English Economic History, 2 vols., New York, 1893 and 1894. 4. THE LABOR MOVEMENT ADAMS, T. S., and SUMNER, H. L. Labor Problems, New York, 1905. WEBB, SIDNEY and BEATRICE. Industrial Democracy, 2d ed., London, New York, and Bombay, 1902. HOLLANDER, J. H., and BARNETT, G. E. Studies in American Trade Union- ism, New York, 1906. COMMONS, J. R. Trade Unionism and Labor Problems, Boston, 1905. HUTCHINS, B. L., and HARRISON, A. A History of Factory Legislation, 2d ed., London, 1907. CLARK, VICTOR S. The Labor Movement in Australia, New York, 1906. 692 APPENDIX B KELLEY, FLORENCE. Some Ethical Gains through Legislation, New York, 1905. BOOTH, CHARLES. Old Age Pensions and the Aged Poor, London, 1907. ROBERTS, PETER. Anthracite Coal Communities, New York, 1904. BUCHANAN, J. R. The Story of a Labor Agitator, New York, 1903. MORE, L. B. Wage-Earner's Budgets, New York, 1907. 5. PLANS FOR SOCIAL REFORM ELY, R. T. Socialism and Social Reform, New York, 1905. KIRKUP, THOMAS. History of Socialism, ad ed., London, 1900. ENSOR, R. C. K. Modern Socialism, London, 1907. ELTZBACHER, PAUL. Anarchism (trans, by S. T. Byington), London, 1908. JAURES, J. L. Studies in Socialism (trans, by M. Minturn), New York, 1906. PODMORE, FRANK. The Life of Robert Owen, 2 vols., London, 1907. BROOKS, J. G. The Social Unrest, New York, 1903. MARX, KARL. Capital (trans, by E. Unterman), 3 vols., Chicago, 1906. MARX, KARL, and FRIEDRICH ENGELS. The Communist Manifesto, many editions. HUNTER, ROBERT. Socialists at Work, New York, 1908. HOLYOAKE, G. J. History of Cooperation, new ed., 2 vols., New York, 1906. 6. CORPORATIONS, MONOPOLIES, AND TRUSTS MEADE, E. S. Trust Finance, New York, 1903. RIPLEY, W. Z. Trusts, Pools, and Corporations, Boston, 1905. ELY, R. T. Monopolies and Trusts, New York, 1900. HIRST, F. W. Monopolies, Trusts, and Cartells, London, 1905. TARBELL, IDA M. History of the Standard Oil Company, New York, 1904. CLARK, J. B. The Problem of Monopoly, New York, 1904. PRICE, W. H. English Patents of Monopoly, Boston, 1906. Bureau of Corporations, Report on the Petroleum Industry, 2 vols., Washington, 1907 and 1908. MEYER, H. R. Municipal Ownership in Great Britain, New York, 1906. HOWE, F. C. The British City, New York, 1907. VEBLEN, T. B. The Theory of Business Enterprise, New York, 1904. 7. TRANSPORTATION JOHNSON, E. R. American Railway Transportation, 2d ed., New York, 1905. Ocean and Inland Water Transportation, New York, 1906. RIPLEY, W. Z. Railway Problems, Boston, 1907. BEALE, J. H. B., and WYMAN, B. Law of Railroad Rate Regulation, Boston, 1906. APPENDIX B 693 " American Waterways." A nnals of the American Academy of Political and Social Science, January, 1908. ACWORTH, WILLIAM. Elements of Railway Economics, Oxford, 1905. PHILLIPS, U. B. History of Transportation in the Eastern Cotton Belt, New York, 1908. MERRITT, A. N. Federal Regulation of Railway Rates, Boston, 1907. MEEKER, R. History of Shipping Subsidies, New York, 1905. NOYES, W. C. American Railroad Rales, Boston, 1905. W T EBB, W. L. Economics of Railroad Construction, New York, 1906. 8. INTERNATIONAL TRADE FISK, G. M. International Commercial Policies, New York, 1907. TAUSSIG, F. W. Tariff History of the United States, sth ed., New York, 1903. BASTABLE, C. F. Theory of International Trade, London, 1897. SMART, WILLIAM. Return to Protection, 2d ed., London, 1906. CLARE, GEORGE. The A B C of the Foreign Exchanges, London, 1895. MARGRAFF, A. W. International Exchange, ad ed., Chicago, 1904. BOWLEY, A. L. England's Foreign Trade in the Nineteenth Century, 2d ed., London, 1905. STANWOOD, EDWARD. American Tariff Controversies in the Nineteenth Century, 2 vols., Boston, 1903. HOBSON, J. A. International Trade, London, 1904. FUCHS, K. J. The Trade Policy of Great Britain and Her Colonies since 1860 (trans, by Archibald), London, 1905. ROOT, J. W. Colonial Tariffs, Liverpool, 1006. CUNNINGHAM, WILLIAM. The Free Trade Movement, 2d ed., Cambridge, 1905. 9. INSURANCE DAWSON, M. M. Elements of Life Insurance, 2d ed., New York, 1902. The Business Side of Life Insurance, New York, 1905. MOIR, HENRY. Life Assurance Primer, New York, 1904. KITCHIN, F. H. Principles and Finance of Fire Insurance, London, 1904. Yale Insurance Lectures, New Haven, 2 vols., 1904. Gow, WILLIAM. Marine Insurance, London, 1900. Institutes of Actuaries Text-book, 2 vols., 2d ed., London, 1902. W T AMBAUGH, EUGENE. Cases on Insurance, Cambridge, 1902. Annals of the American Academy of Political and Social Science, special volume on Insurance, Philadelphia, Vol. 26, 1905. "Q. P." How to buy Life Insurance, New York, 1906. New York Legislative Investigating Committee, 7 vols., 1905. 694 APPENDIX B 10. MONEY AND BANKING SCOTT, W. A. Money and Banking, 2d ed., New York, 1908. HULL, W. H. Practical Problems in Banking and Commerce, New York, 1907. EASTON, H. T. Money, Exchange, and Banking, London, 1905. LAUGHLIN, J. L. Principles of Money, Chicago, 1903. JOHNSON, J. F. Money and Currency, Boston, 1906. KINLEY, DAVID. Money, New York, 1904. WHITE, HORACE. Money and Banking, New York, 1902. SHAW, W. A. History of the Currency, 3d ed., New York, 1896. CLEVELAND, F. A. The Bank and the Treasury, New York, 1905. CONANT, C. A. Modern Banks of Issue, ad ed., New York, 1896. WILLIS, H. P. A History of the Latin Monetary Union, Chicago, 1901. RUSSELL, H. B. International Monetary Conferences, New York, 1898. ii. AGRICULTURAL ECONOMICS TAYLOR, H. C. Introduction to the Study of Agricultural Economics, New York, 1905. COLLIN. The New Agriculture, New York, 1907. PRICHARD, NEWELL, and PINCHOT. Report of Public Land Commission, Washington. HAGGARD, H. R. Rural England, z vols., New York, 1902. ROGERS, A. G. L. The Business Side of Agriculture, London, 1004. HIBBARD, B. H. History of Agriculture in Dane County, Wisconsin, Madison, 1904. Census Reports. Publications of the United States Department of Agriculture. BRIGHT, JOHN. The Agricultural Valuer's Assistant, London, 1901. HALL, BOLTON. Three Acres and Liberty, New York, 1907. 12. STATISTICS BOWLEY, A. L. Elements of Statistics, 2d ed., London, 1902. MAYO SMITH, RICHMOND. Statistics and Economics, New York, 1899; Statistics and Sociology, New York, 1895. NEWSHOLME, ARTHUR. Vital Statistics, 3d ed., London, 1899. THORNDIKE, E. L. An Introduction to the Theory of Mental and Social Measurements, New York, 1904. BAILEY, W. B. Modern Social Conditions, New York, 1906. 13. MATHEMATICAL ECONOMICS FISHER, IRVING. Brief Introduction to Infinitesimal Calculus, 3d ed., New York, 1906. APPENDIX B 695 COURNOT, A. A. Mathematical Principles of the Theory of Wealth, trans, by N. T. Bacon, with a bibliography of Mathematical Economics by Irving Fisher, New York, 1897. 14. PUBLIC FINANCE ADAMS, H. C. The Science of Finance, New York, 1809. BASTABLE, C. F. Public Finance, 2d ed., London, 1895. SELIGMAN, E. R. A. Essays in Taxation, New York, 3d ed., New York, 1000. The Shifting and Incidence of Taxation, New York, 2d ed., New York, 1899. DEWEY, D. R. Financial History of the United States, New York, 1903. BULLOCK, C. J. Selected Readings in Public Finance, Boston, 1906. COOLEY, T. M. A Treatise on the Law of Taxation, 3d ed., 188. ELY, R. T. Taxation in American States and Cities, New York, 1888. SELIGMAN, E. R. A. Progressive Taxation in Theory and Practice, Balti- more, 1894. ADAMS, H. C. Public Debts, New York, 1890. SCOTT, W. A. The Repudiation of State Debts, New York, 1893. Twelfth Census Reports on Wealth, Debt, and Taxation. 15. ECONOMIC GEOGRAPHY TROTTER, The Geography of Commerce, New York, 1903. DAY, CLIVE. The History of Commerce, New York, 1908. REDWAY, J. W. Commercial Geography, New York, 1903. ADAMS, C. C. A Text-book of Commercial Geography, New York, 1901. CHISHOLM, G. G. A Handbook of Commercial Geography, 4th ed., New York, 1903. 16. DICTIONARIES AND REFERENCE BOOKS PALGRAVE, H. I. Dictionary of Political Economy. BLISS, W. D. P. Encyclopedia of Social Reform (zd ed.). LALOR, J. J. Encyclopedia of Political Science, Political Economy, and United States History. New International Encyclopcedia.. Statistical Abstract of the United States. Social Progress: A Year Book (edited by J. Strong). PERIODICALS Quarterly Journal of Economics (Boston). Journal of Political Economy (Chicago). Yale Review (New Haven). Publications and Bulletin of the American Economic Association. The Economic Journal (London). Journal of the Royal Statistical Society (London). Quarterly Publications of the American Statistical Association. INDEX Abstinence, 96. See Waiting. Agriculture, development, 37, 46, 75; problems, 528; stage, 33. Aldrich Act, 1908, 261. American people, characteristics, 58. Amortization of taxes, 621. Anarchism, 525. Anti-trust Act, 88, 153. Arbitration, 402 et seq. Asset banking, 261. Authority, 27. Averages, 273. B Balance of trade, 288. Balance sheet, 137. Banking, 247 et seq. Bargaining, 177, 446. Benevolence, 27. Bimetallism, 225. Birth rate, 60. Bland- Allison Act, 231. Bonds, 144. Biicher's stages, 39. Budget of France, 568-570. Business organization, 136. Business taxes, 648. Call loans, 247, 255. Capital, 100, 123, 416 et seq. Capitalization, 144, 146, 359, 621. Central bank, 262. Chance gains, 445. Cities, migration to, 61. Clark, J. B., 325 (note). Clearing house, 244, 245. Closed shop, 391. Coinage, 117. Collective bargaining, 84, 390, 402. Common field system, 34, 43. Comparative costs, 285, 305, 306. Competition, 24, 49, 78, 88, 159, 203 467, 473. 5i- Compulsory arbitration, 404. Concentration of wealth, 335. Constant expenditure, 175. Consumer, the, 467. Consumption, 106, 117, 434. Contract, 21, 317, 466. Cooperation, 26, 409, 545. Copyright, 463. Corporations, 140, 645. Cost of production, 125. Credit, 243, 538. Crises, 267. Custom, 27. Customs duties, 627. Debts, public, 582. Decreasing expenses, 175. Deferred payment, standard of, 871. Demand, 160, 162. Diminishing productivity, 319, 326. Diminishing utility, 107. Direct appropriation. 30. Discount, 247. Distribution of wealth, see Contents; ideal, 114; and monopoly, 208. Diversification of industry, 302. Dividend, national, 104. 697 6 9 8 INDEX Division of labor, 18, 127-131. Domain, public, 586. Domestic system, 36. Dumping, 303. Economics denned, 3. Economic classes, 19. Economic goods, 95. Economic laws, 7. Economic stages, 29, 40, 56. Economic thought, 657. Education of farmers, 548. Effort, 96. Efficiency and wages, 382. Elastic currency, 260. Elasticity of demand, 163, 369. Employers' associations, 85, 400. Engel's law, 117. England in 1760, 42. Entrepreneur, 126, 138, 440. Equality, 114. Error, normal law of, 382. Ethical level of competition, 467. Expenditures, public, 555. Expense, decreasing and increasing, i7S- Expense of production, 125, 173. Factors of production, 122. Factory system, 47. Family budgets, 118, 119. Farms, size of, 327, 528. Federal control of corporations, 154, 494- Fees, 606. Fiat money, 241. Forest lands, 469, 589, Foreign exchange, 292. Franchises, 506. Freedom, 23, 317, 523. Free goods, 95. Free silver, 230. Free trade, 305. Fundamental institutions, 16, 460. George, Henry, 364, 595. Gilds, 35-36. Gold, 234, 279, 296. Government ownership, 480, 503, 597, See also State activity. Greenbacks, 236. H Handicraft stage, 35. Hoe culture, 30. Home market, 302, 307. Home rule, municipal, 512. Hours of labor, 340. Hypothecation, 246. Immaterial goods, 97. Immigration, 62. Income, 98, 104. Income tax, 634. Independent treasury, 257. Index numbers, 272. Individual standpoint, 98, 101. Industrial democracy, 408. Industrial revolution, 42, 47, 72. Industrial stage, 39. Infant industries, 300. Inheritance, 21, 317, 466. Inheritance tax, 637. Insurance, 485. Intensive margin, 354. Interest, 415 et seq. Internal revenue, 631. International trade, 284. Interstate Commerce Commission, 483. Interstate commerce, taxation, 650. Investment of capital, 422. INDEX 699 Joint expenses, 177. Justice in taxation, 612. Labor, factor in production, 122. Labor legislation, 51. Labor movement, 83. Labor organizations, 53, 387. Labor, supply of, 371. Laissez-faire, 49, 87. Land, 122, 349, 357. Land nationalization, 595. Land policy of U. S., 587. Liberty, 55. See Freedom. License taxes, 648. Localization of industry, 131, 302. Luxury, 1 13. M Machinery and labor, 129, 369. Malthusian theory, 361, 374, 665. Manorial economy, 34. Manufacturers, in America, 76; size of establishment, 79; integration, 80. Marginal expense, 173; land, 353, 356; product, 321, 331, 368. Markets, 24, 48, 158, 543. Mechanical inventions, 44- Mercantilism, 37, 70, 287. Mineral lands, 591 . Money, 214 et seq. Monopoly, 26, 38, 179, 187, 310, 342, 390, 50. 53- Motives in economic activity, 93. Municipalities, economic activity, 496, 57- Mutual dependence, 19. N National banks, 251. Nationalism, 300. Navigation acts, 71. Needs and distribution, 1 1 4. Negro problem, 61. Non-reproducible goods, 178. Normal value, 170. Occupation, 132, 379. Organization of factors, 126, 321, 328. Overcapitalization, 144. Paper money, 234, 250. Partnerships, 139. Pastoral stage, 32. Patents, 462. Personal distribution of wealth, 335. Poll tax, 649. Population, 59, 373. See Malthusian theory. Price, market, 167; statistics, 240, 340. Primitive man, 31. Private enterprise, 16. Production, 121. Productivity, 114, 319, 329, 418. Profits, 439 ** se Q- Profit sharing, 406. Progressive taxation, 616. Property, 20, 317, 461- Property tax, 640. Protection, 86, 87, 300. Prussia, incomes in, 338. Public authority and value, 180. Public expenditures, law of, 562. Public finance, 555 et seq. Public industries, 597. Public ownership, 503. Public revenues, 580 et seq. Public utilities, in cities, see Chap. XXIX. Publicity, 153. 700 INDEX Quality of goods, 50, 87. R Race suicide, 60. Railways, 80, 471 et seq. Rent, 348 et seq. Resources of United States, 66. Retail price, 179. Riches, 341. Risk, 442. Sacrifice, 124. Saving, 113, 123, 420. Sectionalism, 57. Segregation of revenues, 651. Seigniorage, 217. Services, 96. Sherman Act of 1890, 231. Shifting of taxes, 619. Slavery, 33, 61. Smith, Adam, 43, 315, 380, 664. Social dividend, 448. Socialism, 515 et seq. Social reform, 345, 523. Special asesssments, 608. Speculation, 255, 441, 546. Standard of life, 377. Standard of value, 221. State activity, 16, 54, 86, 458, 597. Stocks, forms of, 143. Strikes, 395-397. Subsistence theory of wages, 376. Supply, 160, 166, 167, 17$ Tabular standard, 274. Taxation, 200, 610, 625. Tenancy, 533, 540. Trade marks, 463. 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