''-* :t^-....-:V^; •'lir LIBRARY UNIVERSITY OF CALIFORNIA. %eieivec1 jj,n| 111893 "^9 . Accessions No. ^n 14^ . Class No. Involuntary Idleness. AN EXPOSITION OF THE CAUSE OF THE DISCREPANCY EXISTING BETWEEN THE SUPPLY OF, AND THE DEilAND FOR, LABOR AND ITS PRODUCTS. BY HUGO BILGRAM. n p n I L A D E li p n I A : J. B. LIPPINCOTT COMPANY. 1889. •1 l^/l .?>^ A- l|'^0'l-i+ Copyright, 1889, by Hugo BiloraM. »9TERE0TYPF»p.NpFPlNTFRsl|K PREFACE. ^> While engaged in tlie pre^^aration of a treatise upon the subject of Social Kights and their relation to the distribu- tion of wealth, the author had an oj^por- tunity to present some of the conclu- sions to which his studies have led at the meetins: of the American Economic Association in Philadelphia, and on De- cember 29, 1888, read a paper on ^' In- voluntary Idleness.'' The Association having given but a brief abstract of the paper in the report of their proceedings, the author has been prevailed upon to publish the entire paper, and he is persuaded that its im- 4 PREFACE. portance as a contribution to economic thought will be recognized by'such stu- dents as regard the modern presentation of the science of Political Economy to be in many respects entirely unsatis- factory. ^ESITT miFuv:^'^ INTRODUCTION. In order that tlie reader may more readily follow the line of argument de- veloped in these pages, the following synopsis is presented. The aim of the treatise is to search for the cause of the lack of employment, which is obviously due to the observed fact that the supply of commodities and services exceeds the demand, although reason dictates that supply and demand in general should be precisely equal. The factor destroying this natural equa- tion is looked for among the conditions that regulate the distribution of wealth, — i.e., its division into Rent, Interest, and Wages. 1* (} INTRODUCTION. The arguments evolved by tlie discus- It sion of the Eent question, wliicli of late has excited much public interest, being unable to account for the apparent surfeit of all kinds of raw materials, the topic of rent is eliminated by assuming all local advantages to be equal. At first an examination is made of the relation of capital to the productivity of labor, and that of interest on capital to the remuneration for labor, showing that hidi interest tends to reduce the productivity of, as well as the remunera- tion for, labor. Low wages being also concomitant with a scarcity of employ- ment, it is inferred that a close relation exists between the economic cause of in- vohmtarjif^ idleness and the law of in- terest. \ Following this clue, the two separate INTRODUCTION. 7 meanings of the ambiguous word ^' Capi- tal" are compared, showing that money, which can never be used in the act of production, cannot be capital when that term is used in its concrete sense ; and since capital is capable of producing a profit only w4ien the same is used pro- ductively, the fact that interest is paid for money-loans, when that which is loaned cannot be used productively, must be traced to an independent cause. The usual argument that with money actual capital can be purchased is re- jected, because money and capital would not be interchangeable if their economic properties were not homogeneous. This compels the search for a property in- herent in money that can account for the willingness of borrowers to pay interest on money-loans. 3 INTRODUCTION. It is then sliown that interest on money-loans is j^aid because money af- fords special advantages as a medium of exchange, and the value of this projierty of money is traced to its ultimate utility, or, in other words, to the increment of productivity which the last addendum to the volume of money affords by facili- tatinsr the division of labor. Keturning to the question of interest on actual capital, — i.e., the excess of value produced over the cost of produc- tion, — the question as to what deter- mines the value of a product leads to the assertion that capital-profit must be due to an advantage which the pro- ducer possesses over the marginal jjro- ducer. This is found to be due to the interest payable by the marginal pro- ducer on money-loans. INTRODUCTION. 9 An ideal sej^aration of the financial from the industrial world reveals a ten- dency of the industrial class to drift into bankrujDtcy by force of conditions over which they have no control. Those who are at the verge of bankruptcy being the marginal producers, others who are free of debt will reap a profit corresjDonding to the interest payable by the marginal producers on debts equal to the value of the capital they emjDloy; hence the rate of capital-profit will tend to become equal to the rate of interest payable on money-loans, and the power of money to command interest, instead of being the result, is in reality the cause of caj)ital-profit. The inability of the debtor class to meet their obligations increases the risk of business investments, and the accu- 10 INTRODUCTION. mulation of money in the hands of the financial class de2:>riving the channels of commerce of the needed medium of ex- change, a stagnation of business will en- sue, which readily accounts for the accu- mulation of all kinds of products in the hands of the producers and for the con- sequent dearth of employment. The losses sustained by the lenders of money involve a separation of interest into two branches, risk-premium and interest proper, and considering that the risk premiums equal the sum total of all re- linquished debts, the law of interest is evolved by an analysis of the monetary circulation between the debtors and creditors. This analysis leads to the inference that an expansion of the volume of money, by extending the issue of credit- INTR OD UCTION. \ 1 money, will prevent business stagnation and involuntary idleness. The objections usually urged against credit-money are considered and found untenable, the claim that interest natu- rally accrues to capital is disj)uted at each successive stand-point, and in the con- cluding remarks an exj^lanation is given of the present excess of supply over the demand of commodities and services, con- firming the conclusion that the correction of this abnormal state is contingent upon the financial measure suggested. INVOLUNTARY IDLENESS. In studying the past as well as tlie present drift of popular thought on political and economic questions, there is found not only a striking divergence of opinions, but on every hand doc- trines are met that bear the unmis- takable stamp of anomalous reasoning. It is popular to attribute dull times and the consequent distress of the pro- ducers to an alleged overproduction of things, for the want of which people suffer. The immigration of those who are willing to add to our wealth by work and accept a small remuneration in re- 13 14 INVOL UNTAR Y IDLENESS. turn is considered detrimental to our well-being. The introduction of labor- saving macliinery is contested by work- men in spite of the saving of time and labor. International commerce is con- sidered harmful to that country wdiich receives more than it gives. |3ut in whatever form these self-con- tradictions appear, they evidently arise from the existence of an ever-present fear that there is not enough work to do, and that enforced idleness may inflict its miseries upon those who in the struggle for existence fail to secure their share of the work< Yet our experience, which indicates that the supply of services as w^ell as of connnodities does exceed the effective demand for the same, is in direct conflict with rational thought. Wliatever is offered in the market for INVOLUNTARY IDLENESS. I5 sale is ostensibly offered with tlie exj^ec- tation of obtaining something else in re- turn, either directly or through the me- dium of exchange. Each supply of a commodity, each offer of a service, im- plies a demand for some other valuable thing or service. The more commodities one man makes and offers for sale or ex- change, the greater, it appears, should be the demand for other commodities. But while there is every reason to assume that the total su23ply of commodities and services in general should always equal the total demand, we notice in reality the absence of such an equation, we know thatUabor can become a drug in the market. I The competition of those unemployed, who are in search of work, produce the long-recognized tendency of wages to a minimum of subsistence and ] 6 INVOL UNTAR Y IDLENESS, give 2>liiusible pretext to tlie doctrine of socialism. Tariff_legislation, as well as that regulating immigration, the time^of labor, etc., and other laws designed to regulate competition, testify in unmis- takable terms that_the fear of compe- tition, the dread of involuntary idleness, is not an empty phantom, but a stern reality. Most j^^i^^fi^il is the effect of enforced idleness when it manifests itself in industrial depressions, those social calamities which the science of economics has so far failed to explain satisfactorily. The standard works on Political Economy, such as Eicardo's, Mill's, etc., fail to reveal the cause of the manifest discrepancy between what obviously should be and what really is. In fact, the method of those writers in dealing INVOL UNTAR Y IDLENESS. 1 ^ with defiuitious and propositions is in marked contrast witli tliat adopted in the exact sciences. The use of ambiguous terms has led to unwarranted and incor- rect applications of otherwise correct doctrines. Well-established propositions beins: sometimes admitted and at other times unceremoniously ignored, contra- dictory statements are not infrequently found, which impair the reliability of the conclusions of those writers. But although they have in a measure failed to dispel the confusion of popular views, there is no reason why social phenomena should be more difficult to analyze than those of a physical or chemical nature. It should therefore be possible to find, by logical deduction, the fundamental cause of involuntary idleness, or the factor which destroys the natural equation be- 2* 18 I^yO L UNTAR Y IDLENESS. tween the suj)ply of, and tlie demand for, commodities. And this * can be found only among the conditions that regulate the distribution of wealth and determine its division into Rent, Inter- est, and Wages. The thorou2:h ventilation which the relation of Kent to the Social Problem has received through the works of Ri- cardo and his followers, es23ecially Henry George, while showing that a lowering of the margin of cultivation can account for a lowering of wages by a reduction of the productivity of labor, has brought forthi no clear explanation for the excess of the supj^ly of commodities and servicesk. As long as there exists any uncultivated land ca2)able of affording a living to its cultivator, the law of rent cannot ac- count for enforced idleness. The study INVOL UNTAR Y IDLENESS, IQ of the economic causes wliicli produce, as well as tlie laws which regulate, capital- profit, or interest proper, have in the in- terim been comparatively neglected. It is therefore not inapj^ropriate to give more thought toUhe relation which in- terest bears to wages. A rational anal- ysis requiring the exclusion of all matter foreign to this relation, the question of rent should be eliminated by assuming for the time being that all natural and local advantages were equal. While nature furnishes the substance of all wealth, labor and caj)ital are the factors that give this substance value. The productivity of labor depends, how- ever, in a great measure upon the amount of capital employed. If some one, desiring to jiroduce certain com- modities, could have the assistance of, 20 INVOL UNTAR Y IDLENESS. say, one liuudred men, tlie productivity of their labor would be very low if no auxiliary capital were aj^plied. Tlie use of crude tools would decidedly increase the efficiency of tlieir efforts, and if more capital in the form of improved auxiliaries were added, the productivity would be still greater. There is, how- ever, a limit to this increase of the prod- uctivity of a given number of men by the addition of capital, because capital, when used productively, will deteriorate, and a portion of the labor must be di- verted for the j)urpose of restoring this loss. As the amount of labor so di- verted grows with the increase of capi- tal, it is evident that the productive power of labor will not keep j^ace with the addition of capital, and that a jioint can be reached beyond which a further INVOLUNTARY IDLENESS. 21 increase of capital will have an adverse effect and actually reduce tlie net prod- uctivity of those one hundred men. The variation of their productivity due to an increase of capital can be represented by a curve of the character shown in Fig. 1. (See plate at end of volume.) For reasons just stated this curve will decline after passing the apex M, which represents the highest possible produc- tivity of the stated amount of labor. The contingency of a future progress in the methods of production, which would affect the course of the curve, is of course not considered. Although the productivity is at a maximum when an amount of capital equal to OC is employed, the employer will not find it to his advantage to apply this amount, because of the in- 22 INVOLUNTARY IDLENESS. terest-beariiig power of capital. Letting the distance CI represent the interest due to the capital OC, this amount must be deducted from the value pro- duced, leaving the value IM, from which the emplo3'^er must defray the cost of labor, the remainder being his wages for the management of the business. By using an amount of capital equal to 0(?, the interest would have amounted to Ci, and the return to labor and management, iP, would exceed the quantity IM. The most advantageous proportion of capital can be located in the diagram by finding that point, P, at which the curve is parallel to the in- terest-line 01, and it is the tact of successful business-men to closely ap- proach this 2)oint in their management. The j)oint P bears the same relation to INVOLUNTARY IDLENESS. 23 capital as the point of diminisliing re- turns does to land. If the rate of interest payable on the capital OC had been CI', the high rate would have caused the employer to apply capital more sparingly, and our diagram would in fact indicate that the productivity C'T', due to the capi- tal OC", will give the best result. On the other hand, if the producers could have abundant capital without interest, labor would be employed most advan- tageously at its natural maximum of j)roductivity. The diagram clearly illustrates the separation of the value produced by labor and capital into interest and wages, the remuneration of the man- ager being considered wages. But while so far we can see no indication as to 24 INVOL UNTAR Y IDLENESS. what determines the rate of interest, it will be perceived that las interest rises wages become less, for the productivity of labor will be reduced by the more cautious use of capital, and, besides, a greater proportion of that which has been produced will go to capital as in- terest. The remuneration of all labor is represented by iT' when interest is high, by iP when interest is low, and it would be equal to CM if capital could be obtained without interest. This prop- osition is true only for a state of persis- tency, when no secondary factors inter- vene, and not for transitory periods of industrial activity. If from any cause persistency is disturbed, the disturbing factor may for a time change this re- lation between wages and interest, and make wages and interest rise or fall INVOLUNTARY IDLENESS. 25 simultaneously. We shall see tliat tlie cause of involuntary idleness is just such a factor. In comparing the proposition that under otherwise equal conditions a high rate of interest tends to reduce wages with the indisputable fact that when many men are without employment wages are low, a strong suspicion is raised that lan intimate relation may exist between the economic cause of high interest and that of involuntary idleness; for there is no phenomenon which can have two independent ex- planations, We are therefore justified in pursuing the investigation by search- ing for the law that determines the rate of interest. This inquiry must be directed, not so much to the cause of the increase of 26 INVOLUNTARY IDLENESS, ■' productivity attainable by the use of capital over that of productive efforts made without the use of auxiliaries, but to the economic causes that assign to the oivner of capital a portion of that which is produced by the co-operation of capital and labor.] \ In order to discriminate intelligently bet\yeen the conflicting definitions of the term " Capital," as given by the authorities, we should first understand why a distinction is made between wealth which is, and wealth which is not, capital. Experience shows that wealth under certain conditions is ca- pable of bringing a revenue to its owner, and this power fully justifies a classification being made. There being no other economic difference of impor- tance, it must be accei^ted as the real IXVOL UNTAR Y IDLENESS. 27 motive of this differentiation of wealth. Adam Smith defines the term by this power, and is followed by others, no- tably Macleod. There is, however, a strong tendency among modern writers to depart from this natural definition with a view of indicating the source of this power. According to John Stuart Mill capital is the accumulated produce of labor requisite for further produc- tion. The term ^' Capital," tlierefore, covers two totally distinct concepts, which are frequently confounded to the detriment of correct reasoning. Capital, in its abstract sense, — comprising all wealth capable of bringing a revenue, — admits the conception of a " conver- sion of capital" or of ^' floating capital," etc., not referring to any particular thing, but to wealth in general when 28 INVOLUNTARY IDLENESS. it lias a certain economic relation to its owner, while in its concrete sense, — meaning certain things produced by labor, and used for certain purposes, — its conversion is inconceivable. Yet the adherents of the concrete definition adopt these phrases without even sus- pecting the logical error. Moreover, the concrete definition, if not further qualified, lacks the feature of exactness, in not stating whether wealth is capital w^henever it is capable of being used productively, or only as long as it is in productive use. There is, however, no room for dissent. The mere ability of things to be used in production, if they are not so employed, cannot ac- count for the revenue-returning feature, which being the distinguishing attribute of capital, it is ^Vdin that not the po- INVOLUNTARY IDLENESS. 29 tentiality of wealth, but its actual use alone can turn wealth into capital. Nor does this definition cover objects which are being consumed unproduc- tively, such as private residences rented to tenants, etc. A hired equipage is aidins: farther production no more than a private carriage, yet in one case it is capital, in the other it is not. Another inconsistency is shown by the exponents of the concrete definition when they include money in the cate- gory of capital, while in reality money as such neither is nor can be used in the act of production, and therefore never can be a requisite for further production. This is admitted either di- rectly or by implication by most econ- omists. Newcomb asserts that "the money serves the banker no useful 30 INVOLUNTARY IDLENESS, purpose until he passes it to some one else, iDerbaps a customer. Every one into whose hands it falls must be pay- ing or losing interest on it while he keej)S it, and he cannot gain the inter- est until he purchases an ownership in some form of actual capital." This is clearly an admission that interest must be 2^*"^^^^ ^^ will be lost on money wherever it may be, or to whatever use it may be put; for even if actual capital is purchased, the loss of interest must be borne by the one to whom the money is transferred. Money being thus admitted to be un2)roductive, it cannot be considered capital if the defi- nition of Mill is adopted, and any prop- osition relating to capital and demon- strated under this definition cannot be consistently applied to money. It is INVOLUNTARY IDLENESS. 31 therefore important to pay special at- tention to the interest-bearing power of money, the real source of which is not generally recognized. In the following discussion the term capital will be used in its concrete sense. The income derived from wealth, w^hatever be its form, can be acquired by its owner in two ways. He may use the wealth productively, or, by loaning it to others, receive a premium for its use. In the one case the income accrues as profit, consisting of the ex- cess of value obtained over and above the market value of the labor applied and other expenses incurred ; in the other case it appears as interest proper, which is equal to the gross interest minus the rate of risk and deteriora- 32 INVOL UNTAR Y IDLENESS. tion. But since lie who borrows capi- tal is willing to give interest' because the use of capital will give him a ma- terial advantage, it follows that iwojits derived from loans must be considered mere transfers of the value of this ad- vantage. Applying this proposition to the in- terest-bearing power of money, we are confronted with the fact that money cannot be utilized as a requisite of pro- duction, and is therefore incapable of bringing an excess of value in this re- spect. Consequently we are obliged to look elsewhere for any benefit which may be derived from its use. It is true, we are told that with money actual capital can be purchased from which profit may be obtained. John Stuart Mill says, '^ Money, wliich is so com- INVOLUNTARY IDLENESS. 33 monly understood as tlie synonyme of wealth, is more especially the term in use to denote it when it is the subject of borrowing. When one person lends to another, as well as when he pays wages or rent to another, what he transfers is not the mere money, but a right to a certain value of the produce of the country to be selected at pleasure, the lender having first bought this right by giving for it a portion of his capital. What he really lends is so much capital ; the money is the mere instrument of transfer." In this proposition it is assumed that money is not necessarily wealth, but a right to a certain amount of wealth, and that the lender of money has received his money by giving a portion of his capital for that which is merely an evi- 34 INVOLUNTARY IDLENESS. clence of such surrender of capital coupled with the right to demand an equivalent at pleasure. This right is what is transferred to the borrower, who can use the capital so obtainable, and for this use pays interest. To an unpreju- diced mind several pertinent questions will naturally arise. If society has ob- tained capital for which it lias given merely a right to demand an equivalent, why does not society pay for the use of that capital, indemnifying the holder of money for his abstinence, until that right to demand has been redeemed ? If Mill's reasoning is correct, somebody must have the lender's capital even before he lends the money to others, and justice would require that the interest gained by its use should be paid to the holder of money by the user of that capital. Moreover, INVOLUNTARY IDLENESS. 35 why is it that the borrower of money must pay interest for the mere right to select capital before the selection is made ? During the interval between the borrow- ing of money and the selection of capital society has the use of that capital, and society rather than the borrower of money should in equity bear the burden of interest. Furthermore, why should the borrower of money j^ay the interest to the lender who has given his actual capital to somebody else, instead of pay- ing it to him who renders the service of giving actual capital for a mere evidence of surrender and right to demand an equivalent ? If capital has reproductive powers while money has not, it is not reasonable to assume that anybody would willingly exchange actual, profit-bearing capital 36 INVOL UNTAR Y IDLENESS. for money, on which interest will be lost, if money should not afford some other equivalent advantage, and notwithstand- ing the assertions of authorities we must look for a property inherent in money which alone can account for the willing- ness of borrowers to pay interest to the lender of money. As regards concrete ca|)ital, — i.e., prod- ucts of labor applied to further produc- tion, there can be no doubt that profits can originate only while it is used in combination with labor. Capital profits will therefore invariably appear in con- junction with wages, in the manner shown in the diagram Fig. 1. (See plate at end of volume.) The term production must here of course be understood in its broad sense. Goods exposed for sale, aggregated with others of a similar INVOLUNTARY IDLENESS. 37 nature, tliough apparently out of use, are really in the stage of commercial production, tlie process of distribution^ requiring them to remain, for a time, in a seemingly inert state. Industrial capital may also be temporarily out of use without ceasing to be capital as this term is commonly accepted. Machines are usually idle not only fourteen hours each day but also one day of each week. But the requisites of production may be out of use for quite other reasons. To be productively employed they must be aggregated in certain combinations. A j)ower-loom, for instance, can be in industrial use only when located in a suitable building, when connected by shafting and belting with a motor, when supplied with yarns to be woven into a fabric, and when attended by a me chanic UHri72R3IT7^ 38 INVOL UNTAE Y IDLENESS. skilled in the art of weaving. Each of the numerous branches into which pro- duction is divided requires a peculiar combination of raw materials, auxiliaries, and human skill. Any product passing through the various processes in the course of its economic maturation be- comes alternately a raw and a finished product, the finished product of one group of producers being the raw ma- terial of those that follow. Regarding a single group, the wealth in course of generation, after passing through the process peculiar to that group, becomes a finished product, ceasing to be a requisite of production to this group, and is to all intents and purposes inert wealth or idle capital. In this form it is virtually no-interest capital, and has the same function in the theory INVOLUNTARY IDLENESS. 39 of capital-interest that no-rent land has in the theory of rent. It can be vivi- fied or converted into live capital only if transferred to another group, in which it will find that combination of capital and skilled labor congenial to its further maturation. But in the present quasi-individual- istic state of society such transfers are always contingent upon the return of equivalents. These exchanges would be beset by serious obstacles, practically for- bidding a division of labor, if the special instrument of exchange, money, were un- known, which though not a means of production, is a very essential factor in our industrial system. Without it those transfers which convert inert wealth into active capital and render possible a divi- sion of labor would be almost impossible. 40 INVOL UNTA R Y IDLENESS. This will exj^lain why an owner of actual capital is willing to exchange it for money on which he will lose interest while possessing it. The capital he is willing to give for money has manifestly arrived at that stage of production when it is to him a finished product and re- quires to be transferred to other pro- ducers to become live capital, while he in turn requires capital which is inert to others but capable of further productive manipulation by him. To accomplish these transfers, money is the indispen- sable instrument. One of the most im- portant phases of this function is the paying of wages, — i.e,, the distribution, among the producers, of the increment of value which accrues to all products as they pass through the various stages of production. INVOLUNTARY IDLENESS. 41 This analysis leads to the inference that interest on money-loans is paid be- cause money affords special advantages as a medium- of exchange, and the flict that most money transactions of to-day are made by means of paper evidences with- out transfer of actual wealth confirms this conclusion. A loan of bank-notes on security is admittedly an exchange of two rights of action, — one, the security, having a precarious, the other, the money, having an ever-ready value. The right of action which the banker accepts as security can be exchanged for other things, or realized, only on certain conditions, while that which he gives is readily accepted everywhere at its face value. This universal acceptability gives to money its special advantage, and being the only important difference be- 4« 42 INVOL UNTAR Y IDLENESS. tween the two rights of action, the pay- ment of interest can be traced to no other feature of money. We can now proceed to investigate the value of this advantage and its relation to the rate of interest. In a community in which, for the want of money, barter is the sole method of exchange, an ex- tensive division of labor with its attend- ing advantages would be impossible. A limited su23ply of money can only par- tially improve this condition, but it would naturally flow into those channels in which the resulting advantages are greatest. A second equal supply, while likewise augmenting productivity by per- mitting a further division of labor, would not increase it in the same measure, the channels of the flrst order being filled. A third equal supply would further in- INVOLUNTARY IDLENESS. 43 crease productivity, but in a still less degree. The general advantage afforded by money can therefore be represented by a curve, as shown in Fig. 2 (see j)late at end of volume), the ordinates represent- ing the increase of annual productivity contingent upon the corresponding in- crement of the volume of money repre- sented by the abscissae, each new addi- tion corresponding with a diminishing advantage. Now, although the successive additions to the volume of money produce different effects as far as the general good is con- cerned, the law of supply and demand will tend to accord to all money in the same market an equal rate of interest, and it can be demonstrated that this rate will adjust itself to the uUimate utility of money, namely, the annual increase 44 INVOL UNTAR Y IDLENESS. of productivity, Va, afforded by the last addendum, dV, of the total vorume of money, OV. For if the owner of this last quantity of money expected a higher rate, he would find all channels capable of rendering such a rate fully sui^plied, and must therefore be content with the advan- tage of the best channel yet open. He being the lowest bidder, this obviously determines the market rate of interest, as indicated by the horizontal line ca. The diagram now plainly shows the separation of the total benefit derived from the division of labor attainable by the use of the volume of money OV, and represented by the area OcbaV, into two parts ; the oblong OcaV incloses that part which the law of supply and de- mand will apportion to money as interest, while the remainder, the area cba, ^vill INVOLUNTARY IDLENESS, 45 accrue to capital and labor. The dia- gram also appears to indicate that the rate of interest on money-loans, other things being equal, will depend on the volume of money in circulation, when- ever the law of supply and demand is free to operate. The inquiry as to the economic cause of the profit which accrues to wealth used productively can now be continued. Such profit can arise only if the value created by the combination of capital and labor exceeds the cost of labor ; that is, if the value produced exceeds the cost of production, this cost including the value of the labor of the employer. Here the question naturally arises, What determines the market value of that which is produced, and when and why does it exceed the cost of production f 46 INVOL UNTAR Y IDLENESS, In answer we must refer to the law of supply and demand, the effect of which is thus definitely expressed by Kicardo : **The exchangeable value of all com- modities, whether they be manufactured, or the produce of the mine, or the produce of land, is always regulated not by the less quantity of labor that will suffice for their production under circumstances highly favorable and ex- clusively enjoyed by those who have peculiar facilities of production, but by the greater quantity of labor necessarily bestowed on their production by those who have no such facilities; by those who continue to produce them under the most favorable circumstances ; mean- ing, by the most unfavorable circum- stances, the most unfavorable under which the quantity of produce required INVOLUNTARY IDLENESS. 47 renders it necessary to carry on the pro- duction." Kicardo lias evidently in mind those things which are produced under dif- ferent degrees of difficulty, the quantity produced under the most favorable con- ditions being inadequate to supply the demand. The total demand determining the margin of the least favorable point at which production will be continued, Ricardo's law of value can be briefly stated as follows : The natural value of those things that are being reproduced is always equal to their cost of production at the margin of production. Conced- ing this proposition, it follows that every profit must be traceable to an advantage which its recipient possesses over the mar- ginal ^producer, and, moreover, that no persistent profit can possibly arise unless 48 INVOLUNTARY IDLENESS. tliere be a difference in the opportunities of production. In continuing 'our in- quiry we must look for such a difference. It woukl be an error to bring into consideration the difference of abilities of employers. The so-called profits of the enterprising business manager are, as a rule, a remuneration for valuable ser- vices rendered, and properly belong to the category of wages. Our object is to find the economic cause which appor- tions a share of the produce to capital independent of its owner's ability or assistance as a worker or manager. There is but one class of variable producer's expenses having the character of a dis- advantage that has any direct connection with our subject. Those who do not own all the capital they are using must pay interest on their indebtedness, which INVOLUNTARY IDLENESS. 49 increases their actual outlay over that of business-men free of debt. The question is now, should this outlay be considered an unavoidable addition of the cost at the margin. If it were paid because of the profit-bringing power of the bor- rowed capital, then the solution of the problem would be as remote as ever. But if there be some other economic factor compelling this outlay, its exami- nation may reveal that which we are in search of. Business debts are, as a rule, contracted not by borrowing actual capital, but by borrowing money, and, as we have seen that money bears interest solely on ac- count of its attribute as a medium of exchange, and have taken issue with the prevailing impression that the borrowing of money is a borrowing of capital, we 50 INVOLUNTARY IDLENESS. must search for the reason why business- men so largely depend upon 'loans to procure the medium of exchange. Were it possible to separate by a sharp line the financial from the in- dustrial world, those who issue and those who loan money from those who pro- duce wealth, the flow of money between these two groups would present a very striking feature. The industrial group could obtain the medium of exchange requisite to carry on commerce in but two ways; by selling the products of their labor to the financial group, and by borrowing money from them. By the first measure the transfer of money from one to the other group is absolute, by the second it is conditional upon a return of the principal with the addition of in- terest. Loans, as a rule, imply a return INVOLUNTARY IDLENESS. 51 of a greater sum of money than ^yas loaned, and the only persistent source from which this excess can be drawn is obviously the first mentioned way of obtaining money. These receipts from sales are, however, not so much regulated by the productivity of the debtors as by the willingness of the creditors to buy that which the debtors ofier for sale. And since money loaned to others is a source of income, it is quite natural that the creditors will not only reinvest the principal, but will reserve a part of that which they receive as interest for addi- tional investments. Hence only a por- tion of the money which the debtor class pays as interest to the creditors will return to them by the regular channels of commerce, and the receipts of money, by the industrial group, from sales to the 52 INVOLUNTARY IDLENESS. financial group being for this reason less than the amount of interest j^aid, the primary effect will be a reduction of the money circulating among the producers. Some of the channels of commerce, that were previously filled with the requisite medium of exchange, having been thus depleted, the members of the industrial group will be induced to borrow not only that money which had been returned as principal, but also that which the finan- ciers had reserved for additional invest- ments. This measure will increase both the indebtedness and the obligation to pay interest, augmenting the discrepancy between the amount of money received through sales and that expended to pay interest, the growth of indebtedness as- suming: more or less the nature of a geometrical progression. This cannot INVOLUNTARY IDLENESS. 53 continue forever. It not only becomes a physical impossibility for the debtors, as a class, to ever satisfy their creditors, but they are irresistibly driven, by the fatality of these conditions, into bank- ruptcy. These conditions do in reality exist in our present social system. Even though the distinction between the financiers and the producers is not as sharp as outlined in the above analysis, the prem- ises are, notwithstanding, amply jus- tified. By virtue of our financial laws, which forbid tlie issuer of bank-notes to use them for industrial purposes, this money can be brought into circulation only by the creation of a debtor class, which is necessarily recruited from the industrial group. It is true, the press- ure, wddch we have seen will inevitably 5* 54 INVOL UNTA R Y IDLENESS. result, will not fall with equal severity upon all men engaged in production. Many will keep out of debt, while others will succeed in freeing themselves from that burden. But since interest must be paid in money, and the debtors as a class cannot indefinitely pay more than the amount they realize from sales to the creditors, — these sales being inade- quate to restore to the debtors the means of paying the interest, owing to the fact that the creditors apply a portion of their income to additional investments, — the inability to jiay must result in the failure of the less successful of the pro- ducers despite their industry and intel- litrence, not for the lack of business capacity, but because their competitors are abler than they. They will continue to produce until their debts exceed the INVOL UNTAR Y IDLENESS. 55 value of tlieir capital, wlien, being driven beyond the margin of successful compe- tition, tliey must succumb to the inevi- table. We here recognize a condition which inexorably forces upon tlie pro- ducers an ever-increasing indebtedness and obligation to pay interest, precipi- tating one after another into insolvency. Those who are at the verge of bank- ruptcy, being indebted to an amount equal to the value of the capital they employ, are obviously the marginal pro- ducers, and as the natural value of the products will equal the cost of produc- tion to them, all producers whose capital is unencumbered will obtain a jirofit equal to the interest payable on borrowed money by those marginal joroducers. This course of reasoning would indi- cate that, quite contrary to the generally 56 INVOL UNTA R Y IDLENESS, received doctrine, the power of money to command an interest is not the result, but the cause of ca|3ital-2:>rorit. This is, liowever, not the only impor- tant conclusion to which this analysis leads. The logical results of the con- ditions depicted agree so fully with all the phenomena common to business de- pressions, that no more complete verifi- cation of the theory can be desired. As the indebtedness of the producers grows with an ever-increasing rapidity, they cannot indefinitely continue to contract new loans. Money will accumulate in the hands of the financial class instead of circulating in the channels of com- merce. The inability of the producers to meet their obligations will become general, investments will become haz- ardous, and a portion of the interest must INVOLUNTARY IDLENESS. 57 be devoted to cover the occasional losses of the creditors, the remainder alone being: a real source of income. Interest will thereby be separated into two parts, the risk premium, or insurance to bal- ance the deficiency of the principal re- turned on loans, and the interest proper. The law of supply and demand no longer dominates in fixing the rate of interest. Its operation is impeded by the inability of the debtor class to return more money than they receive. The determination of the rate of interest proper must there- fore be relegated to another law, born of the same conditions that produce the deplorable results so characteristic of our present industrial development. The constant drain upon the money in circu- lation paralyzes commerce and obstructs the division of labor. Products in vari- 58 INVOLUNTARY IDLENESS. ous stages of completion accumulate in tlie hands of tlie producers who cannot transfer them for further productive manipulation. The means of 23roduction are lying idle and workmen skilled in special trades cannot find emj^loyment. The financiers, in whose hands the money accumulates, are anxious to loan it at low interest on good security, but the general stagnation of business renders all investments insecure or unprofitable. Thus we find a ready explanation of the phenomena of business depression, and can discard such insufficient and illogical though popular explanations as a general loss of mutual confidence, speculation, accidental coincidence of unsuccessful enterprises, excessive railroad construc- tion, over-production, keen comjoetition, strikes, etc. All these alleged causes INVOLUNTARY IDLENESS. 59 are in reality merely symptoms of the same social disorder. For the analytical deduction of the Law of Interest see Appendix. When by purely deductive reasoning we arrive at conclusions so completely corresponding wij;h experience, it is reasonable to accept their promptings as to the proper method of avoiding industrial stagnation, which our investi- gation has shown to be engendered by an insufficient supply of money. We are naturally led to ask, What limits the volume of money? Before the de- velopment of the modern banking sys- tem, when the precious metals were the almost exclusive money-medium, the volume of money could not exceed the amount of those metals. But since the use of credit as a medium of exchange (30 INVOLUNTARY IDLENESS. | t lias been established, the extent to which the money- volume can be increased is almost unbounded, encompassing the en- tire credit of the business world, which is undoubtedly the natural limit. Our financial laws, however, by strictly cir- cumscribing the emission of credit-money, impose an artificial barrier, the removal of which would j^ut an end to the invol- untary idleness which the onerous toll for the use of money occasions. But since an issue of money, limited only by the efiective credit, would be a radical departure from our present system, it is projier to examine the principal objec- tions urged against it, — the ease with which it can be abused, and its effect upon the purchasing power of money. The first of these objections is not justified, since the abolition of an arbi- 1 INVOL UNTAR Y IDLENESS. Ql trary limitation need not involve the withdrawal of the ordinary safeguards that restrain the unscrupulous. To pre- vent fraud and imposition the govern- ment has been invested with the power to furnish money, guaranteeing its value, and controlling its issue. But restric- tions are made that are not in harmony with this reason for confining the regula- tion of credit money to the government, and they are primarily responsible for the scarcity of money and its conse- quences. The unlimited issue, by the government, of credit money to those furnishing proper security, precisely as it now loans notes to the national banks, with this difference, that not only national bonds, but any adequate security be acceptable, while removing the arbi- trary limit, would in no wise facilitate (32 INVOLUNTARY IDLENESS. abuse. The risk involved in accepting securities other than bonds could' be met by a charge of interest sufficient to cover these losses, the rate of such risk being readily ascertained. In the ab- sence of an arbitrary limit the volume of money would be free to expand in proportion to the effective demand, and the rate of interest being reduced to the rate of risk only, interest proper for the use of money would cease. To be sure, capital as well as money when loaned will continue to bring a return, but the law of supply and demand oj)erating without artificial restriction, the pay for the loan of capital will naturally adjust itself to the economic value of its use, — i.e., the rate of risk and the deterioration of the capital loaned. Only the apparent power of capital to INVOLUNTARY IDLENESS. 63 more than reproduce itself, the ability to bring a persistent revenue, will ter- minate. The removal of the artificial impedi- ment to the free conversion of sound credit into money would have a vital bearing upon the Rent question which is now exciting considerable interest in economic circles. A reduction of the current rate of interest is known to have the effect of raising land values, and if the rate of interest proper were reduced to zero, land values would obviously rise until the taxes, if assessed pro rata on the value of real estate, will practically absorb all of the economic rent. The nationalization of the economic advan- tages of natural and local opportunities would therefore result without any fur- ther legislation on the subject. 64 INVOLUNTARY IDLENESS. The second objection, founded upon the assertion that the purchasiitg pov^er of money is always inversely propor- tional to the total volume, other things being equal, is widely accepted as con- clusive. Were it true that an increase of the volume of money would be bal- anced by a reduction of the value of each dollar, the capacity of the total amount of money to perform its function would remain unchanged, and under such cir- cumstances the measure suggested would obviously be futile. This theory of the value of money, though disputed by some economists, is vigorously defended by most English and American writers. Kicardo asserts: ^' That commodities would rise or fall in price, in proportion to the increase or diminution of money, I assume as a fact INVOL UNTAR Y IDLENESS. G5 wliich is incontrovertible." Yet tlie strongest arguments that can be adduced against this position are found in this writer's works. He unqualifiedly de- clares that the value of any article capable of reproduction is equal to the highest cost at which its production is continued, tlie cost at the margin of pro- duction. It is therefore remarkable that in the quotation referred to this law of value, which has been so jiroperly ap- plied in the theory of rent, has been totally ignored, especially since he ad- mits that, " While the state coins money, and charges no seignorage, money will be of the same value as any other piece of the same metal of equal weight and fineness; but if the state charges a seignorage for coinage, the coined piece of money will generally exceed the value 66 INVOLUNTARY IDLENESS. of the uncoined piece of metal by the "whole seignorage charged." Here it is plainly acknowledged that the value of money equals its cost of 'prodiic- lion. Now, if this proposition is true, the value of money can rise or fall, or prices in general can fall or rise, only if the cost of producing money is changed, and the volume of money already in circulation cannot influence this value. If, on the other hand, the quantity of money in circulation determines the value of money, this value, in conse- quence, would be independent of the cost of production. Obviously one of the two Kicardian propositions must be wrong. John Stuart Mill follows Ricardo very closely. In two consecutive cha2^ters he exj)ounds both proj^ositions^ and at- INVOL UNTA R Y IDLENESS. 67 tempts to liarmonize tliem by referring to a particular illustration in wliicli the contradiction does not present itself plainly. Other inconsistencies are dis- posed of in an equally remarkable manner. After showing that money is merely a contrivance for facilitating ex- changes, the mode of exchanging things for one another consisting in first ex- changing a thing for money and then exchanging the money for something else, he asserts that *' The value or pur- chasing power of money depends, in the first instance, on demand and supply. . . . The supply of money ... is all the money in circulation at tiie time. ... As the whole of the goods in the market compose the demand for money, so the whole of the money constitutes the demand for goods. The money and G8 INVOLUNTARY IDLENESS. the goods are seeking each other for the purpose of being exchanged. It is in- different whether, in characterizing the phenomena, we speak of the demand and su23ply of goods, or the supply and the demand of money. They are equiv- alent expressions.'' This proposition leads to a very re- markable inference. Conceding that the seller of things wants money only for getting other things, then the de- mand for money is virtually a demand for those other things; and since the supply of goods and the demand for money are " equivalent expressions," and the demand for money really means a demand for goods, it must logically follow that the value of all money must equal the value of all goods offered for sale. This conclusion is obviously at variance INVOL UNTAR Y IDLENESS, G9 with facts. It is true, in the same chapter this very inference is repudiated, but this involves a qualification which reflects disastrously upon the original proposition. The logic of a writer can fairly be questioned who propounds a doctrine, repudiates one of its corollaries, and then finds fault with others for re- fusing to accept this proposition as in- controvertible. Professor Newcomb attempts to show by the equation existing between the in- dustrial or societary and the monetary flow that prices in general must rise or fall as the volume of money is increased or reduced, but the fact appears to have escaped his attention that a restriction of the money-volume necessarily reacts upon the corresponding industrial flow, which renders untenable his conclusion 70 INVOL UNTAR Y IDLENESS. based on a constant industrial flow. It is the amount of societary cilrculation and eventually the raj^idity of circula- tion, and not the value of the dollar, that will respond to a change of the volume of money. His equation, properly in- terpreted, proves conclusively that the limitation of the volume of money, in being attended by a restriction of the monetary flow, must react unfavorably upon the industrial flow and consequently produce business stagnation. The opinion that the value of money bears an inverse ratio to its volume originates from a misconception of the nature of credit-money, resting on the absurd belief that value can be created or changed by the fiat of the government. Even though the followers of Ricardo contest this view, they inadvertently m VOL VNTA R Y IDLENESS. 7 1 commit themselves to it in tlieir doctrine of the yahie of the so-called inconver- tible notes. They aver that such notes, when brought into circulation while coin is yet in use, in driving the coin out of circulation assume a vahie equal to that of the precious metals thus displaced. This would obviously imply that the issue of such notes does increase the wealth of a country. There is but one rational theory of credit-money. The note is merely an evidence that the bearer has a right of action against the issuer, — in other words, a qualified right of ownership to wealth held by the issuer of the note, — and its current value equals the amount of wealth or services obtainable, or sup- posed to be obtainable, for this evidence from the issuer. The value must of 72 INVOL UN2AR Y IDLENESS. course be specified by reference to a value unit, — usually a definite weight of silver or gold, — in which the notes must be conditionally redeemable, but not necessarily on demand, and a de- preciation from this nominal value can occur only if the issuer fails to fulfil his promise and the holders of the notes are unable to compel such ful- filment. As regards their value, bank- notes as well as the so-called inconvert- ible notes are essentially analogous to mortgages, promissory notes, and other evidences of indebtedness, and any at- tempt to apply the volume doctrine to the value of the latter would properly be condemned as a fallacy. Why, then, should it be true if applied to credit- money? If a bank-note is a receipt, showing that the holder has surrendered INVOLUNTARY IDLENESS. 73 some value, it must also specify recip- rocally as to who has received this value, and will return it when the note is re- tired. The members of society sever- ally can surely not be held responsible for what one person has given to an- other ; they will therefore not accept a note unless they have the assurance that the issuer, who is the first recii^ient of value for the mere paper evidence, will ultimately redeem the note by giving the specified value for it. The so-called inconvertible notes contain the promise of redemption by implication only ; and whenever the government accepts them in payment of taxes — that is, in ex- change for services rendered — this promise is fulfilled. But not being definitely exjoressed, governments have often taken advantasje of this looseness 74 INVOL UNTAR Y IDLENESS. of contract, and have violated what should have been a sacred dbligation. Even now the opinion prevails that the excess of the nominal over the in- trinsic value of subsidiary coin is a legitimate " Profit" to the government, contrary to the dictates of honesty, which demand that this excess should be viewed as a temporary surrender of value by the bearer of the coin, to be returned when the coin is retired. Un- fortunately, it is not generally recognized that in money three factors are essen- tial : first, the token ; second, wealth in the control of the issuer and obtainable, or supposed to be obtainable, in some form by the holder of the token ; and, third, the general agreement which makes the token universally acceptable. In making the token of gold weighing INVOLUNTARY IDLENESS. 75 25.8 grains per dollar, any further guar- antee is superfluous, but if only a por- tion or none of the value accompanies the token, the deficiency is supplemented by a right of action or its equivalent against the issuer. For this reason de- preciation cannot take place unless the holder of the token is unable to obtain the promised value from the issuer. Should the government furnish money- tokens to all those who give pro23er se- curity in the form of rights of action against their possessions, the property so involved would be the basis of the value of those notes, the government holding tlie rights of action to insure the ultimate redemption of the notes. It is frequently urged that the French assignats are an example of the evil effects of an expansion of credit-money, 76 INVOL UNTAR Y IDLENESS. •while ill reality their depreciation must be attributed to a virtual absence' of any specific right conferred by their posses- sion. While their value was alleged to be founded upon land, neither the amount of land nor its value was in any way defined upon the notes, and a statement of value or exchangeability having thus been omitted, their value was purely imaginary, and they could circulate only as long as there was a hope of an ultimate redemption. The United States greenbacks dej^reciated for no other reason than a partial re- pudiation, consisting in the refusal of the issuer to accept them for all debts at face value, — i.e., 25.8 grains of gold Ijer dollar. Manifestly, the idea that the volume of money has any effect whatever upon the purchasing power INVOL UNTAR Y IDLENESS. 77 of tlie dollar— except in the measure in which a change of the vohime of coin may affect the demand for, and hence the commodity value of, o-okl is a gigantic delusion, warranted neither by theory nor by facts, and the second objection to an extensive issue of credit- money falls to the ground. There re- mains no reason to fear any evil effects of an expansion of the money-volume while it remains within the bounds of substantial credit. But few words are needed to show how insufficient are the current the- ories that seek to account for the re- productive i^ower of cajiital. There are really but two doctrines in vogue, the one ascribing interest to the in- creased efficiency of labor when sup- plemented by proper tools, the other 7* r' 78 INVOLUNTARY IDLENESS. claiminsf that men will not foreD — -> V being positive on account of a predomi- nating positive, jD. In the second period interest is likewise above the rate given by formula (4), but is accompa- nied by a diminution of the volume of IIG APPENDIX. money in circulation and its accumu- lation in the hands of the financial class, -JD — - JV being positive because the subtrahend ^V is negative. The third period is marked by a deficiency of interest, accompanied by a diminu- tion of indebtedness, ^T> — ^V being negative owing to a negative ^D, and during the fourth period interest is still deficient and accompanied by an increase of the volume of money in circulation, -JD — jV being negative because of the predominance of a posi- tive jV. Only in rare cases is the transition from one into the other of these periods of an abrupt nature; the process is generally attended by a gradual change of conditions. When after a depression business begins to recover and capital APPENDIX. 117 is more freely invested, tlie demand for money-loans will increase and in- terest will rise. The flow L will be copious and the total indebtedness will increase, making jD positive. This condition may last for years; but the ability of the debtors to furnish ade- quate security being limited, new loans cannot always keep up the supply of money requisite to pay the interest which must ultimately be paid at the expense of the money in circulation. The positive aD will be replaced by a negative jV, marking the adyent of the second period, during which money will accumulate in banks. By the consequent scarcity of money com- merce will be impeded, business de- pressed, and investments will no longer be profitable. 118 APPENDIX, The debtors being unable to meet their obligations for want ef money, frequent bankruptcies will occur. This not only reduces the total indebted- ness D, but also the interest proper, since now a greater proportion of the gross interest is required than formerly to balance the losses. Both a negative aD and low interest proper are thus traceable to the same cause. Interest will be low even though money is scarce, and the law of interest illus- trated in the diagram. Fig. 2 (see plate at end of volume), is susj^ended. During this anomalous condition both wages and interest are low because of the industrial stagnation and dearth of employment which will follow and en- dure until the excess of the flow P above the return flow (I + K) increases APPENDIX. 119 the volume V sufficiently to 23romote commercial activity, when a revival of business will follow. The law expressed in formula (3) is thus fully in accord with the features actually observed in the periodical fluctuations of business. ^^^ OF THE ^^ UHIVBESIT 5j ^ ir^* i 1 .■?* 14 DAY USE RETURN TO DESK FROM WHICH BORROWED LOAN DEPT. This book is due on the last date stamped below, or on the date to which renewed. Renewed books are subject to immediate recall. lOMar'63PS REC'D UD mg_6 1963 Due end of SPRING Qua APR_2_0!21L— JtJ LD 21A-50m-ll,'62 (D3279sl0)47fiB General Library University of California Berkeley ^iwctJi'i^B^'C'rir* • I YB 60815 ^: ■^^