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I 


Social  Science  TTert  Boofts 

Edited  by  RICHARD  T.  ELY 


OUTLINES  OF  ECONOMICS 


SOCIAL  SCIBNCB  TEXT  BOOKS 


OUTLINBS  OF  ECONOMICS 

By  Richard  T.  Ely,  Ph.D.,  LL.D.  ReviBed  and 
enlarged  by  the  Author  and  Thomas  8.  Adams, 
Ph.D.,  Max  O.  Lorbkz,  Ph.D.,  Alltti  A. 
YouHO,  Ph.D. 

HISTORY  OF  ECONOMIC  THOUGHT 
By  Lbwm  T.  Hanbt. 

BUSINESS  ORGANIZATION  AND  COMBINATION 
By  Lbwm  T.  Havbt. 

PROBLEMS  OF  CHILD  WELFARE 
By  Gborob  B.  Mangold,  Ph.D. 


OUTLINES  OF  ECONOMICS 

(REVISED  EDITION) 


BY 
RICHARD  T.   ELY,   Ph,D.,  LL.D. 

FSOVOBOR  OF  POLITICAL  BCONOICY  IN  THS  UNIYXftSnY  OF  WISGONSIlf 


REVISED  AND  ENLARGED  BT 
THE  AUTHOR 

AMD 

THOMAS   S.  ADAMS,  Ph.D. 

ntOFBSSOK  OF  FOUnCAL  BCONOMY  IN  THE  UNIVXRSITT 
OF  WISCONSIN 

MAX  O.  LORENZ,  Ph.D. 

ASSISTANT  P&OFBSSOR  OF  POLITICAL  BCONOMY  IN  THS  UNIYSKSTTY 

OF  WISCONSIN ;  DEPUTY  COMMISSIONER  IN  THE  WISCONSIN 

BUREAU  OF  LABOR  AND  INDUSTRIAL  STATISTICS 

ALLYN  A.  YOUNG,   Ph.D. 

PROFBS80R  OF  ECONOMICS  IN  LELAND  STANFORD  JUMIOB 
UNIVERSITY 


THE  MACMILLAN  COMPANY 
1914 


K^  3317 


Copyright,  1893, 
By  hunt  ft  EATON. 

COPYUCHT,  X908, 

By  the  MACMILLAN  COMPANY. 


Fint  published  elsewhere.  Reprinted  May,  1900;  July,  October, 
1901;  August,  1903;  July,  September,  1904:  July,  1905;  Jsnuavy, 
August,  1906;  July,  Z907;  April,  x9o&i 

New  edition,  leYised  aad  enluged,  September,  October,  190I: 
JanuMy,  August,  1909  ;  December,  1910;  August,  19x1 ;  Juae,  t9za  ; 
May,  X9X3  ;  Jamuuy,  July,  19x4. 


J.  ••  Ooddiv  Oo.  ~  Berwlek  &  Smtm  €0^ 

Norwood,  Mass.,  U.S.A. 


PREFACE 

Since  the  first  edition  of  the  Outlines  of  Ecommics  was  pub- 
fished  fifteen  years  ago,  there  has  been  considerable  progress  in 
economic  discussion.  In  this  revision  an  attempt  has  been  made 
to  indude  so  much  of  the  new  thought  as  seems  to  have  established 
itsdf.  No  chapters  remain  unaltered,  most  of  them  have  been 
entirely  rewritten,  and  some  new  ones  have  been  added.  But  the 
{dan  of  the  former  edition  has  been  retained.  This  book  differs 
bom  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  criddsm  has,  it  is  hoped,  resulted  in  a  unified  product. 

Numerous  passages,  amoundng  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  in,  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 
dose  of  each  chapter,  and  an  endeavor  has  been  made  to  frame 
these  so  as  to  require  a  mastery  of  principles  to  answer  them. 
Po-usal  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 
dass  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  th^e 
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  b  as  an  expeditious 
method  of  approaching  the  supply  and  demand  theory,  with  which 
it  is  in  complete  harmony.  When  properly  handle,  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  o£Fer,  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  Wisconsm. 

In  conclusion,  I  wbh  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. 


PUEPACB 


CONTENTS 
BOOK  I.  — INTRODUCTION 

Chaftbr  L— The  Natuu  and  Soon  of  Eoonomigs 

Divenity  of  eoonomic  itudy,  3 ;  DeBnidon  of  economici»  4 ;  A 
•odal  sdence,  5 ;  Studies  man  in  process  of  development,  6 ;  Econo- 
mic laws,  7 ;  Principal  divisions  of  economics,  15. 

CHAFm  IL— ThB  CHAJtACTERISnCS  OF  THB  PUSSNT  EOONOMIC 

System 

Hmnan  and  physical  conditions  of  economic  activity,  16 ;  Private 
enterprise  and  state  activity,  16 ;  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;  Cofiperation,  26; 
Monopoly,  26 ;  Custom,  27 ;  Authority  and  benevolence,  27. 

Craftbr  IIL— The  Evolution  of  Eoonomic  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  V^™^^^  system,  36 ;  Agricultural  changes,  37 ;  The  mercan- 
tile system,  37 ;  Patents  of  monopoly,  38 ;  Industrial  stage,  39 ; 
Other  classifications,  39. 

Ckaftkr  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 
mdnstrial  specialization,  48  ;  Evils  of  the  transition,  48 ;  Competi- 
tioii  and  iaissn-faire,  49 ;  Reaction  against  the  passive  policy,  50 ; 
Quality  of  goods,  50 ;  Protection  of  labor,  5 1 ;  Labor  organizations, 
53  ;  Extension  of  government  enterprise,  54* 

vii 


Viii  CONTENTS 

Chapter  V. — The  Economic  Development  op  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,  61 ;  Inmiigration,  62 ;  Natural  resources,  66. 

Chapter  VI.  —The  Koonomic  Development  of  the  United 
States  {Continued^ 

Mercantilism  in  America,  70 ;  American  inditstriei  in  1776,  73  ; 
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,  100 ;  Social 
and  individual  capital,  loi ;  National  wealth  and  national  divi- 
dend, loi. 

PART  II.  — CONSUMPTION 

Chapter  VIIL  —  Consumfhon 
Consumption  defined,  106;  Productive  and  final  consumption, 
106 ;  Human  wants,  107 ;  Law  of  diminishing  utility,  107 ;  Differ- 
ent uses  for  the  same  commodity,  108  ;  Marginal  utility,  xo8 ;  The 
economic  order  of  consumption,  1 10 ;  Future  wants,  1 1 1 ;  Alleged 
present  consumption  of  future  products,  1 12;  Consumption  and 
saving,  113;  Luxury,  1x3;  Ideal  distribution  of  wealth,  114; 
Harmful  consumption,  116;  Statistics  of  consumption,  117. 

PART  III.  — PRODUCTION 

Chapter  IX.  —  Production 
Production  defined,  121  ;  Thefactorsof  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  ix 

of  division  of  labor,  127 ;  Advantages  of  division  of  labor,  128; 
Effect  npoD  the  worker  and  the  product,  129;  Territorial  division 
of  labor,  131 ;  Prodactive  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 
Cbaftex  XI.— Value  and  Pucb 

Meaning  and  significance  of  value,  156 ;  The  market,  158  ;  Con- 
ditkms  of  competitive  valuation,  159;  Supply  and  demand,  160; 
Nature  of  demand,  160;  Elasticity  of  demand,  163;  Consumer^ 
surplus,  164 ;  Nature  of  supply,  165 ;  The  determination  of  prices 
167;  Producer's  surplus,  169. 

Chapter  XIL— Value  and  Price  {Continunf) 

Normal  value,  1 70;  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,  179;  Retail  prices,  179;  Public  authority  and 
▼aloe,  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 ;  Qassifica- 
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 ;  Qass  price,  202 ;  Monopoly  price, 
high  price,  206;  Monopolies  and  distribution  of  wealth,  208; 
Public  policy  toward  monopolies,  209 ;  Relation  of  monopoly  to 
tni2ta,2ii. 

Chapter  XIV.  —  Money 

De6nitions,  214;  Metallic  money,  216 ;  Coinage,  217  ;  Seignior* 
agCt  217;  The  standard  of  value,  221 ;  Limited  coinage,  224; 
BimetaUism,  225 ;  The  gold  standard,  234 ;  Government  paper 
money,  234 ;  Colonial  and  Revolutionary  bills  of  credit,  235 ;  The 
greenbacks,  236 ;  Fiat  money,  241. 


CONTENTS 

Chafter  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. 

Chaftbr  XVL  — Other  Problems  in  Money  and  BANicma 
Crises,  267 ;   Effects  of  changes  in  the  value  of  money,  270 ; 

Tlie  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  beings  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 

Chapter  XXII.— The  Wages  of  Labor 

Wages  as  the  price  of  labor,  367 ;  Demand  for  labor,  368 ;  Laboi 
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  XXIIL— Labor  Problems 

Types  of  labor  organizations,  387 ;  Jurisdiction  disputes,  388 ; 
Economic  justificatioQ  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 ;  CoSperation,  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  i  The  social  dividend,  448. 


PART  VI.— THE  RELATION  OF  THE  STATE.  TO  INDUSTRY 

Chapter  XXVL— 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 

Chaftbr  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  Commia- 
sion,  483. 

Chaftbr  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  AcnvmEs  of  MumaPALinEs 

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.— Sooausm 

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  forms*  528 ;  Ownership  and  tenancy*  533I;  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 ;  Cla»i* 
fication  of  public  expenditures*  573. 


CONTENTS  xiii 

Chapter  XXXin. — Public  Revenues  from  Loans  and 
Government  Ownership 

Classificatioii,  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  poUcy,  593; 
Land  nationalization  and  municipalization,  public  industries,  595; 
Public  industries,  597. 

Chapter  XXXIV.  —  Pubuc  Revenues:  Derivativs  Rbvbnubs, 
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. 

CoAiTBR  XXXV. ~ Pubuc  Revenues:  Federal,  Static  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,  65 1. 

BOOK  IV.  — HISTORY  OF  ECONOMIC 
THOUGHT 

Chafixr  XXXVI.  ■— History  of  Economic  Thought 

The  development  of  economic  thought,  657  ;  Economic  ideas  in 
the  ancient  world,  658 ;  The  Middle  Ages,  661 ;  Modem  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. 

Aftendiz  A:  Statistics  of  Public  Expenditure  .....  677 
Appendix  B  :  Subjects  for  Eisays  and  Courses  of  Reading  •  •  •  685 
Ihdxz •• 697 


BOOK  I 
INTRODUCTION 


OUTLINES   OF   ECONOMICS 

CHAPTER  I 

THE  HATURE  AND  SCOPE  OF  ECONOMICS 

The  most  striking  characteristics  of  the  great  field  of  knowledge 
the  Outlines  of  which  we  attempt  to  sketch  m  the  present  volume 
arc  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 
loaches  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  mam  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  reso\u*ces  of  an  opulent  territory,  opportunity  Ls 
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,  oflfer  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  modem  statistics; 
fw  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  philanthropici 
unemployment,  accident  insurance,  and  a  number  of  social  prob- 

3 


4  OUTLINES  OF  ECONOMICS 

lems  growing  out  of  the  maladjustments  of  modem  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  conmiunity's 
efforts  to  feed,  clothe,  and  shelter  itself.  Satisfaction  of  social 
need,  and  hot  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  'oj  those  social  phenomena  that  are 
due  to  the  weaUhrgeUing  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- 
ii^  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  imfortunately  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 
Darrowly  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  m 
production."  An  English  writer  speaks  of  dear  labor  as  one  of 
the  chief  obstacles  to  England's  economic  prosperity.  Could 
anythmg  be  more  utterly  an  oversight  of  general  human  well- 
being?  Dear  labor  shouki  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 
torn  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 
kast,  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  aa  in  Pirocess  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  OP  ECONOMICS  J 

understands;  another  founds  a  coDege  to  teach  certain  doctrines 
which  in  a  century  no  one  believes;  and  so  on  indefinitely.  These 
and  a  thousand  other  laborious  efiForts  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  st£^.  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- 
hiations  of  what  is  most  likely  to  occur  for  the  mass  of  men  in 
^be  long  run  under  certain  specified  circumstances. 

In  no  department  of  knowledge,  consequently,  is  there  greater  need  of 
temperate  statement  and  of  that  humility  d  mind  which  is  the  surest  safe- 
guard against  bigotry  and  dogmatism.  No  system  of  economics  is  appli- 
caUe  unchanged  to  all  times  and  all  places:  the  premises  of  the  aigiunents 
dumge ;  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- 
ealBd.  No  general  treatise  on  economics  can  authoritatively  decide  the 
piactical  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  consequenUy  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  battie  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  frequentiy  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  witB  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  necessUies  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  imderstand.  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  (he  power  of  modifying  that  envi- 
ronment by  his  own  conscious  effort. 

Let  us  consider  verV  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 


to  OtrrLINES  OF  ECONOMICS 

theory  is  based  on  an  assumption  that  man  has  no  power  of  iniH- 
aHng  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  sdence  to  give  him. 

In  opposition  to  the  theory  of  natiual  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  their  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  radonal  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  ii,  all  social  sciences  are 
approximate  and  partiy  descriptive.  There  is  much  in  man's  ac- 
tion which  is  exceedingly  (though  not  perfectiy)  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  roake  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  himdreds  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.  Modem  chemistry,  to  take  a  single  example,  has  revo- 
lutionized some  industries,  wholly  created  others,  and,  through 
the  agency  of  the  piu*e  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 
ph3rsical  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  vitally  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.* 
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  oiir  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 

*  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 
Iberiog,  in  hU  Zwuk  im  RecM.    Qf.  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  imits.  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  modem  times  the  individual,  in  his  economic  activity,  consti- 
tutes a  imit,  although  the  family  is  still  the  prevalent  economic 
unit  It  is  a  natmul  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 
an  one  and  cannot  be  profitably  subdivided.  On  the  contrary, 
because   of  the  limitations  of  the  human  mind,  they  must  be 


f  4  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  sdencesyand  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. 
Conmierdal  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  cai^- 
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 
Matshall  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."  * 

*  Marshall,  Principles  of  Economics,  5th  ed.,  p.  720. 


THE  NATURE  AND  SCOPE  OF  ECONOMICS  1 5 

Principal  Divisioiis  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  n,  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  TH 
has  been  reserved  for  the  subject  of  public  finance,  which,  in  the 
opinion  of  the  authors,  constitutes  as  integral  a  part  ai  econcHoic 
science  as  the  subjects  of  money  or  international  trade.  In  Book 
IV  is  given  a  brief  sketch  of  the  history  of  economic  thought. 

QUBsnovs 

I.  What  is  the  most  essential  characteristic  of  tayoomics?    Define  cco- 


2.  Is  man  or  goods  the  more  prominent  thing  in  ecotnomic  study  ?    Docs 
fcannmirs  teach  the  student  how  to  get  rich  ? 

3.  What  determines  ultimately  whether  a  man  is  poor  or  not?    What 
kinds  of  porertj  are  there? 

4.  Wbat  is  meant  by  "dear  labor''?    Is  it  a  good  tbfa^ for  society  m 
gEsieral?  for  employers  in  general?  for  an  individual  employer  ? 

5.  What  is  the  difference  between  natural  and  artificial  selection  ?  Which 
^piies  to  human  society  ? 

6.  Are  practical  ethical  and  political  judgments  the  chief  ends  and  prod- 
ucts of  economic  science  ? 

7.  Is  ecoBDmics  concerned  with  the  negro  question?  asset  atrrency? 
prohibition?  anti-trust  laws?  race  suicide?  protectioii? 

SBPSRBHCBS 

CjKBifis^  J.  £.    The  Characier  and  Logical  Method  nf  FMicaU  Economy, 
CosSA,  L.     An  ImrodncHon  io  the  Study  of  FoUtical  Economy. 
Ikbsaii,  J.  K.    a  History  of  Political  Economy,    Chap.  VII. 
Eetvks,  J.     The  Scope  and  Method  of  Political  Economy, 
Masshaix,  Alfred.    Principles  of  Economics,  5th  ed.,  Appendix  C. 
Mni,  J.  S.     Essays  on  Some  Unsettled  Questions  of  Political  Economy, 
S1D6WICK,  Hensy.    The  Scope  and  Method  of  Economic  Science, 
WuMtM,  A.    '^  On  the  Present  State  ol  Political  IBamamy**    QuaHmly 
Jomnal  of  Economics^  VoL  I. 


CHAPTER  n 

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 
b  the  fact  that  we  live  in  an  environment  in  which  the  things  that 
we  desire  are  not  fiunished  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  efiFort,  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  niunber  of 
social  institutions  which  do  not  fall  within  the  scope  of  the  pres- 
ent chapter.  We  deal  here  only  with  the  social  conditions  directly 
imderlying  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  efiFect  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  Entarpriae  and  State  Activity.  —  We  live  in  an  age  when 
private  enterprise,  for  the  most  part,  is  relied  upon  to  furnish  us 

x6 


THE   PRESENT  ECONOMIC   SYSTEM  17 

with  the  necessities  and  enjoyments  of  Hfe.  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  *  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  seciuing  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  transper- 
tadoa  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  m  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.* 
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  m  the  proper  proportions.    A  hundred  men  are 

^  The  government  does  help,  however,  in  collecting  and  pubHshlng  information, 
as  in  the  cafie  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.  Fanners  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 
bow  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  argxmients,  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  oiu-  cotton  crop. 

Eomomic  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  docs  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  foimda- 
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 
natuie  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. 

Liheritance.  —  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  woiild  result  in  a  great  enlarge- 
ment of  the  public  sphere  of  property  at  the  expense  of  the  private 
^here,  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  iUus- 
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  aU  associated  activity.    To  secure  the  condition  of  such  activityi 


aa  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  laigely 
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.^  —  A  few  words  should  be  said  about  vested 
interests.  Vested  interests  may  be  defined  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  com, 
grain,  and  meal  at  the  lord's  mill  till  well  on  in  the  last  cen- 
tury, and  finally  had  to  pay  ;Si3,ooo  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  tcnn  "  vested  rights  "  is  also  used. 


THE  PRESENT  ECONOMIC  SYSTEM  2$ 

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 
&om  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  he 
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. 

FAedom.  — 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  indivlduak  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  bairiei 
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  difl&cult  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 comp>etition  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  eHst  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  predatory,  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 


36  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  unhealthf  ul  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. 

Coopeiation.  — 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  modem  industrial  civilization  would  be 
impossible  without  a  far-reaching  cooperation  between  individ- 
uak.  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  k  present.     Business  men  endeavor  so  far  as 


THE  PRESENT  ECONOMIC  SYSTEM  37 

possible  to  shelter  themselves  from  the  effects  of  the  competitive 
struck  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- 
pedtion  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  k  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  iip^y  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  EXERaSBS 

'  I.  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  WeaUh  of  Nations,  Book  I,  Chap.  X,  Part  II. 

RSFERENCB8 

Baker,  C.  W.    Monopolies  and  the  People,  Chaps.  X  and  XI. 

Buss,  W.  D.  P.     Encyclopedia  of  Social  Reform  (new  ed.),  article  on 

Amana  Community.      See    also  on  same  subject,  Ely,  R.  T.,  in 

Harper*s  Monthly  Magazine,  October,  1902. 
Ely,  R.  T.    Evolution  of  Industrial  Society,  Part  II,  Chaps.  I,  VII,  or  XL 
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. 

SiDGWiCK,  Henry.  Principles  of  Political  Economy,  Book  II,  Chap.  XII. 
Webb,  Sidney  and  Beatrice.    Industrial  Democracy,  Vol.  II,  pp.  562-573. 


CHAPTER   in 
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  uistitutions.  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  literatiu-e,  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  sucb  simple  explanation. 
The  economic  factor,  however,  is  cleariy  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  tJte  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  bis  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 
foUowing  stages: 

I.  Direct  Appropriation. 

II.  The  Pastoral  Stage. 

III.  The  Agricultural  Stage. 

IV.  The  Handicraft  Stage. 
V.  The  Industrial  Stage. 

I.   DiHECT  Appropkiation  ( 

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  t}'pes  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  3 1 

This  kind  of  agriculture  is  found  in  its  highest  state  of  development  among 
(he  negroes  of  Africa.  "  The  ground  for  cultivation/'  says  Ratzel,  "  is  cleared 
bj  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 
hnce  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 
ID  this  first  stage. 

Chancteristics  of  Primitiytt  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  modem  standards,  remarkably  inef- 
5cient.  Prom  the  best  natural  resources  he  manages  to  get  a 
Tery  poor  living,  depending  as  he  does  largely  on  the  spontaneous 
products  of  nature.  Magic  and  ritual  are  very  generally  relied 
upon  as  idds  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 
peculation  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 
pec^les.  Private  property  in  land  is  absent,  although  the  begin- 
ning of  the  institution  of  ownership  appears  in  the  recognition  of 
the  individuars  right  to  articlj^  of  personal  use.  There  is  little 
division  of  labor.    What  one  man  can  do,  all  can  do.    The  soil 

'Ratzel,  Bistory  of  Mankind,  trans,  by  A.  J.  Butler,  Vol.  TI,  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  and 
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  k  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  var)dng  advancement.  Illustrations  of  existing 
pastoral  life  are  found  in  the  tribes  of  central  -\sia,  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. 

Chazacteristics  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. 


in.  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 
m  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  Manoiial  Economy  in  England.  —  England  was  almost 
wholly  agricultural  for  three  centiuies  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  EngUnd  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  faU 
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."  ^ 

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 

*  See  Ashley,  English  Economic  Sistory,  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 
fanners  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  S3rstem  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  Handicrapt  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 
^  as  the  expansion  and  satisfaction  of  wants  is  concerned, — the 
power  over  nature,  —  the  whole  period  is  in  marked  contrast  with 
the  modem  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  tovnis,  —  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  modem 
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  centimes. 
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  torn- 
through  Great  Britain  (i  724-1 726),  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  keisie  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  com 
enough  to  feed  their  poultry.  .  .  .  The  houses  are  f uU  of  lusty  fellows,  some 
at  the  dye-vat,  some  at  the  looms,  others  dressing  the  cloths;  the  women  or 
childien  carding  or  spinning,  being  all  employed,  from  the  youngest  to  the 
oldest." 

The  domestic  system  should  be  distinguished  from  the  mano- 
ml  economy  of  the  agricultural  period,  for  the  production  under 
the  domestic  system  was  not  for  home  consumption  simply,  but 
for  the  market. 

Agricttltcual  Changes.  —  During  the  handicraft  period  there 
were  a]so  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  moderq 
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  nadonal  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  SchmoUer  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  characterfctic  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  gimpowder,  matches,  and 
pla)dng  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  comprisetfa  many;  it 
is  a  nest  of  wasps,  or  swarm  of  vermin,  which  have  overciept  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.*  "  * 

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  appfen- 
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 

>  Cunningham,  English  Commerce  and  Industry^  Modern  Times,  Part  I,  pp^ 
S07-8- 


THE  EVOLUTION  OF  ECONOMIC  SOCIETY  39 

sbdl  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,  insiuance,  and  foreign  commerce,  and  the  decay 
of  the  old  notions  regarding  the  sinfubess  of  mterest  taking. 

V.  The  Industrial  Stage 

In  the  latter  part  of  the  eighteenth  century,  the  slow-gomg 
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  nodce  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  (Bucher)  has  divided  economic  history  accord- 
ing to  the  length  of  time  which  elapses  betwreen  the  production 
and  the  consumption  of  commodities,  as  follows:  — 

1.  The  mdependent  domestic  economy. 

2.  The  town  economy. 

3.  The  national  economy. 


40 


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 


From  the 
Standpoint 
OF  Produc- 
tion 

From 
BOcher's 
Standpoint 

From 
Hildebrand's 
Standpoint 

From 

THE  T.AnOR 

Standpoint 

Illustrations 
History 

I. 

Direct  Ap- 
propriation 

Independent 
Domestic 
Economy 

Barter 
Economy 

Laboring 
class  not  dif- 
ferentiated 

Prehistoric 

2. 

Pastoral 

Before  Christ 

3. 
Agricultural 

Slavery  and 
Serfdom 

iith-i4th 
Centuries 

4. 
Handicraft 

Town 
Economy 

Money 
Economy 

Free  Labor 
governed 
by  Custom 

I3th-i8th 
Centuries 

Industrial 

National 
Economy 

Credit 
Economy 

Individual 
Contract 

Group 
Contract 

i8th  Century 
to  the  Pres- 
ent Time 

THE  EVOLUTION   OF  ECONOMIC  SOCIETY  4I 

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. 

QUEsnoirs  aud  bzxrcisbs 

I.  Write  a  description  of  the  economic  life  of  a  tribe  in  one  of  the  first  two 
sages. 
3.  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. 

SEFSRElfCES 

Andrews,  C.  M.     The  Old  English  Manor, 

Ashley,  W.  J.    English  Economic  History,  Vol.  I. 

BucHCR,  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. 
Puce,  L.  L.    A  Short  History  of  English  Commerce  and  Industry,  Chaps.  I 

to  VIII. 
PtiCE,  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. 
Staxley,  H.  M.     In  Darkest  Africa,  Vol.  I,  Chap.  XXIH. 
Wallace,  J>.  M.    Russia  (edition  of  1905),  Chap.  VIIL 
Warner,  T.     Landmarks  in  English  Industrial  History^  Chaps.  I  to  XIV. 


CHAPTER  IV 
THE  EVOLUTION  OF  ECONOMIC  S0CIET7  (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  modem  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  mariced  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  yam. 
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 

43 


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  conmion  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  Jethro  Tull  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 
wdl  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  iniSuential  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."  ^ 

The  Mechanical  Xnventioiis.  —  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  yam  from 
the  spinners.  Hand  spinning  was  improved  by  Hargreave's 
*  *  jenny  "  about  1 767 ;  Arkwright,  in  1 7  7 1 ,  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),  ^ind  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  181 4  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.  11. 


THE   EVOLUTION   OF  ECONOMIC  SOCIETY  45 

tors  of  the  Liverpool  and  Manchester  Raikoad  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  1 780-1 795,  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  sdmulus  of  steam  locomotion.  The  third  is  1856-1866  (circa),  when  the 
oonstruction  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 
ra;pkl  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 
rk  possesses  some  interest :  — 

OF  TH£  NINETEENTH  CENTURY        OF  ALL  PRECEDING  AGES 


I.  Railways 

I. 

The  Mariner's  Compass 

2.  Steamships 

2. 

The  Steam  Engine 

>  Electric  Telegraphs 

3- 

The  Telescope 

4.  Tlie  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. 

Modem  Chemistry  Founded 

g.  The  Phonograph 

9. 

Electric  Science  Founded 

10.  Rdntgen  Rays 

10. 

Gravitation  Established 

II.  Spectrum  Analysis 

II. 

Kepler's  Laws 

12.  Anaesthetics 

12. 

The  Differential  Calculus 

13.  Antiseptic  Surgery 

13. 

The  Circulation  of  the  Blood 

14. 

Light    proved    to    have    Finite 
Velocity 

^  Hobaon,  Evolution  of  Modem  Capitalism,  new  edition  of  1907,  p.  89. 


46  OUTLINES  OF  ECONOMICS 

OF  THS  NINETEENTH  CENTURY  OF  ALL  PRECEDING  AGES 

15.  Molecular  Theory  of  Gases         15.  The  Development  of  Geometry 

16.  Velocity    of    Light    directly 

measure^,  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.* 

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  w^as  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  becchen  bowls,  plaited  wicker 

»  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 
sdnups  and  halteis,  peeled  the  rushes  for  and  made  the  candles.  The 
spinning  wheel,  the  distaff,  and  the  needle  were  never  idle;  coarse  hand-made 
doth  and  Unen  supplied  all  wants;  every  farmhouse  had  its  brass  brewery 
kettle.  ...  All  the  domestic  industries  by  which  cultivators  of  the  soil 
moeased  their  incomes,  or  escaped  the  necessity  of  ^selling  their  produce, 
were  now  supplanted  by  manufactures."  * 

Effects  of  the  Industrial  RevolutioxL — As  has  already  been  mdi- 
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 
krge  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 
ao  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 

>  Protliero,  quoted  by  Cunningham,  Growth  of  English  Industry  and  Com- 
mreet  M^dsm  T4m«St  Part  11,  p.  730. 


48  OUTLINES  OF  ECONOMICS 

habits  of  thought.  Can  we  expect  the  institution  of  private  prop- 
erty to  seem  as  natural  arid  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  I 

Evils  of  the  Transitioxial  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- 
cfainery  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 
erils  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 
was  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 
ailed  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 
vould  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 

*  Hutcfains  and  Harrison,  A  History  of  Factory  Legislation^  p.  13. 

X 


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  yeaxs' 
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-fairey  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  "com  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 

mcnt  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- 
amiiiing  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  fidly  recognized,  the  only  question  being  how  far  it  should 
be  applied. 

(2)  Tke  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  1796  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  laboxu:  of  the 
day,  with  respect  to  children,  not  only  tends  to  diminish  futiu-e 
expectations  as  to  the  general  sum  of  life  and  industry,  by  impair- 
ing the  strength  and  destroying  the  vital  stamina  of  the  rismg  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 
work  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,  m  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  o] 
emfloyers  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  up)on  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  modem  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  centiuy.  Laws 
prohibiting  the  combination  of  laborers  had  been  passed  at  inter- 
vals since  the  middle  ages,  and  in  1800  Parliament,  finding  that 
onions  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 
tins  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  r^arded 
them  as  agreements  in  restraint  of  trade.  But  in  1871  a  law  was 
passed  which  declared  that  the  piuposes  and  actions  of  trades 
unions  were  not  to  be  deemed  unlawful  as  being  in  the  restraint 
of  trade,  and  in  1875  ^^^  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  fiu'therance  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 
directiy  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  hot  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 guanintee  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  mdividual  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." 

QUB8TI0V8  AHD  XZBRCISB8 

1.  What  Is  the  origin  of  the  term  "  laisseg-finre  "  f 

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  iaven- 
tioos. 

4.  Give  a  sketch  of  the  enactment  and  repeal  of  the  "com  laws." 

5.  Give  an  account  of  the  development  of  monopolies  and  trusts  in  Eng* 
ItDd. 

REFSREHCBS 

BiAKD,  C.     Th9  Industrial  RevoliUian, 

Cheyney,  E.  p.    Industrial  and  Social  History  of  England,  Chaps.  VIII 

and  IX. 
Cunningham,  W.    GroToth  of  English   Industry  and  Commerce,  Modern 

Times^  Part  .11.     Laisses-Faire. 
HoBSON,  J.  A.    Evolution  of  Modem  Capitalism,  Chaps.  Ill  and  IV. 
Howe,  F.  C.     "  Municipal  Ownership  in  Great  Britain,"  Bulletin  of  the 

United  States  Bureau  of  Labor,  January,  1906. 
Htjtchins  and  Harrison,  A.    A  History  of  Factory  Legislation,  Chap.  II. 
PwcE,  L.  L.     Short  History  of  English  Commerce  and  Industry,  Chaps.  IX 

andX. 
Taylor,  H.  C.    "  The  Decline  of  Land-owning  Fanners  in  England,"  Bulletin 

of  the  University  of  Wisconsin,  Economics  and  Political  Science  Series^ 

No.  142. 
ToTNBEE,  A.     The  Industrial  Revolution. 
VcBLEN,  T.  B.     The  Theory  of  Business  Enterprise,  Chap.  IV. 


CHAPTER  V 
THE  ECONOmC  DEVELOPMElTr  OF  THE  UimED  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  ^ 
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  setdement  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,  latet  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. 

*  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  regtilar  order  from  West  to  East.  Thu§,  a  few  years 
^o,  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  ^ges,  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. 
Sbays'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  coimtry  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  1813,  the  manu- 
facturing centers  of  the  North  redoubled  their  efforts  for  protec- 
tion. This  was  strenuously  resisted  by  the  South,  where  manu- 
factures had  p'ractically  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  fricdon  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  dkappeared,  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  litde  contemptuous  of  its  possibilities,  either 
for  good  or  for  eviL  The  process  of  setdement,  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  oiu:  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  quandty 
rather  than  quality,  product  rather  than  £mish.  We  'Mead  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  Bridsh  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  1905. 

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- 


6o  OUTLINES   OF  ECONOMICS 

tive  steadiness,  over  long  periods;  and  the  dismal  predictions  oi 
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 
8cxx>  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 
Kes  b  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  conunonly  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. 

Slavexy  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 
m  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  161 9.  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  11. 6  per  cent 


6a  OUTLINES  OF  ECONOMICS 

of  the  general  population.  The  relative  decline  of  the  n^ro  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  im- 
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  —  particiUarly  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  poliqr."  *  Owing,  however,  to  the  extraordinary  in- 
aease  of  immigrants  in  recent  years  —  the  number  rose  from 
223,299  in  1898  to  1,385,349  in  1907  —  unusual  interest  in  the 
subject  has  been  aroused,  the  restrictive  features  of  oiur  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  natiu-e  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  centiuies  were  on  the  side  of  those  who  formerly  came 
to  us."  * 

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  theu:  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  do^ 
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 

*  Commissioner  of  Immigration,  Robert  Watchom,  in  The  OiUloek,  Vol.  87, 
p.  900. 

'  WaUcer,  Discussions  in  Economics  and  SUUisiics,  "Restriction  of  Imm^im- 
tion,"  p.  447. 


64 


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 
1850 

185 1 
i860 

1861 
1870 

1871 
1880 

1881 
1890 

1891 
1900 

190 1 
1906 

Total  Number,  000 
omitted 

2456 

2598 

^3^5 

2812 

5247 

3844 

4934 

Per  cent 
Oermanv 

24.2 
I  .0 
42.3 

0.7 

36.6 
16.3 

35-2 

0.9 

34.0 
26.2 
18.8 

54 

25.6 
19.S 
15.5 

8.6 

27.7 
15.4 
".5 

12.5 

14.1 

8.9 

10.S 

9.9 

4.3 
5.4 
4.4 

7.0 

Great  Britain 

Ireland 

Norway,  Sweden,  and 
Denmark 

Total 

Austria  Hungary 

Italy 

82.2 

0.2 
o.i 

89.0 

0.3 
o.i 

84.4 

0.4 

o-S 
0.2 

69.2 

2.6 
2.0 
1.8 

68.1 

6.7 
5-9 

43-4 

I5-S 
17.1 

15.4 

21. 1 

24.5 
25.0 

17.7 

Russia  and  Poland.  . . . 

Total 
All  other  Countries.  . . 
Grand  Total 

0.3 
17.S 
100. 

0.4. 
10.6 
100. 

I.I 

14.5 
100. 

6.4 
24.4 
100. 

17.6 

14.3 
100. 

48.0 
8.6 
100. 

67.2 
11.7 
100. 

<  Data  from  Adams  and  Sumner :  Labor  Problems,  p.  73,  and  the  Statistical  Abstract^ 
1906,  p.  56.  These  figtires  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  anumg  American  Irn^ 
migrants.  Publications  of  the  American  Statistical  Association,  December,  1906  ;  and  Willcox, 
National  Civic  PtderoHon  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 
1 900-1 905.  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  ezclusiveness  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  woidd 
restrict  immigration  by  arbitrarily  limiting  the  number  of  immi- 
grants. 

Nattmd  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  worid'*  in  the  pro- 
duction of  iron  and  steel,  cotton,  coal,  coffee,  gold,  silver,  dairy 
products,  com,  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 

fyiDg  smd  strengthening  the  federal  government.  But  the  lavish 
alienation  of  the  public  lands  in  endowing  free  schools,  subsidij^ 
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 
tree  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 
1863  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  mdependence  that  has  been  the  distinguishing  mark  of  the 
American  workingman.  By  1904,  for  instance,  the  national  gov- 
ernment had  given  away,  imder  the  Homestead  and  Timber  Cul- 
ture Acts,  106,340,464  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  Hke. 

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  modem  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"  ;*  it  was  a  product 
of  the  frontier.    But  the  frontier  has  now  disappeared. 

QUBSTIONS 

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  ? 

^  Bogart,  Economic  History  of  the  United  States,  p.  z. 


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  chaiges  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 

BoGAST,  E.  L.  Economic  History  of  the  United  States,  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  the  Evolution  of  Industrial  Society. 

Emery,  H.  C.  "Economic  Development  of  the  United  States,"  in  The 
Cambridge  Modem  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. 

Sealer,  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  ECONOinC  DEVELOFMEin?  OF  THE  UITHED  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 
ip  1640  commanded  that  every  hide  **be  sent  to  a  tannery  under 
penalty  oi  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,  (pr  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  Wages 
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 
KD  a  variety  of  ways.  It  is  unnecessary  to  enter  into  the  details  of 
this  conflict,  which  is  familiar  to  every  student  of  American  his- 
toiy.  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 


WitUhrof^s  Journal,  printed  at   Hartford,  1790,  p.  188;    reprint 
fl«  1853,  K>.  377-381. 


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  weU. 

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  imsdentific  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  manufactiu-es,"  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  1789, 
and  in  the  following  year  started  the  first  cotton  JacUny  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  181 2,  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  yam  annually.  In  i8ii  there  were  eighty-seven  mills 
operating  80,000  spindles,  producing  2,880,000  pounds  of  yam 
per  year  and  employing  4000  men,  women,  and  children.  In  1815 
Soojooo  spmdles  gave  employment  to  76,000  persons,  with  a  pay- 
roll of  $15,000,000  per  year."  *  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  181 6,  1824,  and  1828.  A  little  later,  in  the  Middle  Adantic  and 
New  England  states,  the  period  of  factory  production  had  fully 
arrived.  A  separate  class  of  wage  eamers  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 

*  Coman,  Industrial  History  of  the  United  States^  p.  i8i. 


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  dty  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  modem  capitalism 
was  assured. 

As  might  be  supposed,  the  Industrial  Revolution  produced  fax 
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  DEVELOPBIENT  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  unfratemal  re* 
ktions  among  men.  We  have  been  greatly  blest  in  that  we  have 
escaped  the  worst  results  so  long. 

The  Bevelopoie&t  of  AgricuHcire.  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  dty,  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 
3S.6  per  cent  On  the  other  hand,  more  persons  are  still  employed 
m  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 
famis  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  lay,  the  machine  power  introduced  into  farming  has  more  than 
taken  the  place  of  those  penons  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 
fami  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.* 

*  H.  W.  Quaintance,  "The  Influence  of  Farm  Machinery  on  Production  and 
labor,"  Publicstions  ol  the  American  Economic  Association,  Third  Series,  Vol  5, 
No.  4,  pp.  a7-a9* 


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.* 

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  modem  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  $20,000,000.  Half  a  centur}'  later,  in  1840, 
77.5  per  cent  of  the  breadwinners  were  employed  in  agricultiure, 
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  favoraUe  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 

$9,372^37,283.  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  $1850.*  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 gready  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  9f  introducing  a  greater  measure  of 
real  industrial  cooperation  and  thus  democratizing  industry,  has 
too  frequentiy  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. 

*  Owing  to  Tariations  in  the  definition  of  "capital"  and  other  similar  changes, 
file  statistical  comparisons  made  in  this  and  the  preceding  paragraph  are  not  Tery 
accurate,  and  are  to  be  accepted  as  illustrations  rather  than  measurements. 


78  OUTLINES  OF  ECONOMICS 

Other  forces,  moreover,  have  been  working  toward  industrial 
concentradon,  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  successfiil  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  size  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 
X905,  to  take  a  single  illustration  of  the  many  that  might  be  dted, 
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  manufactiuing  industries  in  the  year  1905  is 
shown  in  the  following  table,  which  will  repay  careful  study.  Es- 
tablishments of  the  largest  size,  i,c,  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  •  7 


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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  iniegration 
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.  XIH,  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." 

Traiisportation  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  inherentiy  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  181 6,  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 
theErieCanalin  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  oiur  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  railwa3rs  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  raOways  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 
o 


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."  ^  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  thb  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," donodnated  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  doses  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  transportatioii 
agencies,  and  particularly  the  railways,  have  played  in  the  economic  develop- 
ment of  this  country.  Ours  is  a  country  of  "magm'ficent  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  AUeghanies  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 

>  H.  C.  Emery  in  Th$  Cambridg$  Modem  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  againt 
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  hall 
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  subsidised 
the  private  companies  which  engaged  in  similar  enterprises,  with  prodigal 
HbezaUty.  Of  the  total  state  debts — $170,806,187  in  all  — contracted  prior 
to  1838,  $60,301,551  were  chargeable  to  canals,  $43,871,084  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  amoimted  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  vTere  discontin- 
ued, more  than  159,000,000  acres  were  placed  at  the  disposal  of  railroad 
corpoFations  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  rivaky  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 

*  Cf.  Bogart,  Economic  History  o/the  Uniled  Stales,  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  the  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,  ijSg-iSas;  the 
revolutionary  period,  182  5-1 850,  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    8$ 

The  avowed  aim  of  the  trades  union  b  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 
dme,  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 
shalt  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  b  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  afliliated  sixty  national  em- 
fdoyers'  associations,  sixty-six  state  and  district  associations,  and 
three  himdred  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  R^^tion  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  laisses^faire,  and 
establishing  a  constitutional  guarantee  oi  freedom  of  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  stbre 
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  laisseS'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  the  encouragemetU  and  protecHan  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 
morab,  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  mantifacture 
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 

z.  How  do  you  account  for  the  failure  of  the  early  colonial  restrictive 
legislation? 

3.  What  was  the  efifect  of  English  colonial  policy  and  the  Navigation  Acts 
upon  American  manufactures?  shipbuilding?  American  political  philoBO- 
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 
ofthe  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  i^  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  largeHKrale  production  and  monopoly? 

10.  What  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? 

RXRRraCES 

(See  also  References  for  Chapter  V) 

Bishop,  J.  L.    History  of  American  Manufadares. 

Bryn,  E.  W.    Progress  of  Invention  in  the  Nineteenth  Century, 

Census  Reports.    Tenth  Census,  AgricuUnre,  p.  131.    Twelfth  Ceiisus, 

Manu/aaures,  Part  I,  Chap.  II,  {{  I-VI,  XVII,  XXXIX. 
Dewey,  D.  R.     Financial  History  of  the  United  States. 
Hadley,  a.  T.    Railroad  Transportation,  its  History  and  its  Laws, 
Johnson,    £.   R.     American   Railroad    Transportation,  and    Ocean   and 

Inland  Water  Transportation. 
Rabbeno,  Ugo.    The  American  Commercial  Policy. 
Sumner,  W.  G.    History  of  Banking  in  the  United  States. 
Taussig,  F.  W.    Tariff  History  of  the  United  States. 
Webbe^  a.  F.     The  Growth  of  Cities  in  the  Nineteenth  Century.    Columbia 

Studies  in  History,  Economics,  and  Public  Law,  Vol.  II. 
WellSi  D.  a.    Recent  Economic  Changes. 


BOOK   II 
PRINCIPLES   AND   PROBLEMS 


PART  I 

INTRODUCTION 

CHAPTER  Vn 

ELEMENTARY  CONCEPTS 

In  political  economy  many  of  the  technical  terms  employed  are 
often  misunderstood  because  the  same  words  are  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  b  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  conmiand  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  conmionly  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 

de£uiite  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 
economics,  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  possesses  utility  and  is  a  good. 

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  anA  Econooiic  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  tinoe  thinking  about  them  or  our  dependence  upon  them. 


96  OUTLINES  OF  ECONOMICS 

These  are  Jtu  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. 

Eflfort.  —  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  a  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  woidd  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  catde  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. 

Pteisonal  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  inmiaterial  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  nadons  in  whose  language 
they  arc  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  services. 


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  defmed  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  pomt  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  nms  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 
mclude  such  an  item  as  the  post  ofQce,  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 
Id  give  satisfaction  to  those  who  have  unsatisfied  wants,  and  a 


lOO  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  imsatisfied  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  imsatisfied. 

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 instnmients,  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  bidk  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  lOI 

"  capital  goods  "  and  "  capital  value,"  but  it  will  always  be  clear 
from  the  conte3rt  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- 
diise,  and  the  items  of  social  capital  would  not  be  directly  les- 
sened. 

Figure  i  will  make  clear  these  various  distinctions:  — 

Cirde  AB  represents  goods. 

Cirde  AC  represents  economic 
goods. 

Circle  AE  represents  producers^ 
goods. 

Cirde  AF  represents  land. 

Zone  BC  represents /ree  goods. 

Zone  CE  represents  consumers' 
goods. 

Zone  DE  represents  acqwisUive 
capital. 

Zone  EP  represents  social  capi' 
laL 

Tig.  1 

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,  took,  and  implements  are  worth  less  than 


X02  OUTLINES   OF  ECONOMICS 

Estimates  of  Wealth  for  1900  and  1904 


Fouis  OF  Wealth 

1904 

XQOO 

Real  property  and  improvements 
— taxed 

$551510,228,057 

6,831,244,570 

4,o73»79i»736 

844,989»863 

3»397»754,i8o 

1,998,603,303 

11,244,752,000 

2,219,966,000 
227400,000 
585,840,000 
123,000,000 
846,489,804 
275,000,000 

562,851,105 

i,899»379i65a 

7,409,291,668 

495,543*685 

408,066,787 

2,500,000,000 

5,750,000,000 

1461324,830,334 

Real  property  and  improvements 

— exempt 

Live  stock            

6,212,788,930 
^,^06,47^,278 

Farm  implements  and  machinery 
Manufacturing  machinery,  tools, 

and  implements. 

Gold  and  silver  coin  and  bullion 
Raihoads  and  their  equipment. . 
Street  Railways,  etc.: 

Street  railwavs.  ■ 

749»775»97o 

2,541,046,639 
1,677,379,825 
9»o35»73a,ooo 

1,^76,107,160 

THpflTanh  svstems  .......  ^ ,  . 

211,650,000 

Telephone  systems 

Shipping  and  canals 

Privately  owned  waterworks.  . 
Privately  owned  central  elec- 
tric light  and  power  stations 
Mother: 

Agricultural  products 

Manufactured  products 

Imported  merchandise 

MininsT  oroducts 

400,324,000 
98,836,600 

537,849,478 
267,752,468 

402,618,653 

1,455,069,323 
6,087,151,108 

424,970,592 
326,851,517 

Clothing  and  personal  adorn- 
ments  

2 ,000,000 ,000 

Furniture,  carriages,  and  kin- 
dred property 

4,880,000,000 

Total 

$107,104,192,410 

♦88,517,306,775 

our  live  stock.  But  great  caxe  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  I03 

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  mcluded  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  busine^  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  acourate  index  of  changes  in  well-being.  It  is  possible 
that  an  increase  in  concrete  material  goods  will  actiially  decrease 
the  total  quantity  of  wealth  measured  in  dollars.  A  hundred 
bushels  of  wheat  at  $1  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-bein<r  implies  abundance.    Nevertheless. 


I04  OUTLINES  OF  ECONOMICS 

under  present  conditions,  it  is  probable  that  an  increase  in  per 
capUa  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  accoimt  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  iiseful  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  individuak.  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  lOS 

QUESTIOirS  AND  BXERCISB8 

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. 

REFERENCBS 

CAiVER,  T.  N.     The  Distribution  of  Wealth,  Chap.  III. 

aARK,  J.  B.     The  Philosophy  of  Wealth,  Chaps.  I  and  III. 

Fisher,  Irving.     The  Nature  of  Capital  and  Income,  Chaps.  I  and  11. 

Hobson,  J.  A.     The  Social  Problem,  Book  I,  Chap.  V. 

Lesue,  T.  E.  C.    Essays  in  PolUical  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  Pulveris,  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, 

ChapL  V. 
Veblen,  T.  B.     The  Theory  of  the  Leisure  Class,  esp.  pp.  24-34. 
Wagner,  Adolph.    Grundlegung  der  politischen  Oekonomie,  3d  ed.,  Vol 

I,  pp.  83-135. 
Special  Census  Reports,  1907,  Wealth,  Debt,  and  Taxation. 


PART  n 
CONSUMPTION 

CHAPTER  Vm 
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  imrestricted  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  constmiption  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  5s  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 

io6 


CONSUMPTION  107 

economic  activity  directly  in  the  satisfaction  of  wants  is  final  can- 
sumpiion.  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  ntmiber  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  ftiller  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 9  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, 
varying  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  Diminiahing  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:  Tke 
ifUensUy  of  our  desire  far  additional  units  of  any  comtnodiiy  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  utiBty  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  m  the  utility  of  an  additional  unit  only  to  the 


lo8  OUTLINES   OF  ECONOMICS 

extent  that  all  of  his  wants  are  being  satisfied,  since  such  an  ex- 
changeable commodity  in  reality  stands  for  all  conmiodities  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  midtitude  of  such  things,  then  for  sprinkhng  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  imit  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 


109 


Fio. 


A  dearer  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  d^ees  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- 
dendy  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  rims  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 
wiD  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  Ecoaomic  Order  of  Consomption.  —  What  has  been  said 
regarding  the  way  in  which  oiu-  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 


lb 


le 


Id 


2a 

£h 

te 

td 

2t 

FlQ,  2 


Fio.  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  uni 
of  each  commodity  costs  one  dollar.  If  the  individual  has  tei 
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,  2bj  2Cy  lb,  iCf  id,  2d,  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. 

Futttie  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- 


FlG. 


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 

OUT  calculations  when  we  spend  money,  ntodifying  the  order  oi 
our  consumption.  This  will  be  seen  from  Figures  4  and  5.  Let 
us  suppose  that  in  Figure  4y  a,bf  Cy  d,e  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  coasumed  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  imit,  therefore, 
that  is  consumed  would  be  2a,  and  then  the  order  would  be  as 
follows:  lb,  2b,  iCj  etc.  Thus  this  individual  has  saved  two  out 
of  five  units,  i.e.  2a  and  2ft,  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  2c  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  thb:  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.     li 


CONSUMPTION  113 

war  can  be  carried  on  with  the  aid  of  bonds,  it  can,  —  lea\dng  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  Savings.  —  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  stimtilates  saving  above  everything  else. 
Another  important  condition  is  seciuity.  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  encoxu'age  saving  are  private 
property,  corporations,  cooperative  enterprises,  savings  banks, 
and  insurance. 

Loxciiy.  —  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 

condder  as  luxuries  many  things  in  themselves  innocent  and  de- 

I 


114  OUTLINES  OF  ECONOMICS 

sirable,  as  sDk  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  prominendy:  (i)  equality, 
(a)  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  115 

Bomedmes  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  modem  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- 
rided  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  artbt  should  withhold  from  society  the 
satisfactions  afiForded  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  luxiuy  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  luxiuy  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  117 

which  society  may  well  hope  to  make  general,  but  it  is  a  good 
which  society  camiot  yet  afiFord  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, 
aud  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  constunption,  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. 


xi8 


OUTLINES  qF  ECONOMICS 


TABLE  I 
Engei^'s  Law  —  Saxony 


Inm  OF  EzrarDiTusx 


Per  Cent  op  the  Expsndituxx  op  ! 
Family  op 


A  Workingman 

with  an  Income 

of  from  lats 

to  $300  a  year 


A  Man  of  the 

Middle  Class 

with  an  Income 

of  from  I450 

to  S600  a  year 


AMaainEa«7 
Circumstances 
with  an  Income 

of  from$7so 
to  $1000  a  year 


X.  Subsistence 

fl.  Clothing 

3.  Lodging 

4.  Heat  and  light 

5.  Education,  public  warship, 

etc 

6.  Legal  protection .  . 

7.  Care  of  health 

8.  Comfort,  mental  and  bodily 

recreation 

Total 


62.0' 
x6.o 

XS.O 

a.o 
i.o 
x.o 

x.o 


950 


5.P 


5S.O 
18.0 

X9.0 

3-5 
2.0 
2.0 

»-5 


•90.0 


Z0.0 


50.0 
18.0 

Z9.0 

5-5 
30 
30 

35 


85.0 


15.0 


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  11  (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 :  — 


BxANca  OP  ExnMDrruxB 

Amount  Spent 

Pxa  CiMT  OP  TOTAI. 

Food 

Rent 

$363-42 
162.26 

88.45 

42.46 

32.35 

147.31 

836.2s 

43-4 
X9.4 
10.6 

riotliinjr ... 

^     *^**'"o  • ..  . 

Light  and  Fuel 

3-9 
17.6 

100.0 

Insurance , . 

Sundries  •...,....*.*  w  ^ 

Total 

CONSUMPTION 


119 


The  author  of  this  studj  comes  to  the  conclusion  that  a  ''fair  liv- 
ing wage  for  a  workingman's  family  of  average  size  in  New  York 
City  should  be  ai  Uast  (728  a  year,  or  a  steady  income  of  (14. 

TABLE  n 

ExPENDrnTKES  OP  Amekican  Families  Investigated  by  the 
Uottei)  States  Bureau  op  Labo& 

(Fxom  the  Sefantfa  [1891]  and  EightMoth  Amnttl  Reporti  [1903]) 


Under  $200 

$200    or     under 

$300.. 
$300    or 

$400.. 
$400    or 

$500  •• 
$500    or 

$600.. 
$600    or 

$700  •■ 
$700    or 

$800.. 
iSoo    or 

$900.. 
I900    or 

$1000. 
$1000    or 

$1100. 
$1100   or 

$1200. 
$1200  or  over 

AD 


under 


under 


under 


under 


under 


under 


under 


under 


under 


Pit  Cent  of  Total  ExpgwDirum 


Food 


1891 
49.6 

44.3 
45-6 
451 
43-8 
41.2 

38.9 

38.1 

34.3 

34.7 

30-7 
28.6 

41.1 


X903 

50-9 
47-3 
48.1 
46.9 
46.2 

435 
41.4 

41.4 

39-9 

38.8 

37-7 
36.5 

431 


Qothlag 


X89Z 

Z2.8 

14.3 

I4.I 

14.4 

«5.3 
iS-9 
16.3 

z6.8 

175 

16.S 
iS-7 

15.3 


1903 

8.7 
8.7 

lo.o 

11.4 
12.0 
12.9 

135 
13-6 
14.4 

14.9 
130 


Rent 


1891 

14.7 
15.0 
15-3 

iS-5 

16.1 
14.9 

12.2 
12.6 

151 


X903 
16.9 
18.0 
X8.7 
18.6 
18.4 

18.5 
18.Z 
17.1 
17.6 

17.5 

16.6 
17-4 
18.1 


Fuel  and 
light 


Z891 
8.1 
7.6 
7.0 
6,6 
6.6 
59 
5-3 
5'3 
4.7 
4.5 

3.9 

30 

S-9 


igoj 
8.0 
7.2 

6.7 
6.2 

5.8 

5-3 

5-0 

S-o 

4.9 

4.7 
5>o 

5-7 


MiflcelU- 


1891 
Z4.0 

19. 2 
18.3 

z8.6 
19.1 

8X.6 

a3-9 
25-5 
29.  z 
28.Z 

3^-7 
401^ 

22.7 


iS-6 
z8.8 
x6.x  • 
X6.S 

Z7.2 
19.4 

21.6 

t3-o 
fl3-> 
a3-7 

96.Z 

ill 
20.  z 


I20  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."  ^ 

QUSSTIONS  AND  EXBRCISB8 

I.  If  you  had  four  sacks  of  corn  all  alike,  could  you  tell  which  is  the 
marginal  one  ? 

a.  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  $1,  h6w  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  statistica  quoted 
in  the  text. 

REFERENCES 

B5hm-Baw£RK,  £.  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. 

*  More,  Wage-Earners'  Budgets,  New  York,  1907,  pp.  908  and  369. 


PART  III 
PRODUCTION 

CHAPTER  IX 
PRODUCTION 

Ptodnction  Defined. — Man  creates  no  new  matter.  Neither 
the  fanner  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  utUUieSf 
Ume  utililies,  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. 
AU  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  eflFort  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  animak,  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  capUal; 
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-setdng 
machines  and  printing  presses  which  are  used  are  themselves  the 
product  of  other  kinds  of  labor.    To  substitute  capital  for  labor 


PRODUCTION  123 

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  difiFerent  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  sta^s.  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  day,  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 
houae-building,  and  maintain  that,  for  the  building  of  a  bouse,  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 

*  Bdhm-Bawerk,  PasUive  Theory  0/  Capiial  (trans,  by  W.  Smart),  p.  96. 


124  OUTLINES   OF  ECONOMICS 

to  another,  and  thus  secure  a  claim  on  his  services  for  the  futiu^,  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  tinning  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 
longer  labor  is  continued.  Let 
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  las 

not  pick  more  than  Ox,  because  the  Ji^h  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 
x\h  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  imconsciously.  We 
accept  a  position,  considering  its  advantages  and  its  disadvantages 
m  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  conunonly  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  opportimity  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  horn-,  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  Factora.  —  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  differendation  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  arc  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 
busmess  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  consequentiy  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  entreprenexu:  has  become  such  an  important 
one  in  modem  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  failiu-e.  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  shspwd^ 
captains  of  industry.  v/ 

Divisioii  of  Labor.  —  A  characteristic  feature  of  the  organiza- 
don  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  fijid  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,  (j)  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  secdons  of  rooms,  so 
that  all  sections  have  their  supervisors,  known  variously  as  section  bosses, 
section  hands,  section  girls,  and  third  hands.    The  following  list  ci  occupa^ 


laS  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;  railway-head  tenders;  slub- 
bers; speeders,  fly-frame  tenders;  jack  tenders;  rovers;  spinAers;  bobbin 
boys;  yarn  pourers;  piecer  and  doffer;  back  boy;  band  boys;  doublers 
and  twisters;  winders;  yam  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  brusheis;  handers-in;  twisters-in;  loom  fixer;  pattern 
makers;  putters-up  of  samples;  cloth  weavers;  weavers  of  designs;  yam 
carriers ;  smash  piecers ;  spare  weavers ;  inspectors ;  trimmers.  The  finish- 
ing of  the  cloth  is  a  separate  industry.^ 

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  fijid  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  i6  cents  to  50  cents  an  hour. 
The  50-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,  18}  cents,  ao 
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  di£ferent  rates  of  pay.  A  20-cent  man  pulls  off  the 
tail,  a  22}  cent  man  pounds  off  another  part  where  the  hide  separates  readily, 
and  the  knife  of  the  40-cent  man  cuts  a  different  texture  and  has  a  different 
"feel"  from  that  of  the  50-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 

^  From  the  Glossary  of  Occupations  in  the  volume  on  Employees  and  Wages. 
Twclffli  Census,  Special  Reports,  1903. 

*  Commons,  Trade  Unionism  and  Labor  Problems ^  p.  924,  in  a  chapter  appear 
lag  originally  in  the  Quarterly  Journal  of  Economics,  Vol.  XIX,  p.  i. 


PRODUCTION  lag 

learning  one's  business,  as  the  labor  of  each  is  more  simple. 
(2)  Greater  skill  is  acqiiired,  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,  yoimg  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."  ^ 

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  frequendy 
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  Ecamfmics,  4th  ed.,  p.  334. 


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  laigely  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 
modem  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  amoimt  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  ofifhand.  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.*' ' 

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  hoturs,  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  lasure  sanely,  their  condition  will 

»T.  N.  Carver,  "Machinery  and  the  Laborers,"  Quarterly  Journal  of  Eeo* 
nomics,  February,  1908,  p.  930. 


PRODUCTION  131 

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  wiU  limit  the  use  of 
machinery  in  some  directions  (e,g.  we  may  insist  upon  more  hand 
work  in  the  making  of  fumitiu-e),  but  an  extensive  use  of  machinery 
will  always  be  necessary  as  a  servant  of  art,  and  that  in  two  ways: 
(i)  for  an  appredadon  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  pai;;dcular  region  is  often  called  the  territorial  division 
of  labor,  or  the  localization  of  indiistry.  Illustrations  are  seen  in 
the  prominence  of*  the  boqt  and  shpe  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  brassware  in  Waterbury,  Connecticut;  of  carpets 
m  Philadelphia;  of  jewelry  in  Providence,  Rhode  Island,  Atdeboro, 
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.^ 

iConsnlt  HaU,  *'The  Localization  of  Induaby,"  Census  Bulletin,  No.  S44  (also 
found  in  Twelfth  Census,  Manufactures),  and  Ross,  "The  Localization  of 
Industry,"  Quarterly  Journal  of  Economies,  Vol.  X,  p.  347-  Also  the  Federal 
Census  of  MaBofactures  for  1905,  Vol.  I,  Chap.  XII. 


132 


OUTLINES  OF  ECONOMICS 


Productive  Orgaxiization  of  fhe  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 

NuuBER  OF  Males  and  of  Females  of  Each  Specified  Age  engaged 
IN  Gainfxtl  Occupations  compaeed  with  the  Total  Number  of 
THE  Same  Sex  and  Age  :   1900.^ 


Aox  Gkoups 

aob  and  ovxk. 

Pe»  Cent  of  Total 

»  Each  Gkoup 

Age  a2«d  ovkx. 
Pm  Cent  of  Total 

10  to  I  <  vears 

a6.i 
76.8 
93» 
96.3 
96.6 

955 
90.0 

68.4 

59-6 
80.0 

10.2 

16  to  ao  3^ears 

33-3 
30.8 
19.9 
15.6 
14.7 
13.2 
9.1 
24.2 
18.8 

21  to  24  yvftrs  ...*t. ■..««**■«. 

9?  to  t4.  vcars 

ic  to  AA  vears 

4.K  to  <A  vears 

^3  *"  0^  /  wi»»  0. 

c  c  to  6a  vears 

6<!  vears  and  over..  ........... 

Age  unknown 

Aggregate 

The  fact  that  women  at  work  in  their  own  households  are  not 
counted  as  gainful  workers  is  apparent  from  this  table.  The 
effect  of  school  attendance  is  seen  in  earlier  age  groups.  In  the 
column  for  the  female  workers  the  effect  of  marriage  is  seen  in  the 
decline  in  the  percentages  after  twenty  years.  Old  age  makes  its 
influence  felt  in  both  columns. 

The  following  table  shows  the  distribution  of  the  gainful  workers 
among  the  five  main  classes  of  occupations.  The  most  striking 
facts  are  the  decline  in  the  relative  importance  of  agricultural  piu*- 
suits  and  the  increase  in  the  relative  importance  of  trade  and 
transportation :  — 

s  Twelfth  Censtu,  Special  Report  on  Occapations,  1904,  p.  crrlfi. 


PRODUCTION 


lii 


TABLE  n 

Dbthbution  by  Main  Classes  of  Persons  xnoaosd  in  Gazmtdl 
occdpatioms  1 


X900 

1890 

1880 

35-7 
4.3 
Z9.3 
16.4 
244 

39-2 

4.0 

18.1 

14.3 
24.4 

44.3 
35 
Z9.6 
10.8 
ai.8 

I^ofessiona]  service 

Domestic  and  persona]  service 

Trade  and  transportation 

Manufacturing  and  mechanical  pursuits. . 

lOO.O 

Z00.0 

Z00.0 

Tbe  broad  territorial  division  of  labor  is  seen  when  these  per- 
centages are  given  separately  for  groups  of  states:  — 


TABLE  m 

Per  Ctm  of  Gaiswxjl  Workers  in  Each  Class  cat  Occupations  by 
Groups  of  States:   zpoo* 


North  Atlantic 
Sooth  Atlantic 
North  Central 
South  Central 
Western 


^ 


"5 
50.8 
36.6 
63.4 
27-3 


4.8 
30 
S-o 
a.9 

S-7 


az.6 

90.0 

Z8.4 
az.8 


9Z.8 

Z7.4 

9.Z 

Z9.4 


0.3 
0.6 
o.z 
o.z 


2-3 
z.o 

1-7 
z.o 

7-4 


367 

Z4.Z 

90.8 

8.3 
Z7.9 


In  Table  IV  the  various  occupations  differentiated  in  the  Census 
Report  on  Occupations  have  been  classified  somewhat  in  accord- 
ance with  their  natural  ranking,  the  amount  of  skill  they  require, 
and  the  educational  influence  which  they  exercise  over  the  people 
who  follow  them.    In  each  element  of  the  population  the  females 

^Twelfth  Census  Special  Report  on  Occupations,  1904,  p^  IzzxrL 
•  Special  Report  on  Occupations,  1904,  pp.  zdv  and  dl. 


134 


OUTLINES  OP  ECONOMICS 


are  foimd  to  a  larger  extent  than  the  males  In  the  lower  grades  of 
skill.  For  both  male  and  female  negroes,  the  percentage  of  those 
engaged  in  unskilled  labor  is  very  large.  For  the  other  elements 
of  the  population  there  is  an  upward  trend  out  of  this  lowest 
grade. 

TABLE  IV 

PEItCENTAGE  OF  NATIVE  AND   FOREIGN  BORN  ElEICENTS  AND  NeoSOES 

engaged  in  the  special  gsoups  oe  occupations  classified  by 
Sex  :  1880,  1890,  and  1900 


NAIIVITT  AMD  SKX 


Native  Born 

Males.. . 

Native  Bom 

Females. 

Foreign  Born 
Males  . . 

Foreign  Born 
Females 

Negroes 

Male  .. 

Negroes 

Female  . 


Yeak 


1880 
1890 
1900 

1880 
1890 
1900 

z88o 
1890 
1900 

1880 
1890 
1900 

1890 
1900 

1890 
1900 


I 
I 


35-9' 
35.83 
3»-4i 

3.28 
7.72 
8.67 

27.81 

24.77 
33.36 

4.16 
7.08 
7-95 

26.65 
25.98 

5-45 
6.07 


3.X2 
3-74 
3-9^ 

7.54 

9-3a 

12.50 

9.02 
2.15 
2.45 

2.56 
2.52 
2.94 

1.20 

I.I5 

.90 
1.19 


4.29 
6.75 

9.00 

I.6I 

536 

X2.50 

2.78 
4.18 
5." 

.82 

2.39 
4.70 

•39 
.46 

.08 

.12 


"•55 
14.59 
15.20 

1.62 
2.10 
2.83 

17-58 
19.98 

19.45 

1.58 
1.82 
1.71 

6.07 
5-S» 


.04 


5.83 
6.a6 

6.43 

20.65 
23.40 
29.00 

13-25 
12.78 

14,19 

30-37 
27.46 
30.18 

3-37 
3.92 

2.91 
2.86 


39.30 
33.84 
34.00 

66.30 
52.10 
34.50 

36.56 
36.14 
35*44 

60.5a 
58.37 
52.52 

62.32 
62.98 

90.06 
89.72 


Prepared  by  Mr.  H.  J.  Dahl.  of  the  University  of  Wiscxmsin,  from  the  Reports  of  the 
Twelfth  Census,  and  from  Mr.  W.  C.  Hunt's  mono«rraph,  entitled,  Workers  at  GakiiiA  Ocew 
faHom^  published  in  the  BuUetfai  of  the  Department  of  Labor,  No.  zi,  July,  x897« 


PRODUCTION  135 

QUESTIONS 

z.  Is  the  employee  in  a  planing  mill  in  a  worse  position  than  the  old-time 
carpenter  who  has  to  do  his  planing  by  hand  ? 
3.  Is  an  insurance  agent  a  producer  of  wealth  ? 

3.  What  would  happen  if  there  should  be  too  much  saving? 

4.  When  you  spend  money,  do  you  ordinarily  think  of  how  hard  you  had 
to  work  to  get  it? 

5.  Why  is  Massachusetts  the  center  of  the  boot  and  shoe  industry  ? 

KEFERSlfCES 

Carvkr,T.N.    The  Diaribiaion  of  Wealth,  Chap.  II. 

FiSHEK,  Irvino.    The  Nature  of  Capital  and  Income,  Chaps.  V  and  VI, 

HOBSON,  J.  A.     The  Social  Problem,  Book  II,  Chap.  II. 

Marshall,  Alfred.    Principles  of  Economics,  Book  IV. 

Veblbn,  T.  B.     The  Theory  of  Business  Enterprise,  Chaps.  II  and  III. 

Valuable  collateral  reading  will  be  found  in  recent  bulletins  of  the 
Cenras  Buicau  deicribiog  specific  banches  of  pzoductioo. 


CHAPTER  X 
BUSINESS  ORGANIZATION 

The  dominance  of  ''  business''  in  our  present  social  economy  is 
so  familiar  and  commonplace  a  thing  that  we  are  apt  to  forget  its 
real  significance.  But  it  indicates,  as  nothing  else  does,  the 
cleavage  that  exists  in  modem  times  between  money  making  and 
the  other  things  of  Ufe  —  between  exchange  economy  and  domes- 
tic economy.  Commerce  and  manufactures  have  each  in  turn 
been  brought  under  the  dominion  of  business  enterprise;  busi- 
ness methods  and  motives  are  also  of  the  first  importance  in 
agriculture,  although  in  this  last  field  production  for  domestic 
use  still  continues  and  promises  to  continue  hand  in  hand  with 
production  for  the  market. 

''Business"  means  profit  seeking.  It  does  not  cover  so  broad 
a  field  as  does  ''production,"  nor  is  it  quite  the  same  thing  as 
"production  for  the  market."  Business  is  acquisitive  rather 
than  productive,  and  while  acquisition  usually  implies  produc- 
tion, this  is  not  invariably  the  case.  The  economic  world,  in  its 
business  aspect,  is  a  world  of  buying  and  selling  rather  than  of 
making  and  using  things;  it  is  a  world  in  which  prices,  expenses, 
debts  and  credits,  and  contractual  relations  are  the  dominating 
things  rather  than  the  technical  processes  of  production  or  the 
ultimate  costs  of  production  as  measured  in  human  effort  and 
sacrifice. 

The  Nature  of  Business  Units. — Under  competitive  conditions 
profit  seeking  involves  risk  taking.  The  business  world  is  made 
up  of  profit-seeking,  risk-taking  units,  —  entrepreneurial  units. 
We  are  apt  to  think  of  business  units  as  concrete  things,  com- 
posed of  individual  men  or  groups  of  men.  In  an  ultimate 
sense  this  is  true,  but  for  present  purposes  we  may  more  profit- 

136 


BUSINESS  ORGANIZATION 


137 


ably  view  business  units  as  abstract  things,  —  the  centers  or 
Joci  of  tbe  contractual  and  other  legal  relations  that  bind  the 
business  world  together.  These  relations  are  recorded  and  stated 
more  or  less  fully  in  the  accounts  of  each  business  unit;  ulti- 
mately, however,  they  are  matters  of  legal  fact,  and,  as  we  shall 
see,  the  legal  aspect  and  the  occaunHng  aspect  of  these  relations 
are  not  always  identical. 

Without  entering  into  either  the  general  theory  or  the  details 
of  accounting,  we  may  note  that  the  simplest  general  way  in 
which  a  business  unit  can  be  described  by  its  accoimts  is  by 
means  of  the  income  sUUement^  which  is  a  simple  record  of  money 
receipts  and  money  expenditures  during  a  given  period,  such  as 
a  month  or  a  year.  Of  more  significance,  however,  in  the  present 
connection,  is  the  balance  sheet,  which  b  the  statement  of  the 
assets  or  resources  and  the  liabilities  or  obligations  of  the  busi- 
ness unit  as  they  exist  at  a  particular  time.  The  income  state- 
ment is  a  historical  record,  the  balance  sheet  a  photographic 
snap-shot.^  The  following  is  a  simplified  form  of  balance  sheet 
for  a  small  manuf actiuing  establishment :  — 


Assets 

Land  and  buildings $190,000 

Machinicry  and  fixtures. . .  50,000 
Raw  materials,   goods  in 

process,     and     finished 

goods  on  hand 6o/>oo 

Accounts  receivable 8,000 

Cash  on  hand  and  in  banks  7,000 

Total  assets $3x5,000 


LiABiLrnss 

Original  capital  invested.  $200,000 

Income  reinvested 6o/>oo 

Accounts  payable 50,000 

Profits d5t00o 


Total  liabilities $315,000 


The  itemized  assets  explain  themselves,  but  the  meaning  of 
the  various  liabilities  may  not  be  so  clear.  In  this  statement  all 
the  items  of  the  liabilities  except  '^accounts  payable"  refer  to  the 
liabilities  of  the  business  unit,  as  an  abstract  entity,  to  the  owner 

'  The  proJU^nd4oss  staUment  is  another  important  exhibit.  It  difiFers  from 
the  income  statement  in  that  it  is  a  showing  of  the  amount  of  sales  in  a  given  period 
compared  with  the  expense  of  producing  the  particular  things  sold.  Accurate 
profit-and-loss  statements  represent  the  highest  achievements  of  modem  account- 
ing aad  cost-keeping  methods. 


138  OUTLINES  OF  ECONOMICS 

or  owners  of  the  business,  —  the  amount  which  would  be  left  if 
the  business  were  sold  as  a  whole  at  a  price  just  equal  to  the 
total  imputed  value  of  the  assets  minus  the  actual  outstanding 
obligations  (the  accounts  payable).^  It  will  be  noted  that  the 
item  called  '^ profits''  is  the  variable  by  which  the  account  is 
balanced.  On  such  a  showing  as  this  the  owners  might  decide 
to  take  $5000  out  of  the  business  as  dividends,  or  personal  profits, 
as  the  case  may  be.  This  would  reduce  the  ''cash  "  to  $2000  and 
correspondingly  reduce  profits.  They  may  decide,  also,  per- 
manently to  retain  $10,000  of  their  earnings  in  the  business. 
''Profits"  would  then  be  reduced  to  $10,000,  and  the  "income 
reinvested"  or  "siuplus,"  as  it  is  often  called,  would  be  increased 
to  $70,000.  In  practice  "surplus"  and  "profits"  often  constitute 
only  one  item  in  the  accounts.  In  the  case  of  corporations  the 
"original  investment"  item  is  called  "capital"  and  represents 
the  par  value  of  the  corporation's  securities,  whether  the  full 
amoimt  has  been  actually  paid  in  or  not.  Siuplus  profits  in  such 
cases  can  be  easily  converted  into  "capital'*  by  means  of  "stock 
dividends." 

In  the  legal  aspect,  however,  the  business  does  not  always 
app)ear  to  have  so  distinct  a  unity  of  its  own.  This  varies  with 
the  form  of  business  organization,  of  which  there  are  three  im- 
portant types:  the  individual  entrepreneur,  the  partnership,  and 
the  corporation. 

^  The  Individual  Entrepreneur.  —  Any  individual  may  set  him- 
self up  as  a  business  man,  an  entrepreneur,  without  any  legal 
formality  except  the  payment  of  the  license  fee  which  most  states 
impose  on  some  kinds  of  business  undertakings,  such  as  liquor 
dealing,  and  which  some  states,  especially  in  the  South,  impose 
upon  many  kinds  of  undertakings.  The  individual  entrepreneur 
still  dominates  the  field  in  agriculture,  small  retail  trade,  and  in 
local  "shop  industries." 

In  the  legal  aspect  the  obligations  of  a  business  conducted  by 

^  The  form  of  balance  sheet  given  in  the  text  Is  in  reality  a  simple  adaptation 
of  the  kind  of  balance  sheet  used  in  the  published  statements  of  corporation 
accounting.  But  if  the  individual  proprietor  of  a  small  business  keeps  an  accurate 
ledger  account  with  himself,  the  result  is  the  same  so  far  as  the  independence  of 

the  business  as  an  accounting  unit  is  concerned. 


BUSINESS   ORGANIZATION  I39 

an  indiTidual  entrepreneur  are  the  personal  obligations  of  the 
entrepreneur.  All  of  his  possessions  of  whatever  kind  ^  are 
jeopardized  by  his  business  risks.  If  the  entrepreneur  conducts 
two  distinct  business  undertakings,  the  assets  of  one  may  be 
seized,  if  necessary,  to  secure  the  liabilities  of  the  other.  The 
personal  liability  of  the  individual  entrepreneur  is  accordingly 
said  to  be  unlimited.  The  usefulness  of  this  kind  of  business 
(Hganization  is  limited,  obviously,  to  small  imdertakings,  where 
the  capital  and  credit  of  the  individual  business  man  are  adequate. 

Partnerah^.  —  A  ''firm''  or  partnership  represents  a  joint 
undertaking  by  individual  entrepreneurs.  Partnerships  are  most 
common  in  mercantile  imdertakings  of  moderate  size,  in  small 
manufacturing  establishments,  and  in  the  professions.  This  join^ 
ing  of  interests  makes  larger  undertakings  possible,  but  relatively 
increases  the  personal  liability  of  the  individual  members  of  the 
firm.  For  each  member  is  personally  liable  for  all  of  the  obliga- 
tions contracted  by  the  firm,  as  well  as  those  contracted  in  the 
ordinary  course  of  business  by  any  other  one  member  of  the 
firm.'  The  partners  may  have  a  contract  binding  among  them- 
selves as  to  their  respective  contributions  (of  money  or  time), 
shares  in  profits,  and  liabilities.  But  a  member  released  from 
personal  liability  by  an  agreement  of  this  kind  is  still  liable  for 
all  obligations  incurred  by  the  firm.  The  agreement  only  gives 
a  basis  for  instituting  legal  proceedings  to  recover  the  amount  of 
his  personal  losses  from  the  other  members  of  the  firm. 

Aside  from  (i)  the  excessive  personal  liability  involved,  the 
partnership  is  open  to  objection  from  the  business  man's  point 

^  The  "eiemption  laws"  of  some  states  constitute  an  exception  which  does 
not  affect  the  principle  involved. 

'This  refers  to  the  status  of  the  ordinary  partnership  under  common  law. 
The  statutes  of  some  states  provide  for  a  special  form  of  limited  partnerships  in 
which  one  or  more  of  the  partners  are  special  partners,  who  are  not  personally 
liable,  save  for  their  investment  in  the  business,  and  who  are  allowed  to  take  no 
active  part  in  the  management  of  the  business.  In  a  few  states  there  is  a  special 
form  called  a  limited  partnership  association,  in  which  the  liability  of  all  the 
pajtncrs  is  limited.  These  are  practically  joint-stock  companies  with  non- 
transferable shares.  The  partnership  in  comntendam,  which  still  exists  in  Louisi- 
ana as  a  heritage  of  the  dvil  law,  is  essentially  like  the  statutory  limited  partnerships 
of  other  states. 


140  OUTLINES  OF  ECONOMICS 

of  view,  because:  (a)  It  is  impossible  for  a  partner  to  retire  from 
a  firm  without  dissolving  the  partnership  and,  possibly,  break- 
ing up  the  business.  The  death  or  insolvency  of  any  partner  has 
the  same  effect.  (3)  A  new  member  cannot  enter  the  firm  nor 
can  a  member  transfer  his  interests  to  another  person  without 
the  consent  of  all  the  members  of  a  firm,  —  requirements  which 
naturally  follow  from  the  nature  of  a  partnership.  (4)  The 
partnership  form  of  organization  is  not  adapted  to  undertakings 
requiring  large  investments  of  capital  and  hence  requiring  the 
cooperation  of  a  large  number  of  persons.  What  advantage  the 
partnership  has  come  from  the  ease  with  which  it  can  be  organ- 
ized and  dissolved,  and  from  its  elasticity,  —  that  is,  the  ease 
with  which  the  contractual  relations  among  the  partners,  bind- 
ing as  among  themselves,  can  be  altered  to  suit  any  contingencies 
that  may  arise. 

The  Corporation. — The  federal  census  of  1905  showed  that 
although  less  than  one  fourth  of  the  manufacturing  undertakings 
included  in  that  enumeration  were  organized  as  corporations, 
yet  these  produced  nearly  three  fourths  of  the  total  manufactur- 
ing product  (measured  in  money  value).  Most  banks  and  insur- 
ance companies  are  corporations,  while  in  the  field  of  railway 
transportation  corporations  are  in  almost  exclusive  control.  Ac- 
count should  also  be  taken  of  the  large  and  growing  number  of 
mercantile  imdertakings  organized  as  corporations. 

In  the  case  of  the  corporation  the  legal  view  and  the  account- 
ing view  of  the  business  unit  are  practically  identical.  While 
the  ordinary  partnership  is  in  law  simply  a  group  of  individual 
entrepreneurs,  the  corporation  is  regarded,  for  some  purposes,  as 
a  **  person."  To  the  incorporated  business  imit,  —  an  abstract 
thing,  as  we  have  seen,  —  the  law  imputes  some  of  the  attributes 
of  personality,  —  and  of  a  personality  distinct  from  that  of  the 
individual  men  who  are  the  stockholders  of  the  corporation.* 

Municipalities,  universities,  monasteries,  guilds,  etc.,  were  commonly 
incorporated  by  royal  charter  long  before  business  corporations  of  the 

^  Several  states  authorize  the  organization  of  "joint-stock  companies"  which 
are  like  corporations  in  all  essential  particulars,  and  are  sometimes  called  "quasi- 
corporations."  In  theory  they  are  incorporated  partnerships  with  transferable 
shares  and  (usually)  with  limited  liability. 


BUSINESS  ORGANIZATION  141 

modem  kind  arose,  —  for  this  did  not  occur  until  the  rise  of  ''capitalism" 
in  the  seventeenth  century.  The  great  trading  and  colonizing  companies, 
such  as  the  British  East  India  Company,  the  Virginia  Company,  the  Guinea 
CcHnpany,  etc.,  were  the  prototypes  of  the  modem  business  corporation. 
In  connection  with  these  trading  companies  the  joftU-stock  principle,  which 
had  already  been  used  in  a  few  isolated  instances  of  banking,  was  developed. 
This  was  the  practice  of  issuing  certifiicates  to  those  who  made  contributions 
to  the  "joint  stock"  (or  capital)  of  a  company,  which  entitled  the  holder 
to  a  proportionate  share  in  the  profits  accruing  to  the  joint  stock.  The 
modem  business  corporaticxi,  like  these  early  trading  companies,  is  baaed 
essentially  on  the  combination  of  the  joint-stock  principle  with  the  legal 
recognition  of  the  business  unit  as  a  distinct  entity. 

At  the  beginning  of  the  nineteenth  century  what  few  corporations  there 
were  in  America  were,  for  the  most  part,  banks,  insurance  companies,  or 
canal  and  tumpike  companies.  The  introduction  of  railways  in  the  third 
decade  of  the  century  greatly  stimulated  the  organization  of  corporations, 
because  these  new  undertakings  required  larger  investments  of  capital  than 
could  be  furnished  by  any  individual  or  finn.  State  enterprise,  it  is  tme, 
promised  at  one  time  to  be  an  important  factor  in  canal  and  railway  building, 
but  such  state  undertakings  were  usually  planned  with  the  purpose  of  de- 
veloping natural  resources,  attracting  immigration,  and  building  up  the 
trade  oi  particular  districts  and  particular  cities  rather  than  of  getting  money 
profits.  Most  of  these  state  undertakings  had  succumbed  by  1840,  so  that 
the  field  was  left  open  for  business  enterprise.  In  the  general  expansion  and 
reorganization  of  business  that  followed  the  Civil  War  the  corporation  form 
of  organization  began  to  be  more  generally  used  for  all  kinds  of  business 
undertakings.  The  growing  importance  of  corporations  in  business  life  is 
partly  an  effect  and  partly  a  cause  of  the  growing  size  of  the  business  unit. 

The  Corporation  Charter.  — The  corporation  is  a  creature  of 
the  state,  its  right  to  exist  being  dependent  on  a  charter  or  on 
arHdes  of  incorporation,  granted  or  approved  by  the  state.  In- 
corporation formerly  necessitated  a  special  act  of  the  legislature 
in  each  case.  This  gave  opportunity  for  favoritism  and  monop- 
oly and  subjected  corporations  of  all  kinds  to  hostility  and 
suspicion.  Most  corporations  are  now  organized  under  general 
laws,  whereby  any  group  of  men  can  secure  a  corporation  charter 
by  complying  with  certain  prescribed  conditions.  In  fact,  all 
but  six  states  now  have  constitutional  provisions  against  the 
granting  of  charters  to  business  corporations  by  special  act. 

It  was  formerly  a  common  practice  to  grant  corporation  char- 
ters in  perpetuity,  but  the  decision  of  Chief  Justice  Marshall  in 


I4a  OUTLINES  OF  ECONOMICS 

the  Dartmouth  College  case,  whereby  the  corporation  charter 
was  declared  to  constitute  a  binding  contract  between  the  state 
and  the  corporation,  which  could  not  be  altered  or  amended  by 
the  state  except  with  the  consent  of  the  corporation,  has  led  to 
the  general  practice  of  limiting  the  life  of  corporations  to  terms 
of  from  twenty  to  one  hundred  years,  fifty  years  being  a  common 
period.  The  corporation  may,  of  course,  secure  a  new  charter 
at  the  expiration  of  the  old,  but  the  limited  term  gives  the  state 
the  opportunity  to  change  the  requirements  of  the  charter  from 
time  to  time,  or  to  refuse  reincorporation  altogether,  as  may  seem 
most  desirable.  Most  states,  moreover,  now  specifically  reserve 
the  right  to  alter  or  amend  the  corporation  charter  at  pleasure. 

Corporation  charters,  or  articles  of  incorporation,  usually  con- 
tain details  relating  to  such  matters  as  the  purpose  or  purposes 
for  which  the  corporation  is  formed,  its  principal  place  of  busi- 
ness, the  number  of  its  directors,  and  the  amount  of  its  capitali- 
zation. 

Lack  of  Uniformity  in  State  Laws.  — Many  difficulties  in  the 
public  control  of  corporations  have  arisen  from  the  fact  that 
while  charters  are  granted  by  individual  states,  the  activities  of 
many  business  corporations  extend  over  the  boundaries  of  many 
states.  Moreover,  some  states  are  much  more  lenient  than 
others  in  such  matters  as  the  control  of  capitalization,  require- 
ments as  to  publicity,  limitations  on  the  scope  of  activity  of  a 
single  corporation,  taxes  and  fees,  etc.  New  Jersey  has  become 
known  as  the  '^home  of  corporations"  despite  the  fact  that  some 
states  have  even  more  lenient  laws  than  New  Jersey.  New  Jersey 
has  been  favored,  however,  on  accoimt  of  the  proximity  of  New 
York.  City,  —  the  real  home  of  most  of  the  greater  corporate  in- 
terests of  the  country,  —  as  well  as  on  account  of  its  early  start 
and  the  adaptability  of  its  laws  to  the  most  modem  type  of  cor- 
poration,—  the  holding  company.    (See  p.  150.) 

Other  states,  with  stricter  laws,  could  not  prevent  corporations 
organized  under  lax  laws  from  doing  business  within  their  terri- 
tory so  far  as  that  business  is  interstate.  So  far,  however,  as  a 
corporation  organized  under  the  laws  of  one  state  carries  on  any 
part  of  its  business  wholly  within  the  borders  of  another  state. 


BUSINESS    ORGANIZATION  I43 

the  latter  state  has  the  right  of  refusing  to  recognize  it  as  a  cor- 
poration; that  is,  the  right  to  treat  it  as  a  mere  partnership.  In 
practice,  however,  one  state  freely  recognizes  the  corporations  of 
another  state  under  the  rule  of  "interstate  comity."  In  fact, 
many  corporations  transact  all  their  business  outside  the  borders 
of  the  state  which  chartered  them.  The  real  standards,  therefore, 
are  the  laxest  standards,  not  the  highest.  More  use  on  the  part 
of  American  states  of  the  power  of  exacting  certain  standards 
from  "foreign  corporations,"  as  they  are  called,  is  much  to  be 
desired. 

Corporation  Capital  and  Secnrities.  —  In  a  strictly  legal  sense 
the  capUalizaiion  of  a  corporation  is  the  amount  of  its  authorized 
capital  stock.  This  capitalization  represents,  in  theory,  the 
amount  of  money  actually  invested  in  the  business  by  the  original 
stockholders.  As  a  matter  of  fact,  the  full  amount  of  the  au- 
thorized capital  is  rarely  paid  in  at  the  organization  of  a  new  cor- 
poration. The  capitalization  is  apt  to  be,  in  practice,  a  purely 
arbitrary  thing,  —  a  nominal  money  sum  divided  into  units  or 
shares,  the  rdaiwe  holdings  of  different  individuals  being  meas- 
ured by  the  number  of  shares  they  own. 

Corporation  stock  is  divided  into  two  general  classes,  —  pr^ 
ferred  stock  and  common  slock,  although  many  corporations  issue 
only  the  latter.  Preferred  stock  represents  a  prior  claim  on  the 
earnings  of  the  corporation.  A  corporation  which  has  "6  per 
cent  preferred  stock"  outstanding  can  pay  no  dividends  to  its 
common  stockholders  until  it  has  paid  6  per  cent  dividends  on 
its  preferred  stock.  Preferred  stock  may  be  cumulcUive  (in  which 
the  pricff*  claims  to  dividends  accumulate  from  year  to  year,  if 
unpaid)  or  tum-cumulaiive.  It  may  or  may  not  have  any  claim 
on  any  part  of  the  surplus  profits  remaining  after  a  certain  rate 
of  dividend  has  been  paid  on  the  common  stock.  There  may  be 
several  different  grades  of  preferred  stock,  —  first  preferred, 
second  preferred,  etc. 

In  the  popular  use  of  the  word  the  capitalization  of  a  corpora- 
tion includes  also  its  funded  debt.  The  funded  debt  is  represented 
by  bonds,  which  are  interest-bearing  promises  to  pay  certain  sums 
of  money  at  definite  times  in  the  future.    There  are  many  differ- 


144  OUTLINES  OF  ECONOMICS 

ent  kinds  of  bonds,  but  three  principal  classes  are:  (i)  mortgage 
bonds,  (2)  collateral  trust  bonds,  (3)  income  and  debenture 
bonds.  The  first  class  is  based  on  a  mortgage  of  all  or  of  a  specific 
part  of  the  property  of  a  corporation.  Collateral  trust  bonds  are 
secured  by  the  pledge  of  securities  issued  by  other  corporations, 
but  owned  by  the  corporation  issuing  the  bonds.  They  have 
been  much  used  in  financing  railway  consolidations.  Income 
and  debenture  bonds  are  usually  secured  only  by  the  earning 
capacity  of  the  business.  Industrial  corporations  make  less  use 
vof  bonds  than  do  railways,  and  confine  themselves  usually  to  the 
mortgage  bond  type,  —  of  which,  however,  there  are  many  sub- 
ordinate varieties.  In  the  case  of  many  corporations  the  mort- 
gage security  behind  an  issue  of  bonds  is  in  itself  not  of  great 
importance,  for  the  property  mortgaged  is  apt  to  be  worthless 
except  as  an  integral  part  of  a  unified  business  establishment. 
The  mere  power  of  foreclosure,  however,  gives  mortgage  bond- 
holders a  position  of  strength  in  the  reorganization  of  insolvent 
corporations. 

Bonds  are  sometimes  said  to  represent  '^  creditor  interests," 
and  stock  ''entrepreneur  interests."  This  statement  is  sugges- 
tive and  is  fairly  accurate.  In  fact,  however,  stock  and  bonds 
are  simply  different  kinds  of  equities  in  a  business,  —  conveying 
the  right  to  receive  income,  to  share  in  the  distribution  of  the 
assets  in  case  of  insolvency,  and  to  have  a  voice  in  the  manage- 
ment. Stockholders  alone  participate  in  the  management  of  the 
corporation,  although  bondholders  are  often  able  to  dictate 
policies  when  the  affairs  of  a  corporation  are  in  a  precarious  con- 
dition. Bonds  differ  from  stock  in  being  terminable  at  a  definite 
period  of  time  in  the  future.  In  practice,  however,  the  bonds  of 
great  corporations  are  usually  replaced  by  new  issues  as  rapidly 
as  they  mature. 

Overcapitalization.  — Much  has  been  said  about  the  over- 
capitalization of  corporations,  —  ''stock-watering,"  as  it  is  called. 
Only  a  few  states  require  that  all  the  nominal  capitalization 
should  represent  capital  actually  invested.  In  most  states,  more- 
over, it  is  not  difficult  for  a  corporation  to  increase  its  capitali- 
zation from  time  to  time  in  order  to  secure  fimds  from  the  sale 


BUSINESS   ORGANIZATION  1 45 

of  securities,  or  (in  the  case  of  stock-dividends)  in  order  to  afford 
a  basis  for  the  distribution  of  surplus  profits  without  employing 
an  excessively  high  interest  rate.  It  is  this  last  cause  of  in- 
creased capitalization  that  is  of  special  importance  in  this  con- 
nection. 

On  the  one  hand  it  is  urged  that  capitalization  is  a  nominal 
thing,  that  it  is  immaterial  whether  a  corporation  pays  12  per 
cent  dividends  on  $1,000,000  of  capital  stock  or  6  per  cent 
dividends  on  $2,000,000  of  capital  stock.  On  the  other  hand  it 
is  said  that  capitalization  should  not  be  a  merely  nominal  thing, 
but  that  it  should  represent  the  actual  amoimt  of  the  investment; 
that,  without  regard  to  the  amount  of  capitalization,  regularly 
recurring  dividends  of  12  per  cent  suggest  excessive  profits  in  a 
way  that  6  per  cent  dividends  do  not. 

The  argument  in  favor  of  a  closer  correspondence  between 
capitalization  and  real  investment  is  especially  strong  in  the 
case  of  railways  and  other  transportation  corporations  with 
quasi-public  functions,  municipal  public  service  corpbrations, 
and  corporations  enjoying  natural  monopolies  of  all  kinds.  For 
there  is  a  growing  feeling  that  such  corporations  are  in  a  peculiar 
sense  social  trustees,  to  whom  have  been  conunitted  certain' 
public  economic  functions  that  might  very  properly  be  per- 
formed by  the  state,  if  that  coiurse  were  deemed  the  more  advan- 
tageous. That  such  corporations  should  be  restricted  to  the 
payment  of  a  reasonable  dividend  on  reasonable  capitalization 
would  seem  to  be  a  proposition  that  is  scarcely  open  to  question.^ 
Yet  excessive  profits  are  what  make  excessive  dividends  possible, 
and  whether  profits  are  excessive  or  not  can  be  determined  in 
most  cases  without  reference  to  capitalization  by  the  compulsory 
use  of  adequate  accounting  methods. 

Overcapitalization  should  be  looked  at  also  from  the  point  of 
view  of  the  investor, — a  point  of  view  too  often  overlooked. 
When  overcapitaUzation  is  permitted,  it  is  frequently  extremely 
difficult  and  often,  indeed,  impossible  for  the  ordinary  investor 
to  know  precisely  what  he  is  buying  when  he  purchases  a  share 

^  It  is  better  to  curtail  excessive  profits  by  public  control  of  rates,  prices,  and 
services  than  by  arbitrarily  Umitiog  the  dividend  rate. 

L 


146  OUTLINES  OF  ECONOMICS 

of  stock  of  an  overcapitalized  company.  It  helps  to  approri- 
mate  equality  of  opportimity  for  all  when  there  is  an  exact  cor- 
respondence between  investment  and  capitalization.  If  a  person 
buys  a  share  of  national  bank  stock  at  $4000,  he  at  once  knows 
that  the  original  investment  was  $100.  The  apparently  high 
price  immediately  challenges  attention,  and  the  investor  is  led  to 
look  into  the  grounds  of  the  high  price.  There  are  cases  in  which 
such  a  price  would  prove  a  remunerative  investment,  but  it  is 
well  to  warn  the  investing  public  by  prohibition  of  overcapitali- 
zation. It  has  been  strongly  urged,  and  with  some  groimd,  that 
it  is  in  every  way  highly  desirable  that  the  corporate  property  of 
the  country  should  be  more  widely  distributed ;  and  to  promote 
this  end,  every  measure  which  gives  the  average  man  a  "square 
dear*  in  investments  must  be  strongly  favored. 

While  overcapitalization  has  thus  many  undesirable  features, 
it  has  nevertheless  sometimes  been  unduly  emphasized  in  discus- 
sions of  corporation  reform,  to  the  neglect  of  other  and  more 
important  points. 

In  this  connection  we  should  note  the  difference  between  the 
"capitalization"  and  the  "capital"  of  a  corporation.  The  busi- 
ness world  uses  the  term  "capital"  in  two  ways:  it  speaks  of  the 
total  permanent  investments,  —  the  amount  of  money  "tied  up," 
—  in  a  business  as  its  capital,  and  it  also  speaks  of  the  total  sell- 
ing value  of  the  business  as  a  whole  as  its  capital.  This  last  may 
depend  in  part  on  such  intangible  things  as  monopoly  power  or 
good  will.  It  is  measured  by  the  "capitalized"  earning  capacity 
of  the  business,  or,  approximately,  by  the  market  value  of  the 
corporation's  securities,  as  distinct  from  the  par  values  which 
measiue  the  nominal  capitalization  of  the  corporation. 

Form  of  Capitalization.  —  A  significant  feature  of  recent  de- 
velopment in  corporation  finance  is  the  multiplicity  of  types  of 
corporate  securities.  It  is  no  uncommon  thing,  for  example,  for 
the  equities  in  a  railway  corporation  (in  addition  to  the  floating 
debt,  or  accounts  payable)  to  be  divided  among  a  dozen  or  twenty 
varieties  of  bonds  and  two  or  three  varieties  of  stock.  This 
multiplicity  of  securities  is  of  advantage  to  the  corporation  in 
that  it  enables  it  to  offer  to  investors  and  speculators  a  carefully 


BUSINESS  ORGANIZATION  I47 

graded  assortment  of  risks,  —  a  fact  which  makes  the  total  sell- 
ing value  of  a  corporation's  securities  greater  than  it  would  other- 
wise be.  This  complex  kind  of  capitalization  has,  however,  some 
undesirable  features.  If  the  owners  of  a  particular  security, — 
the  common  stockholders,  perhaps,  —  control  the  corporation, 
they  may  desire  to  increase  the  value  of  their  seciuities  for  specu- 
lative purposes  by  the  payment  of  imeamed  dividends,  very 
properly  a  criminal  proceeding  according  to  the  laws  of  some  states 
— a  proceeding  which  would  be  opposed  to  the  interests  of  the  hold- 
ers of  all  the  other  securities  of  the  corporation.  Moreover,  in 
cases  of  insolvency  and  reorganization,  it  is  a  difficult  matter  to 
untangle  and  to  adjust  equitably  the  rights  of  the  holders  of  the 
different  kinds  of  securities. 

In  times  of  prosperity  corporations  often  pay  for  extensions  of 
their  plants  from  the  proceeds  of  bond  sales,  because  it  is  esti- 
mated that  the  earning  power  of  such  extensions  will  more  than 
suffice  to  pay  the  interest  on  the  bonds  and  will  afford  a  hand- 
some surplus  for  the  stockholders.  Corporations  thus  accumu- 
late in  prosperous  times  an  unwieldy  load  of  fixed  charges  in  the 
form  of  interest  on  bonds,  —  a  fact  which  is  apt  to  be  a  source 
of  difficidty  in  less  prosperous  years.  In  periods  of  financial 
stringency  these  fixed  charges  are  a  common  cause  of  insolvency, 
receiverships,  and  consequent  reorganizations,  from  which  the 
bondholders  are  apt  to  emerge  as  stockholders,  and  in  which 
the  stockholders  are  apt  to  lose  their  holdings.  The  legal  restric- 
tion of  the  securities  issued  by  any  one  corporation  to  one  kind 
of  stock  and  three  or  four  varieties  of  bonds  is  both  feasible  and 
desirable.  Nor  should  the  bonded  debt  be  allowed  to  greatly 
exceed  the  amoimt  of  the  paid-up  capital  stock. 

Corporation  Management.  — The  management  of  business  cor- 
porations is,  as  a  rule,  in  the  hands  of  boards  of  directors^  elected 
by  the  stockholders  from  among  their  own  number.  The  details 
of  management  are  in  the  hands  of  officers,  chosen  usually  by  the 
directors.  In  principle  this  system  achieves  something  like  repre- 
sentative government  of  the  affairs  of  the  corporation.  In  prac- 
tice, in  the  larger  corporations,  some  of  the  directors  are  apt  to 
be  "dununy  directors,"  —  usually  employees  of  the  corporation, 


148  OUTLINES  OF  ECONOMICS 

made  directors  in  order  to  complete  the  number  prescribed  in 
the  charter,  —  or  are  the  representatives  of  great  financial  in- 
terests, and  often  of  competing  interests.  Directors  of  this  latter 
sort  are  not  primarily  concerned  with  the  management  of  a  cor- 
poration in  the  interests  of  its  stockholders  and  bondholders. 
They  are  directors  for  the  purpose  of  guarding  special  interests, 
and  in  many  cases  for  the  purpose  of  preventing  "competition" 
from  becoming  anything  more  active  than  an  armed  peace. 

In  many  cases  the  real  direction  of  a  corporation's  policies  is 
in  the  hands  of  an  "executive  committee  "  or  "finance  conmiittee  " 
of  three  or  five  directors  representing  the  person  or  persons  in 
actual  control  of  the  corporation. 

Advantages  of  the  Corporation  as  a  Form  of  Business  Oiigan- 
ization.  —  From  the  point  of  view  of  the  business  man  the  cor- 
poration presents  decided  advantages  over  the  partnership  for 
all  undertakings  of  considerable  size.  Some  of  its  points  of 
superiority  are:  (i)  Stockholders  usually  have  no  personal  lia- 
bility for  the  corporation's  obligations  except  so  far  as  the  full 
par  value  of  their  stockholdings  has  not  been  paid  up.*  (2)  The 
relative  permanence  and  stability  of  the  corporation  are  of  decided 
advantage,  especially  in  undertakings  requiring  large  invest- 
ments of  capital  in  relatively  fixed  and  permanent  forms.  (3)  The 
concentration  of  executive  power  in  the  hands  of  directors  and 
officers  leads  to  efficiency  in  management.  (4)  The  transfer- 
ability of  corporation  securities  makes  it  possible  for  stockholders 
to  enter  or  leave  the  undertaking  at  pleasure.  (5)  The  division 
of  the  securities  into  small  units  and  into  different  grades  and 
classes  affords  opportunities  to  all  kinds  of  investors,  —  the  small 
and  the  large,  the  conservative  and  the  venturesome.  (6)  All  of 
the  advantages  named  make  it  easier  for  the  corporation  to 
attract  and  to  use  efficientiy  large  amounts  of  capital,  furnished 
by  many  different  investors. 

Social  Aspects  of  the  Growth  of  Corporations.  — That  corpora- 
tions do  possess  desirable  features,  from  the  point  of  view  of 

^  Exception  should  be  made  of  banking  and  insurance  corporations,  in  the  case 
of  which  "double  liability"  on  the  part  of  the  stockholders  is  common.  A  few 
states  impose  some  measure  of  personal  liability  upon  the  stockholdezs  of  all 
corporations  organized  under  their  laws. 


BUSINESS  ORGANIZATION  I49 

business  interests,  is  a  fact  clearly  evidenced  by  the  unprecedented 
growth  of  this  form  of  business  organization.  In  the  main,  effi- 
ciency for  business  purposes,  for  money  making,  means  efficiency 
from  the  social  point  of  view,  productive  efficiency,  also.  But, 
nevertheless,  the  two  viewpoints  are  not  identical,  and  what  is 
desirable  from  one  point  of  view  is  not  always  desirable  from 
the  other  point  of  view. 

The  gap  between  money  making  and  service  to  society  (never 
quite  identical  things)  is  distinctly  widened  when  those  in  control 
of  a  corporation's  policies  subordinate  the  profits  to  be  obtained 
by  the  sale  of  its  products  to  the  profits  to  be  obtained  by  specu- 
lation in  its  securities.  Many  of  our  greatest  corporations  are 
directed  by  men  to  whom  fluctuations  in  capital  values  (as  repre- 
sented in  the  prices  of  securities)  are  a  much  more  important 
source  of  personal  income  than  are  the  net  earnings  of  such 
corporations.  The  payment  of  unearned  dividends,  the  non- 
payment of  earned  dividends,  the  direction  of  a  corporati<Mi*s 
policy  for  the  benefit  of  the  holders  of  one  kind  of  security  among 
the  different  ones  issued  by  the  corporation,  the  effecting  of  cor- 
porate combinations  and  reorganizations  that  will  affect  the  stock 
exchange  rather  than  the  produce  market,  —  these'  are  some  of 
the  more  obvious  results  of  the  unfortunate  relation  between 
corporation  management  and  speculation  in  corporation  securi- 
ties. 

It  should  also  be  noted  in  this  connection  that  the  growth  of 
corporations  is  bringing  with  it  a  subtle  but  very  significant 
change  in  the  nature  of  the  institution  of  private  property.  So 
far  as  a  large  and  increasing  proportion  of  productive  wealth  is 
concerned,  we  are  losing  that  direct  relation  of  ownership  be- 
tween men  and  goods  which  Arthur  Young  had  in  mind  when  he 
said,  **  The  magic  of  property  turns  sand  into  gold.'*  We  often 
have,  instead,  several  layers  of  corporation  securities  interposed 
between  the  ultimate  owners  and  the  ultimate  objects  of  owner- 
ship. The  effect  of  this  will  undoubtedly  be  to  bring  about  the 
more  thorough  domination  of  business  principles  in  the  business 
world.  Sentiment,  the  honored  traditions  of  long-established 
firms,  the  ''pride  of  ownership,"  the  joy  of  workmanship  (which 


IgO  OUTLINES  OF  ECONOMICS 

may  be  felt  by  the  employer  who  tiims  out  a  good  product,  as 
well  as  by  the  workman)  are  bound  to  yield  yet  more  completely 
to  the  sway  of  the  cold  logic  of  corporation  accoimts  and  stock* 
market  quotations.  The  adequacy  of  purely  business  principles 
as  the  foundation  of  our  economic  life  will  be  tested  more  thoroughly 
under  the  corporation  form  of  organization  than  ever  before. 

Trusts.  —  A  distinctive  feature  of  the  economic  development 
of  the  past  thirty  years  has  been  the  combination  of  individual 
corporations  into  larger  concerns,  or  trusts.  The  "trust,"  in  the 
technical  sense,  involved  either  giving  a  board  of  trustees  the 
absolute  control  of  the  actual  properties  of  the  different  con- 
cerns in  the  combination,  or  what  amounted  to  the  same  thing, 
assigning  the  stock  of  each  corporation,  with  its  voting  power, 
to  them  in  exchange  for  "trust  certificates,"  on  which  dividends 
were  paid.  The  Standard  Oil  Trust  of  1882  was  the  first  com- 
bination of  this  kind,  but  it  was  speedily  followed  by  several 
others.  In  1890,  in  a  case  brought  by  the  state  of  New  York 
gainst  the  sugar  trust,  the  trust  agreement  was  held  to  be  illegal 
under  common  law.  Corporate  combinations  were  not  destroyed 
by  this  decision.  They  changed,  however,  to  a  more  definitely 
coherent  form,  —  that  in  which  a  single  great  corporation  domi- 
nates the  consolidation. 

In  most  cases,  this  corporation,  which  is  usually  organized 
for  the  purpose,  does  not  own  the  actual  plants  of  the  various 
concerns  in  the  combination,  but  simply  owns  all  or  a  majority  of 
the  stock  of  each.  It  is  accordingly  called  a  "  holding  company." 
The  holding  company  exchanges  its  own  securities  for  the  securi- 
ties of  constituent  companies,  or,  when  necessary,  it  buys  the 
securities  of  the  constituent  companies  with  funds  seciired  from 
the  sale  of  its  own  seciuities,  —  sometimes  by  the  sale  of  bonds 
secured  by  the  pledge  of  the  securities  of  constituent  companies 
as  collateral.  Not  only  in  industrial  consolidations,^  but  also  in 
railway  and  electric  railroad  mergers  has  the  holding  company 
device  become  important. 

*  A  veiy  complete  Ust  of  "trusts,"  prepared  by  Mr.  Byron  W.  Holt  for  the 
World  Almanac  (1908),  contains  the  names  of  about  250  industrial  combinations, 
mcMt  of  which  are  holding  companies. 


BUSINESS  ORGANIZATION  15I 

From  the  point  of  view  of  business  organization  the  holding 
company  is  simply  an  extension  of  the  principle  of  the  corpora- 
tion. The  holding  company  needs  for  purposes  of  control  only 
a  majority  interest  in  the  stocks  of  its  subsidiary  corporations. 
Various  holding  companies  may  in  turn  be  combined  by  means 
of  one  larger  holding  company,  —  and  the  process  may,  and 
does,  go  even  further.  An  individual  capitalist  may,  by  an 
investment  of  $1,000,000,  for  example,  control  a  holding  company 
with  a  stock  issue  of  $2,000,000,  which  in  turn  may  control  cor- 
porations with  $4,000,000  of  stock  outstanding,^  —  and  some  of 
these  last  may  in  their  turn  be  holding  companies.  The  result 
is  a  tremendous  concentration  of  industrial  and  financial  power, 
with  the  minimum  of  liability.  The  uncontrolled  use  of  the 
holding  company  device  leads  to  neglect  of  the  interests  of  the 
minority  stockholders  in  the  various  corporations  concerned;  to 
difficulty  in  fixing  the  legal  responsibility  for  corporate  mis- 
deeds; to  an  undesirable  complexity  in  the  economic  and  legal 
relations  of  the  holders  of  securities  in  the  different  corporations, 
and  to  the  subordination  of  industrial  to  speculative  ends. 

The  "trust  problem,"  however,  has  attracted  more  attention 
as  a  problem  of  monopoly  than  as  a  problem  of  business  organi- 
zation. The  problem  of  monopoly  will  be  considered  in  another 
chapter.  Here  it  is  sufficient  to  note  that  combination  and 
monopoly  are  not  identical  things,  that  we  may  have  either  one 
without  the  other.  It  is  true,  however,  that  the  movement  toward 
combination  originated  as  one  manifestation  of  the  efforts  of  men 
engage^  in  competitive  undertakings  to  escape  from  the  restraints 
imposed  upon  them  by  the  fact  of  competition.  Price  agreements, 
selling  bureaus,  division  of  territory,  limitation  of  output,  pool* 
ing,  etc.,  are  other  forms  of  the  same  general  effort. 

The  specific  motives  usually  mentioned  as  the  most  important 
causes  of  corporate  combinations  are  (i)  the  greater  economy  of 
the  large-scale  business;  (2)  the  elimination  of  piirely  competi- 
tive expenses  (some  kinds  of  advertising,  for  example) ;  (3)  the 

'  It  is  assumed,  for  convenience,  that  the  stock  in  each  case  is  worth  par  and 
that  the  ownership  of  half  of  it  will  give  substantial  control.  In  the  case  of  in- 
dustrial combinations  ownership  of  all  the  stock  of  the  subsidiary  companies  by 
the  holding  company  is  not  uncommon. 


J 


152  OUTLINES  OF  ECONOMICS 

I)ower  to  limit  output  and  control  price.  The  first  of  these  fac- 
tors suggests  the  difficult  question  of  the  most  profitable  size  of 
the  business  imit.  Without  discussing  this  point  in  detail  in  this 
connection  we  may  note  that  the  significant  thing  is  the  most 
economical  size  of  the  industrial  platU  rather  than  of  the  busi- 
ness unit  itself.  Some  of  our  present-day  business  units  are  so 
large  that  they  operate  a  number  of  duplicate  plants.  To  that 
extent,  at  least,  they  are  larger  than  is  necessary  to  secure  maxi- 
mum technical  efficiency.  Whether  competitive  expenses  and 
competitive  prices  are  eliminated  by  combination  depends  on 
whether  the  combination  has  any  real  basis  of  monopoly  power 
over  and  above  the  mere  fact  of  combination,  which,  taken  alone, 
can  give  at  most  only  a  temporary  monopoly. 

It  is  plain,  however,  that  if  any  or  all  of  these  three  classes  of 
advantages  do  exist  in  the  case  of  a  particular  combination,  the 
earning  power  of  the  combination  will  be  greater  than  the  total 
earning  power  of  the  separate  concerns  before  consolidation, — 
a  difference  which  will  be  reflected  in  the  value  of  the  securities 
of  the  holding  company.  It  is  this  increment  in  capital  value, 
due  to  the  real  or  expected  advantages  of  consolidation,  that  has 
been  the  chief  cause  of  such  combinations.  The  organization  of 
trusts  has  in  many  cases  been  effected  by  professional  "pro- 
moters," whose  connection  with  an  undertaking  does  not  con- 
tinue any  longer  than  is  necessary  in  order  to  secure  the  profits 
of  consolidation.  A  few  great  trusts  like  those  which  dominate 
in  the  oil,  sugar,  steel,  and  tobacco  industries  have  been  con- 
spicuously successful  in  a  business  way.  Many  others  were 
"made  to  sell " ;  that  is,  were  organized  only  in  order  that  profits 
might  be  gained  through  the  sale  of  their  securities,  and  have 
been  weighted  down  by  a  capitalization  not  justified  by  their 
actual  earning  capacity.  Some  of  these  have  already  been  re- 
organized, with  diminished  capitalization;  others,  possibly,  only 
await  the  test  of  a  prolonged  period  of  financial  depression. 

Anti-tmst  Laws.  — Most  states  have  statutes  and  some  have 
constitutional  provisions  against  "combinations  in  restraint  of 
trade."  These  are  aimed  primarily  against  the  large  corpora- 
tions of  the  kind  described,  although  if  strictly  construed  they 


BUSINESS  ORGANIZATION  1 53 

also  make  illegal  the  whole  mass  of  price  agreements  and  trade 
restrictions,  general  and  local,  which  are  a  much  more  common 
and  characteristic  feature  of  modem  business  than  is  generally 
supposed.  Anti-trust  statutes  have  accomplished  but  little,  be- 
cause they  have  been  aimed  at  forms  rather  than  at  facts,  at 
symptoms  rather  than  at  fundamental  causes.  If  there  is  mo- 
nopoly, with  resulting  high  and  discriminatory  prices,  the  social 
action  needed  is  the  rooting  out  of  the  fundamental  cause  of 
monopoly,  or,  in  some  cases,  a  frank  recognition  of  the  fact  of 
monopoly,  coupled  with  the  proper  public  regulation  of  prices 
and  services.  If  evils  appear  in  the  undue  concentration  of 
financial  power,  and  in  the  dominance  of  speculative  motives  in 
business  management,  the  social  action  needed  is  more  stringent 
control  of  the  methods,  purposes,  and  conditions  of  corporation 
organization  and  corporation  management.  The  corporation 
problem  and  the  monopoly  problem  are  distinct  things.  The 
"trust  problem"  may  mean  either  one  thing  or  the  other. 

The  Sherman  anti-trust  act  of  1890  is  a  federal  law,  making 
''combinations  in  restraint  of  trade"  criminal,  so  far  as  the 
field  of  interstate  commerce  is  concerned.  It  has  the  defects  of 
the  similar  enactments  of  the  individual  states.  It  has  been 
used  to  some  extent  by  the  government  as  a  means  of  breaking 
up  railway  combinations,  but  the  results  of  this  application  of 
the  Sherman  act  have  been  generally  considered  to  be  xmfortimate. 

Publicity.  —  There  is  a  general  agreement  among  students  of 
corporation  problems  that  greater  publicity  as  to  the  details  of 
corporate  management  is  much  to  be  desired,  both  as  an  end 
in  itself,  and  as  constituting  a  basis  for  the  intelligent  control 
of  corporations.  We  may  distinguish  four  kinds  of  publicity: 
(i)  opening  of  accounts  and  records  to  the  inspection  of  stock- 
holders; (2)  opening  of  accounts  and  records  to  the  proper  admin- 
istrative officials  of  the  state  or  federal  governments;  (3)  periodi- 
cal financial  statements  to  stockholders;  (4)  periodical  fijiandal 
statements  to  proper  administrative  officials. 

Of  these  different  kinds  of  publicity  the  second,  third,  and 
fourth  are  unquestionably  desirable.  The  publicity  of  railway 
accounts  and  the  development  of  uniform  railroad  accounting 


154  OUTLINES  OF  ECONOMICS 

under  the  interstate  commerce  law  has  been  of  great  benefit  to 
the  public,  to  investors,  and  to  the  railways  themselves.  In  re- 
spect to  the  first  kind  of  publicity  mentioned,  it  can  hardly  be 
thought  right  that  every  small  stockholder  should  have  an  un- 
limited right  of  access  to  a  corporation's  books,  especially  in 
competitive  undertakings. 

Federal  Control  of  Corporations.  —  It  has  been  suggested  by 
many  writers  that  the  unfortunate  effects  of  the  lack  of  uniform 
state  requirements  as  to  publicity,  capitalization,  purposes  of 
corporation  organization,  etc.,  could  be  remedied  to  some  extent 
by  federal  action.  Canal,  railway,  and  bridge  companies  have 
in  the  past  been  chartered  by  the  federal  government,  just  as 
national  banks  are  now.  It  would  be  legally  possible  and  eco* 
nomicaUy  advisable  to  require  at  least  a  federal  license  from  all 
corporations  engaging  in  interstate  commerce.  Moderate  and  just 
requirements  as  to  publicity,  and  possibly  as  to  capitalization 
and  other  things,  might  very  well  be  imposed  as  the  price  of  a 
federal  license.  Aside  from  the  present  lack  of  uniformity  in 
state  laws,  the  mere  size  of  modem  business  corporations  and  the 
extent  of  their  operations  make  it  dificult  for  any  individual 
state  or  states  to  control  them  efficiently. 

QtESnONS  AND  BZERCISBS 

z.  What  are  the  terms  under  which  corporations  are  chartered  in  your 
own  state?    What  "anti-trust"  laws  are  in  force  there? 

2.  Explain  the  various  items  in  the  published  balance  sheet  of  some  in- 
dustrial corporation. 

3.  What  limitations  should  be  attached  to  the  statement  that  "a  corpora- 
tion is  a  fictitious  person." 

4.  Does  the  word  "capital"  mean  the  same  thing  in  accounting  and  in 
economics? 

5.  Report  on  the  history  of  one  of  the  following:  United  States  Steel 
Corporation;  American  Sugar  Refining  Company;  American  Tobacco 
Company;   International  Harvester  Company. 


BUSINESS  ORGANIZATION  1 55 

REFERENCES 

Bentley,  H.  C.     Corporate  Finance  and  Accounting, 

Commissioner  of  Corporations,  Annual  and  Special  Reports. 

CoNYNGTON,  Thomas.    Corporate  Management ;  and  Corporate  OrganizhUon. 

Freund,  Esnst.     The  Legal  Nature  of  Corporations. 

Greene,  T.  L.     Corporation  Finance. 

Halle,  E.  L.  von.     Trusts,  or  Industrial  Combinations  and  Coalitions  in 

the  United  States. 
HoRACK,  F.  E.     The  Organization  and  Control  of  Industrial  Corporations. 
Industrial   Commission,   Report,  Vols.   I,  II,   XIII,   XVIII,   XIX.     (See 

general  index  in  Vol.  XIX  under  "Combinations,"  "Corporations," 

"Capitalization,"  etc.) 
Jenks,  J.  W.     The  Trust  ProUem. 
Meade,  £.  S.    Trust  Finance. 
Montague,  G.  H.     Trusts  of  To-day, 
Moody,  John.     The  Truth  about  the  Trusts. 
Ripley,  W.  Z.  (ed.)-    Trusts,  Pools,  and  Corporations. 
Sparling,  S.  E.    Business  Orgamzation. 
WiLGDS,  H.  L.    Should  there  he  a  Federal  IncorporaUon  Law  for  Commercial 

Corporations  ? 
Wood,  W.  A.    Modem  Business  Corporations, 


PART  IV 

VALUE  AND  EXCHANGE 

CHAPTER  XI 
VALUE  AND  PRICE 

If  every  family  produced  all  the  goods  needed  to  supply  the 
wants  of  its  members,  most  of  the  problems  which  to-day  confront 
economic  science  would  not  exist.  Most  of  the  world's  workers 
are,  however,  contributing  their  services  either  direcdy  or  indirectly 
(through  the  production  of  goods)  toward  the  satisfaction  of  the 
wants  of  others.  One's  economic  well-being  to-day  depends  pri- 
marily on  two  things:  the  money  income  which  can  be  got  from 
others  in  return  for  one's  services  or  for  the  use  of  one's  land  or 
capital,  and  the  amount  of  things  that  can  be  bought  with  this 
money  income.  The  federal  census  of  1900  showed  that  about 
93  per  cent  of  the  men  over  twenty  years  old  and  about  18  per  cent 
of  the  women  of  corresponding  age  were  employed  in  money-mak- 
ing occupations;  and  this  number  does  not  include  those  land- 
lords and  capitalists  whose  income  was  derived  entirely  from 
their  investments.  The  work  of  the  housewife  and  the  services  of 
friendship  embody  utilities,  that  is,  satisfy  human  wants,  just  as 
do  money-making  activities,  but  they  are  not  measured  in  terms 
of  dollars  and  cents.  The  production  of  wealth  is  in  these  days 
mostly  "for  the  market,"  and  wants  are  satisfied  very  largely  by 
goods  obtained  from  the  market.  Most  goods  get  from  those  who 
produce  them  to  those  who  use  them  only  by  the  processes  of 
exchange. 

The  Meaning  and  Significance  of  Value.  —  One  of  the  most 
fundamental  of  all  economic  problems  relates  to  the  ratios  at 
which  goods  are  exchanged  for  one  another.    These  ratios  are 

iq6 


VALUE  AND  PRICE  157 

called  exchange  values.  The  exchange  value  of  a  good  is  the  quan^ 
tUy  of  other  goods  that  can  he  obtained  for  it.  Exchange  value  is 
often  called  objective  value,  and  is  to  be  sharply  distinguished 
from  subjective  value,  which,  it  will  be  remembered,  measures 
the  importance  attached  by  an  individual  to  a  particular  unit  of  a 
commodity.  In  this  chapter  the  word  "  value  "  is  to  be  understood 
as  meaning  exchange  value.  It  is  evident  that  the  value  of  a 
commodity  will  vary  with  conditions  of  time  and  place,  and  that 
at  any  particular  time  and  place  it  might  be  expressed  in  a  num- 
ber of  different  ways.  A  pair  of  shoes  might  be  exchanged  for 
four  bushels  of  wheat,  for  two  hats,  or  for  other  quantities  of  other 
commodities.  In  this  sense  any  one  commodity  will  have  not  one, 
but  many,  exchange  values.  It  is,  however,  customary  to-day  to 
express  the  values  of  all  commodities  in  terms  of  one  other  com- 
modity, money.  Price  is  exchange  value  expressed  in  terms  of 
money.  There  are  23.22  grains  of  gold  in  our  monetary  unit,  the 
gold  dollar.  Thus,  when  we  say  that  a  pair  of  shoes  is  worth  four 
dollars,  we  indicate  that  they  have  four  times  the  value  of  23.22 
grains  of  gold.  When  the  words  "  value  "  and  "  price  "  are  used  in- 
terchangeably, as  will  sometimes  be  the  case  in  this  chapter,  there 
is  implied  the  assumption  that  the  value  of  money  is  constant  —  an 
assumption  which,  of  course,  does  not  tntirely  correspond  with 
the  facts. 

The  process  by  which  the  ratios  at  which  goods  are  exchanged 
is  determined  is  called  "  valuation. "  This  word  is  used  in  a  narrow 
sense  as  referring  to  the  fixing  of  the  exchange  values  of  commodi- 
ties; in  a  broader  sense  it  includes  also  the  determination  of  the 
different  rewards  received  by  those  who  have  contributed  to  the 
production  of  these  conmiodities.  In  this  broad  sense  the  prob- 
lem of  valuation  is  the  problem  of  the  distribution  of  wealth.  Im- 
agine the  case  of  a  mechanic  employed  at  a  particular  time  in 
the  manufacture  of  machinery  that  will  be  used  in  a  flour  mill. 
The  final  product  of  the  mechanic's  labor  —  the  only  product 
directiy  useful  in  the  satisfaction  of  human  wants  —  is  the  flour, 
or  bread  made  from  the  flour.  To  the  making  of  this  final  prod- 
uct thousands  besides  our  mechanic  —  farmers,  agricultural  la- 
borers, railway  officers  and  employees,  other  mechanics,  and  so 


158  OUTLINES  OF  ECONOMICS 

on  in  a  practically  endless  list  —  have  contributed.  What  deter- 
mines the  value  of  the  final  product?  What  proportion  of  this 
value  goes  to  the  mechanic?  What  is  his  share  worth  to  him  as 
the  means  of  getting  the  necessaries  of  life  ?  Of  these  three  ques- 
tions, the  first  and  third  fall  within  the  problem  of  the  valuation 
of  commodities;  the  second,  relating  to  the  valuation  of  the  me- 
chanic's services,  falls  within  the  problem  of  the  distribution  of 
wealth.  At  present  we  are  concerned  with  valuation  in  its  nar- 
rower sense,  although  the  principles  to  be  developed  apply  also 
in  the  case  of  the  valuation  of  the  services  of  the  factors  in  pro- 
duction. The  significance  of  the  subject  of  value  in  economic 
science  lies  in  the  fact  that,  within  the  conditions  set  by  existing 
institutions,  and  within  the  limits  set  by  the  total  production  of 
wealth,  human  welfare,  so  far  as  it  is  dependent  upon  the  pos- 
session of  economic  goods,  is  largely  determined  by  the  process  of 
valuation. 

The  Market.  —  It  is  conceivable  that  the  values  of  goods  might 
be  fixed  by  public  authority,  or  that  the  production  of  the  most 
important  commodities  might  be  monopolized.  Then,  too,  it  is 
possible  to  imagine  a  condition  of  society  in  which  custom  should 
have  such  power  that  values,  when  once  established,  would  be 
changed  very  infrequently.  Still  another  possibility  would  be  a 
r^ime  of  competition  in  which  every  man  would  be  left  free  to 
buy  and  sell  as  he  pleased  at  such  prices  as  he  could  get.  The 
first  three  factors  —  public  authority,  monopoly,  and  custom  — 
are  among  the  things  which  determine  the  ratios  at  which  goods 
are  actually  exchanged  to-day;  but  the  dominant  factor  is  the 
fourth  one  mentioned  —  the  free  competition  of  the  market. 

In  this  connection  we  mean  by  the  market,  not  a  particular 
place  for  buying  and  selling,  but  ihe  general  field  within  which  the 
forces  determining  the  price  of  a  particular  commodity  operate.  For 
some  commodities,  especially  perishable  ones,  like  fresh  milk  and 
cream,  the  market  is  distinctly  a  local  one.  In  the  case  of  great 
sta^Je  commodities  like  wheat  and  cotton,  the  market  is  a  world 
market,  for  it  is  impossible  that  the  prices  of  wheat  or  cotton  in 
Europe  should  diflFer  for  any  considerable  time  from  their  prices 
in  America  by  more  than  the  expense  of  transportation.    So-called 


VALUE  AND   PRICE  1 59 

''mternadonal''  securities,  such  as  government  bonds  and  the 
stocks  and  bonds  of  certain  great  corporations,  afford  even  a  better 
example  of  goods  for  which  the  market  is  a  world  market.  Some 
commodities  are  used  only  in  a  particular  locality  or  country, 
although  produced  in  many  different  places.  The  American  con- 
sular rep)orts  frequendy  contain  advice  to  American  manufac- 
turers as  to  special  kinds  and  varieties  of  goods  used  in  different 
foreign  countries.  The  cotton  mills  of  England,  Go-many,  and 
the  United  States  all  make  special  grades  of  cotton  cloth  designed 
especially  for  the  Oriental  market.  Much  more  niunerous,  how- 
ever, are  the  goods  which,  although  of  wide  and  general  consump- 
tion, are  produced  in  but  few  localities.  This  is  especially  evi- 
dent in  the  case  of  agricultural  and  mineral  products,  but  it  is 
increasingly  noticeable  in  manufactures. 

Along  with  this  localization  of  industry  there  has  been  a  broad- 
ening of  the  field  of  consumption  of  many  commodities.  Among 
the  factors  which  have  contributed  to  this  result  may  be  men- 
tioned, first,  the  increasingly  cosmopolitan  character  of  modern 
life, —  a  result  of  more  generally  diffused  facilities  for  higher  edu- 
cation, as  well  as  of  the  growing  ease  of  travel  and  communica- 
tion, and  secondly,  what  has  been  called  the  "standardization  of 
taste,"  —  a  result  in  part  of  modem  advertising  methods  and  of 
the  standardization  of  products  which  is  one  of  the  fundamental 
features  of  modem  machine  industry.  Notwithstanding  the  bar- 
riers which  still  exist  in  the  form  of  protective  tariffs  and  local 
prejudices,  a  dominant  feature  of  modern  markets  is  the  localiza- 
tion of  production  and  the  extension  of  the  field  of  consumption. 

The  Conditions  of  Competitive  Valuation.  —  It  is  often  assumed 
that  competitive  prices  are  in  some  way  "natural"  and  right 
{xices.  To  guard  against  this  error  it  is  only  necessary  to  remind 
ourselves  that  competition  operates  under  the  limitations  imposed 
by  the  fundamental  institutions  of  the  existing  social  order.  In 
the  analysis  of  valuation  under  purely  competitive  conditions,  we 
sbaB  assume  the  existence  of  private  property,  since,  strictiy 
speaking,  it  is  the  property  rights  in  various  goods  that  constitute 
the  things  that  are  bought  and  sold.  It  is  necessary,  also,  to  as- 
sume the  existence  of  the  right  of  free  contract  —  the  right  of 


l6o  OUTLINES  OF  ECONOMICS 

each  man  to  sell  for  what  he  can  get,  and  to  buy  for  as  little  as  he 
can  bargain  to  pay.  So  far  as  society  limits  the  right  of  private 
property  and  the  right  of  free  contract,  it  alters  the  conditions 
of  competition  and  correspondin^y  affects  the  values  fixed  by 
competition. 

Sui^ly  and  Demand.  — The  only  goods  which  are  valued  in  the 
market  are  economic  goods ;  that  is,  such  goods  as  combine  the 
characteristics  of  utility  and  scarcity.  This  statement  is  a  truism, 
for  no  one  will  pay  for  things  that  he  does  not  want  or  for  things 
that  can  be  obtained  freely.  Utility  and  scarcity  affect  the  mar- 
ket value  of  goods  through  the  operation  of  the  forces  of  demand 
and  supply.  The  general  "conmion-sense"  explanation  of  the 
valuation  of  goods  takes  the  form  of  the  statement  that  values  are 
determined  by  supply  and  demand.  When  rightly  interpreted, 
this  statement  cannot  be  criticised,  but  it  is  often  used  in  an  en- 
tirely erroneous  sense.  Producers  do  not  usually  throw  their 
goods  unreservedly  on  the  market,  accepting  any  price  that  can 
be  got  for  them,  nor  do  consumers  generally  demand  definite 
amounts  of  goods,  without  reference  to  the  price  of  them.  An 
entirely  accurate  statement,  and  one  that  is  less  apt  to  be  misin- 
terpreted, is  that  prices  are  among  the  factors  determining  supply 
and  demand.  It  may  seem,  accordingly,  something  like  arguing 
in  a  circle  to  attempt  to  explain  value  by  using  the  formula  of 
supply  and  demand;  but  the  fact  is  that  the  explanation  of  value 
is  to  be  sought  in  the  action  of  mutually  dependent  forces,  rather 
than  in  any  one  principle.  Our  next  task  is,  therefore,  the  analy- 
sis of  supply  and  demand. 

The  Nature  of  Demand.  — Mere  desu-e  for  a  conmiodity  is  not 
demand  for  it.  The  desire  of  the  poor  man  for  the  counterpart 
of  his  wealthy  neighbor's  automobile  is  in  no  sense  demand. 
Effective  demand  is  sometimes  defined  as  desire  coupled  with  the 
ability  to  pay.  But  to  make  demand  really  effective  there  must 
be  added  to  these  the  inclination  to  buy:  desire  must  be  intense 
enough  to  lead  to  piu-chase.  As  has  been  shown  in  a  previous 
chapter,  intensity  of  desire  cannot  be  thought  of  as  existing  for 
a  commodity  in  general,  but  only  for  particular  units  of  a  com- 
modity.   The  intensity  of  one's  desire  for  an  additional  unit  of  a 


VALUE  AND  PRICE  l6l 

commodity  depends  upon  the  extent  to  which  one's  wants  are 
satisfied  by  one's  existing  supply  of  that  commodity.  This  is  the 
same  as  saying  that  the  intensity  of  ow  desire  for  a  commodity 
is  measured  by  its  marginal  utility. 

Every  person  tends  to  keep  the  marginal  utilities  of  the  differ- 
ent kinds  of  commodities  he  consumes  equal.  Either  by  a  con> 
scious  balancing  against  each  other  of  the  pleasures  to  be  ob- 
tained from  two  or  more  possible  purchases,  or  oftener,  by  simply 
buying  the  things  which  we  want  more  than  we  want  other  things, 
we  tend  to  keep  our  unsatisfied  wants  in  a  state  of  approximately 
equal  intensity.  Every  person  thus  has  what  has  been  called  a 
margin  of  consumption,  which  is  measured  by  the  utility  that 
would  be  obtained  by  the  expenditure  of  another  dollar  (or  any 
other  small  amount  of  money)  for  any  one  of  the  things  that  he 
consumes.  An  important  thing  in  the  explanation  of  demand  is 
the  fact  that  this  margin  of  consumption  differs  for  different  per- 
sons, as  well  as  for  the  same  persons  at  different  times.  An 
mdividual's  margin  of  consumption  depends  primarily  on  his 
income,  but  also  on  his  tastes  and  habits,  his  instinct  for  saving, 
and  the  extent  to  which  he  estimates  present  wants  more  highly 
than  future  wants.  Then,  too,  one's  desires  are  constantly  chang- 
ing under  the  influence  of  whim,  fashion,  satiety,  sellers'  adver- 
tising, education,  travel,  reading,  and  new  experiences  of  all  kinds. 
Expenditures  of  all  sorts  are  thus  called  into  being  by  the  neces- 
sity of  maintaining  the  level  of  the  margin  of  consumption.  The 
advertiser  may  succeed  in  making  us  think  that  we  want  his  goods 
more  than  we  want  other  things  that  we  could  purchase  with  the 
same  amount  of  money;  reading  may  so  stimulate  our  desire  for 
travel  that  we  are  willing  to  curtail  other  expenditures  in  order 
to  secure  it.  Education  ought  to  affect  the  quality  as  well  as 
the  quantity  of  our  wants. 

But  even  if  our  desires  were  constant,  changes  in  prices  would 
in  themselves  effect  continual  alterations  in  the  proportions  of 
various  things  that  make  up  our  purchases.  If  the  price  of  a 
commodity  decreases  to  such  an  extent  that  an  additional  dollar's 
worth  has  a  utility  greater  than  our  margin  of  consumption,  we 
normally  purchase  it.    If  the  price  rises,  we  normally  ciutail  our 


i63 


OUTUNES  OF  ECONOMICS 


expenditures  for  this  particular  commodity,  and  may  even,  under 
some  circumstances,  become  sellers  of  it  (as  in  the  case  of  the 
householder  who  has  bought  a  large  supply  of  coal  at  five  dollars 
per  ton,  and  who,  when  the  price  rises  to  ten  dollars,  is  willing  to 
sell  part  of  it).  Some  of  the  foregoing  discussion  may  seem  to 
be  a  statement  of  what  is  obvious  and  commonplace,  but  the  neg- 
lect of  these  seemingly  obvious  factors  is  responsible  for  more 
than  one  erroneous  explanation  of  the  way  in  which  values  are 
determined. 

The  Demand  Curve. — The  relations  between  price  and  de- 
mand may  be  shown  concretely  by  the  analysis  of  the  condi- 
tions in  a  hypothetical 
market.  Imagine  the  case 
of  an  isolated  community 
in  which  there  is  consider- 
able use  of  wood  as  a  fuel. 
The  conditions  might  be 
such  as  are  represented 
graphically  in  Figure  i .  In 
this  diagram  distances 
measured  from  O  along 
the  horizontal  line  OX  represent  different  amounts  of  wood,  while 
distances  measiued  vertically  from  the  line  OX  represent  prices. 
Assuming  that  the  conditions  of  demand  were  as  represented  in 
the  diagram,  if  the  price  of  wood  were  MP  dollars  a  cord,  OM 
cords  of  wood  would  be  bought.  If  MP  represents  a  relatively 
high  price  for  wood,  this  might  mean  that  many  families  would 
choose  to  go  without  wood,  using  other  kinds  of  fuel  instead. 
Others  would  be  content  with  a  scanty  supply.  If,  however,  the 
price  were  reduced  to  JIf'P'  dollars  per  cord,  some  of  the  families 
who  would  have  refused  to  buy  at  the  higher  price  would  purchase 
wood,  while  others  would  increase  their  purchases,  so  that  OM' 
cords  would  be  bought.  Similarly,  at  the  price  M*'P'\  the  amount 
bought  would  be  OM'*  cords.  Other  possible  prices  might  be  in- 
dicated on  the  diagram,  so  that,  in  general,  the  ciu-ve  DD'  (which 
we  may  call  the  demand  curve)  represents  the  relation  between 
price  and  the  amount  demanded.    The  rectangle  OM'P'A'  rep- 


VALUE  AND  PRICE  163 

lesents  the  total  amount  the  community  pays  for  wood  when  the 
price  is  M*P\  just  as  the  rectan^e  OAfP^'A"  represents  the 
total  amount  paid  when  the  price  is  M**P",  It  often  happens 
that  this  total  value  is  less  when  the  price  is  low  than  when  the 
price  is  high,  although  the  amount  bought  at  the  lower  price  may 
be  double  or  treble  the  amount  that  would  be  bought  at  the  higher 
price.  This  means  not  only  a  better  satisfaction  of  wants  with  a 
smaller  expenditiure  of  money,  but  also  that  more  money  is  avail- 
able for  the  purchase  of  other  things;  so  that  there  is  a  general 
lowering  in  the  margin  of  consumption  —  a  better  satisfaction  of 
wants  in  general.  If,  however,  the  relations  between  price  and 
demand  were  such  that  the  rectangle  OM"P"A"  would  be  largpr 
than  the  rectangle  OM'P^A',  the  existence  of  the  lower  price 
would  necessitate  curtailing  expenditiues  for  other  things.  This 
might  involve  only  a  decreased  use  of  substitutes  for  wood,  such 
as  coal;  more  often,  however,  it  would  mean  a  diminished  con- 
sumption of  a  number  of  other  things.  But  any  decrease  in  the 
price  of  any  commodity  of  general  consumption,  other  things  re- 
maining equal,  means  always  a  lowering  of  the  margin  of  con- 
sumption of  all  persons  increasing  their  use  of  the  commodity  in 
question.  For  the  lower  price  would  not  be  accompanied  by  the 
piux:hase  of  a  larger  amount  of  wood  if  the  additional  wood  did 
not  satisfy  more  intense  wants  than  would  other  things  that  might 
be  purchased  with  the  money. 

In  this  way  the  demand  for  any  one  commodity  is  affected  by 
the  demand  for  any  other  commodity.  The  competition  of  the 
market  thus  embraces  not  only  the  buying  and  selling  of  a  given 
commodity  (like  wood),  but  also  the  buying  and  selling  of  all  com- 
modities. In  this  sense  the  wood  dealers  compete  with  the  grocers 
and  the  tailors,  as  well  as  with  coal  dealers  and  with  each  other. 

The  Elasticity  of  Demand.  —  By  the  elasticity  of  demand  we 
mean  the  extent  to  which  the  amounts  demanded  vary  with  changes 
in  price.  In  every  family  in  poor  or  moderate  circumstances 
the  housewife  carefully  economizes  in  the  use  of  eggs  during 
periods  when  they  are  high  in  price,  using  them  more  freely  when 
the  price  is  lower.  In  such  a  case  the  demand  for  eggs  is  an  elastic 
ODt.    Relatively  inelastic  are  the  demands  of  most  families  for 


164 


OUTLINES   OF  ECONOMICS 


Fig.  2 


such  things  as  flour  and  salt.    Other  commodities,  such  as  sugar, 

may  occupy  an  intermediate  position.    Figures  2  and  3  repre- 

sent,  respectively, 
elastic  and  inelas- 
tic conditions  of 
demand.  \^th- 
out  giving  further 
concrete  exam- 
ples, the  follow- 
ing propositions 
respecting  elas- 
ticity of  demand 
maybe  stated:  — 
(i)  Demand  for 
necessities  is   in 

general  less  elastic  than  demand  for  luxuries.    (2)'  Demand  for 

commodities  the  use  of  which  constitutes  a  habit  is  less  elastic 

than  demand  for  commodi-     y 

ties  the  use  of  which  is  gen- 
erally a  matter  of  conscious 

decision.       (3)     The    more 

adequate  the  substitutes  for 

a  particiilar  commodity  the 

more    elastic    will    be    the 

demand    for    it.     (4)    The 

demand  of  persons  of  large 

income  is  less  elastic   than 

that  of  persons  in  poor  or 

moderate  circumstances.   (5) 

A    corollary   of   proposition 

four  is  that  the  higher  the 

general   level  of   well-being 


A' 


Fio.  3 


in  a  community,  the  less  elastic  will  be  the  demand  for  most 
commodities. 

Consumers'  Surplus.  —  Whatever  the  price  of  a  competitively  produced 
commodity  may  be,  there  are  almost  always  some  buyers  who  would  have 
paid  more  if  it  had  been  necessary.    Referring  to  Figure  i,  if  the  price  is 


VALUE  AND   PRICE  16$ 

M'^'^  those  who  are  just  willing  to  pay  that  price,  who  would  either  have 
bought  less  or  bought  none  if  the  price  had  been  higher,  may  be  called  the 
marginal  buyers.  These  are  relatively  few  in  number,  however,  as  compared 
with  those  who  would  have  bought  even  if  the  price  had  been  higher.  The 
utility  of  the  marginal  purchases  to  the  buyers  is  but  little  more  than  the 
utility  of  other  things  that  could  have  been  bought  with  the  same  amount  of 
money :  in  such  cases  the  utility  of  the  purchase  only  about  equals  the  sacri- 
fice involved.  In  the  case  of  all  other  purchases,  however,  there  is  a  surplus 
of  utiUy  over  costs  (whether  costs  are  measured  as  money  costs  or  as  the 
utility  of  the  other  possible  purchases  which  are  given  up)  which  is  called 
consumer f  surplus  (or  sometimes  consumers'  rent,  or  buyers'  gains).  It 
might  be  supposed  at  first  thought  that  if  the  price  were,  for  example,  M'P' 
(Fig.  i),  the  area  included  between  the  horizontal  line  A'P'  and  the  curve 
DP'  would  represent  consumers'  surplus.  This  is  not  exactly  true,  however, 
and  that  for  two  reasons:  in  the  first  place,  the  satisfaction  of  additional 
wants  which  a  lower  price  makes  possible  may  make  the  more  important 
wants  less  intense.  A  man  might  be  willing  to  give  ten  dollars  for  a  cord  of 
wood  in  order  that  at  least  one  room  in  his  house  could  be  heated  during  the 
winter.  He  might  also  be  willing  to  give  seven  dollars  a  cord  for  two  cords, 
so  as  to  heat  two  rooms,  but  the  heating  of  the  second  room  might  render  the 
heating  of  the  first  room  less  important  to  him.  He  might  not  be  willing, 
for  example,  to  give  ten  dollars  plus  seven  dollars  in  order  to  have  the  two 
rooms  heated.  In  the  second  place,  utility  itself  is  to  a  large  extent  affected 
by  price.  So  far  as  our  purchases  satisfy  what  has  been  called  the  desire  for 
distinction,  or  represent  what  Professor  Veblen  has  called  ''conspicuous 
consumption,"  a  lowering  of  the  price  of  a  commodity  would  lessen  its  utility 
to  us.  The  successful  production  of  artificial  diamonds  at  a  low  cost  would 
lessen  the  desire  which  most  people  have  for  natural  ones.  If  touring  cars 
were  less  an  indication  of  one's  ability  to  spend  money  freely,  they  would  be 
less  esteemed  by  a  good  many  people.  On  the  other  hand,  it  might  occur  in 
some  cases  that  a  certain  amount  of  decrease  in  the  price  of  a  commodity, 
permitting  a  more  general  consumption  of  it,  would  increase  the  esteem  in 
which  it  is  held  by  those  who  are  glad  to  follow  fads.  In  general,  we  must  say 
that  even  if  we  had  absolutely  complete  statistics  of  the  actual  relation  of 
prices  to  demand,  consumers'  surplus  would  still  be  an  incommensurable 
thing.  It  is  nevertheless  a  real  thing,  and  is  especially  significant  as  con- 
stituting one  of  the  differences  between  real  income  and  money  incomes. 
It  should  be  noted,  however,  that  consumers'  surplus  relates  only  to  one's 
consumption  of  a  particular  commodity,  taken  by  itself,  for  as  we  have  seen, 
the  amount  which  we  are  willing  to  spend  in  the  purchase  of  any  one  com- 
modity depends  not  only  on  the  price  of  that  commodity,  but  also  on  the  price 
of  the  other  commodities  that  make  up  our  purchases.  The  surpluses  which 
a  consumer  gets  in  his  different  lines  of  consumption  cannot  be  added  to- 
gether to  form  a  total 


106  OUTUNES  OF  ECONOMICS 

The  Nature  of  Supply.  — The  amount  of  goods  that  will  be  sup- 
plied in  a  given  market  at  a  given  time  depends,  like  the  amount 
demanded,  on  the  price.  "Forced  sales,"  in  which  goods  are 
offered  for  whatever  can  be  got  for  them,  form  about  the  only 
important  exception.  The  effect  of  price  on  supply  varies,  how- 
ever, according  to  the  length  of  time  that  is  taken  into  considera- 
tion. The  work  that  is  being  done  to-day  in  the  extension  of  old 
factories  and  the  building  of  new  ones,  the  construction  of  rail- 
ways, the  taking  up  of  new  land,  is  based  on  estimates  of  future 
prices,  the  present  prices  of  agricultural  and  manufactured  prod- 
ucts and  of  railway  transportation  being  of  significance  only  so 
far  as  they  Indicate  what  future  prices  will  be.  The  merchant's 
stock  in  trade  is  bought  on  an  estimate  of  future  business  condi- 
tions; the  amount  of  land  the  farmer  allots  to  wheat  and  com, 
respectively,  depends  on  his  estimate  of  the  relative  prices  the 
two  will  bring  after  the  harvest.  In  a  similar  way  the  amounts  of 
goods  that  can  be  supplied  to  the  market  to-day  are  limited  by 
the  estimates  which  business  men  and  farmers  have  made  in  the 
past  of  the  prices  which  buyers  are  willing  to  pay  to-day.  It 
would  be  possible,  though  not  necessary  for  our  purposes,  to  ana- 
lyze the  way  in  which  the  amount  of  the  capital  and  labor  which 
have  thus  been  applied  to  the  production  of  things  that  will 
satisfy  present  wants  was  partially  determined  by  conditions  which 
existed  still  farther  back  in  the  past,  and  so  on  in  an  indefinitely 
receding  series.  The  amount  of  goods  available  for  the  market 
of  to-day  is  thus  limited  not  only  by  past  estimates  and  conditions, 
but  also  by  present  estimates  of  future  conditions.  Every  seller 
has  the  option  of  selling  at  the  present  price  or  of  waiting  for 
possibly  higher  future  prices  —  an  option  which  is  limited  only  by 
the  perishability  of  his  goods  and  the  urgency  of  his  need  for 
money.  And  the  most  urgent  need  for  money  does  not  neces- 
sarily force  an  immediate  sale  if  his  opinion  as  to  the  future 
value  of  his  goods  is  a  reasonable  one,  for  in  this  case  it  is 
usually  easy  to  borrow  money  on  the  strength  of  the  marketable 
value  of  the  goods. 

The  Supply  Curve.  —  In  the  analysis  of  the  conditions  of  sup- 
ply existing  in  a  particular  market  at  a  particular  time  we  do  not 


VALUE  AND  PRICE 


X67 


btLVt  to  take  account  of  the  limitations  imposed  by  the  forms  which 
productive  efforts  have  taken  in  the  past.  At  any  given  time  a 
certain  definite  amount  of  a  commodity  is  available  for  the  market: 
this  forms  what  may  be  called 
the  potential  supply.  The  pro- 
portion of  this  potential  supply 
that  sellers  will  be  willing  to  part 
with  at  a  particular  time  will  de- 
pend primarily  on  the  prices  they 
can  get..  If  the  price  of  a  unit 
of  a  commodity  is  M'P'  (Fig.  4), 
the  sellers  will  be  willing  to  sell 
a  certain  number  of  units  of  it, 
which  may  be  represented  by 
OM'.  If  the  price  were  as  low  as  PM^  however,  some  sellers 
would  prefer  to  wait  for  higher  prices,  the  amount  thus  withheld 
from  the  market  being  represented  by  MM'.  At  the  price  M^'P", 
however,  an  additional  supply  (M'M")  of  the  commodity  would  be 
forthcoming  from  sellers  who  were  not  tempted  by  the  price  M'P\ 
In  general,  the  supply  curve  SS'  represents  the  relations  between 
price  and  the  amount  that  will  be  supplied  in  a  particular  market 
and  at  a  particular  time. 
The  Determination  of  Price.  — The  foregoing  discussion  of  the 

nature  of  demand  and 
of  supply  makes  it  pos- 
sible to  advance  another 
step  in  our  analysis  of 
the  determination  of 
price,  by  asking  our- 
selves what  will  be  the 
resiilt  of  the  simultane- 
ous operation  of  the 
forces  of  demand  and 
supply.  This  condition 
is  represented  graphic- 
ally in  Figure  5,  where  the  demand  curve  and  supply  curve  are 
combined  in  one  diagram.     If  the  curve  DD'  represents   the 


l68  OUTLINES  OF  ECONOMICS 

potential  demand  in  a  particular  market  at  a  particular  time,  and 
the  curve  55'  represents  the  potential  supply,  the  price  which 
would  be  fixed  by  the  free  working  of  competitive  forces  would 
be  PAf ,  located  at  the  point  where  the  two  curves  cross.  At  this 
point  demand  and  supply  are  equal,  both  being  represented  by 
OM,  It  is  impossible  that  the  price  should  be  fixed  at  any  other 
point,  i/'P',  for  example.  For  if  M"Q  be  drawn  so  as  to  equal 
M^  P\  it  will  be  evident  that  at  this  price  OAf"  units  will  be  de- 
manded, while  only  OM*  units  will  be  supplied.  Most  of  the 
buyers,  however,  are  willing  to  pay  more  than  M^P  li  necessary, 
so  that  in  order  to  secure  their  share  they  will  bid  the  price  up 
until  the  supply  equals  the  demand.  This  is  what  John  Stuart 
Mill  meant  when  he  said  that  ''value  always  adjusts  itself  in  such 
a  manner  that  the  demand  is  equal  to  the  supply,"  —  a  state- 
ment which  has  often  been  misinterpreted,  and  consequently  un- 
justifiably criticised. 

Producer^  Surplus. — Just  as  the  area  APD  (Fig.  5)  has  sometimes  been 
considered,  not  altogether  accurately,  to  represent  a  "Consumers'  Surplus" 
(of  utility  over  costs) ,  so  the  aresiAPS  has  been  considered  to  correspond  to 
what  has  been  called  "  Producers'  Surplus  "  or  "  Sellers*  Gains."  This  sur- 
plus should  not  be  thought  of  as  corresponding  to  the  actual  profits  of  the 
sellers;  that  is,  as  being  in  any  way  a  surplus  of  value  over  and  above  the 
expenses  of  production.  It  cannot  be  too  strongly  emphasized  that  the 
analysis  of  demand  and  supply  thus  far  presented  relates  only  to  the  condi- 
tions existing  in  a  particular  market  at  a  particular  time.  All  that  we  can  say 
is  that  when  OM  units  are  sold  at  the  price  of  MP  per  unit,  the  total  re- 
ceipts of  the  sellers  are  represented  by^the  rectangle  OMPA ;  while  the  area 
OMPS  represents  what  they  would  have  been  willing  to  sell  the  same 
amount  of  goods  for,  had  they  not  been  able  to  get  a  larger  return.  There 
is,  as  we  shall  see,  a  relation  between  the  prices  of  things  and  the  expense 
of  producing  them,  when  a  considerable  period  of  time  is  taken  into  con- 
sideration. At  any  given  time,  however,  sellers  are  mainly  governed  by  the 
relative  profitableness  of  selling  at  existing  prices  or  waiting  for  higher 
ones.  The  only  kind  of  surplus  which  the  area  APS  represents  is  an  intan- 
gible, hypothetical  thing. 

QUESnOHS 

1.  Is  there  such  a  thing  as  "intrinsic  value"?  What  is  usually  meant 
when  the  expression  is  used? 

2.  How  would  you  apply  the  concept  of  marginal  utility  to  a  non-divisible 
good,  like  a  house  ? 


VALUE  AND  PRICE  169 

3.  Does  the  tendency  of  each  individual  to  maintain  the  equilibrium  of 
his  margin  of  consumption  result  in  the  maximum  satisfaction  of  his  wants  ? 

4.  What  relation  is  there  between  the  amounts  which  a  college  student 
pays  for  room  rent,  for  food,  for  clothing,  for  books,  and  for  athletics? 

5.  Which  of  your  customary  purchases  would  you  still  make  if  prices 
were  doubled?    Which  would  you  curtail  ?    Which  would  you  omit  ? 

6.  Illustrate  the  propositions  relating  to  elasticity  of  demand  (p.  164)  by 
concrete  examples. 


Bohm-Bawerk,  E.  von.      Positive  Theory  of  Capital,  Book  IV»  Chape. 

I-VL 
Cakver,  T.  N.    Distribution  of  Wealth,  Chap.  I. 

CuNYNGHAME,  Henry.    Geometrical  Political  Economy,  Chaps.  Ill  and  IV. 
Hadley,  a.  T.    Economics,  Chap.  III. 
HoBSON,  J.  A.    Economics  of  Distribution,  Chaps.  I  and  II. 
Marshall,  Alfred.    Principles  of  Economics,  4th  ed.,  Book  III  and  Book 

V,  Chaps.  I  and  II.    Or  [abridged]  Economics  of  Industry,  3d  ed., 

Book  III  and  Book  V,  Chaps.  I  and  II. 
Mill,  J.  S.    Principles  of  Political  Economy,  Book  m,  Chaps.  I  and  IL 
Wieser,  F.  von.    Natural  Value,  Book  II,  Chaps.  I-V. 


CHAPTER   XII 
VALUE  AITD  PRICE  (Continued) 

SoiCE  of  the  most  important  factors  in  the  determination  of  ex- 
change values  are  not  revealed  by  an  analysis  of  the  conditions 
existing  at  a  particular  time.  We  have  assumed,  for  example, 
an  existing  potential  demand  and  an  existing  potential  supply, 
and  have  shown  how  these  result  in  the  equilibrium  of  actual 
demand  and  supply  at  a  certain  price.  An  explanation  of  why 
potential  demand  and  potential  supply  are  as  they  are  necessi- 
tates taking  a  considerable  period  of  time  into  consideration. 
The  demand  side  of  this  particular  problem  need  not  detain  us. 
It  has  already  been  suggested  that  demand  will  change  with 
changes  in  incomes,  tastes,  fashions,  and  the  like.  The  effect 
of  these  influences  is  so  obvious  that  it  may  be  taken  for  granted. 
Wth  reference  to  the  other  side  of  the  problem,  however,  it  has 
been  pointed  out  that  the  potential  supply  of  the  present  is  lim- 
ited by  conditions  set  by  past  industry.  The  amounts  of  dif- 
ferent kinds  of  consumption  goods  that  are  ready  for  present 
use  depends  upon  the  direction  which  the  work  of  production  has 
taken  in  the  past.  What,  in  the  long  run,  is  the  relation  between 
supply  and  value?  To  answer  this  question  we  shall  have  to 
push  our  analysis  somewhat  farther. 

Normal  Value.  — The  dominant  motive  that  guides  farmers  and 
business  men  in  their  investments  of  labor  and  capital  is  the  de- 
sire for  money  profits.  By  profits  we  mean  in  this  connection 
the  difference  between  the  expense  involved  in  producing  goods 
and  the  money  that  can  be  obtained  for  them.  If  it  were  always 
an  easy  matter  for  business  men  to  change  their  interests  and 
their  energies  from  one  line  of  production  to  another,  and  if 
capital  and  labor  could  likewise  be  freely  transferred  from  one 
undertaking  to  another,  it  is  hard  to  see  how  profits  in  any  one 
competitive  business  could  be  for  any  length  of  time  much  higher 

170 


VALUE  AND   PRICE  X7X 

than  in  other  competitive  businesses.  Managerial  ability,  labor, 
and  capital  would  gravitate  always  toward  those  employments 
which  promise  the  greatest  profits.  The  effect  would  be  a  con- 
tinual tendency  toward  equality  of  advantage  in  different  lines 
of  business.  This  does  not  mean  necessarily  an  equality  of 
profits  as  between  individuals  in  any  given  line  of  business,  for 
the  amount  of  profits  depends  largely  upon  the  skill  and  enter- 
prise of  the  individual  business  man.  In  a  state  of  free  compe- 
tition, with  managerial  ability  as  free  in  its  selection  of  oppor- 
tunities as  we  have  assumed,  the  profits  of  any  business  would 
hardly  be  larger,  for  any  period  of  time,  than  the  business  man 
could  get  as  salary  by  working  for  others  —  for  if  working  for 
others  offered  a  greater  return  than  assuming  the  risks  of  busi- 
ness for  himself,  he  would  naturally  choose  the  salaried  position, 
and  vice  versa,  Piurely  competitive  profits,  under  conditions  of 
absolute  ''fluidity"  of  business  ability,  of  labor,  and  of  capital, 
would  thus  tend  to  adjust  themselves  according  to  the  ability  of 
the  individual  business  man;  that  is,  to  equal  what  we  shall  later 
describe  as  the  ''wages  of  management."  If  we  include  the 
value  of  the  business  man's  services  among  the  expenses  of  pro- 
duction, we  may,  obviously,  state  the  tendency  which  we  have 
described  as  a  tendency  toward  the  equality  of  the  prices  received 
for  the  products  of  any  particular  business  and  the  expenses  of 
producing  them. 

The  assumptions  we  have  made  do  not,  however,  exactly  cor- 
respond to  the  conditions  of  actual  business.  Managerial  ability, 
labor,  and  capital  are  all  specialized  to  a  greater  or  less  extent, 
so  that  they  cannot  be  changed  from  one  emplo]rment  to  another 
without  loss  of  efficiency.  But  it  is  not  necessary  for  the  valid- 
ity of  our  analysis  that  all  managerial  ability,  all  labor,  and  all 
capital  should  be  fluid  enough  to  change  from  industry  to  indus^ 
try  economically.  There  are  always  a  certain  number  of  business 
men  who  are  anxiously  watching  for  the  most  inviting  busi- 
ness opportunities;  there  is  always  a  certain  amount  of  labor 
awaiting  the  most  remunerative  employment,  and  there  is  always 
a  certain  amount  of  money  awaiting  investment  in  those  forms 
of  capital  goods  which  produce  the  greatest  value.    These  (acts 


172  OUTLINES   OF  ECONOMICS 

are  enough  to  give  substantial  truth  to  the  statement  that  in  any 
competitive  industry  the  price  of  the  commodity  produced  tends 
to  equal  the  cost  of  producing  it.  When  the  price  of  bicycles 
was  high,  as  compared  with  the  expense  of  producing  them, 
existing  bicycle  factories  were  extended  and  new  ones  were  built. 
The  supply  of  bicycles  was  thus  so  increased  that  they  could  not 
be  sold  except  at  a  much  lower  price.  On  this  account  and  be- 
cause of  the  cessation  of  demand,  the  profits  in  the  manufacture 
of  bicycles  became  relatively  low,  and  many  former  bicycle  fac- 
tories are  now  used  for  other  purposes.  If  the  excess  of  the 
price  of  wheat  over  the  expense  of  producing  it  promises  to  be 
greater  than  the  excess  of  the  price  of  com  over  the  expense  of 
producing  it,  farmers  will  raise  less  com  and  more  wheat,  and  the 
result  will  be  higher  prices  for  com  and  lower  prices  for  wheat. 

On  account  of  this  tendency  of  prices  to  equal  the  expenses  of 
production,  the  expense  of  producing  a  unit  of  a  commodity  is 
called  its  normal  value.  It  must  be  clearly  understood  that 
normal  values  relate  only  to  a  tendency  —  not  to  the  actual 
prices  of  the  market. 

Different  Conditions  of  Supply.  —  The  strength  of  the  tend- 
ency of  actual  competitive  values  to  equal  normal  values  depends 
upon-  the  length  of  the  period  of  time  that  is  taken  into  considera- 
tion. The  longer  the  period  of  time,  the  larger  will  be  the  pro- 
portion of  managerial  abOity,  labor,  and  capital  that  can  be  trans- 
ferred from  one  industry  to  another.  To  buOd  and  to  equip  new 
factories  and  to  extend  old  ones  takes  time;  the  supply  of  skilled 
labor  in  any  occupation  can  often  be  increased  but  slowly,  for 
many  trades  involve  an  apprenticeship  of  three  or  more  years. 
In  the  undertakings  that  are  becoming  less  profitable,  although 
capital  specialized  in  the  form  of  machines  may  not  be  useful  for 
other  purposes,  yet  such  machines  need  not  be  replaced  as  they 
wear  out;  while  a  skilled  laborer  cannot  take  up  another  trade 
without  loss  of  efficiency,  yet  the  incoming  supply  of  laborers 
may  begin  their  apprenticeship  in  those  occupations  in  which 
there  is  a  greater  demand  for  labor. 

While  the  conditions  of  long-period  supply  are  thus  such  as  to 
result  in  a  constant  tendency  toward  the  equalization  of  normal 


VALUE  AND   PRICE  173 

value  and  market  value,  this  tendency  may  never  work  itself  out 
completely.  For  market  values  themselves  are  constancy  chang- 
ing under  the  influence  of  changing  demand.  The  goal  toward 
which  productive  effort  is  working  is  a  constantly  shifting  one. 
Moreover,  the  expense  of  production  itself  often  depends  upon 
the  amount  produced.  The  efforts  of  entrepreneurs  to  adjust 
production  to  prices  result  inevitably  in  a  readjustment  of  the 
conditions  that  determine  the  expenses  of  productioh.  Three 
forms  of  productive  undertaking  may  be  here  distinguished: 
those  in  which  increased  production  is  accomplished  with  in- 
creasing, decreasing,  or  constant  expense. 

If  transportation  facilities  and  other  controlling  conditions 
remain  constant,  the  amount  of  wheat  raised  in  the  United  States 
cannot  be  substantially  increased  without  resort  to  lands  less 
well  adapted  to  the  production  of  wheat,  or  the  more  intensive 
cultivation  of  lands  ahready  in  use.  Either  alternative  means 
(as  will  be  shown  in  a  later  chapter  in  more  detail)  the  use  of 
relatively  more  labor  and  capital  in  producing  the  additional 
wheat  than  was  required  for  the  wheat  produced  under  the  for- 
mer conditions.  This  fact  means  that  the  production  of  wheat 
cannot  be  substantially  increased  except  at  an  increased  expense 
per  bushel.  When  this  condition  of  increasing  expense  is  met 
with,  —  and  it  holds  true  generally  in  agricultmre,  —  normal 
value  is  fixed  by  the  expense  of  production  of  the  most  expensive 
part  of  the  supply.  That  is,  normal  value  tends  to  equal  margi- 
nal expense.  If  the  price  of  the  product  is  not  high  enough  to 
repay  the  cultivation  of  the  poorest  lands  used,  they  will  cease  to 
be  cultivated.  If  the  price  of  the  product  is  appreciably  higher 
than  the  marginal  expense,  farmers  will  find  it  profitable  to  push 
ciiltivation  still  farther,  up  to  the  point  where  the  new  marginal 
expense  equals  the  price. 

In  many  manufacturing  and  commercial  businesses,  however, 
it  is  cheaper  to  produce  on  a  large  scale,  so  that  an  increase  in 
amount  produced  means  a  relatively  smaller  expense  per  unit  of 
product.  In  such  cases  a  general  increase  in  production  means 
a  decrease  in  the  normal  value  of  the  product.  At  any  definite 
time  a  given  product  will  be  produced  by  a  number  of  different 


174  OUTLINES  OF  ECONOMICS 

establishments  of  varying  grades  of  efficiency,  and  if  these  are  aO 
to  continue  in  operation,  the  price  received  for  the  product  must 
be  sufficient  to  cover  the  expenses  of  production  of  the  least  effi- 
cient of  them.  It  is  the  supply  coming  from  these  least  efficient 
establishments  that  adjusts  itself  most  acou-ately  to  changes  in 
price.  From  this  point  of  view,  we  may  say  that  in  manufac- 
tures, as  in  agriculture,  normal  values  equal  marginal  expenses. 
But  this  fact  is  not  very  significant,  for  as  soon  as  we  take  a  longer 
period  of  time  into  consideration,  we  recognize  that  the  higher 
price  which  enables  the  marginal  establishment  to  produce  at 
all,  also  enables  the  better  establishments  to  produce  on  a  larger 
scale.  The  reduced  expenses  of  production  necessitate,  through 
competition,  a  lowering  of  the  price,  and  the  less  efficient  estab- 
lishments find  themselves  forced  out  by  the  very  conditions  that 
permitted  them  to  produce  at  all.  From  the  long-time  point  of 
view,  it  is  minimum,  rather  than  maximum,  expenses  of  produc- 
tion that  measure  normal  values  in  industries  of  decreasing  ex- 
penses. There  is  by  this  process  a  continual  elimination  of  the 
inefficient  producers  and  a  continual  Insistence  upon  higher  stand- 
ards of  efficiency  on  the  part  of  the  superior  producers.  The 
minimum  expenses  of  production  to-day  become  the  marginal 
expenses  of  production  to-morrow. 

The  condition  of  decreasing  expenses  dominates  in  most  of  the 
great  factory  industries  of  the  present.*  Its  effect  is  sometimes 
offset  by  the  increased  cost  of  raw  material  produced  under  con- 
ditions of  increasing  expenses.  The  diminution  of  expenses 
which  accompanies  an  increase  in  the  amount  of  the  business  is 
of  special  significance  in  railway  transportation,  and  in  a  number 
of  other  monopolistic  businesses.  The  telephone  business,  how- 
ever, is  alleged  to  be  subject  to  conditions  of  increasing  expenses. 
Some  writers  hold  that  the  dominance  of  the  condition  of  de- 
creasing expenses  in  any  business  is  enough  to  make  it  monopo- 
listic in  tendency. 

In  many  hand  industries,  such  as  tailoring  and  cigar  making, 
the  expense  of  production  per  unit  does  not  vary  to  any  great 

'  Some  qualifications  of  this  statement  are  suggested  in  the  following  sectien 
on  "Constant  and  Variable  Expenses." 


VALUE  AND  PRICE 


175 


extent  with  the  amount  produced.  Figures  i,  2,  and  3  illustrate 
supply  under  the  conditions  of  increasmg,  decreasing,  and  con- 
stant  expenses,  respectively: —  y 
These  diagrams  illustrate  the 
relations  between  price  and 
supply  when  a  considerable 
period  of  time  is  taken  into 
account  and  must  be  carefully 
distinguished  from  the  supply 
curve  described  in  the  preced- 
ing chapter,  which  related 
only  to  the  conditions  of 
supply  at  a  particular  time. 
The  "supply"  illustrated  in 
these  long-period  supply 
curves  is  about  the  same  as 
the  "potential  supply"  of 
the  preceding  chapter. 

Constant  and  Variable  Ex- 
penses.— There  is  no  better 
illustration  of  the  necessity 
of  keeping  definite  periods  of  0 
time  in  mind  when  discussing 
problems  relating  to  valuation 
than  that  furnished  by  the 
problem  of  the  apportionment 
of  specific  expenses  of  produc- 
tion to  particular  units  of 
products.  In  almost  any 
industrial  establishment,  any 
increase  in  product  will  be 
attended  by  some  specific  in- 
crease in  expenses:  more  raw 
material  and  more  labor  will 


Fio.  3 


be  tisedy  possibly,  more  power;  although  the  increased  expenses 
for  labor  and  power  may  not  be  proportionate  to  the  increase 
in  production.    Such  expenses  are  called  variabh  expinsesj  and 


176 


OUTLINES   OF  ECONOMICS 


are  to  be  contrasted  with  constant  expenses^  which  remain 
approximately  the  same,  no  matter  what  the  amount  pro- 
duced is.  The  interest  on  the  capital  invested  in  the  factory 
building  and  its  equipment  of  machinery  is  a  constant  expense; 
the  expense  of  management  and  general  office  expenses  will  be 
increased  but  slightly  by  an  increase  in  the  annual  product  of  an 
establishment.  It  is  often  assumed  that  wherever  only  a  part 
of  the  expenses  varies  with  the  amoimt  produced,  the  industry  is 
ipso  facto  one  of  decreasing  expenses.  Whether  this  assumption 
holds  true  or  not  depends  on  the  length  of  the  period  of  time  we 
take  into  consideration.  It  is  true  that  factories  are  built  with 
a  certain  maximum  capacity,  and  until  that  maximum  capacity 
is  utilized,  production  may  be  increased  without  a  proportionate 
increase  in  expenditure.  When  the  maximum  is  reached,  how- 
ever, more  eqmpment,  and  often  more  buildings,  will  be  needed 
before  there  can  be  a  further  increase  in  product.  There  is  often 
a  certain  most  efficient  size  of  plant;  an  increase  in  business  be- 
yond the  capacity  of  the  most  efficient  size  of  plant  necessitates 
either  a  curtailing  of  the  business  or  a  duplication  of  the  plant. 
When  business  conditions  are  such  as  to  warrant  temporarily 
^  pushing  the  output 

of  a  plant  beyond 
its  normal  capacity, 
the  result  usually 
is,  as  every  manu- 
facturer knows,  that 
this  increased  out- 
put is  produced  at 
relatively  increased 
expenses  of  produc- 
^  Jf'  "-^    ^^°-    Many  seem- 

Fio.  4  ingly    constant 

expenditures  (like 
interest  on  the  cost  of  the  plant)  are  variable  in  the  long  run. 
Such  expenditures  increase,  but  only  at  considerable  intervals 
of  time.  A  supply  curve  corresponding  to  the  conditions  of 
production  in  such  a  business  might  be  something  like  Figure  4. 


VALUE  AND  PRICE  I77 

When  the  product  reaches  OM  units,  and  again  when  it  reaches 
OM'  units,  fresh  investments  of  large  amounts  of  capital  are  neces- 
sary. From  the  long-time  point  of  view,  such  a  business  might 
very  possibly  be  one  of  approximately  constant  expenses;  although 
of  course  the  other  economies  of  large-scale  production  may  be 
sufficient  to  bring  them  under  the  rule  of  decreasing  expenses. 
The  problem  which  the  economist  has  to  deal  with  here  is  analo- 
gous to  the  difficult  one  which  the  accountant  has  to  face  in  fac- 
tory cost  keeping.  Careful  analysis  of  the  relations  of  constant 
and  variable  expenses  in  different  modem  businesses  must  pre- 
cede any  broad  generalization. 

Joint  Expenses  of  Production.  —  When  the  production  of  one 
commodity  is  inevitably  accompanied  by  the  production  of  one 
or  more  other  commodities,  it  is  often  impossible  to  assign  a  defi- 
nite part  of  the  total  expense  of  production  to  any  one  of  the  com- 
modities. It  is  obviously  impossible  to  separate  the  expenses 
of  producing  tenderloin  steaks  from  the  expenses  of  producing 
soup  bones,  or  either  one  of  these  from  the  expenses  of  producing 
bides.  Mutton  and  wool,  cotton  and  cotton  seed,  coal  gas  and 
coke,  are  familiar  examples  of  commodities  produced  under 
conditions  of  joint  expense.  Modem  methods  for  the  utilization 
of  industrial  by-products  have  greatly  increased  the  list  of  com- 
modities produced  under  conditions  of  joint  expense.  Such  com- 
modities have  only  a  collective  normal  value,  which  is  equal  to 
the  joint  expenses  of  production.  The  potential  supply  is  govemed 
by  the  total  price  which  the  producer  thinks  he  can  get  for  the 
joint  products,  as  compared  with  the  joint  expenses  of  produc- 
ing them.  The  division  of  the  total  price  into  specific  prices  for 
the  separate  commodities  is  determined  by  the  potential  supply 
and  by  the  conditions  of  demand  that  exist  at  any  one  time  for 
the  separate  products. 

The  Sorphis  of  Bargaining.  — Demand  and  supply  do  not  al- 
ways fix  price  at  a  definite  point.  The  price  of  horses  of  any 
given  grade,  for  example,  is  fixed  only  approxinuttely  by  market 
conditions.  In  the  sale  of  a  horse  there  is  room  for  consider- 
able latitude  of  opinion  as  to  the  price  that  should  be  paid.  If 
the  lowest  price  that  the  seller  will  take  is  considerably  below 


178  OUTLINES  OF  ECONOMICS 

the  highest  price  that  the  buyer  will  give,  just  where  between 
these  limits  the  actual  price  will  be  finally  fixed  will  depend 
upon  the  reladve  skill  at  bargaining  of  the  seller  and  buyer.  In 
the  case  of  a  horse  trade,  this  opportunity  for  the  ''higgling  of 
the  market"  has  become  proverbial,  but  in  many  other  kinds 
of  exchanges  the  efficient  bargainer  has  an  opportunity  to  get 
for  himself  a  surplus  above  his  minimum  selling  price,  or  below 
his  maximum  bu3dng  price.  Real  estate  transactions  furnish 
a  good  example.  In  the  case  of  the  great  commodities  of  the 
world  market,  like  wheat,  cotton,  and  iron,  the  price  is  set  so 
accurately  by  market  conditions  that  the  gains  of  bargaining 
are  relatively  smalL  In  general,  ike  wider  the  marked,  the  more 
general  the  use  of  the  commodity,  the  greater  the  ease  wUh  which  the 
commodity  can  be  sorted  into  standard  grades  (as  in  the  case  of 
wheat  and  cotton),  the  more  accurately  will  competitive  forces  fix  a 
definite  price.  Goods  which  cannot  be  standardized,  each  unit  of 
which  possesses  some  unique  qualities,  give  most  scope  for  the  varia- 
tions in  the  valuations  of  individual  buyers  and  sellers.  In  such 
cases  supply  and  demand  do  not  fix  a  price  point,  but  only  cer- 
tain limits  within  which  the  price  must  fall.  The  widening  of 
the  market,  however,  and  the  increasing  standardization  of 
commodities  —  an  effect  of  machine  production  —  are  bringing 
a  larger  and  larger  proportion  of  goods  into  the  field  where  the 
uniform  market  valuations  dominate. 

Non-reproducible  Goods.  —  Some  economic  writers  have  made 
a  special  class  of  such  goods  as  great  works  of  art.  These  are 
absolutely  unique,  in  that  no  copy  can  have  anything  like  the 
value  of  the  original.  The  price  of  such  non-reproducible  goods 
has  an  upper  limit  fixed  by  the  highest  subjective  valuation  set 
upon  it  by  any  possible  buyer.  The  lower  limit  will  be  either 
the  seller's  own  subjective  valuation,  or  the  second  highest  valu- 
ation set  by  any  competing  buyer,  according  as  one  or  the  other 
of  these  two  is  the  higher.  Between  the  upper  and  lower  limit 
the  exact  fixing  of  the  price  is  a  matter  of  pme  bargaining.  Such 
cases  should  not  be  confused  with  ordinary  monopoly  price,  as 
has  been  done  by  some  writers.  The  products  of  almost  all  the 
industrial  handicrafts,  as  well  as  the  products  of  the  avowedly 


VALUE  AND  PRICE  I79 

artistic  pursuits,  possess  a  non-reproducible  element  of  individ- 
uality, that  removes  them  to  a  greater  or  less  extent  from  the 
operations  of  the  law  of  normal  value.  A  commodity  may  pos- 
sess this  quality  of  uniqueness  to  such  an  extent  that  it  is  not 
affected  at  all  by  the  forces  determining  the  value  of  the  general 
class  of  goods  to  which  it  belongs,  and  in  this  case  its  owner  may 
be  said  to  have  a  monopoly  of  it.  But  it  is  better  to  look  upon 
the  valuations  of  such  non-reprodudble  goods  as  determined  by 
individual  valuations  and  the  process  of  bargaining.  The  "nor- 
mal" price  of  such  goods  is  simply  the  highest  price  that  can  be 
got  for  them  —  a  statement  which  does  not  hold  true  of  most 
monopoly  goods.  For  monopoly  goods  are  not  necessarily  unique 
or  non-reprodudble.  They  differ  from  ordinary  competitive 
goods,  however,  in  that  they  cannot  be  reproduced  except  by 
the  monopolist. 

Monopoly  Values. — The  subject  of  monopoly  price  will  be 
discussed  in  connection  with  an  analysis  of  the  general  subject 
of  monopoly  in  a  later  chapter.  It  is  sufficient  in  this  connection 
to  note  that  the  monopolist  gets  a  special  power  over  the  price 
of  his  product  through  his  ability  to  control  the  supply  of  it. 
The  monopolist,  like  any  other  seller,  seeks  to  get  the  price  that 
yields  the  greatest  net  returns,  but  unlike  the  competitive  seller, 
he  is  not  hampered  by  an  inability  to  fix  the  price  very  much 
above  the  cost  of  production. 

Retail  Prices. — The  retail  prices  paid  by  the  individual  con- 
sumer do  not  always  respond  to  the  variations  in  wholesale  prices 
brought  about  by  changes  in  supply  and  demand.  There  arc 
sometimes  tacit  or  explicit  local  price  agreements  between  local 
merchants,  which  apply  even  to  competitively  produced  goods. 
Some  retailers  consistently  sell  a  few  kinds  of  goods  at  less  than 
cost  to  attract  custom  for  the  goods  on  which  they  may  make  a 
profit.  Merchants  who  make  a  specialty  of  a  high  class  of  goods, 
and  thus  cater  to  a  wealthy  clientele,  are  apt  to  exact  higher  prices 
for  ordinary  goods  than  do  those  merchants  who  have  to  deal  with 
a  poorer  class  of  customers.  Custom  has  more  effect  on  retail 
than  on  wholesale  prices.  The  prices  of  various  articles  sold  as 
"men's  furnishing  goods"  form  a  good  example  of  the  influence 


l8o  OUTLINES  OF  ECONOMICS 

of  custom.  Retail  prices  are  also  governed  by  the  vahie  of  the 
coins  that  are  in  general  use,  and  are  generally  expressed  in 
round  numbers.  In  the  long  run,  demand  and  supply  govern 
retail  prices,  but  they  do  not  set  a  definite  price  point  so  accu- 
rately as  they  do  in  the  case  of  wholesale  prices. 

Public  Autfaoiity  and  Value.  —  In  the  middle  ages  there  was 
considerable  speculation  by  theologians  and  legists  about  the 
subject  of  "just  price"  —  the  value  at  which  things  ought  to 
exchange  for  other  things.  This  idea  denotes  an  important 
difference  between  the  mediaeval  and  modem  Concept  of  value. 
Professor  Ashley  has  put  it  clearly  in  these  words:  "With  Aqiii- 
nas,  the  greatest  of  the  mediaeval  schoolmen,  it  [value]  was  some- 
thing objective;  something  outside  of  the  will  of  the  individual 
purchaser  or  seller;  something  attached  to  the  thing  itself,  exist- 
ing whether  he  liked  it  or  not,  and  that  he  ought  to  recognize. 
And  as  experience  showed  that  individuals  could  not  be  trusted 
thus  to  admit  the  real  value  of  things,  it  followed  that  it  was  the 
duty  of  the  proper  authorities  of  state,  town,  or  gild  to  step  in 
and  determine  it,  and  what  the  just  and  reasonable  price  really 
was."  This  "just  and  reasonable  price"  was  very  often  thought 
to  be  that  price  which  would  afford  a  reasonable  compensation 
for  the  labor  of  the  producer.  When  in  more  modem  times 
theolo^cal  speculations  began  to  yield  precedence  to  inquiries 
into  "natiural  laws,"  the  idea  of  just  price  was  supplanted  by 
the  idea  of  "natural  price."  Sometimes  this  was  interpreted  as 
determined  by  the  value  of  the  labor  put  into  a  commodity  (this 
was  the  dominant  idea  during  the  eighteenth  century),  but  the 
growth  of  capitalistic  production  necessitated  the  recognition  of 
the  other  elements  in  the  expense  of  producing  a  commodity  as 
part  of  its  natural  value.  Modem  economic  science,  as  we  have 
seen,  applies  the  term  "normal  value"  to  the  expense  of  produc- 
ing a  thing,  but  interprets  it  only  as  an  important  factor  control- 
ling the  long-period  fluctuations  of  competitive  exchange  value. 
The  adjective  "natural,"  with  its  misleading  implications,  has  been 
abandoned.  Yet  the  competitive  system  is  to-day  so  thoroughly 
accepted  as  the  "natural"  economic  order,  that  there  is,  as  we 
have  previously  noted,  a  deep-seated  conviction  that  normal 


VALUE  AND  PRICE  l8l 

competitive  prices  (measured  by  the  expenses  of  production) 
are  natural  and  just  prices.  This  conviction  is,  however,  brought 
face  to  face  with  the  fact  of  the  growth  of  a  large  industrial  field 
in  which  monopoly,  rather  than  competition,  rules.  The  ques- 
tion of  just  price  is  again  a  live  issue  —  as  it  was  before  the  growth 
of  the  competitive  system.  Public  authority  is  frequently  invoked 
to  insure  that  the  prices  fixed  by  holders  of  municipal  franchises 
and  other  monopolists  are  just  and  reasonable.  The  chief  fun- 
damental test  which  our  courts  are  able  to  apply  to  the  reason- 
ableness of  any  particular  price  is  its  conformity  to  what  the  price 
would  have  been  under  competitive  conditions.  Thus  it  is  often 
asked  if  a  particular  monopoly  charge  gives  a  more  than  normal 
return  upon  the  capital  invested.  The  determination  of  what 
the  expense  of  producing  a  particular  commodity  or  service  really 
is,  is  often  a  difficult,  or  even  impossible,  task  (the  distinction 
between  constant  and  variable  expenses  being  frequently  a  stum- 
bling-block), but,  given  the  general  acceptance  of  the  competi- 
tive system,  it  is  hard  to  see  what  other  standard  could  be  used. 
Moreover,  the  general  consensus  of  recent  court  decisions  is  that 
the  Fifth  and  Fourteenth  Amendments  to  the  Federal  Constitu- 
tion, prohibiting  the  taking  of  property  without  due  process  of 
law,  prevent  federal  and  state  governments  from  going  farther 
than  this  in  the  regulation  of  monopoly  charges.^  And  even  this 
power  is  not  conceded,  except  in  the  case  of  businesses  affected 
with  a  distinct  public  interest,  such  as  those  conducted  by  so- 
called  public-service  corporations.  In  fixing  prices  for  its  own 
services,  such  as  postal  charges,  the  government  is  controlled  by 
other  considerations.  These  will  be  discussed  in  the  chapters 
on  public  finance. 
bnpisted  Value. — The  only  things  to  which  market  valuations 

>  It  is  the  view  of  some  courts  that  not  only  concrete  physical  objects,  but  also 
the  "franchise  value"  that  has  resulted  from  the  ability  of  a  company  to  charge 
monopoly  prices  in  the  past  must  be  counted  as  "property"  in  the  meaning  of  the 
Constitution.  So  far  as  this  view  governs  the  public  regulation  of  monopoly 
prices,  it  is  impossible  to  reduce  them  to  a  competitive  standard.  It  should  be 
possible,  however,  in  any  particular  case,  to  prevent  any  increase  in  this  acquired 
franchise  value;  that  is,  to  subject  public-service  monopolies  to  competitive 
Mmdaidi  so  lar  as  the  incmse  of  their  earnings  is  concerned. 


l82  OUTUNES  OF  ECONOMICS 

actually  apply  are  the  specific  units  of  goods  that  are  actually 
bought  and  sold.  We  are  accustomed,  however,  to  impute  these 
market  values  to  all  other  existing  goods  of  the  same  kinds.  When 
wheat  is  sixty  cents  a  bushel,  the  only  bushels  of  wheat  actually 
valued  by  the  market  at  that  price  are  the  ones  actually  sold  at 
that  price.  Yet  we  impute  or  ascribe  the  same  value  to  all  other 
bushels  of  the  potential  supply  of  wheat  in  the  same  market  It 
is  obvious  that  all  of  the  potential  supply  could  not  be  sold  at  once 
except  at  a  very  much  lower  price.  Any  seller  could,  however, 
add  a  small  amount  to  the  supply,  without  materially  affecting 
the  price.  Exchange  value,  as  a  concrete  fact,  emerges  only  in 
the  actual  process  of  exchange.  The  value  imputed  to  goods 
not  in  the  actual  process  of  exchange  is  a  hypothetical  value: 
the  price  which  could  be  obtained  for  any  particular  unit  of  a 
good  under  exbting  market  conditions.  This  concept  of  im- 
puted value  in  economics  is  in  some  ways  like  the  concept  of 
potential  energy  in  physics.  A  body  of  a  given  mass  raised  a 
certain  distance  above  the  earth  has  a  certain  amount  of  poten- 
tial energy,  which,  if  the  body  be  allowed  to  fall,  will  be  realized 
in  an  equivalent  amount  of  actual  energy.  To  make  the  analogy 
between  potential  energy  and  potential  value  complete,  how- 
ever, one  would  not  only  have  to  conceive  of  the  force  of  gravi- 
tation as  continually  fluctuating,  but  also  to  imagine  that  the 
amount  of  actual  energy  realized  would  be  relatively  diminished 
according  to  the  mass  of  the  number  of  the  bodies  let  fall  at  any 
particular  time. 

Notwithstanding  the  hypothetical  natiure  of  this  imputed 
value,  it  b  often  treated  as  though  it  were  a  real  thing.  Statis- 
tical attempts  to  state  the  wealth  of  a  nation  in  terms  of  dollars 
and  cents  are  only  estimates  of  the  sums  of  these  potential  values, 
and  involve  the  hypothesis  stated  above.  A  merchant's  inven- 
tory of  his  stock  in  trade  is  often  accompanied  by  an  estimate 
of  its  potential  value.  Whether  this  value  will  be  realized  or 
not  depends  upon  the  constancy  of  business  conditions,  the  ca- 
prices of  fashion,  and  whether  it  can  be  sold  in  the  regular  course 
of  trade  or  whether  it  has  to  be  disposed  of  at  a  forced  sale.  A 
good  many  kinds  of  consumption  goods,  such  as  household  fur* 


VALUE  AND  PRICE  183 

niture,  are  not  customarily  thought  of  by  the  owner  in  terms  of 
exchange  value.  It  is  often  necessary  for  purposes  of  taxation 
to  ascribe  value  to  them,  but  it  should  be  remembered  that  this 
imputed  value  is  purely  hypothetical. 

The  Vahiatioii  of  Prodoctioa  Goods.  — In  our  analysis  of  ex- 
change value  it  has  been  assumed  that  the  commodities  valued 
were  wanted  by  consumers  for  the  satisfaction  of  their  wants; 
that  is,  that  they  were  consumption  goods.  It  is  possible  to 
say  that  producers*  goods  —  capital  and  land  —  have  a  mar- 
ginal utility  for  the  producers,  which  measures  the  importance 
attached  to  the  possession  of  them.  While  one  could  thus,  with 
substantial  accuracy,  include  producers'  goods  in  the  scope  of 
the  foregoing  analysis,  there  is  a  more  instructive  way  of  ap- 
proaching the  problem  of  the  valuation  of  land  and  capital.  Con- 
sumption goods  have  value  because  they  satisfy  human  wants; 
that  is,  they  3deld  an  income  of  satisfactions,  while  production 
goods  are  valued  because  they  have  the  power  of  gaining  a  money 
income  for  the  owner.  Just  as  the  value  of  consumers'  goods 
varies  with  the  intensity  of  the  wants  they  satisfy,  so  the  value 
of  producers'  goods  varies  with  their  power  to  yield  a  money 
income.  The  valuation  of  producers'  goods  will,  accordingly, 
be  discussed  in  the  chapters  on  the  rent  of  land  and  interest 

Other  Theories  of  Value. — The  older  economists  used  to  em- 
phasize the  relation  between  the  value  of  a  thing  and  the  amount 
or  the  expense  of  the  labor  spent  in  producing  it,  —  a  relation 
much  closer  under  the  old  methods  of  hand  production  than  it 
is  at  present.  The  development  of  a  systematic  labor  theory 
of  value  was,  however,  the  work  of  Karl  Marx,  the  founder  of 
modem  "scientific"  socialism.  This  theory  is,  in  essence,  that 
labor  produces  all  value  and  that  the  interest  on  capital  and  the 
rent  of  land  are  deductions  from  the  real  wages  of  labor  —  de- 
ductions that  are  made  possible  only  by  the  existence  of  the  sys- 
tem of  private  property  in  producers'  goods.  It  is  so  obvious 
that  things  do  not  exchange  to-day  in  proportion  to  the  amount 
of  labor  involved  in  producing  them,  that  to  point  this  out  in  de- 
tail, as  some  economists  have  done,  is  unnecessary.  Karl  Marx 
really  meant  that  labor  costs  constitute  the  "natural"  values 


l84  OUTLINES  OF  ECONOMICS 

of  things,  or  the  ratios  at  which  they  ought  to  exchange.  But 
the  only  "natural"  values  that  can  be  recognized  from  the  mod- 
ern scientific  point  of  view  are  the  values  that  really  exist  —  the 
actual  values  of  the  market.  Nor  can  we  say  that  things  oughl 
to  exchange  in  proportion  to  their  labor  costs,  without  b^ging 
the  whole  question  in  favor  of  the  abolition  of  private  property 
in  land  and  capital.  Moreover,  it  will  be  shown  later  that  rent 
and  interest  would  not  be  eliminated,  although  they  might  be 
changed  in  form,  by  a  change  from  private  to  common  owner- 
ship of  producers'  goods.  Although  the  labor  theory  of  value 
is  still  held  by  many  followers  of  Marx,  its  place  in  the  creed  of 
scientific  socialism  is  diminishing  in  importance. 

The  relation  between  value  and  the  expenses  of  production 
has  sometimes  been  stated  in  such  a  way  as  to  lead  to  the  infer- 
ence that  cost  of  production  is  the  cause  of  value.  The  cost  of 
production  theory  of  value,  when  so  stated,  is  open  to  much 
the  same  objections  as  the  labor  theory.  Suppose  I  perfect  a 
machine  at  the  expense  of  ten  thousand  dollars  which  will  blow 
soap  bubbles  at  the  rate  of  a  thousand  an  hour.  Will  it  be  worth 
ten  thousand  dollars?  Certainly  not;  but  why  not?  The  theory 
of  costs  will  not  explain  it.  To  say  that  the  labor  and  materials 
have  not  been  wisely  used  is  simply  to  say  that  the  machine  has 
no  value,  which  is  just  what  we  are  trying  to  explain.  As  a 
fact,  it  is  not  worth  ten  thousand  dollars  simply  because  no  one 
b  willing  to  give  ten  thousand  dollars  for  it.  The  expenses  of 
production  do  not  create  value,  but  there  is  a  sense  in  which 
value  is  the  cause  of  the  expenses  of  production.  That  is,  men 
think  it  worth  while  to  expend  money  in  producing  things  be- 
cause they  think  that  the  products  will  have  value  enough  to 
recompense  them  for  the  expenses  of  production. 

Many  of  the  economists  who  have  written  in  the  past  about 
the  subject  of  value  took  the  facts  of  demand  for  granted,  and 
devoted  most  of  their  treatment  of  the  subject  to  an  examina- 
tion of  the  relation  between  value  and  the  expenses  of  produc- 
tion. This  was  in  part  an  expression  of  a  general  tendency  to 
regard,  the  production  of  wealth  as  something  to  be  desired  for 
its  own  sake;    the  fact  that  the  satisfaction  of  human  wants  is 


VALUE  AND  PRICE  185 

the  real  goal  of  most  economic  efforts  being  underemphasized. 
In  more  recent  years  economic  writers  have  developed  the  analy- 
sis of  human  wants;  the  fact  that  utility  in  the  economic  sense 
is  not  utility  in  general,  but  the  utility  of  a  particular  imit  of  a 
commodity,  being  the  most  significant  point  in  this  new  analysis. 
Some  writers  have  even  gone  so  far  as  to  take  the  facts  of  supply 
for  granted,  and  to  assume  that  value  is  explained  when  mar- 
ginal utility  is  described.  Marginal  utility  is,  as  we  have  seen, 
the  equivalent  of  subjective  value  —  the  importance  an  indi- 
vidual attaches  to  the  possession  of  a  particular  unit  of  a  com- 
modity. To  say  that  the  marginal  utility  of  an  object  determines 
its  exchange  value  is,  however,  to  argue  in  a  circle,  for  the  mar- 
ginal utility  of  a  commodity  to  me  depends  on  the  intensity  of 
my  wants  and  the  extent  to  which  they  are  satisfied.  But  the 
extent  to  which  our  wants  are  satisfied  depends  very  largely  upon 
the  difi&culty  or  expense  of  acquiring  the  things  that  satisfy  them. 
In  this  sense  value  determines  marginal  utility.  The  concept 
of  marginal  utility  does,  however,  aid  us  in  imderstanding  the 
causes  of  exchange  value,  because  it  forms  a  bridge  by  which 
we  can  pass  from  the  definite  money  units  in  which  exchange 
values  are  measured  to  the  indefinite,  subjective  units  of  satis- 
faction in  which  we  measiu'e  the  utility  of  goods. 

As  a  determining  cause  of  value,  utility  has  a  logical  priority 
over  scarcity,  in  the  sense  that  demand  is  usually  the  cause  of 
supply.  Yet  in  the  analysis  of  the  actual  valuation  process  we 
have  to  recognize  that  utility  and  scarcity,  demand  and  supply, 
are  forces  operating  simultaneously,  neither  of  which  can  be 
neglected  without  obscuring  the  fundamental  facts  of  the  market. 

Quxsnovs 

I.  Is  there  any  relation  between  the  price  of  a  lead  pencil  and  the  expense 
of  producing  it? 

a.  What  elements  of  a  fanner's  expenses  are  "constant"?  What  are 
"mriable"? 

3.  What  different  possible  standards  of  just  price  can  you  suggest? 

4.  Draw  diagrams  illustrating  the  fixing  of  normal  value  under  different 
conditions  of  long-period  supply,  the  conditions  of  demand  being  assumed  to 
be  constant. 


l86  OUTUNES  OF  ECONOMICS 

5.  What  difierent  possible  meanings  can  be  attached  to  the  expression 
"natural  value"? 

6.  Discuss  the  following  statement:  — 

"  The  fact  is  that  labor  once  spent  has  no  influence  on  the  future  value  of  any 
article ;  it  is  lost  and  gone  forever.  In  commerce  bygones  are  forever  by- 
gones ;  and  we  are  always  starting  clear  at  each  moment,  judging  the  value 
of  things  with  a  view  to  future  utility."  Jevons,  Theory  of  PolUical  Econ- 
omy, p.  164. 

REFEREffCBS 

Flux,  A.  W.    Economic  Principles,  Chaps.  IV  and  V. 

Marshall,  Alfred.    Principles  of  Economics,  4th  ed.,  Book  V,  Chaps,  m, 

IV,  V,  VI,  Vn,  XI,  XII.     Or  [abridged!  Economics  of  Industry,  3d 

ed.,  Book  V,  Chaps.  III-VIII. 
Mill,  J.  S.    Principles  of  Political  Economy,  Book  III,  Chaps.  Ill  and  IV. 
Seuoman,  E.  R.  a.    Principles  of  Economics,  Chaps.  XVI,  XVIL 
WnSES,  £.  VON.    Natural  Value,  Book  V,  Chaps.  I-VI. 


CHAPTER   Xm 
MONOPOLY 

The  Idea  of  Monopoly.  —  One  of  the  economic  terms  most  fre- 
quently used  nowadays  is  monopoly,  and  at  the  same  time  it 
is  one  of  those  terms  which  are  peculiarly  vague  and  ill-defined 
in  popular  dbcussion.  Even  in  law  and  economics,  contradictory 
meanings  have  been  attached  to  the  term,  although  recently  there 
has  been  a  marked  clarification  of  thought  both  on  the  part  of 
economists  and  jurists.  This  has  been  a  natural  result  of  the 
discussion  of  the  subject;  and  this  discussion  in  turn  has  been  a 
necessary  outcome  of  an  economic  situation  in  which  monopoly 
has  played  and  is  sdll  playing  a  large  r61e.  While  there  has  been 
confusion  of  thought  with  respect  to  monopoly,  all  have  agreed  that 
something  to  be  called  monopoly  has  existed,  and  that  it  has  been 
the  cause  of  perplexing  scientific  and  practical  problems. 

In  economics,  as  in  life,  categories  shade  off  into  each  other,  and 
at  the  boundaries  discrimination  is  difficult.  It  is  best,  therefore, 
to  find  highly  developed,  plainly  marked  types  to  furnish  us  the 
subject-matter  for  definition  and  to  compare  one  t3rpe  with  another. 
This  is  an  especially  desirable  mode  of  procedure  in  the  present 
case,  because  the  term  "  monopoly  "  at  once  suggests  the  term  "  com- 
petition," with  which  it  is  inevitably  contrasted.  When  monopoly 
exists,  competition  is  thought  of  as  absent.  A  state  of  full  and 
free  competition,  on  the  other  hand,  is  incompatible  with  mo- 
nopoly. 

Competition  means  a  market  with  rival  sellers  and  buyers, 
and  prices  determined,  on  the  one  hand,  by  efforts  of  sellers, 
actii^  independendy  of  one  another,  to  dispose  of  commodities 
and  services,  and  on  the  other  hand,  by  efforts  of  purchasers, 
acting  independently  of  one  another,  to  secure  commodities  and 
services.    Competition  means  goods  and  services  freely  produced; 

187 


1 88  OUTLINES  OF   ECONOMICS 

in  other  words,  without  control  by  combination.  We  have  seen 
the  forces  that  under  competition  limit  producers  and  purchasers, 
and  thus  determine  value. 

Monopoly,  as  the  term  contrasted  with  competition,  means  com- 
bination and  unified  action,  signifying  restraint  on  the  free  offering 
of  commodities  and  services  by  rival  sellers  and  on  the  free  pur- 
chase of  these  commodities  and  services  by  rivals  who  desire  to 
secure  them.  The  word  "  monopoly  "  itself  means  a  condition  in 
which  there  is  a  single  seller  and  by  extension  a  single  purchaser, 
and  signifies  imity  in  management  of  some  kind  of  business  in 
some  essential  particular. 

The  particular  in  which  unity  is  secured  in  the  case  of  monopoly 
may  be  in  production,  it  may  be  in  sales,  it  may  be  in  purchases; 
or  it  may  be  in  any  two  or  all  three  of  these  particulars.  This 
use  of  the  term  "  monopoly  "  gives  us  a  clear  scientific  concept  which 
is  workable;  and  on  its  basis  we  may  then  formulate  this  definition 
of  monopoly:  Monopoly  means  that  substantial  unily  of  action 
on  the  part  of  one  or  more  persons  engaged  in  some  kind  of  business 
which  gives  exclusive  control,  more  particularly ^  although  not  solely y 
with  respect  to  price. 

A  few  points  in  our  definition  require  comment.  Price  is 
essential,  and  must  be  regarded  as  the  fundamental  test  of  monop- 
oly, even  if  it  is  obvious  that  price  formation  and  price  control 
do  not  exhaust  monopoly,  since  its  import  reaches  beyond  price. 
The  other  things  than  price  control  which  monopoly  carries  with 
it  flow  from  such  control  and  are  not  secure  without  it.  A  cer- 
tain unity  of  action  may  be  obtained  without  the  establishment  of 
monopoly,  since  it  does  not  give  rise  to  monopoly  until  the  power 
to  control  price  is  secured. 

It  is  possible  that  monopoly  may  not  prevent  price  from  falling 
below  cost,  and  such  a  condition  of  price  is  quite  compatible  with 
the  definition  given.  The  advantage  of  unified  action  may  be 
that  loss  is  diminished.  Sometimes  a  monopoly  will  give,  perhaps, 
simply  normal  returns;  sometimes  there  is  loss,  as  in  the  case  of 
an  improfitable  copyrighted  book;  sometimes  it  might  happen 
that  the  monopoly  price  would  be  exactly  the  same  as  the  com- 
petitive price;  sometimes  it  may  go,  and  generally  will  go,  above 


MONOPOLY  189 

the  competitive  price,^  although  there  might  be  other  gains  than 
those  resulting  from  higher  price. 

The  precise  definition  given  here  of  monopoly  appears  in  the 
main  to  be  in  accordance  with  the  best  English  usage,  and  also  to 
be  in  harmony  with  the  meaning  given  to  the  corresponding  word 
in  other  modem  languages  by  those  who  use  these  languages 
with  discrimination.  If  we  search  our  dictionaries  for  the 
meanings  of  monopoly,  it  will  be  seen  that  there  runs  through  them 
all  the  notion  of  exclusiveness  or  unity  as  the  dominating  thought, 
as  the  essential  thing  for  which  the  mind  is  more  or  less  success- 
fully struggling  and  the  thought  about  which  other  things  are 
grouped. 

When  we  search  our  law  books  and  judicial  utterances  on  the 
subject  of  monopoly,  unsatisfactory  as  they  have  been  to  all  in- 
terests involved  and  contradictory  to  one  another  in  their 
interpretations  in  various  particulars,  we  find,  nevertheless,  a 
sound  tendency  to  emphasize  unified  control  of  business  as  an 
essential  characteristic  of  monopoly.  Lord  Coke,  in  the  seven- 
teenth century,  ladd  emphasis  upon  the  exclusive  nature  of  mo- 
nopoly, when  he  said  that  it  consisted  of  power  granted  "to  any 
person  or  persons,  bodies  politic  or  corporate,  for  the  sole  buying, 
selling,  making,  working,  or  using  of  an3rthing,  whereby  any  per- 
son or  persons,  bodies  politic  or  corporate,  are  sought  to  be  re- 
strained of  any  freedom  or  liberty  that  they  had  before,  or  hindered 
in  their  lawful  trade."  '  Blackstone,  in  his  CammenUiries  an  the 
Laws  of  En^ndy  gave  almost  precisely  the  same  definition  in 
the  following  century.  Recent  American  decisions  lay  emphasis 
on  exclusiveness  as  a  test  of  monopoly. 

Tbe  Idea  of  Monopoly  and  Industrial  Evolution.  —  But  the 
meanings  of  economic  categories  change  with  industrial  evolution. 
Even  such  terms  as  freedom  and  liberty  have  to  be  newly  inter- 
preted with  every  new  stage  and  even  with  every  marked  phase  in 
a  stage  of  economic  life.  Naturally  monopoly  has  acquired  a  new 
significance,  requiring  new  interpretation,  which  even  courts  are 

*  This  point  is  discussed  later  in  the  present  chapter,  vide  p.  ao6. 
'Coke,  3  Institutes,  i8z.    Quoted  by  C.  F.  Beach,  Sr.,  in  his  Monopolies  and 
Indnsirial  Tnuis,  I  5. 


igo  OUTLINES  OF  ECONOMICS 

gradually  learning  to  give.  The  earlier  legal  definitions  made 
monopoly  proceed  from  an  express  grant  of  public  authority. 
Lord  Coke  says:  '*  A  monopoly  is  an  institution  or  allowance  by 
the  king,  by  his  grant,  commission,  or  otherwise ;"  and  Black- 
stone  uses  similar  language  in  defining  monopoly  '^  as  a  license  or 
privilege  allowed  by  the  king." 

Historically,  this  source  of  monopoly  power  is  of  paramount 
importance.  From  early  times,  English  sovereigns  granted  mo- 
nopolies either  for  public  or  private  reasons,  and  they  became  a 
grievous  burden.  Queen  Elizabeth,  in  particular,  sinned  in  this 
respect,  regarding  the  right  to  grant  monopolies  as  **  one  of  the 
fairest  flowers  "  in  her  prerogative,  and  it  was  not  long  before 
the  citizen  found  himself  restrained  and  shut  in  on  every  side  by 
a  privileged  class  of  monopolists.^ 

Our  forefathers  were  so  deeply  impressed  with  the  evils  which 
they  had  suffered  at  the  hands  of  the  monopolists  in  old  England 
that  in  the  Bills  of  Rights  and  elsewhere  in  the  early  constitutions 
of  our  commonwealths  they  frequentiy  inserted  severe  denun- 
ciations of  monopolies,  and  prohibited  them  unqualifiedly;  and 
these  declarations  and  prohibitions  still  last  in  several  states. 
Two  illustrations  will  suffice.  We  read  the  following  utterance  in 
Article  39  of  the  Declaration  of  Rights  which  forms  part  of  the 
constitution  of  Maryland:  ''Monopolies  are  odious,  contrary  to 
the  spirit  of  a  free  government  and  the  principles  of  commerce, 
and  ought  not  to  be  suffered."  And  the  people  of  Texas  still 
cherish  Section  26  of  Article  I  of  their  constitution,  which  among 
other  things  declares  that  "  monopolies  are  contrary  to  the  genius 
of  a  free  government,  and  shall  never  be  allowed." 

While  the  spirit  of  monopoly  is  as  old  as  man,  there  was  imtil 
this  century  comparatively  littie  opportunity  for  monopoly  on 
any  large  scale  save  as  it  proceeded  from  express  grants  of  public 
authority.  These  grants  were  sometimes  made  for  public  purposes, 
and  sometimes  they  proceeded  from  mere  abuse  of  monarchical 
power,  and  were  given  to  favorites  of  royalty.  We  cannot  now 
stop  to  discuss  their  merits  and  demerits,  but  call  attention  to  the 

^  For  a  scholarly  treatment  ol  EUzabethan  monopoUts,  see  English  Paimitt 
of  Monopoly,  by  W.  H.  Price. 


MONOPOLY  191 

fact  that  they  became  odious,  and  were  prohibited  both  in  England 
and  in  this  country,  exception  being  made  of  patents,  copyrights, 
and  trade-marks.  At  the  present  time,  however,  monopolies  pro- 
ceed from  the  nature  of  industrial  society,  and  are  of  far  greater 
significance  in  our  economic  and  political  life  than  ever  before. 
The  really  serious  monopolies  of  our  day  are  far  more  subtle, 
and  have  for  the  most  part  grown  up  outside  of  the  law,  and  even 
in  spite  of  the  law. 

And  this  has  at  last  received  full  recognition  in  an  utterance  of 
the  Supreme  Court  of  the  United  States  in  which  the  idea  of  mo- 
nopoly, as  stated  in  our  definition,  is  reproduced;  ^  and  thus,  for- 
tunately, law  and  economics  are  brought  into  harmony,  as  tbey 
always  should  be. 

Complete  and  Partial  Monopottes.  —  We  have  taken  a  perfect 
type  of  monopoly  to  furnish  us  with  our  definition;  but  there  are 
imperfect  types,  or  incamfkU  monopolies^  as  well  as  comfkie 
monopolies.  We  have  a  partial  monopoly  where  there  is  a  unified 
control  aoer  a  considerable  portion  of  the  industrial  fields  hut  not 
ooer  a  sufficient  portion  to  give  complete  domination  of  the  whole 
field.  It  can  easily  be  understood  that  if  90  per  cent  of  a 
given  business,  but  no  smaller  percentage,  would  afford  control 
over  the  whole  business,  80  per  cent,  while  it  would  not  be 
sufficient  for  domination,  might  carry  with  it  an  advantage  to 
the  person  or  persons  enjoying  unified  control  over  the  80  per 
cent,  yielding  an  excess  above  competitive  returns  which  we 
may  properly  designate  as  one  sort  of  surplus  value.  Busi- 
nesses must  often  be  in  this  position,  and  a  monopoly  may 
be  obliged  to  go  through  several  stages  of  partial  monopoly  be- 
fore it  reaches  a  position  where  it  can  exercise  unified  control 
over  the  entire  business.  After  all,  it  is  a  question  of  degree  of 
control;  and  nearly,  if  not  quite  all,  economic  distinctions  are 
matters  of  degree. 

But  we  must  distinguish  sharply  between  a  condition  of  mo- 
nopoly and  other  conditions,  if  we  are  to  think  dearly  and  ac- 
curately. One  thing  which  does  not  yield  monopoly  is  mere  limi- 
tation of  supply,  and  it  is  strange  that  even  an  economist  of  the 
'lifKenpa,  J^  in  National  Cotton  Oil  Co.  v,  Texas,  197  U.  S.  Ka9. 


192  OUTLINES  OF  ECONOMICS 

ability  of  John  Stuart  Mill  should  have  found  the  essential  feature 
of  monopoly  in  this  limitation;  for  this  at  once  makes  monopoly 
cover  the  entire  field  of  economic  activity,  inasmuch  as  economic 
activity  is  for  the  acquisition  of  valuable  things,  and  things  lack 
value  whenever  their  supply  is  adequate  for  the  satisfaction  of 
all  wants.  It  is  only  things  limited  in  proportion  to  hmnan  desires 
that  have  value. 

Nor  may  we  say  that  a  valuable  thing  is  monopolized  because 
its  supply  is  limited  and  also  graded  in  quality.  Land  exists  in 
quantities  to  which  physical  nature  has  assigned  limits,  and  the 
supply  of  land  exists  in  grades  varying  in  fertility  and  desirability 
of  situation,  and  as  a  consequence  of  this  gradation  we  have  the 
rent  of  land.  Land  is  not,  however,  a  monopoly,  and  it  is  mis- 
leading to  speak  of  it  as  a  natural  monopoly.  Nowhere  do  we 
find  monopoly  either  in  the  ownership  or  in  the  cultivation  of 
land,  but  everywhere  comi)etition  —  competition  among  unequak, 
to  be  sure,  but  still  competition. 

Land  rent  is  a  differential  gain,  a  gain  due  to  the  superiority  of 
the  land  owned  by  rent  receivers  over  that  cultivated  by  those 
who  are  making  use  of  land  which  affords  nothing  beyond  returns 
to  labor  and  to  capital.  Now  we  must  distinguish  between  the 
broad  concept  of  differential  gains  enjoyed  by  those  in  competi- 
tive pursuits,  and  the  monopolistic  gains  which  are  based  on  the 
absence  of  comi)etition. 

Just  as  sharply  must  we  distinguish  between  competitive  busi- 
nesses of  large  magnitude  and  monopolies.  Department  stores 
in  no  city  in  the  world  enjoy  monopolies,  but  are  subjected  to  the 
steady,  permanent  pressure  of  competition.  There  are  those  who 
call  every  business  operating  on  a  vast  scale  monopoly,  and  would 
put  in  the  same  economic  category  a  gasworks  without  a  compet- 
itor and  a  huge  retail  dry-goods  establishment  with  rivals  at  every 
hand,  ready  to  seize  every  opportunity  for  an  advantage  over  it, 
and  certain  to  ruin  it  if  its  managers  relax  their  intense  activity 
and  watchfulness. 

Classificatioii  and  Causes  of  Monopolies.  —  As  our  first  step  in 
the  treatment  is  the  formulation  of  the  idea  of  monopoly,  our 
second  must  be  the  classification  of  monopolies  with  an  examina- 


MONOPOLY  193 

tkm  of  their  caiises.  Comparatively  little  can  be  said  about  mo- 
nopolies that  is  applicable  to  all  monopolistic  businesses.  Here, 
as  everywhere  else  in  economics,  we  need  analysis. 

Many  classifications  of  monopolies  have  been  given,  but  we  must 
here  confine  ourselves  to  the  three  which  seem  of  the  greatest 
importance  to  the  general  student. 

First  Classification 

A.  Public  Monopolies. 

B.  Private  Monopolies.* 

C.  Quasi-public  Monopolies. 

Public  Monopolies  are  those  businesses  which  are  owned  and 
operated  by  some  political  unit,  and  this  pditical  unit  is  the  direct 
and  immediate  beneficiary;  in  other  words,  to  this  political  unit  in 
the  first  place  flow  all  the  benefits  of  monopoly.  A  Private  Mo- 
nopoly, on  the  other  hand,  is  a  monopoly  owned  and  operated  by  a 
private  person ;  it  may  be  a  natural  person,  —  that  is,  a  human 
being,  —  or  some  association  of  natural  persons,  as  a  partner- 
ship, or  it  may  be  a  private  corporation.  In  this  case  the  first  and 
immediate  beneficiary  of  the  benefits  of  the  property  and  business 
is  the  private  person,  although  large  benefits  may  flow  to  the 
general  public. 

It  is  believed  that  this  great  fundamental  distinction  between 
public  and  private  monopolies  is  essential  both  to  clear  thinking 
and  to  sound  public  policy.  Whoever  undertakes  to  tell  us  what 
is  true  about  monopolies,  and  what  is  wise  for  society  to  do  with 
respect  to  monopolies,  must  make  it  plain  whether  he  is  talking 
about  public  monopolies  or  whether  he  is  discussing  private  mo- 
nopolies. We  may  also  have  an  intermediate  class  designated  as 
Quasi-public  Monopolies.  An  illustration  is  afforded  by  state- 
owned  railways  operated  by  private  corporations;  although  prac- 
tically, in  the  United  States,  these  differ  in  their  management 
Hide  from  the  privately  owned  railways. 

>  In  our  dassificationB  the  co5rdinate  classes  will  be  Indicated  by  the  same 
letters  or  marks.    The  capital  letters  will  indicate  the  chief  classes;  the  Roman 
numerals,  dasses  subordinate  to  them;  and  the  Arabic,  classes  subordinate  to 
those  indicated  by  Roman  numerals,  and  so  on. 
o 


194  OUTLINES  OF  ECONOMICS 

# 

Second  Classification,  — The  second  classification  of  monopolieB 
is  made  with  reference  to  the  source  of  monopoly  power,  and  is 
based  upon  a  different  principle  of  classification,  so  that  this  second 
classification  will  cut  across  the  first  We  have  again  two  main 
classes,  and  these  are:  A,  Social  Monopolies;  B.  Natural  Mo- 
nopolies.   These  are  further  classified  as  follows:-^ 

A,  Social  Monopolies. 

I.   General  welfare  monopolies. 

1.  Patents. 

2.  Copyrights. 

3.  Trade-marks. 

4.  Public  consumption  monopolies. 

5.  Fiscal  monopolies. 

n.   Special  privilege  monopolies. 

I.  Those  based  on  public  favoritism. 
3.  Those  based  on  private  favoritisoL 

B,  Natural  Monopolies. 

I.  Those  arising  from  limitation  of  supply  of  raw  ma- 
terial. 

IL  Those  arising  from  peculiar  properties  inherent  in 
the  business. 

III.  Those  arising  from  secrecy. 

Social  Monopolies.  —  Businesses  are  social  monopolies  when  ihey 
are  made  monopolies  not  by  their  own  inherent  properties,  but  either 
by  legislative  enactment  or  by  forming  so  dose  a  connection  with 
great  natural  monopolies  that  ihey  partake  of  the  nature  of  the  latter. 

As  already  stated,  in  old  dmes  kings  and  queens  frequently 
granted  exclusive  business  privileges  to  favored  persons,  and  per- 
mitted no  one  except  those  named  to  engage  in  such  undertakings. 
Such  monopolies,  however,  became  so  odious  that  sovereigns  were 
compelled  to  cease  granting  them.  Governments  still  create 
exclusive  privileges  by  patent  and  copyright  laws,  but  they  do  so 
in  behalf  of  the  general  public.  Authors  and  inventors  are  given 
exclusive  rights  over  their  productions  for  a  limited  period.  These 
monopolies  have  justified  themselves  through  the  stimulus  which 
they  have  given  to  invention  and  authorship. 


MONOPOLY  195 

The  trade-mark  is  a  legal  monopoly  similar  to  the  patent  and  the 
copyright  In  connection  with  lavish  advertising,  trade-marks 
in  recent  days  have  been  made  the  basis  of  enormous  pro&ts.^ 

Public  consumption  monopolies  and  fiscal  monopolies  call  for 
a  word  of  special  comment.  They  are  to  be  distinguished  the  one 
from  the  other  only  by  the  object  which  the  government  has  in 
view  in  establishing  them.  If  the  government  manages  for  itself 
or  grants  to  another  a  monopoly  of  the  liquor  tra£5ic  with  the  object 
of  regulating  the  consumption,  the  monopoly  is  a  public  consump- 
tion monopoly.  If,  on  the  other  hand,  the  chief  object  is  not 
regulation,  but  income,  the  monopoly  is  a  fiscal  one.  Often  the 
two  objects  are  so  blended  that  it  is  difficult  or  impossible  to  say 
to  which  class  the  resulting  monopoly  belongs. 

Our  classification  names  two  kinds  of  special  privilege  monopo- 
lies. Those  monopolies  which  are  due  to  special  tariff  advantages 
or  to  other  legislation  are  rightly  said  to  be  hosed  on  public  favorit- 
ism. The  other  class  of  special  privilege  monopolies  consists  of 
those  which  grow  up  through  special  favors  granted  by  other 
monopolies,  especially  natural  monopolies,  such  as  railways. 

Natural   Monopolies,  —  Natural  monopolies  are   those  which 

depend  for  their  existence  on  natural  forces  as  distinguished  from 

social  arrangements.    They  grow  up  independentiy  of  man's  will 

and  desire,  and  sometimes  even  in  direct  opposition  to  it.    The 

words  which  we  have  used  in  our  classification  wiU  sufficienfly 

explain  the  different  sources  from  which  they  arise.    By  far  the 

most  important  of  all  monopolies  are  natural  monopolies  of  the 

second  class,  chief  among  which  are  the  following:  wagon  roads 

^  The  full  treatment  of  trade-marks  involves  theoretical  points  which  would 
necessitate  a  discussion  too  lengthy  for  the  present  treatise.  They  are  used  largely 
in  competitive  businesses,  and  help  to  establish  what  is  termed  good-will.  They 
are  an  aid  to  the  shrewd  and  capable  in  the  general  effort  to  escape  what  may  be 
designated  as  the  "dead  level*'  of  competition.  They  are  a  monopoly  not  in  the 
sense  of  giving  exclusive  control  of  one  sort  of  business,  but  in  the  strictly  legal 
sense  that  no  one  else  may  use  them.  A  clever  device,  coupled  with  excellence  and 
advertising,  may  have  very  high  value.  The  purchaser  of  o3rsters,  for  example, 
may  feel  that  when  he  buys  oysters  of  a  particular  ''brand"  (trade-mark),  he  is 
getting  ojaters,  plus  something  else ;  or,  in  other  words,  not  merely  oysters  such 
as  others  sell,  but  a  peculiar  excellence  which  can  nowhere  else  surely  be  had. 
It  is  merely  this  "plus  something  else"  that  is  a  monopoly.  Great  importance  is 
attached  thus  to  "establishing  a  brand." 


196  OUTLINES   OF  ECONOMICS 

and  streets,  canals,  docks,  bridges  and  ferries,  waterways,  harbors, 
lighthouses,  railways,  telegraphs,  telephones,  the  post  office, 
electric  lighting,  waterworks,  gas  works,  street  railways  of  all 
kinds.  Whenever  there  is  a  decided  incremetU  in  gain  resulHng 
from  cembinaiion^  we  have  a  tendency  to  monopoly  which  will  over- 
came aU  obstacles.  This  increment  of  gain,  which  is  the  cause  of 
monopoly^  is  always  present  in  businesses  that  occupy  peculiarly 
favorable  spots  or  lines  of  land,  and  that  furnish  services  or  com- 
modiHes  which  must  be  used  in  connection  with  the  plant.  This 
may  be  said  to  be  the  law  of  natural  monopolies. 

Many  economists  believe  that  combination  and  production  on  the  largest 
possible  scale  give  a  decided  increment  in  gain,  and  thus  produce  monopolies 
to  be  designated  as  "capitalistic  monopolies."  The  question  really  turns 
upon  the  degree  of  growth  of  a  business  unit  which  adds  to  the  rate  of  gain ; 
and  the  position  is  taken  in  this  book  that  in  most  kinds  of  business  the  point 
of  maximum  efficiency  is  reached  long  before  the  point  of  monopoly  is  reached. 

One  or  two  very  cogent  reasons  may,  however,  be  stated.  An  exhaustive 
study  of  the  cases  dted  in  support  of  the  alleged  tendency  to  monopoly  in- 
herent in  large  capital  has  failed  to  reveal  a  single  one  in  which  the  monopoly 
did  not  enjoy  one  or  many  of  those  monopoly  advantages  which  we  have  al- 
ready mentioned  and  explained.  Moreover,  many  cases  in  which  the  pos- 
session of  large  capital  seemed  on  the  surface  to  be  a  dominating  influence, 
have  been  cases  in  which  the  monopoly  was  so  short-lived  as  to  furnish  little 
support  to  the  argument  of  those  who  cited  them.  After  all,  whatever  may  be 
the  advantage  conferred  by  large  capital,  we  must  remember  that  capital  is 
so  plentiful  that  one  gigantic  plant  can  always  find  a  rival  whenever  a  slight 
margin  of  profit  invites  its  establishment. 

Our  conclusion,  then,  may  be  stated  as  follows:  There  is  a  great 
and  growing  field  of  industry  in  which  competition  is  not  natural 
or  permanently  possible,  for  reasons  explained  in  the  text;  there 
is  another  field  within  which  monopoly  does  not  and  cannot  ezist, 
and  within  which  social  monopoly  is  unlikely  to  arise. 

Third  Classification 

A.  Local  Monopolies 

These  are  monopolies  extending  over  a  relatively  small  area. 
The  gas  supply  of  any  city  is  an  illustration.  There  are  various 
monopolies  which  are  confined  to  a  single  locality.    Then  there 


MONOPOLY  197 

are  temporary  local  monopolies  which,  under  peculiar  exigencies, 
may  arise.  Two  young  men  in  Chicago  a  few  winters  ago 
cornered  the  market  on  eggs,  and  made  fifteen  thousand  dol- 
lars out  of  the  operation.  The  weather  was  so  cold  that  eggs 
could  not  be  shipped  to  the  city,  and  for  a  few  days  these 
speculators  had  a  monopoly. 


B.  National  Monopolies 
C.    International  or  Universal  Monopolies 

There  have  been  various  attempts  to  seciire  universal  monopoly, 
of  which  the  copper  monopoly  of  1889  affords  an  illustration. 

These  are  more  or  less  arbitrary  divisions,  because  a  protective 
tariff  may  enable  a  monopoly  to  exist  in  one  country  when  the 
same  article  or  service  is  not  monopolized  in  another  country. 
There  are  attempts  to  establish  monopolies  beyond  the  nation, 
but  how  large  will  be  the  number  of  cases  in  which  success  will 
be  achieved,  remains  to  be  seen.  There  is  no  doubt  that  the  oil 
companies  of  the  United  States  and  Russia  are  endeavoring  to 
establish  an  international  and  even  a  world  monopoly. 

The  area  of  monopoly  is  a  topic  that  in  an  extended  treatise  would 
require  an  elaborate  treatment,  for  it  has  a  significance  which  has 
as  yet  not  been  an3rwhere  adequately  presented.  We  can  narrow 
down  the  area  of  monopoly  until  nearly  every  producer  of  goods 
or  seller  of  services  has  a  monopoly.  A  may  be  the  only  seller 
of  shoes  on  a  particular  street  of  his  city  or  in  a  particular  block 
or  building  on  hb  street.  No  one  is  especially  disturbed  or  in- 
convenienced by  a  monopoly  of  so  limited  an  area.  In  general, 
it  may  be  said  that,  — 

The  larger  the  area,  other  things  being  equal,  the  more  significant 
is  the  numopoly. 

Monopoly  Price.  —  Price  in  general  depends  upon  marginal 
utility,  and  that  depends  upwn  the  intensity  of  desire  and  upon 
the  difficulty  or  ease  of  obtaining  goods  or  services  for  the  satis- 
faction of  desire.  If  payment  is  made  in  money  or  in  money  in- 
struments, price  depends  on  the  relative  abundance  of  the  supply 


198  OUTLINES  OF  ECONOMICS 

of  money  and  its  instruments.^  We  see  that  price,  then,  depends 
upon  limitation  of  supply  in  all  cases,  because  it  is  the  limitation 
of  supply  which  gives  us  the  utility  of  a  particular  concrete  good,  or 
our  marginal  utility.  As  the  supply  increases,  the  desires  satisfied 
are  of  a  lower  and  lower  order  until  the  point  of  satiety  is  reached, 
where  all  desires  are  satisfied  and  where  value  entirely  disappears. 

We  now  reach  the  chief  peculiarity  of  monopoly  price,  which  is 
found  in  the  power  of  the  monopolist  over  supply.  The  very  con- 
cept of  a  unified  control  over  business  means  power  to  control 
and  limit  supply.  Supply  is  limited  by  the  monopolist  at  that 
point  where  he  gets  the  greatest  returns,  and  if  he  receives  surplus 
returns,  they  are  due  to  the  fact  that  he  is  in  a  position  to  compel 
men  to  forego  satisfaction. 

Under  competition  in  the  case  of  freely  reproducible  goods, 
supply  is  limited  by  cost  of  production.  If  the  cost  of  production 
were  nothing,  there  would  be  no  limit  to  supply  until  all  wants 
were  satisfied.  Competition  in  its  very  nature  means  that  supply 
is  not  within  the  control  of  a  single  producer;  and  this  fact  ^ves 
us  the  protection  that  competition  affords  to  society;  and  it  is 
on  this  account  that  the  courts  regard  competition  as  one  of  the 
main  pillars  of  our  present  social  order. 

Now  as  the  supply  is  not  determined  as  under  competition  by 
the  cost  of  production,  it  is  determined  by -the  desire  of  the  mo- 
nopolist to  secure  the  maximum  of  revenue  possible  in  the  existing 
state  of  demand.  In  other  words,  the  monopolist,  freed  from  com- 
petition, and  governed  only  by  demand,  is  able  to  adjust  supply  to 
demand  in  such  a  way  that  the  price  will  stand  at  the  point  of 
highest  net  return.  In  determining  what  price  shall  be  fixed  and 
what  quantity  supplied,  —  in  other  words,  what  is  the  point  of 
highest  net  returns,  —  the  monopolist  consciously  or  imconsdously 
proceeds  according  to  the  following  principles :  — 

I.  He  realizes  that,  other  things  being  equal,  every  increase  of 
his  monopolized  product  will  result  in  lowering  its  price,  while 
every  decrease  in  the  supply  will  result  in  a  higher  price. 

'  And  abundance  of  money  will  depend  upon  mai^giinal  cost  of  production  of 
the  precious  metals.  This  subject  is  treated  elsewhere,  as  also  the  general  subject 
of  price,  which  is  here  presented  only  iu  abbreviated  form  for  present  purposes. 


MONOPOLY 


199 


2.  Of  the  expenses  of  production  there  are  some  that  in  a  well- 
organized  business  vary  roughly  in  proportion  to  variation  in  the 
supply.  It  will  frequentiy  happen  that  if  the  product  is  doubled, 
the  cost  of  raw  material  will  be  about  doubled.  Such  ejq)enses 
may  be  called  variable  expenses. 

3.  Other  expenses,  within  the  limits  of  maximum  efficiency, 
remain  more  nearly  the  same,  no  matter  what  may  be  the  amount 
of  the  product.  These,  called  the  fixed  or  consiaiU  expenses, 
include  the  cost  of  plant,  salary  of  superintendent,  interest  on 
bonds,  etc. 

It  follows  from  the  above  principles  that  the  monopolist,  in  a 
case  of  this  kind,  since  he  is  seeking  the  maximum  net  revenue 
from  his  business,  will  pay  little  attention  to  fixed  charges  in 
establishing  the  price  of  the  product,  but  will  consider  chiefly 
the  variable  expenses  in  connection  with  the  probable  demand 
for  his  goods  at  various  points.^ 

An  Illustration.  —  We  may  illustrate  by  an  example  the  opera- 
tion of  these  principles.  The  following  table  shows  in  parallel 
columns  the  number  of  sales  of  a  monopolized  good  at  different 
prices;  the  total  resultant  earnings;  the  variable  expenses;  the 
fixed  expenses;  the  total  expenses;  and  finally,  the  net  revenue  or 
monopoly  profit :  — 


$.10 
.09 
.08 
.07 
.06 

•OS 
.04 


600,000 
800,000 
1,200,000 
1,800,000 
2,500,000 
3,500,000 
5,500,000 


$  60,000 
72,000 
96,000 
126,000 
150,000 
175,000 
220,000 


I03 
•03 
•03 
.03 
•03 
.03 
•03 


$  18,000 
24,000 
36,000 
54,000 

105,000 
165,000 


$50,000 
50,000 
50,000 
50,000 
50,000 
50,000 
50,000 


$  68,000 
74,000 
86,000 
104,000 
125,000 
i55»ooo 
215,000 


-$8,000 
—  2,000 
+  10,000 
+22,000 
+  25,000 
+  20,000 
+  5»ooo 


>  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  illfistration  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  foiur 
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  imits,  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.' 

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  pricb  .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 

'  See  references  to  literature  at  the  close  of  the  chapter.  See  also  the  treatment 
cf  Constant  and  Variable  Expenses  in  Chapter  XH  on  Value  and  Price. 


MONOPOLY  20I 

draw  from  tha  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  weU-being,  and 
ihe  more  readily  wealth  is  generally  expended,  the  higher  will  be 
the  monopoly  price  which  will  yidd  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, 
axe  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  retiuns,  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  modem  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  3deld  the  largest 
net  retiuns.  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  dass  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  ^'  parior  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  ao3 

Nor  Deed  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, 
bom  (dace  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 
iskwer  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  su^ests  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 
dass  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 
woiid  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 


fto4  OUTLINES  OF  ECONOMICS 

9it  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  aoj 

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  \mits  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  conmiunity,  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."  ^  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  commimity  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 

^  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. 
Orer  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- 
atioDS  of  a  different  kind  from  those  mentioned  in  the  text. 


2o6  OUTLINES   OF  ECONOMICS 

price  from  that  we  have  considered.  We  have  a  competitive  class 
price  which,  if  the  competition  is  perfect,  3delds  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  oj 
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  axe  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 
maximimi  of  efficiency,  the  gains  of  competition  in  alertness  and 
inventiveness,  stimulated  by  rivalry,  have  recentiy  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  b  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.^ 

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  conmiissions  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  Conmiission  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  Conmiission),  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. 


aoS  OUTLINES   OF  ECONOMICS 

per  mile.  But  even  the  decision  of  the  Commission  (which  was 
accepted  by  the  railways)  was  a  reduction  of  over  i6  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  modem  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  coimtry  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  raOways,  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  fortimes,  and  point  to  monopoly  as  a  prime  cause  of  the  mod- 
em 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  modem  nations  as  confirmation. 

We  may,  to  begin  with,  admit  that  unregulated  monopolies  in 
private  hands  have  alwajrs  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  modem  democracy  and  which  manifests  itself  as  a  red 


2IO  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  modem  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  conmiunity  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 
^  Bullock,  Essays  on  the  Monektry  History  of  ike  United  SMeSt  p.  67. 


MONOPOLY  an 

and  prudent  management  in  the  field  of  competition.^  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.  Imprudentiy  invested  capi- 
tal is  lost  in  the  field  of  competition;  and  when  it  is  imprudentiy 
and  unwisely  invested  in  the  field  of  monopoly,  it  cannot  justiy 
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  ndlway  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  costiy  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  smaU,  isolated  shop  to  such  a  mammoth  concern  as 
the  United  States  Steel  Corporation,  owning  an  appreciable  propor- 

>  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 
rAle.  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  laiige  measure  responsible  for  high  capitalization.  It  would  not  be  right 
to  place  upon  holders  of  these  properties  all  the  burdens  of  a  mistaken  pubb'c 
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 
presong  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 
legblative  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  AUD  EXERCISES 

z.  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  formeriy? 
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  f  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  il3 

that  would  accrue  from  the  establishment  of  such  a  monopoly  in  the  United 
States?  any  evil  effects? 

zo.  Define  monopoly  price  and  show  how  it  is  determined. 

II.  What  does  class  price  mean?  Compare  monopoly  class  price  with 
competitive  class  price.     Explain  *^  use  price." 

z  2.   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? 
What,  if  any,  to  poverty? 

15.  What  is  the  wise  public  policy  with  respect  to  monopolies  ? 

16.  Describe  the  relation  of  trusts  to  monopolies. 

LITERATURE 

Bakes,  C.  W.    Monopolies  and  the  People^  Part  II. 

Bullock,  C.  J.    Introduaion  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  Riplejr's  Trusts,  Pools, 

and  Corporations,  pp.  428-473. 
Ely,  R.  T.    Monopolies  and  Trusts,  Chap.  Ill,  pp.  103-104 ;  also  Chap.  VI, 

pp.  339-331. 
HoBSON,  J.  A.    Evolution  of  Modern  Capitalism,  new  and  revised  ed.,  2907, 

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. 


CEAPTER  XIV 
MONEY 

The  vast  system  of  valuatioii  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  315 

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  accefftabiliiy  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  instnmients,  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  pa)rment  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  an3rthing  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,  sheUs,  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. 

Metak,  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  metak  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.^ 

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  metak,  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 

^The  names  of  many  ancient  coins  and  of  some  modem  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  recoinagc^ 
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  ciurency  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.^  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  k  the  "government  stamp,"  rather  than  the 
metallic  content,  that  ^ves  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 
1000  ounces  of  biillion  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  figuratiye  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 

>  Under  Phflip  the  Fair,  of  France,  the  seigniorage  chai^ge  went  as  high  as 
50  per  cent.     Charges  of  from  a  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  bulUon  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  thdr  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.^  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  offidal  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  brdlion;  these  and  other  similar  methods  were 
tried,  but  1^  to  no  avail.  Cf .  W.  Lexis,  article  "  MUnzwesen/'  in  HandwMerbuch 
ier  Staatswissttuchaften. 


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.* 
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  ^^^  ^^  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.* 

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- 

'  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  j^3  1 7 J.  gd.  per  ounce.  An  ounce  of  bullion  makes  j^3  17*.  lo^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. 

'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  z  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  di£Ferent  functions, 
but  merely  two  di£Ferent  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  OUTUNES  OF  ECONOMICS 

measuring  values,  as  there  were  units  of  value.^  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  vahie  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  imits,  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  oiu:  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- 

*  An  instructive  bit  of  monetary  experience  may  be  found  in  the  efforts  of 
some  of  the  colonies  to  reduce  this  foreign  money,  especially  Spanish  numey, 
to  the  English  system  of  pounds,  shillings,  and  pence,  in  which  accoimts  were 
generally  kept.  They  were  not  content  with  a  simple  official  statement  of  the 
actual  ratios  between  the  different  value  imits,  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  accoimts  were  kept.  This  was  the  origin  of  the  now  rapidly  vanishing 
use  of  the  word  "shilling"  as  equivalent  to  la^  cents  in  some  localities  and  to 
z6f  cents  in  others.  The  student  may  find  an  instructive  parallel  in  this  eaqieri- 
ence  and  the  official  statements  of  coin  values  by  which  sovereigns  tried  to  retain 
their  seigniorage  profits. 


MONEY  323 

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  significarU  thing  is  that  all  other  kinds  of  money  are  eocchange- 
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  * ;  —  these 
are  the  fundamental  facts  of  our  monetary  system. 

'  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 
unU  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 J  grains  of  pure 
silver  in  a  silver  dollar  was  about  89  cents.  The  value  of  silver  de- 
clined steadily  until  1902,  when  371 J  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  concurrendy  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  modem  times  are  gold  and 
sUver.  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 
alver. 

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  bdng 
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  imder  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,*  disappear  from  circulation, 
being  hoarded,  melted  down,  or  exported,  and  the  other  metal  will 
take  its  place  as  the  actual  standard  of  value. 

*  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  condidon 
of  the  debased,  worn,  and  mutilated  coinage  bequeathed  to  her  by  her  predecessors. 


MONEY  1127 

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  miarket  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 
sdentiffc  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  fluctuadng 
annual  production  of  the  precious  metak,  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  flxed  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 
fX)ssible,  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  1792.^  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 

*  The  act  of  1799  followed  in  detafl  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  foimd  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. 

Sflver  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  a",  '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 


23©  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,  ^^^ 
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  16  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  16.6  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.^  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- 

>  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:  (x)  Cessation  of  an  extraordinary  de- 
mand for  silver  in  India  which  had  existed  since  1850;  (a)  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  pricea  of  commodities. 


MONEY  231 

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  piurchase  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  thoi^h  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  imlimited  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  thdr  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  settie  an 
adverse  balance  of  trade,  and  the  government  found  difl&culty  in 
maintaining  its  own  gold  reserve,  which  was  already  seriously 
threatened  by  a  decline  in  customs  receipts,  accompanied  by  an  in- 
crease in  federal  expenditiures.  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^  J^^c  ^^  t^c  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  for  that  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  233 

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 
piurchasing  power  more  than  they  had  borrowed.* 

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  amoimt  far  beyond  the  resoiurces  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.^  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  imlimited  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  agitadon  for  the  unlimited  coinage  of 
silver,  had  it  not  been  for  the  return  of  prosperous  conditions, 

^This  aigument  raises  the  problem  of  the  standard  of  d^erred  payments, 
which  is  to  be  considered  in  Chapter  XVI. 

'  Cf.  C.  J.  Bullock,  Essays  in  the  Monetary  History  of  the  United  States, 
Parti. 


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  de^itely  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  Dcxminance  of  the  Gold  Standaxd.  —  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  Settiements.^ 

Goveniment  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  instrmnents  which  bind  the  government  to 
pay,  and  usually  to  pay  on  demand,  equivalent  amounts  of  metallic 
money,  —  usually  standard  money. 

Government  paper  money  ako  di£Fers  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, 

*  Report  of  the  Director  of  the  Mint,  in  Finance  Report,  1907,  p.  297. 


MONEY  235 

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 
recdve  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.*  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  181 3  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  237 

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  1861,  moved  by  the  absolute  necessity  of  providing  some  kind 
of  money  for  the  federal  treasury.  Congress  authorized  the  issue  of 
$150,000,000  in  legal  tender  notes,^  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. 
AU  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  inMay,  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 
'  Including  the  "demand  notes,"  which  were  now  made  le^^al  tender. 


238  OUTLINES  OF  ECONOMICS 

difficulties  of  1 890-1 893,  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 
$150,000,000,  to  be  held  against  them  to  insure  their  redeemability. 
If  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  amoimt 
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 


239 


r^umption  of  specie  pa3nnents.  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,  ^^^  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  *  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.'  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  flnandal 
crisis  in  1873,  ^^d  the  return  of  prosperous  conditions  in  the  last  years  of  the 

*  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* 


AVEEACE 

July 

Wholesale 

Peices  ■ 

Average  Annual  Prices' 

YXAS 

Annual  Price 
OF  Gold  in 

Average 

Wages  4 

Gseenbacks 

Wholesale 

ReUU 

i860 

100 

100 

100 

100 

I86I 

95 

94 

107 

99 

i86a 

"33 

120 

109 

131 

104 

1863 

145-2 

155 

148 

168 

119 

1864 

203.3 

236 

225 

215 

142 

1865 

1573 

183 

224 

219 

155 

1866 

140.9 

191 

203 

208 

164 

1867 

138.2 

170 

177 

193 

167 

1868 

1397 

165 

180 

190 

170 

1869 

133-0 

158 

172 

177 

179 

1870 

114.9 

145 

156 

166 

179 

1871 

111.7 

137 

144 

^5S 

184 

187a 

iia.4 

139 

138 

151 

185 

1873 

113.8 

140 

143 

148 

183 

1874 

111.2 

138 

144 

US 

17s 

1875 

114.9 

129 

134 

140 

163 

1876 

iii.S 

118 

120 

13s 

153 

1877 

104.8 

114 

117 

134 

143 

1878 

100.8 

99 

99 

127 

142 

1879 

lOO.O 

98 

93 

123 

139 

'  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  oi  its  price  in  x86o,  and 
then  averaging  the  various  relaUve  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. 

■  pa  commodities.  s  21  commodities.  *  For  78  establishments. 

greenback  period.^  (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. 

^  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  mediiun  of  exchange. 


MONEY  241 

Wages,  in  turn,  axe  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  pa3rments  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 
raUodf "  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  Questiims  a$td  Rs/erences,  see  thefoUowing  chafUr,^ 


CHAPTER  XV 
CREDIT  AND   BAIVKIN 6 

Ci«dit  TtaiiMCtioas.  — 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  ^n  the  sense  of  generally  acceptable 
money  instnunents).  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  amoimt  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  oi 
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  hsuid  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.* 

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.'  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. 

*  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. 

'The  London  Clearing  House  clears  for  all  England  in  a  very  simple  and 
efficient  way.  A  country  bank  sends  its  daUy  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  accomits.  The  mere  territorial  extent  of  the 
United  States  makes  such  a  scheme  unworkable  here.  Various  proposals  have 
hten  made,  however,  for  central  clearing  houses  that  will  make  clearances  for 
limited  districts. 


240  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  credU.  Now, 
his  personal  credit,  his  power  of  purchasing  things  without  immedi- 
ate payment,  will  depend  to  some  extent  on  his  personal  abiUty  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  maybe  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  AND  BANKING  347 

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.^  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  hb  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  ''discoimted"  by  his  banker.  If  the 
note  is  for  sixty  days,  for  example,  the  business  man  3delds  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.'  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 

>  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. 

*  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 b  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  fonn 
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;  *  (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  amoimt  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  proEts  which  they  have  put  back  into  the  business  (**surplus")t  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  conmierdal 
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  wiU  replenish  the  reserve.*  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  discoimts, 
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 

^  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  dear  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  251 

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.^  In  the  panics  of  1814,  1837,  and 
1857  but  few  banks  maintained  specie  payments.  Even  so  late  as 
i860,  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, 

>  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  ol  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  maintdn  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"* 
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 

'  Including  all  kinds  of  United  States  money  except  subsidiary  silver,  minor 
coins,  and  national  bank  notes. 


CREDIT  AND   BANKING 


253 


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  ISfarket.  —  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  33,  1907* 


Location 


No.  OF 
Banks 


Deposits' 


Reszsvk 


Classification  of  Rxsbxvb 


c  c  <° 


New  York 

Chicago 

St.  Louis 

Other  reserve  cities 
Country  bonks  . . 

Total 


38 

14 

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 


165.7 
226.7 


2.6 

0.5 
0.7 

6.3 
17.2 


6544 


5256.1 


1121.4 


21-3 


701.6 


392.4 


27-3 


>  Camjikd  from  Report  of  the  Comptroller  of  the  Currency,  1907,  pp.  M9-9J4. 
•  MiUioDB  of  dollars.  » Per  cent. 

national  banks  in  the  United  States  were  in  the  vaults  of  thirty- 
eight  New  York  banks.^  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  nuu-ket  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 

^  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  ^  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  fmancial  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 
modem  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. 

>  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  355 

S^MCuIation  and  the  New  York  Honey  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  n 

Loans  and  Discounts  of  New  York  National  Banks  on  Specified 

Dates* 

(In  millioos  of  dollars.) 


Charactkk  or  Loan 

1890 

X896 

xgot 

1906 

On  demand 

Z02 

43 
152 

no 

69 

144 

279 
129 
203 

303 
149 

349 

On  time,  with  collateral  security 

On  time,  secured  by  commercial  paper 

>  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  partiy  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  ^  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. 

^  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. 


2S6  OUTUNES  OF  ECONOMICS 

When  the  reserve  is  below  the  legal  limit  demand  loans  have  to  he 
called  in  large  quantities  in  order  to  enable  the  banks  to  meet  press- 
ing demands  for  credit  on  the  part  of  their  regular  customers.' 
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.^ 

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 

>  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. 

'  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  1 901-1906  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  of 
PoUHeal  Economy,  Vol.  XVI,  pp.  273-298. 


CREDIT  AND  BANKING  257 

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.^ 

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  amoimt  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 

^  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,"  AtiantU 
MoiUhly,  Vol.  93,  pp.  183-193. 

8 


2S8  OUTLINES  OF  ECONOMICS 

there  were  1255,  which  held  on  June  lo  of  that  year  $167,000^000  out  of  a 
total  treasury  balance  of  $433,000,000.  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  Moven^ent  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,  »f or  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. 

^  See  Finance  Report,  1906,  p.  41. 


CREDIT  AND  BANKING  359 

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 


26o 


OUTLINES  OF  ECONOMICS 


frequently  reflected  in  difficulties  in  the  money  maxket  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  m,  the  creation  of  the  two  per  cent 
bonds,  payable  in  193O1  stimulated  the  issue  of  bank  notes,  because 


TABLE  III 

Amottnts  of  Bank  Note  Circitlation  secured  by  Specified 
Classes  of  Bonds:  1900-1907' 


Sbcurtty 

March  13, 
1900 

Oct.  31, 
1903 

Oct.  31, 
1904 

Oct  31, 
190S 

Oct  31. 
1906 

Oct  31, 

1907 

Loan  Z908,  3'8  . . 
Loan  1907.  4*s  •  • 
Loan  1935,  4*8  . . 
Loan  1904,  5'«  ■ . 
Loan  1891,  3*8  . . 
Consols  1930, 3*8 
Panama  Canal . . 

$56,164,830 

130,303,350 

14,697350 

ax. 996.350 

30,490,150 

fii79r.58o 

3,797,300 

1,4x0,100 

718,650 

$1,933,940 
S.857.S00 
1,791,600 

$3,315,540 
4.050,350 
4,465.000 

$3,373,700 
35,134,650 
4,603,100 

$6,473,080 
10,733,900 

376,003,300 

416,973,750 

483,181,900 

493,170,650 
14,483,080 

533,543.550 
x7.a45.380 

Total 

3431651.430 

383,736,830 

436,544.700 

493.9x3,790 

S39,653.x8o 

566,994,910 

'  From  Report  d  the  Comptroller  of  the  Currency,  Finance  Report,  1907,  p.  390. 

the  federal  tax  b  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  261 

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  leas  than 


202  OUTLINES  OF  ECONOMICS 

$5,000,000.  Banks  in  such  associations  can  issue  notes  to  an  auKmnt  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  iralue  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  &rst  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- 
gendes.  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  ^ry  nature  inelastic. 

A  Cential  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;  ^  they  hold  the  govem- 

*  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  ligfati  which  Hi 
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  imder  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  Preaent  Position  of  State  and  Private  Banks.  — The  figures 
in  Table  TV  give  only  a  partial  idea  of  the  present  position  of  bank- 

TABLE  IV 

NuiCBER  OY  Banks  and  Amottnt  of  Deposits  in  Specified  Kinds  of 

Banks:  1907^ 


Dsposm 


State  banks. 

Savings  banks 

Private  banks 

Loan  and  trust  companies 
National  banks 

Total 


$3,068,600,000 

3,495,400,000 

151,100,000 

9,061,600,000 

4,322,900,000 


$13,099,600,000 


s  FVom  RepMt  of  Comptroller  of  tbe  Currency,  Finance  Report,  xgo?,  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  oorporations  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. 


QUESnOVS 

I.  Do  you  make  a  loan  to  the  government  when  you  receive  greenbacks 
as  money  ? 

3.  Compare  the  history  of  the  assignais  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  conmiodity  ?  iron  ? 
platinum  ?    diamonds  ? 

8.  Would  it  be  possible  to  maintain  a  seigniorage  of  zo  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  rtandard  of  vaiue^that  could  not  be 
used  as  a  medium  of  exchange? 

RBFERBKCBS 

Bttllock,  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  Modem  Banks  of  Issue. 

Dewey,  D.  R.    Financial  History  of  the  United  States.     (See  index.) 

Director  of  the  Mint,  Annual  Report. 

DuNBAK.    Chapters  on  the  Theory  and  History  of  Banking. 

Hepbxtsn,  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. 

KiNLEY,  David.     The  Independent  treasury  System;  also,  Money. 

Knox,  J.  J.    History  of  Banking  in  the  United  States,  and  United  States  Note». 

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, 

Ecc»iomics,  Vol.  I.) 


266  OUTLINES  OF  ECONOMICS 

NoYES,  A.  D.    Thiriy  Years  of  American  Fittance. 

Pratt,  S.  S.     The  Work  of  WaU  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.    Mon^y  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  nm  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  inmiediate  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  foimded,  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  imder  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  enablod  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  amoimt  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- 
change. Without  understanding  the  exact  process  we  know  that 
prices  are  gradually  increased  under  such  conditions,  there  bdbg 
an  unmistakable  tendency  to  adjust  them  to  the  change  in  the 
''dollar"  or  other  unit  of  the  medium  of  exchange.^  The  lising 
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 

*  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  ooint 
from  which  scipniorage  had  been  taken.  This  Is  the  explanation  of  the  rise  of 
P'-iccs  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  modem  large-scale  industry  in  the  United 
States  were  laid  in  the  period  between  the  Civil  War  and  the  panic 
of  1873.  ^^^  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  medieval 
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 
wdl-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.* 

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.*  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  dear  that  money 
serves  also  as  (i)  the  medium  of  exchange  and  measure  or  denominator  of  value, 
(3)  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. 

*  Of,  the  table  on  p.  940. 


PROBLEMS   IN  MONEY  AND   BANKING  273 

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 


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  frequendy  in  a  given 
year,  —  and  the  geometric  average, —  the  «th  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. 

T 


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  i860.  For  the  period  1860-1880  Mitchell's*  are  the  best; 
the  period  from  1890  to  the  present  is  covered  by  the  United  States 
Bureau  of  Labor,*  and  for  the  gap  from  1880  to  1890  Falkner's  are 
available.'  DufCs  Review  and  Bradstreel's  also  publish  tables  of 
price  changes.* 

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 

*  In  his  Go/4,  Prices^  and  Wages  under  the  Greenback  Standard. 

*  In  various  numbers  of  the  Bulletin  of  the  Bureau  of  Labor. 

*In  **Aldrich  Report"  on  Wholesale  Prices,  Wages,  and  Transportation, 
Senate  Doc.,  32d  Cong.,  2d  Session,  No.  1394' 

*  For  an  exhaustive  account  of  various  index  numbers  and  other  price  statistics 
sec  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. 

Vahte  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  poimds 
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  imiform,  and 
changes  that  affect  only  one  or  two  commodities.  For  exa^mple,  a 
new  invention  may  decrease  the  price  of  a  particidar  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  greenbacksy 
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.^  We  know 
that  the  value  of  money  imits  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  imits  are  only  the  reflected  values  of  the  things 
that  money  will  buy  for  us.' 

Our  standard  money  commodity  is,  however,  a  commodity  that 

*  We  refer  bere  to  a  more  pennanent  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. 

'  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  MON£Y  AND  BANKING  277 

has  other  than  monetary  uses.  Gold  ornaments  an4  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  ihe  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.^ 
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, 
tike  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 

'  The  expense  of  transforming  bullion  into  jewelry,  etc.,  is  left  out  of  account, 
as  it  does  not  affect  the  real  point  under  consideration. 


Sty&  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  submeiige  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.* 

To  smnmarize  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  agricidture  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  conunodities.  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  vrill  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  impc^ant  ones.    Increases  in 

*  Report  on  the  Pnxluctton  of  the  Precious  Metals,*  Z904,  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  07  Gold  in  the  Woiod  smcB  184 1 

(From  1841  to  1885  the  estimate  u  from  a  table  of  avenges  for  certain  periods,  compiled 
by  Dr.  Adolph  Soetbeer;  for  the  years  x886  to  1906  the  production  is  the  axmual  estimate  of 
the  Bureau  of  the  Mint.) 


Annual  Aveiaoe  voa  Peuod 

Peuod 

Value 

1841-1850 

1,7^,502 

$36,393,000 

1851-1855 

6^10,334 

i3«»5i3»ooo 

1856-1860  , 

6,486,262 

134,083,000 

1861-1865 

5,949»58a 

122,989,000 

1866-1870 

6,270,086 

129,614,000 

1871-1875 

S»59i»oH 

"5,577,000 

1876-1880 

S»543»"o 

114,586,000 

1881-1885 

4,794,755 

99,116,000 

1886-1890 

5,461,282 

112,895,000 

1891-1895 

7,883,565 

162,947,000 

1896-1900 

13,446,939 

257,301,100 

1901 

12,625,527 

260,992,900 

1902 

14,354,680 

296,737,600 

1903 

15,852,620 

327,702,700 

1904 

16,804,372 

347,377,200 

1905 

18,268,696 

377,647,700 

1906 

19,366,550 

400,342,100 

take  the  place  of  an  equivalent  amount  of  gold,  however,  because 
some  gold  has  to  be  held  m  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  directly  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 


28o 


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 
(9)  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  n 

Recent  Production  07  Gold  in  Different  Countries^ 

(In  thousands  of  kilograms) 


CODNTIY 

1897 

igoo 

1904 

Africa 

88 

97 
86 

35 
9 

13 
ZI 

9 

36 

13 
III 
119 

31 
42 
14 
13 
8 

35 

139 

13a 

131 

Australia 

Russia 

37 

35 

18 

Canada 

British  India 

Mejdco 

19 
7 

35 

China 

All  others 

Total 

355 

385 

523 

■  Fhm  Jomnal  of  PdiHcal  Economy^  Vol.  X,  p.  580,  and  Finance  Report,  1907,  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 


281 


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2&2  OUTLINES  OF  ECONOMICS 

the  development  of  the  "cyanide  process  "  has  been  of  special  im- 
portance.* Dredging  for  gold  in  the  beds  of  rivers  which  drain 
gold-yielding  lands,  is  a  very  recent  development  that  promises  to 
be  of  considerable  importance.  Notwithstanding  the  decrease  in 
the  value  of  gold,  the  bulk  of  the  gold  produced  in  California  to-day 
is  from  ore  bodies  that  twenty-five  or  thirty  years  ago  were  generally 
considered  worthless. 

The  effects  of  this  enormous  output  have  been  felt  in  both  Europe 
and  America  in  a  general  increase  of  both  prices  and  wages.  There 
are  some  who  expect  that  the  value  of  gold  will  continue  to  depreci- 
ate for  a  long  time  in  the  future.  Account  must  be  taken,  however, 
of  the  automatic  check  which  the  increase  in  wages  and  prices  is 
bound  to  put  on  the  production  of  gold  by  increasing  mining  ex- 
penses. On  the  other  hand,  still  further  economies  in  productive 
methods  are  possible. 

QUESnOKS  AND  EXERCISES 

I.  Report  on  the  Note  Issue  systems  of  Canadian  banks,  the  Bank 
of  England,  the  Bank  of  France,  and  the  Imperial  Bank  of  Germany. 

3.  Make  a  diagram  showing  the  weekly  changes  in  the  total  reserves 
and  the  surplus  reserves  of  New  York  clearing  house  banks  for  any  recent 
year.  (Statistics  may  be  obtained  from  the  annual  Financial  Review,  the 
Commercial  and  Financial  Chronicle,  the  Banker's  Magazine,  or  other  finan- 
cial journal.) 

3.  Construct  a  simple  index  number  for  wholesale  prices,  in  one  city, 
covering  the  period  of  a  few  weeks.  (Use  the  market  quotations  of  a  daily 
paper  as  data.) 

4.  If  half  the  gold  in  the  world  were  destroyed,  would  prices  be  doubled  ? 

REFERENCES 

(See  also  references  for  Chap.  XV.) 
Adams,  T.  S.     "Index  Numbers  and  the  Standard  of  Value,"  Journal  of 
Political  Economy,  December,  190X,  March,  1902. 

*  "There  arc  many  mines  in  operation  now  at  a  profit  which  could  not  have  been 
worked  at  a  profit  ten  years  ago.  There  has  been  an  important  addition  to  the 
gold  and  silver  product  by  the  recovery  of  these  metals  from  lead  and  copper  ores 
by  modem  processes.  The  most  important  gains  seem  to  have  come,  however^ 
through  economies  in  management,  particularly  by  enlarging  the  scale  of  opera- 
tions and  by  more  complete  extraction  of  the  values  from  the  ores  treated."  — 
Report  on  the  Production  of  the  Precious  Metals,  1904,  p.  41. 


PROBLEMS  IN  MONEY  AND   BANKING  283 

BUETON,  T.  E.     Crises  and  Depressions. 

BowLEY,  A.  L.    SUUistics,  Chap.  VII. 

Director  of  the  Mint.    Annual  Report  on  the  Production  of  the  Precious 

Metals. 
Jones,  E.  D.    Economic  Crises, 
Mayo-Smith,  SUUistics  and  Economics, 
United  States  Geological  Survey,  annual  Toluxoe  on  the  Mineral  Industry. 


CHAPTER  XVn 
mTERKATIONAL  TRADE 

The  subject  of  international  trade  brings  us  to  an  examination 
of  exchange  from  a  new  viewpoint.  In  principle,  international 
trade  does  not  differ  essentially  from  other  kinds  of  trade.  In  the 
last  analysis  it  amounts  to  an  aggregate  of  exchanges  between  pairs 
of  traders.  But  in  discussing  international  trade  we  lay  the  em- 
phasis upon  the  aggregate  rather  than  the  specific  exchange,  take 
a  larger  view  of  commercial  relations,  try  to  determine  how  great 
districts  of  the  world  combine  to  supply  one  another's  wants,  and 
analyze  the  machinery  by  which  commerce  overcomes  the  obsta- 
cles of  trade  restrictions  and  the  difficulties  growing  out  of  the  use 
of  different  monetary  units  in  different  parts  of  the  world.  Much 
of  the  confusion  met  with  in  this  branch  of  economic  thought  is 
due  to  mere  forgetfulness  of  the  elementary  axioms  of  exchange, 
and  for  this  reason  it  is  desirable,  even  at  the  cost  of  some  repe- 
tition, to  reexamine  briefly  the  nature  and  function  of  trade. 

Nature  and  Advantage  of  International  Trade.  — The  function 
of  trade  is  to  create  the  utilities  of  time  and  place.  Industry 
itself,  "  production  "  in  the  narrow  sense  of  the  word,  is  like- 
wise confined  to  the  creation  of  utilities  —  form  utilities,  prin- 
cipally. Trade,  therefore,  is  as  beneficial,  as  truly  productive,  as 
agriculture  or  manufactures.  The  American  people  are  just  as 
truly  engaged  in  production  when  they  buy  books  from  Grermany 
as  when  they  cut  down  their  own  spruce  trees  and  manufacture 
them  into  paper  for  the  "yellow  journals." 

Trade  is  not  only  productive  in  the  sense  that  it  creates  utilities, 
but  it  is  also  an  indispensable  part  or  process  of  the  division  of 
labor.  Upon  this  self-evident  fact  it  is  unnecessary  to  dwell.  It 
is,  however,  desirable  to  recall  the  fact  that  specialization  of  func- 

284 


INTERNATIONAL  TRADE  28$ 

tion  is  profitable  even  to  those  individuals  or  classes  which  are 
plainly  superior  in  general  productive  efficiency.  A  successful 
lawyer  does  not  write  his  own  letters,  even  though  he  is  an  expert 
operator  on  the  typewriter.  He  specializes  in  that  occupation  in 
which  he  has  the  greatest  advantage,  and  hires  some  one  to 
write  his  letters  for  him. 

This  rule  —  frequently  referred  to  as  the  law  of  comparative  costs 
—  holds  for  communities  and  nations,  as  well  as  for  individuals. 
If,  in  Holland,  it  costs  ten  times  as  much  to  produce  a  barrel  of 
flour  as  a  yard  of  cloth,  while  in  America  it  costs  only  six  times  as 
much,  it  will  be  profitable  for  the  Dutch  to  confine  themselves  to 
the  production  of  cloth,  and  for  the  Americans  to  confine  themselves 
to  the  production  of  flour;  even  though  both  floiu:  and  cloth  could 
be  produced  more  cheaply  in  America  than  in  Holland.* 

If  this  conclusion  is  true,  it  follows  that  so  long  as  the  compara- 
tive costs  of  producing  goods  vary  among  the  different  nations  of 
the  world,  so  long  there  will  be  some  international  trade.  And, 
furthermore,  since  it  is  impossible  to  conceive  that  the  costs  of 
producing  all  kinds  of  transportable  goods  will  ever  be  exactly 
proportional  in  the  several  countries  of  the  world,  it  is  evident  that 
international  trading  is  bound  to  continue.  It  can  be  permanently 
suppressed  only  by  raising  freight  charges  to  a  prohibitive  level, 
or  by  deliberately  manipulating  customs  tariffs  so  as  to  suppress 
every  new  international  trade  connection  as  soon  as  it  springs  up, 
or  by  the  complete  destruction  of  industry  in  other  parts  of  the 
world;  and  none  of  these  possibilities  is  ever  likely  to  be  realized. 
The  ideal  of  an  exclusive  home  market  is  a  delusion.  The  last 
thirty  years  have  witnessed  a  remarkable  increase  of  protection 
throughout  the  civilized  world,  but  international  trade  has  in- 
creased by  leaps  and  bounds. 

International  trade,  then,  is  productive,  profitable,  and  for  prac- 
tical purposes  irrepressible.  The  tariff  controversy  can  never  be 
settled  until  these  elementary  truths  are  thoroughly  appreciated. 
On  the  other  hand,  it  is  equally  plain  that  these  facts  do  not  settle 
the  tariff  controversy.    Ordinarily,  trade  is  mutually  advantageous 

*  Assuming,  as  Mill  points  out,  that  capital  and  labor  will  not  emigrate 
m  masse  from  Hdland  to  America,  and  that  freight  charges  are  small. 


286  OUTLINES  OF  ECONOMICS 

to  both  parties;  and  in  one  sense  it  is  always  so.  If  Smith  trades 
X  to  Jones  for  y.  Smith  must  have  wanted  y  more  than  Xy  and 
Jones  must  have  wanted  x  more  than  y,  so  that  the  temporary 
happiness  of  both  is  increased  by  the  transaction.  But  this  is  not, 
as  has  sometimes  been  intimated,  sufficient  reason  for  permitting 
all  kinds  of  trade  and  condemning  all  kinds  of  trade  restrictions. 
If  Smith  b  an  ignorant  Indian,  X'  a  blue  fox  pelt,  Jones  an  un- 
scrupulous trader,  and  y  a  pint  bottle  of  adulterated  whisky,  the 
"  sense  "  in  which  this  trade  is  adjudged  "  mutually  profitable  " 
is  scarcely  distinguishable  from  nonsense.  The  logic  which  ap- 
proves unrestricted  trading  of  this  sort  would  also  sanction  unre- 
stricted child  labor  and  the  contemptible  extortion  of  the  '^  loan 
shark  "  who  charges  a  desperate  widow  200  per  cent  a  year  on  a 
small  loan  which  the  woman  in  her  ignorance  and  necessity 
must  secure.  Trade  restrictions  have  existed  as  long  as 
international  trade  itself,  and  the  real  problem  is  not  whether 
there  should  be  any  restriction,  but  when  and  where  particular 
varieties  of  restraint  are  justifiable. 

Restriction  of  International  Trade.  —  In  ancient  times  among 
many  nations,  such  as  the  Hebrews  and  Chinese,  contact  with  other 
peoples  was  feared  and  foreign  trade  was  practically  prohibited. 
In  Greece  and  Rome  the  greatest  thinkers  entertained  a  profound 
contempt  for  trade,  based  in  part  upon  the  belief  that  in  exchange 
one  party  is  usually  cheated;  and  this  prejudice  was  partially 
justified  by  the  character  of  the  primitive  trader  who  was  part 
sailor,  part  pirate,  part  merchant,  and  took  all  the  profit  he  could 
possibly  extort  in  every  transaction  as  insurance  against  the  great 
risks  of  his  calling. 

At  a  later  date,  in  the  middle  ages,  when  commerce  between 
the  semi-independent  cities  of  western  Europe  increased,  trade 
came  to  be  highly  prized  by  the  average  citizen,  although  it  was 
still  condemned  by  the  philosophic  schoolmen;  and  it  was  regu- 
lated in  the  most  exclusive  spirit. 

"  Every  effort  was  made  to  keep  trade  as  much  as  possible  in  the  hands 
of  native  citizens.  For  example,  the  Venetians  forbade  the  Germans  from  en- 
gaging in  trade  with  the  East  by  way  of  Venice,  and  the  citizens  of  Lttbeck  strove 
to  keep  the  Baltic  trade  from  the  Dutch.  .  .  .    Foreigners  were  mistrusted 


INTERNATIONAL  TRADE  287 

and  partnerships  with  them  were  forbidden.  Foreign  visitors  were  restricted 
in  many  ways  in  their  commercial  dealings  with  native  citizens.  Many 
occupations  were  closed  to  them ;  the  length  of  their  sojourn  and  the  number 
of  their  visits  were  limited;  they  could  not  pass  a  town  without  exposing  their 
wares  for  sale  and  paying  the  required  market  dues.  The  wants  of  the  con- 
sumer took  precedence  over  those  of  the  producer  or  merchant.  At  the 
weekly  markets  consumers  could  supply  their  needs  before  the  baker  or  mer- 
chant was  allowed  to  make  purchases.  There  was  a  community  interest 
in  the  supplies  of  necessities,  and  often  their  exportation  was  prohibited.  The 
trade  of  neighboring  peasants  was  restricted  to  the  home  city,  and  laws 
regulating  price,  weight,  measure,  and  quality  were  common.  This  restrict- 
ive municipal  policy  was  very  much  relaxed  at  the  great  fairs  which  were 
held  periodically  in  various  parts  of  Europe.' '  ^ 

In  the  early  modern  period  mercantilism  became  dominant. 
Commercial  policies  were  controlled  by  the  desire  to  get  and  keep 
the  precious  metals.  At  first  the  exportation  of  specie  was  pro- 
hibited; merchants  trading  abroad  were  compelled  to  bring  home 
cash  for  the  goods  they  had  taken  out  with  them;  foreign  mer- 
chants trading  within  the  home  country  were  compelled  to 
exchange  their  cash  for  domestic  goods  before  they  departed; 
exportation  —  except  the  exportation  of  raw  materials  needed 
in  the  manufacturing  industries  —  was  encouraged;  and  impor- 
tation—  except  in  the  case  of  the  precious  metals  and  skilled 
artizans  who  were  encouraged  to  immigrate  —  was  discouraged 
or  prohibited.  When  it  became  apparent  that  the  supply  of 
money  had  to  be  secured  through  international  trading,  the 
greatest  emphasis  came  to  be  laid  upon  the  ^'  favorable  balance 
of  trade";  and  means,  ranging  all  the  way  from  bounties  to 
war,  were  vigorously  employed  to  secure  the  carrying  trade  for 
native  ships.  In  a  large  historical  sense  mercantilism  was  merely 
a  cry  elicited  by  one  of  the  sharpest  of  the  world's  great  growing 
pains.  It  was  a  symptom  more  than  a  cause  or  an  explanation. 
It  marked  the  establishment  of  the  division  of  labor  on  a  territorial 
basis,  and  recorded  the  replacement  of  the  independent  economy 
of  the  middle  ages  by  the  modern  economy  of  exchange.  For 
the  latter,  money  was  indispensable,  and  had  to  be  secured  at  any 
cost 

^ProCesior  G.  M.  Fisk,  InUmaUonal  Commercial  Policies,  pp.  15-16. 


288  OUTLINES   OF  ECONOMICS 

The  mercantilist  period  has  been  followed  —  after  a  brief 
laissez-faire  reaction  in  some  countries  —  by  the  period  of  protec- 
tion in  which  we  still  linger.  The  extensive  taxation  of  imports 
still  continues;  but  trade  prohibitions,  export  and  tran^t  duties, 
have  been  largely  abandoned  in  the  more  advanced  countries.  In 
the  United  States  export  duties  are  prohibited  by  constitutional 
law.  But  few  nations  have  wholly  risen  above  mercantilist  prac- 
tices. Canada  prohibits  the  importation  of  oleomargarine  and 
similar  substitutes  for  butter ;  Great  Britain  prohibits  the  impor- 
tation of  sugar  from  countries  paying  bounties  on  its  production; 
Switzerland  levies  an  export  tax  on  cattle,  hides,  and  skins  shipped 
from  the  country,  while  Norway  and  Sweden  tax  the  exportation 
of  timber ;  and  Russia  still  attempts  to  control  the  Persian  trade 
by  levying  transit  duties  upon  goods  passing  through  her  terri- 
tories destined  for  Persia.  But  export  and  transit  duties  in  their 
old  mercantilist  uses  have  nearly  disappeared. 

Extensive  use  is  still  made  of  export  taxes  for  revenue  purposes  in  South 
America  and  the  Orient;  and  trade  prohibitions  based  upon  grounds  of 
sanitation,  morals,  and  what  Americans  call  the  "police  powers,"  are  in- 
creasing rather  than  decreasing.  Turkey,  for  instance,  levies  an  ad  valorem 
tax  of  I  per  cent  upon  all  exports;  and  in  general  the  most  important 
tropical  products  are  still  subject  to  export  taxes.  As  for  trade  prohibitions 
the  continued  necessity  for  their  occasional  employment  is  illustrated  by  our 
federal  law  authorizing  the  President  to  suspend  the  importation  of  any 
article  which  he  regards  as  "  dangerous  to  the  health  or  welfare  of  the  people 
of  the  United  States."  For  a  more  complete  enumeration  of  modem  export 
duties  and  trade  prohibitions,  see  Fisk's  International  Commercial  Policies^ 
Chap.  VI. 

Mercantilist  ideas  die  hard,  and  current  discussion  of  inter- 
national trade  by  reputable  legislators  and  intelligent  journalists 
is  still  permeated  with  fallacious  notions  which  had  their  origin  in 
the  conditions  and  economic  philosophy  of  the  seventeenth  century. 
One  of  these  notions,  the  idea  that  there  is  something  essentially 
favorable  in  an  excess  of  exports,  and  something  essentially  un- 
favorable in  an  excess  of  imports,  demands  careful  consideration. 

Balance  of  Trade.  —  Suppose,  for  purposes  of  discussion,  that 
the  United  States  succeeded  in  prohibiting  imports  for  a  long 
period,  while  at  the  same  time  it  succeeded  in  selling  a  large 


INTERNATIONAL  TRADE  289 

amount  of  merchandise  to  foreign  purchasers.  What  would 
happen?  Evidently  a  large  portion  of  the  money  of  the  world 
would  accumulate  in  the  vaults  of  American  bankers,  interest 
rates  would  fall,  —  possibly  to  rise  again  later,  —  and  eventually, 
if  the  process  continued  long  enough,  the  prices  of  American  com- 
modities would  ascend  to  such  a  level  that  foreign  nations  would 
be  unable  to  continue  buying  in  this  country.  At  this  point, 
evidently,  our  hypothesis  breaks  down,  and  we  are  forced  to  con- 
clude that  the  original  supposition  was  an  impossible  one. 

This  hypothetical  case  and  its  reducHo  ad  absurdum  are  sufficient 
to  establish  certain  important  practical  conclusions.  The  first  is 
that  a  country  cannot  permanently  sell  goods  for  money  alone. 
If  it  produces  large  quantities  of  the  money  metals,  it  will  regu- 
larly sell  those  metals  for  the  goods  and  services  of  other  nations. 
If  it  produces  no  gold  or  silver  itself,  it  will  secin-e  them  through 
exchange;  although,  even  in  this  case,  gold  and  silver  are  likely  to 
constitute  only  a  minor  part  of  its  imports.  Perhaps  the  gravest 
error  one  can  commit  in  studying  an  international  trade  balance 
is  to  treat  it  as  an  exchange  of  goods  for  money.  It  is  not  even  an 
exchange  of  goods  for  goods.  The  true  international  balance  is 
one  of  claims  against  obligations,  of  credits  against  debits.  The 
complete  statement  is  that  the  goods,  moneys,  and  services  ren- 
dered by  one  country  to  other  countries,  plus  its  claims  and  credits 
of  all  kinds,  will  be  balanced  by  the  goods,  moneys,  and  services 
received  by  the  same  country  plus  its  debts  and  obligations  of  all 
kinds.  Or,  to  put  the  matter  concretely,  we  must  include,  along  with 
the  exports  and  imports  of  merchandise  and  bullion,  loans  which 
the  country  makes  or  receives,  annual  interest  payments  on  loans 
and  capital  invested  abroad,  repayment  of  loans  or  the  purchase 
of  seciudties,  earnings  of  ships,  insurance  premiums,  and  commis- 
sions of  all  kinds  for  international  services,  governmental  ex- 
penditures in  foreign  countries  for  diplomatic  service,  pajrment 
of  subsidies  and  war  indemnities,  remittances  of  immigrants, 
expenditiu-es  of  travelers,  and  a  thousand  and  one  other  items, 
all  tending,  according  as  they  depress  or  raise  the  price  of  foreign 
exchange,  to  bring  about  the  importation  or  exportation  of  gold 
for  the  occasional  balancing  of  the  account 


290  OUTLINES  OF  ECONOMICS 

A  mere  glance  at  this  list  of  items  entering  into  foreign  trade  is 
sufficient  to  puncture  the  old  mercantilist  idea  that  a  '^favorable 
balance  of  trade"  or  an  excess  of  merchandise  exports  brings  about 
an  increase  of  the  money  supply.  This  idea  is  as  fully  refuted  by 
commercial  statistics  as  by  economic  analysis.  In  the  thirty-three 
years,  1 874-1 906,  for  instance,  we  had  a  large  excess  of  merchan- 
dise exports  in  all  except  four  years,  but  there  was  an  excess  of 
gold  imports  in  only  sixteen  years.  So,  similarly,  there  is  no  neces- 
sary truth  in  the  statement  which  we  hear  so  often,  that  our  present 
''favorable  balance"  indicates  that  the  United  States  is  settlmg  its 
indebtedness  to  foreign  capitalists,  repurchasing  American  securi- 
ties owned  abroad,  and  thus  bringing  the  control  of  American 
enterprises  more  completely  into  the  hands  of  Americans.  It  may 
mean  this,  to  be  sure,  but  it  may  also  merely  mean  that  we  are 
paying  England  in  goods  for  canying  and  insiu-ing  our  exports, 
or  that  foreign  owners  of  American  securities  are  taking  in  this 
form  the  annual  interest  or  profits  due  to  them.  The  recent  excess 
of  exports  may  thus  represent  the  continuance  of  indebtedness 
rather  than  its  liquidation.  For  the  same  reasons  an  "unfavor- 
able balance  of  trade"  or  an  excess  of  merchandise  imports  is  open 
to  a  variety  of  diflFerent  interpretations.  It  may  mean  that  foreign 
capital  is  investing  more  heavily  in  the  country  under  discussion, 
or  that  thb  coimtry  is  taking,  in  the  form  of  consumable  commodi- 
ties, interest  and  profits  on  investments  which  it  has  previously 
made  abroad,  or  that  it  is  selling  its  holdbgs  in  foreign  enterprises 
and  taking  the  proceeds  in  the  form  of  consumable  goods.  An 
** unfavorable  balance"  of  trade  may  thus  be,  in  reality,  highly 
encouraging;  and  a  "favorable  balance"  indicative  of  national 
waste  and  extravagance.  The  precise  meaning  of  any  particular 
balance  can  only  be  determined  after  the  most  careful  study,  and 
no  dependence  should  be  placed  upon  the  offhand  interpretations 
of  casual  investigators.  The  great  truth  is  that  there  must  be 
some  sort  of  balance  between  the  credits  and  liabilities  of  any 
country,  and  that  in  practice  a  nation  must  be  wflling  to  buy  if  it 
is  anxious  to  sell. 

A  scholariy  analysis  of  the  foreign  trade  of  the  United  States,  with  a  careful 
interpretation  of  the  meaning  of  the  trade  balance  at  various  periods,  may 


INTERNATIONAL  TRADE  291 

be  found  in  the  North  American  Review  for  July,  1901,  from  the  pen  of 
Professor  C.  J.  Bullock.  Professor  Bullock's  explanation  of  the  balance  in 
two  or  three  periods  may  be  given,  in  order  to  illustrate  the  variety  of  factors 
which  must  be  taken  into  account  when  dealing  with  this  subject.  In  the 
period  1 789-1830  the  imports  of  merchandise  and  specie  exceeded  the  cor- 
responding exports  by  $511,000,000,  and  our  obligations  were  further  in- 
creased by  interest  on  foreign  capital  invested  in  the  United  States  to  the 
amount  of  $200,000,000  approximately.  This  total  indebtedness  of  some- 
thing over  $700,000,000  was  offset  by  the  earnings  of  the  American  mer- 
chant marine,  estimated  at  about  $800,000,000  for  the  period  in  question. 
"So  far,  then,  from  the  country  being  drained  of  its  money  in  payment  for 
the  balance  of  imported  merchandise,  the  banks  held  not  less  than  $20,000,- 
000  of  specie  in  the  year  1820;  while  Gallatin  and  Crawford  estimated  that 
there  had  never  been  more  hard  cash  in  circulation." 

In  the  decade  1 831-1840,  owing  to  the  high  prices  current  in  this  country, 
imports  exceeded  exports  by  $159,700,000;  the  imports  of  specie  also  ex- 
ceeded the  exports  by  $50,650,000 ;  and  the  earnings  of  our  merchant  marine, 
$90,000,000,  sufficed  only  to  reduce  this  "unfavorable  balance"  to  about 
$120,000,000.  This  remaining  balance  is  accounted  for  by  new  foreign 
investments  in  the  United  States,  in  particular  by  foreign  purchases  of  state 
bonds.  "Our  large  imports  of  merchandise  and  specie  had  been  made 
necessary  by  the  movement  of  foreign  capital  toward  the  United  States." 

In  the  decade  1 851- 1860  the  merchandise  imports  again  exceeded  the  ex- 
ports by  $355,800,000;  the  net  amount  due  to  foreign  creditors  was  some- 
where between  $100,000,000  and  $130,000,000;  and  to  offset  these  adverse 
balances  our  merchant  marine  earned  in  this  period  only  $  1 58,000,000.  The 
remaining  balance  in  this  case  was  covered  by  our  lax^ge  excess  of  specie 
exports,  which  amounted  to  $417,608,000,  and  was  due  to  the  discovery  of 
gold  in  California.  "  The  United  States  had  become  one  of  the  leading  gold- 
producing  regions,  and  the  course  of  the  exchanges  was  inevitably  altered." 

In  the  periods  briefly  described  above,  the  striking  factors  in  our  inter- 
national  trade  were,  respectively,  the  earnings  of  our  merchant  marine,  new 
investments  of  foreign  capital  in  the  United  States,  and  large  specie  exports 
following  the  discovery  of  gold  in  California.  ^  the  last  period,  from  1874 
to  1896,  our  exports  both  of  merchandise  and  specie  greatly  exceeded  our 
imports.  "This  meant  simply,"  concludes  Professor  Bullock,  "that  the 
country  had  assumed  its  normal  position  as  a  debtor  nation  on  the*  various 
items  of  invisible  exchanges,  and  was  paying  annually  something  like 
$122,500,000  on  such  accounts." 

In  concluding  this  aspect  of  the  subject  the  student  should  be  warned  that 
trade  statistics  are  full  of  pitfalls  for  the  unwary  and  can  safely  be  handled 
only  by  experts.  Exports  are  sometimes  overvalued,  imports  are  generally 
undervalued:  some  countries  state  values  at  the  point  of  departure  (thus 
excluding  cost  of  carriage) ;  other  countries  state  values  at  the  point  of  entry 


292  OUTLINES  OF  ECONOMICS 

(thus  including  cost  of  carriage) ;  some  countries  make  special  efiForts  to  ex< 
elude  values  of  reexported  goods  from  their  statistics;  others  make  little 
or  no  efifort  to  eliminate  such  nominal  items ;  while  the  complete  prevention 
of  such  reduplication  is  probably  impossible.  Eminent  statisticians  are  now 
making  earnest  effort  to  harmonize  the  trade  statistics  of  the  various  countries 
of  the  world,  but  it  will  be  a  long  time  before  trustworthy  conclusions  con- 
cerning the  real  significance  of  the  so-called  balance  of  trade  can  be  drawn 
by  the  average  student. 

Foreign  Exchange.  —  The  preceding  discussion  makes  it  dear 
that,  compared  to  the  enormous  values  of  the  goods  exchanged  in 
international  trade,  only  a  small  amount  of  money  is  used.  As 
in  domestic  trade,  purchase  is  set  against  sale,  debt  canceled  by 
credit,  and  money  employed  only  for  the  occasional  settlement  of 
balances.  This  cancellation  of  offsetting  claims  is  effected  by  the 
banks  and  brokers  who  engage  in  foreign  exchange;  and  a  brief 
description  of  their  economic  function  becomes  necessary  at  this 
point.  For  it  should  never  be  forgotten  that  the  international 
banker  has  been  in  the  past  and  will  be  in  the  future  an  indis- 
pensable factor  in  the  development  of  foreign  trade.  Without 
his  good  offices  the  vast  international  traffic  of  the  world  would  be 
but  a  shadow  of  what  it  now  is.  It  need  hardly  be  said,  more- 
over, that  in  its  detailed  operation  the  work  of  foreign  exchange 
is  exceedingly  complex,  and  that  only  a  sketch  of  the  essentials  of 
the  process  can  be  given  here. 

As  illustrative  of  the  process,  let  us  take  the  important  case  of 
our  trade  with  England.  Ordinarily,  an  American  exporter  who 
has  sold  goods  to  England  draws  an  order  —  a  biU  of  eocchange  — 
on  the  English  debtor,  directing  him  to  pay  the  claim  at  some 
specified  time  and  place  in  London.  American  importers,  on  the 
other  hand,  commonly  pay  their  foreign  balances  by  buying  bills 
of  exchange,  or  drafts  on  London,  and  sending  them  to  their  Eng- 
lish creditors.  In  this  way  American  debts  and  credits  are  bal- 
anced in  London  without  transferring  any  money  at  all,  except 
occasionally  to  settle  the  balance  of  indebtedness. 

Bills  of  exchange  differ  from  ordinary  drafts  in  that  the  latter 
are  usually  drawn  on  a  bank,  while  the  bill  is  drawn  on  a  com- 
mercial creditor.  They  are  usually  accompanied  by  bills  of 
lading,  insurance  receipts,  certificates  of  weight  and  origin,  and 


INTERNATIONAL  TRADE  293 

all  the  documents  necessary  to  give  the  purchaser  of  the  bill  full 
title  to  the  goods  until  the  bill  is  accepted  or  paid.  They  are 
accordingly  referred  to  as  "documentary  bills"  or  "commercial 
bills,"  to  distinguish  them  from  "bankers'  bills"  and  other  instru- 
ments of  international  credit  described  hereafter.  Documentary 
bills  are  freely  negotiable,  passing  from  hand  to  hand  by  indorse- 
ment, and  gathering  strength  with  each  new  indorsement.  It  is 
important,  also,  to  note  the  difference  between  "sight  bills"  and 
"long  bills,"  the  former  calling  for  payment  upon  presentation, 
the  latter  for  inunediate  "acceptance"  by  the  drawee  and  payment 
after  thirty,  sixty,  or  ninety  days.  The  price  of  ninety-day  bills, 
for  instance,  is  fixed  by  the  price  of  sight  bills  and  the  discount 
rate  in  London. 

We  may  now  enlarge  our  simplified  illustration  to  something 
like  life-size.  Documentary  bills  drawn  by  exporters  or  creditors 
all  over  the  country  are  sold  by  the  drawers  to  bankers,  usually 
New  York  bankers,  who  may  be  called  the  "wholesalers  of  ex- 
change." The  sale  may  be  either  direct  or  through  exchange 
brokers,  "the  jobbers  of  exchange."  These  documentary  bills 
are  sent  by  the  New  York  banks  to  their  foreign  correspondents  for 
collection  (in  the  case  of  sight  bills)  or  acceptance  (in  the  case 
of  long  bills).  The  balances  thus  built  up  abroad  by  the  New 
York  banks  constitute  the  fimd  against  which  they  draw  their 
own  bills.     These   are  sold  directly  or  through  smaller  banks 

—  the  "retailers  of  exchange"  —  located  in  all  parts  of  the 
country.    Foreign  exchange  is  sold  in  a  great  yariety  of  forms 

—  bankers'  drafts,  travelers'  checks,  travelers'  letters  of  credit, 
conunercial  letters  of  credit,  cable  transfers,  and  the  like  — 
descriptions  of  which  may  be  foimd  in  the  references  cited  at  the 
end  of  the  chapter. 

The  illustrations  used  above,  while  typical  of  a  large  part  of  the 
foreign  exchange  of  this  country,  fail  to  represent  adequately  the 
complexity  which  marks  some  of  the  interactions  of  international 
credit.  An  illustration  of  the  more  complex  class  is  found  in  the 
"three-cornered"  or  "triangular  exchange."  We  import  from, 
very  much  more  than  we  export  to,  South  America.  A  part  of 
the  debit  balance  —  though  possibly  not  the  larger  part  at  the 


294  OUTLINES   OF  ECONOMICS 

present  time  —  is  settled  by  the  transmission  of  London  drafts  to 
our  South  American  creditors,  who  can  use  them  advantageously 
in  the  settlement  of  their  debts  in  Europe.  London  thus  ''clears" 
for  the  world  as  New  York  "clears"  for  America  and  Paris  for 
France.  Just  as  the  net  balance  of  our  foreign  trade  is  struck  in 
New  York,  so  final  internadonal  balances  are  cleared  or  settled 
in  London,  although  London's  preeminence  in  international  ex- 
change is  now  not  so  striking  as  it  has  been  in  the  past. 

The  question  next  arises  how  the  price  or  rate  of  exchange  is 
determined.  The  factors  controlling  the  price  or  rate  of  exchange 
are  as  numerous  and  as  difficult  to  trace  as  the  influences  which 
affect  the  price  of  any  economic  good  of  world-wide  bargain  and 
sale.  However,  to  facilitate  discussion,  we  may  classify  them  as: 
(a)  the  amount  of  pmre  gold  in  the  monetary  units  which  are  to  be 
exchanged,  (b)  the  cost  of  shipping  gold,  and  (c)  "general  credit 
conditions." 

An  English  pound  sterling  contains  as  much  fine  gold  as  4.866 
American  dollars,  and  when  exacdy  this  amount  must  be  paid  in 
New  York  for  a  draft  or  order  for  one  pound  payable  in  London, 
exchange  is  said  to  be  a/  par.  Sterling  exchange  and  German 
exchange  are  tisually  quoted  in  dollars  and  cents,  i.e.  the  amount 
of  American  money  required  to  buy  one  poimd  or  fowr  marks 
respectively.  Consequently,  they  rise  or  become  dear  when  ex- 
change nl^ounts  above  par.  French  exchange,  on  the  contrary, 
is  usually  quoted  in  francs,  the  number  of  francs  purchasable 
with  one  dollar;  and  it  is  consequently  cheap  when  above  par  and 
dear  when  below  par.  Exchange  between  the  United  States  and 
countries  with  silver  or  paper  standards  lack  the  steadying  in- 
fluence of  a  par  determined  by  the  actual  mass  of  fine  gold  in  the 
respective  standards  of  value,  and  hence  fluctuates  much  more 
than  exchange  between  countries  on  a  gold  basis.  In  order  to  be 
as  brief  and  clear  as  possible,  the  following  discussion  will  be  con- 
fined to  exchange  between  countries  on  a  gold  basis. 

Fluctuations  in  the  rate  of  exchange  depend  upon  the  "general 
credit  conditions"  mentioned  above,  but  it  is  plain  that  upper  and 
lower  limits  to  these  variations  are  established  by  the  actual  cost 
of  shipping  gold.    Suppose,  for  a  moment,  that  it  costs  three  cents 


INTERNATIONAL  TRADE  29$ 

to  transport  $4,866  worth  of  gold  biiUion  between  New  York  and 
London.  Except  under  unusual  circumstances,  then,  sterling 
exchange  cannot  rise  above  $4,896,  nor  fall  below  $4,836.  These 
limits  are  frequently  spoken  of  as  the  "gold  points,"  ''specie 
points,"  "shippmg  points,"  or  "export  and  import  points";  and 
it  is  necessary  to  mention  them  because  of  their  frequent  employ- 
ment in  discussions  of  foreign  exchange.  But  they  are  usually 
defined  in  much  too  definite  terms.  The  cost  of  shipping  gold 
varies  with  the  size  of  the  shipment,  with  freight,  insurance,  and 
interest  rates,  and  in  some  degree  with  the  steamer  and  the  season 
of  the  year.  Furthermore,  gold  is  so  important  as  the  basis  of 
bank  credit  in  all  parts  of  the  world,  that  it  is  frequently  imported 
regardless  of  the  rate  of  exchange.  During  the  war  between 
Russia  and  Japan,  for  instance,  the  Bank  of  France  imported 
large  quantities  of  American  gold  in  this  semiarbitrary  way  in 
order  to  protect  reserves.  The  "gold  points,"  then,  while  in  one 
sense  very  real,  represent  extreme  limits  and  are  in  themselves 
variable. 

Within  these  extreme  limits  set  by  the  cost  of  shipping  gold, 
the  rate  of  exchange  varies  according  to  general  credit  conditions, 
i.e.  with  the  supply  of  and  demand  for  bills  of  exchange,  with 
interest  rates  here  and  abroad,  and  the  innumerable  forces  which 
influence  interest  rates.  Suppose,  for  instance,  that  our  imports 
of  merchandise  in  a  given  season  greatly  exceed  our  exports  of 
merchandise.  The  demand  for  bills  on  London  would  greatly 
exceed  the  supply  of  bills  against  London,  and  the  price  of  sterling 
exchange  would  rise  very  high  if  no  other  factors  were  involved. 
But  it  may  happen  at  the  same  time  that  interest  rates  in  New 
York  are  higher  than  in  London,  and  under  these  circumstances 
oxir  foreign  creditors  may  prefer  to  lend  their  balances  in  New 
York  in  order  to  earn  the  high  rate  of  interest  obtaining  there. 
The  placing  of  these  loans  in  New  York  will  in  turn  reduce  the 
demand  for  foreign  exchange,  and  thus  moderate  both  the  interest 
rate  and  the  rate  of  exchange. 

This  interaction  of  the  domestic  and  the  international  money 
markets  gives  rise  to  a  number  of  complex  transactions  which  can 
only  be  suggested  here.    In  discussing  the  sale  of  foreign  exchange 


296  OUTLINES  OF  ECONOMICS 

on  page  393  above,  American  bankers  were  described  as  drawing 
against  credit  balances  which  they  had  built  up  abroad.  Some 
bankers'  bills,  however,  the  so-called  "  finance  bills,"  are  drawn 
in  excess  of  the  foreign  balances,  and  thus  represent  borrowings 
abroad.  Finance  bills  are  used  (a)  to  tide  over  the  time  before  a 
plentiful  supply  of  documentary  bills  is  available;  and,  (b)  to 
take  advantage  of  low  discount  rates  abroad,  e.g.  in  London,  by 
borrowing  in  London  and  lending  the  proceeds  in  New  York. 
Under  the  latter  circumstances,  finance  bills  payable  in  London 
at  sixty  or  ninety  days  are  sold  in  large  quantities  in  New  York, 
the  sellers  commonly  covering  their  risk  by  the  purchase  of  future 
drafts  calling  for  the  payment  of  the  same  amounts  in  London  at 
the  dates  when  the  bills  mature.  The  finance  bill  is  thus  one  of 
many  credit  instruments  used  to  bring  the  loanable  funds  of  the 
world  to  the  market  where  they  will  command  the  highest  rate  of 
interest;  and  it  is  hardly  necessary  to  add  that  it  assumes  at  times 
a  highly  speculative  character.  **  Bankers  sometimes  purchase 
outright  entire  new  issues  of  securities  from  corporations  with 
proceeds  obtained  by  the  issue  of  finance  bills,  sell  the  securities 
to  investors  during  the  currency  of  the  finance  bills,  and  apply  the 
proceeds  realized  through  the  sale  of  the  securities  to  the  payment 
of  the  bills  at  maturity."  * 

Regulation  of  the  Gold  Supply.  —  We  may  now  return  to  the 
general  topic  of  trade  regulation,  from  which  we  digressed  in 
order  to  consider  the  fundamental  principles  of  foreign  exchange. 
Historically,  it  will  be  remembered,  many  of  the  most  important 
restrictions  of  trade  have  had  as  their  object  the  regulation  of  the 
gold  supply.  And  the  movement  of  gold  is  still  of  great  interest 
to  the  world  of  high  finance  because  of  the  dependence  of  the 
volume  of  bank  credits  upon  the  gold  reserves  of  the  banks.  But 
the  preceding  discussion  would  seem  to  make  it  clear  that,  ordi- 
narily, there  is  little  that  the  government  can  do,  or  needs  to  do, 
in  the  way  of  regulating  the  supply  of  gold.  Through  interna- 
tional trade  and  foreign  exchange,  the  gold  supply  of  the  world 
is  automatically  distributed  among  the  countries  which  need  gold, 
in  accordance  with  the  intensity  of  their  respective  demands. 

^  Margraff,  International  Exchange,  p.  41. 


INTERNATIONAL  TRADE  297 

In  ordinary  or  normal  times,  the  interest  rate  is  the  most  power- 
ful of  the  many  influences  which  control  the  distribution  of  the 
gold  supply.  International  banking  houses  keep  funds  in  both 
the  United  States  and  Europe,  and  they  are  constantly  shifting 
their  money  to  the  market  in  which  it  will  earn  the  highest  rate  of 
interest.  The  means  employed  to  move  their  funds  may  vary,  as 
has  been  explained,  all  the  way  from  the  simple  sale  of  foreign 
exchange  to  the  actual  importation  of  gold.  So  great  is  the  influ- 
ence exercised  by  the  rate  of  interest  over  the  gold  supply  that  the 
Bank  of  England  usually  flnds  it  necessary  to  do  nothing  more 
than  raise  its  discount  rate  when  it  desires  to  attract  gold  to  Eng- 
land or  discourage  its  exportation. 

The  ordinary  price  level,  that  is,  of  merchandise,  also  exercises 
a  great  influence  upon  the  rate  of  exchange  and  the  movement  of 
gold.  When  prices  abroad  are  high  compared  with  American 
prices,  foreign  countries  increase  their  purchases,  the  supply  of 
American  bills  increases,  sterling  exchange  falls,  and  if  it  goes  low 
enough,  may  cause  the  shipment  of  gold  to  this  country.  Such  a 
condition  of  affairs,  for  instance,  is  likely  to  occur  in  the  autumn 
months,  when  large  exportations  of  American  cotton,  wheat,  and 
agricultural  products  create  a  plethora  of  bills  on  London,  and, 
other  things  being  equal,  depress  the  price  of  sterling  exchange. 

There  can  be  no  doubt,  then,  that  the  price  level  does  influence 
the  movement  of  gold.  Whether  the  gold  movement  influences 
prices,  however,  is  disputed.  Some  opponents  of  the  so-called 
"  quantity  theory  "  of  money  hold  that  it  does  not,  maintaining 
that  before  a  drain  of  gold,  for  instance,  could  raise  prices,  it 
would  so  elevate  the  interest  rate  that  the  drain  would  be  checked 
and  gold  be  brought  back.  In  their  view,  the  interest  rate  acts 
as  a  safety  valve,  through  whose  variations  any  protracted  gold 
movement  which  threatens  to  disturb  the  price  level  is  checked  and 
reversed  before  it  acquires  the  momentum  requisite  to  accom- 
plish the  larger  task.  Without  attempting  to  decide  the  question, 
we  may  be  sure  at  least  of  this  relevant  conclusion:  that  if  the 
movement  of  gold  continued  indefinitely,  prices  would  unques- 
tionably be  affected. 

The  gold  supply  thus  adjusts  itself  automatically  to  the  respec- 


apS  OUTLINES  OF  ECONOMICS 

tive  demands  of  the  various  districts  of  the  world.  This  truth 
is  important  because  it  establishes  a  prima  facie  presumption 
against  laws  or  policies  which  interfere  with  the  normal  distri- 
bution of  the  precious  metals.  This  presumption  is  only  an  initial 
one,  however.  It  does  not  follow  that  *'  Artificial  "  interference 
with  the  distribution  of  the  gold  supply  is  never  warranted.  In 
times  of  war,  panic,  or  severe  financial  stringency,  extraordinary 
expedients  for  obtaining  gold  are  sometimes  used  which,  like  the 
heroic  remedies  employed  in  desperate  illness,  are  necessitated  by 
the  exigencies  of  the  situation.  In  the  undignified  scramble  for 
gold  which  often  attends  a  panic,  the  country  or  the  individual 
who  stands  aloof  and  waits  for  the  normal  laws  of  distribution  to 
bring  him  "  his "  share  of  the  gold  supply,  may  have  cause  to 
regret  his  inaction.  Nevertheless,  it  is  true  that  such  expedients, 
like  strong  drugs,  are  to  be  used  with  the  greatest  caution.  They 
are  frequentiy  employed  when  the  situation  does  not  demand 
them,  their  use  tends  to  become  a  fixed  habit,  and  they  seldom 
accomplish  more  than  the  postponement  of  the  crisis. 

An  expedient  of  the  kind  described  was  employed  by  Mr. 
Shaw,  then  Secretary  of  the  Treasury,  in  the  spring  of  1906. 
The  following  critical  account  of  the  action  of  the  Secretary 
may  be  unjust  to  him,  for  it  must  be  remembered  that  the  financial 
stringency  of  the  time  threatened  to  become  dangerous;  but  it 
illustrates  in  a  striking  way  the  subtie  modem  devices  sometimes 
used  to  increase  the  supply  of  gold. 

"On  April  14  It  was  officially  announced  for  the  first  time,  that  the  Sec- 
retary would  allow  any  depositary  bank  which  engaged  to  import  gold  to 
anticipate  the  arrival  of  the  gold  by  withdrawing  a  like  amount  in  cash  from 
the  Treasury  upon  pledge  of  saving-bank  collateral  as  security.  The  sum 
so  withdrawn  was  to  be  regarded  as  a  temporary  loan,  and  to  be  returned  to 
the  Treasury  as  soon  as  the  gold  arrived.  In  providing  such  an  arrangement, 
Mr.  Shaw  virtually  reduced  the  cost  of  importing  gold  by  the  amount  of 
interest  during  transit,  and  raised  by  so  much  the  'gold  import  point.'  In 
other  words,  he  endeavored  to  make  it  profitable  for  the  depositary  bank, 
to  import  gold  without  waiting  for  sterling  exchange  to  fall  to  the  normal 
'gold  point.*  .  .  .  In  accomplishing  this,  Mr.  Shaw,  temporarily  eliminated, 
so  far  as  the  national  banks  were  concerned,  one  item  of  expense  in  their 
foreign  exchange  operations.  He  gave  them  an  advantage,  for  the  time  being, 
over  all  other  firms  engaged  in  the  same  business;  and  his  action  naturally 


INTERNATIONAL  TRADE  299 

excited  critidsm  among  the  private  bankers  who  found  themselves  discrimi- 
nated against.  Critics  also  attacked  his  method  of  announcing  his  decision. 
It  appeared  that  several  days  before  the  public  or  the  other  banks  were 
informed  of  his  intention,  Mr.  Shaw  had  seen  fit  to  make  private  arrangements 
with  two  New  York  banks  for  gold  imports  under  the  plan  .  .  .  Nor  was 
hostile  critidsm  mitigated  by  the  general  publication  at  this  moment  of  the  fact, 
which  had  not  been  widely  known  before,  that  one  of  these  same  banks  had 
been  favored  by  the  Treasury  for  several  weeks,  and  possibly  months,  pre- 
ceding, with  virtually  the  same  privilege  under  a  different  guise.  This  had 
been  accomplished  by  allowing  the  bank  in  question  to  count  as  part  of  its 
reserve  its  importations  of  gold  during  their  period  of  transit  to  New  York. 
The  imported  gold  had  thus  been  made  practically  available  as  a  basis  for 
loans  from  the  moment  of  its  purchase  abroad,  and  the  item  of  time  cost  in 
such  imports  had  been  as  completely  eliminated  as  under  the  subsequently 
adopted  plan.  .  .  .  His  [Secretary  Shaw's]  statement  issued  at  the  time 
seemed  to  indicate  that,  in  his  opinion,  the  natural  movement  of  gold  was 
toward  this  country,  but  that  the  flow  was  being  lured  to  other  markets 
by  the  practices  of  European  banks.  He  apparently  hoped  to  overcome  what 
he  took  to  be  an  artificial  diversion  of  gold  from  the  United  States  by  adopting, 
through  the  agency  of  the  Treasury,  measures  similar  to  those  which  were 
being  employed  by  the  French  and  German  central  banks."  * 

*  A.  P.  Andrew,  Quarterly  Journal  qfEconomia,  August,  1907,  pp.  544-546. 


{For  QuesH&ns  and  lUferonces,  soe  ihofoUaunng  chapior.) 


CHAPTER  XVIII 
PROTECTION  AIVD  FREE  TRADE 

We  are  now  in  a  position  to  review  intelligibly  the  pros  and 
cons  of  the  modem  tariff  controversy.  Because  of  the  limitations 
of  space,  it  will  be  desirable  to  confine  the  discussion  almost 
wholly  to  American  conditions,  although  most  of  the  arguments 
are  applicable  to  other  countries  as  well. 

The  Case  for  Protection.  —  (i)  One  of  the  most  captivating 
arguments  for  protection  is  the  assertion  that  it  promotes  nation- 
alism, which  is  held  to  be  a  good  thing.  Domestic  trade,  it  is 
claimed,  draws  the  citizens  of  a  country  together,  whUe  international 
trade  is  cosmopolitan  and  tends  to  their  separation.  Upon  the 
creation  of  our  federal  government,  state  tariffs  were  abolished 
and  their  place  taken  by  a  national  tariff  designed  partly  to  pro- 
tect the  whole  of  the  country  against  the  rest  of  the  world.  The 
introduction  of  national  protection  thus  went  hand  in  hand  with 
the  promotion  of  internal  free  trade;  and  Professor  SchmoUer 
even  maintains  the  general  thesis  that,  historically,  this  double 
process  of  internal  abolition  and  external  extension  of  tariffs 
marks  the  formation  of  new  states,  particularly  federal  states. 
Protection  against  foreign  competition,  he  asserts,  is  thus  his- 
torically coincident  with  the  enfranchisement  of  internal  trade; 
and  has  as  its  main  object  the  creation  of  a  strong  national  eco- 
nomic unity,  without  which  permanent  political  imity,  he  thinks, 
is  impossible. 

(2)  Government  should,  the  protectionists  say,  foster  infant 
industries  in  order  to  develop  our  natural  resources  and  to  pro- 
duce diversity  in  industrial  pursuits.  It  is  admitted  that  protec- 
tion is  temporarily  expensive,  but  so  is  the  prohibition  of  child 
labor  temporarily  expensive.    We  prevent  children  from  earning 

300 


PROTECTION  AND  FREE  TRADE         30I 

a  little  while  they  are  young  in  order  that  they  may  earn  more 
when  they  are  old.  For  the  same  reasons  trades  unions  rightfully 
insist  that  apprentices  shall  be  given  a  broad  knowledge  of  the 
trade  they  are  learning,  although  it  is  more  profitable  for  the  em- 
ployer to  have  them  specialize  early  in  some  narrow  branch  of 
the  work.  So,  similarly,  protection  prevents  a  nation  from  special- 
izing too  exclusively  in  its  undeveloped  stage,  in  order  that  it  may 
the  sooner  arrive  at  industrial  manhood. 

Economists  have  generally  admitted  that  there  is  a  certain 
amount  of  truth  in  this  argument.  If  an  industry  gets  an  early 
start  in  a  given  district,  this  locality  is  likely  to  retain  its  advan- 
tage because  of  the  concentration  there  of  capital  and  labor  ac- 
quainted with  the  requirements  and  possibilities  of  the  industry. 
Thus,  69.3  per  cent  of  all  the  clocks  manufactured  in  this  country 
are  made  in  Connecticut,  for  no  other  reasons  that  one  can  see 
than  those  suggested  in  the  explanatory  phrase — "the  momen- 
tum acquired  by  an  early  start."  And  this  localization  of  indus- 
try is  artificially  fostered  by  the  habit,  common  to  exporters  all 
over  the  world,  of  selling  abroad  more  cheaply  than  at  home. 
The  export  trade  seems  to  be  universally  coddled.  Of  course, 
such  localized  industries  can  be  maintained  only  when  the  cost 
of  transporting  the  article  is  small;  and  when  other  districts  do 
not  possess  unusual  natural  advantages  in  the  way  of  accessibility 
to  superior  raw  material,  power,  or  skilled  labor.  The  census 
studies  in  the  localization  of  domestic  industries  ^  seem  to  indicate 
that  while  the  industrial  inertia  of  which  we  have  been  speaking 
is  an  important  factor,  it  is  not  so  important  as  the  opposing 
forces  making  for  territorial  diffusion  of  industry. 

A  most  interesting  illustration  of  an  attempt  to  crush  the  "  infant  indus- 
tries "^of  a  competing  nation  is  found  in  the  effort  of  English  manufacturers, 
after  the  War  of  181 2,  to  recover  the  American  market  of  which  they  had  been 
temporarily  deprived  by  the  long  period  of  non-intercourse.  "English 
manufacturers,  eager  to  regain  control  of  the  lost  markets,  sent  in  shiploads 
of  cotton  and  woolens  and  iron  manufactures,  which  they  oflFercd  on  the  most 
liberal  terms  to  their  agents  in  this  country.  The  goods  were  taken  on  credit 
and  disposed  of  at  auction.    The  object  was  to  undersell  at  any  cost,  and  thus 

^Special  Census  Report,  "Manufactures,"  1905,  Part  I,  p.  cdx.  Cf,  also, 
Twelfth  Census,  "  Mluiufactures,"  Part  I,  pp.  cdz-ccay. 


302  OUTLINES  OF  ECONOMICS 

break  down  the  infant  industries.  Lord  Brougham  justified  the  speculative 
charactec  of  this  trade  on  the  ground  that '  it  was  well  worth  while  to  incur 
a  loss  upon  the  first  exportation,  in  order,  by  the  glut,  to  stifle  in  the  cradle 
those  rising  manufactures  in  the  United  States  which  the  war  had  forced  into 
existence  contrary  to  the  natural  course  of  things.'  "  * 

(3)  Closely  connected  with  the  preceding  arguments  is  a  de- 
fense of  protection  based  upon  grounds  of  war  and  military  neces- 
sity. Industrial  independence,  it  is  asserted,  prepares  a  nation 
better  for  international  war.  There  is  unquestionably  a  great 
deal  of  truth  in  the  argument.  Certainly  a  wise  nation  will  see 
to  it  that  within  its  boimdaries  factories  exist  which  can  manu- 
facture arms  and  all  the  necessary  munitions  of  war.  But  success 
in  war  is  not  dependent  upon  arms  and  ammunitions  alone.  There 
must  be  a  plentiful  supply  of  money,  and  whatever  use  may  be 
made  of  credit,  enormous  amounts  of  money  must  be  raised  by 
taxation.*  But  the  source  of  taxation  is  a  floxu-ishing  condition 
of  private  industry;  and  the  industry  of  the  average  nation  de- 
pendent upon  international  trade  cannot  flourish  in  times  of  war. 
The  failure  of  the  South  in  the  Civil  War  was  very  largely  due 
to  her  industrial  dependence  upon  the  cotton  export  trade.  A 
sufficient  diversification  of  industry  to  prevent  industrial  paralysb 
in  times  of  war  is,  we  believe,  manifestly  desirable. 

(4)  The  home  market  argument  for  protection  naturally  fol- 
lows. Much  that  is  said  in  defense  of  this  claim  is  childish  or 
silly.  One  distinguished  American  economist  seriously  main- 
tained that  a  country  can  remain  permanentiy  prosperous  only 
on  condition  that  what  is  taken  from  the  soil  shall  be  returned  in 
manure  and  other  kinds  of  fertilizers,  and  that  this  will  be  accom- 
plished only  when  the  products  of  the  soil  are  consumed  at  home. 
A  much  stronger  application  of  the  argument,  however,  is  found 
in  the  assertion  that  the  home  market  is  superior  because  it  is  a 
surer  market.  A  foreign  market  is  usually  a  precarious  market. 
It  is  likely  to  be  closed  by  war  or  by  capricious  changes  in  tariff 
policy.    Protection  is  unquestionably  expensive  to  the  coimtry 

*  Coman,  Industrial  History  of  the  United  States ^  p.  185. 

*  For  a  classic  explanation  of  the  dependence  of  both  public  credit  and  taxation 
upon  a  flourishing  condition  of  private  business  in  times  of  war,  see  PtMic  Debt^ 
by  Henry  C.  Adams. 


PROTECTION  AND  FREE  TRADE         303 

that  protects,  but  it  is  worth  paying  something  to  keep  industries 
in  continuous  operation.  1 

(5)  This  brings  us  to  the  argument  against  "dumping/*  By 
dumping  is  meant  the  sale  of  products  abroad  at  prices  lower  than 
those  charged  at  home.  Dumping  arises  in  a  variety  of  ways. 
Export  bounties  may  be  granted  by  the  home  country  for  the  spe- 
cific purpose  of  encouraging  foreign  trade;  or  a  monopoly  may 
find  it  profitable  to  dispose  of  a  surplus  abroad  at  prices  which 
would  be  needlessly  low  in  the  highly  protected  home  country; 
and,  indeed,  there  is  good  reason  to  believe  that  many  manufac- 
turers for  the  export  trade  make  it  a  practice  to  sell  abroad  at 
unusually  low  prices  whenever  they  believe  that  their  foreign 
market  is  threatened.  As  was  stated  above,  the  custom  of  "cod- 
dling "  the  export  trade  seems  to  be  very  general. 

Now  if  the  reduction  of  prices  were  permanent,  the  country  in 
which  the  products  are  dumped  would  have  no  real  cause  for  com- 
plaint. On  the  contrary,  it  might  logically  regard  itself  as  the 
beneficiary  of  the  costly  bounties  of  the  other  nadon.  But  real 
dumping  is  not,  and  in  the  nature  of  things  cannot  be,  permanent. 
So  far  as  it  may  be  said  to  have  a  rational  object,  it  aims  to  sup- 
press competing  industries  by  selling  temporarily  below  cost;  and 
when  those  industries  are  forced  out  of  business,  prices  will  be 
raised.  So  true  is  this  that  economists  have  generally  indorsed 
import  taxes  and  other  temperate  retaliatory  measures  designed  to 
abolish  dumping.  Canada,  for  instance,  has  authorized  the  levy 
in  such  cases  of  a  special  dumping  duty  "equal  to  the  difference 
between  the  selling  price  of  the  article  for  export  and  the  fair 
market  value  thereof  for  home  consumption."  A  few  years  ago 
the  beet-sugar  industry  of  France  and  Germany  was  so  stimu- 
lated by  bounties  that  even  England,  the  principal  dumping 
ground  of  the  product,  was  forced  to  threaten  reprisals  in  the  shape 
of  countervailing  import  duties.  England's  resolute  attitude,  it 
may  be  added,  led  finally  to  the  virtual  abolition  of  sugar  boimties 
at  the  International  Sugar  Conference  of  1903.  In  general,  there 
seems  to  be  ample  justification  for  protective  duties  that  are  hon- 
estly used  to  ward  off  destructive  attacks  upon  home  industries 
which,  if  subjected  only  to  legitimate  competition,  would  be  able 


304  OUTLINES   OF  ECONOMICS 

to  maintain  themselves  in  the  long  run.  It  is  evident  that  we 
have  hdte  returned  to  the  substratum  of  truth  contained  in  the 
infant  industry  and  home  market  arguments. 

Dumping  has  been  more  productive  of  arguments  against  protection  than 
of  arguments  for  protection,  in  the  United  States ;  and  the  opponents  of  pro- 
tection have  laid  great  emphasis  upon  the  fact  that  many  articles  of  American 
manufacture  are  sold  abroad  more  cheaply  than  at  home.  That  this  is  a  fact 
is  now  generally  admitted.  But  the  protectionists  maintain  that  most  of  this 
can  be  explained  by  the  rebates  allowed  to  American  exporters  under  our 
drawback  laws.  Ex-Secretary  of  the  Treasury  Shaw  estimates  that  in  1906, 
owing  to  these  drawbacks,  about  $140,000,000  of  American  manufactures 
might  have  been  legitimately  sold  abroad  at  less  than  domestic  prices.' 

(6)  Intimately  related  to  the  arguments  which  we  have  been 
considering  is  the  claim  that  the  dbtribution  of  labor  and  capital 
of  a  free-trade  nation  is  subject  to  the  control,  and  indeed,  one 
may  say,  to  the  whim  and  caprice  of  foreign  nations.  Industries 
differ  in  their  effect  upon  the  physique  and  character  of  the  people 
who  pursue  them.  The  builder,  the  skilled  engineer,  the  electrical 
worker,  are  benefited  intellectually,  physically,  and  morally  by 
their  occupations.  But  the  tailor,  the  maker  of  ready-made  cloth- 
ing, and  the  sweat-shop  worker  are  probably  harmed  rather  than 
elevated  by  the  nature  of  their  employment.  Now  if  foreign  na- 
tions subsidize  by  protection  and  bounty  the  desirable  industries, 
they  may  leave  to  the  free-trade  nation  only  those  industries  which 
the  protected  nations  do  not  wish  to  maintain. 

(7)  Finally,  protectionists  appeal  to  the  wage-earning  classes 
with  the  argument  that  protection  increases  wages  by  diversify- 
ing industry  and  thus  stimulating  the  demand  for  labor.  Indeed 
the  typical  protectionist  goes  farther  than  this,  and  maintains  that 
every  American  industry  is  entitled  to  an  amount  of  protection 
equal  to  the  difference  between  the  wages  which  it  pays  and  the 
wages  paid  by  its  most  efficient  foreign  competitor.  The  latter  variety 
of  this  argument  seems  to  be  plainly  absurd,  or  at  least  obviously 
inconsistent  with  the  initial  assertion  that  protection  raises  wages. 
For,  taken  together,  —  and  they  are  frequently  advanced  in  com- 
pany,—  they  result  in  this  magnificently  cumulative  plea  for 
ever  increasing  tariffs:  protection  raises  wages,  —  but  high  wages 

>  Leslie  M.  Shaw,  CurretU  Issues,  Chap.  XXI. 


PROTECTION  AND   FREE  TRADE  305 

put  the  American  manufacturer  at  a  disadvantage  in  competing 
with  foreign  producers,  —  and  the  home  producer  must  lie  pro- 
tected to  the  extent  of  the  difference  in  wages,  —  therefore  every 
advance  in  protective  duties  laid  for  the  benefit  of  the  wage  earner 
must  be  accompanied  by  an  additional  advance  for  the  benefit  of 
the  manufacturer,  —  and  so  ad  infinitum. 

Arguments  of  Free  Tradezs.  —  In  the  first  place,  we  may  dis- 
miss a  number  of  arguments  which  are  so  extreme  as  to  weaken 
rather  than  strengthen  the  cause  of  free  trade,  (i)  For  instance, 
it  is  frequently  alleged  that  protective  tariffs  violate  the  assumed 
natural  right  of  every  man  to  buy  his  goods  where  he  will  and  sell 
his  products  wherever  he  sees  fit,  untrammeled  by  human  laws. 
The  futility  of  arguments  based  upon  an  assumption  of  natural 
rights  has  been  sufficiently  exposed  elsewhere,  and  needs  no  elabo- 
ration at  this  point. 

(2)  It  has  also  been  claimed  that  protective  tariffs  in  the  United 
States  are  unconstitutional,  but  this  argument  is  idle;  it  would  be 
most  unfortimate  and  anomalous  if  nowhere  in  our  country  were 
lodged  the  power  to  pass  such  regulations  regarding  international 
commerce  as  might  appear  to  be  required  for  the  promotion  of 
the  public  welfare.  Furthermore,  the  charge  of  unconstitution- 
ality does  not  correspond  to  the  opinion  of  our  best  jurists,  and  it 
is  very  certain  that  we  shall  never  see  a  supreme  court  in  the 
United  States  which  will  venture  to  pronounce  protectionism 
unconstitutional. 

(3)  In  a  similar  vein  protectionism  has  been  called  socialism, 
but  this  epithet  is  so  generally  applied  to  whatever  a  person  in- 
competent to  argue  a  cause  does  not  like  that  it  will  scarcely  ter- 
rify any  one. 

The  really  able  argimients  of  free  traders  are  those  which  aim 
to  show  either  that  protection  actually  does  positive  harm,  or  that 
it  fails  to  accomplish  its  ends,  or  that  those  ends  may  be  better 
accomplished  without  protection. 

(4)  The  natural  starting  point  of  the  free-trade  argument,  and 
the  goal  to  which  it  inevitably  returns  is  the  theory  of  compara- 
tive costs  laid  down  on  page  285,  the  proposition  that,  so  long  as 
there  are  relative,  not  necessarily  absolute,  differences  in  the  cost 

X 


3o6  OUTLINES  OF  ECONOMICS 

of  producing  cheaply  portable  articles  in  various  countries  of  the 
world,  so  long  will  there  be  international  trade  in  those  articles. 
Protective  tariffs,  therefore,  merely  divert  capital  and  labor  from 
intrinsically  more  productive  to  intrinsically  less  productive  in- 
dustries.  To  revert  to  our  simile  of  the  lawyer  and  his  stenog- 
rapher, protection  aims  to  induce  the  lawyer  to  write  his  own 
letters,  on  the  general  grounds  that  lawyers  are  more  intelligent 
people  than  stenographers,  and  if  sufficient  encouragement  be 
held  out  to  them  they  may,  in  the  course  of  time,  be  educated  up 
to  the  point  of  operating  their  own  typewriting  machines  better 
than  the  stenographers  whom  they  have  previously  hired. 

Temperate  advocates  of  "freer  trade"  do  not  contend  that  this 
law  of  comparative  costs  demonstrates  the  desirability  of  complete 
free  trade  imder  all  circumstances.  They  admit  that  it  may  occa- 
sionally be  profitable  for  a  country  to  pay  enormous  bounties  — 
this  is  what  protection  amounts  to  —  for  the  development  of  cer- 
tain industries.  But  they  do  contend  that  it  establishes  free 
trade  as  the  general  rule,  every  departure  from  which  should  re- 
quire the  most  positive  justification.  More  particularly,  they 
hold,  that  at  the  present  time,  after  a  century  of  industrial  devel- 
opment that  obviates  any  military  necessity  for  a  further  diversifica- 
tion of  industry,  capital  and  labor  shoidd  be  freely  allowed  to 
take  themselves  to  those  employments  in  which  they  can  reap  the 
largest  natural  reward,  a  reward,  that  is  to  say,  which  is  not  arti- 
ficially enhanced  by  subsidies  wrung  from  the  general  body  of 
consumers. 

(S)  Moreover,  it  is  not  clear  that  protection  is  necessary  to  di- 
versify industry  in  a  country  with  such  varied  natural  resources  as 
the  United  States.  The  claims  of  the  protectionists  at  this  point 
may  be  tested  by  examining  conditions  within  the  wide  borders 
of  our  own  country,  within  which  trade  is  wholly  free.  Now,  if 
protection  were  necessary  to  foster  infant  industries  and  bring 
them  to  maturity,  the  manufacturing  industries  of  this  country 
would  still  be  concentrated  in  the  northern  states  of  the  Atlantic 
seaboard  where  they  first  gained  a  foothold.  But  they  have  not 
been  so  confined.  The  early  establishment  of  the  textile  indus- 
tries in  New  England  has  not  prevented  their  xecent  development 


PROTECTION  AND  FREE  TRADE 


307 


in  the  South.  Indeed,  the  so-called  "center  of  manufactures" 
moved  steadily  west  from  south-central  Pennsylvania  in  1850  to 
central  Ohio  in  1900;  and  the  increase,  at  the  present  time,  is 
much  more  rapid  in  the  South  and  West  than  in  older  sections  of 
the  country.  Internal  free  trade  has  not  prevented  the  diversifi- 
cation of  industry  in  the  United  States,  and  has  not  delayed  it 
longer  than  was  desirable.  For  who  shall  say  that  the  Dakotas 
and  other  typical  agricultural  states  of  the  Union  have  greatiy 
suffered  from  the  absence  of  grimy  factory  towns  and  the  slums 
which  almost  inevitably  accompany  them? 

(6)  The  inevitable  spread  of  manufactures  throughout  the 
United  States  suggests  the  essential  weakness  of  the  home  market 
argument.  International  trade  expands  just  as  inevitably  as  the 
manufacturing  area.  It  might  be  desirable  to  confine  domestic 
producers  to  the  more  certain  home  market,  which  cannot  be  de- 
stroyed by  tariff  wars  or  international  complications.  But,  as  a 
matter  of  fact,  home  producers  will  seek  foreign  markets,  and  the 
nation  that  sells  abroad  must  buy  abroad.  Since  the  Civil  War  we 
have  protected  home  producers  with  extremely  high  tariffs.  But 
in  the  last  twenty-five  years  our  foreign  trade  has  increased  at  a 
rate  imequaled  by  any  of  the  other  great  commercial  countries 
of  the  world.*  Protective  tariffs  can  cripple  and  harass  and  dis- 
tract foreign  trade,  but  they  cannot  permanentiy  suppress  it.  No 
tariff  can  make  the  costs  of  producing  all  the  articles  common  to 
commerce  precisely  proportional  in  all  quarters  of  the  globe. 

(7)  The  protectionistic  appeal  to  the  wage  earner  seems  par- 
ticularly inconclusive.  One  reason  for  distrusting  it  is  the  double- 
faced  way  in  which  it  is  manipulated  to  suit  the  particular  re- 
quirements of  time  and  place.  France  wants  protection  in  order 
to  protect  her  low-paid  workmen  against  the  greater  skill  and 
efficiency  of  America's  highly  paid  workers.  The  United  States, 
on  the  other  hand,  must  have  protection  in  order  to  shield  her 
highly  paid  employees  from  competition  with  the  "pauper  labor 
of  Europe."  When  first  used  in  the  United  States,  the  argument 
was  that  wages  were  ahready  so  high  in  this  country  as  compared 

» Spedal  Reports  of  the  Census  Office,  "  Manufactures,**  1905,  Part  I,  p.  ccc. 
The  spedfic  period  referred  to  is  the  twenty-fiv»  years,  1880-1905. 


3o8  OUTLINES   OF  ECONOMICS 

with  England,  that  it  was  impossible  for  manufacturers  in  this 
country  to  pay  the  American  rates  and  continue  to  compete  with 
English  manufacturers.  Later,  cause  and  effect,  as  related  in  the 
earlier  syllogism,  were  reversed,  and  it  was  asserted  that  the  high 
wages  in  this  country  were  due  to  protection,  from  which  it 
followed  naturally  that  in  order  to  raise  wages  higher,  still  more 
protection  would  have  to  be  given. 

We  cannot  arrive  at  any  useful  conclusions  concerning  wages, 
however,  without  considering  the  efficiency  of  labor  and  the  pro- 
ductivity or  f avorableness  of  the  environment  in  which  the  laborer 
works.  The  reason  why  American  labor  may  receive  higher 
wages  and  yet  have  nothing  to  fear  from  the  competition  of  less 
highly  paid  workmen  in  Europe  is  found  in  the  greater  produc- 
tivity of  American  labor  (though  this  greater  productivity  may 
depend  more  upon  the  natural  wealth  of  this  country  than  upon 
any  innate  technical  superiority  of  the  American  workmen).  The 
average  American  workman  is  in  no  more  danger  from  the  goods 
produced  by  the  "pauper  labor"  of  Europe  than  the  highly  paid 
workman  of  Montana  is  threatened  by  the  products  of  his  less 
remimerated  fellow-workmen  of  New  England  and  the  South. 
Labor  competes  with  labor,  not  with  commodities.  Consequently, 
if  it  is  really  desired  to  protect  labor,  the  logical  way  would  be  to 
place  a  tax  on  imported  labor,  or  by  other  measures  to  reduce 
immigration.  If  this  were  done,  those  who  desire  labor  would  be 
obliged  to  pay  heavily  for  it,  as  actually  happened  in  England 
after  the  *' Black  Death"  in  the  fourteenth  century  had  killed  off 
a  large  part  of  the  laboring  population.  Indeed,  if  our  tariff 
makers  are  sincerely  anxious  to  benefit  labor,  they  should,  after 
rendering  labor  scarce  and  dear  by  restricting  immigration,  en- 
courage the  importation  of  such  commodities  as  are  consimied 
primarily  by  wage  earners,  in  order  that  labor  may  secure  an 
abundance  of  them  cheaply. 

No  intelligent  free  trader  would  deny  that  there  are  now  dependent  upon 
protection  many  industries  which  pay  high  wages,  nor  that  the  sudden  aboli- 
tion of  protection  would  throw  many  wage  earners  out  of  work.  Their  con- 
tention in  the  first  case  is  merely  that  by  taxation  and  by  diverting  capital 
and  labor  into  naturally  unproductive  industries,  protection  lowers  the  general 


PROTECTION  AND  FREE  TRADE         309 

level  of  real  wages.  Their  reply  to  the  second  point  is  that  protection  affects 
the  industrial  organism  much  as  the  alcoholic  habit  affects  the  human  organ- 
ism. To  abandon  the  habit  suddenly  would  certainly  be  painful  and  prob- 
ably dangerous — but  this  is  sufficient  reason  neither  for  increasing  the  dram 
nor  delaying  the  gradual  abandonment  of  the  habit. 

(8)  Turning  to  the  fiscal  aspects  of  the  question,  the  free  trader 
asserts  that  there  is  little  or  nothing  to  be  said  in  favor  of  protection. 
The  protective  import  duty,  as  compared  with  the  import  duty  "for 
revenue  only,"  is  a  poor  tax.  It  is  uncertain  and  viciously  vari- 
able, and  in  the  great  majority  of  cases  is  borne  by  the  home 
consumer.  To  the  extent  that  it  does  not  prevent  importation  it 
affords  no  protection;  and  in  so  far  as  it  does  protect,  it  yields  no 
revenue  to  the  government.  If  it  raises  the  price  of  the  article  upon 
"which  it  is  levied,  however,  the  increase  constitutes  a  tax  upon  one 
class  of  society  —  the  consumer  —  for  the  benefit  of  another  class 
—  the  producers  of  the  article.  One  authority,  perhaps  the  fore- 
most authority,  upon  the  American  tariff  problem,  estimates  that 
the  present  tariff  upon  sugar  results  in  an  annual  tax  upon  Ameri- 
can consumers  of  $101,000,000,  of  which  $52,400,000  go  into  the 
treasury  and  $48,600,000  into  the  hands  of  sugar  producers,  prin- 
cipally resident  in  Hawaii,  Porto  Rico,  and  Cuba.* 

In  answer  to  this  charge  that  protection  involves  the  taxation  of 
one  class  for  the  benefit  of  another  class,  it  is  not  sufficient  to 
reply  that  everybody  is  free  to  take  advantage  of  the  subsidy  and 
engage  in  a  protected  industry.  Everybody  is  not  free  to  estab- 
lish a  rolling  mill  or  a  silk  factory  or  a  tin-plate  plant.  Protection 
means  the  taxation  of  the  less  acute,  the  less  enterprising,  the  less 
educated  and  the  poorer  classes  in  order  to  create  additional  com- 
mercial opportunities  for  the  abler,  wealthier,  and  better-educated 
classes,  thus  reversing  the  whole  spirit  of  modem  taxation  which 
contemplates  —  so  far  as  it  may  be  done  without  danger  —  rather 
the  taxation  of  the  rich  for  the  assistance  of  the  poor  than  the 
taxation  of  the  poor  for  the  benefit  of  the  rich.  It  is  not  implied, 
of  course,  that  protection  involves  class  legislation  of  an  unlawful 
character,  nor  that  taxes  are  collected  from  one  class  and  handed 
over  in  cold  cash  to  the  members  of  another  class.    The  point 

*  Professor  F.  W.  Taussig,  in  the  Atlantic  Monthly  for  March,  1908,  p.  34a. 


3IO  OUTLINES  OF  ECONOMICS 

turns  upon  the  relative  ability  of  the  various  social  classes  to  take 
advantage  of  artificial  opportunities  created  by  the  state  at  enor- 
mous expense  to  all. 

(9)  This  brings  us  naturally  to  the  ethical  criticism  of  protection, 
the  charge  that  by  making  the  temporary  prosperity  of  influential 
classes  dependent  upon  government  bounty,  protection  encour- 
ages those  classes  to  exert  a  demoralizing  pressure  upon  federal 
legislation.  So  great  is  the  stake  of  private  interests  in  tariff  legis- 
lation, that  systematic  lobbying,  log  rolling,  and  corruption  of  the 
voter  follow  as  inevitable  consequences.  The  beneficiary  of  the 
tariff  sacrifices  his  disinterested  convictions  concerning  the  general 
welfare,  in  order  to  preserve  his  own  little  subsidy  from  the  gov- 
ernment. Neither  the  citizen  nor  the  legislator  can  vote  purely, 
when  his  pocketbook  is  so  vitally  affected.  Even  if  we  admit 
what  is  probably  true,  that  protection  has  resulted  in  comparatively 
little  direct  bribery  of  legislators,  there  seems  no  escape  from  the 
conclusion  that  it  creates  a  kind  of  interest  in  legislation  which 
is  inherently  dangerous  and  exceedingly  difficult  to  keep  within 
legitimate  bounds.  And  as  the  manufacturing  industries  of  the 
country  fall  more  and  more  into  the  hands  of  large  corporations 
and  trusts,  the  possibilities  of  political  corruption  become  more 
and  more  sinister,  while  the  character  of  the  chief  beneficiaries  of 
protection  make  them  more  and  more  undeserving  of  the  bounties 
which  they  receive. 

(10)  Finally,  it  is  alleged  that  protection  fosters  monopolies  by 
shutting  off  international  competition.  This  contention  forms  the 
subject-matter  of  a  particularly  heated  dispute,  and  the  exact  ex- 
tent to  which  the  charge  is  true  cannot  be  determined  at  this  time. 
Certain  modifications  of  the  more  extreme  charge,  however,  are 
hardly  open  to  question.  Protectionists  confessedly  take  it  for 
granted  that  if  foreign  competition  is  shut  off  or  lessened,  home 
producers  will  still  compete.  Nevertheless,  highly  protective  du- 
ties are  still  levied  upon  commodities  whose  manufacture  in  the 
United  States  has  fallen  under  the  substantial  control  of  monopo- 
lies. It  is  furthermore  admitted  that  such  monopolies  frequently 
sell  their  products  at  lower  prices  in  foreign  countries  than  in  the 
United  States;  while  it  is  impossible  to  deny  that  —  whether  the 


4 


PROTECTION  AND  FREE  TRADE        311 

mSinU^  was  created  by  protection  or  not  —  the  abolition  of  the 
duties,  by  giving  foreign  producers  a  chance  to  compete  in  this 
country,  would  tend  to  reduce  prices,  and  thus  give  the  American 
public  a  valuable  aUy  in  their  struggle  against  monopoly.  The 
tariff  therefore  may  or  may  not  be  the  mother  of  trusts,  but  it 
unquestionably  deprives  the  American  people  of  a  strong  weapon 
against  the  trusts. 

Some  General  Considerations.  —  Before  attempting  to  sum  up 
the  preceding  arguments  and  strike,  a  practical  working  balance, 
it  is  necessary  to  call  attention  to  certain  general  considerations 
which  have  not  figured  in  the  foregoing  ''starched  procession"  of 
pros  and  cans.  In  the  first  place,  it  is  necessary  to  remember  that 
the  federal  government  must  secure  a  large  revenue  from  tariff 
duties,  and  that  in  consequence  the  question  which  we  are  dis- 
cussing is  not  one  of  protection  versus  free  trade,  but  of  protection 
versus  freer  trade.  In  the  second  place,  the  economic  importance 
of  the  whole  controversy  has  unquestionably  been  exaggerated. 
We  find  a  country  like  England  prosperous  under  free  trade;  we 
find  coimtries  like  France  and  the  United  States  prosperous  under 
protection.  It  is  of  real  but  not  of  vital  importance.  Our  inter- 
nal trade  vastly  exceeds  our  foreign  trade  in  every  way.  The 
domestic  trade  of  the  Mississippi  Valley  alone  is  far  greater  than 
our  entire  foreign  commerce.  In  the  third  place,  the  American 
tariff  is  a  historical  growth,  and  bad  as  it  may  be  in  many  respects 
it  has  taken  deep  root.  During  the  last  century  it  has  become 
part  of  our  life,  and  cannot  be  suddenly  eradicated  with  impunity. 
If  it  is  true  that  American  labor  would  be  better  off  without  it,  it 
does  not  follow  that  it  ought  to  be  removed  suddenly  in  the  inter- 
ests of  American  labor.  If  the  industrial  growth  is  abnormal,  it 
is  none  the  less  true  that  adjustment  to  normal  conditions  is  a 
painful  process  and  should  be  conducted  cautiously.  Displace- 
ments of  labor  and  capital  cause  suffering  and  loss,  and  it  is  clear 
that  any  reform  of  the  tariff  must  be  conservative  and  careful, 
a  movement  toward  freer  trade,  not  the  sudden  withdrawal  of 
protection. 

Conclusions.  — Most  of  the  arguments  enumerated  above,  both 
for  and  against  protection,  contain  a  measure  of  truth.    Historic- 


312  OUTLINES   OF  ECONOMICS  A 

aUy,  we  believe  that  protection  was  inevitable  in  fl0Vmte<^^ 
States,  and  in  the  early  period  of  the  country's  development,  bene- 
ficial. During  the  three  great  wars  which  seriously  threatened  the 
stability  of  this  country,  many  new  industries  sprang  up  which, 
upon  the  cessation  of  war  and  the  resumption  of  international 
trade,  were  seriously  threatened  by  foreign  competition.  Many 
of  these  industries  were  so  suited  to  our  soil  and  our  people  that 
only  a  short  period  of  protection  was  needed  to  make  them  self- 
supporting.  Under  the  circumstances  it  would  have  been  unwise 
to  permit  the  sacrifice  of  the  capital  invested  in  these  industries; 
and  whether  it  would  have  been  unwise  or  not,  human  nature  is 
such  that  the  needed  protection  was  sure  to  be  granted.  In  short, 
there  is  a  large  measure  of  real  truth  in  the  infant  industry  argu- 
ment. 

Circumstances,  however,  have  radically  changed  in  the  last  few 
decades.  Our  quondam  infant  industries  have,  for  the  most  part, 
attained  a  very  vigorous  maturity,  and  in  some  instances  have 
become  belligerent  and  prone  to  monopolistic  bullying;  our  manu- 
factures have  become  sufficiently  diversified  to  remove  all  danger 
of  industrial  collapse  in  time  of  war;  and,  above  all,  we  are  rapidly 
entering  the  economic  stage  in  which,  according  to  the  ablest  ex- 
ponent of  protection  that  economic  science  has  ever  known,  — 
Frederick  List,  —  protection  is  a  hindrance  rather  than  a  help. 
That  is  to  say,  we  are  rapidly  building  up  an  extensive  export 
trade  in  manufactured  articles;  year  by  year  raw  materials  con- 
stitute a  larger  proportion  of  our  imports  and  a  smaller  propor- 
tion of  our  exports;  and  we  have  already  become  the  greatest 
exporting  country  of  the  world.  All  this  means  that  in  the  near 
future  our  manufacturers  themselves  will  look  with  kindlier  eyes 
upon  the  withdrawal  of  the  protection  they  do  not  need,  which  in 
fact  actually  increases  the  cost  of  some  of  their  raw  materials, 
and  incites  foreign  governments  to  retaliatory  taxation  upon  goods 
imported  from  the  United  States.  Our  growing  export  trade  will 
itself  bring  a  wider  appreciation  of  those  fundamental  principles 
which  have  led  economists,  with  but  few  exceptions,  to  condemn 
protection  as  a  permanent  policy  applicable  to  all  stages  of  eco- 
nomic development. 


PROTECTION  AND   FREE  TRADE  313 

QUBSTIDirS 

z.  What  b  meant  by  the  law  of  comparative  costs?  Is  the  American 
custom  of  importing  the  finer  textile  fabrics  and  manufacturing  the  coarser 
ones  an  effect  of  this  law  ? 

2.  In  the  illustrative  case  dted  on  page  285,  would  America  confine  herself 
wholly,  or  only  chiefly,  to  the  production  of  flour  ?  Would  the  fact  that  some 
doth  was  produced  in  America,  and  some  flour  in  Holland,  affect  the  validity 
of  the  law  of  comparative  costs  ? 

3.  If  a  widow  needs  money  so  badly  that  she  is  willing  to  pay  300  per 
cent  a  year  for  its  use,  why  is  it  wrong  for  a  money  lender  to  charge  this  rate  ? 

4.  What  is  the  real  nature  of  the  balance  of  trade  ?  Does  our  excess  of 
exports  (merchandise)  mean  that  we  are  paying  off  our  foreign  indebtedness, 
or  merely  that  we  are  paying  interest  on  our  foreign  indebtedness  ? 

5.  In  what  respects  does  foreign  exchange  differ  from  exchange  between 
two  American  dties  ? 

6.  What  are  the  prindpal  influences  which  affect  the  rate  of  exchange  ?  i^ 

7.  Is  the  gold  supply  distributed  according  to  the  needs  or  the  respective 
demands  of  the  various  countries  ?  Are  needs  and  demands  in  this  connection 
identical  ? 

8.  Mention  as  many  methods  as  you  can  by  which  governments  have 
endeavored  to  increase  the  supply  of  gold. 

9.  To  what  extent  is  the  infant  industry  argument  true?  The  home- 
market  argument?    The  argument  against  "dumping"? 

10.  In  what  form  was  the  wages  argument  first  employed  in  the  United 
States?    In  what  does  its  essential  error  consist? 


LITERATUSX' 

Ashley,  Percy.    Modern  Tariff  Hisiory. 

Ashley,  W.  J.     Tariff  Problems, 

Bastable,  C.  F.     Theory  of  Iniernational  Trade, 

BsooKS,  H.  K.    Foreign  Exchange  Text-Book, 

Clake,  George.    The  ABC  of  the  Foreign  Exchanges;  The  Money  Marker 

Primer, 
Day,  Clive.    History  of  Commerce, 
Ely,  R.  T.    Problems  of  To-day,    Chaps.  I-XV. 
FiSK,  G.  M.     International  Commercial  Policies, 
GiFFEN,  Robert.     The  Use  of  Export  and  Import  Statistics;  and  Economic 

Inquiries  and  Studies,  Vol.  I,  Chap.  IX. 
George,  Henry.    Protection  or  Free  Trade. 
GosGHEN,  G.  J.     Theory  of  the  Foreign  Exchanges, 
Lauohlin,  J.  L.     The  Principles  of  Money,    Chap.  X,  pp.  336-370. 
Marosait,  a.  W.    International  Exchange, 


314  OUTLINES  OF  ECONOMICS 

Patten,  S.  N.    The  Economic  Basis  of  Protection, 
Pratt,  S.  S.     The  Work  of  Wall  Street. 
Rabbsno,  V.     The  American  Commercial  Policy, 

Stanwood,  £.    American  Tariff  Controversies  in  the  Nineteenth  Centnry, 
Sumner,  W.  G.    History  of  ProUction  in  the  United  States, 
Taussig,   F.  W.    Tariff  History  in  the  United  States,    "The    Present 
Position  of  the  Doctrine  of  Free  Trade,"  Publications  of  the  American 
Economic  Association,  Third  Series,  VoL  VI,  pp.  99-65;  also  State 
Papers  and  Speeches  on  the  Tariff, 


r" 


•      -j,    . 


PART  V 
DISTRIBUTION 

CHAPTER   XIX 
DISTRIBUTION  AS  AN  ECONOMIC   PROBLEM 

It  has  already  been  remarked  that  the  production  and  the  dis- 
tribution of  the  annual  income  of  society  cannot  be  sharply  sepa- 
rated, and  more  or  less  has  already  been  said  about  the  four  parts 
into  which  the  products  of  industry  are  usually  divided;  namely, 
wages,  interest,  rent,  and  profits.  The  greater  part  of  distribu- 
tion might  undoubtedly  be  considered  under  the  general  heading 
"Production,"  but  on  the  other  hand,  it  is  frequently  asserted  that 
distribution  is  "the  true  center  of  aU  economic  inquiries,"  and  it 
would  be  possible  to  treat  nearly  the  whole  of  production  from 
the  standpoint  of  distribution.  The  truth  is  that  these  old  tra- 
ditional divisions  of  oiu-  subject-matter  indicate  different  points  of 
view,  and  on  this  account  it  seems  desirable  to  retain  them.  When 
we  pass  from  production  to  distribution,  we  do  not  enter  an  entirely 
new  field,  but  we  look  at  an  old  field  of  investigation  from  a  new 
point  of  view. 

The  center  of  interest  in  the  practical  applications  of  economic 
principles  has  shifted  from  production  to  distribution.  The  mer- 
cantilistic  writers  of  the  seventeenth  and  eighteenth  centiuies  were 
primarily  interested  in  the  most  efficient  ways  of  increasing  the 
sum  total  of  a  nation's  wealth.  Even  Adam  Smith,  as  the  dtle  of 
his  great  work.  An  Inquiry  into  the  Nature  and  Causes  of  the 
Wealth  of  Nations,  indicates,  had  chiefly  in  mind  the  same  prob- 
lem, although  he  emphasized  the  fact  that  the  real  well-being  of  a 
nation  consists  in  the  well-being  of  the  great  body  of  its  people. 
During  the  past  century  the  production  of  wealth  has  increased 
beyond  all  precedent,  the  chief  factors  contributing  to  this  result 

315 


3l6  OUTLINES   OF  ECONOMICS 

being  the  factory  system,  the  exploitation  of  vast  natural  re- 
sources (made  possible  only  by  modern  methods  of  transportation) 
and  the  free  scope  given  to  the  initiative  of  the  individual  business 
man.  In  the  United  States,  at  least,  we  do  not  feel  that  there  are 
any  pressing  problems  concerning  the  production  of  wealth.  Yet 
poverty  still  exists,  and  its  harsh  features  are  thrown  into  sharper 
relief  by  contrast  with  the  fact  that  the  present  production  of 
wealth  per  capita  m  the  United  States  is  indisputably  the  highest 
that  the  world  has  ever  known.  Moreover,  while  the  social  dis- 
content arising  from  inequalities  in  the  distribution  of  wealth  is 
a  very  old  thing,  it  is  only  in  modem  times  that  democracy  has 
given  it  an  adequate  opportimity  for  formulated,  organized  ex- 
pression. It  is  not  too  much  to  say  that  nearly  all  the  economic 
problems  which  are  felt  to  press  upon  society  to-day  for  solution 
relate  directiy  or  indirectiy  to  the  distribution  of  wealth. 

It  should  be  noted,  however,  that  we  have  to  discuss  under 
the  name  "  distribution ''  two  different  processes.  The  first  and 
inclusive  meaning  of  the  term  is  the  distribution  of  the  wealth  or 
income  of  society  among  individuals  and  families  ;  in  other 
words,  the  question  of  individual  fortunes,  poverty  and  wealth. 
The  second  kind  of  distribution  is  the  division  of  the  product 
among  the  different  factors  of  production.  This  is  not  a  question 
of  wealth  versus  poverty,  but  of  wages  versus  interest,  profits, 
and  rent.  Of  course,  this  kind  of  distribution  affects  the  personal 
distribution  of  wealth,  but  it  is  by  no  means  the  same  question. 
To  explain  why  lots  in  New  York  City  command  high  rents  is  one 
thing;  to  explain  why  a  large  amount  of  these  rents  go  to  the  Astor 
family  is  another  thing.  In  the  case  of  wages,  however,  the  two 
kinds  of  distribution  amount  to  about  the  same  thing.  There  is 
another  sense  in  which  the  word  is  not  used  in  this  chapter.  We 
do  not  mean  by  distribution  the  moving  of  goods  from  the  place 
where  they  are  produced  to  the  place  where  they  are  consumed. 
When  we  hear  of  railways  or  other  concerns  as  "distributive 
agencies,"  we  are  using  the  term  "distribution "  in  a  sense  very 
different  from  that  of  the  technical  economic  term  "distribution." 
Distribution  is  a  question  of  ownership,  not  a  question  of  the 
location  of  goods. 


DISTRIBUTION  AS  AN  ECONOMIC  PROBLEM  317 

Distributum  anUroUed  hy  Existing  InstUuiions.  —  The  statement  that 
distribution  is  a  matter  of  ownership  suggests  at  once  the  relation  of  private 
property  to  distribution.  Individual  wealth  is,  fundamentally,  a  sum  of 
property  rights.  Every  extension  of  property  rights  by  society,  as,  for  ex- 
ample, in  permitting  the  private  ownership  of  the  rights  to  supply  cities  with 
water,  electricity,  or  transportation  facilities,  extends  the  field  of  private 
gain  and  correspondingly  affects  the  distribution  of  wealth.  The  income 
received  by  the  successful  manager  of  a  municipal  waterworks  plant  is  un- 
doubtedly a  very  different  thing  from  the  income  the  same  individual  would 
receive  if  he  were  the  owner  of  a  franchise  permitting  him  to  conduct  the 
business  of  supplying  the  city  with  water  as  a  private  undertaking.  The 
policy  of  leasing,  rather  than  selling,  public  lands,  which  has  been  adopted 
by  some  ol  the  newer  American  states,  is  bound  to  have  an.  appreciable, 
even  if  not  a  very  important,  effect  upon  the  distribution  of  wealth. 

In  the  institution  of  inheritance  we  have  an  instrument  which  once  in  a 
generation  redistributes  the  property  rights  in  existing  wealth.  It  is  not 
strange  that  those  who  wish  to  limit  or  retard  the  growth  of  large  individual 
fortunes  have  looked  to  the  control  and  especially  to  the  taxation  of  inherit- 
ances as  a  means  to  this  end.  Doubtless  the  prevalence  of  large  landed 
estates  in  England  is  closely  connected  with  the  English  law  of  primogeniture, 
just  as  the  predominance  of  small  holdings  in  France  is  in  part  due  to  the 
French  law  forbidding  the  disinheritance  of  any  of  one's  children. 

Personal  freedom,  as  a  legally  guaranteed  institution,  is  also  of  fundamental 
importance.  The  factors  determining  the  income  of  the  free  workingman 
are  very  different  from  those  determining  the  portion  of  the  slave.  It  should 
be  remembered,  too,  that  the  actual  processes  by  which  wealth  is  distributed 
are  to-day  largely  controlled  by  the  institution  of  contract.  What  rent,  wages, 
or  interest  one  gives  or  receives  is  no  longer  fixed  by  custom,  as  in  the  middle 
ages,  but  is  a  matter  of  agreement  between  individuals.  So  far  as  society 
limits  the  right  of  contract,  as  in  the  case  of  legislation  regulating  the  employ- 
ment of  women  and  children,  it  correspondingly  affects  the  distribution  of 
wealth. 

These  fundamental  institutions  are  discussed  more  fully  elsewhere  in  this 
treatise.  They  are  mentioned  in  this  connection  in  order  to  emphasize  more 
definitely  the  fact  that  the  distribution  of  wealth  takes  place  under  the  con- 
ditions imposed  by  the  existing  social  order.  Even  the  most  radical  advocates 
of  greater  equality  in  the  distribution  of  wealth  do  not  propose  an  arbitrary 
leveling  down  of  fortunes.  They  direct  their  attacks  against  one  or  more  of 
these  fundamental  institutions,  such  as  inheritance,  private  property  in  land, 
or  private  property  in  production  goods.  Then  there  are  many  persons  who 
are  willing  to  accept  the  conditions  imposed  by  the  existing  social  order, 
as  a  field  for  the  operation  of  competUive  forces  in  wealth  distribution,  but 
who  object  to  monopoly  and  special  privilege.  This  suggests  that  the  forces 
bringing  about  distribution  on  the  basis  of  the  existing  social  order  are  in 


3l8  OUTLINES  OF  ECONOMICS 

themselves  amenable  to  aodal  control.  If  those  who  secure  the  chief  prises 
in  the  economic  struggle  may  plume  themselves  on  the  fact  that  they  are  the 
victors  in  a  game  that  is  open  to  all,  it  is  none  the  less  true  that  society  lays 
down  the  rules  of  the  game. 

A  large  part  of  the  complex  of  institutions  and  regulations  through  which 
sodety  controls  distribution  work  smoothly  and  silently,  their  action,  so  far 
as  society  at  large  is  concerned,  being  unconscious.  It  is  only  when  obvious 
conflicts  arise  between  some  of  the  effects  of  this  unconscious  control  on  the 
one  hand  and  present-day  ideals  of  social  welfare  on  the  other  hand,  that  the 
significance  of  any  part  of  this  fundamental  institutional  control  becomes 
generally  felt.  It  is  not  the  least  of  the  merits  of  the  study  of  economics  that 
it  emphasizes  the  fundamental  character  of  that  part  of  the  social  control 
of  wealth  production  and  wealth  distribution  which  lies  below  the  horizon 
of  social  consciousness. 

The  Distributive  Process.  —  If  each  family  produced  all  that  it 
consumedi  as  most  families  still  do  in  part,  there  would  be  no 
problem  of  distribution,  except  whatever  problems  might  arise 
as  to  the  factors  determining  the  amount  produced  by  each 
fanuly.  But,  since  most  men  to-day  are  working  in  more  or  less 
specialized  employments,  and  for  money  incomes,  the  fact  is,  as 
was  suggested  in  a  previous  chapter,  that  distribution  takes  place 
through  a  process  of  valuation.  Some  men  (manufacturers,  mer- 
chants, farmers)  make  a  money  income  by  selling  goods  for  more 
than  it  costs  them  to  produce  them  or  to  buy  them  from  others, 
while  other  men  (laborers,  salaried  employees,  professional  men, 
capitalists,  landowners)  get  a  money  income  by  selling  their  serv- 
ices or  by  selling  the  use  of  their  capital  or  land.  In  the  first 
case,  the  money  income  takes  the  form  of  profits;  in  the  second 
case,  it  is  wages,  interest,  or  rent,  as  the  case  may  be.  A  man's 
real  income  consists  of  the  commodities  and  services  that  satisfy 
his  wants;  and  the  extent  to  which  his  mone^  income  can  be 
transmuted  into  real  income  depends  on  the  prices  of  these  things. 
One  always  has  the  option,  of  coiirse,  of  investing  part  of  hb 
money  income  in  production  goods  rather  than  in  consumption 
goods,  thus  giving  up  part  of  his  present  real  income  for  a  larger 
f utiure  income.  However,  since  different  men  have  to  pay  about 
the  same  prices  for  the  same  kinds  of  goods,  a  discussion  of  the 
factors  determining  money  incomes  will  be,  ipso  facto,  a  discus- 
sion of  the  factors  determining  real  incomes,  except  as  it  is  found 


DISTRIBUTION  AS  AN  ECONOMIC  PROBLEM  3I9 

that  certain  kinds  of  incomes  are  changed  more  readily  to  meet 
the  conditions  imposed  by  changes  in  prices  than  are  other  kinds 
of  incomes. 

It  is  obvious  that  one  person  may  be  the  recipient  of  more  than 
one  kind  of  income.  The  American  farmer  who  owns  the  land, 
buildings,  farm  machinery,  and  live  stock  that  make  up  his  pro- 
ductive equipment,  and  who  does  part  of  his  own  work,  is  at  the 
same  time  entrepreneur,  landlord,  capitalist,  and  laborer;  and 
his  income  is  made  up  of  different  proportions  of  profits,  rent, 
interest,  and  wages.  The  net  income  of  a  tenant  farmer,  utilizing 
only  borrowed  capital,  and  employing  only  hired  labor,  would,  on 
the  other  hand,  consist  entirely  of  profits.  The  economic  analysis 
that  seeks  to  determine  the  rules  governing  the  apportionment  of 
the  annual  dividend  under  the  categories  of  profits,  wages,  rent, 
and  interest,  bears  only  indirectly  upon  the  question  of  the  per- 
sonal distribution  of  wealth.  The  income  that  any  individual  re- 
ceives depends  primarily  upon  his  relative  efficiency  as  a  wage 
earner  or  as  an  entrepreneiu',  or  upon  the  amount  and  the  in- 
come-yielding capacity  of  the  capital  and  land  which  he  owns. 
His  ownership  of  capital  and  land  may  have  come  about  through 
the  thrifty  husbanding  of  portions  of  his  income  in  previous  years, 
or  it  may  have  come  about  through  gifts  or  inheritance. 

Bistribtttion  as  Valuation.  — To  explain  the  value  which  society 
puts  upon  personal  services  is  to  explain  wages;  to  explain  the 
values  attached  to  the  use  of  land  and  capital  is  to  explain  rent  and 
interest.  Certain  special  and  distinguishing  characteristics  enter 
into  the  determination  of  each  of  these  three  kinds  of  value.  The 
conditions  governing  the  supply  of  labor  are,  for  example,  very 
different  from  the  conditions  governing  the  supply  of  land.  Yet 
there  are  some  fundamental  facts  that  are  the  same  for  all  of  these 
three  kinds  of  valuation.  The  most  important  of  these  common 
factors  is  the  law  of  diminishing  productivUy. 

Assume  as  an  illustration  that  a  certain  farm  is  cultivated  by  a 
farmer  who  uses  only  his  own  labor,  together  with  a  certain  amount 
of  capital  in  the  form  of  draft  animals  and  agricultural  imple- 
ments. Let  us  assume  further  that  his  land  is  devoted  exclusively 
to  the  growing  of  one  crop,  —  com,  for  instance.     His  money 


3^0  OUTLINES  OF  ECONOMICS 

income  will  depend  on  the  amount  of  com  he  can  produce  and  the 
prices  he  can  get  for  it.  If  prices  remain  constant,  he  can  increase 
his  income  only  by  increasing  his  product.  His  product  may  be 
increased  by  the  use  of  any  one  of  a  number  of  different  methods. 
In  the  first  place,  he  can  hire  a  farm  laborer  to  assist  him.  The 
two  men,  working  together,  will  undoubtedly  be  able  to  get  a 
larger  product  from  the  farm  than  one  man  could.  In  some  cases 
they  may  be  able  to  get  double,  or  even,  through  the  advantages 
of  cooperation,  more  than  double,  what  the  farmer  could  produce 
working  alone.  More  often,  perhaps,  the  employment  of  the  sec- 
ond man  will  not  double  the  total  product  However  that  may 
be,  it  is  absolutely  certain  that  if  the  farmer  employs  a  third,  a 
fourth,  or  even  more  men,  he  will  sooner  or  later  reach  a  point 
where  it  will  be  found  that  the  employment  of  the  last  man  has 
not  increased  the  product  as  much  as  it  was  increased  by  the 
last  previous  laborer.  That  is,  the  addition  of  the  third  man  may 
not  have  increased  the  product  as  much  as  the  employment  of  the 
second  man  did,  or  the  fourth  man  may  not  have  increased  the 
product  as  much  as  the  third  man  did.  This  point  is  called 
the  point  of  diminishing  productivity,*  for  after  this  point  is  once 
reached  it  will  be  found  that,  save  under  the  most  exceptional 
conditions,  each  successive  additional  laborer  will  increase  the  ag- 
gregate product  by  an  amount  less  than  the  last  previous  laborer 
added  to  it.  This  fact  is  not  due  to  any  differences  in  the  laborers, 
whom  we  assume  to  be  of  equal  efficiency.  It  means  simply  that 
as  the  productive  possibilities  of  the  farm  with  its  equipment  of 
capital  become  more  fully  exploited  through  more  careful  tillage, 
it  requires  increasingly  greater  efforts,  in  the  form  of  still  more 
careful  and  thorough  tillage,  to  increase  the  product  by  a  given 
amount.  This  is  a  fact  of  such  common  observation  that  it  needs 
no  statistical  proof;  although  various  agricultiu-al  experiment 
stations  have  made  records  of  the  effect  of  different  degrees  of 
thoroughness  of  cultivation  upon  the  yield  of  different  crops. 

^  In  some  economic  writings  what  is  here  called  "diminishing  productivity'* 
is  termed  "diminishing  returns."  It  seems  preferable  to  reserve  the  latter  term 
for  its  more  familiar  application  to  the  phenomenon  of  the  increasing  costs  connected 
with  the  9xUnsi(m  of  agricultural  cultivation. 


DISTRIBUTION  AS  AN   ECONOMIC   PROBLEM  3^1 

One  might  imagine,  at  first  thought,  that,  after  the  point  of 
diminishing  productivity  had  been  reached,  it  would  not  pay  the 
farmer  to  hire  additional  laborers.  But  the  only  quesdon  that 
directly  concerns  the  farmer  in  this  connection  is  whether  an  addi- 
tional laborer  will  "earn  his  wages,"  —  that  is,  whether  the  added 
product  will  sell  for  enough  to  cover  the  additional  expense  incurred 
for  wages.  It  will  pay  the  farmer  to  extend  his  employment  of 
labor  up  to  the  point  where  the  addition  of  another  laborer  to  the 
working  force  would  increase  the  product  by  an  amount  too  small 
to  sell  for  enough  to  pay  the  wages  of  the  laborer,  and  where  the 
deduction  of  &  laborer  from  the  working  force  would  decrease 
the  product  by  an  amount  at  least  sufficient  to  pay  the  wages  of 
the  laborer.  If  the  farmer  stops  short  of  this  point,  he  is  not  mak- 
ing all  the  possible  profits;  if  he  goes  beyond  it,  he  is  cutting 
down  his  profits  by  employing  labor  which  does  not  "earn  its 
'wages."  The  last  laborer  employed  (not  necessarily  any  particu- 
lar laborer,  nor  the  last  in  point  of  time)  is  the  marginal  laborer^ 
and  the  increase  in  the  total  product  attributable  to  the  marginal 
laborer  (the  part  which  would  be  lost  if  one  less  laborer  were  em- 
ployed) is  the  marginal  product  0/  labor.  If  the  farmer  has  esti- 
mated product  and  prices  accurately,  it  will  be  found,  of  course, 
that  the  value  of  the  marginal  product  of  labor  will  be  appron- 
mately  equal  to  the  wages  of  the  marginal  laborer.  Or,  since  the 
laborers  are  supposed  to  be  of  equal  efficiency,  and  hence  to  re- 
ceive uniform  wages,  the  statement  may  be  put  in  the  broader 
and  more  significant  form  that  wages  and  the  marginal  product  of 
labor  will  tend  to  equal  each  other. 

The  diagrams  iUustrate  the  principle  of  the  diminishing  productivity  of 
labor,  developed  in  the  foregoing  analysis.  In  Figure  i  the  rectangle  OM 
represents  the  amount  of  com  that  the  farmer  could  raise  on  his  land  U  work- 
ing alone,  with  his  given  equipment  of  capital.  The  rectangle  A  N  represents 
the  increase  in  the  product  effected  by  the  addition  of  another  worker.  Simi- 
larly, BP,  CQ,  DR,  and  ES  represent  respectively  the  additions  to  the  product 
resulting  from  the  employment  of  a  third,  fourth,  fifth,  and  sixth  laborer. 
If  DR  bushels  of  corn  —  the  increment  in  the  product  attributable  to  the  fifth 
laborer  —  sells  for  about  enough  to  pay  the  wages  of  one  laborer,  the 
farmer  will  refuse  to  employ  the  sixth  laborer,  while  the  employment  of  the 
fifth  would  be  a  matter  of  indifference.    If  the  fifth  laborer  were  employed, 

Y 


322 


OUTLINES  OF  ECONOMICS 


the  proceeds  of  the  sale  of  that  part  of  the  total  product  represented  by  the 
rectangle  OERH  would  be  used  up  in  the  payment  of  wages  (indttding  paj- 


SL 


c 

Flo.  I 


ment  for  the  farmer's  own  work  as  a  laborer),  while  the  part  o!  the  product 
represented  by  the  small  rectangles  above  the  line  HW  would  be  left  to  rec- 
ompense the  farmer  for  the  use  of  his  land,  for  the  interest  on  and  wear  and 
tear  of  his  capital.  If  any  surplus  is  left  after  these  demands  are  satisfied,  it 
would,  of  course,  constitute  the  farmer's  profits.    If  the  conditions  were  as 

assumed,  the  fifth  la- 
borer would  be  the  mar- 
ginal laborer,  and  the 
product  represented  by 
the  rectangle  DR  would 
be  the  marginal  product 
of  labor. 

If  we  were  dealing  with 
a  very  large  undertaking, 
in  which  many  laborers 
are  employed,  the  succes- 
sive rectangles  represent- 
ing the  increments  in  the 
product  attributed  to  the 
hypothetical  addition  of 
successive  laborers  could  be  conceived  as  indefinitely  narrow,  so  that  the 
graphic  representation  would  take  the  form  represented  in  Figure  a,  where 
the  line  AM  is  located  at  the  point  of  diminishing  productivity,  and 
where  the  line  BN  represents  the  marginal  product  of  labor.  In  this 
case  the  rectangle  OBNH  represents  the  part  of  the  total  product  which 
will  jtttt  suffice  to  pay  the  wages  of  all  the  laborers  employed. 


DISTRIBUTION  AS  AN  ECONOMIC  PROBLEM         323 

Thus  far  we  have  supposed  that  the  farmer  is  content  to  get 
along  with  his  original  amount  of  land  and  capital,  and  to  increase 
his  product  by  means  of  an  increased  use  of  labor.  Other  pos- 
sibilities are,  of  course,  open  to  him.  It  might  happen  that  he 
would  be  content  to  do  without  additional  laborers,  using  instead 
an  increased  equipment  of  capital.  By  purchasing  more  draft 
animals,  more  labor-saving  machinery,  improved  fertilizers,  or 
possibly  by  installing  drains  or  irrigation  ditches,  as  the  case  may 
be,  he  may  be  able  to  raise  considerably  more  com  than  he  could 
without  such  investments.  But  here,  again,  he  will  find  the  possi- 
bilities of  increasing  his  product  subject  to  the  same  limitations 
that  would  have  prevailed  had  he  increased  his  labor  force.  With 
a  team  of  horses  he  will  be  able  to  accomplish  more  than  he  could 
with  one  horse;  two  teams  of  horses  may  still  further  increase  the 
productivity  of  the  farm;  a  third  would  probably  be  of  very  little 
advantage,  and  a  fourth  team  still  less  useful.  So  with  invest- 
ments of  capital  in  other  forms:  the  law  of  diminishing  produc- 
tivity is  a  remorseless  physical  fact  which  the  farmer  has  to  reckon 
with.  But  the  concrete  form  in  which  the  problem  presents  itself 
to  him  is  this:  Will  a  further  investment  of  money  in  a  specific 
kind  of  capital  goods  pay  me?  Here  the  farmer  has  to  make  on 
the  one  hand  the  best  estimate  he  can  of  the  amount  which  the 
proposed  capital  goods  will  add  to  his  annual  product,  and  of  the 
probable  selling  value  of  the  increased  product.  On  the  other 
hand,  he  has  to  count  his  increased  annual  expenses.  These  will 
include  (i)  the  original  cost  of  the  additional  equipment,  divided 
into  annual  costs  according  to  its  probable  durability  (each  year's 
costs  being  properly  only  the  wear  and  tear,  or  "depreciation" 
attributabk  to  that  year's  use);  (a)  the  maintenance  or  upkeep 
(including  such  things  as  ordinary  repairs  on  machinery  and  the 
cost  of  feeding  horses),  and  (3)  the  interest  on  the  investment  (what 
the  farmer  has  to  pay  if  he  borrows  the  necessary  funds  from 
some  one  else,  or  what  he  might  have  lent  his  money  for  to 
some  one  else  if  he  uses  his  own  funds).  Guided  by  these  esti- 
mates, the  farmer  will  naturally  increase  his  equipment  of  capital 
goods  so  far  as  the  returns  from  the  added  product  would  more 
than  suffice  to  cover  his  increased  costs.    Beyond  this  point  he 


324  OUTLINES  OF  ECONOMICS 

could  not  wisely  go.  The  last  inciemeiit  of  capital  —  which  just 
suffices  to  pay  for  itself  —  is  the  marginal  increment  of  capUal^ 
and  the  added  product  attributable  to  it  is  the  marginal  product  of 
capital. 

The  diagrams  portraying  the  operation  of  the  law  of  the  diminishing  prod- 
uctivity of  labor  will  serve  as  well  to  illustrate  the  diminishing  productivity 
of  capital.  Assuming  that  the  amount  of  land  and  the  amount  of  labor  to 
be  utilized  are  definite  in  quantity,  the  successive  rectangles  in  Figure  i  rep- 
resent the  increase  in  the  gross  product  attributable  to  each  of  successive 
increments  of  capital.  Figure  a  represents  the  same  conditions,  except  that 
each  increment  of  capital  is  assumed  to  be  indefinitely  small. 

If  (in  Figure  3)  BN  represents  the  marginal  product  of  capital,  the  whole 
return  imputed  to  capital  is,  of  course,  represented  by  the  rectangle  OBNH. 
The  area  above  the  line  HN  represents  the  part  of  the  product  which  is  avail- 
able for  rent  and  wages,  the  farmer's  profits  being  derived  from  any  surplus 
that  is  left  after  these  demands  are  satisfied. 

There  is  one  difficulty  in  the  foregoing  analysis,  however,  that  may  have 
been  noted  by  the  reader.  What  is  meant  by  an  "increment  of  capital" ? 
In  the  case  of  labor  the  "increment  of  labor'*  can  be  interpreted  as  the  labor 
of  one  man  (for  any  definite  period  of  time  that  may  be  chosen),  the  one  man 
being  assumed  (for  the  purpose  of  simplicity  in  the  analysis)  to  be  of  equal 
efficiency  with  all  others  constituting  the  labor  supply.  It  is  just  as  practicable, 
of  course,  to  assume  that  one  horse  is,  for  the  farmer's  purposes,  just  as 
efficient  as  another  horse,  that  only  one  kind  of  plow  is  available,  and  that 
one  bushel  of  fertilizer  is  exacdy  like  any  other  bushel  of  fertilizer ;  but  this 
does  not  help  us  out  of  our  difficulty.  For  how  can  we  blend  horses,  plows, 
and  fertilizers  into  one  concept,  and  divide  them  into  "  increments  of  capital "  ? 
One  way  of  getting  around  the  difficulty  is  to  think  of  the  capital  which  the 
farmer  combines  with  his  labor  and  his  land  in  terms  of  its  money  value.  Tn 
this  sense  an  increment  of  capital  might  be  a  dollar's  worth  of  capital,  or  ten 
dollars'  worth  of  capital,  without  reference  to  the  di£Ferent  kinds  of  concrete 
production  goods  really  composing  it.  This  device  is  useful  for  some  purposes, 
but  it  obscures  the  fundamental  fact  that  capital  gets  its  value  from  its  ability 
to  secure  an  income  for  its  owner.  The  purpose  of  this  analysis  of  diminish- 
ing productivity  is  to  open  the  way  for  a  discussion  of  the  valuation  of  the 
services  of  land,  labor,  and  capital.  To  use  the  term  "  capital "  in  the  sense 
of  capital  value  at  this  stage  in  the  discussion  would  only  lead  us  into  a  circular 
argument.  This  point  cannot  be  further  elaborated  here,  but  should  be 
kept  in  mind  by  the  reader  in  connection  with  the  discussion  of  interest  in  a 
subsequent  chapter.^    As  a  matter  of  fact  the  law  of  diminishing  productivity 

^  Professor  J.  B.  Clark  avoids  the  difficulty  here  discussed  by  using  the  term 
"capital"  in  a  sense  which  corresponds  neither  to  the  concrete  instruments  of  pro- 
duction that  make  up  capital  goods,  nor  to  the  value  cf  these  capital  goods. 


DISTRIBUTION  AS  AN  ECONOMIC  PROBLEM         335 

holds  for  each  specific  kind  of  capital  that  the  farmer  uses.  For  example, 
imagine  that  the  farmer  is  limited  to  the  use  of  a  fixed  amount  of  all  forms  of 
capital  except  one,  —  horses,  for  instance.  Then  the  successive  rectangles  in 
Figure  i  would  represent  very  well  the  increments  of  product  gained  by  the 
use  of  additional  horses,  while  if  the  product  added  by  the  use  of  a  fifth 
horse  is  just  about  enough  to  pay  for  the  increased  expense,  the  rectangle  DR 
would  represent  the  marginal  product.  The  illustration  can,  by  a  similar 
process,  be  made  to  apply  to  any  other  kind  of  capital.  The  farmer  will 
normally  make  use  of  each  specific  kind  of  capital  up  to  the  marginal  point. 

A  third  way  of  increasing  his  product  is  also  open  to  the  farmer. 
He  may  think  it  wiser  to  get  along  with  his  original  equipment  of 
capital  and  his  own  labor,  and  to  increase  his  product  by  utilizing 
more  land.  The  adoption  of  this  procedure  would  mean  a  less 
intensive  cultivation  per  acre  of  land.  The  use  of  labor  and  capital 
would  have  to  be  distributed  more  thinly  over  the  larger  acreage. 
This  would  result  in  a  smaller  product  per  acre,  but  the  procedure 
would  be  warranted  if  the  increase  in  the  annual  product  should 
sell  for  more  than  the  annual  cost  of  the  additional  acreage.  By 
the  annual  cost  of  additional  land  we  mean  the  rent  which  the 
farmer  has  to  pay  for  the  land  if  he  leases  it,  or  the  interest  on  the 
amoimt  of  the  purchase  price,  if  he  buys  it.  It  is  obvious,  how- 
ever,  that  the  combination  of  more  and  more  land  with  a  fixed 
amount  of  labor  and  capital  will  result  in  a  smaller  and  smaller 
return  per  acre  of  land,  and  that  a  point  will  soon  be  reached  be- 
yond which  it  will  not  pay  the  farmer  to  go.  In  other  words,  the 
law  of  diminishing  productivity  rules  when  land  is  considered  as 
the  variable  factor,  just  as  it  does  when  labor  or  capital  is  consid- 
ered as  the  variable. 

The  diagrams  already  used  may  be  adapted  to  the  illustration  ol  the  present 
hypothesis  by  assuming  that  equal  areas,  if  successively  combined  with  a 
given  amount  of  labor  and  capital,  would  yield  increments  of  product  as 
represented  by  the  successive  rectangles  in  Figure  i,  or  by  the  curve  in  Fig- 
ure 2.  It  is  assumed  for  the  sake  of  simplicity  in  the  illustration  that  the  dif- 
ferent acres  of  land  available  for  the  farmer's  use  are  of  equal  fertility. 

but  as  denoting  a  self-perpetuating  fund  which  bears  the  same  relation  to  concrete 
production  goods  (including  hind)  that  a  river  does  to  the  drops  of  water  of  which  it, 
at  a  given  time,  is  composed.  Professor  Clark  finds  this  concept  useful  in  his 
own  analysis  (tf.  his  DistribiUian  of  WeaUh  and  Essentials  of  Economic  Theory), 
bat  it  is  altoge^ier  too  abstract  and  hypothetical  to  be  of  use  in  the  premit  con- 
nection. 


3»6  OUTLINES  OF  ECONOMICS 

The  Actual  OperatliDii  of  Diminishing  Prodtictivity.  —  It  has 

been  assumed  thus  far  that  the  farmer  of  our  illustratioQ  has  to 
be  content  with  a  fixed  quantity  of  two  of  the  three  factors  in 
production!  but  that  he  is  at  liberty  to  increase  his  use  of  the  third 
factor  up  to  the  point  where  the  maximum  profits  will  be  gained 
for  himself.  Assuming  in  turn  that  each  of  the  three  factors  in 
production  was  the  variable  one,  we  found  that  in  each  case  the 
law  was  the  same  —  maximum  profits  were  obtained  when  the 
product  added  by  the  last  increment  of  the  variable  factor  would 
sell  for  just  enough  *  to  cover  the  increased  expense.  In  one  way, 
however,  this  assumption  does  not  correspond  with  the  facts. 
The  farmer  is  at  liberty  to  increase  his  products  by  increasing  his 
utilization,  not  only  of  any  one,  but  of  any  two,  or  all  of  the  three, 
factors  of  production.  He  may,  for  example,  purchase  more  draft 
animals  and  more  machinery,  employ  moi^  labor,  and  at  the  same 
time  acquire  more  land.  To  a  certain  extent  the  use  of  one  factor 
may  lessen  the  use  of  another  (as  in  the  case  of  labor-saving  ma- 
chinery and  labor).  More  often,  however,  the  reverse  is  true. 
The  acquisition  of  machinery  may  necessitate  the  use  of  more 
horses,  while  the  acquisition  of  more  land  will  often  make  profit- 
able the  use  of  more  labor  as  well  as  more  capital  —  a  fact 
which  is  itself  implied  in  the  law  of  diminishing  productivity. 
Although  the  employment  of  labor,  capital,  and  land  can  thus  be 
ihcreased  simultaneously,  the  significance  of  the  law  of  diminish- 
ing productivity  is  in  no  wise  diminished.  The  farmer,  in  decid- 
ing upon  the  purchase  of  a  particular  kind  of  capital  good,  has  to 
take  into  account  his  present  and,  to  some  extent,  even  his  prob- 
able futtuie  supply  of  other  kinds  of  capital  goods,  as  well  as  of 
land  and  labor,  before  he  can  form  a  judgment  as  to  the  amount 
which  the  use  of  the  particular  capital  good  will  add  to  his  annual 
product.  Moreover,  he  has  to  choose  between  additional  invest- 
ments in  labor  as  against  additional  investments  in  land,  or  ad* 
ditional  investments  in  different  kinds  of  capital.  But  his  effort 
to  get  maximum  profits  will  lead  him  to  make  those  investments 

*  Whether  this  last  unit,  which  just  pays  for  itself,  will  be  added.  Is,  of  course, 
a  matter  of  indifference.  The  maz^  is  consequently  sometiinies  calkd  tht 
"margin  ol  indifference." 


DISTRIBUTION  AS  AN  ECONOMIC   PROBLEM  337 

which  promise  to  result  in  the  greatest  additions  to  his  product. 
The  result  of  this  mXL  be,  nonnally,  that  each  factor  in  producti(Mi 
will  be  utilised  up  to  the  marginal  point — the  point  where  further 
utilisation  would  add  a  product  so  small  as  to  sell  for  less  than 
the  increased  expenses. 

Why  the  farmer  should  not  Increase  his  product  indefinitely  by  increasing 
his  use  of  all  three  of  the  factors  in  production  is  a  question  which  does  not 
concern  us  in  this  connection.  The  law  of  diminishing  productivity  relates 
only  to  the  proporiums  in  which  land,  labor,  and  different  forma  of  capital 
are  combined.  The  question  of  the  most  profitable  size  of  farm  is  quite 
another  thing.* 

It  is  not  only  in  agriculture  that  the  kw  of  diminishing  produc- 
tivity is  the  fundamental  thing  in  determining  the  proportions  in 
which  the  factors  of  production  are  combmed.  Every  manufac* 
turer  has  the  option  of  using  either  relatively  more  machinery  and 
relatively  less  labor,  or  relatively  less  machinery  and  relatively 
more  labor  in  order  to  produce  a  certain  quantity  of  goods.  He 
may  have  to  decide,  also,  between  building  a  six-story  factory 
covering  an  acre  of  ground,  and  a  one-story  factory  covering  six 
acres  of  ground  —  a  problem  which  is  paralleled  by  the  farmer's 
problem  of  deciding  between  the  cultivation  of  a  relatively  large 
acreage  and  the  more  intensive  cultivation  of  a  smaller  acreage. 
The  entrepreneur  in  every  kind  of  undertaking  has  to  decide  as 
to  the  advisability  of  a  particular  investment  in  land,  capital,  or. 
labor,  with  reference  to  the  fundamental  question,  ^'WiU  it 
pay?"  And  the  profitableness  of  any  such  investment  is  always 
a  matter  of  the  cost  of  the  unit  of  land,  labor,  or  capital,  as  com- 
pared with  the  selling  value  of  the  quantity  which  it  will  add  to 
the  entrepreneur's  total  product. 

*  The  limitations  to  the  profitable  sixe  of  a  farm  or  other  business  unit  arise 
from  the  fact  that  the  managerial  efficiency  of  the  entrepreneur  is  itself  subject 
to  the  law  of  diminishing  productivity.  Under  competition  there  is  a  constant 
tenciency  for  labor,  capital,  and  land  to  get  into  the  hands  of  those  entrepreneurs 
who  can  use  them  most  efficiently,  that  is,  who  can  pay  most  for  them  because  they 
can  get  the  largest  product  from  them.  But  even  if  A  is  a  better  entrepreneur  than 
B,  it  may  easily  happen  that  B  can  get  a  larger  product  from  additional  units  of 
labor,  capital,  and  land  than  A  can,  if  B's  existing  equipment  is  considerably 
smaller  than  A's.  A  given  fanner  cannot  extend  his  use  of  land,  labor,  and  capital 
indefinitely,  simply  because,  after  his  establishment  reaches  a  certain  stee,  other 


328  OUTUNES  OF  ECONOMICS 

In  order  to  achieve  maximum  profits,  each  entrepreneur  mU  en^ 
deavor,  so  far  as  is  practicable^  to  apportion  his  use  of  land,  labor, 
and  capital  so  that  the  value  of  the  increment  of  produa  attributoMe 
to  the  marginal  unit  of  each  factor  in  produOion  wOl  about  equal 
its  expense. 

The  significance  of  the  law  of  dimimshing  productivity  in  rela- 
tion to  the  distribution  of  wealth  now  becomes  apparent.  If  a 
given  class  of  laborers  in  a  given  employment  receive  like  wages, 
thdr  wages  (being  the  same  as  the  wages  of  the  marginal  laborer) 
will  tend  to  equal  the  marginal  product  of  labor.  The  expense 
incurred  by  the  entrepreneur  for  any  unit  of  a  certain  kind  of  capi- 
tal goods  will  tend  to  equal  the  value  of  the  margmal  product  of 
that  particular  kind  of  capital  goods.  The  rent  which  the  farmer 
will  pay  for  any  acre  of  a  quantity  of  land  of  uniform  quality  will 
tend  to  equal  the  value  of  the  marginal  product  of  land  of  that 
quality.  But  so  far  as  Competition  works  freely,  different  entre- 
preneurs in  the  same  market  will  have  to  pay  the  same  wages  for 
the  same  kind  of  labor,  the  same  price  for  the  same  kind  of  capi- 
tal goods,  and  the  same  rent  for  the  same  kind  of  land;  and  th^ 
will  get  the  same  prices  for  the  same  kinds  of  products.  So  it  is 
possible  to  state  in  more  general  terms  that  the  remuneration  of 
each  factor  in  production  tends  to  equal  its  marginal  product.^ 

farmers  can  use  additional  units  of  the  productive  factors  more  profitably  than  he 
can.  The  most  profitable  size  of  the  business  unit  will  vary,  other  things  being 
equal,  with  the  efficiency  of  the  entrepreneur. 

Some  writers  have  introduced  the  efficiency  of  the  entrepreneur  as  a  fourth 
variable  in  their  discussion  of  diminishing  productivity.  Such  a  procedure  is 
avoided  in  this  book,  because  it  leads  to  theoretical  complexities  and  because  it 
involves  a  shifting  of  the  point  of  view.  The  diminishing  productivity  of  each  of 
the  three  factors  in  production  is  a  physical  fact  which  every  entrepreneur  has  to 
deal  with,  and  which  we  can  explain  most  clearly  by  adhering  to  the  analysis  of 
the  motives  controlling  the  individual  entrepreneur.  The  analysis  of  the  dimin- 
ishing productivity  of  the  entrepreneur's  efficiency,  on  the  other  hand,  involves  of 
necessity  the  social  point  of  view,  for  the  only  kind  of  estimate  that  is  made  of  the 
entrepreneur's  productivity  is  expressed  through  the  social  process  of  the  valuation 
of  the  entrepreneur's  products.  In  this  book  the  diminishing  productivity  analysis 
is  applied  only  to  the  entrepreneur's  expenses  of  production,  the  entrepreneur 
being  regarded  (as  he  is  in  accounting  practice)  as  the  "residual  claimant." 

1  The  statement  that  rewards  tend  to  equal  products  has  no  ethical  significance, 
and  should  not  be  interpreted  as  a  justification  of  the  present  economic  order,  — ' 
and  this  for  the  following  reasons  among  others:  (i)  That  distribution  ought  to 


DISTRIBUTION  AS  AN  ECONOMIC  PROBLEM         329 

It  is  not  necessary  for  the  validity  of  this  marginal  productivity 
theory  of  distribution,  as  it  is  called,  that  in  any  particular  under- 
taking at  any  given  time  the  proportions  in  which  the  factors  of 
production  are  actually  combined  should  be  adjusted  with  the 
nicety  which  the  theory  seems  to  imply.  The  amount  of  land  which 
the  fanner  holds  at  any  one  time  is  apt  to  be  fixed  by  his  estimate 
of  his  future  rather  than  of  his  present  production,  while  custom, 
pride  of  ownership,  and  the  chance  of  gain  through  an  increase 
in  land  values  (which  is  not  to  be  confused  with  the  motives  guid- 
ing his  activity  as  a  producer)  have  their  influence.  Moreover, 
the  size  of  the  government  homesteads  into  which  a  large  part  of 

be  according  to  productivity  is  itaelf  a  debatable  proposition.  Some  socialists, 
for  example,  maintain  that  distribution  according  to  needs  is  a  higher  ideaL 
(3)  The  ethical  side  of  the  problem  of  distribution  relates  to  personal  dtBtributioo, 
while  the  marginal  productivity  doctrine  relates  to  the  determination  of  the  in- 
comes going  to  the  different  factors  in  production.  To  state  that  the  rent  ol  aa 
acre  of  land  tends  to  equal  the  value  of  its  product  is  not  to  say  that  the  laadoinier 
has  "earned  "  his  income.  The  private  receipt  ol  tent  depends  upon  sach  sodil 
institutions  as  private  property,  inheritance,  and  free  contract,  and  these  have  to 
be  judged  from  the  broad  viewpoint  of  sodal  welfare.  (3)  The  efficiency  ol  the 
individual  laborer,  which  is  one  of  the  things  determining  his  productivity,  often 
depends  upon  the  opportunity  he  has  had  to  "make  the  most  ol  himself."  But 
opportunity  depends  largely  on  environment,  and  this  in  turn  is  to  a  large  eitent 
amenable  to  social  control.  (4)  The  amount  of  the  marginal  product  ol  any  one 
factor  in  production  u  itself  a  resultant  of  all  the  forces  affecting  the  supply  of  all 
the  factors  in  production  and  ol  all  the  conditions  that  affect  their  fitness  to  serve 
in  the  production  of  the  things  that  consumers  are  demanding.  (5)  This  theory 
is  only  a  statement  of  a  normal  tendency.  It  does  not,  properly  understood* 
conflict  with  the  fact  that  such  things  as  custom  and  other  forms  ol  economic 
friction  and  inertia,  the  higgling  of  the  market,  the  conscious  efforts  ol  sodal  classes 
to  better  their  condition,  imperfections  in  the  monetary  system,  short-sighted 
selfishness  on  the  one  hand,  altruism  on  the  other,  as  well  as  the  conscious  sodal 
control  expressed  in  labor  legislation,  usury  laws,  and  the  like,  all  have  important 
effects  upon  the  incomes  actually  received  by  those  who  furnish  labor,  capital,  and 
land  for  the  work  ol  production.  Actual  wages  may  differ  from  the  normal  wages 
measured  by  marginal  product  just  as  contractual  rent  may  differ  from  economic 
rent.  (6)  We  can  imagine  an  economic  order  very  different  from  the  present  one  in 
which  it  would  still  be  true  that  incomes  would  tend  to  equal  products.  If,  for 
example,  wages  were  arbitrarily  increased  50  per  cent  by  law,  while  one  result 
would  undoubtedly  be  an  increase  in  unemployment,  it  would  still  be  true  that 
wages  Would  tend  to  equal  the  marginal  product  of  labor,  or,  rather,  that  the 
marginal  product  of  labor  would  tend  to  equal  wages.  To  attempt  to  avoid  this 
difficulty  by  assuming  that  the  present  order,  or  a  purdy  competitive  order,  is  the 
"natural "  older  ol  things,  is  to  beg  the  whole  question  in  favor  ol  the  < 
status. 


330  OUTUNES  OF  ECONOMICS 

the  public  domain  was  divided  has  had  an  important  effect  on 
the  size  of  the  farmer's  holding  in  a  large  section  of  the  United 
States.  The  average  American  farmer  uidoubtedly  holds  more 
land  than  he  would  if  he  were  looking  only  for  maximum  present 
profits.  The  practical  problem  for  him  is  apt  to  be  how  inten- 
sively he  shall  cultivate  it:  how  much  labor  and  capital  he  shall 
combine  with  it  That  is,  he  is  apt  to  use  relatively  more  land 
and  relatively  less  labor  and  capital  than  he  would  use  if  every 
additional  acre  of  land  used  meant  an  additional  expense  for 
land.  This  conclusion  is  not  altered  by  the  fact  that  his  land  is 
probably  not  of  uniform  quality,  and  that  some  of  it  may  not  repay 
cultivation  under  present  conditions.  In  a  similar  way  the  manu- 
facturer builds  his  factory  for  the  future,  and  may  even  equip  it 
with  a  larger  complement  of  some  kinds  of  machines  (such  as 
boilers  and  engines)  than  present  requirements  justify.  On  the 
other  hand,  a  sudden  and  probably  temporary  increase  in  demand 
for  a  product  will  be  met  by  the  manufacturers  by  the  employ- 
ment of  more  labor  (even  at  the  high  rate  charged  for  overtime  or 
night  work)  rather  than  by  the  installation  of  more  labor-saving 
machinery,  even  though  the  latter  might,  in  the  long  run,  be  more 
economical.  In  general,  when  considerations  which  take  into 
account  a  period  of  years  dominate,  land  and  the  more  perma- 
nent forms  of  capital  goods  will  be  used  more  freely,  labor  and 
the  less  permanent  forms  of  capital  goods  less  freely.  When 
short-time  considerations  are  dominant,  the  reverse  will  be 
true. 

These  limitations  do  not  invalidate  the  law  of  the  equality  of 
the  remimeration  of  the  factors  in  production  and  the  value  of 
their  marginal  products  any  more  than  the  fact  that  a  feather 
does  not  fall  through  the  atmosphere  as  rapidly  as  a  stone  invali- 
dates the  law  of  gravitation.  This  law,  like  other  economic  laws, 
is  the  statement  of  a  fundamental  tendency,  which,  in  this  case,  is 
bound  up  with  the  universal  desire  of  entrepreneurs  to  get  for 
themselves  the  largest  possible  profits. 

Marginal  Productivity  and  Valuation. — The  reader  who  has 
firmly  grasped  the  concept  of  marginal  utility  will  find  that  a 
recognition  of  some  similarities  in  the  r61es  which  marginal  utility 


DISTRIBUTION  AS  AN   ECONOMIC   PROBLEM  331 

and  marginal  productivity  play  in  the  process  of  valuation  will 
help  him  to  grasp  the  significance  of  the  latter  concept.  The  value 
of  consumption  goods  is  determined  by  their  capacity  to  yield  an 
income  of  satisfactions;  the  value  of  production  goods  is  deter- 
mined by  their  capacity  to  yield  a  money  income  to  the  entre- 
preneur. In  the  one  case  the  law  of  diminishing  utility  is  domi- 
nant; in  the  other  case,  the  law  of  diminishing  productivity.  Just 
as  we  cannot  speak  of  the  utility  of  a  commodity  in  general,  but 
only  of  the  utility  of  particular  units  of  a  commodity,  so  we  can- 
not speak  of  the  productivity  of  land,  labor,  or  capital  in  general, 
but  only  of  the  productivity  of  particular  units  of  land,  labor,  and 
capital  —  a  productivity  which  is  attributed  or  imputed  to  other 
similar  units  of  the  supply  of  these  factors  in  production.  The 
consumer  is  getting  the  maximum  of  satisfaction  of  his  wants  when 
the  final  dollar  spent  for  one  commodity  satisfies  just  as  intense 
wants  as  the  final  dollar  spent  for  any  other  commodity,  and  he 
tends  to  apportion  his  expenditures  accordingly.  The  entrepreneur 
is  not  making  maximum  profits  if  his  final  expenditures  for  any 
one  of  the  factors  in  production  add  more  to  his  product  than  his 
final  expenditure  (of  equal  amount)  for  either  of  the  other  factors 
in  production,  and  he  tends  to  apportion  his  employment  of  land, 
labor,  and  capital  accordingly.  But  it  must  not  be  supposed  that 
the  statement  that  the  prices  paid  for  land,  labor,  and  capital  tend 
to  equal  the  value  of  their  mai^nal  products  is  a  complete  explana- 
tion of  the  valuation  of  the  services  of  the  factors  in  production 
any  more  than  the  principle  of  marginal  utility  is  a  complete  ex- 
planation of  the  valuation  of  consumption  goods.  In  fact,  from 
one  point  of  view,  marginal  productivity  is  itself  partly  deter- 
mined by  the  prices  which  the  entrepreneur  has  to  pay  for  the 
services  of  the  factors  in  production. 

TTie  demand  for  the  use  of  land,  labor,  and  capital  is  ultimately 
a  demand  for  their  products  —  the  goods  that  satisfy  human  wants. 
The  entrepreneur's  task  is  to  anticipate  and  meet  this  demand  — 
a  problem  that  takes  the  concrete  form  of  producing  goods  that 
will  sell  for  more  than  the  expense  of  production.  On  the  one 
hand  he  has  to  estimate  the  quantities  which  he  can  sell  at  certain 
prices;  on  the  other  hand,  he  has  to  take  account  of  the  quantities 


3$2  OUTLINES  OF  ECONOMICS 

which  various  units  of  land,  labor,  and  capital  will  contribute  to 
his  product,  together  with  the  prices  (wages,  rent,  and  interest) 
that  be  has  to  pay  for  these  units.  Through  his  mediation  the 
demand  of  society  for  want-satisfying  goods  becomes  a  demand 
for  the  services  of  certain  quantities  of  land,  labor,  and  capital, 
combined  in  certain  proportions.  And  the  principle  that  guides 
the  entrepreneur's  transformation  of  the  social  demand  for  the 
products  of  land,  labor,  and  capital  into  his  own  demand  for  the 
services  of  these  factors  in  production  is  the  principle  of  marginal 
productivity.  The  wages,  rent,  and  interest  that  are  actually  paid 
for  the  services  of  the  factors  in  production  are  the  resultants  of 
the  demand  of  entrepreneurs,  on  the  one  hand,  and  of  the  supply 
of  these  factors  on  the  other  hand.  The  prindpU  of  marginal 
frodudivUy  is  an  illuminating  way  of  stating  the  problem  of  the 
distribution  of  wealth,  rather  than  a  solution  of  it.  Just  how  supply 
and  demand  operate  in  the  case  of  each  factor  in  production  is  a 
topic  to  be  considered  in  later  chapters. 

Social  Aspects  of  Diminishing  Productivity.  —  Since  the  entre- 
preneurs are  only  the  intermediaries  between  society  viewed  as  a 
body  of  consumers  and  society  viewed  as  a  body  of  producers,  we 
may,  for  present  purposes,  leave  them  out  of  consideration,  in 
order  to  fix  our  attention  upon  some  of  the  more  general  results 
of  the  fact  of  diminishing  productivity. 

If  the  number  of  laborers  within  the  boimdaries  of  a  nation  b 
increased  by  immigration,  without  a  corresponding  increase  in 
capital  or  in  the  amoimt  of  land  available  for  use,  the  result  will  be 
an  increase  in  the  total  amoimt  of  goods  produced,  which  means 
an  increase  in  the  amoimt  of  wealth  produced  per  unit  oi  land  and 
capital,  but  (on  account  of  the  operation  of  the  law  of  diminishing 
productivity)  a  decreased  amount  per  laborer;  a  higher  margmal 
product  for  land  and  capital,  and  a  lower  margiu&l  product  for 
labor;  consequentiy,  higher  rent  and  higher  interest,  but  lower 
wages.  If  the  supply  of  capital  within  a  country  is  increased, 
while  labor  and  land  remain  constant,  the  result  will  be  higher 
wages  and  higher  rents,  but  a  smaller  remuneration  for  capital 
Similariy,  if  the  available  supply  of  land  be  increased  (as  by  im- 
provements in  transportation  facilities),  rent  will  absorb  relatively 


DISTRIBUTION  AS  AN  ECONOMIC  PROBLEM         333 

less,  and  wages  and  interest  relatively  more,  of  the  value  of  the 
total  product 

In  a  very  real  sense  the  same  laborer  is  more  productive  in  a 
country  where  land  is  relatively  plentiful  than  in  a  country  where 
land  b  relatively  scarce.  A  laborer  may  gain  no  technical  effi- 
ciency by  migration  from  Europe  to  America,  but  the  increment 
of  product  attributable  to  his  work  is  apt  to  be  considerably  larger 
in  the  United  States  than  it  was  in  Europe.  Here  he  really  creates 
a  larger  product  and  earns  a  larger  wage.  The  migrations  of 
labor  and  capital  from  one  region  to  another,  or  from  one  country 
to  another,  are  guided  by  the  endeavors  of  capitalists  and  laborers 
to  get  the  maximum  remuneration,  —  which  will  always  be  found 
where  the  value  of  the  marginal  product  of  capital  or  labor  is  a 
maximum. 

In  a  prosperous  country  it  is  apt  to  be  the  case  that  the  supply 
of  labor  and  the  supply  of  capital  are  being  increased  simultane- 
ously, though  not  necessarily  with  equal  rapidity,  while  more  land 
is  at  the  same  time  being  made  available  through  improvements 
in  transportation.  Save  under  such  exceptional  conditions  of  rail- 
way building  as  have  prevailed  in  the  United  States  during  the 
past  fifty  years,  the  available  supply  of  land  is  apt  to  increase 
more  slowly  than  the  other  factors  in  production  increase.  In 
general,  the  law  of  diminishing  productivity  will  necessitate  a  con- 
tinual increase  in  the  proportion  of  the  product  set  aside  for  the 
remuneration  of  each  unit  of  the  most  slowly  increasmg  factor  in 
production;  while,  of  the  other  two  factors,  the  one  that  increases 
more  rapidly  will  receive,  per  unit,  a  relatively  smaller  and  smaller 
proportion  of  the  value  of  the  total  product. 

QunnonB  ahd  xzmcmBs 

I.  Do  you  know  of  any  instances  where  the  distribution  of  wealth  has  been 
affected,  directly  or  indirecUy,  by  conscious  social  action? 

3.  Prepare  tables  or  diagrams  illustrating  the  operation  of  the  law  of 
diminishing  productivity  in  some  industry  with  which  you  nt  familiar. 

3.  Why  is  the  same  laborer  more  productive  in  America  than  in  Europe  ? 
Is  this  a  condition  that  wiU  probably  continue  indefinitely  ? 

4.  Why  do  lands  in  Belgium  produce  more  per  acre  than  similar  lands  In 
the  United  States? 


334  OUTLINES  OF  ECONOMICS 

5.  Why  are  twenty-story  office  buildings  not  erected  in  small  dtles? 

6.  What  is  the  relation  of  the  discussion  in  this  chapter  to  the  sodaliit 
coutention  that  labor  produces  all  wealth? 

BBFERXnCBS 

Casvbr,  T.  N.    The  DistribuUon  of  Wealth,  Chap.  IL 
Commons,  J.  R.     The  Distribuiion  of  Wealth,  Chs^.  IIL 
Fetter,  F.  A.     The  Principles  of  Economics,  Chap.  DC. 
Marshall,  Alfred,    Principles  of  Economics,  Vol.  I,  4th  ed.,  Book  VI, 
Chaps.  I  and  II. 


CHAPTER  XX 
THE  PERSONAL  DISTRIBUTION  OF  WEALTH 

In  the  present  chapter  we  shall  study  the  distribution  of  wealth 
and  income  among  individuals  simply  as  individuals,  and  not  as 
factors  of  production.  What  is  the  cause  of  large  fortunes  ?  Is 
the  middle  class  disappearing?  Can  we  abolish  poverty?  In 
the  chapter  on  Consumption,  reference  has  been  made  to  the  ideal 
distribution  of  wealth,  —  here  we  shall  deal  chiefly  with  actual 
conditions.  But  to  beg^n  with,  certain  distinctions  must  be  clearly 
drawn. 

Weatih  and  Income.  — The  distribution  of  wealth  and  income 
should  be  distinguished.  If  we  have  in  mind  simply  the  enjoy- 
ment of  material  things,  then  we  must  pay  attention  to  the  distri- 
bution of  income.  ^  A  man  of  vast  possessions  may  be  very  frugal 
in  his  consumption,  acting  with  respect  to  most  of  his  property 
simply  as  a  trustee  for  society.  But  when  we  are  interested  in 
social  classes,  industrial  democracy,  and  personal  power  and  inde- 
pendence, then  the  distribution  of  wealth  is  the  important  con- 
sideration. 

Abtolote  and  Relative  Well-being.  — Two  entirely  ihdependent 
inquiries  are  very  frequently  confused,  (i)  We  may  wish  to 
know  whether  the  condition  of  the  mass  of  the  people  is  getting 
better  or  worse.  Do  they  have  more  or  less  of  the  good  things  of 
life  than  their  ancestors  had?  But  we  may  also  ask,  (2)  What 
share  of  the  total  product  of  industry  is'  received  by  each  section 
of  the  community?  Which  section  is  gaining  upon  the  others? 
If  A  and  B  divide  a  catch  of  ten  fish  equally  to-day,  and  if  to- 
morrow A  gets  ten  out  of  a  total  catch  of  thirty,  then  absolutely 
his  income  has  increased,  but  relatively  it  has  declined. 

Concentration  of  Wealth  and  Large-scale  Production. — It  is  per- 
haps worth  while  to  warn  the  reader  against  confusing  the  question 

335 


336 


OUTLINES  OF  ECONOMICS 


of  large  and  small  fortunes  with  the  quesdon  of  large  and  small 
scale  production.  However  improbable,  it  is  at  least  conceivable 
that  there  might  be  an  equality  of  property  with  production 
carried  on  largely  as  it  is  to-day,  for  we  have  but  to  imagine  an 
equal  distribution  of  stock  holdings. 

Hetbods  of  measttring  Concentration  of  Wealth  and  Income.  — 
How  shall  we  tell  whether  the  middle  class  is  tending  to  disappear  ? 
A  common  method  is  to  make  a  classification  of  wealth  and  income, 
and  then  to  compare  the  number  of  persons  in  each  class  at  dif- 
ferent dates.  The  unreliability  of  the  conclusions  based  on  such  a 
procedure  is  made  clear  by  the  following  hypothetical  illustra- 
tion: Let  $ioo  be  distributed  among  ten  persons  as  follows: 
♦i»  ts,  iSf  *7i  S9»  *">  Si3i  *iS»  *i7,  Si9-  Then  suppose  each 
individual's  holding  is  doubled,  thus:  $a,  |6,  $io,  $14,  $18, 
$22,  $26,  $30,  $34,  $38.  Relatively  to  each  other  they  hie 
all  in  the  same  posidon  as  before,  but  by  the  erroneous  method 
of  comparison  referred  to,  there  appears  to  have  been  a  concen- 
tradon  because  the  number  in  the  highest  class  has  increased  most 
rapidly:  — 

TABLE  I 


dun 

Nuiazi 

DoUms 

First  Cue 

Second  Case 

0  and  less  than  5 

K  and  leSs  than  10 

a 

3 

2 

3 

z 

I 

10  and  less  than  15 

15  and  over 

3 

6 

A  satisfactory  method  of  comparing  the  distribudon  of  wealth  at 
different  epochs  must  take  account  of  the  changing  significance  of 
fixed  dassificadons  when  there  has  been  a  change  in  the  per  capita 
wealth.  This  can  be  done  by  observing  what  propordon  of  the 
wealth  is  owned  by  certain  secdons  of  the  populadon,  such  as  the 
poorest  third,  the  middle  third,  or  the  upper  third.  If  a  larger 
propordon  of  the  total  wealth  falls  into  the  hands  of  the  upper 
thirdi  we  may  say  there  is  evidence  of  a  growing  concentration  of 


THE  PERSONAL  DISTRIBUTION  OF  WEALTH         337 

wealth.  It  is  clear  that  no  definite  movement  is  necessarily  dis- 
cernible even  when  changes  are  taking  place,  for  these  changes 
may  tend  toward  concentration  in  one  part  of  sodety  and  toward 
diffusion  in  another. 

Statistics  of  DistrilmtioiL — There  are  many  investigations 
showing  the  earnings  of  particular  classes  of  workers,  but  in  the 
United  States  there  is  no  reliable  statement  of  the  division  of  the 
national  wealth  or  income  among  all  classes  of  sodety.  We  could 
not  use  the  property  tax  assessments  for  this  purpose  because  of 
their  inaccuracy,  and  because  of  the  fact  that  one  individual  may 
be  taxed  in  various  jurisdictions.  The  returns  of  the  probate 
courts  have  been  used  as  a  basis  for  a  statement  of  wealth  distri- 
bution in  the  United  States  on  the  assumption  that  the  distribution 
of  wealth  among  persons  who  die  in  any  year  is  an  index  of  the 
distribution  of  wealth  among  those  who  are  living.  But  the  in- 
completeness of  our  probate  returns  make  this  method  ako  a 
hazardous  one.  Such  statistics  as  we  have  do  not  enable  us  to 
say  more  than  that  a  small  proportion  of  the  population  at  the  top 
of  the  social  scale  controls  a  large  proportion  of  the  nation's  wealth, 
but  no  marked  tendency  either  toward  concentration  or  diffusion 
in  the  last  fifty  years  has  been  proved. 

The  growth  of  the  number  of  millionaires  has  been  used  as  an 
evidence  of  growing  wealth  concentration,  but  it  should  be  noted 
that  a  growth  of  population  and  wealth  in  a  conununity  would 
cause  an  increase  in  the  number  of  millionaires,  even  if  the  reladon 
between  the  various  classes  remained  the  same.  Suppose  that  in 
1850  there  had  been  in  the  United  States  but  fifty  millionaires,  that 
three  hundred  and  fifty  persons  had  from  $750,000  to  $1,000,000, 
and  that  six  hundred  persons  had  from  $500,000  to  $750,000.  If 
the  population  had  remained  the  same  and  every  one's  wealth  had 
been  doubled,  in  1900  there  would  have  been  one  thousand  mil- 
lionaires, and  if  the  population  at  the  same  time  increased  fourfold, 
with  the  relations  among  the  new  population  the  same  as  in  the  old, 
we  should  then  have  four  thousand  millionaires  without  any  tend- 
ency toward  concentration.  Nevertheless,  the  increase  of  large 
fortunes  has  been  so  startling  that  in  spite  of  these  considerations 
one  may  perhaps  regard  them  as  an  indication  of  a  growing  con- 
z 


338 


OUTLINES  OF  ECONOMICS 


ccntration  of  wealth.  The  lists  of  very  rich  men  published  in  the 
United  States  from  time  to  time  are  instructive  on  this  point.  In 
z8ao  men  with  a  personal  property  of  $20,000  were  included;  in 
1846  a  total  property  of  $50,000  was  considered  very  large;  in 
1855  this  was  doubled;  in  1892  a  man  must  be  a  millionaire  to  be 
considered  very  rich,  and  at  present  one  may  speak  of  even  a 
billionaire. 

More  satisfactory  statements  can  be  made  for  those  countries 
which  collect  an  income  tax.  The  following  figures  are  from  a 
table  prepared  by  Professor  Wagner,  in  a  study  of  the  income-tax 
returns  of  Prussia:  — 

TABLE  n 
iNcoicBS  IN  Prussia,  1892  and  1909  * 


Classxs  n  DatLAKs 

Pn  Ckmt  of  Piioons 

(Heads  of  Families  or  Single 

Adults) 

Pkb  Cent  ov  iNooia 
(That  bekm  |ax4  la  catinatad) 

xSga 

x9oa 

xSga 

xgoa 

Below  214 

214-714 

714-2261 

9361-7959 

7259-33800.  . . 
Over  23800.  . . 

78.18 
18.98 

2-33 
0.41 
0.08 

O.OI 

70.66 

25-83 
2.88 

0.51 
O.IO 

0.02 

41.21 
30.01 
12.8; 

7.37 
4.65 
3-93 

32.97 

34.92 

1373 

7.84 

540 

Absolute  amouats 
(Total) 

Number 
11,162,000 

Number 
12,813,000 

Dollars 
2,3091076,000 

Dollars 
3»039>49S»«» 

■  Fh)m  Zeitschzift  des  Preusaischen  Statisdaeben  Bureaus,  1904,  p.  ajx. 

The  great  mass  of  the  people  are  too  poor  to  pay  any  income  tax 
at  ally  the  minimum  income  taxed  being  $214.  The  upper  3.51 
per  cent  of  the  population  receives  about  one  third  the  total 
income,  but  in  connection  with  such  a  statement  it  should  be  said 
that  even  if  incomes  should  be  equally  distributed,  the  average 
income  per  fanaily,  or  single  adults,  would  be  very  small  ($337  in 
1903).  With  a  very  moderate  inequality  in  distribution,  the  mass 
of  the  people  must  still  be  unable  to  pay  an  income  tax.  Thus, 
the  table  shows  as  much  the  niggardliness  of  nature  as  the  injustice 


THE  PERSONAL  DISTRIBUTION  OF  WEALTH        339 

of  man  to  man.  From  189a  to  190a  there  seems  to  have  been  an 
absolute  increase  in  money  incomes  among  the  lowest  class  of  the 
people,  since  a  considerably  smaller  proportion  of  the  population 
is  found  in  the  class  with  incomes  below  $214  in  190a  than  in  189a. 
But  the  table  as  a  whole  shows  a  slight  tendency  toward  a  concen- 
tration of  incomes  in  the  hands  of  the  upper  classes. 

When  we  turn  from  the  question  of  relative  well-being  to  that  of 
the  actual  condition  of  each  class  taken  by  itself,  we  find  two  facts 
standing  out  prominently:  (i)  the  fruits  of  economic  progress 
have  not  been  confined  to  a  small  class,  but  have  been  shared  by 
the  masses,  and  (2)  a  surprisingly  large  section  of  the  population 
is  still  in  poverty. 

With  respect  to  the  first,  we  may  say  that  in  material  comforts 
the  people  of  this  generation  are  better  off  than  they  have  ever  been 
before.  The  work  of  settlement  in  which  so  many  of  our  fore- 
fathers engaged  was  laborious  and  exhausting.  Food  was  often 
scarce,  disease  was  rife  in  many  settlements,  and  the  women  and 
children  in  particular  suffered  greatly.  After  the  wilderness  was 
cleared,  there  ensued  a  period  of  "rude  plenty."  Food  was 
abundant,  but  it  was  coarse  in  quality  and  restricted  in  variety, 
whilst  everything  that  had  to  be  brought  from  a  distance  was  very 
expensive.  Education  was  difficult  to  secure,  books  scarce,  and 
the  lives  of  most  people  were,  in  the  main,  monotonous  and 
uneventful. 

The  course  of  wages  from  the  middle  of  the  eighteenth  century 
to  the  year  1905,  and  the  movement  of  prices  from  i860  to  the 
latter  date,  are  given  in  Table  III  following.  The  figiu-es  are  not 
altogether  comparable,  nor  so  trustworthy  as  could  be  wished,  but 
the  general  impression  which  they  give  is  correct.  Speaking 
generally,  money  wages  have  steadily  risen,  and  the  hours  of  labor 
have  declined,  with  minor  interruptions,  since  the  colonial  period, 
while  prices  have  fluctuated  irregularly.  Taking  all  kinds  of  com- 
modities into  account,  the  level  of  prices  in  the  last  half  century 
has  probably  been  little  if  any  above  the  level  of  prices  in  the  first 
half  of  the  nineteenth  century.  The  standard  of  living  has  per- 
ceptibly risen,  and  the  working  classes  save  no  more,  possibly, 
than  they  did  several  generations  ago.    But  they  live  better. 


340 


OUTLINES  OF  ECONOMICS 


TABLE  in 


Wages,  Pxicbr,  ans 

HouBS  OF  Labor   1 

Wages 

,  Prices,  and 

H0US8 

IN  z86o  TAKEN  AS 

zoo 

OF  Labor  in  1890  taken 

AS  100 

Employeks  in  Manvfactuking 

Gbnbeal  Industey,  excluding 

Aguculturb,  Mining,  and 
Tkanspoktation 

Relatzvb 

Rklativb 

Rkla- 

1 

Pekiod 

YiAm 

Cost 

Hours 

Ybab 

Hours 

Waoxs 

Wafes* 

of 

of 
Ubor3 

Wages  4 

Prices  5 

of 
Ijihor* 

i75a-^ 

.29 

i860 

100 

100 

100 

1881 

95-3 

"4.5 

103 

1761-70 

1771-80 

•3^5 

1861 

100 

III 

99.1 

1882 

96.9 

II7-S 
1 14.8 

103 

.376 

1862 

100 

"3 

98.2 

1883 

97-7 

103 

1781-90 

.428 

1863 

109 

137 

98.2 

1884 

98.5 
97.8 

107.7 

103 

1791-00 
I80I-IO 

.623 

1864 

120 

163 

98.2 

1885 

100.8 

103 

.817 

1865 

141 

175 

97-3 

1886 

97.8 

99.6 

102 

i8n-2o 

.910 

1866 

153 

172 

98.2 

1887 

98.6 

100.3 

100 

1821-30 

:!?$ 

1867 
1868 

172 

164 

98.2 

1888 

99.2 

102.1 

100 

1831-40 

167 

165 

96.4 

1889 

99.6 

102.1 

100 

1841-50 

.852 

1869 

174 

163 

96.4 

1890 

100.0 

100.0 

100 

1851-60 

•975 

1870 

:;i 

'57 

95-5 

1891 

99-7 

101.4 

99.8 

1871 

148 

95-5 

1892 

100.3 

995 

99.8 

1872 

174 

147 

95-5 

1893 

100.2 

102.0 

99.6 

1873 

175 

149 

95-5 

1894 

96.7 

97-4 

99.1 

1874 

170 

M5 

95-5 

1895 

97.4 

955 

99-4 

1875 

161 

141 

93-6 

1896 

98.5 

93-3 

99.1 

1876 

156 

134 

93-6 

1897 

98.2 

94.0 

98.9 

1877 

146 

131 

93-6 

1898 

99.0 

96.4 

99.0 

1878 

142 

126 

93-6 

1899 

100.2 

97.2 

98.5 

'52^ 

140 

"3 

93-6 

1900 

103. 1 

98.7 

98.0 

1880 

137 

"5 

93-6 

1901 
1902 

1903 
1904 

190S 

104.8 
108.2 
III. 2 
III. I 
1 1 2.8 

102.7 
108.3 

107.7 
109. 1 
109.8 

97-4 
96.6 

95-9 
95« 
95.3 

■  Data  from  Report  of  Massachusetts  Bureau  of  Statistics  of  Labor  for  1885,  p^  455. 

■  Data  from  Mitchell,  Gold,  Prices^  and  Wages  under  the  Greenback  Standard,  pp.  s4S-944- 
The  cost  of  living  here  is  based  upon  retail  prices  and  covers  rent  as  well  as  food,  etc 

3  Baaed  upon  statistics  covering  ax  industries  given  in  the  Aldrich  Report  on  Wholesale 
Prices,  Wages,  and  Transportation. 

*  Statistics  for  1881-1889  cover  2$  city  occupations,  and  are  based  upon  data  given  in  Bui- 
ktin  of  the  Bureau  of  Labor,  No.  18,  p.  669.  Statistics  for  1890-1905  cover  549  occupations, 
and  are  baaed  upon  data  given  in  Bulletin  of  the  Bureau  of  Labor,  No.  65,  p^  30. 

« Wholesale  prices  from  x88x  to  1889,  based  upon  data  given  m  the  Aldrich  Report  on 
Wholesale  Wages,  Prices,  and  Transportation,  Part  I,  p.  99.  Retail  prices  of  food  from  1890 
to  X905,  from  the  Bulletin  last  dted. 

*  From  the  Aldrich  Report  and  Bulletin  dted  above.  After  1890,  statistict  are  based*  on 
hours  of  labor  per  week. 


THE  PERSONAL  DlSTRIBUtlON  6f  WfiALtii       ^4! 

Regarding  the  second  proposition,  we  may  say  that  reliable 
English  investigations  show  that  more  than  one  fourth  of  the  popu- 
lation of  the  cities  of  London  and  York  are  below  the  poverty  line. 
To  be  sure,  it  is  not  easy  to  determine  definitely  how  poor  a  person 
must  be  in  order  to  be  ''in  poverty,"  but  the  statement  just  made 
is  based  upon  standards  that  are  undeniably  conservative.  But 
a  number  of  those  actually  in  poverty  have  enough  income  to  pur- 
chase the  minimum  physical  requirements  if  they  knew  how  to 
spend  their  money  wisely.  In  the  dty  of  York  9.91  per  cent  of 
the  population  had  insufficient  earnings  for  minimum  require- 
ments estimated  at  $5.25  per  week  for  a  family  of  five.  This 
minimum  is  very  low,  and  it  is  easily  within  the  mark  to  say  that 
at  least  a  fifth  of  the  population  of  York  did  not  have  in  1899  a 
sufficient  income  for  a  decent  existence.  In  the  United  States 
the  proportion  of  the  urban  population  below  the  poverty  line  is 
probably  somewhat  less,  but  reliable  statistics  cannot  be  quoted. 

A  recent  writer  has  estimated  that  ten  million  persons  in  the 
United  States  are  in  poverty,  not  all  in  distress,  but  "much  of  the 
time  underfed,  poorly  clothed,  and  improperly  housed."  The 
estimate  is  based  on  statistics  of  imemployment,  retiuns  of  boards 
of  charity,  court  records  of  evictions,  and  pauper  burials.  What- 
ever the  actual  figiu*es  may  be,  they  would  doubdess  be  startling 
in  comparison  with  statistics  of  oiu*  industrial  progress. 

Causes  of  Poverty  and  Riches.  — The  explanations  of  poverty 
and  riches  may  be  divided  into  two  classes :  (i)  those  that  empha- 
size individual  responsibility,  and  (3)  those  that  emphasize  social 
responsibility.  According  to  the  first,  a  comfortable  fortime  is  the 
reward  of  efficiency,  and  poverty  the  penalty  of  inefficiency.  To 
find  fault  with  existing  wealth  distribution,  it  is  alleged,  is  to  find 
fault  with  natiu-e  for  making  individual  differences  in  ability  so 
enormous.  That  there  are  idle  and  worthless  persons  among  the 
rich  is  not  to  be  denied,  but  they,  it  is  said,  are  to  be  regarded  as 
the  exceptions.  As  a  class,  according  to  this  view,  the  rich  add 
more  to  the  wealth  of  society  than  they  consume,  and  they  do  not 
m  reality  deduct  anything  from  the  income  of  the  lower  classes. 

Those  who  emphasize  the  second  explanation,  on  the  other  hand, 
point  to  the  existence  of  all  sorts  of  special  privileges  which  enable 


^Ct  OUTLINES  OF  ECONOMICS 

the  few  to  levy  toll  on  the  commerce  of  the  nation.  They  assert 
that  the  fortunes  of  most  millionaires  originated  under  the  shelter 
of  some  monopolistic  enterprise.  As  to  the  poori  they  call  atten- 
tion to  the  fact  that  inefficiency  may  be  the  result  of  poverty  as 
well  as  the  cause  of  it.  Society  must,  therefore,  take  active  meas- 
ures to  better  the  environment  of  the  poor.  They  must  be  taught 
to  live  wisely,  and  their  children  must  be  given  a  fair  chance  in  Uf e. 
Children  who  do  not  get  enough  to  eat  when  young  cannot  be  ex- 
pected to  take  care  of  themselves  when  they  are  men  and  women. 

"The  prime  importance  of  monopoly  privileges  in  the  distribution  of 
wealth  is  shown  by  the  results  of  the  investigation  of  the  New  York  Tribune 
(1892)  in  its  efforts  to  ascertain  the  sources  of  the  fortunes  of  the  millionaires 
of  the  United  States.  That  investigation  was  undertaken  to  show  that  the 
system  of  protection  has  not  been  the  main  cause  for  monopolies  and  great 
fortunes.  The  investigation  amply  demonstrated  this  proposition.  Of 
the  4047  millionaires  reported,  only  11 25,  or  28  per  cent,  obtained  their 
fortunes  in  protected  industries.  The  following  partly  estimated  summaries 
are  based  on  the  Tribune  report.  They  show  that  about  78  per  cent  of  the 
fortunes  were  derived  from  permanent  monopoly  privileges  and  only  01,4 
per  cent  from  competitive  industries  unaided  by  natural  and  artificial  monopo- 
lies. Yet  there  can  be  no  question  that  if  these  21.4  per  cent  were  fully 
analyzed,  it  would  appear  that  they  were  not  due  solely  to  personal  abili- 
ties unaided  by  these  permanent  monopoly  privileges.  They  were  mostly 
obtained  from  manufactures,  and  five  sixths  of  the  manufactures  of  the 
country  are  based  on  patents.  Besides,  fortunate  investments  in  real  estate. 
Stocks,  etc.,  have  often  contributed  to  fortunes  where  they  do  not  appear 
prominently.  Furthermore,  if  the  size  of  the  fortunes  is  taken  into  account, 
it  will  be  found  that  perhaps  95  per  cent  of  the  total  values  represented 
by  these  millionaire  fortunes  is  due  to  those  investments  classed  as  land 
values  and  natural  monopolies  and  to  competitive  industries  aided  by  such 
monopolies."  ^ 

Those  who  take  this  second  view  do  not  deny  that  individual 
differences  in  ability  exist  and  are  a  cause  for  a  difference  in  for- 
tune. But  they  think  that  conditions  are  such  that  differences  in 
reward  are  quite  out  of  proportion  to  the  difference  in  ability.  A 
little  shrewdness  may  accumulate  a  fortune  just  as  the  touch  of  a 
child's  hand  may  start  a  bowlder  down  the  moimtain  side.' 

The  controversy  as  to  the  ultimate  responsibOity  for  poverty 

'  Commons,  The  Distribution  of  Wealth,  p.  352. 

*  The  relation  of  competitive  wages  to  effidency  is  discussed  In  Chapter  XXu. 


•THE  PERSONAL  DISTRIBUTION  OF  WEALTH        343 

cannot  be  settled  by  an  appeal  to  the  results  of  the  investigations 
that  have  been  made  as  to  the  immediate  causes  of  poverty.  The 
investigation  in  the  city  of  York,  before  referred  to,  gives  the  fol- 
lowing as  to  the  immediate  causes  of  primary  poverty,  that  is, 
where  the  income  was  insufficient  to  provide  the  minimum  re« 
quirements  for  physical  efficiency  even  if  wisely  spent:  -^ 

TABLE  IV 
Immsdiate  Causes  op  "Primary*'  Poverty* 


PkI  CKMT  or  POPOLAtlOM 
«  FOVXRTT 


Death  ol  chief  wage  earner 

Illness  or  old  age  of  chief  wage  earner 

Chief  wage  earner  out  of  work 

Irregularity  of  work 

Largeness  of  family,  >.«.  more  than  four  children. 
In  regular  work  but  at  low  wages 


15.63 

S-" 

a.31 

t.83 

M.16 

51-96 


^  Rowntree,  Pcveriy,  p.  xao. 

la  Greater  Diffoaion  Possible?— Most  people  agree  that  a 
greater  equality  of  possessions  would  be  desirable  if  it  could  be 
brought  about  without  any  confiscation  of  the  real  earnings  of  the 
more  efficient  members  of  society.  The  idea  of  a  leisure  class 
whose  mission  is  to  further  culture  without  great  contribudon  to 
the  production  of  what  it  consumes,  does  not  find  much  favor  in 
this  democratic  age.  The  disadvantages  of  wide  extremes  in 
wealth  have  been  so  often  pointed  out  by  social  philosophers  that 
they  need  not  be  emphasized  here.  But  those  who  believe  that 
the  competitive  system  roughly  apportions  rewards  according  to 
individual  production  will  say  that  nothing  can  be  done  directiy  to 
diffuse  wealth.  That  each  individual  should  bear  the  consequences 
of  his  own  conduct,  they  think  is  necessary  as  a  discipline  for  the 
race.  **  Give  the  children  of  the  shiftiess,  by  thoughtiess  charity 
or  various  systems  of  poor  relief,  the  right  to  eat  the  substance  of 
the  efficient  and  the  prudent,  and  you  will  soon  lose  both  the 


344  OUTLINES  OF  ECONOMICS 

capital  and  the  morality  under  which  that  capital  has  been  cre- 
ated," *  says  a  writer  of  this  class. 

Those,  on  the  other  hand,  who  think  that  something  can  and 
should  be  done  directly,  question  the  possibility  of  discovering  the 
separate  productivity  of  workers  under  modem  complex  indus- 
trial conditions  with  any  degree  of  exactness,  and  think  there  is 
little  danger  of  discouraging  industry  and  thrift.  If  the  highest 
incomes  were  $100,000  per  year,  men  would  struggle  just  as  hard 
as  they  do  now  to  get  into  the  highest  class. 

If  we  take  the  view  that  something  can  be  done  to  lessen  the 
extreme  inequality  in  wealth  distribution  that  exists  at  the  present 
time,  it  is  necessary  to  formulate  some  programme  of  social  re- 
form. In  framing  such  a  progranune  it  must  be  remembered,  on 
the  one  hand,  that  the  right  of  private  property  is  not  an  abso- 
lute right.  No  one  has  a  vested  interest  in  that  institution,  and  we 
are  at  liberty  to  make  such  modification  in  the  institution  as  will 
contribute  to  the  social  welfare.  For  the  present  the  measures  here 
advocated  are  not  in  the  slightest  danger  of  being  carried  so  far  as 
to  discourage  that  wealth-getting  ambition  which  is  considered  by 
many  to  be  essential  to  progress.  On  the  other  hand,  there  is 
danger  of  injuring  by  wrong  methods  the  very  persons  whom  it  is 
desirable  to  elevate.  Indiscriminate  charity  may  convert  poverty 
to  pauperism. 

"This  distinction  between  the  poor  and  the  paupers  may  be  seen  every- 
where. There  are,  in  all  large  cities  in  America  and  abroad,  streets  and  courts 
and  alleys  where  a  class  of  people  live  who  have  lost  all  self-respect  and 
ambition,  and  who  rarely  if  ever  work,  who  are  aimless  and  drifting,  who  like 
drink  and  who  have  no  thought  for  their  children,  and  who  live  aimless  and 
contentedly  on  rubbish  and  alms.  ...  In  our  American  cities,  Negroes, 
Whites,  Chinese,  Mexicans,  Half-breeds,  Americans,  Irish,  and  others  are 
indiscriminately  housed  together  in  the  same  tenements  and  often  in  the 
same  rooms.  The  blind,  the  crippled,  the  consumptive,  the  aged,  — the 
ragged  ends  of  life;  the  babies,  the  children,  the  half -starved,  underdad 
beginnings  in  life,  all  huddled  together,  waiting,  drifting.  This  is  pauper- 
bm.  There  is  no  mental  agony  here;  they  do  not  work  sore;  there  is  no 
dread ;  they  live  miserable,  but  they  do  not  care. 

"In  these  same  cities,  and  indeed  everywhere,  there  are  great  districts  of 
people  who  are  up  at  dawn,  who  wash  and  dress,  and  eat  breakfast,  kiss 
*  Hadlcy,  Economics,  p.  49. 


THE  PERSONAL  DISTRIBUTION  OF  WEALTH        345 

wives  and  children,  and  hurry  away  to  work  or  to  aeek  work.  The  world 
rests  upon  their  shoulders;  it  moves  by  their  muscle;  everything  would  stop 
if  for  any  reason  they  should  decide  not  to  go  into  the  fields  and  factories  and 
mines.  But  the  world  is  so  organized  that  they  gain  enough  to  live  upon 
only  when  they  work ;  should  they  cease,  they  are  in  destitution  and  hunger. 
The  more  fortunate  of  the  laborers  are  but  a  few  weeks  from  actual  distress 
when  the  machines  are  stopped.  Upon  the  unskilled  masses  want  is  con- 
stantly pressing.  As  soon  as  employment  ceases,  suffering  stares  them  in 
the  face.  They  are  the  actual  producers  of  wealth,  but  they  have  no  home 
nor  any  bit  of  soil  which  they  can  call  their  own.  They  are  the  millions  who 
possess  no  tools  and  can  work  only  by  permission  of  another.  In  the  main 
they  live  miserably,  they  know  not  why.  They  work  sore,  and  yet  gain  noth- 
ing. They  know  the  meaning  of  hunger  and  the  fear  of  want.  They  love 
their  wives  and  children.  They  try  to  retain  their  self-respect.  They  have 
some  ambition.  They  give  to  neighbors  in  need,  yet  they  are  themselves  the 
actual  children  of  poverty.'' ' 

We  shall  not  discuss  here  the  methods  of  alleviating  the  suffer- 
ing that  comes  from  poverty.  The  best  methods  of  charitable 
relief  are  necessary  as  palliatives,  but  they  cannot  cure  the  evib  of 
poverty.  Two  classes  of  reform  measures  should  be  distinguished: 
(i)  those  that  aim  to  alter  the  methods  of  wealth  acquisition  in  the 
future,  and  (2)  those  that  aim  to  diffuse  the  excessive  accumu- 
lations of  the  past. 

Modifying  the  Methods  of  Wealth  Acquisition.  —  These  methods 
again  faU  into  two  classes:  (a)  prevention  of  improper  methods  of 
wealth  acciunulation;  (b)  eliminating  or  strengthening  the  in- 
efficient members  of  society.  Under  the  first  of  these  falls  the 
problem  of  reducing  to  lower  terms  such  incomes  as  are  indi- 
vidually unearned.  There  must  be  such  control  of  monopolistic 
privileges  as  to  keep  them  from  being  the  means  of  exploiting  the 
masses.  Fraud  and  favoritism  must  be  eliminated  so  that  income 
shall  not  be  wholly  out  of  proportion  to  service  or  needs. 

The  second  class  includes  a  large  variety  of  methods,  (i)  It  is 
possible  to  do  something  to  prevent  defective  human  beings  from 
being  bom.  There  is  a  growing  sentiment  in  favor  of  preventing 
the  marriage  of  persons  who  are  not  fit  for  marriage.  No  indi- 
vidual would  be  deprived  of  any  important  right  if  a  medical  cer- 
tificate of  good  health  were  made  a  condition  precedent  to  the 

*  R.  Hunter,  Povtriyy  pp.  3-5. 


346  OUTLINES  OF  ECONOMICS 

granting  of  a  marriage  license.  (3)  Education  should  be  made 
compulsory  with  the  endeavor  of  making  the  rising  generation 
not  only  efficient  producers  of  wealth,  but  also  wise  spenders  of 
what  they  receive.  (3)  It  is  possible  to  provide  against  the  mis- 
fortunes of  life  by  insurance  of  various  kinds.  If  men  will  not 
voluntarily  make  provision  for  themselves  and  for  those  dependent 
upon  them  in  cases  of  sickness,  accident,  old  age,  and  premature 
death,  they  should  be  helped  to  do  so  indirectly  by  some  com- 
prehensive system  of  workingmen's  insurance  and  old  age  pen- 
sions. (4)  The  solution  of  the  problem  of  unemployment  depends 
upon  more  indirect  measures,  such  as  monetary  and  banking 
reform,  which  steady  the  progress  of  industry,  although  European 
experiments  show  that  there  are  possibilities  in  insurance  against 
unemplo3anent.  (5)  Opportunities  for  saving  should  be  multi- 
pb'ed.  The  establishment  of  postal  savings  banks  would  be  of 
some  assistance.  (6)  The  health  and  vigor  of  the  people  should 
be  improved  by  sanitation  and  by  legislation  which  improves  the 
conditions  of  work. 

The  DUfasion  of  Wetlth.  —To  some  extent  large  fortunes  dis- 
appear without  governmental  interference,  but  it  takes  com- 
paratively slight  ability  to  maintain  an  inherited  estate.  It  does 
not  seem  practicable  or  desirable  to  limit  directly  the  total  amount 
of  wealth  which  a  man  may  own,  but  there  is  no  reason  why  the 
'government  should  refrain  from  consciously  encouraging  the  dif- 
fusion of  wealth.  The  regulation  and  taxation  of  inheritances 
seems  to  be  the  proper  remedy  in  this  connection,  even  if  its  action 
is  somewhat  slow. 

QUESTIONS  AKD  EXERCISES 

I.  Can  anything  be  said  in  favor  of  a  leisure  class? 
3.  Would  Mr.  Carnegie's  plan  of  levying  an  inheritance  tax  of  50  per 
cent  destroy  the  incentive  to  work? 

3.  Explain  the  various  systems  of  poor  relief. 

4.  Describe  the  German  system  of  compulsory  insurance. 

5.  Describe  the  old  age  pension  system  in  Australia. 

6.  What  objections  have  been  offered  against  postal  savings  banks? 

7.  Discuss  the  following  statement:  "We  have,  then,  little  reason  for 
expecting  that  the  prevailing  insecurity  in  the  lot  of  the  modern  workman 
will  ever  be  removed  by  the  development  of  individual  thrift."  —  A.  S.  JOBW- 
SON,  Political  Science  Quarterly,  Vol.  XXII,  p.  244. 


THE  PERSONAL  DISTRIBUTION  OF  WEALTH        347 

REFERENCES 

Adams,  T.  S.,  and  Sumner,  H.  L.    Labor  Problems,  Chap.  V. 

Brooks,  J.  G.     The  Social  Unrest,  Chap.  VII. 

Booth.     Life  and  Labour  of  the  People  in  London,  final  volume. 

Cannan,  Edwin.    "  Division  of  Income,"  Quarterly  Journal  of  Economics^ 

Vol.  19,  p.  341. 
Commons,  J.  R.    DistribuHon  of  Wealth,  pp.  95a  sqq, 
Devine,  E.  T.    Principles  of  Relief. 

Eliot,  C.  W.    "  Great  Riches,"  World^s  Work,  Vol.  11,  p.  7451. 
Ely,  R.  T.    Evolution  of  Industrial  Society,  Chap.  VI,  Part  I. 
Hadley,  a.  T.    Economics,  pp.  39-63  and  330-335. 
Hunter,  Robert.    Poverty. 
Hobson  J.  A.    The  Social  Problem,  Chap.  IV,  and  Problems  of  Poverty, 

Chap.  IX. 
Henderson,  C.  R.    Modern  Methods  of  Charity. 
Johnson,  A.  S.    "  Influences  afiFecting  the  Development  of  Thrift,"  PeHtical 

Science  Quarterly,  Vol.  XXII,  No.  a. 
London,  Jack.     The  People  of  the  Abyss. 

Laughlin,  J.  L.     "Large  Fortunes,"  Atlantic  Monthly,  Vol.  96,  p.  40. 
Mallocx,  W.  H,    **  Great  Fortunes  and  the  Community,"  North  American 

Review,  Vd.  183,  p.  349. 
Paupers  in  Almshouses,  1904.    Special  Report  of  the  Bureau  of  the  Census. 
Rowntree.    Poverty,  A  Study  in  ToTvn  Life. 
Spargo,  John.     Socialism,  Chap.  V. 

Spahr,  C.  B.     The  Present  Distribution  of  Wealth  in  the  United  States. 
Ssager,  H.  R.    Outline  of  a  Program  of  Social  Reform,  Charities  and 

the  Commons,  February  a,  1907. 
Warner,  A.  G.    American  Charities. 
Watdns,  G.  B.    "The  Growth  of  Large  Fortunes,"  Publications  of  the 

American  Economic  Association,  November,  1907. 
Yottngman,  Anna.    "The  Fortune  of  John  Jacob  Astor,"  Journal  of 

Political  Economy,  June,  1908. 


CHAPTER  XXI 
THE  RENT  OF  LAND 

Rent  is  the  price  paid  for  the  services  of  land.  In  common 
usage  the  meaning  of  the  word  is,  however,  much  less  exact. 
That  which  one  pays  for  the  use  of  durable  goods  of  any  kind 
owned  by  another  is  conmionly  caUed  rent.  The  payment  for 
the  use  of  a  house  or  a  business  building  is,  for  example,  counted 
as  rent.  We  shall  see  that  in  this  case  the  so-called  rent  really 
consists  of  two  elements, — one  a  ground  rent,  or  rent  proper,  the 
other  capital  rent,  or  what  we  shall  call  gross  interest.  If  this 
distinction  seems  fanciful,  it  is  only  because  we  are  accustomed 
to  see  the  two  united  under  one  ownership.  But  in  most  large 
dties  separate  ownership  is  common.  Sometimes  one  man  owns 
the  land  and  leases  it  for  a  long  term  of  years  to  another  who 
erects  buildings  upon  it,  which,  either  with  or  without  payment, 
become  the  property  of  the  landowner  at  the  expiration  of  the 
lease,  unless  it  is  renewed,  and  if  it  is  renewed,  the  one  who  pos- 
sesses the  building  must  frecjuendy  pay  for  it.  Often,  however, 
the  separation  in  ownership  is  a  permanent  one,  the  house  owner 
pa3dng  perpetually  an  annual  sum  for  the  use  of  the  ground. 
This  is  the  case  in  Baltimore,  for  example,  where  ground  rents 
are  an  important  feature  in  the  economic  life  of  the  city.  In 
such  cases  the  two  kinds  of  income  are  very  clearly  distinguished. 

Some  modem  economists  have  extended  the  meaning  of  both 
rent  and  interest,  using  them  as  two  different  ways  of  describ- 
ing one  form  of  income,  rather  than  as  two  distinct  kinds  of  in- 
come. This  usage  is  based  on  the  obvious  fact  that  the  rent 
which  a  landlord  receives  for  an  acre  of  land  may  easily  be  com- 
puted as  a  certain  rate  of  interest  on  the  money  value  of  the  land, 
just  as  the  amount  earned  by  a  machine  may  be  viewed  either 

348 


THE  RENT  OF  LAND  349 

as  the  rent  of  the  machine  or  as  interest  on  its  money  value. 
But  we  shall  see  later  that  the  income  from  other  production 
goodsy  while  governed  in  part  by  the  same  laws  that  control  the 
income  from  land,  is  also  governed  in  part  by  very  different  laws. 
Without  dwelling  further  upon  this  distinction  at  this  stage  of 
our  discussion,  let  us  remember  that  in  the  great  majority  of  eco- 
nomic writings  the  term  "  rent "  means  only  an  income  from  land, 
and  that  it  is  used  only  in  this  sense  in  the  following  discussion. 
The  Services  of  Land.  —  The  first  thing  to  be  noted  about 
land  is  its  quality.  Differences  of  fertility  are  familiar  to  every  one, 
and  depend  upon  what  has  been  known  as  the  "original  and 
indestructible  properties  of  the  soil."  An  effort  has  been  made 
by  certain  writers  to  minimize  or  deny  the  significance  of  this 
factor.  It  has  been  said  that  "soil "is  not  indestructible,  that 
it  may  be  exhausted  or  removed  from  land  altogether,  and  that 
it  may  in  turn  be  created  by  means  of  fertilization.  These  writers 
recognize  in  land  no  other  indestructible  property  than  standing 
room.  This  objection  arises  from  the  use  of  the  word  "  soU  "  in  a 
narrow  sense.  If  by  "  sofl  "  we  mean  only  that  thin  top  layer 
containing  some  elements  necessary  to  plant  life,  it  is  true  that 
this  may  be  carted  on  or  off  at  pleasure,  that  it  may  be  wasted 
or  replenished.  But,  granting  this,  there  still  remain  many 
qualities  of  land  which  are  indestructible  and  unprodudble, 
and  which  so  directly  affect  the  productiveness  of  the  land  that 
we  may  not  inappropriately  call  them  "properties  of  the  sofl." 
Such  a  property  is  the  conformation  of  the  land.  A  steep,  grav- 
elly hillside  will  by  no  possible  effort  equal  a  plain  in  fertility. 
The  north  side  of  a  mountain  cannot  be  made  to  produce  the 
same  as  the  south  side.  Climate  is  not,  to  be  sure,  a  "  property 
of  the  sofl,"  but  it  is  an  inseparable  appurtenance  of  the  land, 
and  upon  it  the  productiveness  of  the  land  primarfly  depends. 
It  is  needless  to  say  that  the  ownership  of  a  piece  of  land  carries 
with  it  the  advantage  of  all  the  conditions  which  attach  to  that 
land.  It  is  simply  true,  therefore,  that  the  expression  "original 
and  indestructible  properties  of  the  soU"  is  an  inadequate  and 
misleading  expression;  not  that  there  is  nothing  but  standing 
room  to  be  considered  under  such  a  term. 


350 


OUTLmES  OF  ECONOMICS 


Wo  will,  therefore,  adopt  another  expression  to  explain  what 
we  mean  by  quality  in  land;  namely,  the  irremovable  conditions 
affecting  its  productiveness.  Of  these  its  extent  (standing  room), 
its  conformation,  and  its  climate  are  essentially  original  and  in- 
destructible. Others,  such  as  are  connected  with  the  **  soil "  in 
the  narrow  sense,  are  not  indestructible  nor  necessarily  original, 
but  they  affect  rent  none  the  less.  In  defining  quality  as  the 
conditions  affecting  productiveness  of  land,  we  have  discarded 
the  word  "soil"  because  it  has  proved  itself  treacherous;  we 
have  omitted  the  words  "original  and  indestructible"  because 
fertility  may  be  artificial,  and  is  always  destructible.  On  the 
other  hand,  fertility,  even  when  artificial,  becomes  essentially  a 
property  of  the  land.  While  it  is  physically  removable,  it  is  not 
economically  so.  From  the  case  where  capital  is  embodied  in 
land  and  entirely  assimilated  to  it  in  character,  we  pass  by  in- 
sendble  gradations  to  fences,  bams,  houses,  etc.,  which  more 
and  more  assume  the  character  of  capital  as  distinguished  from 
land.  It  would  be  possible  to  restrict  the  term  "  land  "  to  strictiy 
natural  land,  and  apply  the  term  "  capital "  to  all  products,  in- 
cluding the  soils  of  old  land.  This  would  be  a  logical  distinction, 
but,  like  so  many  logical  distinctions,  it  would  be  confusing.  On 
the  other  hand,  if  we  include  under  land  all  capital  that  has  been 
incorporated  in  it,  we  must  recognize  that  there  is  no  absolute 
line  of  division  between  land  and  capital.  Thus  we  are  again 
reminded  that  distinctions  in  economics,  as  well  as  in  practical 
life,  are  questions  of  convenience,  and  are  good  or  bad  according 
as  they  are  more  or  less  useful. 

The  second  great  fact  regarding  land  is  locaHon.  On  one  side 
this  is  closely  connected  v/ith  climate.  Land  situated  near  a 
body  of  water  or  near  a  mountain  range  is  much  affected  by 
these  great  controllers  of  climate.  But  a  more  distinct  meaning 
of  the  word  is  location  with  regard  to  the  consumers  of  products. 
Everybody  knows  that  land  a  hundred  miles  from  market  is, 
other  things  being  equal,  worth  more  than  land  a  thousand  miles 
from  market.  This,  however,  is  a  question  of  accessibility  rather 
than  of  mere  distance.  Land  may  be  far  away  and  yet  easy  to 
reach,  or  near  and  difficult  of  access.    It  will  be  noted  that  any 


THE  RENT  OF  LAND  351 

change  in  the  co&t  of  transportation  affects  rents.  The  rents  of 
England  have  been  revolutionized  by  cheap  ocean  transporta- 
tion, which  has  practically  brought  distant  land  very  near  to  her 
shores.  To  this  fact  of  location  we  must  ascribe  almost  wholly 
the  enormous  rents  paid  for  dty  lots.  Here,  again,  transporta* 
tion  facilities,  such  as  are  afforded  by  good  rapid  transit  systems, 
powerfully  affect  rents. 

One  important  difference  in  the  way  quality  and  location  affect 
rent  must,  however,  be  noted.  The  quality  of  a  piece  of  land 
affects  the  amount  of  its  physical  product;  it  determines  how 
many  bushels  of  wheat  or  how  many  pounds  of  cotton  it  will 
yield  with  a  given  amount  of  cultivation.  The  location  of  land 
does  not,  it  is  true,  affect  the  amount  of  its  phydcal  product, 
but  it  does  affect  the  price  of  the  product,  since  that  varies  with 
the  expense  of  transporting  the  product  to  market.  The  value 
of  a  piece  of  land  to  the  user  depends  upon  the  value  of  its  yield, 
which  is  ascertained  by  multiplying  the  number  of  units  of  prod- 
uct by  the  price  per  unit.  Suppose  a  man  owns  two  wheat  farms 
of  equal  size,  one  in  Dakota  and  one  in  Illinois.  If  the  farm  in 
Dakota  produces  thirty  bushels  of  wheat  to  the  acre,  and  it  costs 
twenty  cents  a  bushel  to  get  it  to  the  Chicago  market,  where  wheat 
is  selling  at  a  dollar  per  bushel,  while  the  farmer  in  Illinois  pro- 
duces twenty-five  bushels  to  the  acre,  and  it  costs  four  cents  a 
bushel  to  get  this  to  the  Chicago  market,  the  farms  are  equally 
productive  so  far  as  the  owner  is  concerned,  for  in  each  case  he 
will  get  $24  for  an  acre's  yield  of  wheat.  If  the  other  conditions 
of  production  are  the  same,  the  farms  are  equally  valuable  to  the 
owner.  From  the  social  point  of  view,  too,  one  of  the  farms  is 
as  good  as  the  other.  For  the  costs  of  transportation,  of  moving 
things  to  where  they  are  wanted,  have  to  be  counted  among  the 
legitimate  and  necessary  costs  of  production.  In  short,  we  may 
say  that  the  two  pieces  of  land  are  equally  gi>od  land.  When  we 
speak  of  good  land,  therefore,  in  connection  with  the  subject  of 
rent,  we  mean  land  which  for  all  purposes  taken  together  is  de- 
sirable. 

Rent  under  Assumed  Conditions  of  Uniform  Intensivity  of 
Cultivation. — The  first  settlers  in  a  new  country  have  no  need  to 


352 


OUTLINES  OF  ECONOMICS 


pay  rent.  They  find  plenty  of  land,  and  even  the  best  of  it  will  be 
a  free  good,  like  air  or  water.  So  long  as  any  man  can  get  land 
of  the  best  quality  free,  there  is  no  reason  why  he  should  pay  rent 
to  any  one  else.  But  this  fortunate  state  of  affairs  will  last  only 
so  long  as  some  of  the  best  lands  remain  unoccupied.  When 
increase  in  the  population  makes  the  utilization  of  inferior  lands 
necessary,  the  owners  of  the  better  lands  will  be  able  to  demand 
and  receive  a  rent  for  the  use  of  their  lands.  This  will  be  made 
clear  by  reference  to  Figiure  i,  which  is  constructed  on  the  assump- 


G  D  M  F       " 

Flo.  I  ^ 

tk>n  that  there  are  six  grades  of  land,  A^  B,Cy  D,  E,  and  F,  and 
that  for  all  these  lands  the  same  amount  of  cultivation  per  acre 
b  necessary.  The  successive  rectangles  represent  the  selling 
value  of  the  product  that  can  be  raised  on  one  acre  of  each  of 
these  different  grades  of  land,  by  the  use  of  a  fixed  amount  of 
labor  and  capital.  The  product  of  an  acre  of  the  best  land,  A, 
will  sell  for  Oamy  dollars.  Until  all  of  this  best  land  is  occupied, 
no  rent  will  be  paid,  and  the  entire  value  of  the  product  will  be 
available  for  the  expense  of  the  capital  and  the  wages  of  labor 
employed  in  its  cultivation.* 

As  soon,  however,  as  it  becomes  necessary  to  cultivate  some  of 
the  B  lands,  the  situation  will  be  altered.  The  owners  of  the  A 
lands  can  now  exact  a  rent  for  their  use,  and  the  farmer  has  no 

^  The  profits  which  the  farmer  may  receive  as  entrepreneur  do  not  affect  th« 
analysis,  and  may  accordingly  be  neglected. 


THE  RENT  OF  LAND  353 

alternative,  except  to  utilize  land  of  the  second  grade,  on  which 
the  fixed  amount  of  labor  and  capital  will  onljr  produce  a  prod- 
uct per  acre  selling  for  abnk  dollars.  The  rent  which  will  be 
charged  per  acre  for  A  lands  will  amount  to  the  difference  between 
the  value  of  the  products  of  the  two  grades  of  land  (hkmy  in  the 
diagram).  For  if  the  landowners  attempt  to  charge  more  than 
this  difference,  the  farmers  will  find  it  more  advantageous  to  use 
the  B  lands;  if  they  charge  less,  the  A  lands  will  be  the  more 
remunerative  to  the  farmer,  and  competition  among  the  farmers 
for  the  leases  of  A  lands  will  force  the  rent  up.  In  short,  rent 
will  normally  be  fixed  at  the  point  which  will  just  equalize  the 
advantages  of  cultivating  the  two  kinds  of  land. 

As  soon  as  increased  population  and  the  consequent  need  of 
a  larger  food  supply  and  more  raw  materials  have  forced  men  to 
begin  to  cultivate  lands  of  the  C  grade,  the  B  lands  will  conunand  a 
rent,  while  the  rent  of  the  A  lands  will  be  increased  by  an  amount 
equal  to  the  rent  of  the  B  lands.  And  as  cultivation  is  pushed 
down  to  still  poorer  and  poorer  lands,  the  rents  which  these  better 
lands  command  will  be  still  further  increased.  Thus,  when  some 
lands  of  grade  E  are  in  use,  the  value  of  the  product  which  can 
be  got  from  this  free  land,  by  the  use  of  the  fixed  amount  of  labor 
and  capital,  will  be  deii  dollars  per  acre.  This  sum  will  just  pay 
the  cost  of  labor  and  capital,  for  if  it  amounts  to  less  than  these 
expenses  of  production,  the  E  lands  will  not  be  worth  cultivating; 
if  it  amounts  to  very  much  more,  it  will  pay  to  cultivate  still  poorer 
land.  But  if  dert  dollars  will  just  pay  wages  and  interest  on  the 
E  lands,  the  same  amount  will  pay  wages  and  interest  on  the 
better  lands,  for  we  have  assumed  that  the  same  amount  of  labor 
and  capital  is  used  on  each  grade  of  land.  The  expense  for  labor 
and  capital  will,  therefore,  be  represented  on  each  rectangle  by 
the  area  below  the  line  gt,  while  the  area  above  this  line  will  rep- 
resent in  each  case  the  rent  per  acre  which  the  landowner  will 
receive. 

Rent,  under  these  conditions,  is  a  differential  which  measures 
accurately  the  superiority  of  the  rent-bearing  land  over  the  mar- 
ginal  land  —  the  land  which  just  repays  the  expenses  of  cultiva- 
tion.   It  is  not  necessary  to  the  significance  of  the  theory  that 


354 


OUTLINES   OF  ECONOMICS 


all,  or  even  any,  of  the  farmers  should  be  tenant  farmers.  If 
the  farmer  owns  the  land  that  he  operates,  the  part  of  his  income 
which  measures  the  superiority  of  his  land  over  an  equal  area  of 
marginal  land,  must,  in  any  accurate  analysis,  be  counted  as  rent 
Rent  under  Actual  Conditions.  — The  conditions  assumed  in 
the  foregoing  analysis  depart  from  actual  conditions  in  one  im- 
portant particular,  —  the  assumption  that  equal  amounts  of  labor 
and  capital,  that  is,  a  uniform  intensivity  of  cultivation,  would 
be  applied  to  lands  of  different  grades.  As  a  matter  of  fact,  even 
after  the  A  lands  are  all  occupied,  the  supply  of  agricultural  prod- 
ucts can  be  increased  without  resort  to  poorer  lands.  All  that  is 
really  necessary  is  the  more  intensive  cultivation  of  the  A  lands. 
This  cannot  be  done,  however,  without  encountering  the  law  of 
diminishing  productivity.  Successive  equal  amounts  of  labor 
and  capital  used  on  the  same  lands  cannot  be  expected  to  yield 
uniformly  large  increments  of  product.  It  will  pay,  however, 
to  make  use  of  more  intensive  cultivation  up  to  the  point  where 
the  last  unit  of  labor  and  capital  adds  barely  enough  to  the  prod- 
uct to  pay  for  the  increased  expense,  —  a  point  which  is  called 
the  intensvve  margin.  The  result  of  this  more  intensive  culti- 
vation is  represented  in  Figure  a. 
Now  the  first  rectangle  in  this  dia- 
gram (Oamy)  represents  precisely 
the  same  thing  as  is  represented  by 
the  first  rectangle  in  Figure  i,  the 
return  0n  value  of  product)  from 
the  cultivation  of  an  acre  of  land 
of  A  grade  by  the  use  of  a  fixed 
amount  of  labor  and  capital.  The 
second  rectangle  in  Figiue  a,  how- 
ever, represents  the  additional 
product  resulting  from  the  use  of  a 
similar  unit  of  labor  and  capital  on 
the  same  acre,  while  the  third  rep- 
resents the  increment  of  product  due  to  the  emplojrment  of  yet  a 
third  unit  of  labor  and  capital  on  the  same  land.  Assume  that 
this  third  unit,  A^  adds  just  enough  to  the  selling  value  of  the 


Flo.  i 


THE  RENT  OF  LAND 


355 


product  to  pay  for  itself.  Then,  as  already  explained  in  the 
discussion  of  diminishing  productivity,  the  area  Ocph  will  represent 
that  part  of  the  farmer's  income  which  will  be  used  up  by  the 
expense  incurred  for  the  three  units  of  labor  and  capital  used  on 
this  one  acre  of  land,  and  the  area  above  the  line  hq  will  repre- 
sent the  real  rent  of  that  acre.  If  land  E  (Figure  i)  just  repays 
the  expenses  of  cultivation  when  one  unit  of  labor  and  capital 
is  used  per  acre,  the  value  of  the  product  per  acre  of  this  land 
will  equal  the  value  of  the  increment  of  product  attributable  to 
the  third  unit  of  labor  and  capital  used  on  land  A,  (That  is,  the 
area  deti,  Figure  i,  equals  the  area  bcpq.  Figure  2.)  So  far, 
then,  as  the  margin  of  cultivation  is  concerned.  Figure  i  repre- 
sents the  conditions  accurately.  The  productivity  of  capital  and 
labor  at  the  intensive  and  extensive  margins  are  the  same.  But 
Figure  i  does  not  represent  the  complete  theory  of  rent  in  that 
(i)  it  does  not  indicate  the  fact  that  larger  quantities  of  capital 
and  labor  are  used  on  the  better  lands  than  on  the  poorer  lands, 
and  (2)  it  does  not  represent  the  larger  products  due  to  this 
more  intensive  cultivation  of  the  better  lands.  These  considera- 
tions are  taken  account  of 
in  Figure  3,  which  also,  by 
the  substitution  of  curves 
for  successive  rectangles, 
represents  the  infinite  vari- 
ety of  degrees  of  goodness 
of  the  different  acres  mak- 
ing up  the  land  supply  of 
a  country.  In  Figure  3 
the  line  am  represents  the 
value  of  a  product  of  a  unit 
of  labor  and  capital  on  the 
poorest  land  in  use,  and  the 
area  hmi  represents  what 
rent  would  be  under  con- 
ditions of  uniform  intensivity  of  cultivation.  The  area  Oamg 
represents  the  diminishing  amounts  of  labor  and  capital  used 
per  acre  as  we  pass  from  the  better  to  the  poorer  lands,  while  the 


356  OUTLINES  OF  ECONOMICS 

area  ymg  represents  the  rent  per  acre  of  the  different  grades  of 
lands.  The  foregoing  analysis  leads  to  the  following  statement 
of  the  theory  of  rent,  which  the  reader  may  verify  for  himself  by 
referring  to  Figures  i  and  2:  — 

The  rent  of  any  piece  of  land  is  measured  by  Ike  difference  between 
the  value  of  the  products  obtained  from  it  by  the  use  of  the  most  profit- 
able amounts  of  labor  and  capital  and  the  value  of  the  products 
which  could  be  obtained  by  the  use  of  the  same  amounts  of  labor  and 
capital  on  marginal  land,  or  at  the  intensive  margin  of  cultivation. 

This  statement  should  not  be  understood  as  comparing  the 
total  product  raised  on  a  given  piece  of  land  with  the  total  product 
which  could  be  got  from  the  same  amount  of  marginal  land. 
This  would  be  to  reintroduce  the  assumption  of  uniform  inten- 
sivity  of  cultivation  —  an  assumption  which  impaired  the  ade* 
quacy  of  the  theory  of  rent  illustrated  in  Figure  i  above.  On  the 
contrary,  it  is  assumed  in  the  present  statement  that  the  farmer 
would  use  whatever  amount  of  the  marginal  land  he  found  most 
profitable.  If  it  were  profitable  to  use  twenty  times  as  much 
labor  and  capital  on  a  certain  piece  of  land  as  on  a  similar  amount 
of  marginal  land,  to  employ  the  same  amount  of  labor  and  capi- 
tal  profitably  on  marginal  land  would  take  twenty  times  as  much 
land. 

Rent  and  the  Marginal  Product  of  Land,  —  In  an  earlier  chapter  it  was 
suggested  that  rent  could  be  measured  by  the  marginal  product  of  land;  in 
other  words,  that  the  amount  which  a  farmer  would  pay  per  acre  for  the  use 
of  land  would  depend  upon  the  value  of  so  much  of  his  product  as  was  depend- 
ent upon  the  possession  of  any  one  acre  of  land.  In  that  discussion  it  was 
assumed,  however,  that  land  was  of  a  uniform  degree  of  goodness.  Obviously, 
if  all  land  really  were  of  a  uniform  degree  of  goodness,  in  all  ways  equally 
desirable,  no  rent  would  be  paid  until  all  lands  were  utilized,  when  rent  would 
arise  on  account  of  the  necessity  of  increased  intenstvity  of  cultivation. 

But  even  under  the  actual  conditions  of  the  existence  of  different  grades  of 
land  and  of  a  large  body  of  land  which  is  below  the  margin  of  cultivation, 
the  rent  of  any  acre  of  the  better  lands  can  be  stated  in  terms  of  the  value 
of  its  product.  For  the  rent  of  any  acre  of  land  is  measured  by  the  value  of 
the  amount  of  the  product  imputed  to  it  (as  distinct  from  the  product  imputed 
to  the  labor  and  the  capital  employed  upon  it).  Now  the  product  that  must 
be  imputed  to  any  acre  of  land  is,  of  course,  the  amount  which  it  adds  to  the 
total  product,  or,  what  amounts  to  the  same  thing,  the  amount  by  which  the 


THE  RENT  OF  LAND  357 

total  product  would  be  decreased  if  just  as  much  labor  and  capital  were  em- 
ployed in  agriculture,  but  if  this  particular  acre  of  land  were  not  available. 
This  means,  however,  that  the  labor  and  capital  which  would  haye  been 
employed  on  this  land  would  have  to  be  utilized  either  in  cultivating  the  lands 
already  utilized  more  intensively  or  in  cultivating  lands  previously  unculti- 
vated; that  is,  at  either  the  intensive  or  extensive  margin.  Obviously 
the  product  imputed  to  the  land  in  question  would  be  the  difference  between 
the  total  product  got  from  it  and  the  product  Nvhich  would  result  from  the 
employment  of  the  same  amount  of  labor  and  capital  at  the  margin.  Thus,  by 
a  somewhat  different  line  of  analysis,  we  have  again  reached  the  statement 
of  the  theory  of  rent  given  in  the  preceding  section. 

The  Dififoient  Uses  of  Land.  — We  have  seen  that]  the  better 
lands  will  repay  a  more  intensive  cultivation  than  the  poorer 
lands,  and  have  found  this  fact  to  be  of  great  significance  in  the 
theory  of  rent.  By  varying  degrees  of  intensivity  of  cultivation 
we  do  not  mean  only  the  more  thorough  cultivation  of  the  land 
in  the  raising  of  any  one  crop.  Land  produces  a  great  variety 
of  products,  and  some  of  these  need  much  more  intensive  culti- 
vadon  than  others.  In  the  business  of  raising  cattle,  as  it  is  con- 
ducted on  a  large  Western  ranch,  the  total  investment  of  capi- 
tal and  labor  may  be  very  considerable,  but  the  investment  per 
acre  of  land  is  very  small  indeed,  while  a  small  market  garden, 
located  near  a  great  city,  will  repay  a  very  high  degree  of  inten- 
sivity of  cultivation.  It  is  only  on  the  best  lands  that  crops  neces- 
sitating a  large  amount  of  labor  per  acre  can  be  raised  profitably. 
By  the  best  lands  we  mean  in  this  connection  not  only  those  lands 
which  are  best  fitted  by  soil  and  climate  for  the  production  of 
particular  crops,  but  the  best  lands  in  the  sense  that  they  are 
nearest  the  market.  For  example,  cities  in  the  eastern  part  of 
the  United  States  get  part  of  their  supply  of  fresh  vegetables 
from  market  gardens  in  their  own  environs,  while  another  part 
of  this  supply  may  come  from  the  Southern  states  and  even  across 
the  continent  from  California.  The  local  market  gardens  are 
good  lands  on  account  of  their  situation;  the  more  distant  lands 
are  good  lands  on  account  of  special  qualities  of  soil  or  climate 
which  enable  them  to  furnish  ''out  of  season"  vegetables. 

Because  certain  lands  are  adapted,  on  account  of  quality  or 
location,  for  intensive  cultivation,  they  command  high  rents. 


358  OUTLINES  OF  ECONOMICS 

On  the  other  hand,  lands  which  command  high  rents  generaUy 
have  to  be  cultivated  intensively,  because  the  entrepreneur  is 
forced  by  the  very  fact  of  high  rent  to  economize  in  his  use  of 
land  as  compared  with  his  use  of  capital  and  labor.  The  raising 
of  flax  as  raw  material  for  linen  is  a  profitable  agricultural  indus- 
try in  densely  populated  Belgium,  but  it  has  never  met  with  much 
success  in  the  United  States  because  flax  straw  of  a  quality  fit  for 
the  better  grades  of  linen  demands  a  large  amount  of  care  and 
labor.  Land  is  so  plentiful  here  that  it  pays  us  better  to  special- 
ize in  a  less  intensive  kind  of  agriculture  —  to  spread  our  labor 
and  capital  more  thinly  over  a  larger  number  of  acres. 

The  poorest  land  that  can  be  profitably  used  in  the  growing 
of  any  one  kind  of  product  is  not  necessarily  marginal  land. 
Land  too  poor  to  use  for  market  gardening  may  be  good  wheat 
land;  land  too  poor  to  devote  to  wheat  may  be  good  grazing  land. 
The  poorest  land  devoted  to  any  one  purpose  may  yield  a  rent, 
arising  from  its  relative  superiority  for  some  other  use.  It  will 
be  readily  understood  that  the  marginal  lands  used  as  a  bads  of 
comp)arison  in  our  statement  of  the  law  of  rent  are  the  poorest 
lands  used  for  any  purpose  —  grazing  lands,  possibly.  But,  as 
we  have  seen,  rent  may  also  be  measured  from  the  intensive  mar- 
gin of  cultivation,  and  the  intensive  margin  is  found  on  all 
lands,  even  the  best. 

Although  all  our  illustrations  of  the  theory  of  rent  have  been 
drawn  from  agriculture,  the  theory  is,  in  fact,  perfectly  geneni^. 
The  rent  of  land  used  for  industrial  or  commercial  purposes  is 
determined  in  precisely  the  same  way  as  the  rent  of  agricultural 
land.  In  fact,  different  kinds  of  manufacturing,  wholesale  and 
retail  trading,  quarrying,  forestry,  etc.,  may  be  looked  upon  as 
different  possible  uses  of  land,  differing  in  the  amount  of  labor 
and  capital  they  require,  and  all  subject  to  the  law  of  diminish- 
ing productivity,  and  hence  to  the  law  of  rent.  W^en  we  pass 
from  the  agricultural  uses  of  land  to  its  commercial  and  indus- 
trial Uses,  the  fact  of  quality  becomes  of  practically  no  importance 
in  the  determination  of  rent,  while  the  fact  of  location  becomes 
the  fundamental  one. 

In  addition  to  these  different  productive  uses  of  land,  w«  haw 


THE  RENT  OF  LAND  359 

to  take  account  of  its  other  uses,  such  as  for  pleasure  grounds  and 
residence  sites.  Here  the  explanation  of  rent  is  simpler  than  in 
the  case  of  productive  lands.  For  these  lands  yield  their  utilities 
directly,  and  hence  come  under  the  general  law  of  value.  Such 
lands  command  a  rent  on  account  of  their  capacity  to  satisfy 
human  wants  directly,  the  extent  of  this  capacity  being  measured 
by  their  marginal  utility.  In  the  case  of  productive  lands,  it  is 
only  their  products  that  satisfy  human  wants  direcdy.  The 
lands  themselves  are  valued  according  to  the  specific  share  of  the 
valuable  product  that  can  be  imputed  to  their  productivity,  as 
distinct  from  the  productivity  of  labor  and  capitaL 

The  Capitalization  of  Rent.  — To  the  individual  who  has  a  cer- 
tain amount  of  money  for  which  he  is  seeking  the  most  profitable 
use,  the  question  whether  he  shall  invest  it  in  land  or  other  f