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| author | Roger Frank <rfrank@pglaf.org> | 2025-10-14 19:53:11 -0700 |
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| committer | Roger Frank <rfrank@pglaf.org> | 2025-10-14 19:53:11 -0700 |
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diff --git a/30107-tei/30107-tei.tei b/30107-tei/30107-tei.tei new file mode 100644 index 0000000..a97cebd --- /dev/null +++ b/30107-tei/30107-tei.tei @@ -0,0 +1,33000 @@ +<?xml version="1.0" encoding="utf-8" ?> + +<!DOCTYPE TEI.2 SYSTEM "http://www.gutenberg.org/tei/marcello/0.4/dtd/pgtei.dtd" [ + +<!ENTITY u5 "http://www.tei-c.org/Lite/"> + +]> + +<TEI.2 lang="en"> +<teiHeader> + <fileDesc> + <titleStmt> + <title>Principles Of Political Economy</title> + <author><name reg="Mill, John Stuart">John Stuart Mill</name></author> + <respStmt><resp>Abridged by</resp> <name>J. Laurence Laughlin, Ph. D.</name></respStmt> + </titleStmt> + <editionStmt> + <edition n="1">Edition 1</edition> + </editionStmt> + <publicationStmt> + <publisher>Project Gutenberg</publisher> + <date>September 27, 2009</date> + <idno type="etext-no">30107</idno> + <availability> + <p>This eBook is for the use of anyone anywhere at no cost and + with almost no restrictions whatsoever. You may copy it, give it + away or re-use it under the terms of the Project Gutenberg + License online at www.gutenberg.org/license</p> + </availability> + </publicationStmt> + <sourceDesc> + <bibl> + Created electronically. + </bibl> + </sourceDesc> + </fileDesc> + <encodingDesc> + </encodingDesc> + <profileDesc> + <langUsage> + <language id="en"></language> + <language id="fr"></language> + <language id="la"></language> + </langUsage> + </profileDesc> + <revisionDesc> + <change> + <date value="2009-09-27">September 27, 2009</date> + <respStmt> + <name> + Produced by Chris Curnow, Matt Mello, David King, and the Online + Distributed Proofreading Team at <http://www.pgdp.net/>. + </name> + </respStmt> + <item>Project Gutenberg TEI edition 1</item> + </change> + </revisionDesc> +</teiHeader> + +<pgExtensions> + <pgStyleSheet> + .boxed { x-class: boxed } + .shaded { x-class: shaded } + .rules { x-class: rules; rules: all } + .indent { margin-left: 2 } + .bold { font-weight: bold } + .italic { font-style: italic } + .smallcaps { font-variant: small-caps } + </pgStyleSheet> + + <pgCharMap formats="txt.iso-8859-1"> + <char id="U0x2014"> + <charName>mdash</charName> + <desc>EM DASH</desc> + <mapping>--</mapping> + </char> + <char id="U0x2003"> + <charName>emsp</charName> + <desc>EM SPACE</desc> + <mapping> </mapping> + </char> + <char id="U0x2026"> + <charName>hellip</charName> + <desc>HORIZONTAL ELLIPSIS</desc> + <mapping>...</mapping> + </char> + </pgCharMap> +</pgExtensions> + +<text lang="en"> + <front> + <div> + <divGen type="pgheader" /> + </div> + <div> + <divGen type="encodingDesc" /> + </div> + + <div rend="page-break-before: always"> + <p rend="font-size: xx-large; text-align: center">Principles Of Political Economy</p> + <p rend="font-size: large; text-align: center">By</p> + <p rend="font-size: xx-large; text-align: center">John Stuart Mill</p> + <p rend="text-align: center">Abridged, with Critical, Bibliographical,</p> + <p rend="text-align: center">and Explanatory Notes, and a Sketch</p> + <p rend="text-align: center">of the History of Political Economy,</p> + <p rend="text-align: center">By</p> + <p rend="font-size: large; text-align: center">J. Laurence Laughlin, Ph. D.</p> + <p rend="text-align: center">Assistant Professor of Political Economy in Harvard University</p> + <p rend="text-align: center">A Text-Book For Colleges.</p> + <p rend="text-align: center">New York:</p> + <p rend="text-align: center">D. Appleton And Company,</p> + <p rend="text-align: center">1, 3, and 5 Bond Street.</p> + <p rend="text-align: center">1885</p> + </div> + <div rend="page-break-before: always"> + <head>Contents</head> + <divGen type="toc" /> + </div> + + </front> +<body> + +<pb n='iii'/><anchor id='Pgiii'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Preface.</head> + +<p> +An experience of five years with Mr. Mill's treatise in +the class-room not only convinced me of the great usefulness +of what still remains one of the most lucid and systematic +books yet published which cover the whole range of the +study, but I have also been convinced of the need of such +additions as should give the results of later thinking, without +militating against the general tenor of Mr. Mill's system; +of such illustrations as should fit it better for American +students, by turning their attention to the application +of principles in the facts around us; of a bibliography which +should make it easier to get at the writers of other schools +who offer opposing views on controverted questions; and of +some attempts to lighten those parts of his work in which +Mr. Mill frightened away the reader by an appearance of +too great abstractness, and to render them, if possible, more +easy of comprehension to the student who first approaches +Political Economy through this author. Believing, also, that +the omission of much that should properly be classed under +the head of Sociology, or Social Philosophy, would narrow +the field to Political Economy alone, and aid, perhaps, in +<pb n='iv'/><anchor id='Pgiv'/> +clearer ideas, I was led to reduce the two volumes into one, +with, of course, the additional hope that the smaller book +would tempt some readers who might hesitate to attack his +larger work. In consonance with the above plan, I have +abridged Mr. Mill's treatise, yet have always retained his own +words; although it should be said that they are not always +his consecutive words. Everything in the larger type on +the page is taken literally from Mr. Mill, and, whenever it +has been necessary to use a word to complete the sense, it +has been always inserted in square brackets. All additional +matter introduced by me has been printed in a smaller but +distinctive type. The reader can see at a glance which part +of the page is Mr. Mill's and which my own. +</p> + +<p> +It has seemed necessary to make the most additions to +the original treatise under the subjects of the Wages Question; +of Wages of Superintendence; of Socialism; of Cost +of Production; of Bimetallism; of the Paper Money experiments +in this country; of International Values; of the +Future of the Laboring-Classes (in which the chapter was +entirely rewritten); and of Protection. The treatment of +Land Tenures has not been entirely omitted, but it does not +appear as a separate subject, because it has at present less +value as an elementary study for American students. The +chapters on Land Tenures, the English currency discussion, +and much of Book V, on the Influence of Government, have +been simply omitted. In one case I have changed the order +of the chapters, by inserting Chap. XV of Book III, treating +of a standard of value, under the chapter treating of money +and its functions. In other respects, the same order has +been followed as in the original work. +</p> + +<p> +Wherever it has seemed possible, American illustrations +have been inserted instead of English or Continental ones. +</p> + +<pb n='v'/><anchor id='Pgv'/> + +<p> +To interest the reader in home problems, twenty-four charts +have been scattered throughout the volume, which bear upon +our own conditions, with the expectation, also, that the different +methods of graphic representation here presented would +lead students to apply them to other questions. They are +mainly such as I have employed in my class-room. The use +and preparation of such charts ought to be encouraged. The +earlier pages of the volume have been given up to a <q>Sketch +of the History of Political Economy,</q> which aims to give +the story of how we have arrived at our present knowledge +of economic laws. The student who has completed Mill +will then have a very considerable bibliography of the various +schools and writers from which to select further reading, and +to select this reading so that it may not fall wholly within the +range of one class of writers. But, for the time that Mill is +being first studied, I have added a list of the most important +books for consultation. I have also collected, in Appendix I, +some brief bibliographies on the Tariff, on Bimetallism, and +on American Shipping, which may be of use to those who +may not have the means of inquiring for authorities, and in +Appendix II a number of questions and problems for the +teacher's use. +</p> + +<p> +In some cases I have omitted Mr. Mill's statement entirely, +and put in its stead a simpler form of the same exposition +which I believed would be more easily grasped by a +student. Of such cases, the argument to show that Demand +for Commodities is not Demand for Labor, the Doctrine +of International Values, and the Effect of the Progress +of Society on wages, profits, and rent, are examples. +Whether I have succeeded or not, must be left for the experience +of the teacher to determine. Many small figures +and diagrams have been used throughout the text, in order +<pb n='vi'/><anchor id='Pgvi'/> +to suggest the concrete means of getting a clear grasp of a +principle. +</p> + +<p> +In conclusion, I wish to acknowledge my indebtedness +to several friends for assistance in the preparation of this +volume, among whom are Professor Charles F. Dunbar, Dr. +F. W. Taussig, Dr. A. B. Hart, and Mr. Edward Atkinson. +</p> + +<p> +<hi rend='smallcaps'>J. Laurence Laughlin</hi>.<lb/> +<hi rend='smallcaps'>Harvard University, Cambridge, Massachusetts</hi>,<lb/> +<hi rend='italic'>September, 1884.</hi> +</p> + +<p rend='text-align: center'> + <figure url='images/chart1.png' rend='width: 80%'> + <head>Chart I</head> + <figDesc>Illustration: Population Map of eastern United States, 1830</figDesc> + </figure> +</p> +<p rend='text-align: center'> + <figure url='images/chart2.png' rend='width: 80%'> + <head>Chart II</head> + <figDesc>Illustration: Population Map of United States, 1880</figDesc> + </figure> +</p> + +</div> + +<pb n='001'/><anchor id='Pg001'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Introductory.</head> + +<div> +<index index='toc'/> +<index index='pdf'/> +<head>A Sketch Of The History Of Political Economy.</head> + +<quote rend='display'> +<p> +<hi rend='smallcaps'>General Bibliography</hi>.—There is no satisfactory general +history of political economy in English. Blanqui's <q>Histoire de l'économie +politique en Europe</q> (Paris, 1837) is disproportioned and superficial, +and he labors under the disadvantage of not understanding the English +school of economists. He studies to give the history of economic facts, +rather than of economic laws. The book has been translated into English +(New York, 1880). +</p> + +<p> +Villeneuve-Bargemont, in his <q>Histoire de l'économie politique</q> +(Paris, 1841), aims to oppose a <q>Christian political economy</q> to the +<q>English</q> political economy, and indulges in religious discussions. +</p> + +<p> +Travers Twiss, <q>View of the Progress of Political Economy in Europe +since the Sixteenth Century</q> (London, 1847), marked an advance +by treating the subject in the last four centuries, and by separating the +history of principles from the history of facts. It is brief, and only a +sketch. Julius Kautz has published in German the best existing history, +<q>Die geschichtliche Entwickelung der National-Oekonomie und ihrer +Literatur</q> (Vienna, 1860). (See Cossa, <q>Guide to the Study of Political +Economy,</q> page 80.) Cossa in his book has furnished a vast +amount of information about writers, classified by epochs and countries, +and a valuable discussion of the divisions of political economy by various +writers, and its relation to other sciences. It is a very desirable +little hand-book. McCulloch, in his <q>Introduction to the Wealth of +Nations,</q> gives a brief sketch of the growth of economic doctrine. The +editor begs to acknowledge his great indebtedness for information to his +colleague, Professor Charles F. Dunbar, of Harvard University. +</p> +</quote> + +<p> +Systematic study for an understanding of the laws of +political economy is to be found no farther back than the +<pb n='002'/><anchor id='Pg002'/> +sixteenth century. The history of political economy is not +the history of economic institutions, any more than the history +of mathematics is the history of every object possessing +length, breadth, and thickness. Economic history is the +story of the gradual evolution in the thought of men of an +understanding of the laws which to-day constitute the science +we are studying. It is essentially modern.<note place='foot'>Yet +Blanqui diffusively gives nearly one half of his <q>History of Political +Economy</q> to the period before the sixteenth century, when politico-economic +laws had not yet been recognized. A. L. Perry, <q>Political Economy</q> (eighteenth +edition, 1883), also devotes thirty-five out of eighty-seven pages to the period +in which there was no systematic study of political economy.</note> +</p> + +<p> +Aristotle<note place='foot'>Xenophon, <q>Means +of increasing the Revenues of Attika,</q> ch. ix; also +see his <q>Economics;</q> and Aristotle, <q>Politics,</q> b. +i, ch. vi, b. iii, ch. i.</note> and Xenophon had some comprehension of the +theory of money, and Plato<note place='foot'><q>Republic,</q> b. +ii.</note> had defined its functions with +some accuracy. The economic laws of the Romans were all +summed up in the idea of enriching the metropolis at the +expense of the dependencies. During the middle ages no +systematic study was undertaken, and the nature of economic +laws was not even suspected. +</p> + +<p> +It is worth notice that the first glimmerings of political +economy came to be seen through the discussions on money, +and the extraordinary movements of gold and silver. About +the time of Charles V, the young study was born, accompanied +by the revival of learning, the Reformation, the discovery +of America, and the great fall in the value of gold +and silver. Modern society was just beginning, and had +already brought manufactures into existence—woolens in +England, silks in France, Genoa, and Florence; Venice had +become the great commercial city of the world; the Hanseatic +League was carrying goods from the Mediterranean to the +Baltic; and the Jews of Lombardy had by that time brought +into use the bill of exchange. While the supply of the precious +metals had been tolerably constant hitherto, the steady +increase of business brought about a fall of prices. From the +middle of the fourteenth to the end of the fifteenth century +<pb n='003'/><anchor id='Pg003'/> +the purchasing power of money increased in the ratio of +four to ten. Then into this situation came the great influx +of gold and silver from the New World. Prices rose unequally; +the trading and manufacturing classes were flourishing, +while others were depressed. In the sixteenth century +the price of wheat tripled, but wages only doubled; the +laboring-classes of England deteriorated, while others were +enriched, producing profound social changes and the well-known +flood of pauperism, together with the rise of the mercantile +classes. Then new channels of trade were opened to +the East and West. Of course, men saw but dimly the operation +of these economic causes; although the books now began +to hint at the right understanding of the movements +and the true laws of money. +</p> + +<p> +Even before this time, however, Nicole Orêsme, Bishop +of Lisieux (died 1382), had written intelligently on money;<note place='foot'>Roscher +exhumed this book, entitled <q>De Origine, Natura, Jure et Mutationibus +Monetarum,</q> and it was reprinted in 1864 by Wolowski at Paris, +together with the treatise of Copernicus, <q>De Monetae Cudendae Ratione.</q></note> +but, about 1526, the astronomer Copernicus gave a very good +exposition of some of the functions of money. But he, as +well as Latimer,<note place='foot'>Sermon at St. Paul's Cross, +1549 (also see Jacob, <q>On the Precious Metals,</q> +pp. 244, 245).</note> while noticing the economic changes, +gave no correct explanation. The Seigneur de Malestroit, +a councilor of the King of France, however, by his errors +drew out Jean Bodin<note place='foot'>1530-1596. See II. Baudrillart's <q>J. +Bodin et son temps</q> (Paris, 1853). +Bodin wrote <q>Réponse aux paradoxes de M. de Malestroit touchant l'enchérissement +de toutes les choses et des monnaies</q> (1568), and <q>Discours sur +le rehaussement et la diminution des monnaies</q> (1578).</note> +to say that the rise of prices was due +to the abundance of money brought from America. But he +was in advance of his time, as well as William Stafford,<note place='foot'><q>A +Briefe Conceipte of English Policy</q> (1581). The book was published +under the initials <q>W. S.,</q> and was long regarded as the production of +Shakespere.</note> the +author of the first English treatise on money, which showed +a perfect insight into the subject. Stafford distinctly grasped +<pb n='004'/><anchor id='Pg004'/> +the idea that the high prices brought no loss to merchants, +great gain to those who held long leases, and loss to those +who did not buy and sell; that, in reality, commodities were +exchanged when money was passed from hand to hand. +</p> + +<p> +Such was the situation<note place='foot'>For information +on this as well as a later period, consult Jacob <q>On the +Precious Metals</q> (1832), a history of the production and influences of gold and +silver from the earliest times. He is considered a very high authority. Humboldt's +<q>Essay on New Spain</q> gives estimates and facts on the production of +the precious metals in America. A very excellent study has been made by +Levasseur in his <q>Histoire des classes ouvrières en France jusqu'à la Révolution.</q> +For pauperism and its history, Nicholl's <q>History of the Poor Laws</q> +is, of course, to be consulted.</note> which prefaced the first general +system destined to be based on supposed economic considerations, +wrongly understood, to be sure, but vigorously carried +out. I refer to the well-known mercantile system which +over-spread Europe.<note place='foot'>See Cossa, <q>Guide,</q> p. +119.</note> Spain, as the first receiver of American +gold and silver, attributed to it abnormal power, and by +heavy duties and prohibitions tried to keep the precious +metals to herself. This led to a general belief in the tenets +of the mercantile system, and its adoption by all Europe. +1. It was maintained that, where gold and silver abounded, +there would be found no lack of the necessaries of life; 2. +Therefore governments should do all in their power to secure +an abundance of money. Noting that commerce and political +power seemed to be in the hands of the states having the +greatest quantity of money, men wished mainly to create +such a relation of exports and imports of goods as would +bring about an importation of money. The natural sequence +of this was, the policy of creating a favorable <q>balance of +trade</q> by increasing exports and diminishing imports, thus +implying that the gain in international trade was not a mutual +one. The error consisted in supposing that a nation could +sell without buying, and in overlooking the instrumental +character of money. The errors even went so far as to create +prohibitory legislation, in the hope of shutting out imported +goods and keeping the precious metals at home. The system +<pb n='005'/><anchor id='Pg005'/> +spread over Europe, so that France (1544) and England (1552) +forbade the export of specie. But, with the more peaceful +conditions at the end of the sixteenth century, the expansion +of commerce, the value of money became steadier, and prices +advanced more slowly. +</p> + +<p> +Italian writers were among the first to discuss the laws +of money intelligently,<note place='foot'>See Antonio Serra, +<q>Breve Trattato delle Cause che possono fare abbondare +li Regni d' Oro e d' Argento,</q> Naples, 1613.</note> but a number of acute Englishmen +enriched the literature of the subject,<note place='foot'>Thomas Mun, +<q>England's Treasure by Foreign Trade</q> (published in 1640 +and 1664); <q>Advice of the Council of Trade</q> (1660), in Lord Overstone's +<q>Select Tracts on Money</q>; Sir William Petty, <q>Political Arithmetic,</q> etc. +(about 1680); Sir Josiah Child, <q>New Discourse of Trade</q> (1690); Sir Dudley +North, <q>Discourse on Trade</q> (1691); Davenant's Works (1690-1711); Joshua +Gee, <q>Trade and Navigation of Great Britain</q> (1730); Sir Matthew Decker +(according to McCulloch, William Richardson), <q>Essay on the Causes of the +Decline of Foreign Trade</q> (1744); Sir James Steuart, <q>An Inquiry into the +Principles of Political Economy</q> (1767). For this period also consult Anderson's +<q>History of Commerce</q> (1764), Macpherson's <q>Annals of Commerce</q> +(1803), and Lord Sheffield's <q>Observations on the Commerce of the American +States</q> (1783).</note> and it may be said +that any modern study of political economy received its first +definite impulse from England and France. +</p> + +<p> +The prohibition of the export of coin was embarrassing +to the East India Company and to merchants; and Mun +tried to show that freedom of exportation would increase +the amount of gold and silver in a country, since the profits +in foreign trade would bring back more than went out. It +probably was not clear to them, however, that the export of +bullion to the East was advantageous, because the commodities +brought back in return were more valuable in England +than the precious metals. The purpose of the mercantilists +was to increase the amount of gold and silver in the country. +Mun, with some penetration, had even pointed out that too +much money was an evil; but in 1663 the English Parliament +removed the restriction on the exportation of coin. +The balance-of-trade heresy, that exports should always exceed +<pb n='006'/><anchor id='Pg006'/> +imports (as if merchants would send out goods which, +when paid for in commodities, should be returned in a form +of less value than those sent out!), was the outcome of the +mercantile system, and it has continued in the minds of many +men to this day. The policy which aimed at securing a +favorable balance of trade, and the plan of protecting home +industries, had the same origin. If all consumable goods +were produced at home, and none imported, that would +increase exports, and bring more gold and silver into the +country. As all the countries of Europe had adopted the +mercantile theory after 1664, retaliatory and prohibitory +tariffs were set up against each other by England, France, +Holland, and Germany. Then, because it was seen that +large sums were paid for carrying goods, in order that no +coin should be required to pay foreigners in any branch +of industry, navigation laws were enacted, which required +goods to be imported only in ships belonging to the importing +nation. These remnants of the mercantile system +continue to this day in the shipping laws of this and other +countries.<note place='foot'>The English +Navigation Act of 1651 is usually described as the cause of the +decline of Dutch shipping. The taxation necessitated by her wars is rather the +cause, as history shows it to us. Sir Josiah Child (1668 and 1690) speaks of a +serious depression in English commerce, and says the low rate of interest among +the Dutch hurts the English trade. This does not show that the acts greatly +aided English shipping. Moreover, Gee, a determined partisan of the mercantile +theory, says, in 1730, that the ship-trade was languishing. Sir Matthew Decker +(1744) confirms Gee's impressions. It looks very much as if the commercial +supremacy of England was acquired by internal causes, and in spite of her +navigation acts. The anonymous author of <q>Britannia Languens</q> confirms +this view.</note> +</p> + +<p> +A natural consequence of the navigation acts, and of the +mercantile system, was the so-called colonial policy, by which +the colonies were excluded from all trade except with the +mother-country. A plantation like New England, which +produced commodities in competition with England, was +looked upon with disfavor for her enterprise; and all this +because of the fallacy, at the foundation of the mercantile +<pb n='007'/><anchor id='Pg007'/> +system, that the gain in international trade is not mutual, but +that what one country gains another must lose.<note place='foot'>This was, +in substance, the whole teaching of one of the leading and most +intelligent writers, Sir James Steuart (1767), <q>Principles of Political Economy.</q> +See also Held's <q>Carey's Socialwissenschaft und das Merkantilsystem</q> +(1866), which places Carey among the mercantilists.</note> +</p> + +<p> +An exposition of mercantilism would not be complete +without a statement of the form it assumed in France under +the guidance of Colbert,<note place='foot'>Forbonnais, <q>Récherches +sur les finances de la France</q> (1595-1721); Pierre +Clément, <q>Histoire de Colbert et de son administration</q> (1874); <q>Lettres, +instructions et mémoires de Colbert</q> (1861-1870); <q>Histoire du système protecteur +en France</q> (1854); Martin, <q>Histoire de France,</q> tome xiii.</note> +the great minister of Louis XIV, +from 1661 to 1683. In order to create a favorable balance of +trade, he devoted himself to fostering home productions, by +attempts to abolish vexatious tolls and customs within the +country, and by an extraordinary system of supervision in +manufacturing establishments (which has been the stimulus +to paternal government from which France has never since +been able to free herself). Processes were borrowed from +England, Germany, and Sweden, and new establishments for +making tapestries and silk goods sprang up; even the sizes +of fabrics were regulated by Colbert, and looms unsuitable +for these sizes destroyed. In 1671 wool-dyers were given +a code of detailed instructions as to the processes and materials +that might be used. Long after, French industry felt +the difficulty of struggling with stereotyped processes. His +system, however, naturally resulted in a series of tariff measures +(in 1664 and 1667). Moderate duties on the exportation +of raw materials were first laid on, followed by heavy customs +imposed on the importation of foreign goods. The shipment +of coin was forbidden; but Colbert's criterion of prosperity +was the favorable balance of trade. French agriculture was +overlooked. The tariff of 1667 was based on the theory +that foreigners must of necessity buy French wines, lace, and +wheat; that the French could sell, but not buy; but the act +of 1667 cut off the demand for French goods, and Portuguese +<pb n='008'/><anchor id='Pg008'/> +wines came into the market. England and Holland +retaliated and shut off the foreign markets from France. The +wine and wheat growers of the latter country were ruined, +and the rural population came to the verge of starvation. +Colbert's last years were full of misfortune and disappointment; +and a new illustration was given of the fallacy that +the gain from international trade was not mutual. +</p> + +<p> +From this time, economic principles began to be better +apprehended. It is to be noted that the first just observations +arose from discussions upon money, and thence upon +international trade. So far England has furnished the most +acute writers: now France became the scene of a new movement. +Marshal Vauban,<note place='foot'><q>Dîme royale</q> (1707).</note> +the great soldier, and Boisguillebert<note place='foot'><q>Factum +de la France</q> (1707).</note> +both began to emphasize the truth that wealth really +consists, not in money alone, but in an abundance of commodities; +that countries which have plenty of gold and silver +are not wealthier than others, and that money is only a medium +of exchange. It was not, however, until 1750 that +evidences of any real advance began to appear; for Law's +famous scheme (1716-1720) only served as a drag upon the +growth of economic truth. But in the middle of the eighteenth +century an intellectual revival set in: the <q>Encyclopædia</q> +was published, Montesquieu wrote his <q>l'Ésprit des +Lois,</q> Rousseau was beginning to write, and Voltaire was at +the height of his power. In this movement political economy +had an important share, and there resulted the first school +of Economists, termed the Physiocrats. +</p> + +<p> +The founder and leader of this new body of economic +thinkers was François Quesnay,<note place='foot'>When Quesnay +was sixty-one years old he wrote the article, <q>Fermiers,</q> in +the <q>Encyclopædia</q> (of Diderot and D'Alembert) in 1756; article <q>Grains,</q> in +the same, 1757; <q>Tableau économique,</q> 1758; <q>Maximes générales du gouvernement +économique d'un royaume</q>; <q>Problème économique</q>; <q>Dialogues +sur le commerce et sur les travaux des artisans</q>; <q>Droit natural</q> +(1768). <q>Collection des principaux économistes,</q> edited by E. Daire (1846), is a +collection containing the works of Quesnay, Turgot, and Dupont de Nemours. See also +Lavergne, <q>Les économistes françaises du 18<hi rend='vertical-align: super'>e</hi> +siècle</q> (1870); and H. Martin, <q>Histoire de France.</q> Quesnay's <q>Tableau +économique</q> was the Koran of the school.</note> a physician and favorite at +<pb n='009'/><anchor id='Pg009'/> +the court of Louis XV. Passing by his ethical basis of a +natural order of society, and natural rights of man, his main +doctrine, in brief, was that the cultivation of the soil was the +only source of wealth; that labor in other industries was +sterile; and that freedom of trade was a necessary condition +of healthy distribution. While known as the <q>Economists,</q> +they were also called the <q>Physiocrats,</q><note place='foot'>From +χράτησις τῆς φύσεως, as indicating a reverence for natural +laws.</note> or the <q>Agricultural +School.</q> Quesnay and his followers distinguished between +the creation of wealth (which could only come from the soil) +and the union of these materials, once created, by labor in +other occupations. In the latter case the laborer did not, in +their theory, produce wealth. A natural consequence of this +view appeared in a rule of taxation, by which all the burdens +of state expenditure were laid upon the landed proprietors +alone, since they alone received a surplus of wealth (the famous +<foreign lang='fr' rend='italic'>net produit</foreign>) +above their sustenance and expenses of production. +This position, of course, did not recognize the old +mercantile theory that foreign commerce enriched a nation +solely by increasing the quantity of money. To a physiocrat +the wealth of a community was increased not by money, but +by an abundant produce from its own soil. In fact, Quesnay +argued that the right of property included the right to dispose +of it freely at home or abroad, unrestricted by the state. This +doctrine was formulated in the familiar expression, +<q><foreign lang='fr' rend='italic'>Laissez faire, laissez +passer</foreign>.</q><note place='foot'>The words +were not invented by Quesnay, but formed the phrase of a merchant, +Legendre, in addressing Colbert; although it was later ascribed, as by +Perry, <q>Political Economy</q> (p. 46), and Cossa (p. 150), to one of the Economists, +Gournay. (See Wolowski, in his Essay prefixed to <q>Roscher's Political +Economy,</q> p. 36, American translation.)</note> Condorcet and Condillac favored +the new ideas. The <q>Economists</q> became the fashion in +France; and even included in their number Joseph II of +Austria, the Kings of Spain, Poland, Sweden, Naples, Catharine +<pb n='010'/><anchor id='Pg010'/> +of Russia, and the Margrave of Baden.<note place='foot'>The Margrave +Karl Friedrich was the author of <q>Abrégé des principes +de l'économie politique</q> (1775), and applied the physiocratic system of taxation +to two of his villages with disastrous results.</note> Agriculture, +therefore, received a great stimulus. +</p> + +<p> +Quesnay had many vigorous supporters, of whom the +most conspicuous was the Marquis de Mirabeau<note place='foot'>He published +a first work on <q>Population</q> (1756); the <q>Théorie de +l'impôt</q> (1760); and <q>Philosophie rurale</q> (1763). In this latter work Mirabeau +adopted the <q>Tableau économique</q> as the key to the subject, and classed +it with the discovery of printing and of money.</note> (father of +him of the Revolution), and the culmination of their popularity +was reached about 1764. A feeling that the true +increase of wealth was not in a mere increase of money, but +in the products of the soil, led them naturally into a reaction +against mercantilism, but also made them dogmatic and overbearing +in their one-sided system, which did not recognize +that labor in all industries created wealth. As the mercantile +system found a great minister in Colbert to carry those +opinions into effect on a national scale, so the Physiocrats +found in Turgot<note place='foot'>In 1742 Turgot, +when scarcely twenty, appeared as a sound writer on +Paper Money in letters to Abbé Cicé. The physiocratic doctrines were presented +in a more intelligible form in his greater work, <q>Réflexions sur la formation +et la distribution des richesses</q> (1766). Three works of Turgot, on +mining property, interest of money, and freedom in the corn-trade, bear a high +reputation. For works treating of Turgot, see Batbie, <q>Turgot, philosophe, +économiste et administrateur</q> (1861); Mastier, <q>Turgot, sa vie et sa doctrine</q> +(1861); Tissot, <q>Turgot, sa vie, son administration et ses ouvrages</q> +(1862).</note> a minister, under Louis XVI, who gave +them a national field in which to try the doctrines of the +new school. Benevolently devoted to bettering the condition +of the people while Intendant of Limoges (1751), he +was made comptroller-general of the finances by Louis XVI +in 1774. Turgot had the ability to separate political economy +from politics, law, and ethics. His system of freeing industry +from governmental interference resulted in abolishing +many abuses, securing a freer movement of grain, and in +lightening the taxation. But the rigidity of national prejudices +<pb n='011'/><anchor id='Pg011'/> +was too strong to allow him success. He had little +tact, and raised many difficulties in his way. The proposal +to abolish the <foreign rend='italic'>corvées</foreign> (compulsory repair of roads by the +peasants), and substitute a tax on land, brought his king into +a costly struggle (1776), and attempts to undermine Turgot's +power were successful. With his downfall ended the influence +of the Economists. The last of them was Dupont +de Nemours,<note place='foot'>He was the editor +of the works of Quesnay and Turgot, and wrote a +<q>Mémoire de Turgot</q> (1817). He opposed the issue of assignats during the +French Revolution, and, falling into disfavor, he barely escaped the scaffold. +Having been a correspondent of Jefferson's, when Napoleon returned from Elba, +he came to America, and settled in Delaware, where he died in 1817. The +connection between the Economists and the framers of our Constitution is interesting, +because it explains some peculiarities introduced into our system of +taxation in that document. The only direct taxes recognized by the Supreme +Court under our Constitution are the poll and land taxes; and it is in this +connection that the constitutionality of the income-tax (a direct tax) +is doubted.</note> who saw a temporary popularity of the Physiocrats +in the early years of the French Revolution, when the +Constituent Assembly threw the burden of taxes on land. +But the fire blazed up fitfully for a moment, only to die +away entirely. +</p> + +<p> +All this, however, was the slow preparation for a newer +and greater movement in political economy than had yet been +known, and which laid the foundation of the modern study as +it exists to-day. The previous discussions on money and the +prominence given to agriculture and economic considerations +by the Economists made possible the great achievements of +Adam Smith and the English school. A reaction in England +against the mercantile system produced a complete +revolution in political economy. Vigorous protests against +mercantilism had appeared long before,<note place='foot'>One of +the earliest is that of Roger Coke (1675), in which he argues for +free trade, and attacks the navigation acts. Sir Dudley North's <q>Discourse on +Trade</q> (1691) urges that the whole world, as regards trade, is but one people, +and explains that money is only merchandise.</note> and the true functions +of money had come to be rightly understood.<note place='foot'>Joseph Harris, +an official in the London Mint, published a very clear exposition +of this subject in his <q>Essay upon Money and Coins</q> (1757); but, +eighty years before, Rice Vaughan had given a satisfactory statement in his +<q>Treatise of Money.</q></note> More +<pb n='012'/><anchor id='Pg012'/> +than that, many of the most important doctrines had been +either discussed, or been given to the public in print. It is +at least certain that hints of much that made so astonishing +an effect in Adam Smith's <q>Wealth of Nations</q> (1776) +had been given to the world before the latter was written. +To what sources, among the minor writers, he was most +indebted, it is hard to say. Two, at least, deserve considerable +attention, David Hume and Richard Cantillon. The +former published his <q>Economic Essays</q> in 1752, which +contained what even now would be considered enlightened +views on money, interest, balance of trade, commerce, and +taxation; and a personal friendship existed between Hume +and Adam Smith dating back as far as 1748, when the latter +was lecturing in Edinburgh on rhetoric. The extent of +Cantillon's acquirements and Adam Smith's possible indebtedness +to him have been but lately recognized. In a recent +study<note place='foot'><q>Contemporary Review,</q> +January, 1881, <q>Richard Cantillon.</q> Adam +Smith had quoted Cantillon on his discussion of the wages of labor, b. i, ch. +viii, and evidently knew his book.</note> on +Cantillon, the late Professor Jevons has pointed +out that the former anticipated many of the doctrines later +ascribed to Adam Smith, Malthus, and Ricardo. Certain it +is that the author of the <q>Wealth of Nations</q> took the +truth wherever he found it, received substantial suggestions +from various sources, but, after having devoted himself +in a peculiarly successful way to collecting facts, he +wrought out of all he had gathered the first rounded system +of political economy the world had yet known; which +pointed out that labor was at the basis of production, not +merely in agriculture, as the French school would have it, +but in all industries; and which battered down all the defenses +of the mediæval mercantile system. In a marked +degree Adam Smith<note place='foot'>Born in 1723, +and died 1790; he was eleven years younger than Hume. +A Professor of Logic (1751) and Moral Philosophy (1752) at Glasgow, he +published a treatise on ethical philosophy, entitled the <q>Theory of Moral Sentiments</q> +(1739). Dugald Stewart is the authority as to Smith's life, having +received information from a contemporary of Smith's, Professor Miller (see +Playfair's edition of Smith's works); for Adam Smith destroyed all his own +papers in his last illness. His lectures on political economy at Glasgow outlined +the results as they appeared in the <q>Wealth of Nations</q>; it was not +until 1764 that he resigned his professorship, and spent two years on the Continent +(twelve months of this in France). On his return home he immured +himself for ten years of quiet study, and published the <q>Wealth of Nations</q> +in 1776. (See also McCulloch's introduction to his edition of the <q>Wealth of +Nations,</q> and Bagehot's <q>Economic Studies,</q> iii.)</note> +combined a logical precision and a +<pb n='013'/><anchor id='Pg013'/> +power of generalizing results out of confused data with a +practical and intuitive regard for facts which are absolutely +necessary for great achievements in the science of political +economy. At Glasgow (1751-1764) Adam Smith gave lectures +on natural theology, ethical philosophy, jurisprudence, +and political economy, believing that these subjects were +complementary to each other. +</p> + +<p> +A connected and comprehensive grasp of principles was +the great achievement of Adam Smith;<note place='foot'>A glance +at Sir James Steuart's treatise (1767) with the <q>Wealth of Nations</q> +shows Adam Smith's great qualities; the former was a series of detached +essays, although of wide range, but admittedly without any consistent +plan.</note> for, although the +<q>Wealth of Nations</q> was naturally not without faults, it has +been the basis of all subsequent discussion and advance in +political economy. In Books I and II his own system is elucidated, +while Book IV contains his discussion of the Agricultural +School and the attacks on the mercantile system. +Seeing distinctly that labor was the basis of all production +(not merely in agriculture), he shows (Books I and II) that +the wealth of a country depends on the skill with which its +labor is applied, and upon the proportion of productive to +unproductive laborers. The gains from division of labor are +explained, and money appears as a necessary instrument after +society has reached such a division. He is then led to discuss +prices (market price) and value; and, since from the +price a distribution takes place among the factors of production, +he is brought to wages, profit, and rent. The functions +<pb n='014'/><anchor id='Pg014'/> +of capital are explained in general; the separation of fixed +from circulating capital is made; and he discusses the influence +of capital on the distribution of productive and unproductive +labor; the accumulation of capital, money, paper +money, and interest. He, therefore, gets a connected set of +ideas on production, distribution, and exchange. On questions +of production not much advance has been made since his +day; and his rules of taxation are now classic. He attacked +vigorously the balance-of-trade theory, and the unnatural diversion +of industry in England by prohibitions, bounties, and +the arbitrary colonial system. In brief, he held that a plan +for the regulation of industry by the Government was indefensible, +and that to direct private persons how to employ +their capital was either hurtful or useless. He taught that a +country will be more prosperous if its neighbors are prosperous, +and that nations have no interest in injuring each other. +It was, however, but human that his work should have been +somewhat defective.<note place='foot'><p>(<hi rend='italic'>a</hi>.) +He went into a vague discussion upon labor as a measure of value. +(<hi rend='italic'>b</hi>.) +A legal rate of interest received his support, and his argument was answered +effectually by Bentham (<q>Defense of Usury</q>). (<hi rend='italic'>c</hi>.) +While not agreeing with +the French school that agriculture is the only industry producing more than it +consumes, and so land pays rent, yet he thinks that it produces more in proportion +to the labor than other industries; that manufactures came next; and exportation +and commerce after them. This error, however, did not modify his more +important conclusions. Thorold Rogers and even Chevalier, however, claim that +Adam Smith drew his inspiration from the French school. (<hi rend='italic'>d</hi>.) In +the discussion of rent, he failed to follow out his ideas to a legitimate end, and did not +get at the true doctrine. While hinting at the right connection between price +and rent, he yet believed that rent formed a part of price. Of the fundamental +principle in the doctrine of rent, the law of diminishing returns, he had no full +knowledge, but came very close to it. He points out that in colonies, when the +good soil has all been occupied, profits fall. (<hi rend='italic'>e</hi>.) In saying that +every animal naturally multiplies in proportion to, and is limited by, the means of +subsistence, Adam Smith just missed Malthus's law of population. In fact, Cantillon +came quite as near it. +</p> +<p> +Book III in his <q>Wealth of Nations</q> is concerned with the policy of Europe +in encouraging commerce at the expense of agriculture, and has less interest +for us. Book V considers the revenue of the sovereign, and much of it is now +obsolete; but his discussion of taxation is still highly important.</p></note> +A new period in the history of political +<pb n='015'/><anchor id='Pg015'/> +economy, however, begins with Adam Smith. As Roscher +says, he stands in the center of economic history. +</p> + +<p> +New writers now appear who add gradually stone after +stone to the good foundation already laid, and raise the edifice +to fairer proportions. The first considerable addition +comes from a contribution by a country clergyman, Thomas +Robert Malthus,<note place='foot'><p>Among the +English Liberals carried away by the French Revolution, and by +such theories as those of Condorcet, was William Godwin, the author of <q>Political +Justice</q> (1793) and the <q>Inquirer</q> (1797), who advocated the abolition +of government and even marriage, since by the universal practice of the golden +rule there would come about a lengthening of life. Malthus tells us that his +study was brought forward as an answer to the doctrines of the <q>Inquirer,</q> and +he applied his principles to Condorcet's and Godwin's ideas. It was a period +when pauperism demanded attention from all. Malthus favored the repeal of +the old poor-laws, as destroying independence of character among the poor. +</p> +<p> +Malthus also wrote <q>Principles of Political Economy</q> (1821) and <q>Definitions +in Political Economy</q> (1827), but the former did not increase his reputation. +He believed in taxing imported corn, and he gave in his adherence to the +doctrine of over-production. But, on the other hand, he was one of several +writers who, almost at the same time, discovered the true theory of rent. His +father was a friend of Godwin, and a correspondent of Rousseau. (See Bagehot, +<q>Economic Studies,</q> p. 135.)</p></note> in +his <q>Essay on the Principles of Population</q> +(1798). Against the view of Pitt that <q>the man who +had a large family was a benefactor to his country,</q> Malthus +argued conclusively that <q>a perfectly happy and virtuous +community, by physical law, is constrained to increase very +rapidly.... By nature human food increases in a slow +arithmetical ratio; man himself increases in a quick geometrical +ratio, unless want and vice stop him.</q> In his second +edition (1803), besides the positive check of vice and want, +he gave more importance to the negative check of <q>self-restraint, +moral and prudential.</q> The whole theory was crudely +stated at first; and it raised the cry that such a doctrine was +inconsistent with the belief in a benevolent Creator. In its +essence, the law of population is simply that a tendency +and ability exist in mankind to increase its numbers faster +than subsistence, and that this result actually will happen +unless checks retard it, or new means of getting subsistence +<pb n='016'/><anchor id='Pg016'/> +arise. If an undue increase of population led to vice and +misery, in Malthus's theory, he certainly is not to be charged +with unchristian feelings if he urged a self-restraint by which +that evil result should be avoided. Malthus's doctrines excited +great discussion: Godwin says that by 1820 thirty or +forty answers to the essay had been written; and they have +continued to appear. The chief contributions have been by A. +H. Everett, <q>New Ideas on Population</q> (1823), who believed +that an increase of numbers increased productive power; by +M. T. Sadler, <q>Law of Population</q> (1830), who taught that +human fertility varied inversely with numbers, falling off +with density of population; by Sir Archibald Alison, <q>Principles +of Population</q> (1840), who reasoned inductively that +the material improvement of the human race is a proof that +man can produce more than he consumes, or that in the progress +of society preventive checks necessarily arise; by W. +R. Greg, <q>Enigmas of Life</q> (1873); and by Herbert Spencer, +<q>Westminster Review</q> (April, 1852), and <q>Principles +of Biology,</q> (part vi, ch. xii and xiii), who worked out a physiological +check, in that with a mental development out of lower +stages there comes an increased demand upon the nervous +energy which causes a diminution of fertility. Since Darwin's +studies it has been very generally admitted that it is +the innate <emph>tendency</emph> of all organic life to increase until numbers +press upon the limit of food-production; not that population +has always done so in every country.<note place='foot'>See Cairnes, +<q>Logical Method,</q> Lecture VII, for the best modern statement +of the question. Also, Roscher, <q>Principles of Political Economy,</q> b. +v, whose extended notes furnish information on facts and as to books. H. +Carey, <q>Social Science</q> (edition of 1877), iii, pp. 263-312, opposes the doctrine, +as also Bowen, <q>American Political Economy</q> (1870), ch. viii, and Henry George, +<q>Progress and Poverty</q> (1880), pp. 81-134.</note> Malthus's +teachings resulted in the modern poor-house system, beginning +with 1834 in England, and they corrected some of the +abuses of indiscriminate charity. +</p> + +<p> +While Adam Smith had formulated very correctly the +laws of production, in his way Malthus was adding to the +<pb n='017'/><anchor id='Pg017'/> +means by which a better knowledge of the principles of distribution +was to be obtained; and the next advance, owing +to the sharp discussions of the time on the corn laws, was, by +a natural progress, to the law of diminishing returns and +rent. An independent discovery of the law of rent is to be +assigned to no less than four persons,<note place='foot'>J. Anderson, +<q>An Inquiry into the Nature of the Corn Laws</q> (1777), +<q>Agricultural Recreations,</q> vol. v, p. 401 (1801); Sir Edward West, <q>Essay +on the Application of Capital to Land</q> (1815); Rev. T. R. Malthus, <q>An Inquiry +into the Nature and Progress of Rent</q> (1815). The last two appeared +after Anderson's discoveries had been forgotten, but he has the honor of first +discovery.</note> but for the full perception +of its truth and its connection with other principles +of political economy the credit has been rightly given to +David Ricardo,<note place='foot'>Born in 1772 of +Jewish parentage, Ricardo died in 1824. A rich banker, +who made a fortune on the Stock Exchange, he early in life retired from business. +The discussions on the Restriction Act and the corn laws led him to investigate +the laws governing the subjects of money and rent. He gained notice first by +his <q>Letters on the High Price of Bullion</q> (1810). The <q>Reply to Mr. Bosanquet</q> +(1811), and <q>Inquiry into Rent</q> (1815), were followed by his greater +work, <q>Principles of Political Economy and Taxation</q> (1817). He entered the +House of Commons from Portarlington, a pocket borough in Ireland, and was +influential in the discussions on resumption. Although he was not on the +committee, his views on depreciated paper are practically embodied in the +famous <q>Bullion Report</q> (1810). Tooke, <q>History of Prices,</q> says the results +of the restriction were not known until the time of Ricardo's contributions. +Neither Mill nor Say has had so great an influence as Ricardo has gained, +through the pages of his <q>Political Economy.</q></note> +next to Adam Smith without question the +greatest economist of the English school. Curiously enough, +although Adam Smith was immersed in abstract speculations, +his <q>homely sagacity</q> led him to the most practical results; +but while Ricardo was an experienced and successful man of +business, he it was, above all others, who established the abstract +political economy, in the sense of a body of scientific +laws to which concrete phenomena, in spite of temporary +inconsistencies, must in the end conform. His work, therefore, +supplemented that of Adam Smith; and there are very +few doctrines fully worked out to-day of which hints have +not been found in Ricardo's wonderfully compact statements. +<pb n='018'/><anchor id='Pg018'/> +With no graces of exposition, his writings seem dry, but are +notwithstanding mines of valuable suggestions. +</p> + +<p> +In the field of distribution and exchange Ricardo made +great additions. Malthus and West had shown that rent was +not an element in cost of production; but both Malthus and +Ricardo seemed to have been familiar with the doctrine of +rent long before the former published his book. Ricardo, +however, saw into its connection with other parts of a system +of distribution.<note place='foot'>Johann Heinrich +von Thünen, a rich land-owner of Mecklenburg, in his +<q>Der isolirte Staat in Beziehung auf Landwirthschaft und National-Oekonomie</q> +(1826), worked entirely by himself, but reached practically the same law of rent +as Ricardo's. In spreading the doctrines of Adam Smith he has influenced later +German writers.</note> The Malthusian doctrine of a pressure of +population on subsistence naturally forced a recognition of +the law of diminishing returns from land;<note place='foot'>The +first distinct recognition of this important physical law, according to +McCulloch (Introduction to <q>Wealth of Nations,</q> lv), was in a fanciful work of +two volumes, entitled <q>Principes de tout gouvernement,</q> published in 1766: +<q>Quand les cultivateurs, devenus nombreux, auront défriché toutes les bonnes +terres; par leur augmentation successive, et par la continuité du défrichement, +il se trouvera un point ou il sera plus avantageux à un nouveau colon de prendre +à ferme des terres fécondes, que d'en défricher de nouvelles beaucoup moins +bonnes</q> (I, p. 126). The author was, however, unaware of the importance +of his discovery.</note> then as soon as +different qualities of land were simultaneously cultivated, the +best necessarily gave larger returns than the poorest; and the +idea that the payment of rent was made for a superior instrument, +and in proportion to its superiority over the poorest +instrument which society found necessary to use, resulted in +the law of rent. Ricardo, moreover, carried out this principle +as it affected wages, profits, values, and the fall of profits; +but did not give sufficient importance to the operation of +forces in the form of improvements acting in opposition to +the tendency toward lessened returns. The theory of rent still holds +its place, although it has met with no little opposition.<note place='foot'>Carey, +<q>Social Science</q> (I, ch. iv, v), and Bowen, <q>American Political +Economy</q> (ch. ix), have denied Ricardo's doctrine of rent. Thesupposed connection +between free trade and Ricardo's teachings on rent has prejudiced protectionists +against him. Free trade follows from the theory of international +trade, and has nothing to do with Ricardo's main doctrines. It is true, Ricardo +was a vigorous free-trader. Of opposing views on rent, Carey's argument is +the most important.</note> +A doctrine, quite as important in its effects on free +<pb n='019'/><anchor id='Pg019'/> +exchange, was clearly established by Ricardo, under the name +of the doctrine of <q>Comparative Cost,</q> which is the reason +for the existence of any and all international trade. +</p> + +<p> +The work of Adam Smith was soon known to other countries, +apart from translations. A most lucid and attractive +exposition was given to the French by J. B. Say, <q>Traité +d'économie politique</q> (1803), followed, after lecturing in +Paris from 1815-1830, by a more complete treatise,<note place='foot'>Say drew +considerable attention by his theory of <q>gluts.</q> He based his +idea of value wholly on <emph>utility</emph>, which has lately been taken up again by +Professor Jevons. Say was answered on this point by Ricardo in a later edition +of his <q>Political Economy.</q> See Cairnes, <q>Leading Principles,</q> p. 17. As a +free-trader and opponent of governmental interference, he went further than +his master, Adam Smith. Napoleon did not like this part of Say's teaching, +saying that it would destroy an empire of adamant, and tried to induce him to +modify his position, but in vain. The second edition was not allowed to be +published until 1815.</note> <q>Cours +complète d'économie politique</q> (1828). While not contributing +much that was new, Say did a great service by +popularizing previous results in a happy and lively style, +combined with good arrangement, and many illustrations. +The theory that general demand and supply are identical is +his most important contribution to the study. Although he +translated Ricardo's book, he did not grasp the fact that +rent did not enter into price. Say's work was later supplemented +by an Italian, Pellegrino Rossi,<note place='foot'>Educated at +Bologna, he went to Geneva in 1816, and was called (1833) by +the French Government to succeed Say in the Collége de France. In 1845 he +was sent as minister to Rome, led the revolutionary movement there, and was +assassinated in 1848. His lectures were taken down in short-hand by one of his +disciples, Porée, and later published.</note> who, in his <q>Cours +d'économie politique</q> (1843-1851), naturalized the doctrines +of Malthus and Ricardo on French soil. His work is of solid +value, and he and Say have given rise to an active school of +<pb n='020'/><anchor id='Pg020'/> +political economy in France. In Switzerland, Sismondi expounded +Adam Smith's results in his <q>De la richesse commerciale</q> +(1803), but was soon led into a new position, +explained in his <q>Nouveaux principes d'économie politique</q> +(1819). This has made him the earliest and most distinguished +of the humanitarian economists. Seeing the sufferings +caused by readjustments of industries after the peace, +and the warehouses filled with unsold goods, he thought +the excess of production over the power of consumption was +permanent, and attacked division of labor, labor-saving machinery, +and competition. Discoveries which would supersede +labor he feared would continue, and the abolition of patents, +together with the limitation of population,<note place='foot'>Malthus, +who held that the unproductive consumption of the rich was +desirable for the poor, supported Sismondi. The latter was answered by Say +and McCulloch (<q>Edinburgh Review,</q> March, 1821), to which Sismondi replied in +his second edition, in 1827, and then withdrew from economic discussion.</note> was urged. +These arguments furnished excellent weapons to the socialistic +agitators. Heinrich Storch<note place='foot'>A native of Riga, +educated in Germany, Storch was charged by the Czar +Alexander with the duty of instructing his sons, the Grand Dukes Nicholas and +Michael, and his treatise is the collection of his lectures. Knowing little of Malthus +or Ricardo, he made a near approach to the doctrine of rent. His unsparing +denunciation of Russian administrative corruption caused the Government to +forbid the publication of the Russian translation.</note> aimed to spread the views +of Adam Smith<note place='foot'>Cossa, <q>Guide</q> (p. 173), +points out Sartorius, Lüder, Kraus, and Schlözer +as teachers of Adam Smith, in Germany, followed later by G. Hufeland, J. F. E. +Lotz, and L. H. von Jakob; Count Hogendorp and Gogel, in Holland; Count +Szecheny, in Hungary, and (pp. 211-213) Cagnazzi, Bosellini, Ressi, Sanfilippo, +and Scuderi (the last two protectionists), in Italy. Fuoco (1825-1827), in Italy, +first saw the value of Ricardo's theory of rent, while Gioja opposed Adam Smith +and Say. But K. H. Rau (died 1870), in his <q>Lehrbuch der politischen Oekonomie</q> +(1826, fifth edition 1864), had the most extensive influence in Germany +in expounding Adam Smith's system, with proper improvements. Another important +writer of this school was F. B. W. von Hermann, <q>Staatswirthschaftliche +Untersuchungen</q> (1832).</note> in Russia, by his <q>Cours d'économie politique</q> +(1815). Without further developing the theory of +political economy, he produced a book of exceptional merit +by pointing out the application of the principles to Russia, +particularly in regard to the effect of a progress of wealth on +agriculture and manufactures; to the natural steps by which +a new country changes from agriculture to a manufacturing +<foreign rend='italic'>régime</foreign>; and to finance and currency, with an account of +Russian depreciated paper since Catharine II. +</p> + +<pb n='021'/><anchor id='Pg021'/> + +<p> +For the next advance, we must again look to England. +Passing by McCulloch<note place='foot'>From 1810 +to 1840, political economy was a favorite study in England, +and many writers deserve mention. There were Huskisson, a great financier; +Thomas Tooke (1773-1858), who began his matchless <q>History of Prices</q> (1823); +Lord Overstone (Samuel Jones Loyd), <q>Tracts and other Publications on Metallic +and Paper Currency</q> (1858); Robert Torrens (1784-1864), <q>Essay on the +Production of Wealth</q> (1821); Archbishop Whately, <q>Introductory Lectures</q> +(1831), and <q>Easy Lessons on Money Matters</q>; Cobden and Sir Robert Peel; +N. W. Senior (1790-1864), Professor of Political Economy at Oxford, article on +<q>Political Economy</q> (1836) in the <q>Encyclopædia Metropolitana,</q> and <q>Lectures +on the Cost of obtaining Money</q> (1830). Senior showed great ability in +analyzing cost of production, and stands far above McCulloch in real ability. +J. R. McCulloch (1789-1864), who preceded Mill, wrote a good but dry textbook, +<q>Principles of Political Economy</q> (1825), <q>A Treatise on the Principles, +Practice, and History of Commerce</q> (1833), an excellent <q>Dictionary of Commerce</q> +(last enlarged edition, 1882), <q>Literature of Political Economy</q> (1845). +He edited Ricardo's works, with a biography, published a <q>Select Collection of +Scarce and Valuable Tracts on Money</q> (1856), <q>A Treatise on the Principles and +Practical Influence of Taxation and the Funding System</q> (1845). He contributed +nothing practically new to the study. Miss Harriet Martineau (1802-1876) +gave some admirable although somewhat extended stories in illustration of the various +principles of political economy, entitled <q>Illustrations of Political Economy</q> +(1859). This period in England was signalized by the abolition of the +Corn Laws (1846), and the Navigation Laws (1849), the passage of the Bank +Act (which separated the issue from the banking department, 1844), and the +general abandonment of protective duties. Cf. Noble, <q>Fiscal Legislation, +1842-1865</q> (1867).</note> and Senior, a gifted writer, the legitimate +successor of Ricardo is John Stuart Mill.<note place='foot'>Born in 1806, +he died in 1873. For his extraordinary education see his +<q>Autobiography.</q> When thirteen years old, he began the study of political +economy through lectures from his father while walking; he then (1819) read +Ricardo and Adam Smith, and at fourteen he journeyed to France, where he +lived for a time with J. B. Say. He entered the East India Office at seventeen, +was occupied finally in conducting the correspondence for the directors, where +he remained until 1858. When about twenty, Mill met twice a week in +Threadneedle Street, from 8.30 to 10 <hi rend='smallcaps'>a.m.</hi>, +with a political economy club, composed +of Grote, Roebuck, Ellis, Graham, and Prescott, where they discussed +James Mill's and Ricardo's books, and also Bailey's <q>Dissertations on Value.</q> +In these discussions, chiefly with Graham, Mill elaborated his theory of international +values. In 1865 he entered Parliament for Westminster, and for +three years had a singular, characteristic, independent, but uninfluential career. +His adherence to two radical reforms, woman suffrage and changes in the tenure +of land, lost him any considerable influence.</note> His father, +<pb n='022'/><anchor id='Pg022'/> +James Mill,<note place='foot'>He (1773-1836) wrote +the <q>History of India</q> (1817-1819), and <q>Elements +of Political Economy</q> (1821). He was intimate with Ricardo, Bentham, Austin, +and Zachary Macaulay.</note> introduced him into a circle of able men, of which +Bentham was the ablest, although his father undoubtedly exercised +the chief influence over his training. While yet but +twenty-three, in his first book, <q>Essays on some Unsettled +Questions of Political Economy</q> (1829-1830), he gained a +high position as an economist. In one form or another, all +his additions to the study are to be found here in a matured +condition. The views on productive and unproductive consumption, +profits, economic methods, and especially his very +clever investigation on international values, were there presented. +His <q>Logic</q> (1843) contains (Book VI) a careful +statement of the relation of political economy to other sciences, +and of the proper economic method to be adopted in investigations. +Through his <q>Principles of Political Economy</q> +(1848) he has exercised a remarkable influence upon men in +all lands; not so much because of great originality, since, in +truth, he only put Ricardo's principles in better and more +attractive form, but chiefly by a method of systematic treatment +more lucid and practical than had been hitherto reached, +by improving vastly beyond the dry treatises of his predecessors +(including Ricardo, who was concise and dull), by infusing +a human element into his aims, and by illustrations and +practical applications. Even yet, however, some parts of his +book show the tendency to too great a fondness for abstract +statement, induced probably by a dislike to slighting his +reasons (due to his early training), and by the limits of his +book, which obliged him to omit many possible illustrations. +With a deep sympathy for the laboring-classes, he was +<pb n='023'/><anchor id='Pg023'/> +tempted into the field of sociology in this book, although he +saw distinctly that political economy was but one of the sciences, +a knowledge of which was necessary to a legislator in +reaching a decision upon social questions. Mill shows an +advance beyond Ricardo in this treatise, by giving the study +a more practical direction. Although it is usual to credit +Mill with originating the laws of international values, yet +they are but a development of Ricardo's doctrine of international +trade, and Mill's discussions of the progress of society +toward the stationary state were also hinted at, although +obscurely, by Ricardo. In the volumes of Mr. Mill the subject +is developed as symmetrically as a proof in geometry. +While he held strongly to free trade,<note place='foot'>In his +<q>infant industries</q> argument, and his statement on navigation +laws (B. v, ch. x, §1), he conceded a great deal of free-trade ground; but in a +private letter, 1866 (see New York <q>Nation,</q> May 29, 1873), he denied that he +intended the <q>infant industries</q> argument to apply to the United States. He +did not consider New England and Pennsylvania any longer as young countries +within the limits of his meaning. See also Taussig's <q>Protection to Young +Industries</q> (1883).</note> he gave little space to +the subject in his book. All in all, his book yet remains the +best systematic treatise in the English language, although +much has been done since his day.<note place='foot'>W. T. Thornton +(1813-1880), in a volume <q>On Labor: its Wrongful Claims +and Rightful Dues</q> (1869), attacked Mill's position on demand and supply, and +on wages, so that Mill in consequence abandoned his doctrine of wages, in the +<q>Fortnightly Review,</q> May 1, 1869. Mr. Cairnes, however, rescued the Wages-Fund +theory from Mr. Mill in his <q>Leading Principles</q> (1874). Thornton also +wrote <q>Over-Population, and its Remedy</q> (1846), and an excellent book, +<q>Plea for Peasant Proprietorship</q> (1848). See also <q>Nineteenth Century,</q> +August, 1879, for an answer by Thornton to Mr. Cairnes on the wages question.</note> +</p> + +<p> +He who has improved upon previous conceptions, and been +the only one to make any very important advance in the science +since Mill's day, is J. E. Cairnes,<note place='foot'>James Eliot +Cairnes was born at Drogheda, 1824; was educated at Trinity +College, Dublin, and made Whately Professor there in 1856. Having been +Professor of Political Economy in Queen's College, Galway, he left Ireland in +1866 to accept the chair of Political Economy in University College, London. +In that year, through an attack of inflammatory rheumatism, he fell under +the power of a painful and growing malady which rendered him physically +helpless, and portended certain death in the near future. The three years +before his death, while working only in hopeless pain, was the period of +his greatest literary activity. He collected his <q>Essays in Political Economy, +Theoretical and Applied</q> (1873), in which he traced with great ability +the effect of the gold-discoveries; brought out his <q>Leading Principles</q> (1874), +and an enlarged edition of his <q>Logical Method</q> (second edition, 1875). The +first edition of this last book was the result of lectures delivered in Dublin about +1858. In his earlier years the interest he felt in the United States led him into +a very vigorous and masterly study of <q>The Slave Power; its Character, Career, +and Probable Dangers</q> (1862); <q>The Revolution in America</q> (1862). He then +wrote <q>Colonization and Colonial Government</q> (1864), and <q>Negro Suffrage</q> +(1866). He finally succumbed to his fatal disease, and passed away prematurely, +July 8, 1875. A short sketch of his personal character was written by +Professor Fawcett, in the <q>Fortnightly Review,</q> August 1, 1875, +p. 149.</note> in his <q>Leading Principles of +<pb n='024'/><anchor id='Pg024'/> +Political Economy newly expounded</q> (1874). Scarcely any +previous writer has equaled him in logical clearness, originality, +insight into economic phenomena, and lucidity of +style. He subjected value, supply and demand, cost of production, +and international trade, to a rigid investigation, +which has given us actual additions to our knowledge of the +study. The wages-fund theory was re-examined, and was +stated in a new form, although Mr. Mill had given it up. +Cairnes undoubtedly has given it its best statement. His +argument on free trade (Part III, chapter iv) is the ablest and +strongest to be found in modern writers. This volume is, +however, not a systematic treatise on all the principles of +political economy; but no student can properly pass by +these great additions for the right understanding of the +science. His <q>Logical Method of Political Economy</q> +(1875) is a clear and able statement of the process to be +adopted in an economic investigation, and is a book of exceptional +merit and usefulness, especially in view of the rising +differences in the minds of economists as to method. +</p> + +<p> +A group of English writers of ability in this period have +written in such a way as to win for them mention in connection +with Cairnes and Mill. Professor W. Stanley Jevons<note place='foot'>Professor +Jevons (1835-1882) was educated at University College, London, +and spent the years from 1854 to 1859 in the Australian Royal Mint, where he +became interested in the gold question. He wrote a study on <q>A Serious Fall +in the Value of Gold ascertained</q> (1863), which attracted great attention. A +fine metaphysician and mathematician, he did not give his whole time to economic +work. In 1866 he became Professor of Logic and Cobden Lecturer on +Political Economy in Owens College, Manchester, but later became Professor of +Political Economy in University College, London. In 1881 he gave up academic +teaching, to devote himself to literature. He investigated the permanence of +the English coal-supply in <q>The Coal Question</q> (second edition, 1866). <q>The +Theory of Political Economy</q> (1871) contains his application of the mathematical +method, and a bibliography of similar attempts. <q>The Railways and the +State</q> are to be found in his <q>Essays and Addresses</q> (1874). He prepared +an elementary book, <q>Primer of Political Economy</q> (second edition, 1878). He +was a contributor to the journals, and especially to the <q>London Statistical +Journal.</q> His last books were <q>The State in Relation to Labor</q> (1882), which +deals with the question of state interference; and <q>Methods of Social Reform</q> +(1883), containing a paper on industrial partnerships. He also advanced the +theory that the presence of sun-spots affected agriculture unfavorably, and that, +coming somewhat regularly, they produced a constant succession of commercial +crises. (See <q>Nature,</q> xix, 33, 588.) At the early age of forty-seven he was +unfortunately drowned while bathing near Bexhill, England (1882).</note> +<pb n='025'/><anchor id='Pg025'/> +put himself in opposition to the methods of the men just +mentioned, and applied the mathematical process to political +economy, but without reaching new results. His most serviceable +work has been in the study of money, which appears +in an excellent form, <q>The Money and Mechanism of +Exchange</q> (1875), and in an investigation which showed a +fall of the value of gold since the discoveries of 1849. In +this latter he has furnished a model for any subsequent +investigator. Like Professor Jevons, T. E. Cliffe Leslie<note place='foot'>Like +Cairnes, Thomas Edward Cliffe Leslie was a native of Ireland, and +educated at Trinity College, Dublin. He was called to the bar, but gave up the +law when offered the professorship of Political Economy in Queen's College, +Belfast. Besides his discussion of land tenures, he published <q>Political and +Moral Philosophy</q> (1874). He long suffered from bad health, and died January +28, 1882. His volume of <q>Land Systems</q> is now (1884) out of print, and +scarce. He had also devoted himself to financial reform.</note> +opposed the older English school (the so-called <q>orthodox</q>), +but in the different way of urging with great ability the use +of the historical method, of which more will be said in speaking +of later German writers.<note place='foot'>See p. +<ref target='Pg033'>33</ref>.</note> He also distinguished himself +by a study of land tenures, in his <q>Land Systems and Industrial +<pb n='026'/><anchor id='Pg026'/> +Economy of Ireland, England, and Continental Countries</q> +(1870), which was a brilliant exposition of the advantages of +small holdings. +</p> + +<p> +By far the ablest of the group, both by reason of his +natural gifts and his training as a banker and financial +editor, was Walter Bagehot.<note place='foot'>Born 1826, +died 1877. He was early made familiar with banking in connection +with the Stuckey Banking Company, in Somersetshire; was educated at +University College, London. In 1858 he married the daughter of James Wilson, +the editor of the London <q>Economist,</q> whom he succeeded. He was a political +student of a rare kind, as is shown by his <q>English Constitution</q> (second edition, +1872), <q>Physics and Politics</q> (1872), <q>Literary Studies</q> (second edition, +1879). He also wrote <q>Depreciation of Silver</q> (1877).</note> +In his <q>Economic Studies</q> +(1880) he has discussed with a remarkable economic insight +the postulates of political economy, and the position of Adam +Smith, Ricardo, and Malthus; in his <q>Lombard Street</q> +(fourth edition, 1873), the money market is pictured with a +vivid distinctness which implies the possession of rare qualities +for financial writing; indeed, it is in this practical way +also, as editor of the London <q>Economist,</q><note place='foot'>Established +in 1848, and unquestionably the most useful economic publication +for English questions.</note> that he made +his great reputation. +</p> + +<p> +Of living English economists, Professor Henry Fawcett,<note place='foot'>Born +1833. His eye-sight was lost by an accidental shot in 1858, but he was +chosen Professor of Political Economy at Cambridge in 1863. His <q>Manual</q> +and the <q>Economic Position of the British Laborer</q> (1865) gave him reputation, +in 1865 he entered Parliament, and since 1880 he has been Postmaster-General +in Mr. Gladstone's administration. He has published <q>Pauperism, its +Causes and Remedies</q> (1871), <q>Speeches</q> (1878), <q>Free Trade and Protection</q> +(1878). His wife (born 1847), Millicent Garret Fawcett, reduced his +<q>Manual</q> into <q>Political Economy for Beginners</q> (1869), and also wrote +<q>Tales in Political Economy</q> (1874). Died November 13, 1884.</note> +in his <q>Manual of Political Economy</q> (1865; sixth edition, +1883), is a close follower of Mill, giving special care to +co-operation, silver, nationalization of land, and trades-unions. +He is an exponent of the strict wages-fund theory, and a +vigorous free-trader. Professor J. E. Thorold Rogers, of +Oxford, also holds aloof from the methods of the old school. +<pb n='027'/><anchor id='Pg027'/> +His greatest contribution has been a <q>History of Agriculture +and Prices in England,</q> from 1255 to 1793, in four volumes<note place='foot'>He +has also published <q>Social Economy</q> (1872); a small <q>Manual of Political +Economy</q> (third edition, 1878); and a very considerable work, <q>Six +Centuries of Work and Wages: the History of English Labor,</q> 1250-1883 +(1884). He has edited Adam Smith's <q>Wealth of Nations,</q> and written <q>Cobden +and Modern Political Opinion</q> (1873), and <q>The Colonial Question,</q> in +the Cobden Club Essays (1872).</note> +(1866-1882). +</p> + +<p> +Of all the writers<note place='foot'>Of other +books, mention should be made of G. J. Goschen's most admirable +<q>Theory of Foreign Exchanges</q> (eighth edition, 1875); <q>Reports and Speeches +on Local Taxation</q> (1872); T. Brassey's <q>Work and Wages</q> (third edition, +1883); E. Seyd, <q>Bullion and the Foreign Exchanges</q> (1868); H. D. McLeod, +an eccentric writer, <q>Dictionary of Political Economy</q> (only one vol., A-C, +1863, published); and <q>Theory and Practice of Banking</q> (second edition, 1875-1876); +H. Sidgwick, <q>Principles of Political Economy</q> (1883); J. Caird, +<q>Landed Interest</q> (fourth edition, 1880); L. Levi, <q>History of British Commerce</q> +(1872).</note> since Cairnes, it may be said that, while +adding to the data with which political economy has to do, and +putting principles to the test of facts, they have made no actual +addition to the existing body of principles; although questions +of distribution and taxation are certainly not yet fully +settled, as is seen by the wide differences of opinion expressed +on subjects falling within these heads by writers of to-day. +</p> + +<p> +It now remains to complete this sketch of the growth of +political economy by a brief account of the writers on the +Continent and in the United States, beginning with France. +About the time of the founding of the London <q>Economist</q> +(1844) and <q>The Statistical Journal</q> (1839) in England, there +was established in Paris the <q>Journal des Économistes</q> +(1842), which contains many valuable papers. On the whole, +the most popular writer since J. B. Say has been Bastiat,<note place='foot'>Frédéric +Bastiat (1801-1850) began life in a commercial house at Bayonne, +but gained notice first by an article, <q>De l'influence des tarifs français et +anglais sur l'avenir des deux peuples,</q> in the <q>Journal des Économistes</q> of +1844, and consequently had a very short period of literary activity. The corn-law +agitation in England and the revolutionary movement of 1848 led him +to write chiefly against protection and socialism. He translated Cobden's +speeches, <q>Cobden et la Ligue</q> (1845). His arguments against protection, +<q>Sophismes économiques</q> (1846-1847), have been translated and published in +this country; but the more extended exposition of his doctrine of value diminishing +with the growth of civilization, and the harmony of all interests is in the +<q>Harmonies économiques</q> (1850). In this his position is not much different +from Carey's. His other books were <q>Capital et rente</q> (1849), directed +against gratuitous loans; <q>Protectionisme et communisme</q> (1849), showing +protection to be communism for the rich; <q>Propriété et loi</q> (1848), directed +against socialism; and <q>Essais sur l'économie politique</q> (1853); <q>Le +Libre-échange</q> (1855). <q>Œuvres complètes,</q> 7 tom. (1855-1864).</note> +who aspired to be the French Cobden. He especially urged +<pb n='028'/><anchor id='Pg028'/> +a new<note place='foot'>Carey, however, claimed, with probable truth, that Bastiat +borrowed the idea from him, and Bastiat did not appear well in the controversy. Almost +no one has followed the French writer in his theory except Professor A. L. +Perry, of Williams College, Massachusetts, who has shaped his general argument +according to this view of value. Also see Cairnes, <q>Essays in Political +Economy,</q> p. 312.</note> view of value, which he defined as the relation established +by an exchange of services; that nature's products are +gratuitous, so that man can not exact anything except for a +given service. Chiefly as a foe of protection, which he regarded +as qualified socialism, he has won a reputation for +popular and clever writing; and he was led to believe in a +general harmony of interests between industrial classes; but +in general he can not be said to have much influenced the +course of French thought. On value, rent, and population, +he is undoubtedly unsound. A writer of far greater depth +than Bastiat, with uncommon industry and wide knowledge, +was Michel Chevalier,<note place='foot'>Chevalier +(1806-1879) first drew attention in an experiment of Saint-Simonism +in 1830-1833. After traveling in the United States, and writing excellent +books on the country and its railways, he became professor in the Collége de +France, where his lectures were collected in a <q>Cours d'économie politique</q> +(1842-1850; second edition, 1855-1866). His third volume, <q>La Monnaie,</q> is +a standard treatise on money, with an extensive bibliography. His treatise +<q>Examen du système commerciale connu sous le nom de système protecteur</q> +(1851) is now somewhat out of date. In his book <q>De la Baisse, probable +de l'or</q> (1859), translated by Richard Cobden, he held that, unless prevented, +gold would drive out the French currency, as against Faucher, who thought the +fall temporary, and would progressively diminish. Other books are, <q>De l'industrie +manufacturière en France,</q> and <q>La liberté du travail</q> (1848).</note> +easily the first among modern French +economists. He has led in the discussion upon the fall of +gold, protection, banking, and particularly upon money; +an ardent free-trader, he had influence enough to induce +France to enter into the commercial treaty of 1860 with +England. One of the ablest writers on special topics is +<pb n='029'/><anchor id='Pg029'/> +Levasseur,<note place='foot'>Émile Levasseur +(born 1828) was professor at Alençon, 1852-1854, and +elected a member of the Academy of Sciences in 1868. He has published +<q>Récherches historiques sur le système de Law</q> (1854); <q>La question de +l'or</q> (1858); <q>Histoire des classes ouvrières en France depuis la conquête de +Jules César jusqu'à la révolution</q> (1859); the same history continued, <q>Depuis +1789 jusqu'à nos jours</q> (1867); <q>La France industriale</q> (1865); <q>Cours +d'économie rurale, la France et ses colonies</q> (1868); <q>Précis d'économie +politique</q> (fourth edition, 1883).</note> +who has given us a history of the working-classes +before and since the Revolution, and the best existing monograph +on John Law. The most industrious and reliable of +the recent writers is the well-known statistician, Maurice +Block,<note place='foot'>Born in Berlin in 1816, but since 1821 living in France. He was +long connected with the Bureau de Statistique Générale, and the Ministry of Agriculture +and Commerce, but in 1861 he left office and gave himself wholly to private +work. In this year he received the Montyon prize for statistics, not given since +1857. His chief books are: <q>Des charges de l'agriculture dans les divers pays +de l'Europe</q> (1850), a work crowned by the Institute; <q>Statistique de la France, +comparée avec les divers états de l'Europe</q> (1860); <q>Le dictionnaire de +l'administration française</q> (second edition, 1878); <q>Les finances de la France depuis +1815</q> (1863); <q>Les théoriciens du socialisme en Allemagne</q> (1872); and in +connection with M. Guillaumin, <q>L'annuaire de l'économie politique,</q> since +1856.</note> while less profound economists were J. A. +Blanqui<note place='foot'>Jérôme-Adolphe Blanqui <foreign rend='italic'>ainé</foreign> +(1798-1854) in 1833 succeeded to the chair +of J. B. Say in the Conservatoire des Arts et Métiers, and was one of the +founders of the <q>Journal des économistes.</q> Besides his <q>Histoire de l'économie +politique en l'Europe</q> (1837-1852), he published a <q>Résumé de l'histoire du +commerce et de l'industrie</q> (1826); <q>Précis élémentaire d'économie politique</q> +(1826); <q>Rapports, histoire de l'exposition des produits de l'industrie française +en 1827</q> (1827); <q>Cours d'economie politique</q> (2 vols., 1837-1838), and +notices of Huskisson and J. B. Say.</note> +and Wolowski.<note place='foot'>Louis Wolowski +(1810-1876), of Polish origin, was Chevalier's chief antagonist, +and Professor of Legislation at the Conservatoire des Arts et Métiers +(1839); founded the first Crédit Foncier of Paris, and was elected to the Institute +in the place of Blanqui. In 1875 he was chosen senator. He was a fertile +writer: <q>Mobilisation du Crédit Foncier</q> (1839); <q>De l'organisation du travail</q> +(1846); <q>Études de l'économie politique et de statistique</q> (1848); <q>Henri +IV, économiste, introduction de l'industrie de la soie en France</q> (1855); +<q>Introduction de l'économie politique en Italie</q> (1859); <q>Les finances de la +Russie</q> (1864); <q>La question des banques</q> (1864); his testimony in the +<q>Enquête sur les principes et les faits généraux qui régissent la circulation +monétaire et fiduciaire</q> (1866); <q>La banque d'Angleterre et les banques +d'Écosse</q> (1867); <q>La liberté commerciale et les résultats du traité de commerce +de 1860</q> (1868); <q>L'or et l'argent</q> (1870); <q>La change et la circulation</q>; +and a translation of Roscher.</note> The latter devoted himself enthusiastically +<pb n='030'/><anchor id='Pg030'/> +to banks of issue, and bimetallism. A small group gave +themselves up chiefly to studies on agriculture and land-tenures—H. +Passy,<note place='foot'>Hippolyte-Philibert Passy (1793-1880) was educated for the army, +and served at Waterloo. He was more prominent as a statesman than as an economist. +In 1838 he entered the Academy in the place of Talleyrand, but politics +left him unoccupied, and he wrote <q>Des systèmes de culture et de leur influence +sur l'économie sociale</q> (1846), and <q>Des causes de l'inégalité des richesses</q> +(1849).</note> Laveleye, and Lavergne.<note place='foot'>M. Léonce +de Lavergne (1809-1880) came from Toulouse to Paris in 1840, +elected deputy in 1846, a member of the Institute in 1855, and became professor +in the Institut agronomique of Versailles. He was also the author of <q>L'économie +rurale de l'Angleterre, de l'Écosse, et de l'Irlande</q> (1854), translated into +English (1855); <q>L'agriculture et la population</q> (1857), a striking confirmation +of Malthusianism; <q>Les économistes françaises du dixhuitième siècle</q> +(1870). He also has contributed largely to the <q>Revue des Deux Mondes</q> and +the <q>Journal des Économistes.</q> For a personal sketch by Cliffe Leslie, see +<q>Fortnightly Review,</q> February, 1881.</note> The latter is +by far the most important, as shown by his <q>L'économie +rurale de la France depuis 1789</q> (1857), which gives a +means of comparing recent French agriculture with that +before the Revolution, as described in Arthur Young's +<q>Travels in France</q> (1789). The best systematic treatise +in French is the <q>Précis de la science économique</q> (1862), +by Antoine-Élise Cherbuliez,<note place='foot'>Born at Geneva, +1797, and died at Zurich, 1869. After studying law, he +became an advocate, and in 1833 Professor of Law in the place of Rossi. In +1837 he was made Professor of Political Economy and Public Law at Geneva. +He was also a member of the Swiss Grand Council. Besides his treatise, he +wrote: <q>Richesse ou pauvreté</q> (1840); <q>Le socialisme, c'est la barbarie</q> +(1848); <q>Études sur les causes de la misère</q> (1853); and aided in the <q>Dictionnaire +de l'économie politique.</q></note> a Genevan. The French were +the first to produce an alphabetical encyclopædia of economics, +<pb n='031'/><anchor id='Pg031'/> +by Coquelin and Guillaumin, entitled the <q>Dictionnaire +de l'économie politique</q> (1851-1853, third edition, 1864). +Courcelle-Seneuil,<note place='foot'>J. G. Courcelle-Seneuil +(born 1813) left a commercial career to become a +writer, first for the journals, and later for the <q>Dictionnaire politique</q> (edited +by Pagnerre). In 1848 he was connected with the Ministry of Finance, and +called to a professorship of Political Economy in Santiago, Chili, 1853-1863. +His chief work is a <q>Traité théorique et pratique d'économie politique</q> (1858), +but he has also published <q>La crédit de banque</q> (1840), reforms for the bank +of France; <q>Traité des opérations de banque</q> (1852; sixth edition, 1876); +<q>Traité des entreprises industrielles, commerciales, et agricoles</q> (1854); +<q>Études sur la science sociale</q> (1862); <q>Leçons élémentaires d'économie +politique</q> (1864); <q>La banque libre</q> (1867); <q>Liberté et socialisme</q> +(1868); and articles in the <q>Dictionnaire de l'économie politique.</q></note> +by his <q>Traité théorique et pratique +d'économie politique</q> (second edition, 1867); and Baudrillart, +by a good compendium. Joseph Garnier, Dunoyer,<note place='foot'>Died +1862; author of <q>De la liberté du travail</q> (1845).</note> +Paul Leroy-Beaulieu,<note place='foot'>Professor of +Political Economy at the Collége de France, author of an extended +and able <q>Traité de la science des finances</q> (third edition, 1883). He +has also published <q>De l'état moral et intellectual des populations ouvrières et +de son influence sur le taux des salaires</q> (1868); <q>Récherches economiques, +historiques, et statistiques sur les guerres contemporaines</q> (1869); <q>La question +ouvrière au XIX siècle</q> (second edition, 1882); <q>L'administration locale +en France et en Angleterre</q> (1872); <q>Le travail des femmes au XIX siècle</q> +(1873); <q>Essai sur la répartition des richesses</q> (1880; second edition, 1883); +and <q>De la colonisation chez les peuples modernes</q> (1882).</note> +Reybaud,<note place='foot'>He published two volumes on Socialism (see list of books +p. <ref target='Pg044'>44</ref>). In several volumes on the +<q>Régime des manufactures</q> he described the condition of the silk, woolen, cotton, +and iron industries.</note> De Parieu,<note place='foot'>The most vigorous advocate of +monometallism in France. He also wrote well on taxation, <q>Traité des impôts</q> +(4 vols., 1866-1867).</note> Léon Say,<note place='foot'>His <q>Rapport sur l'indemnité +du guerre</q> to the Corps Législatif gives +the account of the most marvelous exchange operation of modern times, arising +from the payment of the indemnity by France to Germany (1871-1873).</note> +Boiteau, and others, have done excellent work in France, and +Walras<note place='foot'>An advocate of the mathematical method.</note> in Switzerland. +</p> + +<p> +As Cobden had an influence on Bastiat, so both had an +influence in Germany in creating what has been styled by +opponents the <q>Manchester school,</q> led by Prince-Smith +(died 1874). They have worked to secure complete liberty of +<pb n='032'/><anchor id='Pg032'/> +commerce and industry, and include in their numbers many +men of ability and learning. Yearly congresses have been +organized for the purpose of disseminating liberal ideas, and +an excellent review, the <q>Vierteljahrschrift für Volkswirthschaft, +Politik, und Kulturgeschichte,</q><note place='foot'>Founded in +1863, published at Berlin, and edited by Dr. Eduard Wiss.</note> has been established. +They have devoted themselves successfully to reforms of +labor-laws, interest, workingmen's dwellings, the money system, +and banking, and strive for the abolition of protective +duties. Schulze-Delitzsch has acquired a deserved reputation +for the creation of people's banks, and other forms of +co-operation. The translator of Mill into German, Adolph +Soetbeer,<note place='foot'>Long Secretary to the Chamber of Commerce at Hamburg, +and now honorary professor at Göttingen.</note> +is the most eminent living authority on the production +of the precious metals, and a vigorous monometallist. +The school is represented in the <q>Handwörterbuch der Volkswirthschaftslehre</q> +(1865) of Reutzsch. The other writers +of this group are Von Böhmert,<note place='foot'>Professor of +Political Economy at Zürich in 1866, since 1875 director of +statistics at Dresden, and editor of <q>Der Arbeiterfreund.</q> He made a valuable +study of industrial partnerships, <q>Die Gewinnbetheiligung</q> (second edition +1878). He also wrote <q>Freiheit der Arbeit</q> (1858), and <q>Beiträge zur geschichte +des Zunftwesens</q> (1861).</note> Faucher, Braun, Wolff, Michaelis, +Emminghaus,<note place='foot'>His most important work is <q>Das Armenwesen und die +Armengesetzebung in Europäischen Staaten</q> (1870). Selected essays from this have been +translated into English by E. B. Eastwick, <q>Poor Relief in Different Parts of Europe</q> +(1873).</note> Wirth,<note place='foot'>Max Wirth is at Vienna, and has devoted himself +to a <q>Geschichte der Handelskrisen</q> (1874), including the crisis of 1873. Baron von +Hock has written a history of the finances of France, and of the United +States—<q>Die Finanzen und die Finanzgeschichte der vereinigten Staaten von +Amerika</q> (1867).</note> Hertzka, and Von Holtzendorf. +The best known of the German protectionists is Friedrich +List, the author of <q>Das nationale System der politischen +Oekonomie</q> (1841), whose doctrines are very similar +to those of H. C. Carey in this country.<note place='foot'>This book has +been translated into English by G. A. Matile, with notes by +Stephen Colwell (1856).</note> An able writer on +<pb n='033'/><anchor id='Pg033'/> +administrative functions and finance<note place='foot'>Mohl on +administration, and Rau and A. Wagner on finance, also deserve +mention. Stein, besides other works, is the author of a handbook, +<q>Die Verwaltungslehre</q> (1870).</note> is Lorenz Stein, of +Vienna. +</p> + +<p> +But German economists are of interest, inasmuch as they +have established a new school who urge the use of the historical +method in political economy, and it is about the question +of method that much of the interest of to-day centers. In +1814 Savigny introduced this method into jurisprudence, +and about 1850 it was applied to political economy. The +new school claim that the English <q>orthodox</q> writers begin +by an <hi rend='italic'>a priori</hi> process, and by deductions reach conclusions +which are possibly true of imaginary cases, but are not true +of man as he really acts. They therefore assert that economic +laws can only be truly discovered by induction, or a +study of phenomena first, as the means of reaching a generalization. +To them Bagehot<note place='foot'><q>Fortnightly Review</q> +(1876).</note> answers that scientific bookkeeping, +or collections of facts, in themselves give no results +ending in scientific laws; for instance, since the facts of +banking change and vary every day, no one can by induction +alone reach any laws of banking; or, for example, the study +of a panic from the concrete phenomena would be like trying +to explain the bursting of a boiler without a theory of steam. +More lately,<note place='foot'>In Ely's <q>The +Past and Present of Political Economy</q> (p. 9) it is clear +the new school do not differ so much in reality as in seeming from the methods +of the English writers, like Cairnes.</note> since it seems that the new school claim that +induction does not preclude deduction, and as the old school +never intended to disconnect themselves from <q>comparing +conclusions with external facts,</q> there is not such a cause of +difference as has previously appeared. Doubtless the insistence +upon the merits of induction will be fruitful of good +to <q>orthodox</q> writers, in the more general resort to the +collection of statistics and means of verification. It is suggestive +also that the leaders of the new school in Germany +<pb n='034'/><anchor id='Pg034'/> +and England have reached no different results by their new +method, and in the main agree with the laws evolved by the +old English school. The economist does not pretend that +his assumptions are descriptions of economic conditions existing +at a given time; he simply considers them as forces +(often acting many on one point or occasion) to be inquired +into separately, inasmuch as concrete phenomena are the +resultants of several forces, not to be known until we know +the separate operation of each of the conjoined forces. +</p> + +<p> +The most prominent of the new school is Wilhelm Roscher,<note place='foot'><p>The first +division of Roscher's (born 1817) treatise, also known under the +title of <q>Grundlagen der Nationalökonomie,</q> has been translated here by J. J. +Lalor, in two volumes, <q>Principles of Political Economy</q> (1878), with an essay +by Wolowski on the historical method inserted. In 1840 he was made +<hi rend='italic'>Privat-Docent</hi> +at Göttingen, and professor extraordinary in 1843. In 1844 he was +called to a chair at Erlangen, but since 1848 he has remained at Leipsic. A list +of Roscher's works is as follows: +</p> +<p> +<q>Grundriss zu Vorlesungen über die Staatswirthschaft nach geschichtlicher +Methode</q> (1843); <q>Kornhandel und Theuerungspolitik</q> (third edition, 1852); +<q>Untersuchungen über das Colonialwesen</q>; <q>Verhältniss der Nationalökonomie +zum klassischen Alterthume</q> (1849); <q>Geschichte der englischen Volkswirthschaftslehre +im 16. und 17. Jahrhunderts</q>; <q>Ein nationalökonom. Princep der +Forstwirthschaft</q>; <q>Ansichten der Volkswirthschaft aus dem geschichtlichen +Standpunkte</q> (second edition, 1861); <q>Die deutsche Nationalökonomie an der +Grenzscheide des 16. und 17. Jahrhunderts</q> (1862); <q>Gründungsgeschichte des +Zollvereins</q> (1870); <q>Betrachtungen über die Währungsfrage der deutschen +Müntzreform</q> (1872); <q>Geschichte der Nationalökonomie in Deutschland</q> +(1874); <q>Nationalökonomie des Ackerbaues</q> (eighth edition, 1875). His histories +of political economy in England and Germany are particularly valuable (see +review by Cliffe Leslie, <q>Fortnightly Review,</q> July, 1875). But he does not +rightly estimate the English writers when he takes McLeod as a type; and Carey +is the only American to whom he refers.</p></note> +of Leipsic, who wrote a systematic treatise, <q>System der +Volkswirthschaft</q> (1854, sixteenth edition, 1883), in the first +division of which the notes contain a marvelous collection +of facts and authorities. He agrees in results with Adam +Smith, Ricardo, Malthus, and Mill, but does not seem to +have known much of Cairnes. This book, however, is only +a first of four treatises eventually intended to include the +political economy of (2) agriculture, (3) industry and commerce, +<pb n='035'/><anchor id='Pg035'/> +and (4) the state and commune. The ablest contemporary +of Roscher, who was probably the first to urge the historical +method, is Karl Knies,<note place='foot'>Professor at Marburg, then +at the University of Friedburg, in Breisgau, +and now at Heidelberg. He has also studied railways (1853), and telegraphs +(1857), and money and credit, <q>Geld und Credit</q> (1873-1879).</note> +in <q>Die politische Oekonomie +vom Standpunkte der geschichtlichen Methode</q> (1853, second +edition, 1881-1883). The third of the group who founded +the historical school is Bruno Hildebrand,<note place='foot'>Died 1878. He devoted +himself mainly to criticism of other systems, and +seems to be the least able of the three.</note> of Jena, author of +<q>Die Nationalökonomie der Gegenwart und Zukunft</q> (1848). +</p> + +<p> +The German mind has always been familiar with the interference +of the state, and a class of writers has arisen, not +only advocating the inductive method, but strongly imbued +with a belief in a close connection of the state with industry; +and, inasmuch as the essence of modern socialism is a resort +to state-help, this body of men, with Wagner at their head, +has received the name of <q>Socialists<note place='foot'><q>Catheder-Socialisten,</q> +or <q>Professional Socialists.</q></note> of the Chair,</q> and +now wield a wide influence in Germany. Of these writers,<note place='foot'><p>By far +the ablest is Adolph Wagner, of Berlin, editor of Rau's <q>Lehrbuch +der politischen Oekonomie</q> (1872). He also published <q>Die russische Papierwährung</q> +(1868); <q>Staatspapiergeld, Reichs-Kassen Scheine, und Banknoten</q> +(1874); <q>Unsere Müntzreform</q> (1877); <q>Finanzwissenschaft</q> (1877); and +<q>Die Communalsteuerfrage</q> (1878). +</p> +<p> +Dr. Eduard Engel was formerly the head of the Prussian Bureau of Statistics. +Professor Gustav Schönberg, of Tübingen, with the assistance of twenty-one other +economists, produced a large <q>Handbuch der politischen Oekonomie</q> (1882). +The school have expressed their peculiar doctrines in the <q>Zeitschrift für die +gesammte Staatswissenschaft</q> (quarterly, founded 1844, Tübingen), and the +<q>Jahrbücher für Nationalökonomie</q> (established at Jena, 1863). Also, see +A. Wagner's <q>Rede über die sociale Frage</q> (1872), H. v. Scheel's <q>Die Theorie +der socialen Frage</q> (1871), and G. Schmoller's <q>Ueber einige Grundfrage +des Rects und der Volkswirthschaft</q> (1875). A. E. F. Schäffle, once Minister +of Commerce at Vienna, gained considerable reputation by <q>Das gesellschaftliche +System der menschlichen Wirthschaft</q> (third edition, 1873).</p></note> +Wagner, Engel, Schmoller, Von Scheel, Brentano, Held, +Schönberg, and Schäffle are the most prominent. +</p> + +<p> +The historical school has received the adhesion of Émile +<pb n='036'/><anchor id='Pg036'/> +de Laveleye,<note place='foot'>Émile de Laveleye +(born 1822) studied law at Ghent, but since 1848 has +given himself up to political economy and public questions. Through the pages +of the <q>Revue des Deux Mondes</q> he gained attention in 1863, and the next year +was made Professor of Political Economy at the University of Liége. In 1869 +he received an election as corresponding member of the Academy of Sciences. +While a fertile writer on political subjects, he has produced <q>La question +d'or</q> (1860); <q>Essai sur l'économie rurale de la Belgique</q> (1863); a study +on <q>Suisse,</q> see <q>Revue des Deux Mondes,</q> April 15, 1863; <q>Études d'économie +rurale, la Neerlande</q> (1864); <q>La marché monetaire depuis cinquante +ans</q> (1865); <q>Land Systems of Belgium and Holland,</q> in the Cobden Club +volume on <q>Land Tenures</q> (1870); <q>Bi-metallic Money,</q> translated by G. +Walker (1877); <q>La socialisme contemporaine</q> (1881); <q>Éléments d'économie +politique</q> (1882), which satisfies a certain modern demand for <q>ethical +political economy.</q></note> in Belgium, and other economists in England +and the United States. While Cliffe Leslie has been the +most vigorous opponent of the methods of the old school, +there have been many others of less distinction. Indeed, the +period, the close of which is marked by J. R. McCulloch's +book, was one in which the old school had seemingly come +to an end of its progress, from too close an adhesion to deductions +from assumed premises. Mill's great merit was +that he began the movement to better adapt political economy +to society as it actually existed; and the historical school +will probably give a most desirable impetus to the same +results, even though its exaggerated claims as to the true +method<note place='foot'>Leslie found support in a well-known paper read before the +Association for the Advancement of Science (see <q>London Statistical Journal,</q> +December, 1878; also see <q>Penn Monthly,</q> 1879), by J. K. Ingram, who claimed that the +old school isolated the study of economic from other social phenomena, and that +Ricardo's system was not only too abstract, but that its conclusions were of so +absolute a character that they were little adapted for real use. Robert Lowe +(Lord Sherbrooke) replied to Leslie and Ingram (<q>Nineteenth Century,</q> November, +1878). For most of this literature it will be necessary to consult the magazines. +Cliffe Leslie, <q>Fortnightly Review</q> (November, 1870), placed Adam +Smith among the inductive economists; D. Syme attacked the old methods, +<q>Westminster Review,</q> vol. xcvi (1871); Cairnes represented the old school, +and discussed the new theories, <q>Political Economy and Comte,</q> in the <q>Fortnightly +Review,</q> vol. xiii, p. 579 (1870), <q>Political Economy and Laissez +Faire,</q> vol. xvi, p. 80 (1871), and in 1872; see also his admirable <q>Logical +Method</q>; F. Harrison discussed the limits of political economy, ibid. (1865), +and answered Cairnes in an article on <q>Cairnes on Political Economy and M. +Comte,</q> <q>Fortnightly Review,</q> vol. xiv, p. 39 (1870). W. Newmarch gave +attention to Ingram's paper, <q>Statistical Journal</q> (1871). Leslie, <q>Fortnightly +Review</q> (1875), and G. Cohn, ibid. (1873), wrote on political economy in Germany. +Leslie also contributed an article on <q>Political Economy and Sociology,</q> +<q>Fortnightly Review,</q> vol. xxxi, p. 25 (1879), and the <q>Bicentenary of Political +Economy,</q> in the <q>Bankers' Magazine,</q> vol. xxxii, p. 29. Leslie examined +the philosophical method, <q>Penn Monthly</q> (1877); Jevons saw the only hope +for the future in the mathematical method, <q>Fortnightly Review</q> (1876); +McLeod asks, <q>What is political economy?</q> in the <q>Contemporary Review</q> +(1875); Maurice Block entered the discussion, <q>Penn Monthly</q> (1877), and +<q>Bankers' Magazine,</q> March and November, 1878. Henry Sidgwick answers +Leslie in a paper on <q>Economic Method,</q> in the <q>Fortnightly Review,</q> vol. +xxxi (1879), p. 301. See also essay by Wolowski prefixed to Roscher's <q>Political +Economy</q> (English translation); Roscher's own statement in Chapters II +and III of the Introduction to his <q>Political Economy,</q> and Laveleye's <q>New +Tendencies of Political Economy</q> (1879). See also <q>Penn Monthly,</q> vol. vii, +p. 190, and <q>Bankers' Magazine,</q> vol. xxxiii, pp. 601, 698, 761; vol. xxxvi, pp. +349, 422; S. Newcomb for an admirable essay <q>On the Method and Province +of Political Economy,</q> <q>North American Review</q> (1875), vol. cxxi, p. 241, +in which the <q>Orthodox</q> method is strongly supported; and an extreme position +in favor of the historical method in a pamphlet, <q>The Past and Present of +Political Economy,</q> by R. T. Ely (1884).</note> can not possibly be admitted. +</p> + +<pb n='037'/><anchor id='Pg037'/> + +<p> +Italian writers have not received hitherto the attention +they deserve. After 1830, besides Rossi, who went to +France, there was Romagnosi, who dealt more with the relations +of economics to other studies; Cattanes, who turned +to rural questions and free trade (combating the German, +List); Scialoja, at the University of Turin; and Francesco +Ferrara, also at Turin from 1849 to 1858. The latter was a +follower of Bastiat and Carey, as regards value and rent, and +at the same time was a radical believer in +<foreign lang='fr' rend='italic'>laissez-faire</foreign>. Since +the union of Italy there has been a new interest in economic +study, as with us after our war. The most eminent living +Italian economist is said to be Angelo Messedaglia, holding +a chair at Padua since 1858. He has excelled in statistical +and financial subjects, and is now engaged on a treatise on +money, <q>Moneta,</q> of which one part has been issued (1882). +Marco Minghetti and Fedele Lampertico stand above others, +the former for a study of the connection of political economy +<pb n='038'/><anchor id='Pg038'/> +with morals, and for his public career as a statesman; the latter +for his studies on paper money and other subjects. Carlo +Ferrais presented a good monograph on <q>Money and the +Forced Currency</q> (1879); and Boccardo issued a library of +selected works of the best economists, and a large Dictionary +of Political Economy, <q>Dizionario universale di Economia +Politica e di Commercio</q> (2 vols., second edition, 1875). +Luigi Luzzati is a vigorous advocate of co-operation; and Elia +Lattes has made a serious study of the early Venetian banks. +</p> + +<p> +Political economy has gained little from American writers. +Of our statesmen none have made any additions to the +science, and only Hamilton and Gallatin can properly be +called economists. Hamilton, in his famous <q>Report on +Manufactures</q> (1791), shared in some of the erroneous conceptions +of his day; but this paper, together with his reports +on a national bank and the public credit, are evidences of a +real economic power. Gallatin's <q>Memorial in Favor of +Tariff Reform</q> (1832) is as able as Hamilton's report on +manufactures, and a strong argument against protection. +Both men made a reputation as practical financiers. +</p> + +<p> +<q>With few exceptions, the works produced in the United +States have been prepared as text-books<note place='foot'>Daniel +Raymond, <q>The Elements of Political Economy</q> (1820). Thomas +Cooper, <q>Lectures on the Elements of Political Economy</q> (1826); <q>A Manual +of Political Economy</q> (1834). Willard Phillips, <q>A Manual of Political Economy</q> +(1828); <q>Propositions concerning Protection and Free Trade</q> (1860). +President Francis Wayland (1796-1865), <q>The Elements of Political Economy</q> +(1837). Henry Vethake, <q>Principles of Political Economy</q> (1838). From +1840 to the civil war there appeared F. Bowen's <q>Principles of Political +Economy</q> (1856), since changed to <q>American Political Economy</q> (1873), +which opposed the Malthusian doctrine and defended protection; John Bascom's +<q>Political Economy</q> (1859); and Stephen Colwell's <q>Ways and Means +of Payment</q> (1859). After the war, <q>Science of Wealth</q> (1866), by Amasa +Walker, a lecturer in Amherst College, and father of F. A. Walker.</note> +by authors engaged +in college instruction, and therefore chiefly interested in +bringing principles previously worked out by others within +the easy comprehension of undergraduate students.</q><note place='foot'>Prof. +C. F. Dunbar, <q>North American Review,</q> January, 1876, in an admirable +review of economic science in America during the last century (1776-1876).</note> Of these +<pb n='039'/><anchor id='Pg039'/> +exceptions, Alexander H. Everett's <q>New Ideas on Population</q><note place='foot'>See +<hi rend='italic'>supra</hi>, p. <ref target='Pg016'>16</ref>.</note> +(1822), forms a valuable part in the discussion which +followed the appearance of Malthus's <q>Essay.</q> The writer, +however, who has drawn most attention, at home and abroad, +for a vigorous attack on the doctrines of Ricardo is Henry +Charles Carey.<note place='foot'>Carey (1793-1879) +was the son of an Irish exile, and began a business career +at the age of twelve. At twenty-eight he was the leading partner in the publishing +firm of Carey & Lea, Philadelphia, from which he retired in 1835, to devote +himself wholly to political economy. His leading works have been translated +into French, Italian, Portuguese, German, Swedish, Russian, Magyar, and +Japanese. He has written thirteen octavo volumes, three thousand pages in +pamphlet form, and twice that amount for the newspaper press. See <q>Proceedings +of the American Academy of Science</q> (1881-1882, p. 417), and W. +Elder's <q>Memoir of Henry C. Carey</q> (January 5, 1880). The latter gives a +list of his books.</note> Beginning with <q>The Rate of Wages</q> +(1835), he developed a new theory of value (see <q>Principles +of Political Economy,</q> 1837-1840), <q>which he defined as a +measure of the resistance to be overcome in obtaining things +required for use, or the measure of the power of nature over +man. In simpler terms, value is measured by the cost of +reproduction. The value of every article thus declines as +the arts advance, while the general command of commodities +constantly increases. This causes a constant fall in the value +of accumulated capital as compared with the results of present +labor, from which is inferred a tendency toward harmony +rather than divergence of interests between capitalist and +laborer.</q> This theory of value<note place='foot'>Bastiat's +<q>Harmonies économiques</q> appeared in 1850, and the question +of his indebtedness to Carey was discussed, rather unfavorably to Bastiat, in a +series of letters in the <q>Journal des économistes</q> for 1851.</note> +he applied to land, and even +to man, in his desire to give it universality. He next claimed +to have discovered a law of increasing production from land +in his <q>Past, Present, and Future</q> (1848), which was diametrically +opposed to Ricardo's law of diminishing returns. +His proof was an historical one, that in fact the poorer, not +the richer lands, were first taken into cultivation. This, +however, did not explain the fact that different grades of +<pb n='040'/><anchor id='Pg040'/> +land are simultaneously under cultivation, on which Ricardo's +doctrine of rent is based. The constantly increasing production +of land naturally led Carey to believe in the indefinite +increase of population. He, however, was logically brought +to accept the supposed law of an ultimate limit to numbers +suggested by Herbert Spencer, based on a diminution of human +fertility. He tried to identify physical and social laws, +and fused his political economy in a system of <q>Social Science</q> +(1853), and his <q>Unity of Law</q> (1872). From about +1845 he became a protectionist, and his writings were vigorously +controversial. In his doctrines on money he is distinctly +a mercantilist;<note place='foot'>See an able +study, by Adolphe Held, <q>Carey's Socialwissenschaft und das +Merkantilsystem</q> (1866).</note> but, by his earnest attacks on all that +has been gained in the science up to his day, he has done a +great service in stimulating inquiry and causing a better +statement of results. While undoubtedly the best known +of American writers, yet, because of a prolix style and an +illogical habit of mind, he has had no extended influence on +his countrymen.<note place='foot'>His system appears also +in the books of disciples: E. Peshine Smith, <q>A +Manual of Political Economy</q> (1853), William Elder's <q>Questions of the Day</q> +(1871), and of Robert E. Thompson's <q>Social Science and National Economy</q> +(1875). A condensation of Carey's <q>Social Science</q> has been made by Kate +McKean, in one volume, octavo.</note> +</p> + +<p> +The effect of the civil war is now beginning to show +itself in an unmistakable drift toward the investigation of +economic questions, and there is a distinctly energetic tone +which may bring new contributions from American writers. +General Francis A. Walker,<note place='foot'>The son of +Amasa Walker, and formerly Professor of Political Economy +and History in the Sheffield Scientific School of Yale College, he has become +well known for his statistical work in connection with the United States census. +His <q>Statistical Atlas of the United States</q> (1874) is unequaled. He has also +published <q>Money</q> (1878); <q>Money, Trade, and Industry</q> (1879); <q>Political +Economy</q> (1883); and <q>Land and Rent</q> (1884). The last book replies to +various attacks on Ricardo's doctrine of rent, and particularly to Henry George's +<q>Progress and Poverty.</q> General Walker in 1883 became President of the +Massachusetts Institute of Technology in Boston. He is also well known as an +advocate of bimetallism.</note> in his study on <q>The Wages +Question</q> (1876), has combated the wages-fund theory, and +<pb n='041'/><anchor id='Pg041'/> +proposed in its place a doctrine that wages are paid out of the +product, and not out of accumulated capital. Professor W. +G. Sumner<note place='foot'>Professor of Political +and Social Science in Yale College, and author of a +<q>History of American Currency</q> (1874); <q>Lectures on the History of Protection +in the United States</q> (1877); <q>What Social Classes owe to Each Other</q> +(1883). He is a monometallist, and has devoted himself vigorously to the advocacy +of free trade. His last book is a study in sociology, not in political +economy.</note> is a vigorous writer in the school of Mill and +Cairnes, and has done good work in the cause of sound money +doctrines. Both General Walker and Professor Sumner hold +to the method of economic investigation as expounded by +Mr. Cairnes; although several younger economists show the +influence of the German school. Professor A. L. Perry,<note place='foot'>He has +written <q>Political Economy</q> (eighteenth edition, 1883), and also +<q>Introduction to Political Economy,</q> an elementary work on the same basis as +the former.</note> of +Williams College, adopted Bastiat's theory of value. He also +accepts the wages-fund theory, rejects the law of Malthus, +and, although believing in the law of diminishing returns +from land, regards rent as the reward for a service rendered. +Another writer, Henry George,<note place='foot'>Henry George +was born in Philadelphia, 1839, ran away to sea, and in +1857 entered a printing-office in San Francisco. In 1871 he was one of the +founders of the <q>San Francisco Post,</q> which he gave up in 1875, and received +a public office. He first began to agitate his views in a pamphlet entitled +<q>Our Land and Land Policy</q> (1871), but not until the comparative leisure of +his occupation (1875) gave him opportunity did he seriously begin the study +which resulted in his <q>Progress and Poverty.</q> This volume was begun in the +summer of 1877, and finished in the spring of 1879. The sale of the book, it +is needless to say, has been phenomenal. He has also applied his doctrine of +land to Ireland, in a pamphlet entitled <q>The Irish Land Question</q> (1882). His +last book is a collection of essays entitled <q>Social Problems</q> (1884). His +home is now in New York.</note> has gained an abnormal +prominence by a plausible book, <q>Progress and Poverty</q> +(1880), which rejects the doctrine of Malthus, and argues +that the increase of production of any kind augments the +<pb n='042'/><anchor id='Pg042'/> +demand for land, and so raises its value. His conclusions +lead him to advocate the nationalization of land. Although +in opposition to almost all that political economy has yet +produced, his writing has drawn to him very unusual notice. +The increasing interest in social questions, and the general +lack of economic training, which prevents a right estimate of +his reasoning by people in general, sufficiently account for +the wide attention he has received. +</p> + +<p> +Of late, however, new activity has been shown in the +establishment of better facilities for the study of political +economy in the principal seats of learning—Harvard, Yale, +Cornell, Columbia, Michigan, and Pennsylvania: and a +<q>Cyclopædia of Political Science</q> (1881-1884, three volumes) +has been published by J. J. Lalor, after the example +of the French dictionaries. +</p> + +</div> + +<pb n='043'/><anchor id='Pg043'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Books For Consultation (From English, French, And German Authors).</head> + +<p> +<hi rend='smallcaps'>General Treatises forming a Parallel Course of Reading with +Mill.</hi> +</p> + +<p> +Professor Fawcett's <q>Manual of Political Economy</q> (London, sixth +edition, 1883) is a brief statement of Mill's book, with additional matter +on the precious metals, slavery, trades-unions, co-operation, local taxation, +etc. +</p> + +<p> +Antoine-Élise Cherbuliez's <q>Précis de la science économique</q> +(Paris, 1862, 2 vols.) follows the same arrangement as Mill, and is considered +the best treatise on economic science in the French language. +He is methodical, profound, and clear, and separates pure from applied +political economy. +</p> + +<p> +Other excellent books in French are: Courcelle-Seneuil's <q>Traité +théorique et pratique d'économie politique</q> (1858), (Paris, second edition, +1867, 2 vols.), and a compendium by Henri Baudrillart, <q>Manuel +d'économie politique</q> (third edition, 1872). +</p> + +<p> +Roscher's <q>Principles of Political Economy</q> is a good example of +the German historical method; its notes are crowded with facts; but +the English translation (New York, 1878) is badly done. There is an +excellent translation of it into French by Wolowski. +</p> + +<p> +A desirable elementary work, <q>The Economics of Industry</q> (London, +1879), was prepared by Mr. and Mrs. Marshall. +</p> + +<p> +Professor Jevons wrote a <q>Primer of Political Economy</q> (1878), +which is a simple, bird's-eye view of the subject in a very narrow +compass. +</p> + +<p> +<hi rend='smallcaps'>Important General Works.</hi> +</p> + +<p> +Adam Smith's <q>Wealth of Nations</q> (1776). The edition of McCulloch +is perhaps more serviceable than that of J. E. T. Rogers. +</p> + +<pb n='044'/><anchor id='Pg044'/> + +<p> +Ricardo's <q>Principles of Political Economy and Taxation</q> (1817). +</p> + +<p> +J. S. Mill's <q>Principles of Political Economy</q> (2 vols., 1848—sixth +edition, 1865). +</p> + +<p> +Schönberg's <q>Handbuch der politischen Oekonomie</q> (1882). This +is a large co-operative treatise by twenty-one writers from the historical +school. +</p> + +<p> +Cairnes's <q>Leading Principles of Political Economy</q> (1874); <q>Logical +Method</q> (1875), lectures first delivered in Dublin in 1857. +</p> + +<p> +Carey's <q>Social Science</q> (1877). This has been abridged in one +volume by Kate McKean. +</p> + +<p> +F. A. Walker's <q>Political Economy</q> (1883). This author differs +from other economists, particularly on wages and questions of distribution. +</p> + +<p> +H. George's <q>Progress and Poverty</q> (1879). In connection with +this, read F. A. Walker's <q>Land and Rent</q> (1884). +</p> + +<p> +<hi rend='smallcaps'>Treatises on Special Subjects.</hi> +</p> + +<p> +W. T. Thornton's <q>On Labor</q> (1869). +</p> + +<p> +McLeod's <q>Theory and Practice of Banking</q> (second edition, 1875-1876). +</p> + +<p> +M. Block's <q>Traité théorique et pratique de statistique</q> (1878). +</p> + +<p> +Goschen's <q>Theory of Foreign Exchanges</q> (eighth edition, 1875). +</p> + +<p> +J. Caird's <q>Landed Interest</q> (fourth edition, 1880), treating of English +land and the food-supply. +</p> + +<p> +W. G. Sumner's <q>History of American Currency</q> (1874). +</p> + +<p> +John Jay Knox's <q>United States Notes</q> (1884). +</p> + +<p> +Jevons's <q>Money and the Mechanism of Exchange</q> (1875). +</p> + +<p> +Tooke and Newmarch's <q>History of Prices</q> (1837-1856), in six +volumes. +</p> + +<p> +Leroy-Beaulieu's <q>Traité de la science des finances</q> (1883). This +is an extended work, in two volumes, on taxation and finance; <q>Essai +sur la répartition des richesses</q> (second edition, 1883). +</p> + +<p> +F. A. Walker's <q>The Wages Question</q> (1876); <q>Money</q> (1878). +</p> + +<p> +L. Reybaud's <q>Études sur les réformateurs contemporains, ou +socialistes modernes</q> (seventh edition, 1864). +</p> + +<p> +<hi rend='smallcaps'>Dictionaries.</hi> +</p> + +<p> +McCulloch's <q>Commercial Dictionary</q> (new and enlarged edition, +1882). +</p> + +<p> +Lalor's <q>Cyclopædia of Political Science</q> (1881-84) is devoted to +articles on political science, political economy, and American history. +</p> + +<p> +Coquelin and Guillaumin's <q>Dictionnaire de l'économie politique</q> +(1851-1853, third edition, 1864), in two large volumes. +</p> + +<pb n='045'/><anchor id='Pg045'/> + +<p> +<hi rend='smallcaps'>Reports and Statistics.</hi> +</p> + +<p> +The <q>Compendiums of the Census</q> for 1840, 1850, 1860, and 1870, +are desirable. The volumes of the tenth census (1880) are of great +value for all questions; as is also F. A. Walker's <q>Statistical Atlas</q> +(1874). +</p> + +<p> +The United States Bureau of Statistics issues quarterly statements; +and annually a report on <q>Commerce and Navigation,</q> and another on +the <q>Internal Commerce of the United States.</q> +</p> + +<p> +The <q>Statistical Abstract</q> is an annual publication, by the same +department, compact and useful. It dates only from 1878. +</p> + +<p> +The Director of the Mint issues an annual report dealing with the +precious metals and the circulation. Its tables are important. +</p> + +<p> +The Comptroller of the Currency (especially during the administration +of J. J. Knox) has given important annual reports upon the banking +systems of the United States. +</p> + +<p> +The reports of the Secretary of the Treasury deal with the general +finances of the United States. These, with the two last mentioned, +are bound together in the volume of <q>Finance Reports,</q> but often +shorn of their tables. +</p> + +<p> +There are valuable special reports to Congress of commissioners on +the tariff, shipping, and other subjects, published by the Government. +</p> + +<p> +The report on the <q>International Monetary Conference of 1878</q> +contains a vast quantity of material on monetary questions. +</p> + +<p> +The British parliamentary documents contain several annual <q>Statistical +Abstracts</q> of the greatest value, of which the one relating to +other European states is peculiarly convenient and useful. These can +always be purchased at given prices. +</p> + +<p> +A. R. Spofford's <q>American Almanac</q> is an annual of great usefulness. +</p> + +</div> + +<pb n='047'/><anchor id='Pg047'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Preliminary Remarks.</head> + +<p> +Writers on Political Economy profess to teach, or to +investigate, the nature of Wealth, and the laws of its production +and distribution; including, directly or remotely, the +operation of all the causes by which the condition of mankind, +or of any society of human beings, in respect to this +universal object of human desire, is made prosperous or the +reverse. +</p> + +<quote rend='display'> +It will be noticed that political economy does not include +ethics, legislation, or the science of government. The results +of political economy are offered to the statesman, who reaches +a conclusion after weighing them in connection with moral and +political considerations. Political Economy is distinct from +Sociology; although it is common to include in the former +everything which concerns social life. Some writers distinguish +between the pure, or abstract science, and the applied +art, and we can speak of a science of political economy only in +the sense of a body of abstract laws or formulas. This, however, +does not make political economy less practical than physics, +for, after a principle is ascertained, its operation is to be +observed in the same way that we study the force of gravitation +in a falling stone, even when retarded by opposing forces. +An economic force, or tendency, can be likewise distinctly observed, +although other influences, working at the same time, +prevent the expected effect from following its cause. It is, in +short, the aim of political economy to investigate the laws +which govern the phenomena of material wealth. (Cf. Cossa, +<q>Guide,</q> chap. iii.) +</quote> + +<p> +While the [Mercantile] system prevailed, it was assumed, +either expressly or tacitly, in the whole policy of nations, +<pb n='048'/><anchor id='Pg048'/> +that wealth consisted solely of money; or of the precious +metals, which, when not already in the state of money, are +capable of being directly converted into it. According to +the doctrines then prevalent, whatever tended to heap up +money or bullion in a country added to its wealth. +</p> + +<quote rend='display'> +More correctly the Mercantilists (in the sixteenth and seventeenth +centuries) held that where money was most plentiful, +there would be found the greatest abundance of the necessaries +of life.<note place='foot'>Cf. p. <ref target='Pg004'>4</ref>, +<hi rend='italic'>supra</hi>.</note> +</quote> + +<p> +Whatever sent the precious metals out of a country impoverished +it. If a country possessed no gold or silver +mines, the only industry by which it could be enriched was +foreign trade, being the only one which could bring in +money. Any branch of trade which was supposed to send +out more money than it brought in, however ample and +valuable might be the returns in another shape, was looked +upon as a losing trade. Exportation of goods was favored +and encouraged (even by means extremely onerous to the +real resources of the country), because, the exported goods +being stipulated to be paid for in money, it was hoped that +the returns would actually be made in gold and silver. Importation +of anything, other than the precious metals, was +regarded as a loss to the nation of the whole price of the +things imported; unless they were brought in to be re-exported +at a profit, or unless, being the materials or instruments +of some industry practiced in the country itself, they +gave the power of producing exportable articles at smaller +cost, and thereby effecting a larger exportation. The commerce +of the world was looked upon as a struggle among +nations, which could draw to itself the largest share of the +gold and silver in existence; and in this competition no +nation could gain anything, except by making others lose +as much, or, at the least, preventing them from gaining it. +</p> + +<p> +The Mercantile Theory could not fail to be seen in its +true character when men began, even in an imperfect manner, +<pb n='049'/><anchor id='Pg049'/> +to explore into the foundations of things. Money, as +money, satisfies no want; its worth to any one consists in +its being a convenient shape in which to receive his incomings +of all sorts, which incomings he afterwards, at the times +which suit him best, converts into the forms in which they +can be useful to him. The difference between a country +with money, and a country altogether without it, would be +only one of convenience; a saving of time and trouble, like +grinding by water instead of by hand, or (to use Adam +Smith's illustration) like the benefit derived from roads; +and to mistake money for wealth is the same sort of error +as to mistake the highway, which may be the easiest way of +getting to your house or lands, for the house and lands themselves. +</p> + +<p> +Money, being the instrument of an important public and +private purpose, is rightly regarded as wealth; but everything +else which serves any human purpose, and which +nature does not afford gratuitously, is wealth also. To be +wealthy is to have a large stock of useful articles, or the +means of purchasing them. Everything forms, therefore, a +part of wealth, which has a power of purchasing; for which +anything useful or agreeable would be given in exchange. +Things for which nothing could be obtained in exchange, +however useful or necessary they may be, are not wealth in +the sense in which the term is used in Political Economy. +Air, for example, though the most absolute of necessaries, +bears no price in the market, because it can be obtained +gratuitously; to accumulate a stock of it would yield no +profit or advantage to any one; and the laws of its production +and distribution are the subject of a very different study +from Political Economy. It is possible to imagine circumstances +in which air would be a part of wealth. If it became +customary to sojourn long in places where the air does not +naturally penetrate, as in diving-bells sunk in the sea, a supply +of air artificially furnished would, like water conveyed +into houses, bear a price: and, if from any revolution in +nature the atmosphere became too scanty for the consumption, +<pb n='050'/><anchor id='Pg050'/> +or could be monopolized, air might acquire a very high +marketable value. In such a case, the possession of it, beyond +his own wants, would be, to its owner, wealth; and the +general wealth of mankind might at first sight appear to be +increased, by what would be so great a calamity to them. +The error would lie in not considering that, however rich +the possessor of air might become at the expense of the rest +of the community, all persons else would be poorer by all +that they were compelled to pay for what they had before +obtained without payment. +</p> + +<p> +Wealth, then, may be defined, all useful or agreeable +things which possess exchangeable value; or, in other +words, all useful or agreeable things except those which can +be obtained, in the quantity desired, without labor or sacrifice. +</p> + +<quote rend='display'> +This is the usual definition of wealth. Henry George (see +<q>Progress and Poverty,</q> pp. 34-37) regards wealth as consisting +<q>of natural products that have been secured, moved, combined, +separated, or in other ways <emph>modified by human exertion</emph>, +so as to fit them for the gratification of human desires.... +Nothing which Nature supplies to man without his labor is +wealth.... All things which have an exchange value are, +therefore, not wealth. Only such things can be wealth the +production of which increases and the destruction of which +decreases the aggregate of wealth.... Increase in land values +does not represent increase in the common wealth, for what +land-owners gain by higher prices the tenants or purchasers who +must pay them will lose.</q> Jevons (<q>Primer,</q> p. 13) defines +wealth very properly as what is transferable, limited in supply, +and useful. F. A. Walker defines wealth as comprising <q>all +articles of value and nothing else</q> (<q>Political Economy,</q> p. 5). +Levasseur's definition (<q>Précis,</q> p. 15) is, <q>all material objects +possessing utility</q> (i.e., the power to satisfy a want). (Cf. +various definitions in Roscher's <q>Political Economy,</q> section +9, note 3.) Perry (<q>Political Economy,</q> p. 99) rejects the term +<emph>wealth</emph> as a clog to progress in +the science, and adopts <emph>property</emph> +in its stead, defining it as that <q>which can be bought or sold.</q> +Cherbuliez (<q>Précis,</q> p. 70) defines wealth as the material +product of nature appropriated by labor for the wants of man. +Carey (<q>Social Science,</q> i, 186) asserts that wealth consists in +the power to command Nature's services, including in wealth +such intangible things as mental qualities. +</quote> + +</div> + +</div> + +<pb n='053'/><anchor id='Pg053'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Book I. Production.</head> + + +<div> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter I. Of The Requisites Of Production.</head> + +<div> +<index index='toc' level1='§ 1. The requisites of production.'/> +<head>§ 1. The Requisites of Production are Two: Labor, and +Appropriate Natural Objects.</head> + +<quote rend='display'> +There is a third requisite of production, capital (see page +<ref target='Pg058'>58</ref>). Since the limitation to only two requisites applies solely +to a primitive condition of existence, so soon as the element +of <emph>time</emph> enters into production, then a store of capital becomes +necessary; that is, so soon as production requires such a term +that during the operation the laborer can not at the same time +provide himself with subsistence, then capital is a requisite of +production. This takes place also under any general division +of labor in a community. When one man is making a pin-head, +he must be supplied with food by some person until the +pins are finished and exchanged. +</quote> + +<p> +Labor is either bodily or mental; or, to express the distinction +more comprehensively, either muscular or nervous; +and it is necessary to include in the idea, not solely the exertion +itself, but all feelings of a disagreeable kind, all bodily +inconvenience or mental annoyance, connected with the employment +of one's thoughts, or muscles, or both, in a particular +occupation. +</p> + +<quote rend='display'> +The word <q>sacrifice</q> conveys a just idea of what the laborer +undergoes, and it corresponds to the abstinence of the capitalist. +</quote> + +<pb n='054'/><anchor id='Pg054'/> + +<p> +Of the other requisite—appropriate natural objects—it is +to be remarked that some objects exist or grow up spontaneously, +of a kind suited to the supply of human wants. +There are caves and hollow trees capable of affording shelter; +fruits, roots, wild honey, and other natural products, on +which human life can be supported; but even here a considerable +quantity of labor is generally required, not for the +purpose of creating, but of finding and appropriating them. +</p> + +<p> +Of natural powers, some are unlimited, others limited in +quantity. By an unlimited quantity is of course not meant +literally, but practically unlimited: a quantity beyond the +use which can in any, or at least in present circumstances, +be made of it. Land is, in some newly settled countries, +practically unlimited in quantity: there is more than can be +used by the existing population of the country, or by any accession +likely to be made to it for generations to come. But, +even there, land favorably situated with regard to markets, +or means of carriage, is generally limited in quantity: there +is not so much of it as persons would gladly occupy and cultivate, +or otherwise turn to use. In all old countries, land +capable of cultivation, land at least of any tolerable fertility, +must be ranked among agents limited in quantity. Coal, +metallic ores, and other useful substances found in the earth, +are still more limited than land. +</p> + +<p> +For the present I shall only remark that, so long as the +quantity of a natural agent is practically unlimited, it can +not, unless susceptible of artificial monopoly, bear any value +in the market, since no one will give anything for what can +be obtained gratis. But as soon as a limitation becomes +practically operative—as soon as there is not so much of the +thing to be had as would be appropriated and used if it could +be obtained for asking—the ownership or use of the natural +agent acquires an exchangeable value. +</p> + +<quote rend='display'> +Rich lands in our Western Territories a few years ago could +be had practically for the asking; but now, since railways and +an increase of population have brought them nearer to the markets, +they have acquired a distinct exchange value. The value +<pb n='055'/><anchor id='Pg055'/> +of a commodity (it may be anticipated) is the quantity of other +things for which it can be exchanged. +</quote> + +<p> +When more water-power is wanted in a particular district +than there are falls of water to supply it, persons will +give an equivalent for the use of a fall of water. When +there is more land wanted for cultivation than a place possesses, +or than it possesses of a certain quality and certain +advantages of situation, land of that quality and situation +may be sold for a price, or let for an annual rent. +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_I_Chapter_I_Section_2'/> +<head>§ 2. The Second Requisite +of Production, Labor.</head> + +<quote rend='display'> +<p> +It is now our purpose to describe the second requisite +of production, labor, and point out that it can be either direct +or indirect. This division and subdivision can be seen from +the classification given below. Under the head of indirect +labor are to be arranged all the many employments subsidiary +to the production of any one article, and which, as they furnish +but a small part of labor for the one article (e.g., bread), are +subsidiary to the production of a vast number of other articles; +and hence we see the interdependence of one employment +on another, which comes out so conspicuously at the time of a +commercial depression. +</p> + +<p> +<q>We think it little to sit down to a table covered with articles +from all quarters of the globe and from the remotest isles +of the sea—with tea from China, coffee from Brazil, spices +from the East, and sugar from the West Indies; knives from +Sheffield, made with iron from Sweden and ivory from Africa; +with silver from Mexico and cotton from South Carolina; all +being lighted with oil brought from New Zealand or the Arctic +Circle. Still less do we think of the great number of persons +whose united agency is required to bring any one of these +<pb n='056'/><anchor id='Pg056'/> +finished products to our homes—of the merchants, insurers, +sailors, ship-builders, cordage and sail makers, astronomical-instrument +makers, men of science, and others, before a pound +of tea can appear in our market.</q><note place='foot'>Bowen, +<q>American Political Economy,</q> p. 25.</note> +</p> +</quote> + +<p> +The labor<note place='foot'>This is the beginning of Chapter +II in the original treatise.</note> which terminates in the production of an +article fitted for some human use is either employed directly +about the thing, or in previous operations destined to facilitate, +perhaps essential to the possibility of, the subsequent +ones. In making bread, for example, the labor employed +about the thing itself is that of the baker; but the labor of +the miller, though employed directly in the production not +of bread but of flour, is equally part of the aggregate sum +of labor by which the bread is produced; as is also the +labor of the sower, and of the reaper. Some may think that +all these persons ought to be considered as employing their +labor directly about the thing; the corn, the flour, and the +bread being one substance in three different states. Without +disputing about this question of mere language, there is +still the plowman, who prepared the ground for the seed, +and whose labor never came in contact with the substance +in any of its states; and the plow-maker, whose share in +the result was still more remote. We must add yet another +kind of labor; that of transporting the produce from the +place of its production to the place of its destined use: the +labor of carrying the corn to market, and from market to +the miller's, the flour from the miller's to the baker's, and +the bread from the baker's to the place of its final consumption. +</p> + +<quote rend='display'> +Besides the two classes of indirect laborers here mentioned, +those engaged in producing materials and those in transportation, +there are several others who are paid fractions out of the +bread. Subsidiary to the direct labor of the bread-maker is the +labor of all those who make the instruments employed in the +process (as, e.g., the oven). Materials are completely changed +in character by one use, as when the coal is burned, or the +flour baked into bread; while an instrument, like an oven, is +<pb n='057'/><anchor id='Pg057'/> +capable of remaining intact throughout many operations. The +producer of materials and the transporter are paid by the +bread-maker in the price of his coal and flour when left at his +door, so that the price of the loaf is influenced by these payments. +Those persons, moreover, who, like the police and officers +of our government, act to protect property and life, are +also to be classed as laborers indirectly aiding in the production +of the given article, bread (and by his taxes the bread-maker +helps pay the wages of these officials). Shading off into a more +distant, although essential, connection is another class—that +of those laborers who train human beings in the branches of +knowledge necessary to the attainment of proper skill in managing +the processes and instruments of an industry. The acquisition +of the rudiments of education, and, in many cases, +the most profound knowledge of chemistry, physics and recondite +studies, are essential to production; and teachers are indirect +laborers in producing almost every article in the market. +In this country, especially, are inventors a class of indirect +laborers essential to all ultimate production as it now goes on. +The improvements in the instruments of production are the +results of an inventive ability which has made American machinery +known all over the world. They, too, as well as the +teacher, are paid (a small fraction, of course) out of the ultimate +result, by an indirect path, and materially change the ease +or difficulty, cheapness or dearness, of production in nearly +every branch of industry. In the particular illustration given +they have improved the ovens, ranges, and stoves, so that the +same or better articles are produced at a less cost than formerly. +All these indirect laborers receive, in the way of remuneration, +a fraction, some more, some less (the farther they are removed +from the direct process), of the value of the final result. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Of Capital as a Requisite of Production.</head> + +<quote rend='display'> +But another set of laborers are to be placed in distinct +contrast with these, so far as the grounds on which they receive +their remuneration is concerned. These are the men engaged +previously in providing the subsistence, and articles by which +the former classes of labor can carry on their operations. +</quote> + +<p> +The previous employment of labor is an indispensable +condition to every productive operation, on any other than +the very smallest scale. Except the labor of the hunter and +fisher, there is scarcely any kind of labor to which the returns +are immediate. Productive operations require to be +continued a certain time before their fruits are obtained. +Unless the laborer, before commencing his work, possesses a +<pb n='058'/><anchor id='Pg058'/> +store of food, or can obtain access to the stores of some one +else, in sufficient quantity to maintain him until the production +is completed, he can undertake no labor but such as can +be carried on at odd intervals, concurrently with the pursuit +of his subsistence. +</p> + +<quote rend='display'> +The possession of capital is thus a third requisite of production, +together with land and labor, as noted above. Henry +George (<q>Progress and Poverty,</q> chap. iv) holds an opposite +opinion: <q>The subsistence of the laborers who built the Pyramids +was drawn, not from a previously hoarded stock</q> (does he +not forget the story of Joseph's store of corn?), <q>but from the +constantly recurring crops of the Nile Valley.</q> +</quote> + +<p> +He can not obtain food itself in any abundance; for every +mode of so obtaining it requires that there be already food in +store. Agriculture only brings forth food after the lapse of +months; and, though the labors of the agriculturist are not +necessarily continuous during the whole period, they must +occupy a considerable part of it. Not only is agriculture impossible +without food produced in advance, but there must +be a very great quantity in advance to enable any considerable +community to support itself wholly by agriculture. A +country like England or the United States is only able to +carry on the agriculture of the present year because that of +past years has provided, in those countries or somewhere +else, sufficient food to support their agricultural population +until the next harvest. They are only enabled to produce +so many other things besides food, because the food which +was in store at the close of the last harvest suffices to maintain +not only the agricultural laborers, but a large industrious +population besides. +</p> + +<p> +The claim to remuneration founded on the possession of +food, available for the maintenance of laborers, is of another +kind; remuneration for abstinence, not for labor. If a person +has a store of food, he has it in his power to consume it +himself in idleness, or in feeding others to attend on him, or +to fight for him, or to sing or dance for him. If, instead of +these things, he gives it to productive laborers to support +<pb n='059'/><anchor id='Pg059'/> +them during their work, he can, and naturally will, claim a +remuneration from the produce. He will not be content +with simple repayment; if he receives merely that, he is +only in the same situation as at first, and has derived no advantage +from delaying to apply his savings to his own benefit +or pleasure. He will look for some equivalent for this +forbearance:<note place='foot'>This is his <q>sacrifice,</q> +which corresponds to the exertion of the laborer.</note> +he will expect his advance of food to come +back to him with an increase, called, in the language of +business, a profit; and the hope of this profit will generally +have been a part of the inducement which made him accumulate +a stock, by economizing in his own consumption; or, at +any rate, which made him forego the application of it, when +accumulated, to his personal ease or satisfaction. +</p> + +</div> + +</div> + +<pb n='060'/><anchor id='Pg060'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter II. Of Unproductive Labor.</head> + +<div> +<index index='toc'/> +<head>§ 1. Definition of Productive and Unproductive Labor.</head> + +<p> +Labor is indispensable to production, but has not +always production for its effect. There is much labor, and +of a high order of usefulness, of which production is not the +object. Labor has accordingly been distinguished into Productive +and Unproductive. Productive labor means labor +productive of wealth. We are recalled, therefore, to the +question touched upon in our [Preliminary Remarks], what +Wealth is. +</p> + +<p> +By Unproductive Labor, on the contrary, will be understood +labor which does not terminate in the creation of +material wealth. And all labor, according to our present +definition, must be classed as unproductive, which terminates +in a permanent benefit, however important, provided +that an increase of material products forms no part of that +benefit. The labor of saving a friend's life is not productive, +unless the friend is a productive laborer, and produces +more than he consumes. +</p> + +<quote rend='display'> +The principle on which the distinction is made is perfectly +clear, but in many cases persons may be misled chiefly in regard +to matters of fact. A clergyman may at first sight be +classed as an unproductive laborer; but, until we know the +facts, we can not apply the principle of our definition. Unless +we know that no clergyman, by inculcating rules of morality +and self-control, ever caused an idler or wrong-doer to become +a steady laborer, we can not say that a clergyman is a laborer +unproductive of material wealth. Likewise the army, or the +officers of our government at Washington, may or may not +have aided in producing material wealth according as they do +or do not, in fact, accomplish the protective purposes for which +<pb n='061'/><anchor id='Pg061'/> +they exist. So with teachers. There is, however, no disparagement +implied in the word unproductive; it is merely an +economic question, and has to do only with forces affecting the +production of wealth. +</quote> + +<p> +Unproductive may be as useful as productive labor; it +may be more useful, even in point of permanent advantage; +or its use may consist only in pleasurable sensation, which +when gone leaves no trace; or it may not afford even this, +but may be absolute waste. In any case, society or mankind +grow no richer by it, but poorer. All material products +consumed by any one while he produces nothing are so +much subtracted, for the time, from the material products +which society would otherwise have possessed. +</p> + +<p> +To be wasted, however, is a liability not confined to unproductive +labor. Productive labor may equally be waste, +if more of it is expended than really conduces to production. +If defect of skill in laborers, or of judgment in those who +direct them, causes a misapplication of productive industry, +labor is wasted. Productive labor may render a nation +poorer, if the wealth it produces, that is, the increase it makes +in the stock of useful or agreeable things, be of a kind not +immediately wanted: as when a commodity is unsalable, +because produced in a quantity beyond the present demand; +or when speculators build docks and warehouses before there +is any trade. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Productive and Unproductive Consumption.</head> + +<p> +The distinction of Productive and Unproductive is +applicable to Consumption as well as to Labor. All the +members of the community are not laborers, but all are consumers, +and consume either unproductively or productively. +Whoever contributes nothing directly or indirectly to production +is an unproductive consumer. The only productive +consumers are productive laborers; the labor of direction +being of course included, as well as that of execution. But +the consumption even of productive laborers is not all of it +Productive Consumption. There is unproductive consumption +by productive consumers. What they consume in +keeping up or improving their health, strength, and capacities +<pb n='062'/><anchor id='Pg062'/> +of work, or in rearing other productive laborers to succeed +them, is Productive Consumption. But consumption +on pleasures or luxuries, whether by the idle or by the industrious, +since production is neither its object nor is in any +way advanced by it, must be reckoned Unproductive: with +a reservation, perhaps, of a certain quantum of enjoyment +which may be classed among necessaries, since anything +short of it would not be consistent with the greatest efficiency +of labor. That alone is productive consumption +which goes to maintain and increase the productive powers +of the community; either those residing in its soil, in its +materials, in the number and efficiency of its instruments of +production, or in its people. +</p> + +<p> +I grant that no labor really tends to the enrichment of +society, which is employed in producing things for the use +of unproductive consumers. The tailor who makes a coat +for a man who produces nothing is a productive laborer; but +in a few weeks or months the coat is worn out, while the +wearer has not produced anything to replace it, and the community +is then no richer by the labor of the tailor than if +the same sum had been paid for a stall at the opera. Nevertheless, +society has been richer by the labor while the coat +lasted. These things also [such as lace and pine-apples] are +wealth until they have been consumed. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Distinction Between Labor for the Supply of Productive +Consumption and Labor for the Supply of Unproductive Consumption.</head> + +<p> +We see, however, by this, that there is a distinction +more important to the wealth of a community than even that +between productive and unproductive labor; the distinction, +namely, between labor for the supply of productive, and for +the supply of unproductive, consumption; between labor +employed in keeping up or in adding to the productive resources +of the country, and that which is employed otherwise. +Of the produce of the country, a part only is destined to be +consumed productively; the remainder supplies the unproductive +consumption of producers, and the entire consumption +of the unproductive class. Suppose that the proportion +of the annual produce applied to the first purpose amounts +to half; then one half the productive laborers of the country +<pb n='063'/><anchor id='Pg063'/> +are all that are employed in the operations on which the +permanent wealth of the country depends. The other half +are occupied from year to year and from generation to generation +in producing things which are consumed and disappear +without return; and whatever this half consume is +as completely lost, as to any permanent effect on the national +resources, as if it were consumed unproductively. Suppose +that this second half of the laboring population ceased to +work, and that the government maintained them in idleness +for a whole year: the first half would suffice to produce, as +they had done before, their own necessaries and the necessaries +of the second half, and to keep the stock of materials +and implements undiminished: the unproductive classes, indeed, +would be either starved or obliged to produce their +own subsistence, and the whole community would be reduced +during a year to bare necessaries; but the sources of +production would be unimpaired, and the next year there +would not necessarily be a smaller produce than if no such +interval of inactivity had occurred; while if the case had +been reversed, if the first half of the laborers had suspended +their accustomed occupations, and the second half had continued +theirs, the country at the end of the twelvemonth +would have been entirely impoverished. It would be a great +error to regret the large proportion of the annual produce, +which in an opulent country goes to supply unproductive +consumption. That so great a surplus should be available +for such purposes, and that it should be applied to them, can +only be a subject of congratulation. +</p> + +<p> +This principle may be seen by the following classification: +</p> + +<p> +(A) Idlers; or unproductive laborers—e.g., actors.<lb/> +(B) Productive laborers—e.g., farmers.<lb/> + (C) Producing wealth for productive consumption, one half +the annual produce.<lb/> + (D) Producing wealth for unproductive consumption (A), one +half the annual produce. +</p> + +<pb n='064'/><anchor id='Pg064'/> + +<p> +Group D are productive laborers, and their <emph>own necessaries</emph> +are productively consumed, but they are supplied by C, who +keep themselves and D in existence. So long as C work, both +C and D can go on producing. If D stopped working, they +could be still subsisted as before by C; but A would be forced +to produce for themselves. But, if C stopped working, D and +C would be left without the necessaries of life, and would be +obliged to cease their usual work. In this way it may be seen +how much more important to the increase of material wealth +C are than D, who labor <q>for the supply of unproductive consumption.</q> +Of course, group D are desirable on other than +economic grounds, because their labor represents what can be +enjoyed beyond the necessities of life. +</p> + +</div> + +</div> + +<pb n='065'/><anchor id='Pg065'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter III. Of Capital.</head> + +<div> +<index index='toc'/> +<head>§ 1. Capital is Wealth Appropriated to Reproductive Employment.</head> + +<p> +It has been seen in the preceding chapters that besides +the primary and universal requisites of production, +labor and natural agents, there is another requisite without +which no productive operations beyond the rude and scanty +beginnings of primitive industry are possible—namely, a +stock, previously accumulated, of the products of former labor. +This accumulated stock of the produce of labor is +termed Capital. What capital does for production is, to +afford the shelter, protection, tools, and materials which the +work requires, and to feed and otherwise maintain the laborers +during the process. These are the services which present +labor requires from past, and from the produce of past, +labor. Whatever things are destined for this use—destined +to supply productive labor with these various prerequisites—are +Capital. +</p> + +<quote rend='display'> +Professor Fawcett, <q>Manual</q> (chap. ii), says: <q>Since the +laborer must be fed by previously accumulated food, ... some +of the results of past labor are required to be set aside to sustain +the laborer while producing. The third requisite of production, +therefore, is a fund reserved from consumption, and +devoted to sustain those engaged in future production.... +Capital is not confined to the food which feeds the laborers, +but includes machinery, buildings, and, in fact, every product +due to man's labor which can be applied to assist his industry</q> +(chap. iv). General Walker (<q>Political Economy,</q> pages 68-70) +defines capital as that portion of wealth (excluding unimproved +land and natural agents) which is employed in the +production of new forms of wealth. Henry George (<q>Progress +and Poverty,</q> page 41) returns to Adam Smith's definition: +<pb n='066'/><anchor id='Pg066'/> +<q>That part of a man's stock which he expects to yield +him a revenue is called his capital.</q> Cherbuliez (<q>Précis,</q> +page 70) points out the increasing interdependence of industrial +operations as society increases in wealth, and that there is not +a single industry which does not demand the use of products +obtained by previous labor. <q>These auxiliary products accumulated +with a view to the production to which they are subservient</q> +form what is called capital. Carey (<q>Social Science,</q> +iii, page 48) regards as capital all things which in any +way form the machinery by which society obtains wealth. +Roscher's definition is, <q>Every product laid by for purposes +of further production.</q> (<q>Political Economy,</q> section 42.) +By some, labor is regarded as capital.<note place='foot'>See Roscher's +note 1, section 42, for various definitions of capital.</note> +</quote> + +<p> +A manufacturer, for example, has one part of his capital +in the form of buildings, fitted and destined for carrying on +this branch of manufacture. Another part he has in the +form of machinery. A third consists, if he be a spinner, of +raw cotton, flax, or wool; if a weaver, of flaxen, woolen, +silk, or cotton thread; and the like, according to the nature +of the manufacture. Food and clothing for his operatives +it is not the custom of the present age that he should directly +provide; and few capitalists, except the producers of food +or clothing, have any portion worth mentioning of their capital +in that shape. Instead of this, each capitalist has money, +which he pays to his work-people, and so enables them to +supply themselves. What, then, is his capital? Precisely +that part of his possessions, whatever it be, which he designs +to employ in carrying on fresh production. It is of +no consequence that a part, or even the whole of it, is in a +form in which it can not directly supply the wants of laborers. +</p> + +<quote rend='display'> +Care should be taken to distinguish between wealth, +capital, and money. Capital may be succinctly defined as +<emph>saved wealth devoted to reproduction</emph>, and the relations of the +three terms mentioned may be illustrated by the following +figure: The area of the circle, A, represents the wealth of a +country; the area of the inscribed circle, B, the quantity out +of the whole wealth which is saved and devoted to reproduction +and called capital. But money is only one part of capital, +as shown by the area of circle C. Wherefore, it can be plainly +<pb n='067'/><anchor id='Pg067'/> +seen that not all capital, B, is money; that not all wealth, A, +is capital, although all capital is necessarily wealth as included +within it. It is not always understood that +money is merely a convenient article by +which other forms of wealth are exchanged +against each other, and that a man may +have capital without ever having any actual +money in his possession. In times of +commercial depression, that which is capital +to-day may not to-morrow satisfy any +desires (i.e., not be in demand), and so +for the time it may, so to speak, drop entirely +out of our circles above. For the +moment, not having an exchange value, it can not be wealth, +and so can the less be capital. +</quote> + +<p rend='text-align: center'> + <figure url='images/capital-circle.png' rend='width: 40%'> + <figDesc>Illustration. Outer circle A, enclosing inner circle B, with small circle C +overlapping edge of circle B.</figDesc> + </figure> +</p> + +<p> +Suppose, for instance, that the capitalist is a hardware +manufacturer, and that his stock in trade, over and above +his machinery, consists at present wholly in iron goods. +Iron goods can not feed laborers. Nevertheless, by a mere +change of the destination of the iron goods, he can cause +laborers to be fed. Suppose that [the capitalist changed into +wages what he had before spent] in buying plate and jewels; +and, in order to render the effect perceptible, let us suppose +that the change takes place on a considerable scale, and that +a large sum is diverted from buying plate and jewels to employing +productive laborers, whom we shall suppose to have +been previously, like the Irish peasantry, only half employed +and half fed. The laborers, on receiving their increased +wages, will not lay them out in plate and jewels, but in food. +There is not, however, additional food in the country; nor +any unproductive laborers or animals, as in the former case, +whose food is set free for productive purposes. Food will +therefore be imported if possible; if not possible, the laborers +will remain for a season on their short allowance: but +the consequence of this change in the demand for commodities, +occasioned by the change in the expenditure of capitalists +from unproductive to productive, is that next year more +food will be produced, and less plate and jewelry. So that +again, without having had anything to do with the food of +<pb n='068'/><anchor id='Pg068'/> +the laborers directly, the conversion by individuals of a portion +of their property, no matter of what sort, from an unproductive +destination to a productive, has had the effect of +causing more food to be appropriated to the consumption of +productive laborers. The distinction, then, between Capital +and Not-capital, does not lie in the kind of commodities, but +in the mind of the capitalist—in his will to employ them for +one purpose rather than another; and all property, however +ill adapted in itself for the use of laborers, is a part of capital, +so soon as it, or the value to be received from it, is set +apart for productive reinvestment. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. More Capital Devoted to Production than Actually Employed in it.</head> + +<p> +As whatever of the produce of the country is devoted +to production is capital, so, conversely, the whole of +the capital of the country is devoted to production. This +second proposition, however, must be taken with some limitations +and explanations. (1) A fund may be seeking for +productive employment, and find none adapted to the inclinations +of its possessor: it then is capital still, but unemployed +capital. (2) Or the stock may consist of unsold goods, not +susceptible of direct application to productive uses, and not, +at the moment, marketable: these, until sold, are in the condition +of unemployed capital. +</p> + +<quote rend='display'> +This is not an important distinction. The goods are doubtless +marketable at some price, if offered low enough. If no +one wants them, then, by definition, they are not wealth so +long as that condition exists. +</quote> + +<p> +(3) [Or] suppose that the Government lays a tax on the +production in one of its earlier stages, as, for instance, by taxing +the material. The manufacturer has to advance the tax, +before commencing the manufacture, and is therefore under +a necessity of having a larger accumulated fund than is required +for, or is actually employed in, the production which +he carries on. He must have a larger capital to maintain the +same quantity of productive labor; or (what is equivalent) +with a given capital he maintains less labor. (4) For another +example: a farmer may enter on his farm at such a time of +the year that he may be required to pay one, two, or even +<pb n='069'/><anchor id='Pg069'/> +three quarters' rent before obtaining any return from the +produce. This, therefore, must be paid out of his capital. +</p> + +<p> +(5) Finally, that large portion of the productive capital of a +country which is employed in paying the wages and salaries +of laborers, evidently is not, all of it, strictly and indispensably +necessary for production. As much of it as exceeds the +actual necessaries of life and health (an excess which in the +case of skilled laborers is usually considerable) is not expended +in supporting labor, but in remunerating it, and the +laborers could wait for this part of their remuneration until +the production is completed. +</p> + +<quote rend='display'> +The previous accumulation of commodities requisite for +production must inevitably be large enough to cover necessaries, +but need not be more, if the laborer is willing to wait +for the additional amount of his wages (the amount of his unproductive +consumption) until the completion of the industrial +operation. In fact, however, the accumulation must be sufficient +to pay the laborer all his wages from week to week, by +force of custom (wherever there is any considerable division of +labor), and also sufficient to purchase tools and materials. The +various elements of capital are materials, instruments, and subsistence, +giving <q>instruments</q> its wide signification which +includes money (the tool of exchange), and other necessary +appliances of each special kind of production. +</quote> + +<p> +In truth, it is only after an abundant capital had already +been accumulated that the practice of paying in advance any +remuneration of labor beyond a bare subsistence could possibly +have arisen: since whatever is so paid is not really +applied to production, but to the unproductive consumption +of productive laborers, indicating a fund for production sufficiently +ample to admit of habitually diverting a part of it +to a mere convenience. +</p> + +<p> +It will be observed that I have assumed that the laborers +are always subsisted from capital:<note place='foot'>General Walker +(<q>Political Economy,</q> Part II, Chap. iv) adopts the same +position, although seemingly inconsistent with his doctrine on the rate of wages. +The <q>rate of wages</q> is, however, a different thing from the source of a laborer's +subsistence. See <ref target='Book_II_Chapter_II_Section_2'>Book II, Chapter II, +§ 2</ref>.</note> and this is obviously +the fact, though the capital need not necessarily be furnished +by a person called a capitalist. +</p> + +<pb n='070'/><anchor id='Pg070'/> + +<p> +The peasant does not subsist this year on the produce +of this year's harvest, but on that of the last. The artisan +is not living on the proceeds of the work he has in hand, +but on those of work previously executed and disposed of. +Each is supported by a small capital of his own, which he +periodically replaces from the produce of his labor. The +large capitalist is, in like manner, maintained from funds +provided in advance. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Examination of Cases Illustrative of the Idea of Capital.</head> + +<p> +That which is virtually capital to the individual is or +is not capital to the nation, according as the fund which by +the supposition he has not dissipated has or has not been +dissipated by somebody else. +</p> + +<quote rend='display'> +Let the reader consider, in the four following suppositions, +whether or not the given capital has wholly dropped out of the +circle in the diagram, page <ref target='Pg067'>67</ref>. In (3) and (4) the wealth is +entirely dissipated; as it can not longer be in circle A, it can +not, of course, be in circle B. +</quote> + +<p> +(1.) For example, let property of the value of ten thousand +pounds, belonging to A, be lent to B, a farmer or manufacturer, +and employed profitably in B's occupation. It is as +much capital as if it belonged to B. A is really a farmer +or manufacturer, not personally, but in respect of his property. +Capital worth ten thousand pounds is employed in +production—in maintaining laborers and providing tools and +materials—which capital belongs to A, while B takes the +trouble of employing it, and receives for his remuneration +the difference between the profit which it yields and the interest +he pays to A. This is the simplest case. +</p> + +<p> +(2.) Suppose next that A's ten thousand pounds, instead +of being lent to B, are lent on mortgage to C, a landed +proprietor, by whom they are employed in improving the +productive powers of his estate, by fencing, draining, +road-making, or permanent manures. This is productive +employment. The ten thousand pounds are sunk, but not +<pb n='071'/><anchor id='Pg071'/> +dissipated. They yield a permanent return; the land now +affords an increase of produce, sufficient in a few years, if +the outlay has been judicious, to replace the amount, and in +time to multiply it manifold. Here, then, is a value of ten +thousand pounds, employed in increasing the produce of the +country. This constitutes a capital, for which C, if he lets +his land, receives the returns in the nominal form of increased +rent; and the mortgage entitles A to receive from +these returns, in the shape of interest, such annual sum as +has been agreed on. +</p> + +<p> +(3.) Suppose, however, that C, the borrowing landlord, is +a spendthrift, who burdens his land not to increase his fortune +but to squander it, expending the amount in equipages +and entertainments. In a year or two it is dissipated, and +without return. A is as rich as before; he has no longer +his ten thousand pounds, but he has a lien on the land, +which he could still sell for that amount. C, however, is ten +thousand pounds poorer than formerly; and nobody is richer. +It may be said that those are richer who have made profit +out of the money while it was being spent. No doubt if C +lost it by gaming, or was cheated of it by his servants, that +is a mere transfer, not a destruction, and those who have +gained the amount may employ it productively. But if C +has received the fair value for his expenditure in articles of +subsistence or luxury, which he has consumed on himself, or +by means of his servants or guests, these articles have ceased +to exist, and nothing has been produced to replace them: +while if the same sum had been employed in farming or +manufacturing, the consumption which would have taken +place would have been more than balanced at the end of the +year by new products, created by the labor of those who +would in that case have been the consumers. By C's prodigality, +that which would have been consumed with a return +is consumed without return. C's tradesmen may have made +a profit during the process; but, if the capital had been expended +productively, an equivalent profit would have been +made by builders, fencers, tool-makers, and the tradespeople +<pb n='072'/><anchor id='Pg072'/> +who supply the consumption of the laboring-classes; +while, at the expiration of the time (to say nothing of an +increase), C would have had the ten thousand pounds or +its value replaced to him, which now he has not. There is, +therefore, on the general result, a difference, to the disadvantage +of the community, of at least ten thousand pounds, +being the amount of C's unproductive expenditure. To A, +the difference is not material, since his income is secured to +him, and while the security is good, and the market rate of +interest the same, he can always sell the mortgage at its +original value. To A, therefore, the lien of ten thousand +pounds on C's estate is virtually a capital of that amount; +but is it so in reference to the community? It is not. A +had a capital of ten thousand pounds, but this has been extinguished—dissipated +and destroyed by C's prodigality. A +now receives his income, not from the produce of his capital, +but from some other source of income belonging to C, probably +from the rent of his land, that is, from payments made +to him by farmers out of the produce of <emph>their</emph> capital. +</p> + +<p> +(4.) Let us now vary the hypothesis still further, and +suppose that the money is borrowed, not by a landlord, but +by the state. A lends his capital to Government to carry +on a war: he buys from the state what are called government +securities; that is, obligations on the Government to +pay a certain annual income. If the Government employed +the money in making a railroad, this might be a productive +employment, and A's property would still be used as capital; +but since it is employed in war, that is, in the pay of officers +and soldiers who produce nothing, and in destroying a quantity +of gunpowder and bullets without return, the Government +is in the situation of C, the spendthrift landlord, and +A's ten thousand pounds are so much national capital which +once existed, but exists no longer—virtually thrown into the +sea, as wealth or production is concerned; though for +other reasons the employment of it may have been justifiable. +A's subsequent income is derived, not from the produce +of his own capital, but from taxes drawn from the produce +<pb n='073'/><anchor id='Pg073'/> +of the remaining capital of the community; to whom +his capital is not yielding any return, to indemnify them for +the payment; it is all lost and gone, and what he now possesses +is a claim on the returns to other people's capital +and industry. +</p> + +<p> +The breach in the capital of the country was made when +the Government spent A's money: whereby a value of ten +thousand pounds was withdrawn or withheld from productive +employment, placed in the fund for unproductive consumption, +and destroyed without equivalent. +</p> + +<quote rend='display'> +The United States had borrowed in the late civil war, by August +31, 1865, $2,845,907,626; and, to June 30, 1881, the Government +had paid in interest on its bonds, <q>from taxes drawn +from the produce of the remaining capital,</q> $1,270,596,784, +as an income to bondholders. From this can be seen the +enormous waste of wealth to the United States during the war, +and consequently the less existing capital to-day in this country; +since, under the same inducements to save, the smaller the +outside circle (wealth), the less the inside circle (capital) must +be. +</quote> + +</div> + +</div> + +<pb n='074'/><anchor id='Pg074'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_I_Chapter_IV'/> +<head>Chapter IV. Fundamental Propositions Respecting Capital.</head> + +<div> +<index index='toc'/> +<head>§ 1. Industry is Limited by Capital.</head> + +<p> +The first of these propositions is, that industry is +limited by capital. To employ labor in a manufacture is to +invest capital in the manufacture. This implies that industry +can not be employed to any greater extent than there +is capital to invest. The proposition, indeed, must be assented +to as soon as it is distinctly apprehended. The expression +<q>applying capital</q> is of course metaphorical: what +is really applied is labor; capital being an indispensable +condition. The food of laborers and the materials of production +have no productive power; but labor can not exert +its productive power unless provided with them. There can +be no more industry than is supplied with materials to work +up and food to eat. Self-evident as the thing is, it is often +forgotten that the people of a country are maintained and +have their wants supplied, not by the produce of present +labor, but of past. +</p> + +<quote rend='display'> +Therefore, as capital increases, more labor can be employed. +When the Pittsburg rioters, in 1877, destroyed property, or +the product of past labor, they did not realize then that that +property might, but now could never again, be employed for +productive purposes, and thereby support laborers. +</quote> + +<p> +They consume what has been produced, not what is about +to be produced. Now, of what has been produced, a part +only is allotted to the support of productive labor; and there +will not and can not be more of that labor than the portion +<pb n='075'/><anchor id='Pg075'/> +so allotted (which is the capital of the country) can feed, and +provide with the materials and instruments of production. +</p> + +<p> +Because industry is limited by capital, we are not, however, +to infer that it always reaches that limit. There may not +be as many laborers obtainable as the capital would maintain and +employ. This has been known to occur in new colonies, where +capital has sometimes perished uselessly for want of labor. +</p> + +<quote rend='display'> +In the farming districts of our Middle and Western States, +in harvest-time, crops have been often of late years ruined +because farm-hands could not be obtained. In earlier days, +President John Adams was unable to hire a man in Washington +to cut wood in the surrounding forests with which to warm +the White House. +</quote> + +<p> +The unproductive consumption of productive laborers, +the whole of which is now supplied by capital, might cease, +or be postponed, until the produce came in; and additional +productive laborers might be maintained with the amount. +</p> + +<p> +[Governments] can create capital. They may lay on +taxes, and employ the amount productively. They may do +what is nearly equivalent: they may lay taxes on income or +expenditure, and apply the proceeds toward paying off the +public debts. The fund-holder, when paid off, would still +desire to draw an income from his property, most of which, +therefore, would find its way into productive employment, +while a great part of it would have been drawn from the +fund for unproductive expenditure, since people do not +wholly pay their taxes from what they would have saved, +but partly, if not chiefly, from what they would have spent. +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_I_Chapter_IV_Section_2'/> +<head>§ 2. Increase of Capital gives Increased Employment to Labor, Without +Assignable Bounds.</head> + +<p> +While, on the one hand, industry is limited by capital, +so, on the other, every increase of capital gives, or is +capable of giving, additional employment to industry; and +this without assignable limit. I do not mean to deny that +the capital, or part of it, may be so employed as not to support +laborers, being fixed in machinery, buildings, improvement +of land, and the like. In any large increase of capital +a considerable portion will generally be thus employed, and +will only co-operate with laborers, not maintain them. +</p> + +<pb n='076'/><anchor id='Pg076'/> + +<quote rend='display'> +It will be remembered, however, that subsistence is but +one part or element of capital; that instruments and materials +form a large part of capital. But still the question of +mere maintenance is rightfully discussed, because it is asserted +to-day that, while the rich are growing richer, the poor lack +even the food to keep them alive; and throughout this discussion +Mr. Mill has in view the fact that laborers may exist in +the community either <q>half fed or unemployed.</q> +</quote> + +<p> +What I do intend to assert is, that the portion which is +destined to their maintenance may (supposing no alteration +in anything else) be indefinitely increased, without creating +an impossibility of finding the employment: in other words, +that if there are human beings capable of work, and food to +feed them, they may always be employed in producing something. +It is very much opposed to common doctrines.<note place='foot'>The opinion +mentioned above in the text is that of the believers in over-production, +of whom the most distinguished are Mr. Malthus, Dr. Chalmers, and +Sismondi.</note> There +is not an opinion more general among mankind than this, +that the unproductive expenditure of the rich is necessary to +the employment of the poor. +</p> + +<quote rend='display'> +It is to be noticed that, in fact, after the arts have so +far advanced in a community that mankind can obtain by their +exertion more than the amount of the mere necessaries of life +sufficient on the average for the subsistence of all, any further +production rendered possible to the human race by new discoveries +and processes is naturally unproductively consumed, and +that consequently a demand for labor for unproductive consumption +is essential for the employment of all existing laborers. +This, however, can be done, because enough capital has +been brought into existence to create the demand for the labor. +Yet it is clear that it is not <emph>expenditure</emph>, but capital, by which +employment is given to the poor. +</quote> + +<p> +Suppose that every capitalist came to be of opinion that, +not being more meritorious than a well-conducted laborer, +he ought not to fare better; and accordingly laid by, from +conscientious motives, the surplus of his profits; unproductive +expenditure is now reduced to its lowest limit: and it is +asked, How is the increased capital to find employment? +<pb n='077'/><anchor id='Pg077'/> +Who is to buy the goods which it will produce? There are +no longer customers even for those which were produced +before. The goods, therefore (it is said), will remain unsold; +they will perish in the warehouses, until capital is brought +down to what it was originally, or rather to as much less as +the demand of the customers has lessened. But this is seeing +only one half of the matter. In the case supposed, there +would no longer be any demand for luxuries on the part of +capitalists and land-owners. But, when these classes turn +their income into capital, they do not thereby annihilate +their power of consumption; they do but transfer it from +themselves to the laborers to whom they give employment. +Now, there are two possible suppositions in regard to the +laborers: either there is, or there is not, an increase of their +numbers proportional to the increase of capital. (1.) If there +is, the case offers no difficulty. The production of necessaries +for the new population takes the place of the production +of luxuries for a portion of the old, and supplies +exactly the amount of employment which has been lost. +(2.) But suppose that there is no increase of population. +The whole of what was previously expended in luxuries, by +capitalists and landlords, is distributed among the existing +laborers, in the form of additional wages. We will assume +them to be already sufficiently supplied with necessaries. +</p> + +<p> +What follows? That the laborers become consumers of +luxuries; and the capital previously employed in the production +of luxuries is still able to employ itself in the same +manner; the difference being, that the luxuries are shared +among the community generally, instead of being confined +to a few, supposing that the power of their labor were +physically sufficient to produce all this amount of indulgences +for their whole number. Thus the limit of wealth +is never deficiency of consumers, but of producers and productive +power. Every addition to capital gives to labor +either additional employment or additional remuneration. +</p> + +<quote rend='display'> +<p> +That laborers should get more (<hi rend='italic'>a</hi>) by capitalists abstaining +from unproductive expenditure than (<hi rend='italic'>b</hi>) by expenditure +<pb n='078'/><anchor id='Pg078'/> +in articles unproductively consumed is a question difficult for +many to comprehend, and needs all the elucidation possible. +To start with, no one ever knew of a community all of whose +wants were satisfied: in fact, civilization is constantly leading +us into new fields of enjoyment, and results in a constant differentiation +of new desires. To satisfy these wants is the spring +to nearly all production and industry. There can, therefore, +be no stop to production arising from lack of desire for commodities. +<q>The limit of wealth is never deficiency of consumers,</q> +but of productive power. +</p> + +<p> +Now, in supposition (2) of the text, remember that the +laborers are supposed not to be employed up to their full productive +power. If all capitalists abstain from unproductive consumption, +and devote that amount of wealth to production, +then, since there can be no production without labor, the same +number of laborers have offered to them in the aggregate a +larger sum of articles for their exertions, which is equivalent +to saying they receive additional wages. +</p> + +<p> +But some persons want to see the process in the concrete, +and the same principle may be illustrated by a practical case. +It is supposed that all laborers have the necessaries of life +only, but none of the comforts, decencies, and luxuries. Let A +be a farmer in New York, who can also weave carpets, and B +a lumberman in Maine. A begins to want a better house, and +B wishes a carpet, both having food, clothing, and shelter. +One of the capitalists abstaining from unproductive consumption, +as above, is X, who, knowing the two desires of A and +B, presents himself as a middle-man (i.e., he gives a market +for both men, as is found in every center of trade, as well as in +a country store), furnishing A the tools, materials, etc., and +giving him the promise of lumber if he will create the carpet, +and promising B the carpet if he will likewise produce the additional +lumber. To be more matter of fact, X buys the carpet +of A, and sells it to B for the lumber. Thus two new +articles have been created, and for their exertions A has received +additional wages (either in the form of lumber, or of the +money paid him for the carpet), and B has received additional +wages (either in the form of a carpet, or the money paid him +by X for the lumber). If A and B are regarded as typifying +all the laborers, and X all the above capitalists, in the multiplicity +of actual exchanges, it will be seen that A and B +are creating new articles to satisfy their own demand, instead +of meeting the demands of X. If their primary wants are +already supplied, then they take their additional wages in +the form of comforts and decencies. When Class X forego +their consumption, but add that amount to capital, they do not +give up their title to that capital, but they transfer the use of +<pb n='079'/><anchor id='Pg079'/> +it, or their consuming power, to others for the time being. +This question will be more fully discussed in +<ref target='Book_I_Chapter_IV_Section_6'>§ 6</ref>. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Capital is the result of Saving, and all Capital is Consumed.</head> + +<p> +A second fundamental theorem respecting capital +relates to the source from which it is derived. It is the result +of saving. +</p> + +<p> +If all persons were to expend in personal indulgences all +that they produce, and all the income that they receive from +what is produced by others, capital could not increase. Some +saving, therefore, there must have been, even in the simplest +of all states of economical relations; people must have produced +more than they used, or used less than they produced. +Still more must they do so before they can employ other +laborers, or increase their production beyond what can be +accomplished by the work of their own hands. If it were +said, for instance, that the only way to accelerate the increase +of capital is by increase of saving, the idea would probably +be suggested of greater abstinence and increased privation. +But it is obvious that whatever increases the productive +power of labor, creates an additional fund to make savings +from, and enables capital to be enlarged, not only without +additional privation, but concurrently with an increase of +personal consumption. Nevertheless, there is here an increase +of saving, in the scientific sense. Though there is +more consumed, there is also more spared. There is a greater +excess of production over consumption. To consume less +than is produced is saving; and that is the process by which +capital is increased; not necessarily by consuming less, absolutely. +</p> + +<quote rend='display'> +The economic idea of saving involves, of course, the intention +of using the wealth in reproduction. Saving, without this +meaning, results only in hoarding of wealth, and while hoarded +this amount is not capital. To explain the process by which +capital comes into existence, Bastiat has given the well-known +illustration of the plane in his <q>Sophisms of Protection.</q><note place='foot'>Page +371, English translation, N. Y. (1871).</note> +</quote> + +<p> +A fundamental theorem respecting capital, closely connected +with the one last discussed, is, that although saved, +<pb n='080'/><anchor id='Pg080'/> +and the result of saving, it is nevertheless consumed. The +word saving does not imply that what is saved is not consumed, +nor even necessarily that its consumption is deferred; +but only that, if consumed immediately, it is not consumed +by the person who saves it. If merely laid by for +future use, it is said to be hoarded; and, while hoarded, is +not consumed at all. But, if employed as capital, it is all +consumed, though not by the capitalist. Part is exchanged +for tools or machinery, which are worn out by use; part +for seed or materials, which are destroyed as such by being +sown or wrought up, and destroyed altogether by the consumption +of the ultimate product. The remainder is paid +in wages to productive laborers, who consume it for their +daily wants; or if they in their turn save any part, this also +is not, generally speaking, hoarded, but (through savings-banks, +benefit clubs, or some other channel) re-employed as +capital, and consumed. To the vulgar, it is not at all apparent +that what is saved is consumed. To them, every one +who saves appears in the light of a person who hoards. The +person who expends his fortune in unproductive consumption +is looked upon as diffusing benefits all around, and is +an object of so much favor, that some portion of the same +popularity attaches even to him who spends what does not +belong to him; who not only destroys his own capital, if he +ever had any, but, under pretense of borrowing, and on +promise of repayment, possesses himself of capital belonging +to others, and destroys that likewise. +</p> + +<p> +This popular error comes from attending to a small portion +only of the consequences that flow from the saving or +the spending; all the effects of either, which are out of sight, +being out of mind. There is, in the one case, a wearing out +of tools, a destruction of material, and a quantity of food +and clothing supplied to laborers, which they destroy by use; +in the other case, there is a consumption, that is to say, a +destruction, of wines, equipages, and furniture. Thus far, +the consequence to the national wealth has been much the +same; an equivalent quantity of it has been destroyed in +<pb n='081'/><anchor id='Pg081'/> +both cases. But in the spending, this first stage is also the +final stage; that particular amount of the produce of labor +has disappeared, and there is nothing left; while, on the +contrary, the saving person, during the whole time that the +destruction was going on, has had laborers at work repairing +it; who are ultimately found to have replaced, with an increase, +the equivalent of what has been consumed. +</p> + +<p> +Almost all expenditure being carried on by means of +money, the money comes to be looked upon as the main feature +in the transaction; and since that does not perish, but +only changes hands, people overlook the destruction which +takes place in the case of unproductive expenditure. The +money being merely transferred, they think the wealth also +has only been handed over from the spendthrift to other +people. But this is simply confounding money with wealth. +The wealth which has been destroyed was not the money, +but the wines, equipages, and furniture which the money +purchased; and, these having been destroyed without return, +society collectively is poorer by the amount. In proportion +as any class is improvident or luxurious, the industry of the +country takes the direction of producing luxuries for their +use; while not only the employment for productive laborers +is diminished, but the subsistence and instruments which are +the means of such employment do actually exist in smaller +quantity. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Capital is kept up by Perpetual Reproduction, as shown by the Recovery +of Countries from Devastation.</head> + +<p> +To return to our fundamental theorem. Everything +which is produced is consumed—both what is saved and +what is said to be spent—and the former quite as rapidly as +the latter. All the ordinary forms of language tend to disguise +this. When people talk of the ancient wealth of a +country, of riches inherited from ancestors, and similar expressions, +the idea suggested is, that the riches so transmitted +were produced long ago, at the time when they are said to +have been first acquired, and that no portion of the capital +of the country was produced this year, except as much as +may have been this year added to the total amount. The +fact is far otherwise. The greater part, in value, of the +<pb n='082'/><anchor id='Pg082'/> +wealth now existing [in the United States] has been produced +by human hands within the last twelve months. +</p> + +<quote rend='display'> +<q>In the State of Massachusetts it is estimated that the capital, +on the average, belonging to each individual does not exceed +$600, and that the average annual product <hi rend='italic'>per capita</hi> is +about $200; so that the total capital is the product of only two +or three years' labor.</q><note place='foot'>Edward Atkinson, +<q>Labor and Capital, Allies not Enemies,</q> p. 60.</note> +</quote> + +<p> +The land subsists, and the land is almost the only thing +that subsists. Everything which is produced perishes, and +most things very quickly. Most kinds of capital are not +fitted by their nature to be long preserved. Westminster +Abbey has lasted many centuries, with occasional repairs; +some Grecian sculptures have existed above two thousand +years; the Pyramids perhaps double or treble that time. +But these were objects devoted to unproductive use. Capital +is kept in existence from age to age not by preservation, +but by perpetual reproduction; every part of it is used and +destroyed, generally very soon after it is produced, but those +who consume it are employed meanwhile in producing more. +The growth of capital is similar to the growth of population. +Every individual who is born, dies, but in each year the +number born exceeds the number who die; the population, +therefore, always increases, though not one person of those +composing it was alive until a very recent date. +</p> + +<p> +This perpetual consumption and reproduction of capital +afford the explanation of what has so often excited wonder, +the great rapidity with which countries recover from a state +of devastation. The possibility of a rapid repair of their +disasters mainly depends on whether the country has been +depopulated. If its effective population have not been extirpated +at the time, and are not starved afterward, then, +with the same skill and knowledge which they had before, +with their land and its permanent improvements undestroyed, +and the more durable buildings probably unimpaired, or only +partially injured, they have nearly all the requisites for their +<pb n='083'/><anchor id='Pg083'/> +former amount of production. If there is as much of food +left to them, or of valuables to buy food, as enables them by +any amount of privation to remain alive and in working condition, +they will, in a short time, have raised as great a produce, +and acquired collectively as great wealth and as great a +capital, as before, by the mere continuance of that ordinary +amount of exertion which they are accustomed to employ in +their occupations. Nor does this evince any strength in the +principle of saving, in the popular sense of the term, since +what takes place is not intentional abstinence, but involuntary +privation. +</p> + +<quote rend='display'> +The world has at any given period the power, under existing +conditions of production and skill, to create a certain +amount of wealth, as represented by the inner rectangle, W. +Each increased power of production arising from conquests +over Nature's forces, as the use of steam and labor-saving machinery, +permits the total wealth +to be enlarged, as, in the figure, to +rectangle W'. For the production +of wealth are required labor, +capital, and land; therefore, if +the labor and land are not destroyed +by war, there need not +necessarily be in existence all the +previous capital. If there are +the necessaries for all, and only sufficient tools to accomplish +the work, they will, in a few years, again recreate all the +wealth that formerly existed, regain the same position as before, +and go on slowly increasing the total wealth just as fast +as improvements in the arts of production render it possible. +</quote> + +<p rend='text-align: center'> + <figure url='images/wealth-rectangles.png' rend='width: 40%'> + <figDesc>Illustration. Inner rectangle W, surrounded by rectangle W'.</figDesc> + </figure> +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_I_Chapter_IV_Section_5'/> +<head>§ 5. Effects of Defraying Government Expenditure by Loans.</head> + +<p> +[An application of this truth has been made to the +question of raising government supplies for war purposes.] +Loans, being drawn from capital (in lieu of taxes, which +would generally have been paid from income, and made +up in part or altogether by increased economy), must, according +to the principles we have laid down, tend to impoverish +the country: yet the years in which expenditure of +this sort has been on the greatest scale have often been years +of great apparent prosperity: the wealth and resources of the +country, instead of diminishing, have given every sign of +<pb n='084'/><anchor id='Pg084'/> +rapid increase during the process, and of greatly expanded +dimensions after its close. +</p> + +<quote rend='display'> +During our civil war, at the same time that wealth was +being destroyed on an enormous scale, there was a very general +feeling that trade was good, and large fortunes were +made. At the close of the war a period of speculation and +overtrading continued until it was brought to a disastrous +close by the panic of 1873. Much of this speculation, however, +was due to an inflated paper currency. +</quote> + +<p> +We will suppose the most unfavorable case possible: that +the whole amount borrowed and destroyed by the Government +was abstracted by the lender from a productive employment +in which it had actually been invested. The capital, +therefore, of the country, is this year diminished by so +much. But, unless the amount abstracted is something enormous, +there is no reason in the nature of the case why next +year the national capital should not be as great as ever. The +loan can not have been taken from that portion of the capital +of the country which consists of tools, machinery, and +buildings. It must have been wholly drawn from the portion +employed in paying laborers: and the laborers will suffer +accordingly. But if none of them are starved, if their +wages can bear such an amount of reduction, or if charity +interposes between them and absolute destitution, there is no +reason that their labor should produce less in the next year +than in the year before. If they produce as much as usual, +having been paid less by so many millions sterling, these +millions are gained by their employers. The breach made +in the capital of the country is thus instantly repaired, but +repaired by the privations and often the real misery of the +laboring-class. +</p> + +<quote rend='display'> +As Mr. Mill points out, during the Napoleonic wars, in +France the withdrawal of laborers from industry into the army +was so large that it caused a rise of wages, and a fall in the +profits of capital; while in England, inasmuch as capital, +rather than men, was sent to the Continent in the war, the very +reverse took place: the diversion of <q>hundreds of millions of +capital from productive employment</q> caused a fall of wages, +<pb n='085'/><anchor id='Pg085'/> +and the prosperity of the capitalist class, while the permanent +productive resources did not fall off. +</quote> + +<p> +This leads to the vexed question to which Dr. Chalmers +has very particularly adverted: whether the funds required +by a government for extraordinary unproductive expenditure +are best raised by loans, the interest only being provided +by taxes, or whether taxes should be at once laid on +to the whole amount; which is called, in the financial vocabulary, +raising the whole of the supplies within the year. +Dr. Chalmers is strongly for the latter method. He says +the common notion is that, in calling for the whole amount +in one year, you require what is either impossible, or very +inconvenient; that the people can not, without great hardship, +pay the whole at once out of their yearly income; and +that it is much better to require of them a small payment +every year in the shape of interest, than so great a sacrifice +once for all. To which his answer is, that the sacrifice is +made equally in either case. Whatever is spent can not but +be drawn from yearly income. The whole and every part +of the wealth produced in the country forms, or helps to +form, the yearly income of somebody. The privation which +it is supposed must result from taking the amount in the +shape of taxes is not avoided by taking it in a loan. The +suffering is not averted, but only thrown upon the laboring-classes, +the least able, and who least ought, to bear it: while +all the inconveniences, physical, moral, and political, produced +by maintaining taxes for the perpetual payment of +the interest, are incurred in pure loss. Whenever capital is +withdrawn from production, or from the fund destined for +production, to be lent to the state and expended unproductively, +that whole sum is withheld from the laboring-classes: +the loan, therefore, is in truth paid off the same year; the +whole of the sacrifice necessary for paying it off is actually +made: only it is paid to the wrong persons, and therefore +does not extinguish the claim; and paid by the very worst +of taxes, a tax exclusively on the laboring-class. And, after +having, in this most painful and unjust of ways, gone through +<pb n='086'/><anchor id='Pg086'/> +the whole effort necessary for extinguishing the debt, the +country remains charged with it, and with the payment of its +interest in perpetuity. +</p> + +<quote rend='display'> +<p> +The United States, for example, borrows capital from A, with +which it buys stores from B. If the loan all comes from within +the country, A's capital is <emph>borrowed</emph>, when the United States +should have taken that amount outright by taxation. When the +money is borrowed of A, the laborers undergo the sacrifice, the +title to the whole sum remains in A's hands, and the claim against +the Government by A still exists; while, if the amount were +taken by taxation, the title to the sum raised is in the state, +and it is paid to the right person. +</p> + +<p> +The experience of the United States during the civil war +is an illustration of this principle. It is asserted that, as a +matter of fact, the total expenses of the war were defrayed by +the Northern States, during the four years of its continuance, +out of surplus earnings; and yet at the close of the conflict a +debt of $2,800,000,000 was saddled on the country. +</p> + +<table rend="latexcolumns: 'l r'; + tblcolumns: 'lw(30) r'"> +<row><cell>The United States borrowed</cell><cell>$2,400,000,000</cell></row> +<row><cell>Revenue during that time</cell><cell>1,700,000,000</cell></row> +<row><cell>Total cost of the war</cell><cell>$4,100,000,000</cell></row> +</table> + +<p> +In reality we borrowed only about $1,500,000,000 instead +of $2,400,000,000, since (1) the Government issued paper which +depreciated, and yet received it at par in subscriptions for loans. +Moreover, the total cost would have been much reduced had +we issued no paper and (2) thereby not increased the prices of +goods to the state, and (3) if no interest account had been created +by borrowing. But could the country have raised the whole +sum each year by taxation? In the first fiscal year after the +war the United States paid in war taxes $650,000,000. At the +beginning of the struggle, to June 30, 1862, the expenditure +was $515,000,000, and by June 30, 1863, it had amounted to +$1,098,000,000; so that $600,000,000 of taxes a year would +have paid the war expenses, and left us free of debt at the close. +</p> + +<p> +A confirmatory experience is that of England during the +Continental wars, 1793-1817: +</p> + +<table rend="latexcolumns: 'l{3cm} r'; + tblcolumns: 'lw(40) r'"> +<row><cell>Total war expenditures</cell><cell>£1,060,000,000</cell></row> +<row><cell>Interest charge on the existing debt</cell><cell>235,000,000</cell></row> +<row><cell>Total amount required</cell><cell>£1,295,000,000</cell></row> +<row><cell>Revenue for that period</cell><cell>1,145,000,000</cell></row> +<row><cell>Deficit</cell><cell>£150,000,000</cell></row> +</table> + +<p> +To provide for this deficit, the Government actually increased +<pb n='087'/><anchor id='Pg087'/> +its debt by £600,000,000. A slight additional exertion +would have provided £150,000,000 more of revenue, and saved +£450,000,000 to the taxpayers.<note place='foot'>Cf. Bowen, +<q>American Political Economy,</q> p. 399.</note> +</p> +</quote> + +<p> +The practical state of the case, however, seldom exactly +corresponds with this supposition. The loans of the less +wealthy countries are made chiefly with foreign capital, +which would not, perhaps, have been brought in to be invested +on any less security than that of the Government: +while those of rich and prosperous countries are generally +made, not with funds withdrawn from productive employment, +but with the new accumulations constantly making +from income, and often with a part of them which, if not +so taken, would have migrated to colonies, or sought other +investments abroad. +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_I_Chapter_IV_Section_6'/> +<head>§ 6. Demand for Commodities is not Demand for Labor.</head> + +<quote rend='display'> +<p> +Mr. Mill's statement of the theorem respecting capital, +discussed in the argument that <q>demand for commodities is +not demand for labor,</q> needs some simplification. For this +purpose represent by the letters of the alphabet, A, B, C, ... +X, Y, Z, the different kinds of commodities produced in the +world which are exchanged against each other in the process of +reaching the consumers. This exchange of commodities for +each other, it need hardly be said, does not increase the number +or quantity of commodities already in existence; since +their production, as we have seen, requires labor and capital in +connection with natural agents. Mere exchange does not alter +the quantity of commodities produced. +</p> + +<p> +To produce a plow, for example, the maker must have capital +(in the form of subsistence, tools, and materials) of which +some one has foregone the use by a process of saving in order +that something else, in this case a plow, may be produced. +This saving must be accomplished first to an amount sufficient +to keep production going on from day to day. This capital is +all consumed, but in a longer or shorter term (depending on the +particular industrial operation) it is reproduced in new forms +adapted to the existing wants of man. Moreover, without any +new exertion of abstinence, this amount of capital may be again +consumed and reproduced, and so go on forever, after once +being saved (if never destroyed in the mean while, thereby +passing out of the category not only of capital, but also of +wealth). The total capital of the country, then, is not the sum +<pb n='088'/><anchor id='Pg088'/> +of one year's capital added to that of another; but that of last +year reproduced in a new form this year, plus a fractional increase +arising from new savings. But, once saved, capital can +go on constantly aiding in production forever. This plow when +made is exchanged (if a plow is wanted, and the production is +properly adjusted to meet desires) for such other products, +food, means for repairing tools, etc., as give back to the plow-maker +all the commodities consumed in its manufacture (with +an increase, called profit). +</p> + +<p> +Returning to our illustration of the alphabet, it is evident +that a certain amount of capital united with labor (constituting +what may be called a productive engine) lies behind the production +of A (such as the plow, for example), and to which its +existence is due. The same is true of Z. Suppose that 5,000 +of Z is produced, of which 4,000 is enough to reimburse the +capital used up by labor in the operation, and that the owner +of commodity Z spends the remaining 1,000 Z in exchange for +1,000 of commodity A. It is evident (no money being used as +yet) that this exchange of goods is regulated entirely by the +desires of the two parties to the transaction. No more goods +are created simply by the exchange; the simple process of exchange +does not keep the laborers engaged on A occupied. And +yet the owner of Z had a demand for commodity A; his demand +was worthless, except through the fact of his production, +which gave him actual wealth, or purchasing power, in the form +of Z. His demand for commodity A was not the thing which +employed the laborers engaged in producing A, although the +demand (if known beforehand) would cause them to produce A +rather than some other article—that is, the demand of one +quantity of wealth for a certain thing determines the <emph>direction</emph> +taken by the owner of capital A. But, since the exchange is +merely the form in which the demand manifests itself, it is clear +that the demand does not add to production, and so of itself +does not employ labor. Of course, if there were no desires, +there would be no demand, and so no production and employment +of labor. But we may conclude by formulating the proposition, +that wealth (Z) offered for commodities (A) necessitates +the use of other wealth (than Z) as capital to support the operation +by which those commodities (A) are produced. It +makes no difference to the existing employment of labor what +want is supplied by the producers of A, whether it is velvet +(intended for unproductive consumption) or plows (intended +for productive consumption). Even if Z is no longer offered +in exchange for A, and if then A is no longer to be made, the +laborers formerly occupied in producing A—if warning is +given of the coming change; if not, loss results—having the +plant, can produce something else wanted by the owner of Z. +</p> + +<pb n='089'/><anchor id='Pg089'/> + +<p> +Now into a community, as here pictured, all laborers supposed +to be occupied, and all capital employed in producing +A, B, C, ... X, Y, Z, imagine the coming of a shipwrecked +crew. Instead of exchanging Z for A, as before, the owner of +Z may offer his wealth to the crew to dance for him. The +essential question is, Is more employment offered to labor by +this action than the former exchange for A? That is, it is a +question merely of distribution of wealth among the members +of a community. The labor engaged on A is not thrown out +of employment (if they have warning). There is no more +wealth in existence, but it is differently distributed than before: +the crew, instead of the former owner, now have 1,000 +of Z. So far as the question of employment is concerned, it +makes no difference on what terms the crew got it: they +might have been hired to stand in a row and admire the owner +of Z when he goes out. But yet it may naturally be assumed +that the crew were employed productively. In this case, after +they have consumed the wealth Z, they have brought into +existence articles in the place of those they consumed. But, +although this last operation is economically more desirable for +the future growth of wealth, yet no more laborers for the time +were employed than if the crew had merely danced. The advantages +or disadvantages of productive consumption are not +to be discussed here. It is intended, however, to establish the +proposition that <emph>wealth paid out in wages, or advanced to producers, +itself supports labor</emph>; that wealth offered directly to +laborers in this way employs more labor than when merely +offered in exchange for other goods, or, in other words, by a +demand for commodities; that an increased demand for commodities +does not involve an increased demand for labor, since +this can only be created by capital. The essential difference +is, that the owner of Z in one case, by exchanging goods for +A, did not forego his consuming power; in the other case, by +giving Z to the unemployed crew, he actually went through the +process of saving by foregoing his personal consumption, and +handing it over to the crew. If the crew use it unproductively, +it is in the end the same as if the owner of Z had done +it; but meanwhile the additional laborers were employed. If +the crew be employed productively, then the saving once made +will go on forever, as explained above, and the world will be +the richer by the wealth this additional capital can create. +</p> + +<p> +It may now be objected that, if A is no longer in demand, +the laborers in that industry will be thrown out of employment. +Out of that employment certainly, but not out of every +other. One thousand of Z was able to purchase certain results +of labor and capital in industry A, when in the hands of its +former owner; and now when in the hands of the crew it will +<pb n='090'/><anchor id='Pg090'/> +control, as purchasing power, equivalent results of labor and +capital. The crew may not want the same articles as the former +owner of Z, but they will want the equivalents of 1,000 of Z in +something, and that something will be produced now instead +of A. The whole process may be represented by this diagram. +</p> + +<p rend='text-align: center'> + <figure url='images/demand-crew.png' rend='width: 40%'> + <figDesc>Illustration, showing interrelationships between A, Z, and Crew.</figDesc> + </figure> +</p> + +<p> +1. Z is exchanged +against A, and the crew +remain unemployed. +</p> + +<p> +2. Here the crew possess +Z, and they themselves +exchange Z for +whatever A may produce +in satisfaction of their +wants, and the crew are +then employed. +</p> + +<p> +It is possible that the +intervention of money +blinds some minds to a +proper understanding of +the operations described above. The supposition, as given, +applies to a condition of barter, but is equally true if money is +used.<note place='foot'>The functions of +money are discussed later in the volume, and it is not proposed +to unfold them here.</note> Imagine a display of all the industries of the world, A, +B, C, ... X, Y, Z, presented within sight on one large field, +and at the central spot the producer of gold and silver. When +Z is produced, it is taken to the gold-counter, and exchanged +for money; when A is produced, the same is done. Then the +former money is given for A, and the latter for Z, so that in +truth A is exchanged against Z through the medium of money, +just as before money was considered. Now, it may be said by +an objector, <q>If A is not wanted, after it is produced, and can +not be sold, because the demand from Z has been withdrawn, +then the capital used for A will not be returned, and the laborers +in A will be thrown out of employment.</q> The answer is, +of course, that the state of things here contemplated is a permanent +and normal one wherein production is correctly adapted +to human desires. If A is found not to be wanted, after the +production of it, an industrial blunder has been committed, and +wealth is wasted just as when burned up. It is ill-assorted production. +The trouble is not in a lack of demand for what A +may produce (of something else), but with the producers of A +in not making that for which there were desires, from ignorance +or lack of early information of the disposition of wealth +Z. In practice, however, it will be found that most goods are +made upon <q>orders,</q> and, except under peculiar circumstances, +<pb n='091'/><anchor id='Pg091'/> +not actually produced unless a market is foreseen. Indeed, as +every man knows, the most important function of a successful +business man is the adaptation of production to the market, +that is, to the desires of consumers. +</p> + +<p> +One other form of this question needs brief mention. It is +truly remarked that a large portion of industrial activity is engaged +to-day, not in supplying productive consumption, such +as food, shelter, and clothing, but in supplying the comforts +and luxuries of low and high alike, or unproductive consumption; +now, if there were not a demand for luxuries and comforts, +many vast industries would cease to exist, and labor +would be thrown out of employment. Is not a demand for +such commodities, then, a cause of the present employment of +labor? No, it is not. Luxuries and comforts are of course +the objects of human wants; but a desire alone, without purchasing +power, can not either buy or produce these commodities. +To obtain a piano, one must produce goods, and this +implies the possession of capital, by which to bring into existence +goods, or purchasing power, to be offered for a piano. +Nor is this sufficient. Even after a man, A, for example, offers +purchasing power, he will not get a piano unless there exists an +accumulation of unemployed capital, together with labor ready +to manufacture the instrument. If capital were all previously +occupied, no piano could be made, although A stood offering +an equivalent in valuable goods. It may be said that A himself +has the means. He has the <emph>wealth</emph>, and if he is willing to +forego the use of this wealth, or, in other words, save it by devoting +it to reproduction in the piano industry—that is, create +the capital necessary for the purpose—then the piano can be +made. But this shows again that, not a mere desire, but the +existence of capital, is necessary to the production, and so to +the employment of labor. An increased demand for commodities, +therefore, does not give additional employment to labor, +unless there be capital to support the labor. +</p> + +<p> +Some important corollaries result from this proposition: +(<hi rend='italic'>a.</hi>) When a country by legislation creates a home demand for +commodities, that does not of itself give additional employment +to labor. If the goods had before been purchased abroad, +under free discretion, then if produced at home they must require +more capital and labor, or they would not have been +brought from foreign countries. If produced at home, it would +require, to purchase them, more of what was formerly sent +abroad; or some must do without. The legislation can not, +<hi rend='italic'>ipso facto</hi>, create capital, and only by an increase of capital +can more employment result. It is possible, however, that +legislation might cause a more effective use of existing capital; +but that must be a question of fact, to be settled by circumstances +<pb n='092'/><anchor id='Pg092'/> +in each particular case. It is not a thing to be governed +by principles. +</p> + +<p> +(<hi rend='italic'>b.</hi>) It follows from the above proposition also that taxes +levied on the rich, and paid by a saving from their consumption +of luxuries, do not fall on the poor because of a lessened demand +for commodities; since, as we have seen, that demand does not +create or diminish the demand for labor. But, if the taxes +levied on the rich are paid by savings from what the rich would +have expended in wages, then if the Government spends the +amount of revenue thus taken in the direct purchase of labor, +as of soldiers and sailors, the tax does not fall on the laboring-class +taken as a whole. When the Government takes that +wealth which was formerly capital, burns it up, or dissipates it +in war, it ceases to exist any longer as a means of again producing +wealth, or of employing labor. +</p> +</quote> + +</div> + +</div> + +<pb n='093'/><anchor id='Pg093'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter V. On Circulating And Fixed Capital.</head> + +<div> +<index index='toc'/> +<anchor id='Book_I_Chapter_V_Section_1'/> +<head>§ 1. Fixed and Circulating Capital.</head> + +<p> +Of the capital engaged in the production of any commodity, +there is a part which, after being once used, exists +no longer as capital; is no longer capable of rendering service +to production, or at least not the same service, nor to the +same sort of production. Such, for example, is the portion +of capital which consists of materials. The tallow and alkali +of which soap is made, once used in the manufacture, are destroyed +as alkali and tallow. In the same division must be +placed the portion of capital which is paid as the wages, or +consumed as the subsistence, of laborers. That part of the +capital of a cotton-spinner which he pays away to his work-people, +once so paid, exists no longer as his capital, or as a +cotton-spinner's capital. Capital which in this manner fulfills +the whole of its office in the production in which it is +engaged, by a single use, is called Circulating Capital. The +term, which is not very appropriate, is derived from the circumstance +that this portion of capital requires to be constantly +renewed by the sale of the finished product, and +when renewed is perpetually parted with in buying materials +and paying wages; so that it does its work, not by being +kept, but by changing hands. +</p> + +<p> +Another large portion of capital, however, consists in +instruments of production, of a more or less permanent character; +which produce their effect not by being parted with, +but by being kept; and the efficacy of which is not exhausted +by a single use. To this class belong buildings, +<pb n='094'/><anchor id='Pg094'/> +machinery, and all or most things known by the name of implements +or tools. The durability of some of these is considerable, +and their function as productive instruments is +prolonged through many repetitions of the productive operation. +In this class must likewise be included capital sunk +(as the expression is) in permanent improvements of land. +So also the capital expended once for all, in the commencement +of an undertaking, to prepare the way for subsequent +operations: the expense of opening a mine, for example; of +cutting canals, of making roads or docks. Other examples +might be added, but these are sufficient. Capital which exists +in any of these durable shapes, and the return to which +is spread over a period of corresponding duration, is called +Fixed Capital. +</p> + +<p> +Of fixed capital, some kinds require to be occasionally +or periodically renewed. Such are all implements and +buildings: they require, at intervals, partial renewal by +means of repairs, and are at last entirely worn out. In other +cases the capital does not, unless as a consequence of some +unusual accident, require entire renewal. A dock or a canal, +once made, does not require, like a machine, to be made +again, unless purposely destroyed. The most permanent of +all kinds of fixed capital is that employed in giving increased +productiveness to a natural agent, such as land. +</p> + +<p> +To return to the theoretical distinction between fixed and +circulating capital. Since all wealth which is destined to be +employed for reproduction comes within the designation of +capital, there are parts of capital which do not agree with +the definition of either species of it; for instance, the stock +of finished goods which a manufacturer or dealer at any time +possesses unsold in his warehouses. But this, though capital +as to its destination, is not yet capital in actual exercise; it is +not engaged in production, but has first to be sold or exchanged, +that is, converted into an equivalent value of some +other commodities, and therefore is not yet either fixed or +circulating capital, but will become either one or the other, +or be eventually divided between them. +</p> + +</div> + +<pb n='095'/><anchor id='Pg095'/> + +<div> +<index index='toc'/> +<anchor id='Book_I_Chapter_V_Section_2'/> +<head>§ 2. Increase of Fixed Capital, when, at the Expense of Circulating, might be +Detrimental to the Laborers.</head> + +<p> +There is a great difference between the effects of +circulating and those of fixed capital, on the amount of the +gross produce of the country. Circulating capital being +destroyed as such, the result of a single use must be a reproduction +equal to the whole amount of the circulating capital +used, and a profit besides. This, however, is by no means +necessary in the case of fixed capital. Since machinery, for +example, is not wholly consumed by one use, it is not necessary +that it should be wholly replaced from the product of +that use. The machine answers the purpose of its owner if +it brings in, during each interval of time, enough to cover +the expense of repairs, and the deterioration in value which +the machine has sustained during the same time, with a surplus +sufficient to yield the ordinary profit on the entire +value of the machine. +</p> + +<p> +From this it follows that all increase of fixed capital, +when taking place at the expense of circulating, must be, at +least temporarily, prejudicial to the interests of the laborers. +This is true, not of machinery alone, but of all improvements +by which capital is sunk; that is, rendered permanently +incapable of being applied to the maintenance and +remuneration of labor. +</p> + +<quote rend='display'> +It is highly probable that in the twenty-five years preceding +the panic of 1873, owing to the progress of invention, those +industries in the United States employing much machinery +were unduly stimulated in comparison with other industries, +and that the readjustment was a slow and painful process. +After the collapse vast numbers left the manufacturing to +enter the extractive industries. +</quote> + +<p> +The argument relied on by most of those who contend +that machinery can never be injurious to the laboring-class +is, that by cheapening production it creates such an increased +demand for the commodity as enables, ere long, a greater +number of persons than ever to find employment in producing +it. The argument does not seem to me to have +the weight commonly ascribed to it. The fact, though too +broadly stated, is, no doubt, often true. The copyists who +were thrown out of employment by the invention of printing +<pb n='096'/><anchor id='Pg096'/> +were doubtless soon outnumbered by the compositors +and pressmen who took their place; and the number of laboring +persons now employed in the cotton manufacture is +many times greater than were so occupied previously to the +inventions of Hargreaves and Arkwright, which shows that, +besides the enormous fixed capital now embarked in the +manufacture, it also employs a far larger circulating capital +than at any former time. But if this capital was drawn +from other employments, if the funds which took the place +of the capital sunk in costly machinery were supplied not +by any additional saving consequent on the improvements, +but by drafts on the general capital of the community, what +better are the laboring-classes for the mere transfer? +</p> + +<quote rend='display'> +There is a machine used for sizing the cotton yarn to prepare +it for weaving, by which it is dried over a steam cylinder, +the wages for attendance on which were only two dollars per +day, as compared with an expenditure for labor of fourteen +dollars per day to accomplish the same ends before the machine +was invented. +</quote> + +<p> +All attempts to make out that the laboring-classes as a +collective body <emph>can not</emph> suffer temporarily by the introduction +of machinery, or by the sinking of capital in permanent +improvements, are, I conceive, necessarily fallacious.<note place='foot'>See, +for the argument that machinery necessarily injures labor, <q>Land and +Labor,</q> William Godwin Moody (1883); and for the answer, <q>North American +Review,</q> May, 1884, p. 510.</note> +That they would suffer in the particular department of industry +to which the change applies is generally admitted, +and obvious to common sense; but it is often said that, +though employment is withdrawn from labor in one department, +an exactly equivalent employment is opened for it in +others, because what the consumers save in the increased +cheapness of one particular article enables them to augment +their consumption of others, thereby increasing the demand +for other kinds of labor. This is plausible, but, as was +shown in the last chapter, involves a fallacy; demand for +commodities being a totally different thing from demand +<pb n='097'/><anchor id='Pg097'/> +for labor. It is true, the consumers have now additional +means of buying other things; but this will not create the +other things, unless there is capital to produce them, and the +improvement has not set at liberty any capital, even if it has +not absorbed some from other employments. +</p> + +<quote rend='display'> +If the improvement has lowered the cost of production, it +has often required less capital (as well as less labor) to produce +the same quantity of goods; or, what is the same thing, an +increased product with the same capital. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. —This seldom, if ever, occurs.</head> + +<p> +Nevertheless, I do not believe that, as things are +actually transacted, improvements in production are often, if +ever, injurious, even temporarily, to the laboring-classes in +the aggregate. They would be so if they took place suddenly +to a great amount, because much of the capital sunk +must necessarily in that case be provided from funds already +employed as circulating capital. But improvements are +always introduced very gradually, and are seldom or never +made by withdrawing circulating capital from actual production, +but are made by the employment of the annual +increase. I doubt if there would be found a single example +of a great increase of fixed capital, at a time and place where +circulating capital was not rapidly increasing likewise. +</p> + +<quote rend='display'> +<p> +In the United States, while the cost per yard of the manufactured +goods has decreased, and so made accessible to poorer +classes than before, the capital engaged in manufactures has increased +so as to allow a vastly greater number of persons to be +employed, as will be seen by the following comparison of 1860 +with 1880 taken from the last census returns. (Compendium, +1880, pp. 928, 930.) +</p> +</quote> + +<table rend="latexcolumns: 'l p{1.3cm} p{1.5cm} p{1.5cm} p{1.8cm}'; + tblcolumns: 'lw(10) r r r r'"> +<row><cell></cell><cell>Number of establishments.</cell><cell>Capital (Thousands).</cell> + <cell>Average number of hands employed.</cell> + <cell>Total amount paid in wages during the year.</cell></row> +<row><cell>1860</cell><cell>140,433</cell><cell>$1,009,855</cell> + <cell>1,311,246</cell><cell>$378,878,966</cell></row> +<row><cell>1880</cell><cell>253,852</cell><cell>2,790,272</cell> + <cell>2,732,595</cell><cell>947,953,795</cell></row> +</table> + +<quote rend='display'> +<p> +<q>A hundred years ago, one person in every family of five +or six must have been absolutely needed to spin and weave by +<pb n='098'/><anchor id='Pg098'/> +hand the fabrics required for the scanty clothing of the people; +now one person in two hundred or two hundred and fifty +only need work in the factory to produce the cotton and woolen +fabrics of the most amply clothed nation of the world.</q><note place='foot'>Edward +Atkinson, <q>Labor and Capital, Allies not Enemies,</q> p. 33.</note> +</p> +</quote> + +<p> +To these considerations must be added, that, even if improvements +did for a time decrease the aggregate produce +and the circulating capital of the community, they would +not the less tend in the long run to augment both. This +tendency of improvements in production to cause increased +accumulation, and thereby ultimately to increase the gross +produce, even if temporarily diminishing it, will assume a +still more decided character if it should appear that there +are assignable limits both to the accumulation of capital and +to the increase of production from the land, which limits +once attained, all further increase of produce must stop; but +that improvements in production, whatever may be their +other effects, tend to throw one or both of these limits farther +off. Now, these are truths which will appear in the +clearest light in a subsequent stage of our investigation. It +will be seen that the quantity of capital which will, or even +which can, be accumulated in any country, and the amount +of gross produce which will, or even which can, be raised, +bear a proportion to the state of the arts of production there +existing; and that every improvement, even if for the time it +diminish the circulating capital and the gross produce, ultimately +makes room for a larger amount of both than could +possibly have existed otherwise. It is this which is the conclusive +answer to the objections against machinery; and the +proof thence arising of the ultimate benefit to laborers of +mechanical inventions, even in the existing state of society, +will hereafter be seen to be conclusive.<note place='foot'>See +<ref target='Book_IV_Chapter_IV'>book iv, chap. iv</ref>.</note> +</p> + +</div> + +</div> + +<pb n='099'/><anchor id='Pg099'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter VI. Of Causes Affecting The Efficiency Of Production.</head> + +<div> +<index index='toc'/> +<head>§ 1. General Causes of Superior Productiveness.</head> + +<p> +The most evident cause of superior productiveness +is what are called natural advantages. These are various. +Fertility of soil is one of the principal. The influence of +climate [is another advantage, and] consists in lessening the +physical requirements of the producers. +</p> + +<quote rend='display'> +<p> +In spinning very fine cotton thread, England's natural climate +gives in some parts of the country such advantages in +proper moisture and electric conditions that the operation can +be carried on out-of-doors; while in the United States it is +generally necessary to create an artificial atmosphere. In +ordinary spinning in our country more is accomplished when +the wind is in one quarter than in another. The dry northwest +wind in New England reduces the amount of product, +while the dry northeast wind in England has a similar effect, +and it is said has practically driven the cotton-spinners from +Manchester to Oldham, where the climate is more equably +moist. The full reasons for these facts are not yet ascertained. +</p> + +<p> +Experts in the woolen industry, also, explain that the quality +and fiber of wool depend upon the soil and climate where the +sheep are pastured. When Ohio sheep are transferred to Texas, +in a few years their wool loses the distinctive quality it formerly +possessed, and takes on a new character belonging to the breeds +of Texas. The wool produced by one set of climatic conditions +is quite different from that of another set, and is used by the +manufacturers for different purposes. +</p> +</quote> + +<p> +In hot regions, mankind can exist in comfort with less +perfect housing, less clothing; fuel, that absolute necessary +of life in cold climates, they can almost dispense with, except +for industrial uses. They also require less aliment. +Among natural advantages, besides soil and climate, must be +<pb n='100'/><anchor id='Pg100'/> +mentioned abundance of mineral productions, in convenient +situations, and capable of being worked with moderate labor. +Such are the coal-fields of Great Britain, which do so much +to compensate its inhabitants for the disadvantages of climate; +and the scarcely inferior resource possessed by this +country and the United States, in a copious supply of an +easily reduced iron-ore, at no great depth below the earth's +surface, and in close proximity to coal-deposits available for +working it. But perhaps a greater advantage than all these +is a maritime situation, especially when accompanied with +good natural harbors; and, next to it, great navigable rivers. +These advantages consist indeed wholly in saving of cost of +carriage. But few, who have not considered the subject, +have any adequate notion how great an extent of economical +advantage this comprises. +</p> + +<p> +As the second of the [general] causes of superior productiveness, +we may rank the greater energy of labor. By this +is not to be understood occasional, but regular and habitual +energy. The third element which determines the productiveness +of the labor of a community is the skill and knowledge +therein existing, whether it be the skill and knowledge +of the laborers themselves or of those who direct their labor. +That the productiveness of the labor of a people is limited +by their knowledge of the arts of life is self-evident, and +that any progress in those arts, any improved application of +the objects or powers of nature to industrial uses, enables the +same quantity and intensity of labor to raise a greater produce. +One principal department of these improvements +consists in the invention and use of tools and machinery.<note place='foot'>See +Mr. Babbage's <q>Economy of Machinery and Manufactures.</q></note> +</p> + +<p> +The deficiency of practical good sense, which renders the +majority of the laboring-class such bad calculators—which +makes, for instance, their domestic economy so improvident, +lax, and irregular—must disqualify them for any but a low +grade of intelligent labor, and render their industry far less +productive than with equal energy it otherwise might be. +<pb n='101'/><anchor id='Pg101'/> +The moral qualities of the laborers are fully as important to +the efficiency and worth of their labor as the intellectual. +Independently of the effects of intemperance upon their bodily +and mental faculties, and of flighty, unsteady habits upon +the energy and continuity of their work (points so easily +understood as not to require being insisted upon), it is well +worthy of meditation how much of the aggregate effect of +their labor depends on their trustworthiness. +</p> + +<p> +Among the secondary causes which determine the productiveness +of productive agents, the most important is Security. +By security I mean the completeness of the protection +which society affords to its members. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Combination and Division of Labor Increase Productiveness.</head> + +<p> +In the enumeration of the circumstances which promote +the productiveness of labor, we have left one untouched, +which is co-operation, or the combined action of numbers. +Of this great aid to production, a single department, known +by the name of Division of Labor, has engaged a large share +of the attention of political economists; most deservedly, indeed, +but to the exclusion of other cases and exemplifications +of the same comprehensive law. In the lifting of heavy +weights, for example, in the felling of trees, in the sawing +of timber, in the gathering of much hay or corn during a +short period of fine weather, in draining a large extent of +land during the short season when such a work may be properly +conducted, in the pulling of ropes on board ship, in the +rowing of large boats, in some mining operations, in the +erection of a scaffolding for building, and in the breaking of +stones for the repair of a road, so that the whole of the road +shall always be kept in good order: in all these simple operations, +and thousands more, it is absolutely necessary that +many persons should work together, at the same time, in the +same place, and in the same way. [But] in the present state of +society, the breeding and feeding of sheep is the occupation +of one set of people; dressing the wool to prepare it for the +spinner is that of another; spinning it into thread, of a third; +weaving the thread into broadcloth, of a fourth; dyeing the +cloth, of a fifth; making it into a coat, of a sixth; without +<pb n='102'/><anchor id='Pg102'/> +counting the multitude of carriers, merchants, factors, and +retailers put in requisition at the successive stages of this +progress. +</p> + +<p> +Without some separation of employments, very few things +would be produced at all. Suppose a set of persons, or a +number of families, all employed precisely in the same manner; +each family settled on a piece of its own land, on which +it grows by its labor the food required for its own sustenance, +and, as there are no persons to buy any surplus produce where +all are producers, each family has to produce within itself +whatever other articles it consumes. In such circumstances, +if the soil was tolerably fertile, and population did not tread +too closely on the heels of subsistence, there would be, no +doubt, some kind of domestic manufactures; clothing for the +family might, perhaps, be spun and woven within it, by the +labor, probably, of the women (a first step in the separation +of employments); and a dwelling of some sort would be +erected and kept in repair by their united labor. But beyond +simple food (precarious, too, from the variations of the seasons), +coarse clothing, and very imperfect lodging, it would +be scarcely possible that the family should produce anything +more. +</p> + +<p> +Suppose that a company of artificers, provided with tools, +and with food sufficient to maintain them for a year, arrive in +the country and establish themselves in the midst of the population. +These new settlers occupy themselves in producing +articles of use or ornament adapted to the taste of a simple +people; and before their food is exhausted they have produced +these in considerable quantity, and are ready to exchange +them for more food. The economical position of +the landed population is now most materially altered. They +have an opportunity given them of acquiring comforts and +luxuries. Things which, while they depended solely upon +their own labor, they never could have obtained, because +they could not have produced, are now accessible to them if +they can succeed in producing an additional quantity of food +and necessaries. They are thus incited to increase the productiveness +<pb n='103'/><anchor id='Pg103'/> +of their industry. The new settlers constitute +what is called a <emph>market</emph> for surplus agricultural produce; and +their arrival has enriched the settlement, not only by the +manufactured articles which they produce, but by the food +which would not have been produced unless they had been +there to consume it. +</p> + +<p> +There is no inconsistency between this doctrine and the +proposition we before +maintained,<note place='foot'><ref target='Book_I_Chapter_IV_Section_6'>Book +i, chap. iv, § 6</ref>.</note> that a market for commodities +does not constitute employment for labor. The labor of +the agriculturists was already provided with employment; +they are not indebted to the demand of the new-comers for +being able to maintain themselves. What that demand does +for them is to call their labor into increased vigor and efficiency; +to stimulate them, by new motives, to new exertions. +</p> + +<p> +From these considerations it appears that a country will +seldom have a productive agriculture unless it has a large +town population, or, the only available substitute, a large export +trade in agricultural produce to supply a population +elsewhere. I use the phrase <q>town population</q> for shortness, +to imply a population non-agricultural. +</p> + +<p> +It is found that the productive power of labor is increased +by carrying the separation further and further; by +breaking down more and more every process of industry +into parts, so that each laborer shall confine himself to an +ever smaller number of simple operations. And thus, in +time, arise those remarkable cases of what is called the division +of labor, with which all readers on subjects of this nature +are familiar. Adam Smith's illustration from pin-making, +though so well known, is so much to the point that I +will venture once more to transcribe it: <q>The business of +making a pin is divided into about eighteen distinct operations. +One man draws out the wire, another straights it, a +third cuts it, a fourth points it, a fifth grinds it at the top +for receiving the head; to make the head requires two or +three distinct operations; to put it on, is a peculiar business; +<pb n='104'/><anchor id='Pg104'/> +to whiten the pins is another; it is even a trade by itself +to put them into the paper.... I have seen a small manufactory +where ten men only were employed, and where some +of them, consequently, performed two or three distinct operations. +But though they were very poor, and therefore but +indifferently accommodated with the necessary machinery, +they could, when they exerted themselves, make among +them about twelve pounds of pins in a day. There are in a +pound upward of four thousand pins of a middling size. +Those ten persons, therefore, could make among them upward +of forty-eight thousand pins in a day. Each person, +therefore, making a tenth part of forty-eight thousand pins, +might be considered as making four thousand eight hundred +pins in a day. But if they had all wrought separately +and independently, and without any of them having been +educated to this peculiar business, they certainly could not +each of them have made twenty, perhaps not one pin in a +day.</q> +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Advantages of Division of Labor.</head> + +<p> +The causes of the increased efficiency given to labor +by the division of employments are some of them too familiar +to require specification; but it is worth while to attempt +a complete enumeration of them. By Adam Smith they +are reduced to three: <q>First, the increase of dexterity in +every particular workman; secondly, the saving of the time +which is commonly lost in passing from one species of work +to another; and, lastly, the invention of a great number of +machines which facilitate and abridge labor, and enable one +man to do the work of many.</q> +</p> + +<p> +(1.) Of these, the increase of dexterity of the individual +workman is the most obvious and universal. It does not follow +that because a thing has been done oftener it will be +done better. That depends on the intelligence of the workman, +and on the degree in which his mind works along with +his hands. But it will be done more easily. This is as true +of mental operations as of bodily. Even a child, after much +practice, sums up a column of figures with a rapidity which +resembles intuition. The act of speaking any language, of +<pb n='105'/><anchor id='Pg105'/> +reading fluently, of playing music at sight, are cases as remarkable +as they are familiar. Among bodily acts, dancing, +gymnastic exercises, ease and brilliancy of execution on a +musical instrument, are examples of the rapidity and facility +acquired by repetition. In simpler manual operations the +effect is, of course, still sooner produced. +</p> + +<p> +(2.) The second advantage enumerated by Adam Smith as +arising from the division of labor is one on which I can not +help thinking that more stress is laid by him and others than +it deserves. To do full justice to his opinion, I will quote +his own exposition of it: <q>It is impossible to pass very +quickly from one kind of work to another, that is carried on +in a different place, and with quite different tools. A country +weaver, who cultivates a small farm, must lose a good +deal of time in passing from his loom to the field, and from +the field to his loom. When the two trades can be carried +on in the same workhouse, the loss of time is no doubt much +less. It is even in this case, however, very considerable. A +man commonly saunters a little in turning his hand from one +sort of employment to another.</q> I am very far from implying +that these considerations are of no weight; but I +think there are counter-considerations which are overlooked. +If one kind of muscular or mental labor is different from +another, for that very reason it is to some extent a rest from +that other; and if the greatest vigor is not at once obtained +in the second occupation, neither could the first have been +indefinitely prolonged without some relaxation of energy. +It is a matter of common experience that a change of occupation +will often afford relief where complete repose would +otherwise be necessary, and that a person can work many +more hours without fatigue at a succession of occupations, +than if confined during the whole time to one.<note place='foot'>Constant +use of the same muscles, as by gold-beaters or writers, very often +produces paralysis.</note> Different +occupations employ different muscles, or different energies +of the mind, some of which rest and are refreshed while +<pb n='106'/><anchor id='Pg106'/> +others work. Bodily labor itself rests from mental, and +conversely. The variety itself has an invigorating effect on +what, for want of a more philosophical appellation, we must +term the animal spirits—so important to the efficiency of +all work not mechanical, and not unimportant even to that. +</p> + +<p> +(3.) The third advantage attributed by Adam Smith to the +division of labor is, to a certain extent, real. Inventions +tending to save labor in a particular operation are more likely +to occur to any one in proportion as his thoughts are intensely +directed to that occupation, and continually employed +upon it. +</p> + +<quote rend='display'> +This also can not be wholly true. <q>The founder of the +cotton manufacture was a barber. The inventor of the power-loom +was a clergyman. A farmer devised the application of the +screw-propeller. A fancy-goods shopkeeper is one of the most +enterprising experimentalists in agriculture. The most remarkable +architectural design of our day has been furnished by a +gardener. The first person who supplied London with water +was a goldsmith. The first extensive maker of English roads +was a blind man, bred to no trade. The father of English inland +navigation was a duke, and his engineer was a millwright. The +first great builder of iron bridges was a stone-mason, and the +greatest railway engineer commenced his life as a colliery +engineer.</q><note place='foot'>Hearn's <q>Plutology,</q> p. 279.</note> +</quote> + +<p> +(4.) The greatest advantage (next to the dexterity of the +workmen) derived from the minute division of labor which +takes place in modern manufacturing industry, is one not +mentioned by Adam Smith, but to which attention has been +drawn by Mr. Babbage: the more economical distribution of +labor by classing the work-people according to their capacity. +Different parts of the same series of operations require unequal +degrees of skill and bodily strength; and those who +have skill enough for the most difficult, or strength enough +for the hardest parts of the labor, are made much more useful +by being employed solely in them; the operations which +everybody is capable of being left to those who are fit for +no others. +</p> + +<pb n='107'/><anchor id='Pg107'/> + +<p> +The division of labor, as all writers on the subject have +remarked, is limited by the extent of the market. If, by +the separation of pin-making into ten distinct employments, +forty-eight thousand pins can be made in a day, this separation +will only be advisable if the number of accessible consumers +is such as to require, every day, something like +forty-eight thousand pins. If there is only a demand for +twenty-four thousand, the division of labor can only be advantageously +carried to the extent which will every day produce +that smaller number. The increase of the general +riches of the world, when accompanied with freedom of +commercial intercourse, improvements in navigation, and inland +communication by roads, canals, or railways, tends to +give increased productiveness to the labor of every nation +in particular, by enabling each locality to supply with its +special products so much larger a market that a great extension +of the division of labor in their production is an ordinary +consequence. The division of labor is also limited, in +many cases, by the nature of the employment. Agriculture, +for example, is not susceptible of so great a division of occupations +as many branches of manufactures, because its different +operations can not possibly be simultaneous. +</p> + +<quote rend='display'> +(5.) <q>In the examples given above the advantage obtained +was derived from the mere fact of the separation of employments, +altogether independently of the mode in which the +separated employments were distributed among the <emph>persons</emph> +carrying them on, as well as of the <emph>places</emph> in which they were +conducted. But a further gain arises when the employments +are of a kind which, in order to their effective performance, +call for special capacities in the workman, or special natural +resources in the scene of operation. There would be a manifest +waste of special power in compelling to a mere mechanical +or routine pursuit a man who is fitted to excel in a professional +career; and similarly, if a branch of industry were established +on some site which offered greater facilities to an industry of +another sort, a waste, analogous in character, would be incurred. +In a word, while a great number of the occupations +in which men engage are such as, with proper preparation for +them, might equally well be carried on by any of those engaged +in them, or in any of the localities in which they are +respectively established, there are others which demand for +<pb n='108'/><anchor id='Pg108'/> +their effective performance special personal qualifications and +special local conditions; and the general effectiveness of productive +industry will, other things being equal, be proportioned +to the completeness with which the adaptation is accomplished +between occupation on the one hand and individuals and localities +on the other.</q><note place='foot'>Cairnes, <q>Leading Principles,</q> +pp. 299, 300.</note> +</quote> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_I_Chapter_VI_Section_4'/> +<head>§ 4. Production on a Large and Production on a Small Scale.</head> + +<p> +Whenever it is essential to the greatest efficiency of +labor that many laborers should combine, the scale of the +enterprise must be such as to bring many laborers together, +and the capital must be large enough to maintain them. +Still more needful is this when the nature of the employment +allows, and the extent of the possible market encourages, +a considerable division of labor. The larger the +enterprise the further the division of labor may be carried. +This is one of the principal causes of large manufactories. +Every increase of business would enable the +whole to be carried on with a proportionally smaller amount +of labor. +</p> + +<p> +As a general rule, the expenses of a business do not increase +by any means proportionally to the quantity of business. +Let us take as an example a set of operations which we +are accustomed to see carried on by one great establishment, +that of the Post-Office. Suppose that the business, let us +say only of the letter-post, instead of being centralized in a +single concern, were divided among five or six competing +companies. Each of these would be obliged to maintain +almost as large an establishment as is now sufficient for the +whole. Since each must arrange for receiving and delivering +letters in all parts of the town, each must send letter-carriers +into every street, and almost every alley, and this, +too, as many times in the day as is now done by the Post-Office, +if the service is to be as well performed. Each must +have an office for receiving letters in every neighborhood, +with all subsidiary arrangements for collecting the letters +from the different offices and redistributing them. To this +must be added the much greater number of superior officers +<pb n='109'/><anchor id='Pg109'/> +who would be required to check and control the subordinates, +implying not only a greater cost in salaries for such responsible +officers, but the necessity, perhaps, of being satisfied in +many instances with an inferior standard of qualification, +and so failing in the object. +</p> + +<p> +Whether or not the advantages obtained by operating on +a large scale preponderate in any particular case over the +more watchful attention and greater regard to minor gains +and losses usually found in small establishments, can be ascertained, +in a state of free competition, by an unfailing test. +Wherever there are large and small establishments in the +same business, that one of the two which in existing circumstances +carries on the production at greatest advantage will +be able to undersell the other. The power of permanently +underselling can only, generally speaking, be derived from +increased effectiveness of labor; and this, when obtained by +a more extended division of employment, or by a classification +tending to a better economy of skill, always implies a +greater produce from the same labor, and not merely the +same produce from less labor; it increases not the surplus +only, but the gross produce of industry. If an increased +quantity of the particular article is not required, and part of +the laborers in consequence lose their employment, the capital +which maintained and employed them is also set at +liberty, and the general produce of the country is increased +by some other application of their labor. +</p> + +<p> +A considerable part of the saving of labor effected by +substituting the large system of production for the small, is +the saving in the labor of the capitalists themselves. If a +hundred producers with small capitals carry on separately +the same business, the superintendence of each concern will +probably require the whole attention of the person conducting +it, sufficiently, at least, to hinder his time or thoughts +from being disposable for anything else; while a single +manufacturer possessing a capital equal to the sum of theirs, +with ten or a dozen clerks, could conduct the whole of their +amount of business, and have leisure, too, for other occupations. +</p> + +<pb n='110'/><anchor id='Pg110'/> + +<p> +Production on a large scale is greatly promoted by the +practice of forming a large capital by the combination of +many small contributions; or, in other words, by the formation +of stock companies. The advantages of the principle are +important, [since] (1) many undertakings require an amount +of capital beyond the means of the richest individual or private +partnership. [Of course] the Government can alone be +looked to for any of those works for which a great combination +of means is requisite, because it can obtain those means +by compulsory taxation, and is already accustomed to the +conduct of large operations. For reasons, however, which +are tolerably well known, government agency for the conduct +of industrial operations is generally one of the least +eligible of resources when any other is available. Of [the +advantages referred to above] one of the most important is +(2) that which relates to the intellectual and active qualifications +of the directing head. The stimulus of individual +interest is some security for exertion, but exertion is of little +avail if the intelligence exerted is of an inferior order, which +it must necessarily be in the majority of concerns carried +on by the persons chiefly interested in them. Where the +concern is large, and can afford a remuneration sufficient to +attract a class of candidates superior to the common average, +it is possible to select for the general management, and for all +the skilled employments of a subordinate kind, persons of a +degree of acquirement and cultivated intelligence which more +than compensates for their inferior interest in the result. It +must be further remarked that it is not a necessary consequence +of joint-stock management that the persons employed, +whether in superior or in subordinate offices, should +be paid wholly by fixed salaries. In the case of the managers +of joint-stock companies, and of the superintending and +controlling officers in many private establishments, it is a +common enough practice to connect their pecuniary interest +with the interest of their employers, by giving them part +of their remuneration in the form of a percentage on the +profits. +</p> + +<pb n='111'/><anchor id='Pg111'/> + +<p> +The possibility of substituting the large system of production +for the small depends, of course, in the first place, on +the extent of the market. The large system can only be advantageous +when a large amount of business is to be done: +it implies, therefore, either a populous and flourishing community, +or a great opening for exportation. +</p> + +<p> +In the countries in which there are the largest markets, +the widest diffusion of commercial confidence and enterprise, +the greatest annual increase of capital, and the greatest number +of large capitals owned by individuals, there is a tendency +to substitute more and more, in one branch of industry +after another, large establishments for small ones. These +are almost always able to undersell the smaller tradesmen, +partly, it is understood, by means of division of labor, and +the economy occasioned by limiting the employment of +skilled agency to cases where skill is required; and partly, +no doubt, by the saving of labor arising from the great scale +of the transactions; as it costs no more time, and not much +more exertion of mind, to make a large purchase, for example, +than a small one, and very much less than to make a +number of small ones. With a view merely to production, +and to the greatest efficiency of labor, this change is wholly +beneficial. +</p> + +<quote rend='display'> +A single large company very often, instead of being a +monopoly, is generally better than two large companies; for +there is little likelihood of competition and lower prices when +the competitors are so few as to be able to agree not to compete. +As Mr. Mill says in regard to parallel railroads: <q>No one can +desire to see the enormous waste of capital and land (not to +speak of increased nuisance) involved in the construction of a +second railway to connect the same places already united by +an existing one; while the two would not do the work better +than it could be done by one, and after a short time would +probably be amalgamated.</q> The actual tendency of charges +to diminish on the railways, before the matter of parallel railways +was suggested is clearly seen by reference to Chart V +(p. <ref target='Pg137'>137</ref>). +</quote> + +</div> + +</div> + +<pb n='112'/><anchor id='Pg112'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter VII. Of The Law Of The Increase Of Labor.</head> + +<div> +<index index='toc'/> +<head>§ 1. The Law of the Increase of Production Depends on those of Three +Elements—Labor. Capital, and Land.</head> + +<p> +Production is not a fixed but an increasing thing. +When not kept back by bad institutions, or a low state of +the arts of life, the produce of industry has usually tended to +increase; stimulated not only by the desire of the producers +to augment their means of consumption, but by the increasing +number of the consumers. +</p> + +<p> +We have seen that the essential requisites of production +are three—labor, capital, and natural agents; the term capital +including all external and physical requisites which are +products of labor, the term natural agents all those which are +not. The increase of production, therefore, depends on the +properties of these elements. It is a result of the increase +either of the elements themselves, or of their productiveness. +We proceed to consider the three elements successively, with +reference to this effect; or, in other words, the law of the +increase of production, viewed in respect of its dependence, +first on Labor, secondly on Capital, and lastly on Land. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. The Law of Population.</head> + +<p> +The increase of labor is the increase of mankind; of +population. The power of multiplication inherent in all +organic life may be regarded as infinite. There are many +species of vegetables of which a single plant will produce in +one year the germs of a thousand; if only two come to maturity, +in fourteen years the two will have multiplied to sixteen +thousand and more. It is but a moderate case of fecundity +in animals to be capable of quadrupling their numbers +in a single year; if they only do as much in half a century, +<pb n='113'/><anchor id='Pg113'/> +ten thousand will have swelled within two centuries to upward +to two millions and a half. The capacity of increase is +necessarily in a geometrical progression: the numerical ratio +alone is different. +</p> + +<p> +To this property of organized beings, the human species +forms no exception. Its power of increase is indefinite, and +the actual multiplication would be extraordinarily rapid, if +the power were exercised to the utmost. It never is exercised +to the utmost, and yet, in the most favorable circumstances +known to exist, which are those of a fertile region +colonized from an industrious and civilized community, +population has continued, for several generations, independently +of fresh immigration, to double itself in not much +more than twenty years. +</p> + +<quote rend='display'> +<table rend="latexcolumns: 'p{3cm} p{3cm} p{3cm}'; + tblcolumns: 'lw(23) r r'"> +<row><cell>Years.</cell><cell>Population.</cell><cell>Food.</cell></row> +<row><cell>25</cell><cell>11 mills</cell><cell>x</cell></row> +<row><cell>25</cell><cell>22 mills</cell><cell>2x</cell></row> +<row><cell>25</cell><cell>44 mills</cell><cell>3x</cell></row> +<row><cell>25</cell><cell>88 mills</cell><cell>4x</cell></row> +<row><cell>25</cell><cell>176 mills</cell><cell>5x</cell></row> +</table> + +<p> +By this table it will be seen that if +population can double itself in twenty-five +years, and if food can only be increased +by as much as <hi rend='italic'>x</hi> (the subsistence +of eleven millions) by additional application +of another equal quantity of labor on +the same land in each period, then at the +end of one hundred years there would be +the disproportion of one hundred and seventy-six +millions of people, with subsistence +for only fifty-five millions. Of course, this is prevented +either by checking population to the amount of the subsistence; +by sending off the surplus population; or by bringing in +food from new lands. +</p> + +<p> +In the United States to 1860 population has doubled itself +about every twenty years, while in France there is practically +no increase of population. It is stated that the white population +of the United States between 1790 and 1840 increased +400.4 per cent, deducting immigration. The extraordinary +advance of population with us, where subsistence is easily attainable, +is to be seen in the chart on the next page (No. <ref target='Chart_III'>III</ref>), +which shows the striking rapidity of increase in the United +States when compared with the older countries of Europe. The +steady demand for land can be seen by the gradual westward +movement of the center of population, as seen in chart No. IV +(p. 116), and by the rapid settlement of the distant parts of +our country, as shown by the two charts (frontispieces), which +represent to the eye by heavier colors the areas of the more +densely settled districts in 1830 and in 1880. +</p> +</quote> + +<pb n='114'/><anchor id='Pg114'/> + +<anchor id='Chart_III'/> +<p rend='text-align: center'> + <figure url='images/chart3.png' rend='width: 80%'> + <head>Chart III: Population of European Countries, XIXth Century.</head> + <figDesc>Illustration.</figDesc> + </figure> +</p> + +</div> + +<pb n='115'/><anchor id='Pg115'/> + +<div> +<index index='toc'/> +<head>§ 3. By what Checks the Increase of Population is Practically Limited.</head> + +<p> +The obstacle to a just understanding of the subject +arises from too confused a notion of the causes which, at +most times and places, keep the actual increase of mankind +so far behind the capacity. +</p> + +<p> +The conduct of human creatures is more or less influenced +by foresight of consequences, and by some impulses superior +to mere animal instincts; and they do not, therefore, propagate +like swine, but are capable, though in very unequal +degrees, of being withheld by prudence, or by the social +affections, from giving existence to beings born only to misery +and premature death. +</p> + +<quote rend='display'> +Malthus found an explanation of the anomaly that in the +Swiss villages, with the longest average duration of life, there +were the fewest births, by noting that no one married until a +cow-herd's cottage became vacant, and precisely because the +tenants lived so long were the new-comers long kept out of a +place. +</quote> + +<p> +In proportion as mankind rise above the condition of the +beast, population is restrained by the fear of want, rather +than by want itself. Even where there is no question of +starvation, many are similarly acted upon by the apprehension +of losing what have come to be regarded as the decencies +of their situation in life. Among the middle classes, in +many individual instances, there is an additional restraint +exercised from the desire of doing more than maintaining +their circumstances—of improving them; but such a desire +is rarely found, or rarely has that effect, in the laboring-classes. +If they can bring up a family as they were themselves +brought up, even the prudent among them are usually +satisfied. Too often they do not think even of that, but rely +on fortune, or on the resources to be found in legal or voluntary +charity. +</p> + +<p rend='text-align: center'> + <figure url='images/chart4.png' rend='width: 80%'> + <head>Chart IV: Westward Movement of Center of Population.</head> + <figDesc>Illustration.</figDesc> + </figure> +</p> + +<quote rend='display'> +This, in effect, is the well-known Malthusian doctrine. The +thorough reader will also consult the original <q>Essay</q> of Malthus. +Mr. Bowen<note place='foot'><q>American Political +Economy,</q> p. 134. See also an article, <q>Malthusianism, +Darwinism, and Pessimism,</q> <q>North American Review,</q> November, 1879.</note> +and other writers oppose it, saying it has +<pb n='116'/><anchor id='Pg116'/> +<q>no relation to the times +in which we live, or to any +which are near at hand.</q> +He thinks the productive +power of the whole world +prevents the necessity of +considering the pressure of +population upon subsistence +as an actuality now or in +the future. This, however, +does not deny the existence +of Malthus's principles, but +opposes them only on the +methods of their action. Mr. +Rickards<note place='foot'>See Cairnes, <q>Logical Method,</q> pp. +170-177.</note> holds that man's +food—as, e.g., wheat—has +the power to increase geometrically +faster than man; +but he omits to consider that +for the growth of this food +land is demanded; that land +is not capable of such geometrical +increase; and that +without it the food can not +be grown. Of course, any +extension of the land area, +as happened when England +abolished the corn laws and +drew her food from our prairies, +removes the previous +pressure of population on +subsistence. No believer in +the Malthusian doctrine is +so absurd as to hold that +the growth of population +actually exceeds subsistence, +but that there is a +<q>constant <emph>tendency</emph> in all animated life to increase beyond the +nourishment prepared for it,</q> no one can possibly doubt. This +is not inconsistent with the fact that subsistence has at any time +increased faster than population. It is as if a block of wood +on the floor were acted on by two opposing forces, one tending +to move it forward, one backward: if it moves backward, that +does not prove the absence of any force working to move it forward, +but only that the other force is the stronger of the two, +<pb n='117'/><anchor id='Pg117'/> +and that the final motion is the resultant of the two forces. It +is only near-sighted generalization to say that since the block +moves forward, there is therefore no opposing force to its advance.<note place='foot'>See +also Walker's <q>Wages Question,</q> chap. vi, and Roscher, <q>Political +Economy,</q> book v, chaps. i, ii, iii.</note> +Mr. Doubleday maintains that, as people become better +fed, they become unprolific. Mr. Mill's answer, referring to +the large families of the English peerage, is unfortunate.<note place='foot'>See +Galton's <q>Hereditary Genius,</q> p. 131-135.</note> In +Sweden the increase of the peasantry is six times that of the +middle classes, and fourteen times that of the nobility. The +diminishing fertility of New England families gives a truer +explanation, when it is seen that with the progress in material +wealth later marriages are the rule. When New-Englanders +emigrate to the Western States, where labor is in demand and +where it is less burdensome to have large families, there is no +question as to their fertility.<note place='foot'>See also +Edward Jarvis, <q>Atlantic Monthly,</q> 1872, and F. A. Walker, +<q>Social Science Journal,</q> vol. v, 1873, p. 71. For other literature, see <q>Sketch +of the History of Political Economy,</q> p. 16.</note> +</quote> + +<p> +(1.) In a very backward state of society, like that of +Europe in the middle ages, and many parts of Asia at present, +population is kept down by actual starvation. The +starvation does not take place in ordinary years, but in seasons +of scarcity, which in those states of society are much +more frequent and more extreme than Europe is now accustomed +to. (2.) In a more improved state, few, even among +the poorest of the people, are limited to actual necessaries, +and to a bare sufficiency of those: and the increase is kept +within bounds, not by excess of deaths, but by limitation of +births.<note place='foot'>This is the +<q>preventive check</q> of Mr. Malthus, while the limitation through +war, starvation, etc., is the <q>positive check.</q></note> +The limitation is brought about in various ways. +In some countries, it is the result of prudent or conscientious +self-restraint. There is a condition to which the laboring-people +are habituated; they perceive that, by having too +numerous families, they must sink below that condition, or +fail to transmit it to their children; and this they do not +choose to submit to. +</p> + +<p> +There are other cases in which the prudence and forethought, +which perhaps might not be exercised by the people +<pb n='118'/><anchor id='Pg118'/> +themselves, are exercised by the state for their benefit; marriage +not being permitted until the contracting parties can +show that they have the prospect of a comfortable support. +There are places, again, in which the restraining cause seems +to be not so much individual prudence, as some general +and perhaps even accidental habit of the country. In the +rural districts of England, during the last century, the +growth of population was very effectually repressed by the +difficulty of obtaining a cottage to live in. It was the custom +for unmarried laborers to lodge and board with their +employers; it was the custom for married laborers to have a +cottage: and the rule of the English poor-laws, by which a +parish was charged with the support of its unemployed poor, +rendered land-owners averse to promote marriage. About +the end of the century, the great demand for men in war +and manufactures made it be thought a patriotic thing to +encourage population: and about the same time the growing +inclination of farmers to live like rich people, favored as it +was by a long period of high prices, made them desirous of +keeping inferiors at a greater distance, and, pecuniary motives +arising from abuses of the poor-laws being superadded, +they gradually drove their laborers into cottages, which the +landowners now no longer refused permission to build. +</p> + +<p> +It is but rarely that improvements in the condition of +the laboring-classes do anything more than give a temporary +margin, speedily filled up by an increase of their numbers. +Unless, either by their general improvement in intellectual +and moral culture, or at least by raising their habitual standard +of comfortable living, they can be taught to make a better +use of favorable circumstances, nothing permanent can +be done for them; the most promising schemes end only in +having a more numerous but not a happier people. There +is no doubt that [the standard] is gradually, though slowly, +rising in the more advanced countries of Western Europe.<note place='foot'>This +is fully confirmed by the inaugural address of Mr. Giffen as President +of the London Statistical Society, November 20, 1883, <hi rend='italic'>infra</hi>, +<ref target='Book_IV_Chapter_V_Section_1'>book iv, chap. v, § 1</ref>. +(See the London <q>Statistical Journal,</q> 1883.)</note> +<pb n='119'/><anchor id='Pg119'/> +Subsistence and employment in England have never increased +more rapidly than in the last forty years, but every +census since 1821 showed a smaller proportional increase of +population than that of the period preceding; and the produce +of French agriculture and industry is increasing in a progressive +ratio, while the population exhibits, in every quinquennial +census, a smaller proportion of births to the population. +</p> + +<quote rend='display'> +This brings forward the near connection between land-tenures +and population. France is pre-eminently a country of +small holdings, and it is undoubtedly true that the system has +checked the thoughtless increase of numbers. On his few hectares, +the French peasant sees in the size of his farm and the +amount of its produce the limit of subsistence for himself and +his family; as in no other way does he see beforehand the results +of any lack of food from his lack of prudence.<note place='foot'>See +Lavergne's <q>Agriculture et Population,</q> pp. 305-316.</note> From +1790 to 1815 the average yearly increase of population was +120,000; from 1815 to 1846, the golden age of French agriculture, +200,000; from 1846 to 1856, when agriculture was not +prosperous, 60,000; from 1856 to 1880 the increase has been +not more than 36,000 yearly. In France the question shapes +itself to the peasant proprietor, How many can be subsisted by +the amount of produce, not on an unlimited area of land in +other parts of the world, but on this particular property of a +small size? While in England there are ten births to six deaths, +in France there are about ten births to every nine deaths.<note place='foot'>For +tables of relative births and deaths, see <q>Statesman's Year-Book,</q> p. +253.</note> In +no country has the doctrine of Malthus been more attacked +than in France, and yet in no other country has there been a +more marked obedience to its principles in actual practice. +Since the French are practically not at all an emigrating people, +population has strictly adapted itself to subsistence. For +the relative increase of population in France and the United +States, see also the movement of lines indicating the increase +of population in chart No. III (p. <ref target='Pg114'>114</ref>). +</quote> + + +</div> + +</div> + +<pb n='120'/><anchor id='Pg120'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_I_Chapter_VIII'/> +<head>Chapter VIII. Of The Law Of The Increase Of Capital.</head> + +<div> +<index index='toc'/> +<head>§ 1. Means for Saving in the Surplus above Necessaries.</head> + +<p> +The requisites of production being labor, capital, and +land, it has been seen from the preceding chapter that the +impediments to the increase of production do not arise from +the first of these elements. But production has other requisites, +and, of these, the one which we shall next consider is +Capital. There can not be more people in any country, or +in the world, than can be supported from the produce of +past labor until that of present labor comes in [although it +is not to be supposed that capital consists wholly of food]. +We have next, therefore, to inquire into the conditions of the +increase of capital: the causes by which the rapidity of its +increase is determined, and the necessary limitations of that +increase. +</p> + +<p> +Since all capital is the product of saving, that is, of abstinence +from present consumption for the sake of a future +good, the increase of capital must depend upon two things—the +amount of the fund from which saving can be made, +and the strength of the dispositions which prompt to it. +</p> + +<pb n='121'/><anchor id='Pg121'/> + +<p> +(1.) The fund from which saving can be made is the surplus +of the produce of labor, after supplying the necessaries +of life to all concerned in the production (including those +employed in replacing the materials, and keeping the fixed +capital in repair). More than this surplus can not be saved +under any circumstances. As much as this, though it never +is saved, always might be. This surplus is the fund from +which the enjoyments, as distinguished from the necessaries +of the producers, are provided; it is the fund from which all +are subsisted who are not themselves engaged in production, +and from which all additions are made to capital. The +capital of the employer forms the revenue of the laborers, +and, if this exceeds the necessaries of life, it gives them a +surplus which they may either expend in enjoyments or save. +</p> + +<quote rend='display'> +It is evident that the whole unproductive consumption of the +laborer can be saved. When it is considered how enormous a +sum is spent by the working-classes in drink alone (and also +in the great reserves of the Trades-Unions collected for purposes +of strikes), it is indisputable that the laborers have the +margin from which savings can be made, and by which they +themselves may become capitalists. The great accumulations +in the savings-banks by small depositors in the United States +also show somewhat how much is actually saved. In 1882-1883 +there were 2,876,438 persons who had deposited in the savings-banks +of the United States $1,024,856,787, with an average to +each depositor of $356.29. The unproductive consumption, +however, of all classes—not merely that of the working-men—is +the possible fund which may be saved. That being the +amount which <emph>can</emph> be saved, how much <emph>will</emph> be saved depends +on the strength of the desire to save. +</quote> + +<p> +The greater the produce of labor after supporting the +laborers, the more there is which <emph>can</emph> be saved. The same +thing also partly contributes to determine how much <emph>will</emph> be +saved. A part of the motive to saving consists in the prospect +of deriving an income from savings; in the fact that +capital, employed in production, is capable of not only reproducing +itself but yielding an increase. The greater the +profit that can be made from capital, the stronger is the motive +to its accumulation. +</p> + +</div> + +<pb n='122'/><anchor id='Pg122'/> + +<div> +<index index='toc'/> +<head>§ 2. Motive for Saving in the Surplus above Necessaries.</head> + +<p> +But the disposition to save does not wholly depend +on the external inducement to it; on the amount of profit +to be made from savings. With the same pecuniary inducement, +the inclination is very different, in different persons, +and in different communities. +</p> + +<p> +(2.) All accumulation involves the sacrifice of a present, +for the sake of a future good. +</p> + +<quote rend='display'> +This is the fundamental motive underlying the effective +desire of accumulation, and is far more important than any +other. It is, in short, the test of civilization. In order to induce +the laboring-classes to improve their condition and save +capital, it is absolutely necessary to excite in them (by education +or religion) a belief in a future gain greater than the present +sacrifice. It is, to be sure, the whole problem of creating +character, and belongs to sociology and ethics rather than to +political economy. +</quote> + +<p> +In weighing the future against the present, the uncertainty +of all things future is a leading element; and that uncertainty +is of very different degrees. <q>All circumstances,</q> +therefore, <q>increasing the probability of the provision +we make for futurity being enjoyed by ourselves or others, +tend</q> justly and reasonably <q>to give strength to the effective +desire of accumulation. Thus a healthy climate or occupation, +by increasing the probability of life, has a tendency +to add to this desire. When engaged in safe occupations +and living in healthy countries, men are much more +apt to be frugal, than in unhealthy or hazardous occupations +and in climates pernicious to human life. Sailors and soldiers +are prodigals. In the West Indies, New Orleans, the +East Indies, the expenditure of the inhabitants is profuse. +The same people, coming to reside in the healthy parts of +Europe, and not getting into the vortex of extravagant fashion, +live economically. War and pestilence have always +waste and luxury among the other evils that follow in their +train. For similar reasons, whatever gives security to the +affairs of the community is favorable to the strength of this +principle. In this respect the general prevalence of law and +<pb n='123'/><anchor id='Pg123'/> +order and the prospect of the continuance of peace and tranquillity +have considerable influence.</q><note place='foot'>This and +the subsequent quotations are taken by Mr. Mill from Rae's +<q>New Principles of Political Economy.</q></note> +</p> + +<quote rend='display'> +It is asserted that the prevalence of homicide in certain +parts of the United States has had a vital influence in retarding +the material growth of those sections. The Southern States +have received but a very small fraction (from ten to thirteen +per cent) of foreign immigration. <q>A country where law and +order prevail to perfection may find its material prosperity +checked by a deadly and fatal climate; or, on the other +hand, a people may destroy all the advantages accruing from +matchless natural resources and climate by persistent disregard +of life and property. A rather startling confirmation of this +economic truth is afforded by the fact that homicide has been +as destructive of life in the South as yellow fever. Although +there have been forty thousand deaths from yellow fever since +the war, the deaths from homicide, for the same period, have +been even greater.</q><note place='foot'><q>International Review,</q> +article <q>Colonization,</q> 1881, p. 88. See H. V. +Redfield, <q>Homicide North and South,</q> 1880.</note> +The influence of the old slave <foreign rend='italic'>régime</foreign>, +and its still existing influences, in checking foreign immigration +into the South can be seen by the colored chart, No. VIII, +showing the relative density of foreign-born inhabitants in the +several parts of the United States. The deeper color shows +the greater foreign-born population. +</quote> + +<p> +The more perfect the security, the greater will be the +effective strength of the desire of accumulation. Where +property is less safe, or the vicissitudes ruinous to fortunes +are more frequent and severe, fewer persons will save at all, +and, of those who do, many will require the inducement of a +higher rate of profit on capital to make them prefer a doubtful +future to the temptation of present enjoyment. +</p> + +<p> +In the circumstances, for example, of a hunting tribe, +<q>man may be said to be necessarily improvident, and regardless +of futurity, because, in this state, the future presents +nothing which can be with certainty either foreseen or +governed.... Besides a want of the motives exciting to +provide for the needs of futurity through means of the abilities +of the present, there is a want of the habits of perception +<pb n='124'/><anchor id='Pg124'/> +and action, leading to a constant connection in the mind of +those distant points, and of the series of events serving to +unite them. Even, therefore, if motives be awakened capable +of producing the exertion necessary to effect this connection, +there remains the task of training the mind to think and +act so as to establish it.</q> +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Examples of Deficiency in the Strength of this Desire.</head> + +<p> +For instance: <q>Upon the banks of the St. Lawrence +there are several little Indian villages. The cleared +land is rarely, I may almost say never, cultivated, nor are any +inroads made in the forest for such a purpose. The soil is, +nevertheless, fertile, and, were it not, manure lies in heaps +by their houses. Were every family to inclose half an acre +of ground, till it, and plant it in potatoes and maize, it would +yield a sufficiency to support them one half the year. They +suffer, too, every now and then, extreme want, insomuch +that, joined to occasional intemperance, it is rapidly reducing +their numbers. This, to us, so strange apathy proceeds not, +in any great degree, from repugnance to labor; on the contrary, +they apply very diligently to it when its reward is +immediate. It is evidently not the necessary labor that is +the obstacle to more extended culture, but the distant return +from that labor. I am assured, indeed, that among some of +the more remote tribes, the labor thus expended much exceeds +that given by the whites. On the Indian, succeeding +years are too distant to make sufficient impression; though, +to obtain what labor may bring about in the course of a few +months, he toils even more assiduously than the white man.</q> +</p> + +<p> +This view of things is confirmed by the experience of +the Jesuits, in their interesting efforts to civilize the Indians +of Paraguay. The real difficulty was the improvidence of +the people; their inability to think for the future; and the +necessity accordingly of the most unremitting and minute +superintendence on the part of their instructors. <q>Thus at +first, if these gave up to them the care of the oxen with +which they plowed, their indolent thoughtlessness would +probably leave them at evening still yoked to the implement. +Worse than this, instances occurred where they cut them up +<pb n='125'/><anchor id='Pg125'/> +for supper, thinking, when reprehended, that they sufficiently +excused themselves by saying they were hungry.</q> +</p> + +<p> +As an example intermediate, in the strength of the effective +desire of accumulation, between the state of things thus +depicted and that of modern Europe, the case of the Chinese +deserves attention. <q>Durability is one of the chief qualities, +marking a high degree of the effective desire of accumulation. +The testimony of travelers ascribes to the instruments +formed by the Chinese a very inferior durability to +similar instruments constructed by Europeans. The houses, +we are told, unless of the higher ranks, are in general of +unburnt bricks, of clay, or of hurdles plastered with earth; +the roofs, of reeds fastened to laths. A greater degree of +strength in the effective desire of accumulation would cause +them to be constructed of materials requiring a greater present +expenditure, but being far more durable. From the same +cause, much land, that in other countries would be cultivated, +lies waste. All travelers take notice of large tracts of lands, +chiefly swamps, which continue in a state of nature. To +bring a swamp into tillage is generally a process to complete +which requires several years. It must be previously +drained, the surface long exposed to the sun, and many +operations performed, before it can be made capable of bearing +a crop. Though yielding, probably, a very considerable +return for the labor bestowed on it, that return is not made +until a long time has elapsed. The cultivation of such land +implies a greater strength of the effective desire of accumulation +than exists in the empire. The amount of self-denial +would seem to be small. It is their great deficiency in forethought +and frugality in this respect which is the cause of +the scarcities and famines that frequently occur.</q> +</p> + +<p> +That it is defect of providence, not defect of industry, +that limits production among the Chinese, is still more +obvious than in the case of the semi-agriculturized Indians. +<q>Where the returns are quick, where the instruments formed +require but little time to bring the events for which they +were formed to an issue,</q> it is well known that <q>the great +<pb n='126'/><anchor id='Pg126'/> +progress which has been made in the knowledge of the arts +suited to the nature of the country and the wants of its inhabitants</q> +makes industry energetic and effective. <q>What +marks the readiness with which labor is forced to form the +most difficult materials into instruments, where these instruments +soon bring to an issue the events for which they are +formed, is the frequent occurrence, on many of their lakes +and rivers, of structures resembling the floating gardens of +the Peruvians, rafts covered with vegetable soil and cultivated. +Labor in this way draws from the materials on which +it acts very speedy returns. Nothing can exceed the luxuriance +of vegetation when the quickening powers of a +genial sun are ministered to by a rich soil and abundant +moisture. It is otherwise, as we have seen, in cases where +the return, though copious, is distant. European travelers are +surprised at meeting these little floating farms by the side of +swamps which only require draining to render them tillable.</q> +</p> + +<p> +When a country has carried production as far as in the +existing state of knowledge it can be carried with an amount +of return corresponding to the average strength of the effective +desire of accumulation in that country, it has reached +what is called the stationary state; the state in which no +further addition will be made to capital, unless there takes +place either some improvement in the arts of production, or +an increase in the strength of the desire to accumulate. In +the stationary state, though capital does not on the whole +increase, some persons grow richer and others poorer. Those +whose degree of providence is below the usual standard +become impoverished, their capital perishes, and makes room +for the savings of those whose effective desire of accumulation +exceeds the average. These become the natural purchasers +of the lands, manufactories, and other instruments of +production owned by their less provident countrymen. +</p> + +<p> +In China, if that country has really attained, as it is supposed +to have done, the stationary state, accumulation has +stopped when the returns to capital are still as high as is indicated +by a rate of interest legally twelve per cent, and practically +<pb n='127'/><anchor id='Pg127'/> +varying (it is said) between eighteen and thirty-six. +It is to be presumed, therefore, that no greater amount of capital +than the country already possesses can find employment +at this high rate of profit, and that any lower rate does not +hold out to a Chinese sufficient temptation to induce him to +abstain from present enjoyment. What a contrast with +Holland, where, during the most flourishing period of its +history, the government was able habitually to borrow at two +per cent, and private individuals, on good security, at three! +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Examples of Excess of this Desire.</head> + +<p> +In [the United States and] the more prosperous +countries of Europe, there are to be found abundance of +prodigals: still, in a very numerous portion of the community, +the professional, manufacturing, and trading classes, being +those who, generally speaking, unite more of the means with +more of the motives for saving than any other class, the spirit +of accumulation is so strong that the signs of rapidly increasing +wealth meet every eye: and the great amount of capital +seeking investment excites astonishment, whenever peculiar +circumstances turning much of it into some one channel, such +as railway construction or foreign speculative adventure, bring +the largeness of the total amount into evidence. +</p> + +<p> +There are many circumstances which, in England, give +a peculiar force to the accumulating propensity. The long +exemption of the country from the ravages of war and the +far earlier period than elsewhere at which property was +secure from military violence or arbitrary spoliation have +produced a long-standing and hereditary confidence in the +safety of funds when trusted out of the owner's hands, which +in most other countries is of much more recent origin, and +less firmly established. +</p> + +<quote rend='display'> +The growth of deposit-banking in Great Britain, therefore, +advances with enormous strides, while in Continental countries +it makes very little headway. The disturbed condition of the +country in France, owing to wars, leads the thrifty to hoard +instead of depositing their savings. But in the United States +the same growth is seen as among the English. The net deposits +of the national banks of the United States in 1871 were +$636,000,000, but in 1883 they had increased more than 83 +<pb n='128'/><anchor id='Pg128'/> +per cent to $1,168,000,000. Deposit accounts are the rule even +with small tradesmen; and the savings-banks of Massachusetts +alone show deposits in 1882-1883 of $241,311,362, and those +of New York of $412,147,213. The United States also escapes +from the heavy taxation which in Europe is imposed to maintain +an extravagant army and navy chest. The effect of institutions, +moreover, in stimulating the growth of material +prosperity is far more true of the United States than of England, +for the barriers raised against the movement from lower +to higher social classes in the latter country are non-existent +here, and consequently there is more stimulus toward acquiring +the means of bettering a man's social condition. +</quote> + +<p> +The geographical causes which have made industry rather +than war the natural source of power and importance to +Great Britain [and the United States] have turned an unusual +proportion of the most enterprising and energetic characters +into the direction of manufactures and commerce; +into supplying their wants and gratifying their ambition by +producing and saving, rather than by appropriating what +has been produced and saved. Much also depended on the +better political institutions of this country, which, by the +scope they have allowed to individual freedom of action, +have encouraged personal activity and self-reliance, while, +by the liberty they confer of association and combination, +they facilitate industrial enterprise on a large scale. The +same institutions, in another of their aspects, give a most +direct and potent stimulus to the desire of acquiring wealth. +The earlier decline of feudalism [in England] having removed +or much weakened invidious distinctions between the +originally trading classes and those who had been accustomed +to despise them, and a polity having grown up which made +wealth the real source of political influence, its acquisition +was invested with a factitious value independent of its intrinsic +utility. And, inasmuch as to be rich without industry +has always hitherto constituted a step in the social scale +above those who are rich by means of industry, it becomes +the object of ambition to save not merely as much as will +afford a large income while in business, but enough to retire +from business and live in affluence on realized gains. +</p> + +<pb n='129'/><anchor id='Pg129'/> + +<p> +In [the United States,] England, and Holland, then, for a +long time past, and now in most other countries in Europe, +the second requisite of increased production, increase of capital, +shows no tendency to become deficient. So far as that +element is concerned, production is susceptible of an increase +without any assignable bounds. The limitation to production, +not consisting in any necessary limit to the increase of the +other two elements, labor and capital, must turn upon the +properties of the only element which is inherently, and in +itself, limited in quantity. It must depend on the properties +of land. +</p> + +</div> + +</div> + +<pb n='130'/><anchor id='Pg130'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_I_Chapter_IX'/> +<head>Chapter IX. Of The Law Of The Increase Of Production From Land.</head> + +<div> +<index index='toc'/> +<head>§ 1. The Law of Production from the Soil, a Law of Diminishing Return +in Proportion to the Increased Application of Labor and Capital.</head> + +<p> +Land differs from the other elements of production, +labor, and capital, in not being susceptible of indefinite increase. +Its extent is limited, and the extent of the more +productive kinds of it more limited still. It is also evident +that the quantity of produce capable of being raised on any +given piece of land is not indefinite. This limited quantity +of land and limited productiveness of it are the real limits +to the increase of production. +</p> + +<p> +The limitation to production from the properties of the +soil is not like the obstacle opposed by a wall, which stands +immovable in one particular spot, and offers no hindrance to +motion short of stopping it entirely. We may rather compare +it to a highly elastic and extensible band, which is +hardly ever so violently stretched that it could not possibly +be stretched any more, yet the pressure of which is felt long +before the final limit is reached, and felt more severely the +nearer that limit is approached. +</p> + +<p> +After a certain, and not very advanced, stage in the progress +of agriculture—as soon, in fact, as mankind have applied +themselves to cultivation with any energy, and have +brought to it any tolerable tools—from that time it is the +law of production from the land, that in any given state of +agricultural skill and knowledge, by increasing the labor, the +produce is not increased in an equal degree; doubling the +labor does not double the produce; or, to express the same +thing in other words, every increase of produce is obtained +<pb n='131'/><anchor id='Pg131'/> +by a more than proportional increase in the application of +labor to the land. This general law of agricultural industry +is the most important proposition in political economy. Were +the law different, nearly all the phenomena of the production +and distribution of wealth would be other than they are. +</p> + +<quote rend='display'> +It is not generally considered that in the United States, +where in many sparsely settled parts of the country new land +is constantly being brought into cultivation, an additional population +under existing conditions of agricultural skill can be +maintained with constantly increasing returns up to a certain +point before the law of diminishing returns begins to operate. +Where more laborers are necessary, and more capital wanted, +to co-operate in a new country before all the land can give its +maximum product, in such a stage of cultivation it can not be +said that the law of diminishing returns has yet practically set in. +</quote> + +<p> +When, for the purpose of raising an increase of produce, +recourse is had to inferior land, it is evident that, so far, the +produce does not increase in the same proportion with the +labor. The very meaning of inferior land is land which +with equal labor returns a smaller amount of produce. Land +may be inferior either in fertility or in situation. The one +requires a greater proportional amount of labor for growing +the produce, the other for carrying it to market. If the land +A yields a thousand quarters of wheat to a given outlay in +wages, manure, etc., and, in order to raise another thousand, +recourse must be had to the land B, which is either less +fertile or more distant from the market, the two thousand +quarters will cost more than twice as much labor as the +original thousand, and the produce of agriculture will be +increased in a less ratio than the labor employed in procuring +it. +</p> + +<p> +Instead of cultivating the land B, it would be possible, +by higher cultivation, to make the land A produce more. +It might be plowed or harrowed twice instead of once, or +three times instead of twice; it might be dug instead of +being plowed; after plowing, it might be gone over with +a hoe instead of a harrow, and the soil more completely pulverized; +it might be oftener or more thoroughly weeded; +<pb n='132'/><anchor id='Pg132'/> +the implements used might be of higher finish, or more +elaborate construction; a greater quantity or more expensive +kinds of manure might be applied, or, when applied, they +might be more carefully mixed and incorporated with the soil. +</p> + +<quote rend='display'> +The example of market-gardens in the vicinity of great +cities and towns shows how the intensive culture permits an +increase of labor and capital with larger returns. These lands, +by their situation, are superior lands for this particular purpose, +although they might be inferior lands as regards absolute +productiveness when compared with the rich wheat-lands of +Dakota. New England and New Jersey farms, generally +speaking, no longer attempt the culture of grains, but (when +driven out of that culture by the great railway lines which +have opened up the West) they have arranged themselves in a +scale of adaptability for stock, grass, fruit, dairy, or vegetable +farming; and have thereby given greater profits to their owners +than the same land did under the old <foreign rend='italic'>régime</foreign>. Even on +lands where any grain can still be grown, corn, buckwheat, barley, +oats, and rye, cover the cultivated areas instead of wheat. +</quote> + +<p> +Inferior lands, or lands at a greater distance from the +market, of course yield an inferior return, and an increasing +demand can not be supplied from them unless at an +augmentation of cost, and therefore of price. If the additional +demand could continue to be supplied from the superior +lands, by applying additional labor and capital, at no +greater proportional cost than that at which they yield the +quantity first demanded of them, the owners or farmers of +those lands could undersell all others, and engross the whole +market. Lands of a lower degree of fertility or in a more +remote situation might indeed be cultivated by their proprietors, +for the sake of subsistence or independence; but +it never could be the interest of any one to farm them for +profit. That a profit can be made from them, sufficient to +attract capital to such an investment, is a proof that cultivation +on the more eligible lands has reached a point beyond +which any greater application of labor and capital would +yield, at the best, no greater return than can be obtained at +the same expense from less fertile or less favorably situated +lands. +</p> + +<pb n='133'/><anchor id='Pg133'/> + +<p> +<q>It is long,</q> says a late traveler in the United +States,<note place='foot'><q>Letters from America,</q> by John Robert Godley, +vol. i. p. 42. See also +Lyell's <q>Travels in America,</q> vol. ii, p. 83.—Mill.</note> +<q>before an English eye becomes reconciled to the lightness +of the crops and the careless farming (as we should call it) +which is apparent. One forgets that, where land is so plentiful +and labor so dear as it is here, a totally different principle +must be pursued from that which prevails in populous countries, +and that the consequence will of course be a want of +tidiness, as it were, and finish, about everything which requires +labor.</q> Of the two causes mentioned, the plentifulness +of land seems to me the true explanation, rather than +the dearness of labor; for, however dear labor may be, when +food is wanted, labor will always be applied to producing it +in preference to anything else. But this labor is more effective +for its end by being applied to fresh soil than if it were +employed in bringing the soil already occupied into higher +cultivation. +</p> + +<quote rend='display'> +The Western movement of what might be called the <q>wheat-center</q> +is quite perceptible. Until recently Minnesota has +been a great wheat-producing State, and vast tracts of land +were there planted with that grain when the soil was first +broken. The profits on the first few crops have been enormous, +but it is now said to be more desirable for wheat-growers +to move onward to newer lands, and to sell the land to cultivators +of a different class (of fruit and varied products), who +produce for a denser population. So that (in 1884) Dakota, +instead of Minnesota, has become the district of the greatest +wheat production.<note place='foot'>Cf. <q>American Agriculture,</q> +<q>Princeton Review,</q> May, 1882, by F. A. +Walker.</note> +</quote> + +<p> +Only when no soils remain to be broken up, but such as +either from distance or inferior quality require a considerable +rise of price to render their cultivation profitable, can it +become advantageous to apply the high farming of Europe +to any American lands; except, perhaps, in the immediate +vicinity of towns, where saving in cost of carriage may compensate +for great inferiority in the return from the soil itself. +</p> + +<pb n='134'/><anchor id='Pg134'/> + +<p> +The principle which has now been stated must be received, +no doubt, with certain explanations and limitations. +Even after the land is so highly cultivated that the mere +application of additional labor, or of an additional amount of +ordinary dressing, would yield no return proportioned to the +expense, it may still happen that the application of a much +greater additional labor and capital to improving the soil +itself, by draining or permanent manures, would be as liberally +remunerated by the produce as any portion of the labor +and capital already employed. It would sometimes be much +more amply remunerated. This could not be, if capital always +sought and found the most advantageous employment. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Antagonist Principle to the Law of Diminishing Return; +the Progress of Improvements in Production.</head> + +<p> +That the produce of land increases, +<foreign lang='la' rend='italic'>cæteris paribus</foreign>, +in a diminishing ratio to the increase in the labor employed, +is, as we have said (allowing for occasional and temporary +exceptions), the universal law of agricultural industry. This +principle, however, has been denied. So much so, indeed, +that (it is affirmed) the worst land now in cultivation produces +as much food per acre, and even as much to a given +amount of labor, as our ancestors contrived to extract from +the richest soils in England. +</p> + +<quote rend='display'> +The law of diminishing returns is the physical fact upon +which the economic doctrine of rent is based, and requires careful +attention. Carey asserts, instead, that there is a law of +increasing productiveness, since, as men grow in numbers and +intelligence, there arises an ability to get more from the +soil.<note place='foot'><q>Social Science,</q> vol. iii, p. 19.</note> +Some objectors even deny that different grades of land are +cultivated, and that there is no need of taking inferior soils +into cultivation. If this were true, why would not one half an +acre of land be as good as a whole State? Johnston<note place='foot'><q>Notes +on North America,</q> 1851, vol. ii, pp. 116, 117.</note> says: +<q>In a country and among poor settlers ... poor land is a +relative term. Land is called poor which is not suitable to a +poor man, which on mere clearing and burning will not yield +good first crops. Thus that which is poor land for a poor man +may prove rich land to a rich man.</q><note place='foot'>See also Cairnes, +<q>Logical Method,</q> p. 35.</note> Moreover, as is constantly +the case in our country, it often happens that a railway +may bring new lands into competition with old lands in a given +<pb n='135'/><anchor id='Pg135'/> +market; of which the most conspicuous example is the competition +of Western grain-fields with the Eastern farms. In +these older districts, before the competition came, there was a +given series of grades in the cultivated land; after the railway +was built there was a disarrangement of the old series, some +going out of cultivation, some remaining, and some of the new +lands entering the list. The result is a new series of grades +better suited to satisfy the wants of men. +</quote> + +<p> +This, however, does not prove that the law of which we +have been speaking does not exist, but only that there is +some antagonizing principle at work, capable for a time of +making head against the law. Such an agency there is, in +habitual antagonism to the law of diminishing return from +land; and to the consideration of this we shall now proceed. +It is no other than the progress of civilization. The most obvious +[part of it] is the progress of agricultural knowledge, skill, +and invention. Improved processes of agriculture are of two +kinds: (1) some enable the land to yield a greater absolute +produce, without an equivalent increase of labor; (2) others +have not the power of increasing the produce, but have that of +diminishing the labor and expense by which it is obtained. +(1.) Among the first are to be reckoned the disuse of fallows, +by means of the rotation of crops; and the introduction of new +articles of cultivation capable of entering advantageously into +the rotation. The change made in agriculture toward the +close of the last century, by the introduction of turnip-husbandry, +is spoken of as amounting to a revolution. Next in +order comes the introduction of new articles of food, containing +a greater amount of sustenance, like the potato, or more +productive species or varieties of the same plant, such as the +Swedish turnip. In the same class of improvements must +be placed a better knowledge of the properties of manures, +and of the most effectual modes of applying them; the introduction +of new and more powerful fertilizing agents, such as +guano, and the conversion to the same purpose of substances +previously wasted; inventions like subsoil-plowing or tile-draining, +by which the produce of some kinds of lands is so +greatly multiplied; improvements in the breed or feeding of +<pb n='136'/><anchor id='Pg136'/> +laboring cattle; augmented stock, of the animals which consume +and convert into human food what would otherwise be +wasted; and the like. (2.) The other sort of improvements, +those which diminish labor, but without increasing the capacity +of the land to produce, are such as the improved construction +of tools; the introduction of new instruments which +spare manual labor, as the winnowing and thrashing machines. +These improvements do not add to the productiveness +of the land, but they are equally calculated with the +former to counteract the tendency in the cost of production +of agricultural produce, to rise with the progress of population +and demand. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. —In Railways.</head> + +<p> +Analogous in effect to this second class of agricultural +improvements are improved means of communication. +Good roads are equivalent to good tools. It is of no consequence +whether the economy of labor takes place in extracting +the produce from the soil, or in conveying it to the place +where it is to be consumed. +</p> + +<quote rend='display'> +The functions performed by railways in the system of +production is highly important. They are among the most +influential causes affecting the cost of producing commodities, +particularly those which satisfy the primary wants of man, of +which food is the chief. The amount of tonnage carried is +enormous; and the cost of this service to the producers and +consumers of the United States is a question of very great +magnitude. The serious reduction in the cost of transportation +on the railways will be a surprise to all who have not followed +the matter very closely; the more so, that it has been brought +about by natural causes, and independent of legislation. Corn, +meat, and dairy products form, it is said, at least 50 per cent, +and coal and timber about 30 per cent, of the tonnage moved +on all the railways of the United States. If a lowered cost of +transportation has come about, it has then cost less to move the +main articles of immediate necessity. Had the charge in 1880 +remained as high even as it was from 1866 to 1869, the number +of tons carried in 1880 would have cost the United States from +$500,000,000 to $800,000,000 more than the charge actually +made, owing to the reductions by the railways. It seems, however, +that this process of reduction culminated about 1879. In +order to show the facts of this process, note the changes in +the following chart, No. V. The railways of the State of New +York are taken, but the same is also true of those of Ohio: +</quote> + +<pb n='137'/><anchor id='Pg137'/> + +<anchor id='Chart_V'/> +<quote rend='display'> +<p> +Chart V. +</p> + +<p> +<hi rend='italic'>Cost of 20 Barrels of Flour, 10 Beef, 10 Pork, +100 Bushels Wheat, 100 Corn, 100 Oats, 100 Pounds Butter, 100 Lard, and +100 Fleece Wool, in New York City, at the Average of each Year, +Compiled by Months, in Gold; Compared Graphically with the +Decrease in the Charge per Ton per Mile, on all the Railroads of +the State of New York, during the Same Period.</hi> +</p> + +<table rend="latexcolumns: 'p{1.5cm} p{1.8cm} p{1.8cm} p{1.8cm} p{1.8cm}'; + tblcolumns: 'lw(10) r r r r'"> +<row><cell>Year.</cell><cell>Price in gold of staple farm products. (Dollars)</cell> + <cell>Charge for carrying one ton one mile. (Cents)</cell> + <cell>Decrease in the railroad expenses per ton. (Cents)</cell> + <cell>Decrease in the profits of the railroads for carrying one ton. + (Cents)</cell></row> +<row><cell>1870</cell><cell>776.02</cell><cell>1.7016</cell><cell>1.1471</cell> + <cell>.5545</cell></row> +<row><cell>1871</cell><cell>735.33</cell><cell>1.7005</cell><cell>1.1450</cell> + <cell>.5555</cell></row> +<row><cell>1872</cell><cell>675.92</cell><cell>1.6645</cell><cell>1.1490</cell> + <cell>.5155</cell></row> +<row><cell>1873</cell><cell>662.50</cell><cell>1.6000</cell><cell>1.0864</cell> + <cell>.5136</cell></row> +<row><cell>1874</cell><cell>748.54</cell><cell>1.4480</cell><cell>.9730</cell> + <cell>.4750</cell></row> +<row><cell>1875</cell><cell>696.40</cell><cell>1.3039</cell><cell>.9587</cell> + <cell>.3452</cell></row> +<row><cell>1876</cell><cell>651.74</cell><cell>1.1604</cell><cell>.8561</cell> + <cell>.3043</cell></row> +<row><cell>1877</cell><cell>751.95</cell><cell>1.0590</cell><cell>.7740</cell> + <cell>.2850</cell></row> +<row><cell>1878</cell><cell>569.81</cell><cell>.9994</cell><cell>.6900</cell> + <cell>.3094</cell></row> +<row><cell>1879</cell><cell>568.34</cell><cell>.8082</cell><cell>.5847</cell> + <cell>.2295</cell></row> +<row><cell>1880</cell><cell>631.32</cell><cell>.9220</cell><cell>.6030</cell> + <cell>.3190</cell></row> +<row><cell>1881</cell><cell>703.10</cell><cell>.8390</cell><cell>.5880</cell> + <cell>.2510</cell></row> +<row><cell>1882</cell><cell>776.12</cell><cell>.8170</cell><cell>.6010</cell> + <cell>.2160</cell></row> +<row><cell>1883</cell><cell>662.11</cell><cell>.8990</cell><cell>.6490</cell> + <cell>.2500</cell></row> +</table> + +<p> +In 1855 the charge per ton per mile was 3.27 cents, as compared with 0.89 +in 1883. +</p> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell>Tons moved 1 m. in 1883 by railroads of N.Y.</cell> + <cell>9,286,216,628</cell></row> +<row><cell>At rate of 1855, would cost</cell><cell>$303,659,283</cell></row> +<row><cell>Actual cost in 1883</cell><cell>83,464,919</cell></row> +<row><cell>Saving to the State</cell><cell>$220,194,364</cell></row> +</table> + +<pb n='138'/><anchor id='Pg138'/> + +<p> +The explanation of this reduced cost is given by Mr. Edward +Atkinson<note place='foot'>I am indebted +to Mr. Atkinson for advanced proofs of the annexed charts. +See his paper in the <q>Journal of the American Agricultural Association,</q> vol. +i, Nos. 3 and 4, p. 154, and a later discussion in the supplement of the Boston +<q>Manufacturers' Gazette,</q> August 9, 1884, entitled <q>The Railway, the Farmer, +and the Public.</q> His figures are drawn mainly from Poor's <q>Railway +Manual.</q></note> as (1) the competition of water-ways, (2) the competition +of one railway with another, and (3) the competition of +other countries, which forces our railways to try to lay our +staple products down in foreign markets at a price which will +warrant continued shipment. Besides these reasons, much +ought also (4) to be assigned to the progress of inventions and +the reduced cost of steel and all appliances necessary to the +railways. +</p> + +<p> +The large importance of the railways shows itself in an +influence on general business prosperity, and as a place for +large investments of a rapidly growing capital. The building +of railways, however, has been going on, at some times with +greater speed than at others. Instead of 33,908 miles of railways +at the close of our war, we have now (1884) over 120,000 +miles. How the additional mileage has been built year by +year, with two distinct eras of increased building—one from +1869 to 1873, and another from 1879 to 1884—may be seen by +the shorter lines of the subjoined chart, No. <ref target='Chart_VI'>VI</ref>. +</p> + +<p> +That speculation has been excited at different times by the +opening up of our Western country, there can be no doubt. +And if a comparison be made with Chart No. <ref target='Chart_XVII'>XVII</ref> +(<ref target='Book_III_Chapter_III'>Book IV, +Chap. III</ref>), which gives the total grain-crops of the United +States, it will be seen that since 1879, although our population has +increased from 12-½ per cent to 14 per cent, our grain-crops only +5 per cent, yet our railway mileage has increased 40 per cent. +</p> + +<p> +The extent to which the United States has carried railway-building, +as compared with European countries, although we +have a very much greater area, is distinctly shown by Chart +No. <ref target='Chart_VII'>VII</ref>. This application of one form of improvement to +oppose the law of diminishing returns in the United States +has produced extraordinary results, especially when we consider +that we are probably not yet using all our best lands, +or, in other words, that we have not yet felt the law of diminishing +returns in some large districts. +</p> +</quote> + +<anchor id='Chart_VI'/> +<p> +Chart VI. +</p> + +<p> +<hi rend='italic'>Miles of Railroad in Operation on the 1st January in each Year, and the +Miles added in the Year Ensuing.</hi> +</p> + +<table rend="latexcolumns: 'p{1.5cm} p{3cm} p{2cm}'; + tblcolumns: 'lw(10) r r'"> +<row><cell>Year.</cell><cell>Miles of Railroad.</cell><cell>Miles added.</cell></row> +<row><cell>1865</cell><cell>33,908</cell><cell>1,177</cell></row> +<row><cell>1866</cell><cell>35,085</cell><cell>1,716</cell></row> +<row><cell>1867</cell><cell>36,801</cell><cell>2,449</cell></row> +<row><cell>1868</cell><cell>39,250</cell><cell>2,979</cell></row> +<row><cell>1869</cell><cell>42,229</cell><cell>4,615</cell></row> +<row><cell>1870</cell><cell>46,844</cell><cell>6,070</cell></row> +<row><cell>1871</cell><cell>52,914</cell><cell>7,379</cell></row> +<row><cell>1872</cell><cell>60,293</cell><cell>5,878</cell></row> +<row><cell>1873</cell><cell>66,171</cell><cell>4,107</cell></row> +<row><cell>1874</cell><cell>70,278</cell><cell>2,105</cell></row> +<row><cell>1875</cell><cell>72,383</cell><cell>1,713</cell></row> +<row><cell>1876</cell><cell>74,096</cell><cell>2,712</cell></row> +<row><cell>1877</cell><cell>76,808</cell><cell>2,281</cell></row> +<row><cell>1878</cell><cell>79,089</cell><cell>2,687</cell></row> +<row><cell>1879</cell><cell>81,776</cell><cell>4,721</cell></row> +<row><cell>1880</cell><cell>86,497</cell><cell>7,048</cell></row> +<row><cell>1881</cell><cell>93,545</cell><cell>9,789</cell></row> +<row><cell>1882</cell><cell>103,334</cell><cell>11,591</cell></row> +<row><cell>1883</cell><cell>114,925</cell><cell>6,618</cell></row> +</table> + +<p> +Railways and canals are virtually a diminution of the cost +of production of all things sent to market by them; and literally +so of all those the appliances and aids for producing +which they serve to transmit. By their means land can be +<pb n='140'/><anchor id='Pg140'/> +cultivated, which would not otherwise have remunerated the +cultivators without a rise of price. Improvements in navigation +have, with respect to food or materials brought from +beyond sea, a corresponding effect. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. —In Manufactures.</head> + +<p> +From similar considerations, it appears that many +purely mechanical improvements, which have, apparently, at +least, no peculiar connection with agriculture, nevertheless +enable a given amount of food to be obtained with a smaller +expenditure of labor. A great improvement in the process +of smelting iron would tend to cheapen agricultural implements, +diminish the cost of railroads, of wagons and carts, +ships, and perhaps buildings, and many other things to which +iron is not at present applied, because it is too costly; and +would thence diminish the cost of production of food. The +same effect would follow from an improvement in those processes +of what may be termed manufacture, to which the +material of food is subjected after it is separated from the +ground. The first application of wind or water power to +grind corn tended to cheapen bread as much as a very important +discovery in agriculture would have done; and any +great improvement in the construction of corn-mills would +have, in proportion, a similar influence. +</p> + +<p> +Those manufacturing improvements which can not be +made instrumental to facilitate, in any of its stages, the actual +production of food, and therefore do not help to counteract +or retard the diminution of the proportional return to labor +from the soil, have, however, another effect, which is practically +equivalent. What they do not prevent, they yet, in +some degree, compensate +for.<note place='foot'>Cf. <ref target='Book_IV_Chapter_I'>Book IV, Chap. I</ref>.</note> +</p> + +<anchor id='Chart_VII'/> +<p> +Chart VII. +</p> + +<p> +<hi rend='italic'>Ratio of Miles of Railroad to the Areas of States and +Countries—United States and Europe. The relative proportion is 1 Mile Railroad +to 4 Square Miles of Area.</hi> +</p> + +<table rend="latexcolumns: 'p{1cm} p{2.5cm} p{1.5cm} p{2cm}'; + tblcolumns: 'r lw(10) r r'"> +<row><cell>No.</cell><cell>Name.</cell><cell>Rank in Size.</cell> + <cell>Relative.</cell></row> +<row><cell>1</cell><cell>Massachusetts</cell><cell>67</cell><cell>98</cell></row> +<row><cell>2</cell><cell>Belgium</cell><cell>62</cell><cell>96</cell></row> +<row><cell>3</cell><cell>England and Wales</cell><cell>29</cell><cell>88</cell></row> +<row><cell>4</cell><cell>New Jersey</cell><cell>62</cell><cell>81</cell></row> +<row><cell>5</cell><cell>Connecticut</cell><cell>68</cell><cell>80</cell></row> +<row><cell>6</cell><cell>Rhode Island</cell><cell>71</cell><cell>65</cell></row> +<row><cell>7</cell><cell>Ohio</cell><cell>44</cell><cell>60</cell></row> +<row><cell>8</cell><cell>Illinois</cell><cell>32</cell><cell>59</cell></row> +<row><cell>9</cell><cell>Pennsylvania</cell><cell>40</cell><cell>55</cell></row> +<row><cell>10</cell><cell>Delaware</cell><cell>69</cell><cell>53</cell></row> +<row><cell>11</cell><cell>Indiana</cell><cell>50</cell><cell>52</cell></row> +<row><cell>12</cell><cell>New Hampshire</cell><cell>65</cell><cell>45</cell></row> +<row><cell>13</cell><cell>Switzerland</cell><cell>59</cell><cell>44</cell></row> +<row><cell>14</cell><cell>New York</cell><cell>39</cell><cell>41</cell></row> +<row><cell>15</cell><cell>Iowa</cell><cell>33</cell><cell>39</cell></row> +<row><cell>16</cell><cell>German Empire</cell><cell>4</cell><cell>38</cell></row> +<row><cell>17</cell><cell>Scotland</cell><cell>52</cell><cell>37</cell></row> +<row><cell>18</cell><cell>Maryland</cell><cell>63</cell><cell>36</cell></row> +<row><cell>19</cell><cell>Vermont</cell><cell>64</cell><cell>35</cell></row> +<row><cell>20</cell><cell>Ireland</cell><cell>51</cell><cell>29</cell></row> +<row><cell>21</cell><cell>Michigan</cell><cell>31</cell><cell>28</cell></row> +<row><cell>22</cell><cell>France</cell><cell>5</cell><cell>27</cell></row> +<row><cell>23</cell><cell>Denmark</cell><cell>60</cell><cell>26</cell></row> +<row><cell>24</cell><cell>Netherlands</cell><cell>57</cell><cell>25</cell></row> +<row><cell>25</cell><cell>Missouri</cell><cell>26</cell><cell>24</cell></row> +<row><cell>26</cell><cell>Wisconsin</cell><cell>34</cell><cell>23</cell></row> +<row><cell>27</cell><cell>Austrian Empire</cell><cell>3</cell><cell>21</cell></row> +<row><cell>28</cell><cell>Virginia</cell><cell>45</cell><cell>19</cell></row> +<row><cell>29</cell><cell>Italy</cell><cell>13</cell><cell>18</cell></row> +<row><cell>30</cell><cell>Georgia</cell><cell>30</cell><cell>17</cell></row> +<row><cell>31</cell><cell>Kansas</cell><cell>22</cell><cell>16</cell></row> +<row><cell>32</cell><cell>Kentucky</cell><cell>46</cell><cell>15</cell></row> +<row><cell>33</cell><cell>South Carolina</cell><cell>49</cell><cell>14</cell></row> +<row><cell>34</cell><cell>Tennessee</cell><cell>42</cell><cell>14</cell></row> +<row><cell>35</cell><cell>Minnesota</cell><cell>21</cell><cell>13</cell></row> +<row><cell>36</cell><cell>Alabama</cell><cell>36</cell><cell>13</cell></row> +<row><cell>37</cell><cell>West Virginia</cell><cell>55</cell><cell>12</cell></row> +<row><cell>38</cell><cell>Roumania</cell><cell>41</cell><cell>12</cell></row> +<row><cell>39</cell><cell>North Carolina</cell><cell>37</cell><cell>12</cell></row> +<row><cell>40</cell><cell>Maine</cell><cell>48</cell><cell>12</cell></row> +<row><cell>41</cell><cell>Nebraska</cell><cell>23</cell><cell>10</cell></row> +<row><cell>42</cell><cell>Mississippi</cell><cell>38</cell><cell>9</cell></row> +<row><cell>43</cell><cell>Spain</cell><cell>6</cell><cell>9</cell></row> +<row><cell>44</cell><cell>Portugal</cell><cell>47</cell><cell>9</cell></row> +<row><cell>45</cell><cell>Sweden</cell><cell>7</cell><cell>9</cell></row> +<row><cell>46</cell><cell>Arkansas</cell><cell>35</cell><cell>8</cell></row> +<row><cell>47</cell><cell>Louisiana</cell><cell>43</cell><cell>8</cell></row> +<row><cell>48</cell><cell>Colorado</cell><cell>16</cell><cell>8</cell></row> +<row><cell>49</cell><cell>California</cell><cell>8</cell><cell>7</cell></row> +<row><cell>50</cell><cell>Turkey</cell><cell>27</cell><cell>7</cell></row> +<row><cell>51</cell><cell>Texas</cell><cell>2</cell><cell>7</cell></row> +<row><cell>52</cell><cell>Utah</cell><cell>20</cell><cell>6</cell></row> +<row><cell>53</cell><cell>Florida</cell><cell>28</cell><cell>6</cell></row> +<row><cell>54</cell><cell>Dakota</cell><cell>7</cell><cell>6</cell></row> +<row><cell>55</cell><cell>Russia in Europe</cell><cell>1</cell><cell>5</cell></row> +<row><cell>56</cell><cell>Nevada</cell><cell>15</cell><cell>5</cell></row> +<row><cell>57</cell><cell>Norway</cell><cell>11</cell><cell>5</cell></row> +<row><cell>58</cell><cell>Oregon</cell><cell>18</cell><cell>4</cell></row> +<row><cell>59</cell><cell>Bulgaria</cell><cell>54</cell><cell>4</cell></row> +<row><cell>60</cell><cell>New Mexico</cell><cell>12</cell><cell>3</cell></row> +<row><cell>61</cell><cell>Wyoming</cell><cell>17</cell><cell>2</cell></row> +<row><cell>62</cell><cell>Indian Territory</cell><cell>25</cell><cell>2</cell></row> +<row><cell>63</cell><cell>Washington</cell><cell>24</cell><cell>1</cell></row> +<row><cell>64</cell><cell>Arizona</cell><cell>14</cell><cell>1</cell></row> +<row><cell>65</cell><cell>Idaho</cell><cell>19</cell><cell>1</cell></row> +<row><cell>66</cell><cell>Greece</cell><cell>58</cell><cell>0</cell></row> +<row><cell>67</cell><cell>Montana</cell><cell>10</cell><cell>0</cell></row> +<row><cell>68</cell><cell>Bosnia and Herzegovina</cell><cell>53</cell><cell>0</cell></row> +<row><cell>69</cell><cell>Servia</cell><cell>56</cell><cell>0</cell></row> +<row><cell>70</cell><cell>Eastern Roumelia</cell><cell>61</cell><cell>0</cell></row> +<row><cell>71</cell><cell>Montenegro</cell><cell>70</cell><cell>0</cell></row> +<row><cell>72</cell><cell>Andorra</cell><cell>72</cell><cell>0</cell></row> +</table> + +<p> +(The United States have substantially one mile of railway to each 540 inhabitants. +Europe has one mile to each 3,000 inhabitants, if Russia be included; about +one mile to each 2,540, exclusive of Russia.) +</p> + +<p> +The materials of manufactures being all drawn from the +land, and many of them from agriculture, which supplies in +particular the entire material of clothing, the general law +of production from the land, the law of diminishing return, +must in the last resort be applicable to manufacturing as +well as to agricultural history. As population increases, and +<pb n='142'/><anchor id='Pg142'/> +the power of the land to yield increased produce is strained +harder and harder, any additional supply of material, as well +as of food, must be obtained by a more than proportionally +increasing expenditure of labor. But the cost of the material +forming generally a very small portion of the entire cost +of the manufacture, the agricultural labor concerned in the +production of manufactured goods is but a small fraction of +the whole labor worked up in the commodity. +</p> + +<quote rend='display'> +<p> +Mr. Babbage<note place='foot'><q>Economy of Manufactures,</q> pp. 163, 164.</note> +gives an interesting illustration of this principle. +Bar-iron of the value of £1 became worth, when manufactured +into— +</p> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell></cell><cell>£</cell></row> +<row><cell>Slit-iron, for nails</cell><cell>1.10</cell></row> +<row><cell>Natural steel</cell><cell>1.42</cell></row> +<row><cell>Horseshoes</cell><cell>2.55</cell></row> +<row><cell>Gun-barrels, ordinary</cell><cell>9.10</cell></row> +<row><cell>Wood-saws</cell><cell>14.28</cell></row> +<row><cell>Scissors, best</cell><cell>446.94</cell></row> +<row><cell>Penknife-blades</cell><cell>657.14</cell></row> +<row><cell>Sword-handles, polished steel</cell><cell>972.82</cell></row> +</table> + +<p> +It can not, however, be said of such manufactures as coarse +cotton cloth, wherein the increased cost of raw cotton causes +an immediate effect upon the price of the cloth, that the cost +of the materials forms but a small portion of the cost of the +manufacture.<note place='foot'>Cf. <ref target='Book_IV_Chapter_I_Section_4'>Book +IV, Chap. I, § 4</ref>.</note> +</p> +</quote> + +<p> +All the labor [not engaged in preparing materials] tends +constantly and strongly toward diminution, as the amount of +production increases. Manufactures are vastly more susceptible +than agriculture of mechanical improvements and contrivances +for saving labor. In manufactures, accordingly, +the causes tending to increase the productiveness of industry +preponderate greatly over the one cause which tends to diminish +it; and the increase of production, called forth by the +progress of society, takes place, not at an increasing, but at +a continually diminishing proportional cost. This fact has +manifested itself in the progressive fall of the prices and +values of almost every kind of manufactured goods during +two centuries past; a fall accelerated by the mechanical inventions +of the last seventy or eighty years, and susceptible +<pb n='143'/><anchor id='Pg143'/> +of being prolonged and extended beyond any limit which +it would be safe to specify. The benefit might even extend +to the poorest class. The increased cheapness of clothing +and lodging might make up to them for the augmented cost +of their food. +</p> + +<p> +There is, thus, no possible improvement in the arts of +production which does not in one or another mode exercise +an antagonistic influence to the law of diminishing return to +agricultural labor. Nor is it only industrial improvements +which have this effect. Improvements in government, and +almost every kind of moral and social advancement, operate +in the same manner. We may say the same of improvements +in education. The intelligence of the workman +is a most important element in the productiveness of labor. +The carefulness, economy, and general trustworthiness of +laborers are as important as their intelligence. Friendly relations +and a community of interest and feeling between +laborers and employers are eminently so. In the rich and idle +classes, increased mental energy, more solid instruction, and +stronger feelings of conscience, public spirit, or philanthropy, +would qualify them to originate and promote the most valuable +improvements, both in the economical resources of their +country and in its institutions and customs. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Law Holds True of Mining.</head> + +<p> +We must observe that what we have said of agriculture +is true, with little variation, of the other occupations +which it represents; of all the arts which extract materials +from the globe. Mining industry, for example, usually yields +an increase of produce at a more than proportional increase +of expense. +</p> + +<p> +It does worse, for even its customary annual produce requires +to be extracted by a greater and greater expenditure +of labor and capital. As a mine does not reproduce the coal +or ore taken from it, not only are all mines at last exhausted, +but even when they as yet show no signs of exhaustion they +must be worked at a continually increasing cost; shafts must +be sunk deeper, galleries driven farther, greater power applied +to keep them clear of water; the produce must be +<pb n='144'/><anchor id='Pg144'/> +lifted from a greater depth, or conveyed a greater distance. +The law of diminishing return applies therefore to mining +in a still more unqualified sense than to agriculture; but the +antagonizing agency, that of improvements in production, +also applies in a still greater degree. Mining operations are +more susceptible of mechanical improvements than agricultural: +the first great application of the steam-engine was to +mining; and there are unlimited possibilities of improvement +in the chemical processes by which the metals are extracted. +There is another contingency, of no unfrequent +occurrence, which avails to counterbalance the progress of +all existing mines toward exhaustion: this is, the discovery +of new ones, equal or superior in richness. +</p> + +<quote rend='display'> +Professor Jevons has applied this economic law to the industrial +situation of England.<note place='foot'><q>The Coal Question</q> +(1866).</note> While explaining that the +supply of cheap coal is the basis of English manufacturing +prosperity, yet he insists that, if the demand for coal is constantly +increasing, the point must inevitably be reached in the +future when the increased supply can be obtained only at a +higher cost. When coal costs England as much as it does any +other nation, then her exclusive industrial advantage will cease +to exist. In the United States the outlying iron deposits of +Lake Superior, Lake Champlain, and Pennsylvania, so geologists +tell us, will find competition arising from the new grades +of greater productiveness in the richer deposits of States like +Alabama. In that case we shall be going from poorer to better +grades of iron-mines, but after the change is made a series of +different grades of productiveness will be established as before. +</quote> + +<p> +To resume: all natural agents which are limited in quantity +are not only limited in their ultimate productive power, +but, long before that power is stretched to the utmost, they +yield to any additional demands on progressively harder +terms. This law may, however, be suspended, or temporarily +controlled, by whatever adds to the general power of mankind +over nature, and especially by any extension of their +knowledge, and their consequent command, of the properties +and powers of natural agents. +</p> + +</div> + +</div> + +<pb n='145'/><anchor id='Pg145'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter X. Consequences Of The Foregoing Laws.</head> + +<div> +<index index='toc'/> +<head>§ 1. Remedies for Weakness of the Principle of Accumulation.</head> + +<p> +From the preceding exposition it appears that the +limit to the increase of production is twofold: from deficiency +of capital, or of land. Production comes to a pause, either +because the effective desire of accumulation is not sufficient +to give rise to any further increase of capital, or because, +however disposed the possessors of surplus income may be +to save a portion of it, the limited land at the disposal of the +community does not permit additional capital to be employed +with such a return as would be an equivalent to them +for their abstinence. +</p> + +<p> +In countries where the principle of accumulation is as +weak as it is in the various nations of Asia, the desideratum +economically considered is an increase of industry, and of +the effective desire of accumulation. The means are, first, +a better government: more complete security of property; +moderate taxes, and freedom from arbitrary exaction under +the name of taxes; a more permanent and more advantageous +tenure of land, securing to the cultivator as far as possible +the undivided benefits of the industry, skill, and economy +he may exert. Secondly, improvement of the public intelligence. +Thirdly, the introduction of foreign arts, which raise +the returns derivable from additional capital to a rate corresponding +to the low strength of the desire of accumulation. +</p> + +<quote rend='display'> +An excellent example of what might be done by this process +is to be seen under our very eyes in the present development +of Mexico, to which American capital and enterprise have been +<pb n='146'/><anchor id='Pg146'/> +so prominently drawn of late. All these proposed remedies, +if put into use in Mexico, would undoubtedly result in a striking +increase of wealth. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Even where the Desire to Accumulate is Strong, +Population must be Kept within the Limits of Population from Land.</head> + +<p> +But there are other countries, and England [and the +United States are] at the head of them, in which neither the +spirit of industry nor the effective desire of accumulation +need any encouragement. In these countries there would +never be any deficiency of capital, if its increase were never +checked or brought to a stand by too great a diminution of +its returns. It is the tendency of the returns to a progressive +diminution which causes the increase of production to be +often attended with a deterioration in the condition of the +producers; and this tendency, which would in time put an +end to increase of production altogether, is a result of the +necessary and inherent conditions of production from the +land. +</p> + +<quote rend='display'> +This, of course, is based on the supposition that no new +lands, such as those of the United States, can be opened for +cultivation. If there is no prohibition to the importation of +cheaper food, new and richer land in any part of the world, +within reach of the given country, is an influence which works +against the tendency. Yet the tendency, or economic law, is +there all the same, forever working. +</quote> + +<p> +In all countries which have passed beyond a very early +stage in the progress of agriculture, every increase in the +demand for food, occasioned by increased population, will +always, unless there is a simultaneous improvement in production, +diminish the share which on a fair division would +fall to each individual. An increased production, in default +of unoccupied tracts of fertile land, or of fresh improvements +tending to cheapen commodities, can never be obtained +but by increasing the labor in more than the same +proportion. The population must either work harder or eat +less, or obtain their usual food by sacrificing a part of their +other customary comforts. Whenever this necessity is postponed, +it is because the improvements which facilitate production +continue progressive; because the contrivances of +mankind for making their labor more effective keep up an +<pb n='147'/><anchor id='Pg147'/> +equal struggle with Nature, and extort fresh resources from +her reluctant powers as fast as human necessities occupy and +engross the old. +</p> + +<p> +From this results the important corollary, that the necessity +of restraining population is not, as many persons believe, +peculiar to a condition of great inequality of property. +A greater number of people can not, in any given state of +civilization, be collectively so well provided for as a smaller. +The niggardliness of nature,<note place='foot'>Henry George, +as well as the Socialists, thinks poverty arises from the +injustice of society, and here takes issue with the present teaching. But the +question can be better discussed under Distribution.</note> +not the injustice of society, is +the cause of the penalty attached to over-population. An +unjust distribution of wealth does not even aggravate the +evil, but, at most, causes it to be somewhat earlier felt. It +is in vain to say that all mouths which the increase of mankind +calls into existence bring with them hands. The new +mouths require as much food as the old ones, and the hands +do not produce as much. +</p> + +<p> +After a degree of density has been attained, sufficient to +allow the principal benefits of combination of labor, all further +increase tends in itself to mischief, so far as regards the +average condition of the people; but the progress of improvement +has a counteracting operation, and allows of increased +numbers without any deterioration, and even consistently +with a higher average of comfort. Improvement +must here be understood in a wide sense, including not only +new industrial inventions, or an extended use of those already +known, but improvements in institutions, education, opinions, +and human affairs generally, provided they tend, as +almost all improvements do, to give new motives or new +facilities to production. +</p> + +<quote rend='display'> +<p> +The increase in the population of the United States has +been enormous, as already seen, but the increase of production +has been still greater, owing to the fertility of our land, to improvements +in the arts, and to our great genius for invention, +as may be seen by the following table (amounts in the second +<pb n='148'/><anchor id='Pg148'/> +column are given in millions).<note place='foot'>Henry Gannet, +<q>International Review,</q> 1882, p. 503.</note> The steady increase of the +valuation of our wealth goes on faster than the increase of +population, so that it manifests itself in a larger average wealth +to each inhabitant. +</p> + +<table rend="latexcolumns: 'l p{1.5cm} p{1.3cm} p{1.5cm} p{1.3cm} p{1.5cm}'; + tblcolumns: 'lw(6) r r r r r'"> +<row><cell>Decades.</cell><cell>Valuation.</cell> + <cell>Per cent of increase.</cell><cell>Population.</cell> + <cell>Per cent of increase.</cell><cell>Per capital valuation.</cell></row> +<row><cell>1800</cell><cell>$1,742</cell><cell>..</cell><cell>5,308,483</cell> + <cell>..</cell><cell>$328</cell></row> +<row><cell>1810</cell><cell>2,382</cell><cell>37</cell><cell>7,239,881</cell> + <cell>36</cell><cell>329</cell></row> +<row><cell>1820</cell><cell>3,734</cell><cell>57</cell><cell>9,633,882</cell> + <cell>33</cell><cell>386</cell></row> +<row><cell>1830</cell><cell>4,328</cell><cell>16</cell><cell>12,866,020</cell> + <cell>34</cell><cell>336</cell></row> +<row><cell>1840</cell><cell>6,124</cell><cell>41</cell><cell>17,069,453</cell> + <cell>33</cell><cell>359</cell></row> +<row><cell>1850</cell><cell>8,800</cell><cell>44</cell><cell>23,191,876</cell> + <cell>36</cell><cell>379</cell></row> +<row><cell>1860</cell><cell>16,160</cell><cell>84</cell><cell>31,443,321</cell> + <cell>35</cell><cell>514</cell></row> +<row><cell>1870</cell><cell>30,068</cell><cell>86</cell><cell>38,558,371</cell> + <cell>23</cell><cell>780</cell></row> +<row><cell>1880</cell><cell>40,000</cell><cell>33</cell><cell>50,155,783</cell> + <cell>30</cell><cell>798</cell></row> +</table> +</quote> + +<p> +If the productive powers of the country increase as rapidly +as advancing numbers call for an augmentation of +produce, it is not necessary to obtain that augmentation by +the cultivation of soils more sterile than the worst already +under culture, or by applying additional labor to the old soils +at a diminished advantage; or at all events this loss of power +is compensated by the increased efficiency with which, in the +progress of improvement, labor is employed in manufactures. +In one way or the other, the increased population is +provided for, and all are as well off as before. But if the +growth of human power over nature is suspended or slackened, +and population does not slacken its increase; if, with +only the existing command over natural agencies, those +agencies are called upon for an increased produce; this +greater produce will not be afforded to the increased population, +without either demanding on the average a greater +effort from each, or on the average reducing each to a smaller +ration out of the aggregate produce. +</p> + +<p> +Ever since the great mechanical inventions of Watt, +Arkwright, and their contemporaries, the return to labor has +probably increased as fast as the population; and would +<pb n='149'/><anchor id='Pg149'/> +even have outstripped it, if that very augmentation of return +had not called forth an additional portion of the inherent +power of multiplication in the human species. During the +twenty or thirty years last elapsed, so rapid has been the extension +of improved processes of agriculture [in England], +that even the land yields a greater produce in proportion to +the labor employed; the average price of corn had become +decidedly lower, even before the repeal of the corn laws had +so materially lightened, for the time being, the pressure of +population upon production. But though improvement may +during a certain space of time keep up with, or even surpass, +the actual increase of population, it assuredly never comes +up to the rate of increase of which population is capable: +and nothing could have prevented a general deterioration +in the condition of the human race, were it not that population +has in fact been restrained. Had it been restrained +still more, and the same improvements taken place, there +would have been a larger dividend than there now is, for the +nation or the species at large. The new ground wrung +from nature by the improvements would not have been all +tied up in the support of mere numbers. Though the +gross produce would not have been so great, there would +have been a greater produce per head of the population. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Necessity of Restraining Population not superseded by Free +Trade in Food.</head> + +<p> +When the growth of numbers outstrips the progress +of improvement, and a country is driven to obtain the means +of subsistence on terms more and more unfavorable, by the +inability of its land to meet additional demands except on +more onerous conditions, there are two expedients, by which +it may hope to mitigate that disagreeable necessity, even +though no change should take place in the habits of the +people with respect to their rate of increase. One of these +expedients is the importation of food from abroad. The +other is emigration. +</p> + +<p> +The admission of cheaper food from a foreign country is +equivalent to an agricultural invention by which food could +be raised at a similarly diminished cost at home. It equally +increases the productive power of labor. The return was +<pb n='150'/><anchor id='Pg150'/> +before, so much food for so much labor employed in the +growth of food: the return is now, a greater quantity of +food for the same labor employed in producing cottons or +hardware, or some other commodity to be given in exchange +for food. The one improvement, like the other, throws +back the decline of the productive power of labor by a +certain distance: but in the one case, as in the other, it immediately +resumes its course; the tide which has receded, +instantly begins to readvance. It might seem, indeed, that, +when a country draws its supply of food from so wide a surface +as the whole habitable globe, so little impression can be +produced on that great expanse by any increase of mouths +in one small corner of it that the inhabitants of the country +may double and treble their numbers without feeling +the effect in any increased tension of the springs of production, +or any enhancement of the price of food throughout +the world. But in this calculation several things are overlooked. +</p> + +<p> +In the first place, the foreign regions from which corn +can be imported do not comprise the whole globe, but those +parts of it almost alone which are in the immediate neighborhood +of coasts or navigable rivers; and of such there is +not, in the productive regions of the earth, so great a multitude +as to suffice during an indefinite time for a rapidly +growing demand, without an increasing strain on the productive +powers of the soil. +</p> + +<p> +In the next place, even if the supply were drawn from +the whole instead of a small part of the surface of the exporting +countries, the quantity of food would still be limited, +which could be obtained from them without an increase +of the proportional cost. The countries which export +food may be divided into two classes: those in which the +effective desire of accumulation is strong, and those in +which it is weak. In Australia and the United States of +America, the effective desire of accumulation is strong; +capital increases fast, and the production of food might be +very rapidly extended. But in such countries population +<pb n='151'/><anchor id='Pg151'/> +also increases with extraordinary rapidity. Their agriculture +has to provide for their own expanding numbers, as +well as for those of the importing countries. They must, +therefore, from the nature of the case, be rapidly driven, if +not to less fertile, at least what is equivalent, to remoter +and less accessible lands, and to modes of cultivation like +those of old countries, less productive in proportion to the +labor and expense. +</p> + +<quote rend='display'> +The extraordinary resources of the United States are scarcely +understood even by Americans. Chart No. <ref target='Chart_XVIII'>XVIII</ref> (see +<ref target='Book_IV_Chapter_III'>Book IV, Chap. III</ref>) +may give some idea of the agricultural +possibilities of our land. It will be seen from this that the +quantity of fertile land in but one of our States—Texas—is +greater than that of Austria-Hungary. +</quote> + +<p> +But the countries which have at the same time cheap +food and great industrial prosperity are few, being only those +in which the arts of civilized life have been transferred full-grown +to a rich and uncultivated soil. Among old countries, +those which are able to export food, are able only because +their industry is in a very backward state, because capital, +and hence population, have never increased sufficiently to +make food rise to a higher price. Such countries are Russia, +Poland, and Hungary. +</p> + +<p> +The law, therefore, of diminishing return to industry, +whenever population makes a more rapid progress than improvement, +is not solely applicable to countries which are +fed from their own soil, but in substance applies quite as +much to those which are willing to draw their food from +any accessible quarter that can afford it cheapest. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. —Nor by Emigration.</head> + +<p> +Besides the importation of corn, there is another +resource which can be invoked by a nation whose increasing +numbers press hard, not against their capital, but against +the productive capacity of their land: I mean Emigration, +especially in the form of Colonization. Of this remedy the +efficacy as far as it goes is real, since it consists in seeking +elsewhere those unoccupied tracts of fertile land which, if +they existed at home, would enable the demand of an increasing +<pb n='152'/><anchor id='Pg152'/> +population to be met without any falling off in the +productiveness of labor. Accordingly, when the region to +be colonized is near at hand, and the habits and tastes of +the people sufficiently migratory, this remedy is completely +effectual. The migration from the older parts of the American +Confederation to the new Territories, which is to all intents +and purposes colonization, is what enables population +to go on unchecked throughout the Union without having +yet diminished the return to industry, or increased the difficulty +of earning a subsistence. +</p> + +<quote rend='display'> +How strictly true this is may be seen by examining the map +given in the last census returns,<note place='foot'>Volume on +Population, p. 481.</note> showing the residence of the +natives of the State of New York. The greater or less frequency +of natives of New York, residing in other States, is +shown by different degrees of shading on the map. A large +district westward as far as the Mississippi shows a density of +natives of New York of from two to six to a square mile, and +a lesser density from Minnesota to Indian Territory, on the +other side of the Mississippi. The same is shown of other older +States. The explanation of the movement can not be anything +else than the same as that for the larger movement from Europe +to America. +</quote> + +<p> +There is no probability that even under the most enlightened +arrangements (in older countries) a permanent stream of +emigration could be kept up, sufficient to take off, as in +America, all that portion of the annual increase (when proceeding +at its greatest rapidity) which, being in excess of +the progress made during the same short period in the arts +of life, tends to render living more difficult for every averagely +situated individual in the community. And, unless this +can be done, emigration can not, even in an economical point +of view, dispense with the necessity of checks to population. +</p> + +<p> +The influence of immigration to the United States from +European countries, in lessening the tension in the relation +between food and numbers, is one of the most marked events +in this century. The United States has received about one +fourth of its total population in 1880 from abroad since the +foundation of the republic, as will be seen by this table: +</p> + +<pb n='153'/><anchor id='Pg153'/> + +<p> +Total Immigration Into The +United States. +</p> + +<table rend="latexcolumns: 'p{3cm} r{3cm}'; + tblcolumns: 'lw(10) r'"> +<row><cell>Periods.</cell><cell>Numbers.</cell></row> +<row><cell>From 1789-1820</cell> + <cell>250,000<note place='foot'>Estimated.</note></cell></row> +<row><cell>1820-1830</cell><cell>151,824</cell></row> +<row><cell>1831-1840</cell><cell>599,125</cell></row> +<row><cell>1841-1850</cell><cell>1,713,251</cell></row> +<row><cell>1851-1860</cell><cell>2,598,214</cell></row> +<row><cell>1861-1870</cell><cell>2,491,451</cell></row> +<row><cell>1871-1880</cell><cell>2,812,191</cell></row> +<row><cell>1881-1883</cell><cell>2,061,745</cell></row> +<row><cell>Total</cell><cell>12,677,801</cell></row> +</table> + +<p> +Of this number, 5,333,991 came +from the British Isles, of which 3,367,624 +were Irish. +</p> + +<p> +There came 3,860,624 Germans, +593,021 Scandinavians, and 334,064 +French. (See United States <q>Statistical +Abstract,</q> 1878, 1880, 1883.) +</p> + +<p> +The causes operating on this +movement of men—a movement +unequaled in history—are undoubtedly +economic. Like the +migration of the early Teutonic +races from the Baltic to Southern +Europe, it is due to the pressure +of numbers on subsistence. +</p> + +<p> +A still more interesting study +is that of the causes which attempt +to explain the direction of +this stream after it has reached +our shores. It is a definite fact +that the old slave States have +hitherto received practically +none of this vast foreign immigration.<note place='foot'>See article +<q>Colonization,</q> <q>International Review,</q> 1881, p. 88.</note> +The actual distribution +of the foreign born in the +United States is to be seen in a +most interesting way by aid of +the colored map, Chart No. VIII, +giving the different densities of +foreign-born population in different parts of the Union. It seems +almost certain that the general belief hitherto in the insecurity +of life and property in the old slave States has worked against +the material prosperity of that section. +</p> + +<p> +The different ages of the native- and foreign-born inhabitants +of the United States may be seen from the accompanying +diagrams<note place='foot'>See F. A. Walker's <q>Statistical Atlas.</q></note> +comparing the aggregate population of the United +States with the foreign-born. This may profitably be compared +with a similar diagram relating to the Chinese in the +United States (<ref target='Book_II_Chapter_III_Section_3'>Book II, Chap. III, § 3</ref>). +</p> + +<p> +Aggregate: 1870. +The figures give the number of thousands of each sex. +</p> + +<table rend="latexcolumns: 'p{2cm} r r'; + tblcolumns: 'r r r'"> +<row><cell>Decade of Life.</cell><cell>Males.</cell><cell>Females.</cell></row> +<row><cell>1</cell><cell>136</cell><cell>132</cell></row> +<row><cell>2</cell><cell>115</cell><cell>114</cell></row> +<row><cell>3</cell><cell>87</cell><cell>90</cell></row> +<row><cell>4</cell><cell>62</cell><cell>63</cell></row> +<row><cell>5</cell><cell>47</cell><cell>44</cell></row> +<row><cell>6</cell><cell>31</cell><cell>27</cell></row> +<row><cell>7</cell><cell>17</cell><cell>15</cell></row> +<row><cell>8</cell><cell>7</cell><cell>7</cell></row> +<row><cell>9</cell><cell>2</cell><cell>2</cell></row> +</table> + +<p> +Foreign: 1870. +</p> + +<table rend="latexcolumns: 'p{2cm} r r'; + tblcolumns: 'r r r'"> +<row><cell>Decade of Life.</cell><cell>Males.</cell><cell>Females.</cell></row> +<row><cell>1</cell><cell>24</cell><cell>23</cell></row> +<row><cell>2</cell><cell>48</cell><cell>49</cell></row> +<row><cell>3</cell><cell>128</cell><cell>114</cell></row> +<row><cell>4</cell><cell>134</cell><cell>113</cell></row> +<row><cell>5</cell><cell>107</cell><cell>84</cell></row> +<row><cell>6</cell><cell>60</cell><cell>44</cell></row> +<row><cell>7</cell><cell>27</cell><cell>23</cell></row> +<row><cell>8</cell><cell>9</cell><cell>9</cell></row> +<row><cell>9</cell><cell>2</cell><cell>2</cell></row> +</table> + +</div> + +</div> + +</div> + +<pb n='155'/><anchor id='Pg155'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Book II. Distribution.</head> + +<div> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter I. Of Property.</head> + +<div> +<index index='toc'/> +<head>§ 1. Individual Property and its opponents.</head> + +<p> +The laws and conditions of the Production of +Wealth partake of the character of physical truths. There +is nothing optional or arbitrary in them. It is not so with +the Distribution of Wealth. That is a matter of human institution +solely. The things once there, mankind, individually +or collectively, can do with them as they like. They can +place them at the disposal of whomsoever they please, and +on whatever terms. The Distribution of Wealth depends +on the laws and customs of society. The rules by which it +is determined are what the opinions and feelings of the ruling +portion of the community make them, and are very different +in different ages and countries; and might be still +more different, if mankind so chose. We have here to consider, +not the causes, but the consequences, of the rules according +to which wealth may be distributed. Those, at least, +are as little arbitrary, and have as much the character of +physical laws, as the laws of production. +</p> + +<p> +We proceed, then, to the consideration of the different +modes of distributing the produce of land and labor, which +have been adopted in practice, or may be conceived in theory. +Among these, our attention is first claimed by that +primary and fundamental institution, on which, unless in +<pb n='156'/><anchor id='Pg156'/> +some exceptional and very limited cases, the economical +arrangements of society have always rested, though in +its secondary features it has varied, and is liable to vary. +I mean, of course, the institution of individual property. +</p> + +<p> +Private property, as an institution, did not owe its origin +to any of those considerations of utility which plead for +the maintenance of it when established. Enough is known +of rude ages, both from history and from analogous states of +society in our own time, to show that tribunals (which always +precede laws) were originally established, not to determine +rights, but to repress violence and terminate quarrels. +With this object chiefly in view, they naturally enough gave +legal effect to first occupancy, by treating as the aggressor +the person who first commenced violence, by turning, or attempting +to turn, another out of possession. +</p> + +<p> +In considering the institution of property as a question +in social philosophy, we must leave out of consideration its +actual origin in any of the existing nations of Europe. We +may suppose a community unhampered by any previous possession; +a body of colonists, occupying for the first time an +uninhabited country. (1.) If private property were adopted, +we must presume that it would be accompanied by none of +the initial inequalities and injustice which obstruct the beneficial +operation of the principle in old society. Every full-grown +man or woman, we must suppose, would be secured +in the unfettered use and disposal of his or her bodily and +mental faculties; and the instruments of production, the +land and tools, would be divided fairly among them, so that +all might start, in respect to outward appliances, on equal +terms. It is possible also to conceive that, in this original +apportionment, compensation might be made for the injuries +of nature, and the balance redressed by assigning to the less +robust members of the community advantages in the distribution, +sufficient to put them on a par with the rest. But +the division, once made, would not again be interfered with; +individuals would be left to their own exertions and to the +<pb n='157'/><anchor id='Pg157'/> +ordinary chances for making an advantageous use of what +was assigned to them. (2.) If individual property, on the +contrary, were excluded, the plan which must be adopted +would be to hold the land and all instruments of production +as the joint property of the community, and to carry on the +operations of industry on the common account. The direction +of the labor of the community would devolve upon a +magistrate or magistrates, whom we may suppose elected by +the suffrages of the community, and whom we must assume +to be voluntarily obeyed by them. The division of the +produce would in like manner be a public act. The principle +might either be that of complete equality, or of apportionment +to the necessities or deserts of individuals, in whatever +manner might be conformable to the ideas of justice or +policy prevailing in the community. +</p> + +<p> +The assailants of the principle of individual property +may be divided into two classes: (1) those whose scheme +implies absolute equality in the distribution of the physical +means of life and enjoyment, and (2) those who admit inequality, +but grounded on some principle, or supposed principle, +of justice or general expediency, and not, like so many +of the existing social inequalities, dependent on accident +alone. The characteristic name for this [first] economical +system is Communism, a word of Continental origin, only +of late introduced into this country. The word Socialism, +which originated among the English Communists, and was +assumed by them as a name to designate their own doctrine, +is now, on the Continent, employed in a larger sense; not +necessarily implying Communism, or the entire abolition of +private property, but applied to any system which requires +that the land and the instruments of production should be +the property, not of individuals, but of communities, or associations, +or of the government. +</p> + +<quote rend='display'> +It should be said, moreover, that Socialism is to-day used in +the distinct sense of a system which abolishes private property, +and places the control of the capital, labor, and combined industries +of the country in the hands of the state. The essence +<pb n='158'/><anchor id='Pg158'/> +of modern socialism is the appeal to state-help and the weakening +of individual self-help. Collectivism is also a term now +used by German and French writers to describe an organization +of the industries of a country under a collective instead of an +individual management. Collectivism is but the French expression +for the system of state socialism. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. The case for Communism against private property presented.</head> + +<p> +The objection ordinarily made to a system of community +of property and equal distribution of the produce, +that each person would be incessantly occupied in evading +his fair share of the work, points, undoubtedly, to a real +difficulty. But those who urge this objection forget to how +great an extent the same difficulty exists under the system +on which nine tenths of the business of society is now conducted. +And though the <q>master's eye,</q> when the master +is vigilant and intelligent, is of proverbial value, it must be +remembered that, in a Socialist farm or manufactory, each +laborer would be under the eye, not of one master, but of +the whole community. If Communistic labor might be less +vigorous than that of a peasant proprietor, or a workman +laboring on his own account, it would probably be more energetic +than that of a laborer for hire, who has no personal +interest in the matter at all. +</p> + +<p> +Another of the objections to Communism is that if every +member of the community were assured of subsistence for +himself and any number of children, on the sole condition of +willingness to work, prudential restraint on the multiplication +of mankind would be at an end, and population would +start forward at a rate which would reduce the community +through successive stages of increasing discomfort to actual +starvation. But Communism is precisely the state of things +in which opinion might be expected to declare itself with +greatest intensity against this kind of selfish intemperance. +An augmentation of numbers which diminished the comfort +or increased the toil of the mass would then cause (which now +it does not) immediate and unmistakable inconvenience to +every individual in the association; inconvenience which +could not then be imputed to the avarice of employers, or +the unjust privileges of the rich. +</p> + +<pb n='159'/><anchor id='Pg159'/> + +<p> +A more real difficulty is that of fairly apportioning the +labor of the community among its members. There are +many kinds of work, and by what standard are they to be +measured one against another? Who is to judge how much +cotton-spinning, or distributing goods from the stores, or +brick-laying, or chimney-sweeping, is equivalent to so much +plowing? Besides, even in the same kind of work, nominal +equality of labor would be so great a real inequality that +the feeling of justice would revolt against its being enforced. +All persons are not equally fit for all labor; and the same +quantity of labor is an unequal burden on the weak and the +strong, the hardy and the delicate, the quick and the slow, +the dull and the intelligent.<note place='foot'>For a further +discussion of the difference between the motive powers under +private property and under Communism, see Mr. Mill's posthumous <q>Chapters +on Socialism,</q> <q>Fortnightly Review,</q> 1879 (vol. xxxi).</note> +</p> + +<p> +If, therefore, the choice were to be made between Communism +with all its chances and the present state of society +with all its sufferings and injustices, all the difficulties, great +or small, of Communism, would be but as dust in the balance. +But, to make the comparison applicable, we must compare +Communism at its best with the <foreign rend='italic'>régime</foreign> +of individual property, +not as it is, but as it might be made. The laws of +property have never yet conformed to the principles on +which the justification of private property rests. They have +made property of things which never ought to be property, +and absolute property where only a qualified property ought +to exist. Private property, in every defense made of it, is +supposed to mean the guarantee to individuals of the fruits +of their own labor and abstinence. The guarantee to them +of the fruits of the labor and abstinence of others, transmitted +to them without any merit or exertion of their own, is +not of the essence of the institution, but a mere incidental +consequence, which, when it reaches a certain height, does +not promote, but conflicts with the ends which render private +property legitimate. To judge of the final destination +of the institution of property, we must suppose everything +<pb n='160'/><anchor id='Pg160'/> +rectified which causes the institution to work in a manner +opposed to that equitable principle, of proportion between +remuneration and exertion, on which, in every vindication of +it that will bear the light, it is assumed to be grounded. We +must also suppose two conditions realized, without which +neither Communism nor any other laws or institutions could +make the condition of the mass of mankind other than degraded +and miserable. One of these conditions is, universal +education; the other, a due limitation of the numbers of the +community. With these, there could be no poverty, even +under the present social institutions: and, these being supposed, +the question of socialism is not, as generally stated by +Socialists, a question of flying to the sole refuge against the +evils which now bear down humanity, but a mere question +of comparative advantages, which futurity must determine. +We are too ignorant either of what individual agency in its +best form, or socialism in its best form, can accomplish, to be +qualified to decide which of the two will be the ultimate +form of human society. +</p> + +<p> +If a conjecture may be hazarded, the decision will probably +depend mainly on one consideration, viz., which of the +two systems is consistent with the greatest amount of human +liberty and spontaneity. It is yet to be ascertained whether +the communistic scheme would be consistent with that multiform +development of human nature, those manifold unlikenesses, +that diversity of tastes and talents, and variety of +intellectual points of view, which not only form a great part +of the interest of human life, but, by bringing intellects into +stimulating collision and by presenting to each innumerable +notions that he would not have conceived of himself, are the +mainspring of mental and moral progression. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. The Socialists who appeal to state-help.</head> + +<quote rend='display'> +<p> +For general purposes, a clearer understanding of the +various schemes may be gained by observing that (1) one class +of socialists intend to include the state itself within their plan, +and (2) another class aim to form separate communities inside +the state, and under its protection. +</p> + +<p> +Of this first system there are no present examples; but +the object of most of the socialistic organizations in the United +<pb n='161'/><anchor id='Pg161'/> +States and Europe is to strive for the assumption by the +state of the production and distribution of wealth.<note place='foot'>For +an exposition of the varying forms of modern state socialism, and that +form of it which advocates the nationalization of land (in H. George's <q>Progress +and Poverty,</q> and Alfred Russel Wallace's <q>Land Nationalization, its +Necessity and its Aims</q>) see a chapter in Henry Fawcett's last (sixth) edition +of his <q>Manual</q> (1884). For a general and valuable treatise on Socialism, but +one which does not describe schemes much later than Owen's, see Louis Reybaud's +<q>Études sur les reformateurs, ou socialistes modernes</q> (seventh edition, +1864). An excellent bibliography is given, vol. ii, pp. 453-470.</note> At present +the most active Socialists are to be found in Germany. The +origin of this influence, however, is to be traced to France.<note place='foot'>Pierre +Joseph Proudhon (born 1809) made a well-known attack on private +property in his <q>Qu'est-ce que la Propriété,</q> <q>What is Property?</q> (1840). His +answer was, <q>It is robbery.</q> See also Ely, <q>French and German Socialism</q> +(1883), p. 140.</note> +Louis Blanc,<note place='foot'>Louis Blanc +(born 1813, died 1882). His chief book, the <q>Organization of +Labor,</q> appeared in 1840, in the columns of the <q>Revue du Progrès.</q></note> +in his <q>Organisation du Travail,</q> considers property +the great scourge of society. The Government, he asserts, +should regulate production; raise money to be appropriated +without interest for creating state workshops, in which the +workmen should elect their own overseers, and all receive the +same wages; and the sums needed should be raised from the +abolition of collateral inheritance. The important practical +part of his scheme was that the great state workshops, aided +by the Government, would make private competition in those +industries impossible, and thus bring about the change from +the private to the socialistic system. +</p> + +<p> +The founder of modern German socialism was Karl Marx,<note place='foot'>Karl Marx +(born 1818, died 1883) published <q>The Criticism of Political +Economy</q> (1859); and an extension of the same book under the new title of +<q>Capital</q> (1867), of which only the first volume has appeared, on <q>The Process +of the Production of Capital.</q> This was again enlarged in 1872 to 822 +pages. A large part of the work is filled with extracts from parliamentary reports +on the condition of English workmen. Before the Revolution of 1848 he +edited a communistic journal, and was obliged to leave the country afterward, +by which he was led to London. He was an able writer on history and politics. +Marx was assisted by Friedrich Engels, who wrote <q>The Condition of the Working +Classes in England</q> (1845). See Ely, ibid., chap. x.</note> +and almost the only Socialist who pretended to economic +knowledge. He aimed his attack on the present social system +against the question of value, by asserting that the amount +of labor necessary for the production of an article is the sole +measure of its exchange value. It follows from this that the +<pb n='162'/><anchor id='Pg162'/> +right of property in the article vests wholly in the laborer, +while the capitalist, if he claims a share of the product, is nothing +less than a robber. No just system, he avers, can properly +exist so long as the rate of wages is fixed by free contract between +the employer and laborer; therefore the only remedy is +the nationalization of all the elements of production, land, tools, +materials, and all existing appliances, which involves, of course, +the destruction of the institution of private property. An obvious +weakness in this scheme is the provision that the Government +should determine what goods are to be produced, and +that every one is bound to perform that work which is assigned +by the state. In this there is no choice of work, and the +tyranny of one master would be supplanted by the tyranny +of a greater multiplex master in the officers of Government. +Moreover, it can not be admitted that exchange value is determined +by the quantity of labor alone. Every one knows +that the result of ten days' labor of a skilled watch-maker does +not exchange for the result of ten days' labor of an unskilled +hodman. Of two men making shoes, one may produce a good +the other a poor article, although both may work the same +length of time; so that their exchange value ought not to be +determined by the mere quantity of labor expended. Above +all, Marx would extend the equality of wages for the same +time to the manager and superintendent also. In other words, +he proposes to take away all the incentives to the acquirement +or exercise of superior and signal ability in every work of life, +the result of which would inevitably lead to a deadening extension +of mediocrity. +</p> + +<p> +This system gained an undue attention because it was +made the instrument of a socialist propaganda under the leadership +of Ferdinand Lassalle.<note place='foot'>Born 1825, +the son of a rich Jewish merchant. In philosophy and jurisprudence +he won the praise of Humboldt and Boeckh. But vanity and wild +ambition checked the success due to great abilities and energy of character. +He was finally shot in a duel in 1864. He appears as the antagonist of Schultze +(of Delitzsch), advocating state-help against the self-help of the originator of +the People's Banks.</note> This active leader, in 1863, +founded the German <q>Workingmen's Union,</q> a year earlier +than the <q>International<note place='foot'>For an +account of this society see Theodore D. Woolsey's <q>Communism +and Socialism</q> (1880); <q>Nineteenth Century,</q> July, 1878; and Ely, ibid., +chap. xi.</note> Association.</q> In 1869 Liebknecht +and his friends established the <q>Social Democratic Workingmen's +Party,</q> which after some difficulties absorbed the followers +of Lassalle in a congress at Gotha in 1875, and form the +<pb n='163'/><anchor id='Pg163'/> +present Socialist party in Germany. Their programme,<note place='foot'>See +New York <q>Nation,</q> Nos. 684, 686.</note> as +announced at Gotha, is as follows: +</p> + +<p> +I. Labor is the source of all riches and of all culture. As +general profitable labor can only be done by the human society, +the whole product of labor belongs to society—i.e., to all its +members—who have the same duties and the same right to +work, each according to his reasonable wants. +</p> + +<p> +In the present society the means of work are the monopoly +of the class of capitalists. The class of workingmen thus become +dependent on them, and consequently are given over to +all degrees of misery and servitude. +</p> + +<p> +In order to emancipate labor it is requisite that the means +of work be transformed into the common property of society, +that all production be regulated by associations, and that the +entire product of labor be turned over to society and justly +distributed for the benefit of all. +</p> + +<p> +None but the working-class itself can emancipate labor, as +in relation to it all other classes are only a reactionary mass. +</p> + +<p> +II. Led by these principles, the German Social Workingmen's +party, by all legal means, strives for a free state and society, +the breaking down of the iron laws of wages by abolishing +the system of hired workingmen, by abolishing exploitation in +every shape, and doing away with all social and political inequality. +</p> + +<p> +The German Social Workingmen's party, although first +working within its national confines, is fully conscious of the +international character of the general workingmen's movement, +and is resolved to fulfill all duties which it imposes on each +workingman in order to realize the fraternity of all men. +</p> + +<p> +The German Social Workingmen's party, for the purpose +of preparing the way, and for the solution of the social problem, +demands the creation of social productive associations, to +be supported by the state government, and under the control +of the working-people. The productive associations are to be +founded in such numbers that the social organization of the +whole production can be effected by them. +</p> + +<p> +The German Social Workingmen's party requires as the +basis of state government: +</p> + +<p> +1. Universal, equal, direct, and secret suffrage, which, beginning +with the twentieth year, obliges all citizens to vote in +all State, county, and town elections. Election-day must be a +Sunday or a holiday. +</p> + +<p> +2. Direct legislation by the people; decision as to war and +peace by the people. +</p> + +<pb n='164'/><anchor id='Pg164'/> + +<p> +3. General capability of bearing arms; popular defense in +place of standing armies. +</p> + +<p> +4. Abolition of all exceptional laws, especially those relating +to the press, public meetings, and associations—in short, of all +laws which hinder the free expression of ideas and thought. +</p> + +<p> +5. Gratuitous administration of justice by the people. +</p> + +<p> +6. General and equal, popular and gratuitous education by +the Government in all classes and institutes of learning; general +duty to attend school; religion to be declared a private affair. +</p> + +<p> +The German Social Workingmen's party insists on realizing +in the present state of society: +</p> + +<p> +1. The largest possible extension of political rights and +freedom in conformity to the above six demands. +</p> + +<p> +2. A single progressive income-tax for State, counties, and +towns, instead of those which are imposed at present, and in +place of indirect taxes, which unequally burden the people. +</p> + +<p> +3. Unlimited right of combination. +</p> + +<p> +4. A normal working-day corresponding with the wants of +society; prohibition of Sunday labor. +</p> + +<p> +5. Prohibition of children's work and of women's work, so +far as it injures their health and morality. +</p> + +<p> +6. Protective laws for the life and health of workingmen; +sanitary control of their dwellings; superintendence of mines, +factories, industry, and home work by officers chosen by the +workingmen; an effectual law guaranteeing the responsibility +of employers. +</p> + +<p> +7. Regulation of prison-work. +</p> + +<p> +8. Unrestricted self-government of all banks established for +the mutual assistance of workingmen. +</p> + +<p> +The above scheme also represents very well the character of +the Socialist agitators in the United States, who are themselves +chiefly foreigners, and have foreign conceptions of socialism. +On this form of socialism it is interesting to have Mr. Mill's +later opinions<note place='foot'>From his +posthumous <q>Chapters on Socialism,</q> <q>Fortnightly Review,</q> +1879, p. 513 (vol. xxxi), and written in 1869.</note> in his own words. +</p> +</quote> + +<p> +<q>Among those who call themselves Socialists, two kinds +of persons may be distinguished. There are, in the first +place, (1) those whose plans for a new order of society, in +which private property and individual competition are to be +superseded and other motives to action substituted, are on +the scale of a village community or township, and would be +applied to an entire country by the multiplication of such +<pb n='165'/><anchor id='Pg165'/> +self-acting units; of this character are the systems of Owen, +of Fourier, and the more thoughtful and philosophic Socialists +generally. The other class (2) who are more a product +of the Continent than of Great Britain, and may be called +the revolutionary Socialists, propose to themselves a much +bolder stroke. Their scheme is the management of the +whole productive resources of the country by one central +authority, the general Government. And with this view +some of them avow as their purpose that the working-classes, +or somebody in their behalf, should take possession +of all the property of the country, and administer it for the +general benefit. The aim of that is to substitute the new +rule for the old at a single stroke, and to exchange the +amount of good realized under the present system, and its +large possibilities of improvement, for a plunge without any +preparation into the most extreme form of the problem of +carrying on the whole round of the operations of social life +without the motive power which has always hitherto worked +the social machinery. It must be acknowledged that those +who would play this game on the strength of their own +private opinion, unconfirmed as yet by any experimental +verification, must have a serene confidence in their own +wisdom on the one hand, and a recklessness of people's sufferings +on the other, which Robespierre and St. Just, hitherto +the typical instances of those united attributes, scarcely +came up to.</q> +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Of various minor schemes, Communistic and Socialistic.</head> + +<p> +[Of the schemes to be tried within a state], the +two elaborate forms of non-communistic Socialism known +as Saint-Simonism and Fourierism are totally free from the +objections usually urged against Communism. The Saint-Simonian<note place='foot'>The +Count de Saint-Simon served in our Revolutionary War in the French +army, while very young, and ended a life of misfortune and poverty in 1825, a +month after the publication of his <q>Nouveau Christianisme</q> (Woolsey's <q>Communism +and Socialism,</q> p. 107). For a fuller account, see R. T. Ely's <q>French +and German Socialism,</q> p. 53; A. J. Booth's <q>Saint-Simon and Saint-Simonism</q> +(London, 1871); and Reybaud, ibid.</note> +scheme does not contemplate an equal, but an +<pb n='166'/><anchor id='Pg166'/> +unequal division of the produce; it does not propose that +all should be occupied alike, but differently, according to +their vocation or capacity; the function of each being assigned, +like grades in a regiment, by the choice of the directing +authority, and the remuneration being by salary, proportioned +to the importance, in the eyes of that authority, +of the function itself, and the merits of the person who fulfills +it. But to suppose that one or a few human beings, +howsoever selected, could, by whatever machinery of subordinate +agency, be qualified to adapt each person's work +to his capacity, and proportion each person's remuneration +to his merits, is a supposition almost too chimerical to be +reasoned against.<note place='foot'>This experiment +when put on trial in France first brought up the question +of the legal justice of giving an absolute right to inherited property, and numbered +among its disciples the economists, Michel Chevalier and Adolphe Blanqui, +and the philosopher, Auguste Comte.</note> +</p> + +<p> +The most skillfully combined, and with the greatest foresight +of objections, of all the forms of Socialism is that commonly +known as Fourierism.<note place='foot'>Fourier was +born at Besançon in 1772. He wrote the <q>Theory of the +Four Movements</q> (1808); <q>A Treatise on Domestic and Agricultural Association</q> +(1822); <q>The Theory of Universal Unity</q> (1841). Died 1837. See Ely, +ibid., p. 81; Victor Considérant's <q>La Destinée Sociale</q> (fourth edition, 1851); +and Reybaud, ibid.</note> This system does not contemplate +the abolition of private property, nor even of inheritance: +on the contrary, it avowedly takes into consideration, +as an element in the distribution of the produce, +capital as well as labor. It proposes that the operations of +industry should be carried on by associations of about two +thousand members, combining their labor on a district of +about a square league in extent, under the guidance of +chiefs selected by themselves (the <q>phalanstery</q>). In the +distribution a certain minimum is first assigned for the +subsistence of every member of the community, whether +capable or not of labor. The remainder of the produce +is shared in certain proportions, to be determined beforehand, +among the three elements, Labor, Capital, and Talent. +<pb n='167'/><anchor id='Pg167'/> +The capital of the community may be owned in unequal +shares by different members, who would in that case receive, +as in any other joint-stock company, proportional dividends. +The claim of each person on the share of the produce +apportioned to talent is estimated by the grade or rank +which the individual occupies in the several groups of laborers +to which he or she belongs, these grades being in all +cases conferred by the choice of his or her companions. +The remuneration, when received, would not of necessity be +expended or enjoyed in common; there would be separate +<foreign rend='italic'>ménages</foreign> for all who +preferred them, and no other community +of living is contemplated than that all the members of +the association should reside in the same pile of buildings; +for saving of labor and expense, not only in building, but +in every branch of domestic economy; and in order that, +the whole buying and selling operations of the community +being performed by a single agent, the enormous portion of +the produce of industry now carried off by the profits of +mere distributors might be reduced to the smallest amount +possible. +</p> + +<quote rend='display'> +<p> +Fourierism was tried in West Virginia by American disciples, +and it was advocated by Horace Greeley. A modified +form appeared in the famous community at Brook Farm (near +Dedham, Massachusetts), which drew there George Ripley, +Margaret Fuller, and even George William Curtis and Nathaniel +Hawthorne. +</p> + +<p> +There have been many smaller communities established in +the United States, but it can not be said that they have been +successful from the point of view either of numbers or material +prosperity. The followers of Rapp, or the Harmonists, in +Pennsylvania and Indiana; the Owenites,<note place='foot'>Robert Owen +(father of Robert Dale Owen), born 1771, in 1799 was engaged +in the famous New Lanark Mills, of which Jeremy Bentham was one of +the partners. In 1825 he purchased Harmony, in Indiana, from Mr. Rapp. He +believed in a full community of property; that the Government should employ +the surplus of labor for which there was no demand; and that, until the members +became fully trained, affairs should be managed by one head (as in +Saint-Simonism).</note> in Indiana; the +community of Zoar, in Ohio; the Inspirationists, in New York +<pb n='168'/><anchor id='Pg168'/> +and Iowa; the Perfectionists, at Oneida and Wallingford—are +all evidently suffering from the difficulties due to the absence of +family life, from the increasing spirit of personal independence +which carries away the younger members of the organizations,<note place='foot'>For +Brook Farm, see Noyes's <q>History of American Socialism,</q> chapter +xi, and the life of <q>George Ripley,</q> by O. B. Frothingham (1882). In general, +also, for American experiments see Charles Nordhoff's <q>The Communistic Societies +of the United States</q>; W. A. Hinds's <q>American Communists</q> (1878); +Woolsey's <q>Communism and Socialism</q> (1880); and Noyes's <q>American Socialism</q> +(1870).</note> +and the want of that executive ability which distinguishes the +successful manager in private enterprises. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. The Socialist objections to the present order of Society examined.</head> + +<p> +<q rend='pre'>The attacks<note place='foot'>The extracts +in large type in this section are taken from Mr. Mill's <q>Chapters +on Socialism</q> (<q>Fortnightly Review,</q> 1879), being only the beginning of +a larger work begun in 1869, and given to the public since his death. They +are of interest because they give his conclusions twenty years after his <q>Political +Economy</q> was written.</note> on the present social order are vigorous +and earnest, but open to the charge of exaggeration.</q> +</p> + +<p> +<q rend='pre'>In the first place, it is unhappily true that the wages of +ordinary labor, in all the countries of Europe, are wretchedly +insufficient to supply the physical and moral necessities of +the population in any tolerable measure. But when it is +further alleged that even this insufficient remuneration has a +tendency to diminish; that there is, in the words of M. Louis +Blanc, <foreign lang='fr' rend='italic'>une baisse +continue des salaires</foreign>; the assertion is in +opposition to all accurate information, and to many notorious +facts. It has yet to be proved that there is any country +in the civilized world where the ordinary wages of labor, estimated +either in money or in articles of consumption, are +declining; while in many they are, on the whole, on the increase; +and an increase which is becoming, not slower, but +more rapid. There are, occasionally, branches of industry +which are being gradually superseded by something else, +and in those, until production accommodates itself to demand, +wages are depressed.</q> +</p> + +<p> +<q rend='pre'>M. Louis Blanc appears to have fallen into the same error +which was at first committed by Malthus and his followers, +that of supposing because population has a greater power of +<pb n='169'/><anchor id='Pg169'/> +increase than subsistence, its pressure upon subsistence must +be always growing more severe. It is a great point gained +for truth when it comes to be seen that the tendency to over-population +is a fact which Communism, as well as the existing +order of society, would have to deal with. However +this may be, experience shows that in the existing state of +society the pressure of population on subsistence, which is +the principal cause of low wages, though a great, is not an +increasing evil; on the contrary, the progress of all that is +called civilization has a tendency to diminish it, partly by +the more rapid increase of the means of employing and maintaining +labor, partly by the increased facilities opened to +labor for transporting itself to new countries and unoccupied +fields of employment, and partly by a general improvement +in the intelligence and prudence of the population. It is, +of course, open to discussion what form of society has the +greatest power of dealing successfully with the pressure of +population on subsistence, and on this question there is +much to be said for Socialism; but it has no just claim +to be considered as the sole means of preventing the +general and growing degradation of the mass of mankind +through the peculiar tendency of poverty to produce over-population.</q> +</p> + +<p> +<q rend='pre'>Next, it must be observed that Socialists generally, and +even the most enlightened of them, have a very imperfect +and one-sided notion of the operation of competition. They +see half its effects, and overlook the other half. They forget +that competition is a cause of high prices and values as well +as of low; that the buyers of labor and of commodities compete +with one another as well as the sellers; and that, if it is +competition which keeps the prices of labor and commodities +as low as they are, it is competition which keeps them from +falling still lower. To meet this consideration, Socialists are +reduced to affirm that, when the richest competitor has got +rid of all his rivals, he commands the market and can demand +any price he pleases. But in the ordinary branches of +industry no one rich competitor has it in his power to drive +<pb n='170'/><anchor id='Pg170'/> +out all the smaller ones. Some businesses show a tendency +to pass out of the hands of small producers or dealers into a +smaller number of larger ones; but the cases in which this +happens are those in which the possession of a larger capital +permits the adoption of more powerful machinery, more +efficient by more expensive processes, or a better organized +and more economical mode of carrying on business, and this +enables the large dealer legitimately and permanently to +supply the commodity cheaper than can be done on the small +scale; to the great advantage of the consumers, and therefore +of the laboring-classes, and diminishing, <foreign rend='italic'>pro tanto</foreign>, that +waste of the resources of the community so much complained +of by Socialists, the unnecessary multiplication of mere distributors, +and of the various other classes whom Fourier calls +the parasites of industry.</q> +</p> + +<p> +<q rend='pre'>Another point on which there is much misapprehension +on the part of Socialists, as well as of trades-unionists and +other partisans of labor against capital, relates to the proportion +in which the produce of the country is really shared and +the amount of what is actually diverted from those who produce +it, to enrich other persons. When, for instance, a capitalist +invests £20,000 in his business, and draws from it an income +of (suppose) £2,000 a year, the common impression is +as if he were the beneficial owner both of the £20,000 and +of the £2,000, while the laborers own nothing but their wages. +The truth, however, is that he only obtains the £2,000 on +condition of applying no part of the £20,000 to his own +use. He has the legal control over it, and might squander +it if he chose, but if he did he would not have the +£2,000 a year also. For all personal purposes they have +the capital and he has but the profits, which it only yields +to him on condition that the capital itself is employed in +satisfying not his own wants, but those of laborers. Even +of his own share a small part only belongs to him as the +owner of capital. The portion of the produce which falls +to capital merely as capital is measured by the interest of +money, since that is all that the owner of capital obtains +<pb n='171'/><anchor id='Pg171'/> +when he contributes to production nothing except the capital +itself.</q> +</p> + +<p> +<q>The result of our review of the various difficulties of Socialism +has led us to the conclusion that the various schemes +for managing the productive resources of the country by +public instead of private agency have a case for a trial, and +some of them may eventually establish their claims to preference +over the existing order of things, but that they are at +present workable only by the <foreign rend='italic'>élite</foreign> of mankind, and have +yet to prove their power of training mankind at large to the state +of improvement which they presuppose.</q> +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_II_Chapter_I_Section_6'/> +<head>§ 6. Property in land different from property in Movables.</head> + +<p> +It is next to be considered what is included in the +idea of private property and by what considerations the application +of the principle should be bounded. +</p> + +<p> +The institution of property, when limited to its essential +elements, consists in the recognition, in each person, of a +right to the exclusive disposal of what he or she have produced +by their own exertions, or received either by gift or +by fair agreement, without force or fraud, from those who +produced it. The foundation of the whole is, the right of +producers to what they themselves have produced. Nothing +is implied in property but the right of each to his (or her) +own faculties, to what he can produce by them, and to whatever +he can get for them in a fair market: together with his +right to give this to any other person if he chooses, and the +right of that other to receive and enjoy it. +</p> + +<p> +It follows, therefore, that although the right of bequest, +or gift after death, forms part of the idea of private property, +the right of inheritance, as distinguished from bequest, does +not. That the property of persons who have made no disposition +of it during their lifetime should pass first to their +children, and, failing them, to the nearest relations, may be +a proper arrangement or not, but is no consequence of the +principle of private property. I see no reason why collateral +inheritance should exist at all. Mr. Bentham long ago proposed, +and other high authorities have agreed in the opinion, +that, if there are no heirs either in the descending or in the +<pb n='172'/><anchor id='Pg172'/> +ascending line, the property, in case of intestacy, should escheat +to the state. The parent owes to society to endeavor +to make the child a good and valuable member of it, and +owes to the children to provide, so far as depends on him, +such education, and such appliances and means, as will enable +them to start with a fair chance of achieving by their +own exertions a successful life. To this every child has a +claim; and I can not admit that as a child he has a claim to +more. +</p> + +<p> +The essential principle of property being to assure to all +persons what they have produced by their labor and accumulated +by their abstinence, this principle can not apply to what +is not the produce of labor, the raw material of the earth. If +the land derived its productive power wholly from nature, +and not at all from industry, or if there were any means of +discriminating what is derived from each source, it not only +would not be necessary, but it would be the height of injustice, +to let the gift of nature be engrossed by individuals. +[But] the use of the land in agriculture must indeed, for the +time being, be of necessity exclusive; the same person who +has plowed and sown must be permitted to reap. +</p> + +<p> +But though land is not the produce of industry, most of +its valuable qualities are so. Labor is not only requisite for +using, but almost equally so for fashioning, the instrument. +Considerable labor is often required at the commencement, +to clear the land for cultivation. In many cases, even when +cleared, its productiveness is wholly the effect of labor and +art. One of the barrenest soils in the world, composed of +the material of the Goodwin Sands, the Pays de Waes in +Flanders, has been so fertilized by industry as to have become +one of the most productive in Europe. Cultivation +also requires buildings and fences, which are wholly the produce +of labor. The fruits of this industry can not be reaped +in a short period. The labor and outlay are immediate, the +benefit is spread over many years, perhaps over all future +time. A holder will not incur this labor and outlay when +strangers and not himself will be benefited by it. If he +<pb n='173'/><anchor id='Pg173'/> +undertakes such improvements, he must have a sufficient +period before him in which to profit by them; and he is in +no way so sure of having always a sufficient period as when +his tenure is perpetual. +</p> + +<p> +These are the reasons which form the justification, in an +economical point of view, of property in land. It is seen +that they are only valid in so far as the proprietor of land is +its improver. Whenever, in any country, the proprietor, +generally speaking, ceases to be the improver, political economy +has nothing to say in defense of landed property, as there +established. +</p> + +<p> +When the <q>sacredness of property</q> is talked of, it +should always be remembered that any such sacredness +does not belong in the same degree to landed property. No +man made the land. It is the original inheritance of the +whole species. Its appropriation is wholly a question of +general expediency. When private property in land is not +expedient, it is unjust. The reverse is the case with property +in movables, and in all things the product of labor: +over these, the owner's power both of use and of exclusion +should be absolute, except where positive evil to others +would result from it; but, in the case of land, no exclusive +right should be permitted in any individual which can not +be shown to be productive of positive good. To be allowed +any exclusive right at all, over a portion of the common inheritance, +while there are others who have no portion, is +already a privilege. No quantity of movable goods which +a person can acquire by his labor prevents others from acquiring +the like by the same means; but, from the very +nature of the case, whoever owns land keeps others out +of the enjoyment of it. When land is not intended to be +cultivated, no good reason can in general be given for its +being private property at all. Even in the case of cultivated +land, a man whom, though only one among millions, the law +permits to hold thousands of acres as his single share, is not +entitled to think that all this is given to him to use and +abuse, and deal with as if it concerned nobody but himself. +<pb n='174'/><anchor id='Pg174'/> +The rents or profits which he can obtain from it are at +his sole disposal; but with regard to the land, in everything +which he does with it, and in everything which he abstains +from doing, he is morally bound, and should, whenever the +case admits, be legally compelled to make his interest and +pleasure consistent with the public good. +</p> + +</div> + +</div> + +<pb n='175'/><anchor id='Pg175'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_II_Chapter_II'/> +<head>Chapter II. Of Wages.</head> + +<div> +<index index='toc'/> +<anchor id='Book_II_Chapter_II_Section_1'/> +<head>§ 1. Of Competition and Custom.</head> + +<p> +Political economists generally, and English political +economists above others, have been accustomed to lay +almost exclusive stress upon the first of [two] agencies +[competition and custom]; to exaggerate the effect of competition, +and to take into little account the other and conflicting +principle. They are apt to express themselves as +if they thought that competition actually does, in all cases, +whatever it can be shown to be the tendency of competition +to do. This is partly intelligible, if we consider that only +through the principle of competition has political economy +any pretension to the character of a science. So far as rents, +profits, wages, prices, are determined by competition, laws +may be assigned for them. Assume competition to be their +exclusive regulator, and principles of broad generality and +scientific precision may be laid down, according to which +they will be regulated. The political economist justly deems +this his proper business: and, as an abstract or hypothetical +science, political economy can not be required to do, and indeed +can not do, anything more. But it would be a great +misconception of the actual course of human affairs to suppose +that competition exercises in fact this unlimited sway. +I am not speaking of monopolies, either natural or artificial, +or of any interferences of authority with the liberty of production +or exchange. Such disturbing causes have always +been allowed for by political economists. I speak of cases +in which there is nothing to restrain competition; no hindrance +<pb n='176'/><anchor id='Pg176'/> +to it either in the nature of the case or in artificial +obstacles; yet in which the result is not determined by +competition, but by custom or usage; competition either +not taking place at all, or producing its effect in quite a different +manner from that which is ordinarily assumed to be +natural to it. +</p> + +<quote rend='display'> +As stated by Mr. Cairnes,<note place='foot'><q>Logical Method,</q> +pp. 34, 36.</note> political economy is a science +just as is any recognized physical science—astronomy, chemistry, +physiology. The economic <q>facts we find existing are +the results of causes, between which and them the connection +is constant and invariable. It is, then, the constant relations +exhibited in economic phenomena that we have in view when +we speak of the laws of the phenomena of wealth; and in the +exposition of these laws consists the science of political economy.</q> +It is to be remembered that economic laws are <emph>tendencies</emph>, +not actual descriptions of any given conditions in this or +that place. +</quote> + +<p> +Competition, in fact, has only become in any considerable +degree the governing principle of contracts, at a comparatively +modern period. The further we look back into history, +the more we see all transactions and engagements under +the influence of fixed customs. The relations, more especially +between the land-owner and the cultivator, and the +payments made by the latter to the former, are, in all states +of society but the most modern, determined by the usage of +the country. The custom of the country is the universal +rule; nobody thinks of raising or lowering rents, or of letting +land, on other than the customary conditions. Competition, +as a regulator of rent, has no existence. +</p> + +<p> +Prices, whenever there was no monopoly, came earlier +under the influence of competition, and are much more universally +subject to it, than rents. The wholesale trade, in +the great articles of commerce, is really under the dominion +of competition. But retail price, the price paid by the +actual consumer, seems to feel very slowly and imperfectly +the effect of competition; and, when competition does exist, +<pb n='177'/><anchor id='Pg177'/> +it often, instead of lowering prices, merely divides the gains +of the high price among a greater number of dealers. The +influence of competition is making itself felt more and more +through the principal branches of retail trade in the large +towns. +</p> + +<p> +All professional remuneration is regulated by custom. +The fees of physicians, surgeons, and barristers, the charges +of attorneys, are nearly invariable. Not certainly for want +of abundant competition in those professions, but because +the competition operates by diminishing each competitor's +chance of fees, not by lowering the fees themselves. +</p> + +<p> +These observations must be received as a general correction +to be applied whenever relevant, whether expressly +mentioned or not, to the conclusions contained in the subsequent +portions of this treatise. Our reasonings must, in +general, proceed as if the known and natural effects of competition +were actually produced by it, in all cases in which +it is not restrained by some positive obstacle. Where competition, +though free to exist, does not exist, or where it +exists, but has its natural consequences overruled by any +other agency, the conclusions will fail more or less of being +applicable. To escape error, we ought, in applying the conclusions +of political economy to the actual affairs of life, to +consider not only what will happen supposing the maximum +of competition, but how far the result will be affected if +competition falls short of the maximum. +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_II_Chapter_II_Section_2'/> +<head>§ 2. The Wages-fund, and the Objections to it Considered.</head> + +<p> +Under the head of Wages are to be considered, first, +the causes which determine or influence the wages of labor +generally, and secondly, the differences that exist between +the wages of different employments. It is convenient to +keep these two classes of considerations separate; and in +discussing the law of wages, to proceed in the first instance +as if there were no other kind of labor than common unskilled +labor, of the average degree of hardness and disagreeableness. +</p> + +<p> +Competition, however, must be regarded, in the present +state of society, as the principal regulator of wages, and custom +<pb n='178'/><anchor id='Pg178'/> +or individual character only as a modifying circumstance, +and that in a comparatively slight degree. +</p> + +<p> +Wages, then, depend mainly upon the demand and supply +of labor; or, as it is often expressed, on the proportion +between population and capital. By population is here +meant the number only of the laboring-class, or rather of +those who work for hire; and by capital, only circulating +capital, and not even the whole of that, but the part which +is expended in the direct purchase of labor. To this, however, +must be added all funds which, without forming a part +of capital, are paid in exchange for labor, such as the wages +of soldiers, domestic servants, and all other unproductive +laborers. There is unfortunately no mode of expressing, by +one familiar term, the aggregate of what may be called the +wages-fund of a country: and, as the wages of productive +labor form nearly the whole of that fund, it is usual to overlook +the smaller and less important part, and to say that +wages depend on population and capital. It will be convenient +to employ this expression, remembering, however, +to consider it as elliptical, and not as a literal statement of +the entire truth. +</p> + +<p> +With these limitations of the terms, wages not only depend +upon the relative amount of capital and population, +but can not, under the rule of competition, be affected by +anything else. Wages (meaning, of course, the general rate) +can not rise, but by an increase of the aggregate funds +employed in hiring laborers, or a diminution in the number +of the competitors for hire; nor fall, except either by a +diminution of the funds devoted to paying labor, or by an +increase in the number of laborers to be paid. +</p> + +<quote rend='display'> +<p rend='text-align: center'> + <figure url='images/wages-fund.png' rend='width: 40%'> + <figDesc>Illustration: Pie chart of Fixed Capital, Raw Materials, and Wages + Fund.</figDesc> + </figure> +</p> + +<p> +This is the simple statement of the well-known Wages-Fund +Theory, which has given rise to no little animated discussion. +Few economists now assent to this doctrine when stated as +above, and without changes. The first attack on this explanation +of the rate of wages came from what is now a very scarce +pamphlet, written by F. D. Longe, entitled <q>A Refutation of +the Wage-Fund Theory of Modern Political Economy</q> (1866). +Because laborers do not really compete with each other, he +<pb n='179'/><anchor id='Pg179'/> +regarded the idea of average wages as absurd as the idea of an +average price of ships and cloth; he declared that there was no +predetermined wages-fund necessarily expended on labor; and +that <q>demand for commodities</q> determined the amount of +wealth devoted to paying wages (p. 46). While the so-called +wages-fund limits the total amount which the laborers <emph>can</emph> receive, +the employer would try to get his workmen at as much less +than that amount as possible, so that the aggregate fund would +have no bearing on the actual amount paid in wages. The +quantity of work to be done, he asserts, determines the quantity +of labor to be employed. About the same time (but unknown +to Mr. Longe), W. T. Thornton was studying the same +subject, and attracted considerable attention by his publication, +<q>On Labor</q> (1868), which in Book II, Chap. I, contained an +extended argument to show that demand and supply (i.e., the +proportion between wages-fund and laborers) did not regulate +wages, and denied the existence of a predetermined wages-fund +fixed in amount. His attack, however, assumes a very different +conception of an economic law from that which we think right to +insist upon. The character of mankind being what it is, it will +be for their interest to invest so +much and no more in labor, and +we must believe that in this sense +there is a predetermination of +wealth to be paid in wages. In +order to make good investments, +a certain amount must, if capitalists +follow their best interests, +go to the payment of labor.<note place='foot'>Cf. Cairnes, +<q>Leading Principles,</q> pp. 180-188.</note> Mr. +Thornton's argument attracted +the more attention because Mr. +Mill<note place='foot'>In the <q>Fortnightly Review,</q> May 1, +1869.</note> admitted that Mr. Thornton +had induced him to abandon his +Wages-Fund Theory. The subject +was, however, taken up, re-examined +by Mr. Cairnes,<note place='foot'><q>Leading Principles,</q> pp. 149-189.</note> +and stated in a truer form. (1.) The +total wealth of a country (circle A in the diagram) is the outside +limit of its capital. How much capital will be saved out of this +depends upon the effective desire of accumulation in the community +(as set forth in <ref target='Book_I_Chapter_VIII'>Book I, Chap. VIII</ref>). +The size of circle +B within circle A, therefore, depends on the character of the +people. The wages-fund, then, depends ultimately on the extent +of A, and proximately on the extent of B. It can never +<pb n='180'/><anchor id='Pg180'/> +be larger than B. So far, at least, its amount is <q>predetermined</q> +in the economic sense by general laws regarding the +accumulation of capital and the expectation of profit. Circle +B contracts and expands under influences which have nothing +to do with the immediate bargains between capitalists and laborers. +(2.) Another influence now comes in to affect the amount +of capital actually paid as wages, one also governed by general +causes outside the reach of laborer or capitalist, that is, the +state of the arts of production. In production, the particular +conditions of each industry will determine how much capital +is to be set apart for raw material, how much for machinery, +buildings, and all forms of fixed capital, and how many laborers +will be assigned to a given machine for a given amount of +material. With some kinds of hand-made goods the largest +share of capital goes to wages, a less amount for materials, +and a very small proportion for machinery and tools. In +many branches of agriculture and small farming this holds true. +The converse, however, is true in many manufactures, where +machinery is largely used. No two industries will maintain +the same proportion between the three elements. The nature +of the industry, therefore, will determine whether a greater or +a less share of capital will be spent in wages. It is needless to +say that this condition of things is not one to be changed at +the demand of either of the two parties to production, Labor +and Capital; it responds only to the advance of mechanical science +or general intelligence. It is impossible, then, to escape +the conclusion that general causes restrict the amount which +will, under any normal investment, go to the payment of +wages. Only within the limits set by these forces can any +further expansion or contraction take place. (3.) Within these +limits, of course, minor changes may take place, so that the +fund can not be said to be <q>fixed</q> or <q>absolutely predetermined</q>; +but these changes must take place within such narrow +limits that they do not much affect the practical side of +the question. How these changes act, may be seen in a part of +the following illustration of the above principles: +</p> + +<p> +Suppose a cotton-mill established in one of the valleys of +Vermont, for the management of which the owner has $140,000 +of capital. Of this, $100,000 is given for buildings, machinery, +and plant. If he turns over his remaining capital ($40,000) +each month, we will suppose that $28,000 spent in raw materials +will keep five hundred men occupied at a monthly expenditure +of $12,000. The present state of cotton-manufacture +itself settles the relation between a given quantity of raw cotton +and a certain amount of machinery. A fixed amount of +cotton, no more, no less, can be spun by each spindle and +woven by each loom; and the nature of the process determines +<pb n='181'/><anchor id='Pg181'/> +the number of laborers to each machine. This proportion is +something which an owner must obey, if he expects to compete +with other manufacturers: the relationship is fixed for, not by, +him. Now, each of the five hundred laborers being supposed +to receive on an average $1.00 a day, imagine an influx of a +body of French Canadians who offer to work, on an average, +for eighty cents a day.<note place='foot'>Counting six +days to a week and four weeks to a month.</note> The five hundred men will now receive +but $9,600 monthly instead of $12,000, as before, as a wages-fund; +the monthly payment for wages now is nearly seven per +cent, while formerly it was nearly nine per cent of the total +capital invested ($140,000). Thus it will be seen that the +wages-fund can change with a change in the supply of labor: +but the point to be noticed is that it is a change in the subdivision, +$12,000, of the total $140,000. That is, this alteration +can take place only within the limits set by the nature of the +industry. Now, if this $2,400 (i.e., $12,000 less $9,600) saved +out of the wages-fund were to be reinvested, it must necessarily +be divided between raw materials, fixed capital, and wages +in the existing relations, that is, only seven per cent of the new +$2,400 would be added to the wages-fund. It is worth while +calling attention to this, if for no other reason than to show +that in this way a change can be readily made in the wages-fund +by natural movements; and that no one can be so absurd +as to say that it is absolutely fixed in amount. But it certainly +is <q>predetermined</q> in the economic sense, in that any reinvestments, +as well as former funds, must necessarily be distributed +according to the above general principles, independent of +the <q>higgling</q> in the labor market. The following is Mr. +Cairnes's statement of the amount and <q>predetermination</q> of +the wages-fund: +</p> + +<p> +<q>I believe that, in the existing state of the national wealth, +the character of Englishmen being what it is, a certain prospect +of profit will <q>determine</q> a certain proportion of this +wealth to productive investment; that the amount thus <q>determined</q> +will increase as the field for investment is extended, +and that it will not increase beyond what this field can find +employment for at that rate of profit which satisfies English +commercial expectation. Further, I believe that, investment +thus taking place, the form which it shall assume will be <q>determined</q> +by the nature of the national industries—<q>determined,</q> +not under acts of Parliament, or in virtue of any physical +law, but through the influence of the investor's interests; +while this, the form of the investment, will again <q>determine</q> +the proportion of the whole capital which shall be paid as +<pb n='182'/><anchor id='Pg182'/> +wages to laborers.</q><note place='foot'><q>Leading Principles,</q> +p. 185.</note> In this excellent and masterly conception, +the doctrine of a wages-fund is not open to the objections +usually urged against it. Indeed, with the exception of Professor +Fawcett, scarcely any economist believes in an absolutely +fixed wages-fund. In this sense, then, and in view of the +above explanation, it will be understood what is meant by saying +that wages depend upon the proportion of the wages-fund +to the number of the wage-receivers.<note place='foot'>Mr. Thornton +replied to Mr. Cairnes (<q>Nineteenth Century,</q> August, 1879). +A succinct statement of the condition of the wages-fund controversy has been +made by Henry Sidgwick, <q>Fortnightly Review,</q> September 1, 1879. See also +W. G. Sumner, <q>Princeton Review,</q> <q>Wages,</q> November, 1882.</note> +</p> + +<p> +In applying these principles to the question of strikes, it is +evident enough that if they result in an actual expansion of the +whole circle B, by forcing saving from unproductive expenditure, +a real addition, of some extent, may be made to the +wages-fund; but only by increasing the total capital. If, however, +they attempt to increase one of the elements of capital, the +wages-fund, without also adding to the other elements, fixed +capital and materials, in the proportion fixed by the nature of +the industry, they will destroy all possibility of continuing that +production in the normal way, and the capitalist must withdraw +from the enterprise. +</p> + +<p> +Francis A. Walker<note place='foot'>He advanced +the same view in the <q>North American Review,</q> vol. cxx, +January, 1875. In his <q>Political Economy</q> (1883) he advances a more extensive +theory of distribution. See <q>Atlantic Monthly,</q> July, 1883, p. +129.</note> has also offered a solution of this problem +in his <q>Wages Question</q> (1876), in which he holds that +<q>wages are, in a philosophical view of the subject, paid out of +the product of present industry, and hence that production +furnishes the true measure of wages</q> (p. 128). <q>It is the +prospect of a profit in production which determines the employer +to hire laborers; it is the anticipated value of the product +which determines how much he can pay him</q> (p. 144). +No doubt wages <emph>can</emph> be (and often are) paid out of the current +product; but <emph>what</emph> amount? What is the principle of distribution? +Wherever the incoming product is a moral certainty +(and, unless this is true, in no case could wages be paid out of +the future product), saving is as effective upon it as upon the +actual accumulations of the past; and the amount of the coming +product which will be saved and used as capital is determined +by the same principles which govern the saving of past products. +An increase of circle A by a larger production makes +possible an increase of circle B, but whether it will be enlarged +<pb n='183'/><anchor id='Pg183'/> +or not depends on the principle of accumulation. The larger +the total production of wealth, the greater the <emph>possible</emph> wages, +all must admit; but it does not seem clear that General Walker +has given us a solution of the real question at issue. The +larger the house you build, the larger the rooms may be; but +it does not follow that the rooms will be necessarily large—as +any inmate of a summer hotel will testify. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_II_Chapter_II_Section_3'/> +<head>§ 3. Examination of some popular Opinions respecting Wages.</head> + +<p> +There are, however, some facts in apparent contradiction +to this [the Wages-Fund] doctrine, which it is incumbent +on us to consider and explain. +</p> + +<p> +1. For instance, it is a common saying that wages are high +when trade is good. The demand for labor in any particular +employment is more pressing, and higher wages are +paid, when there is a brisk demand for the commodity produced; +and the contrary when there is what is called a +stagnation: then work-people are dismissed, and those who +are retained must submit to a reduction of wages; though +in these cases there is neither more nor less capital than before. +This is true; and is one of those complications in the +concrete phenomena which obscure and disguise the operation +of general causes; but it is not really inconsistent with +the principles laid down. Capital which the owner does +not employ in purchasing labor, but keeps idle in his hands, +is the same thing to the laborers, for the time being, as +if it did not exist. All capital is, from the variations of +trade, occasionally in this state. A manufacturer, finding +a slack demand for his commodity, forbears to employ laborers +in increasing a stock which he finds it difficult to +dispose of; or if he goes on until all his capital is locked up +in unsold goods, then at least he must of necessity pause +until he can get paid for some of them. But no one expects +either of these states to be permanent; if he did, he would +at the first opportunity remove his capital to some other +occupation, in which it would still continue to employ labor. +The capital remains unemployed for a time, during +which the labor market is overstocked, and wages fall. +Afterward the demand revives, and perhaps becomes unusually +brisk, enabling the manufacturer to sell his commodity +<pb n='184'/><anchor id='Pg184'/> +even faster than he can produce it; his whole capital +is then brought into complete efficiency, and, if he is able, +he borrows capital in addition, which would otherwise have +gone into some other employment. These, however, are +but temporary fluctuations: the capital now lying idle will +next year be in active employment, that which is this year +unable to keep up with the demand will in its turn be locked +up in crowded warehouses; and wages in these several departments +will ebb and flow accordingly: but nothing can +permanently alter general wages, except an increase or a +diminution of capital itself (always meaning by the term, +the funds of all sorts, destined for the payment of labor) compared +with the quantity of labor offering itself to be hired. +</p> + +<p> +2. Again, it is another common notion that high prices +make high wages; because the producers and dealers, being +better off, can afford to pay more to their laborers. I have +already said that a brisk demand, which causes temporary +high prices, causes also temporary high wages. But high +prices, in themselves, can only raise wages if the dealers, +receiving more, are induced to save more, and make an +addition to their capital, or at least to their purchases of +labor. Wages will probably be temporarily higher in the +employment in which prices have risen, and somewhat lower +in other employments: in which case, while the first half of +the phenomenon excites notice, the other is generally overlooked, +or, if observed, is not ascribed to the cause which +really produced it. Nor will the partial rise of wages last +long: for, though the dealers in that one employment gain +more, it does not follow that there is room to employ a +greater amount of savings in their own business: their increasing +capital will probably flow over into other employments, +and there counterbalance the diminution previously +made in the demand for labor by the diminished savings of +other classes. +</p> + +<quote rend='display'> +<p> +A clear distinction must be made between real wages and +money wages; the former is of importance to the laborer as +being his real receipts. The quantity of commodities satisfying +<pb n='185'/><anchor id='Pg185'/> +his desires which the laborer receives for his exertion constitutes +his real wages. The mere amount of money he receives +for his exertions, irrespective of what the money will exchange +for, forms his money wages. Since the functions of money +have not yet been explained, it is difficult to discuss the relation +between prices and money wages here. But, as the total +value of the products in a certain industry is the sum out of +which both money wages and profits are paid, this total will +rise or fall (efficiency of labor remaining the same) with the +price of the particular article. If the price rises, profits will +be greater than elsewhere, and more capital will be invested in +that one business; that is, the capital will be a demand for +more labor, and, until equalization is accomplished in all trades +between wages and profits, money wages will be higher in +some trades than in others.<note place='foot'>See Cairnes, +<q>Leading Principles,</q> p. 209.</note> +</p> + +<p> +When reference is had to the connection between real +wages and prices, the question is a different one. General +high prices would not change general <emph>real wages</emph>. But if high +prices cause higher money wages in particular branches of trade, +then, because the movement is not general, there will accrue, to +those receiving more money, the means to buy more of real +wages. And, as in practice, changes in prices which arise from +an increased demand are partial, and not general, it often happens +that high prices produce high real wages (not general high +wages) in some, not in all employments. (For a further study +of this relation between prices and wages the reader is advised +to recall this discussion in connection with that in a later part +of the volume, Book III, Chaps. <ref target='Book_III_Chapter_XX'>XX</ref> and +<ref target='Book_III_Chapter_XXI'>XXI</ref>.) +</p> +</quote> + +<p> +3. Another opinion often maintained is, that wages (meaning +of course money wages) vary with the price of food; +rising when it rises, and falling when it falls. This opinion +is, I conceive, only partially true; and, in so far as true, in +no way affects the dependence of wages on the proportion +between capital and labor: since the price of food, when +it affects wages at all, affects them through that law. Dear +or cheap food caused by variety of seasons does not affect +wages (unless they are artificially adjusted to it by law or +charity): or rather, it has some tendency to affect them in +the contrary way to that supposed; since in times of scarcity +people generally compete more violently for employment, +and lower the labor market against themselves. But dearness +<pb n='186'/><anchor id='Pg186'/> +or cheapness of food, when of a permanent character, +and capable of being calculated on beforehand, may affect +wages. (1.) In the first place, if the laborers have, as is often +the case, no more than enough to keep them in working +condition and enable them barely to support the ordinary +number of children, it follows that, if food grows permanently +dearer without a rise of wages, a greater number of +the children will prematurely die; and thus wages will +ultimately be higher, but only because the number of people +will be smaller, than if food had remained cheap. (2.) +But, secondly, even though wages were high enough to admit +of food's becoming more costly without depriving the laborers +and their families of necessaries; though they could +bear, physically speaking, to be worse off, perhaps they +would not consent to be so. They might have habits of +comfort which were to them as necessaries, and sooner than +forego which, they would put an additional restraint on +their power of multiplication; so that wages would rise, +not by increase of deaths but by diminution of births. In +these cases, then, wages do adapt themselves to the price +of food, though after an interval of almost a generation.<note place='foot'>This +proposition needs to be kept in mind for the future discussion of the +cost of production of food and its relation to cost of labor. +<ref target='Book_II_Chapter_V_Section_5'>Book II, Chap. V, +§ 5</ref>.</note> +If wages were previously so high that they could bear reduction, +to which the obstacle was a high standard of comfort +habitual among the laborers, a rise of the price of food, or +any other disadvantageous change in their circumstances, +may operate in two ways: (<hi rend='italic'>a</hi>) it may correct itself by a rise +of wages, brought about through a gradual effect on the prudential +check to population; or (<hi rend='italic'>b</hi>) it may permanently lower +the standard of living of the class, in case their previous +habits in respect of population prove stronger than their +previous habits in respect of comfort. In that case the injury +done to them will be permanent, and their deteriorated +condition will become a new minimum, tending to perpetuate +<pb n='187'/><anchor id='Pg187'/> +itself as the more ample minimum did before. It is to +be feared that, of the two modes in which the cause may +operate, the last (<hi rend='italic'>b</hi>) is the most frequent, or at all events +sufficiently so to render all propositions, ascribing a self-repairing +quality to the calamities which befall the laboring-classes, +practically of no validity. +</p> + +<p> +The converse case occurs when, by improvements in agriculture, +the repeal of corn laws, or other such causes, the +necessaries of the laborers are cheapened, and they are enabled +with the same [money] wages to command greater comforts +than before. Wages will not fall immediately: it is even +possible that they may rise; but they will fall at last, so as +to leave the laborers no better off than before, unless during +this interval of prosperity the standard of comfort regarded +as indispensable by the class is permanently raised. Unfortunately +this salutary effect is by no means to be counted +upon: it is a much more difficult thing to raise, than to +lower, the scale of living which the laborers will consider as +more indispensable than marrying and having a family. +According to all experience, a great increase invariably takes +place in the number of marriages in seasons of cheap food +and full employment. +</p> + +<quote rend='display'> +<p> +This is to be seen by some brief statistics of marriages in +Vermont and Massachusetts. +</p> + +<table rend="latexcolumns: 'p{2cm} p{3cm} p{3cm}'; + tblcolumns: 'lw(20) r r'"> +<row><cell>Year.</cell><cell>Vermont</cell><cell>Massachusetts</cell></row> +<row><cell>1860</cell><cell>2,179</cell><cell>12,404</cell></row> +<row><cell>1861</cell><cell>2,188</cell><cell>10,972</cell></row> +<row><cell>1862</cell><cell>1,962</cell><cell>11,014</cell></row> +<row><cell>1863</cell><cell>2,007</cell><cell>10,873</cell></row> +<row><cell>1864</cell><cell>1,804</cell><cell>12,513</cell></row> +<row><cell>1865</cell><cell>2,569</cell><cell>13,052</cell></row> +<row><cell>1866</cell><cell>3,001</cell><cell>14,428</cell></row> +<row><cell>1867</cell><cell>2,857</cell><cell>14,451</cell></row> +</table> + +<p> +In Vermont, while the average number of marriages was +reached in 1860 and 1861, it fell off on the breaking out of the +war; rose in 1863, under the fair progress of the Northern +arms; again fell off in 1864, during +the period of discouragement; and +since 1865 has kept a steadily +higher average. In manufacturing +Massachusetts the number fell earlier +than in agricultural Vermont, +at the beginning of the difficulties. +</p> + +<table rend="latexcolumns: 'p{4cm} p{3cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell>1856, July to Jan.</cell><cell>6,418</cell></row> +<row><cell>1857, Jan. to July</cell><cell>5,803</cell></row> +<row><cell>1857, July to Jan.</cell><cell>5,936</cell></row> +<row><cell>1858, Jan. to July</cell><cell>4,917</cell></row> +<row><cell>1858, July to Jan.</cell><cell>5,610</cell></row> +</table> + +<p> +The effects of the financial panic of 1857, in Massachusetts, +<pb n='188'/><anchor id='Pg188'/> +show a similar movement in the number of marriages. The +crisis came in October, 1857. In the three months following +that date there were 400 less marriages. +</p> +</quote> + +<p> +To produce permanent advantage, the temporary cause +operating upon them must be sufficient to make a great change +in their condition—a change such as will be felt for many +years, notwithstanding any stimulus which it may give during +one generation to the increase of people. When, indeed, +the improvement is of this signal character, and a generation +grows up which has always been used to an improved scale +of comfort, the habits of this new generation in respect to +population become formed upon a higher minimum, and the +improvement in their condition becomes permanent. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Certain rare Circumstances excepted, High Wages imply Restraints +on Population.</head> + +<p> +Wages depend, then, on the proportion between the +number of the laboring population and the capital or other +funds devoted to the purchase of labor; we will say, for +shortness, the capital. If wages are higher at one time or +place than at another, if the subsistence and comfort of the +class of hired laborers are more ample, it is for no other +reason than because capital bears a greater proportion to +population. It is not the absolute amount of accumulation +or of production that is of importance to the laboring-class; +it is not the amount even of the funds destined for distribution +among the laborers; it is the proportion between those +funds and the numbers among whom they are shared. The +condition of the class can be bettered in no other way than +by altering that proportion to their advantage: and every +scheme for their benefit which does not proceed on this as its +foundation is, for all permanent purposes, a delusion. +</p> + +<p> +In countries like North America and the Australian colonies, +where the knowledge and arts of civilized life and a +high effective desire of accumulation coexist with a boundless +extent of unoccupied land, the growth of capital easily +keeps pace with the utmost possible increase of population, +and is chiefly retarded by the impracticability of obtaining +laborers enough. All, therefore, who can possibly be born +can find employment without overstocking the market: every +<pb n='189'/><anchor id='Pg189'/> +laboring family enjoys in abundance the necessaries, many +of the comforts, and some of the luxuries of life; and, unless +in case of individual misconduct, or actual inability to +work, poverty does not, and dependence need not, exist. +[In England] so gigantic has been the progress of the cotton +manufacture since the inventions of Watt and Arkwright, +that the capital engaged in it has probably quadrupled in the +time which population requires for doubling. While, therefore, +it has attracted from other employments nearly all the +hands which geographical circumstances and the habits or +inclinations of the people rendered available; and while the +demand it created for infant labor has enlisted the immediate +pecuniary interest of the operatives in favor of promoting, +instead of restraining, the increase of population; nevertheless +wages in the great seats of the manufacture are still so +high that the collective earnings of a family amount, on an +average of years, to a very satisfactory sum; and there is as +yet no sign of decrease, while the effect has also been felt +in raising the general standard of agricultural wages in the +counties adjoining. +</p> + +<p> +But those circumstances of a country, or of an occupation, +in which population can with impunity increase at its +utmost rate, are rare and transitory. Very few are the countries +presenting the needful union of conditions. Either the +industrial arts are backward and stationary, and capital therefore +increases slowly, or, the effective desire of accumulation +being low, the increase soon reaches its limit; or, even though +both these elements are at their highest known degree, the +increase of capital is checked, because there is not fresh land +to be resorted to of as good quality as that already occupied. +Though capital should for a time double itself simultaneously +with population, if all this capital and population are to +find employment on the same land, they can not, without +an unexampled succession of agricultural inventions, continue +doubling the produce; therefore, if wages do not fall, profits +must; and, when profits fall, increase of capital is slackened. +</p> + +<p> +Except, therefore, in the very peculiar cases which I have +<pb n='190'/><anchor id='Pg190'/> +just noticed, of which the only one of any practical importance +is that of a new colony, or a country in circumstances +equivalent to it, it is impossible that population should increase +at its utmost rate without lowering wages. In no old +country does population increase at anything like its utmost +rate; in most, at a very moderate rate: in some countries, +not at all. These facts are only to be accounted for in two +ways. Either the whole number of births which nature +admits of, and which happen in some circumstances, do not +take place; or, if they do, a large proportion of those who +are born, die. The retardation of increase results either from +mortality or prudence; from Mr. Malthus's positive, or from +his preventive check: and one or the other of these must +and does exist, and very powerfully too, in all old societies. +Wherever population is not kept down by the prudence +either of individuals or of the state, it is kept down by starvation +or disease. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Due Restriction of Population the only Safeguard of a Laboring-Class.</head> + +<p> +Where a laboring-class who have no property but +their daily wages, and no hope of acquiring it, refrain from +over-rapid multiplication, the cause, I believe, has always +hitherto been, either actual legal restraint, or a custom of +some sort which, without intention on their part, insensibly +molds their conduct, or affords immediate inducements not +to marry. It is not generally known in how many countries +of Europe direct legal obstacles are opposed to improvident +marriages. +</p> + +<p> +Where there is no general law restrictive of marriage, +there are often customs equivalent to it. When the guilds +or trade corporations of the middle ages were in vigor, their +by-laws or regulations were conceived with a very vigilant +eye to the advantage which the trade derived from limiting +competition; and they made it very effectually the interest +of artisans not to marry until after passing through the two +stages of apprentice and journeyman, and attaining the rank +of master. +</p> + +<p> +Unhappily, sentimentality rather than common sense +usually presides over the discussions of these subjects. Discussions +<pb n='191'/><anchor id='Pg191'/> +on the condition of the laborers, lamentations over +its wretchedness, denunciations of all who are supposed to +be indifferent to it, projects of one kind or another for improving +it, were in no country and in no time of the world +so rife as in the present generation; but there is a tacit +agreement to ignore totally the law of wages, or to dismiss +it in a parenthesis, with such terms as <q>hard-hearted Malthusianism</q>; +as if it were not a thousand times more hard-hearted +to tell human beings that they may, than that they +may not, call into existence swarms of creatures who are +sure to be miserable, and most likely to be depraved! +</p> + +<p> +I ask, then, is it true or not, that if their numbers were +fewer they would obtain higher wages? This is the question, +and no other: and it is idle to divert attention from it, +by attacking any incidental position of Malthus or some +other writer, and pretending that to refute that is to disprove +the principle of population. Some, for instance, have +achieved an easy victory over a passing remark of Mr. Malthus, +hazarded chiefly by way of illustration, that the increase +of food may perhaps be assumed to take place in an arithmetical +ratio, while population increases in a geometrical: +when every candid reader knows that Mr. Malthus laid no +stress on this unlucky attempt to give numerical precision to +things which do not admit of it, and every person capable +of reasoning must see that it is wholly superfluous to his +argument. Others have attached immense importance to +a correction which more recent political economists have +made in the mere language of the earlier followers of Mr. +Malthus. Several writers had said that it is the tendency +of population to <emph>increase faster</emph> than the means of subsistence. +The assertion was true in the sense in which they +meant it, namely, that population would in most circumstances +increase faster than the means of subsistence, if it +were not checked either by mortality or by prudence. But +inasmuch as these checks act with unequal force at different +times and places, it was possible to interpret the language of +these writers as if they had meant that population is usually +<pb n='192'/><anchor id='Pg192'/> +gaining ground upon subsistence, and the poverty of the +people becoming greater. Under this interpretation of their +meaning, it was urged that the reverse is the truth: that as +civilization advances, the prudential check tends to become +stronger, and population to slacken its rate of increase, relatively +to subsistence; and that it is an error to maintain +that population, in any improving community, tends to increase +faster than, or even so fast as, subsistence.<note place='foot'>Mr. +Carey takes this ground.</note> The word +tendency<note place='foot'>See the explanation of an economic law, +<ref target='Book_II_Chapter_II_Section_1'>Book II, Chap. II, § 1</ref>.</note> +is here used in a totally different sense from that +of the writers who affirmed the proposition; but waiving the +verbal question, is it not allowed, on both sides, that in old +countries population presses too closely upon the means of +subsistence? +</p> + +</div> + +</div> + +<pb n='193'/><anchor id='Pg193'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter III. Of Remedies For Low Wages.</head> + +<div> +<index index='toc'/> +<head>§ 1. A Legal or Customary Minimum of Wages, with a Guarantee of +Employment.</head> + +<p> +The simplest expedient which can be imagined for +keeping the wages of labor up to the desirable point would +be to fix them by law; and this is virtually the object aimed +at in a variety of plans which have at different times been, +or still are, current, for remodeling the relation between +laborers and employers. No one, probably, ever suggested +that wages should be absolutely fixed, since the interests of +all concerned often require that they should be variable; but +some have proposed to fix a minimum of wages, leaving the +variations above that point to be adjusted by competition. +Another plan, which has found many advocates among the +leaders of the operatives, is that councils should be formed, +which in England have been called local boards of trade, in +France <q>conseils de prud'hommes,</q> and other names; consisting +of delegates from the work-people and from the employers, +who, meeting in conference, should agree upon a +rate of wages, and promulgate it from authority, to be binding +generally on employers and workmen; the ground of +decision being, not the state of the labor market, but natural +equity; to provide that the workmen shall have <emph>reasonable</emph> +wages, and the capitalist reasonable profits. +</p> + +<quote rend='display'> +The one expedient most suggested by politicians and labor-reformers +in the United States is an eight-hour law, mandatory +upon all employers. It is to be remembered, however, that in +very many industries piece-work exists, and if a diminution of +hours is enforced, that will mean a serious reduction in the +amount of wages which can be possibly earned in a day. +<pb n='194'/><anchor id='Pg194'/> +Even if all industries were alike in the matter of arranging +their work, this plan means higher wages for the same work, +or the same wages for less work, and so an increased cost of +labor. This would, then, take its effect on profits at once; and +the effects would be probably seen in a withdrawal of capital +from many industries, where, as now, the profits are very low. +It must be recalled, however, that in the United States there +has been, under the influence of natural causes, unaided by +legislation, a very marked reduction in the hours of labor, accompanied +by an increase of wages. For example, in 1840, +Rhode Island operatives in the carding-room of the cotton-mills +worked fourteen hours a day for $3.28 a week, while in 1884 +they work eleven hours and receive $5.40 a week. This result +is most probably due to the gain arising from the invention of +labor-saving machinery. +</quote> + +<p> +Others again (but these are rather philanthropists interesting +themselves for the laboring-classes, than the laboring +people themselves) are shy of admitting the interference of +authority in contracts for labor: they fear that if law intervened, +it would intervene rashly and ignorantly; they are +convinced that two parties, with opposite interests, attempting +to adjust those interests by negotiation through their +representatives on principles of equity, when no rule could +be laid down to determine what was equitable, would merely +exasperate their differences instead of healing them; but +what it is useless to attempt by the legal sanction, these persons +desire to compass by the moral. Every employer, they +think, <emph>ought</emph> to give <emph>sufficient</emph> wages; and if he does it not +willingly, should be compelled to it by general opinion; the +test of sufficient wages being their own feelings, or what they +suppose to be those of the public. This is, I think, a fair +representation of a considerable body of existing opinion on +the subject. +</p> + +<p> +I desire to confine my remarks to the principle involved +in all these suggestions, without taking into account practical +difficulties, serious as these must at once be seen to be. I +shall suppose that by one or other of these contrivances +wages could be kept above the point to which they would +be brought by competition. This is as much as to say, above +the highest rate which can be afforded by the existing capital +<pb n='195'/><anchor id='Pg195'/> +consistently with employing all the laborers. For it is a +mistake to suppose that competition merely keeps down +wages. It is equally the means by which they are kept up. +When there are any laborers unemployed, these, unless maintained +by charity, become competitors for hire, and wages +fall; but when all who were out of work have found employment, +wages will not, under the freest system of competition, +fall lower. There are strange notions afloat concerning +the nature of competition. Some people seem to imagine +that its effect is something indefinite; that the competition +of sellers may lower prices, and the competition of laborers +may lower wages, down to zero, or some unassignable minimum. +Nothing can be more unfounded. Goods can only +be lowered in price by competition to the point which calls +forth buyers sufficient to take them off; and wages can only +be lowered by competition until room is made to admit all +the laborers to a share in the distribution of the wages-fund. +If they fell below this point, a portion of capital would remain +unemployed for want of laborers; a counter-competition +would commence on the side of capitalists, and wages +would rise. +</p> + +<quote rend='display'> +The assumption in the last chapter in regard to competition +and custom should be kept in mind in all this reasoning. As +a matter of fact, there is not that mobility of labor which insures +so free an operation of competition that equality of payment +always exists. In reality there is no competition at all +between the lower grades of laborers and the higher classes of +skilled labor. Of course, the <emph>tendency</emph> is as explained by Mr. +Mill, and as time goes on there is a distinctly greater mobility +of labor visible. Vast numbers pass from Scandinavia and +other countries of Europe to the United States, or from England +to Australia, urged by the desire to go from a community +of low to one of higher wages. +</quote> + +<p> +Since, therefore, the rate of wages which results from +competition distributes the whole wages-fund among the +whole laboring population, if law or opinion succeeds in +fixing wages above this rate, some laborers are kept out of +employment; and as it is not the intention of the philanthropists +that these should starve, they must be provided for +<pb n='196'/><anchor id='Pg196'/> +by a forced increase of the wages-fund—by a compulsory +saving. It is nothing to fix a minimum of wages unless +there be a provision that work, or wages at least, be found +for all who apply for it. This, accordingly, is always part +of the scheme, and is consistent with the ideas of more people +than would approve of either a legal or a moral minimum +of wages. Popular sentiment looks upon it as the duty of +the rich, or of the state, to find employment for all the poor. +If the moral influence of opinion does not induce the rich to +spare from their consumption enough to set all the poor at +work at <q>reasonable wages,</q> it is supposed to be incumbent +on the state to lay on taxes for the purpose, either by local +rates or votes of public money. The proportion between +labor and the wages-fund would thus be modified to the advantage +of the laborers, not by restriction of population, but +by an increase of capital. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. —Would Require as a Condition Legal Measures for Repression of +Population.</head> + +<p> +If this claim on society could be limited to the existing +generation; if nothing more were necessary than a compulsory +accumulation, sufficient to provide permanent employment +at ample wages for the existing numbers of the +people; such a proposition would have no more strenuous +supporter than myself. Society mainly consists of those who +live by bodily labor; and if society, that is, if the laborers, +lend their physical force to protect individuals in the enjoyment +of superfluities, they are entitled to do so, and have +always done so, with the reservation of a power to tax those +superfluities for purposes of public utility; among which +purposes the subsistence of the people is the foremost. +Since no one is responsible for having been born, no pecuniary +sacrifice is too great to be made by those who have +more than enough, for the purpose of securing enough to all +persons already in existence. +</p> + +<p> +But it is another thing altogether when those who have +produced and accumulated are called upon to abstain from +consuming until they have given food and clothing, not only +to all who now exist, but to all whom these or their descendants +may think fit to call into existence. Such an obligation +<pb n='197'/><anchor id='Pg197'/> +acknowledged and acted upon, would suspend all checks, +both positive and preventive; there would be nothing to +hinder population from starting forward at its rapidest rate; +and as the natural increase of capital would, at the best, not +be more rapid than before, taxation, to make up the growing +deficiency, must advance with the same gigantic strides. +But let them work ever so efficiently, the increasing population +could not, as we have so often shown, increase the produce +proportionally; the surplus, after all were fed, would +bear a less and less proportion to the whole produce and to +the population: and the increase of people going on in a constant +ratio, while the increase of produce went on in a diminishing +ratio, the surplus would in time be wholly absorbed; +taxation for the support of the poor would engross the whole +income of the country; the payers and the receivers would +be melted down into one mass. +</p> + +<p> +It would be possible for the state to guarantee employment +at ample wages to all who are born. But if it does +this, it is bound in self-protection, and for the sake of every +purpose for which government exists, to provide that no person +shall be born without its consent. To give profusely to +the people, whether under the name of charity or of employment, +without placing them under such influences that prudential +motives shall act powerfully upon them, is to lavish +the means of benefiting mankind without attaining the object. +But remove the regulation of their wages from their +own control; guarantee to them a certain payment, either by +law or by the feeding of the community; and no amount of +comfort that you can give them will make either them or +their descendants look to their own self-restraint as the proper +means for preserving them in that state. +</p> + +<quote rend='display'> +<p> +The famous poor-laws of Elizabeth, enacted in 1601, were +at first intended to relieve the destitute poor, sick, aged, and +impotent, but in their administration a share was given to all +who <emph>begged</emph> it. Employers, of course, found it cheaper to hire +labor partly paid for by the parish, and the independent farm-laborer +who would not go on the parish found his own wages +lowered by this kind of competition. This continued a crying +<pb n='198'/><anchor id='Pg198'/> +evil until it reached the proportions described by May: <q>As +the cost of pauperism, thus encouraged, was increasing, the +poorer rate-payers were themselves reduced to poverty. The +soil was ill-cultivated by pauper labor, and its rental consumed +by parish rates. In a period of fifty years, the poor-rates were +quadrupled, and had reached, in 1833, the enormous amount +of £8,600,000. In many parishes they were approaching the +annual value of the land itself.</q><note place='foot'><q>Constitutional +History of England,</q> vol. ii, p. 563. See also Nicholls's +<q>History of the Poor Laws,</q> vol. ii, p. 303.</note> The old poor-laws were repealed, +and there went into effect in 1834 the workhouse system, +which, while not denying subsistence to all those born, +required that the giving of aid should be made as disagreeable +as possible, in order to stimulate among the poor a feeling of +repugnance to all aid from the community. This is also the +general idea of poor-relief in the United States. +</p> + +<p> +The cultivation of the principle of self-help in each laborer +is certainly the right object at which to aim. In the United +States voluntary charitable organizations have associated together, +in some cities, in order to scrutinize all cases of poverty +through a number of visitors in each district, who advise +and counsel the unfortunate, but never give money. This system +has been very successful, and, by basing its operations on +the principle of self-help, has given the best proof of its right +to an increasing influence. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_II_Chapter_III_Section_3'/> +<head>§ 3. Allowances in Aid of Wages and the Standard of Living.</head> + +<p> +Next to the attempts to regulate wages, and provide +artificially that all who are willing to work shall receive an +adequate price for their labor, we have to consider another +class of popular remedies, which do not profess to interfere +with freedom of contract; which leave wages to be fixed by +the competition of the market, but, when they are considered +insufficient, endeavor by some subsidiary resource to make +up to the laborers for the insufficiency. Of this nature was +the allowance system. The principle of this scheme being +avowedly that of adapting the means of every family to its +necessities, it was a natural consequence that more should be +given to the married than to the single, and to those who had +large families than to those who had not: in fact, an allowance +was usually granted for every child. It is obvious that +this is merely another mode of fixing a minimum of wages. +</p> + +<p> +There is a rate of wages, either the lowest on which the +<pb n='199'/><anchor id='Pg199'/> +people can, or the lowest on which they will consent, to live. +We will suppose this to be seven shillings a week. Shocked +at the wretchedness of this pittance, the parish authorities +humanely make it up to ten. But the laborers are accustomed +to seven, and though they would gladly have more, +will live on that (as the fact proves) rather than restrain the +instinct of multiplication. Their habits will not be altered +for the better by giving them parish pay. Receiving three +shillings from the parish, they will be as well off as before, +though they should increase sufficiently to bring down wages +to four shillings. They will accordingly people down to that +point; or, perhaps, without waiting for an increase of numbers, +there are unemployed laborers enough in the workhouse +to produce the effect at once. It is well known that the allowance +system did practically operate in the mode described, +and that under its influence wages sank to a lower rate than +had been known in England before. +</p> + +<quote rend='display'> +<p> +The operation of a low standard upon the wages of those in +the community who have a higher one, has been seen in the +United States to a certain extent by the landing on our shores +of Chinese laborers, who maintain a decidedly lower standard +of living than either their American or Irish competitors. If +they come in such numbers as to retain their lower standard +by forming a group by themselves, and are thereby not assimilated +into the body +of laborers who have +a higher standard of +comfort, they can, to +the extent of their +ability to do work, +drive other laborers +out of employment. +This, moreover, is +exactly what was +done by the Irish, who +drove Americans out +of the mills of New England, and who are now being driven +out, probably, by the French Canadians, with a standard lower +than the Irish. The Chinese come here now without their +families, as may be seen by the accompanying diagram, in +which the shaded side represents the males on the left, and the +unshaded the females on the right, of the perpendicular line. +</p> + +<table rend="latexcolumns: 'l r r'; + tblcolumns: 'lw(10) r r'"> +<row><cell>Decade.</cell><cell>Males.</cell><cell>Females.</cell></row> +<row><cell>1</cell><cell>6</cell><cell>4</cell></row> +<row><cell>2</cell><cell>106</cell><cell>12</cell></row> +<row><cell>3</cell><cell>351</cell><cell>37</cell></row> +<row><cell>4</cell><cell>283</cell><cell>15</cell></row> +<row><cell>5</cell><cell>139</cell><cell>3</cell></row> +<row><cell>6</cell><cell>32</cell><cell>1</cell></row> +<row><cell>7</cell><cell>10</cell><cell>0</cell></row> +<row><cell>8</cell><cell>1</cell><cell>0</cell></row> +<row><cell>9</cell><cell>0</cell><cell>0</cell></row> +</table> + +<pb n='200'/><anchor id='Pg200'/> + +<p> +The horizontal lines show the ages, the largest number being +about thirty years of age. It will be noted how many come in +the prime of life, and how few children and females there are. +</p> + +<p> +It need hardly be said that the economic side of a question +is here discussed, which requires for its solution many ethical +and political considerations besides. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Grounds for Expecting Improvement in Public Opinion on the Subject +of Population.</head> + +<p> +By what means, then, is poverty to be contended +against? How is the evil of low wages to be remedied? +If the expedients usually recommended for the purpose are +not adapted to it, can no others be thought of? Is the +problem incapable of solution? Can political economy do +nothing, but only object to everything, and demonstrate that +nothing can be done? Those who think it hopeless that the +laboring-classes should be induced to practice a sufficient +degree of prudence in regard to the increase of their families, +because they have hitherto stopped short of that point, +show an inability to estimate the ordinary principles of +human action. Nothing more would probably be necessary +to secure that result, than an opinion generally diffused that +it was desirable. +</p> + +<p> +But let us try to imagine what would happen if the idea +became general among the laboring-class that the competition +of too great numbers was the principal cause of their +poverty. We are often told that the most thorough perception +of the dependence of wages on population will not influence +the conduct of a laboring-man, because it is not the +children he himself can have that will produce any effect in +generally depressing the labor market. True, and it is also +true that one soldier's running away will not lose the battle; +accordingly, it is not that consideration which keeps each +soldier in his rank: it is the disgrace which naturally and +inevitably attends on conduct by any one individual which, +if pursued by a majority, everybody can see would be fatal. +Men are seldom found to brave the general opinion of their +class, unless supported either by some principle higher than +regard for opinion, or by some strong body of opinion elsewhere. +</p> + +<p> +If the opinion were once generally established among the +<pb n='201'/><anchor id='Pg201'/> +laboring-class that their welfare required a due regulation +of the numbers of families, the respectable and well-conducted +of the body would conform to the prescription, and +only those would exempt themselves from it who were in +the habit of making light of social obligations generally; +and there would be then an evident justification for converting +the moral obligation against bringing children into the +world, who are a burden to the community, into a legal +one; just as in many other cases of the progress of opinion, +the law ends by enforcing against recalcitrant minorities +obligations which, to be useful, must be general, and which, +from a sense of their utility, a large majority have voluntarily +consented to take upon themselves. +</p> + +<p> +The dependence of wages on the number of the competitors +for employment is so far from hard of comprehension, +or unintelligible to the laboring-classes, that by great bodies +of them it is already recognized and habitually acted on. It +is familiar to all trades-unions: every successful combination +to keep up wages owes its success to contrivances for +restricting the number of competitors; all skilled trades are +anxious to keep down their own numbers, and many impose, +or endeavor to impose, as a condition upon employers, that +they shall not take more than a prescribed number of apprentices. +There is, of course, a great difference between limiting +their numbers by excluding other people, and doing the +same thing by a restraint imposed on themselves; but the +one as much as the other shows a clear perception of the relation +between their numbers and their remuneration. The +principle is understood in its application to any one employment, +but not to the general mass of employment. For this +there are several reasons: first, the operation of causes is +more easily and distinctly seen in the more circumscribed +field; secondly, skilled artisans are a more intelligent class +than ordinary manual laborers; and the habit of concert, +and of passing in review their general condition as +a trade, keeps up a better understanding of their collective +interests; thirdly and lastly, they are the most +<pb n='202'/><anchor id='Pg202'/> +provident, because they are the best off, and have the most +to preserve. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Twofold means of Elevating the Habits of the Laboring-People; by Education, +and by Foreign and Home Colonization.</head> + +<p> +For the purpose, therefore, of altering the habits of +the laboring people, there is need of a twofold action, directed +simultaneously upon their intelligence and their poverty. +An effective national education of the children of the laboring-class +is the first thing needful; and, coincidently with +this, a system of measures which shall (as the Revolution +did in France) extinguish extreme poverty for one whole +generation. Without entering into disputable points, it may +be asserted without scruple that the aim of all intellectual +training for the mass of the people should be to cultivate +common sense; to qualify them for forming a sound practical +judgment of the circumstances by which they are surrounded. +[But] education is not compatible with extreme +poverty. It is impossible effectually to teach an indigent +population. Toward effecting this object there are two resources +available, without wrong to any one, without any of +the liabilities of mischief attendant on voluntary or legal +charity, and not only without weakening, but on the contrary +strengthening, every incentive to industry, and every +motive to forethought. +</p> + +<p> +The first is a great national measure of colonization. I +mean, a grant of public money, sufficient to remove at once, +and establish in the colonies, a considerable fraction of the +youthful agricultural population. It has been shown by +others that colonization on an adequate scale might be so +conducted as to cost the country nothing, or nothing that +would not be certainly repaid; and that the funds required, +even by way of advance, would not be drawn from the capital +employed in maintaining labor, but from that surplus +which can not find employment at such profit as constitutes +an adequate remuneration for the abstinence of the possessor, +and which is therefore sent abroad for investment, or wasted +at home in reckless speculations. +</p> + +<p> +The second resource would be to devote all common +land, hereafter brought into cultivation, to raising a class of +<pb n='203'/><anchor id='Pg203'/> +small proprietors. What I would propose is, that common +land should be divided into sections of five acres or thereabout, +to be conferred in absolute property on individuals +of the laboring-class who would reclaim and bring them into +cultivation by their own labor. +</p> + +<quote rend='display'> +This suggestion works to the same purpose as the proposal +that our Government should retain its public lands and aid in +the formation of a great number of small farmers, rather than, +by huge grants, to foster large holdings in the Western States +and Territories.<note place='foot'>For further discussion of +the advantages of small holdings, see <ref target='Book_IV_Chapter_V_Section_2'>Book IV, +Chap. V, § 2</ref>.</note> +</quote> + +<p> +The preference should be given to such laborers, and +there are many of them, as had saved enough to maintain +them until their first crop was got in, or whose character +was such as to induce some responsible person to advance +to them the requisite amount on their personal security. +The tools, the manure, and in some cases the subsistence +also, might be supplied by the parish, or by the state; interest +for the advance, at the rate yielded by the public funds, +being laid on as a perpetual quitrent, with power to the +peasant to redeem it at any time for a moderate number of +years' purchase. These little landed estates might, if it were +thought necessary, be indivisible by law; though, if the plan +worked in the manner designed, I should not apprehend any +objectionable degree of subdivision. In case of intestacy, +and in default of amicable arrangement among the heirs, +they might be bought by government at their value, and re-granted +to some other laborer who could give security for the +price. The desire to possess one of these small properties +would probably become, as on the Continent, an inducement +to prudence and economy pervading the whole laboring population; +and that great desideratum among a people of hired +laborers would be provided, an intermediate class between +them and their employers; affording them the double advantage +of an object for their hopes, and, as there would be +good reason to anticipate, an example for their imitation. +</p> + +<pb n='204'/><anchor id='Pg204'/> + +<p> +It would, however, be of little avail that either or both +of these measures of relief should be adopted, unless on such +a scale as would enable the whole body of hired laborers +remaining on the soil to obtain not merely employment, but +a large addition to the present wages—such an addition as +would enable them to live and bring up their children in a +degree of comfort and independence to which they have +hitherto been strangers. +</p> + +</div> + +</div> + +<pb n='205'/><anchor id='Pg205'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter IV. Of The Differences Of Wages In Different Employments.</head> + +<div> +<index index='toc'/> +<head>§ 1. Differences of Wages Arising from Different Degrees of Attractiveness in +Different Employments.</head> + +<p> +In treating of wages, we have hitherto confined ourselves +to the causes which operate on them generally, and +<foreign rend='italic'>en masse</foreign>; the laws which govern the remuneration of +ordinary or average labor, without reference to the existence of +different kinds of work which are habitually paid at different +rates, depending in some degree on different laws. We +will now take into consideration these differences, and examine +in what manner they affect or are affected by the conclusions +already established. +</p> + +<p> +The differences, says [Adam Smith], arise partly <q>from +certain circumstances in the employments themselves, which +either really, or at least in the imaginations of men, make +up for a small pecuniary gain in some, and counterbalance +a great one in others.</q> These circumstances he considers to +be: <q>First, the agreeableness or disagreeableness of the employments +themselves; secondly, the easiness and cheapness, +or the difficulty and expense of learning them; thirdly, the +constancy or inconstancy of employment in them; fourthly, +the small or great trust which must be reposed in those who +exercise them; and, fifthly, the probability or improbability +of success in them.</q> +</p> + +<p> +(1.) <q>The wages of labor vary with the ease or hardship, +the cleanliness or dirtiness, the honorableness or dishonorableness +of the employment. A journeyman blacksmith, +though an artificer, seldom earns so much in twelve hours +as a collier, who is only a laborer, does in eight. His work +<pb n='206'/><anchor id='Pg206'/> +is not quite so dirty, is less dangerous, and is carried on in +daylight and above ground. Honor makes a great part of +the reward of all honorable professions. In point of pecuniary +gain, all things considered,</q> their recompense is, in his +opinion, below the average. <q>Disgrace has the contrary +effect. The trade of a butcher is a brutal and an odious +business; but it is in most places more profitable than the +greater part of common trades. The most detestable of all +employments, that of the public executioner, is, in proportion +to the quantity of work done, better paid than any common +trade whatever.</q> +</p> + +<p> +(2.) <q>Employment is much more constant,</q> continues +Adam Smith, <q>in some trades than in others. In the greater +part of manufactures, a journeyman may be pretty sure +of employment almost every day in the year that he is able +to work. A mason or brick-layer, on the contrary, can work +neither in hard frost nor in foul weather, and his employment +at all other times depends upon the occasional calls of +his customers. He is liable, in consequence, to be frequently +without any. What he earns, therefore, while he is employed, +must not only maintain him while he is idle, but +make him some compensation for those anxious and desponding +moments which the thought of so precarious a situation +must sometimes occasion.</q> +</p> + +<p> +<q>When (1) the inconstancy of the employment is combined +with (2) the hardship, disagreeableness, and dirtiness +of the work, it sometimes raises the wages of the most common +labor above those of the most skillful artificers. A +collier working by the piece is supposed, at Newcastle, to +earn commonly about double, and in many parts of Scotland +about three times, the wages of common labor. His high +wages arise altogether from the hardship, disagreeableness, +and dirtiness of his work. His employment may, upon most +occasions, be as constant as he pleases. The coal-heavers in +London exercise a trade which in hardship, dirtiness, and +disagreeableness almost equals that of colliers; and from +the unavoidable irregularity in the arrivals of coal-ships, the +<pb n='207'/><anchor id='Pg207'/> +employment of the greater part of them is necessarily very +inconstant. If colliers, therefore, commonly earn double and +triple the wages of common labor, it ought not to seem unreasonable +that coal-heavers should sometimes earn four or +five times those wages. In the inquiry made into their condition +a few years ago, it was found that, at the rate at which +they were then paid, they could earn about four times the +wages of common labor in London.</q> +</p> + +<p> +These inequalities of remuneration, which are supposed +to compensate for the disagreeable circumstances of particular +employments, would, under certain conditions, be natural +consequences of perfectly free competition: and as between +employments of about the same grade, and filled by nearly +the same description of people, they are, no doubt, for the +most part, realized in practice. +</p> + +<p> +But it is altogether a false view of the state of facts to +present this as the relation which generally exists between +agreeable and disagreeable employments. The really exhausting +and the really repulsive labors, instead of being +better paid than others, are almost invariably paid the worst +of all, because performed by those who have no choice. If +the laborers in the aggregate, instead of exceeding, fell short +of the amount of employment, work which was generally +disliked would not be undertaken, except for more than +ordinary wages. But when the supply of labor so far exceeds +the demand that to find employment at all is an uncertainty, +and to be offered it on any terms a favor, the case is +totally the reverse. Partly from this cause, and partly from +the natural and artificial monopolies, which will be spoken of +presently, the inequalities of wages are generally in an opposite +direction to the equitable principle of compensation, +erroneously represented by Adam Smith as the general law +of the remuneration of labor. +</p> + +<p> +(3.) One of the points best illustrated by Adam Smith is +the influence exercised on the remuneration of an employment +by the uncertainty of success in it. If the chances are +great of total failure, the reward in case of success must be +<pb n='208'/><anchor id='Pg208'/> +sufficient to make up, in the general estimation, for those +adverse chances. Put your son apprentice to a shoemaker, +there is little doubt of his learning to make a pair of shoes; +but send him to study the law, it is at least twenty to one if +ever he makes such proficiency as will enable him to live by +the business. In a perfectly fair lottery, those who draw the +prizes ought to gain all that is lost by those who draw the +blanks. In a profession where twenty fail for one that succeeds, +that one ought to gain all that should have been gained +by the unsuccessful twenty. How extravagant soever the +fees of counselors-at-law may sometimes appear, their real +retribution is never equal to this. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Differences arising from Natural Monopolies.</head> + +<p> +The preceding are cases in which inequality of +remuneration is necessary to produce equality of attractiveness, +and are examples of the equalizing effect of free competition. +The following are cases of real inequality, and +arise from a different principle. +</p> + +<p> +(4.) <q>The wages of labor vary according to the small or +great trust which must be reposed in the workmen. The +wages of goldsmiths and jewelers are everywhere superior +to those of many other workmen, not only of equal but of +much superior ingenuity, on account of the precious materials +with which they are intrusted.</q> The superiority of +reward is not here the consequence of competition, but of its +absence: not a compensation for disadvantages inherent in +the employment, but an extra advantage; a kind of monopoly +price, the effect not of a legal, but of what has been termed +a natural monopoly. If all laborers were trustworthy, it +would not be necessary to give extra pay to working goldsmiths +on account of the trust. The degree of integrity required +being supposed to be uncommon, those who can make +it appear that they possess it are able to take advantage of +the peculiarity, and obtain higher pay in proportion to its +rarity. +</p> + +<quote rend='display'> +This same explanation of a natural monopoly applies exactly +to the causes which give able executive managers, who +watch over productive operations, the usually high rewards for +<pb n='209'/><anchor id='Pg209'/> +labor under the name of <q>wages of superintendence.</q> If successful +managers of cotton or woolen mills were as plentiful, in +proportion to the demand for them, as ordinary artisans, in +proportion to the demand for them, then the former would get +no higher rewards than the latter. Able executive and business +managers secure high wages solely on the ground—as explained +above—of monopoly; that is, because their numbers, +owing to natural causes, are few relatively to the demand for +them in every industry in the land. +</quote> + +<p> +(5.) Some employments require a much longer time to +learn, and a much more expensive course of instruction, than +others; and to this extent there is, as explained by Adam +Smith, an inherent reason for their being more highly remunerated. +Wages, consequently, must yield, over and above +the ordinary amount, an annuity sufficient to repay these +sums, with the common rate of profit, within the number of +years [the laborer] can expect to live and be in working condition. +</p> + +<p> +But, independently of these or any other artificial monopolies, +there is a natural monopoly in favor of skilled +laborers against the unskilled, which makes the difference of +reward exceed, sometimes in a manifold proportion, what is +sufficient merely to equalize their advantages. But the fact +that a course of instruction is required, of even a low degree +of costliness, or that the laborer must be maintained for a +considerable time from other sources, suffices everywhere to +exclude the great body of the laboring people from the possibility +of any such competition. Until lately, all employments +which required even the humble education of reading +and writing could be recruited only from a select class, the +majority having had no opportunity of acquiring those attainments. +</p> + +<quote rend='display'> +Here is found the germ of the idea, which has been elaborately +worked out by Mr. Cairnes<note place='foot'><q>Leading Principles,</q> +pp. 64-69.</note> in his theory of non-competing +groups of laborers: <q>What we find, in effect, is not a +whole population competing indiscriminately for all occupations, +but a series of industrial layers superposed on one another, +within each of which the various candidates for employment +<pb n='210'/><anchor id='Pg210'/> +possess a real and effective power of selection, while +those occupying the several strata are, for all purposes of +effective competition, practically isolated from each other.</q> +(Mr. Mill certainly understood this fully, and stated it clearly +again in <ref target='Book_III_Chapter_II_Section_2'>Book III, Chap. II, § 2</ref>.) +</quote> + +<p> +The changes, however, now so rapidly taking place in +usages and ideas, are undermining all these distinctions; the +habits or disabilities which chained people to their hereditary +condition are fast wearing away, and every class is exposed +to increased and increasing competition from at least the +class immediately below it. The general relaxation of conventional +barriers, and the increased facilities of education +which already are, and will be in a much greater degree, +brought within the reach of all, tend to produce, among +many excellent effects, one which is the reverse: they tend +to bring down the wages of skilled labor. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Effect on Wages of the Competition of Persons having other Means of +Support.</head> + +<p> +A modifying circumstance still remains to be noticed, +which interferes to some extent with the operation of +the principles thus far brought to view. While it is true, as +a general rule, that the earnings of skilled labor, and especially +of any labor which requires school education, are at a +monopoly rate, from the impossibility, to the mass of the +people, of obtaining that education, it is also true that the +policy of nations, or the bounty of individuals, formerly did +much to counteract the effect of this limitation of competition, +by offering eleemosynary instruction to a much larger +class of persons than could have obtained the same advantages +by paying their price. +</p> + +<p> +[Adam Smith has pointed out that] <q>whenever the law +has attempted to regulate the wages of workmen, it has always +been rather to lower them than to raise them. But the +law has upon many occasions attempted to raise the wages of +curates, and, for the dignity of the Church, to oblige the +rectors of parishes to give them more than the wretched +maintenance which they themselves might be willing to accept +of. And in both cases the law seems to have been +equally ineffectual, and has never been either able to raise +<pb n='211'/><anchor id='Pg211'/> +the wages of curates or to sink those of laborers to the degree +that was intended, because it has never been able to hinder +either the one from being willing to accept of less than the +legal allowance, on account of the indigence of their situation +and the multitude of their competitors, or the other +from receiving more, on account of the contrary competition +of those who expected to derive either profit or pleasure from +employing them.</q> +</p> + +<p> +Although the highest pecuniary prizes of successful authorship +are incomparably greater than at any former period, +yet on any rational calculation of the chances, in the existing +competition, scarcely any writer can hope to gain a living by +books, and to do so by magazines and reviews becomes daily +more difficult. It is only the more troublesome and disagreeable +kinds of literary labor, and those which confer no personal +celebrity, such as most of those connected with newspapers, +or with the smaller periodicals, on which an educated +person can now rely for subsistence. Of these, the remuneration +is, on the whole, decidedly high; because, though exposed +to the competition of what used to be called <q>poor +scholars</q> (persons who have received a learned education +from some public or private charity), they are exempt from +that of amateurs, those who have other means of support +being seldom candidates for such employments. +</p> + +<p> +When an occupation is carried on chiefly by persons who +derive the main portion of their subsistence from other +sources, its remuneration may be lower almost to any extent +than the wages of equally severe labor in other employments. +The principal example of the kind is domestic +manufactures. When spinning and knitting were carried on +in every cottage, by families deriving their principal support +from agriculture, the price at which their produce was sold +(which constituted the remuneration of their labor) was often +so low that there would have been required great perfection +of machinery to undersell it. The amount of the remuneration +in such a case depends chiefly upon whether the quantity +of the commodity produced by this description of labor +<pb n='212'/><anchor id='Pg212'/> +suffices to supply the whole of the demand. If it does not, +and there is consequently a necessity for some laborers who +devote themselves entirely to the employment, the price of +the article must be sufficient to pay those laborers at the ordinary +rate, and to reward, therefore, very handsomely the domestic +producers. But if the demand is so limited that the +domestic manufacture can do more than satisfy it, the price +is naturally kept down to the lowest rate at which peasant +families think it worth while to continue the production. +Thus far, as to the remuneration of the subsidiary employment; +but the effect to the laborers of having this additional +resource is almost certain to be (unless peculiar counteracting +causes intervene) a proportional diminution of the wages +of their main occupation. +</p> + +<p> +For the same reason it is found that, +<foreign lang='la' rend='italic'>cæteris paribus</foreign>, +those trades are generally the worst paid in which the wife +and children of the artisan aid in the work. The income +which the habits of the class demand, and down to which +they are almost sure to multiply, is made up in those trades +by the earnings of the whole family, while in others the +same income must be obtained by the labor of the man alone. +It is even probable that their collective earnings will amount +to a smaller sum than those of the man alone in other trades, +because the prudential restraint on marriage is unusually weak +when the only consequence immediately felt is an improvement +of circumstances, the joint earnings of the two going +further in their domestic economy after marriage than before. +</p> + +<quote rend='display'> +<p> +This statement seems to be borne out by the statistics of +wages<note place='foot'>See Young, <q>Labor in +Europe.</q></note> both in England and the United States. In our cotton-mills, +where women do certain kinds of work equally well with +men, the wages of the men are lower than in outside employments +into which women can not enter. +</p> + +<p> +Blacksmiths, per week: $16.74<lb/> +Family of four: Drawers-in, cotton-mill—man, per week: $5.50<lb/> +Family of four: Drawers-in, cotton-mill—woman, per week: $5.50<lb/> +Family of four: Tenders, two boys: $4.50<lb/> +Total: $15.50 +</p> + +<pb n='213'/><anchor id='Pg213'/> + +<p> +In this case the family of four all together receive only +about the same as the wages of the single blacksmith alone. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Wages of Women, why Lower than those of Men.</head> + +<p> +Where men and women work at the same employment, +if it be one for which they are equally fitted in point +of physical power, they are not always unequally paid. +Women in factories sometimes earn as much as men; and +so they do in hand-loom weaving, which, being paid by the +piece, brings their efficiency to a sure test. When the efficiency +is equal, but the pay unequal, the only explanation that +can be given is custom. But the principal question relates +to the peculiar employments of women. The remuneration +of these is always, I believe, greatly below that of employments +of equal skill and equal disagreeableness carried on +by men. In some of these cases the explanation is evidently +that already given: as in the case of domestic servants, whose +wages, speaking generally, are not determined by competition, +but are greatly in excess of the market value of the +labor, and in this excess, as in almost all things which are +regulated by custom, the male sex obtains by far the largest +share. In the occupations in which employers take full advantage +of competition, the low wages of women, as compared +with the ordinary earnings of men, are a proof that +the employments are overstocked: that although so much +smaller a number of women than of men support themselves +by wages, the occupations which law and usage make +accessible to them are comparatively so few that the field of +their employment is still more overcrowded. +</p> + +<quote rend='display'> +Yet within the employments open to women, such as millinery +and dress-making, certain women are able to charge +excessively high prices for work, because, having obtained a +reputation for especial skill and taste, they can exact in the +high prices of their articles what is really their high wages. +Within these employments women are unable to earn a living +not so much by the lack of work, as by not bringing to their +occupation that amount of skill and those business qualities +(owing, of course, to their being brought up unaccustomed to +business methods) which are requisite for the success of any +one, either man or woman. +</quote> + +<pb n='214'/><anchor id='Pg214'/> + +<p> +It must be observed that, as matters now stand, a sufficient +degree of overcrowding may depress the wages of +women to a much lower minimum than those of men. The +wages, at least of single women, must be equal to their support, +but need not be more than equal to it; the minimum, +in their case, is the pittance absolutely requisite for the +sustenance of one human being. Now the lowest point +to which the most superabundant competition can permanently +depress the wages of a man is always somewhat more +than this. Where the wife of a laboring-man does not by +general custom contribute to his earnings, the man's wages +must be at least sufficient to support himself, a wife, and +a number of children adequate to keep up the population, +since, if it were less, the population would not be +kept up. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Differences of Wages Arising from Laws, Combinations, or Customs.</head> + +<p> +Thus far we have, throughout this discussion, proceeded +on the supposition that competition is free, so far as +regards human interference; being limited only by natural +causes, or by the unintended effect of general social circumstances. +But law or custom may interfere to limit competition. +If apprentice laws, or the regulations of corporate +bodies, make the access to a particular employment slow, +costly, or difficult, the wages of that employment may be +kept much above their natural proportion to the wages of +common labor. In some trades, however, and to some extent, +the combinations of workmen produce a similar effect. +Those combinations always fail to uphold wages at an artificial +rate unless they also limit the number of competitors. +Putting aside the atrocities sometimes committed by workmen +in the way of personal outrage or intimidation, which +can not be too rigidly repressed, if the present state of the +general habits of the people were to remain forever unimproved, +these partial combinations, in so far as they do succeed +in keeping up the wages of any trade by limiting its +numbers, might be looked upon as simply intrenching round +a particular spot against the inroads of over-population, and +making the wages of the class depend upon their own rate of +<pb n='215'/><anchor id='Pg215'/> +increase, instead of depending on that of a more reckless and +improvident class than themselves. +</p> + +<p> +To conclude this subject, I must repeat an observation +already made, that there are kinds of labor of which the +wages are fixed by custom, and not by competition. Such +are the fees or charges of professional persons—of physicians, +surgeons, barristers, and even attorneys. +</p> + +</div> + +</div> + +<pb n='216'/><anchor id='Pg216'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_II_Chapter_V'/> +<head>Chapter V. Of Profits.</head> + +<div> +<index index='toc'/> +<anchor id='Book_II_Chapter_V_Section_1'/> +<head>§ 1. Profits include Interest and Risk; but, correctly speaking, do not +include Wages of Superintendence.</head> + +<p> +Having treated of the laborer's share of the produce, +we next proceed to the share of the capitalist; the profits of +capital or stock; the gains of the person who advances the +expenses of production—who, from funds in his possession, +pays the wages of the laborers, or supports them during the +work; who supplies the requisite buildings, materials, and +tools or machinery; and to whom, by the usual terms of the +contract, the produce belongs, to be disposed of at his pleasure. +After indemnifying him for his outlay, there commonly +remains a surplus, which is his profit; the net income +from his capital [and skill]; the amount which he can afford +to expend in necessaries or pleasures, or from which by further +saving he can add to his wealth. +</p> + +<p> +As the wages of the laborer are the remuneration of labor, +so [a part of] the profits of the capitalist are properly, +according to Mr. Senior's well-chosen expression, the remuneration +of abstinence. They are what he gains by forbearing +to consume his capital for his own uses, and allowing it +to be consumed by productive laborers for their uses. For +this forbearance he requires a recompense. +</p> + +<p> +Of the gains, however, which the possession of a capital +enables a person to make, (1) a part only is properly an +equivalent for the use of the capital itself; namely, as much +as a solvent person would be willing to pay for the loan of it. +This, which as everybody knows is called interest, is all that +a person is enabled to get by merely abstaining from the +<pb n='217'/><anchor id='Pg217'/> +immediate consumption of his capital, and allowing it to be +used for productive purposes by others. The remuneration +which is obtained in any country for mere abstinence is +measured by the current rate of interest on the best security; +such security as precludes any appreciable chance of losing +the principal. What a person expects to gain, who superintends +the employment of his own capital, is always more, and +generally much more, than this. The rate of profit greatly +exceeds the rate of interest. (2.) The surplus is partly compensation +for risk. By lending his capital on unexceptionable +security he runs little or no risk. But if he embarks in +business on his own account, he always exposes his capital to +some, and in many cases to very great, danger of partial or +total loss. For this danger he must be compensated, otherwise +he will not incur it. (3.) He must likewise be remunerated +for the devotion of his time and labor. The control of +the operations of industry usually belongs to the person who +supplies the whole or the greatest part of the funds by which +they are carried on, and who, according to the ordinary arrangement, +is either alone interested, or is the person most +interested (at least directly), in the result. To exercise this +control with efficiency, if the concern is large and complicated, +requires great assiduity, and often no ordinary skill. +This assiduity and skill must be remunerated. +</p> + +<p> +The gross profits from capital, the gains returned to those +who supply the funds for production, must suffice for these +three purposes; and the three parts into which profit may +be considered as resolving itself may be described respectively +as interest, insurance, and wages of superintendence. +</p> + +<quote rend='display'> +Inasmuch as risk is the cause affecting the rate of interest, +it would be much simpler to consider the whole reward for abstinence +as interest, the rate of which is affected by the risk; +and to carefully exclude from the profits of capital the payment +for <q>assiduity and skill,</q> which is distinctly wages of labor. +The <q>wages of superintendence,</q> as every one on a moment's +reflection must admit, have no necessary connection whatever +with the possession of capital. The thing with which the laborer +is occupied does not give the reason for associating his +<pb n='218'/><anchor id='Pg218'/> +wages with the name of that thing; because a highly-qualified +manager supervises the operations of capital, it does not follow +that he has capital, or should be regarded as being paid for the +possession of capital. The man who shovels ashes is not paid +wages of ashes, any more than a man who superintends other +people's capital is paid the reward of capital. The payment +for services, in the one case as in the other, depends upon the +skill of the manager, just as it does with an ordinary mechanic, +rising or falling with his fitness for the peculiar work. Skill +as a manager is the cause; the amount of the remuneration is +the consequence. If so, then the wages of superintendence +have no logical connection, in the economic sense, with capital +as the thing which determines the amount of its reward, +any more than it affects the wages of any and all labor. The +payment for the use of capital, simply as capital, may be seen +by the amount which a widow who is not engaged in active +business receives from her property invested as trust funds. +Moreover, it is less and less true that the manager of the operations +of industry is necessarily the capitalist. To see this, +mark the executive managers (called <q>treasurers</q> by custom) +of cotton and woolen mills, who receive a remuneration entirely +distinct from any capital they may have invested in the +shares of the corporation; and the officials of the great mutual +insurance companies, who receive the wages of managers, but +for managing the capital of others. A large—by far the largest—part +of what is usually called profit, therefore, should be +treated as wages, and the forces which govern its amount are +the same as those affecting the amounts of all other kinds of +wages, such as are discussed in the preceding chapter. The +acknowledgment of this distinction is of extreme importance, +and affects, in a profound way, the whole question of distribution. +To include <q>wages of superintendence</q> in profits of +capital is to unnecessarily complicate one of the most serious +economic questions—namely, the relations of capital and labor. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. The Minimum of Profits; what produces Variations in the Amount +of Profits.</head> + +<p> +The lowest rate of profit that can permanently exist +is that which is barely adequate, at the given place and time, +to afford an equivalent for the abstinence, risk, and exertion +implied in the employment of capital. From the gross profit +has first to be deducted as much as will form a fund sufficient +on the average to cover all losses incident to the employment. +Next, it must afford such an equivalent to the owner +of the capital for forbearing to consume it as is then and +there a sufficient motive to him to persist in his abstinence. +How much will be required to form this equivalent depends +<pb n='219'/><anchor id='Pg219'/> +on the comparative value placed, in the given society, upon +the present and the future (in the words formerly used): on +the strength of the effective desire of accumulation. Further, +after covering all losses, and remunerating the owner +for forbearing to consume, there must be something left to +recompense the labor and skill of the person who devotes +his time to the business. +</p> + +<p> +Such, then, is the minimum of profits: but that minimum +is exceedingly variable, and at some times and places +extremely low, on account of the great variableness of two +out of its three elements. That the rate of necessary remuneration +for abstinence, or in other words the effective desire +of accumulation, differs widely in different states of society +and civilization, has been seen in a former chapter. There +is a still wider difference in the element which consists in +compensation for risk. +</p> + +<p> +The remuneration of capital in different employments, +much more than the remuneration of labor, varies according +to the circumstances which render one employment more attractive +or more repulsive than another. The profits, for example, +of retail trade, in proportion to the capital employed, +exceed those of wholesale dealers or manufacturers, for this +reason among others, that there is less consideration attached +to the employment. The greatest, however, of these differences, +is that caused by difference of risk. The profits of a +gunpowder-manufacturer must be considerably greater than +the average, to make up for the peculiar risks to which he +and his property are constantly exposed. When, however, +as in the case of marine adventure, the peculiar risks are +capable of being, and commonly are, commuted for a fixed +payment, the premium of insurance takes its regular place +among the charges of production, and the compensation +which the owner of the ship or cargo receives for that payment +does not appear in the estimate of his profits, but is +included in the replacement of his capital. +</p> + +<quote rend='display'> +The minimum of profits can not properly include wages of +superintendence, nor is it so included, practically, in Mr. Mill's +<pb n='220'/><anchor id='Pg220'/> +discussions on the minimum of profits in a later part of this +volume. The operation of the various elements in changing the +amount of profits might be expressed as follows: As between +different countries and communities, who have a different effective +desire of accumulation, profits may vary with the element +of interest and risk; within the same district, where interest +is generally the same on the same security, profits may +vary with the risk attached to different industries; and, within +the same occupations, interest and risk being given, the wages +of superintendence may make a greater variation than either +of the other two causes—since a skillful manager may make a +large return, a poor one none at all. Or between two employments, +interest and risk remaining the same, wages of superintendence +sometimes produce a wide difference. +</quote> + +<p> +The portion, too, of the gross profit, which forms the +remuneration for the labor and skill of the dealer or producer, +is very different in different employments. This is +the explanation always given of the extraordinary rate of +apothecaries' profit. There are cases, again, in which a considerable +amount of labor and skill is required to conduct a +business necessarily of limited extent. In such cases a higher +than common rate of profit is necessary to yield only the +common rate of remuneration. +</p> + +<p> +All the natural monopolies (meaning thereby those which +are created by circumstances, and not by law) which produce +or aggravate the disparities in the remuneration of different +kinds of labor, operate similarly between different employments +of capital. +</p> + +<quote rend='display'> +In this passage Mr. Mill points out distinctly that the movement +up and down in the wages of a manager are governed by +the same laws as those which regulate differences in the different +rewards of labor, but yet he connects it improperly with +capital. It will be seen that Mr. Mill uses the term <q>gross +profit</q> on the next page in order to avoid the difficulty, which +rises unconsciously in his mind, of the anomalous presence of +the wages of the manager in the question of profit. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. General Tendency of Profits to an Equality.</head> + +<p> +After due allowance is made for these various causes +of inequality, namely, difference in the risk or agreeableness +of different employments, and natural or artificial monopolies +[which give greater or less wages of superintendence], +<pb n='221'/><anchor id='Pg221'/> +the rate of profit on capital in all employments tends +to an equality. That portion of profit which is properly +interest, and which forms the real remuneration for abstinence, +is strictly the same at the same time and place, whatever +be the employment. The rate of interest, on equally +good security, does not vary according to the destination of +the principal, though it does vary from time to time very +much, according to the circumstances of the market. +</p> + +<p> +It is far otherwise with gross profit, which, though (as +will presently be seen) it does not vary much from employment +to employment, varies very greatly from individual to +individual, and can scarcely be in any two cases the same. +It depends on the knowledge, talents, economy, and energy +of the capitalist himself, or of the agents whom he employs; +on the accidents of personal connection; and even on chance. +Hardly any two dealers in the same trade, even if their commodities +are equally good and equally cheap, carry on their +business at the same expense, or turn over their capital in +the same time. That equal capitals give equal profits, as a +general maxim of trade, would be as false as that equal age +or size gives equal bodily strength, or that equal reading or +experience gives equal knowledge. The effect depends as +much upon twenty other things as upon the single cause +specified. On an average (whatever may be the occasional +fluctuations) the various employments of capital are on such +a footing as to hold out, not equal profits, but equal expectations +of profit, to persons of average abilities and advantages. +By equal, I mean after making compensation for any +inferiority in the agreeableness or safety of an employment. +If the case were not so; if there were, evidently, and to +common experience, more favorable chances of pecuniary +success in one business than in others, more persons would +engage their capital in the business. If, on the contrary, a +business is not considered thriving; if the chances of profit +in it are thought to be inferior to those in other employments; +capital gradually leaves it, or at least new capital is +not attracted to it; and by this change in the distribution of +<pb n='222'/><anchor id='Pg222'/> +capital between the less profitable and the more profitable +employments, a sort of balance is restored. +</p> + +<p rend='text-align: center'> + <figure url='images/capital-profitability.png' rend='width: 80%'> + <figDesc>Illustration: Parallel vertical lines AB and GD, with horizontal +lines EG and FC joining them.</figDesc> + </figure> +</p> + +<quote rend='display'> +This may be easily shown by a diagram in +which the capital in one employment is represented +by <hi rend='italic'>A B</hi>, and which exceeds <hi rend='italic'>C D</hi>, that in +another employment, by the amount of <hi rend='italic'>A F</hi>. It +is not necessary that the whole of the excess, +<hi rend='italic'>A F</hi> should be transferred to <hi rend='italic'>C D</hi> to make the +two capitals equal, but only <hi rend='italic'>A E</hi>, which, added +to <hi rend='italic'>C D</hi>, brings +<hi rend='italic'>C D</hi> to an equality with <hi rend='italic'>E B</hi>. +</quote> + +<p> +This equalizing process, commonly described +as the transfer of capital from one employment +to another, is not necessarily the onerous, slow, +and almost impracticable operation which it is very often +represented to be. In the first place, it does not always +imply the actual removal of capital already embarked in an +employment. In a rapidly progressive state of capital, the +adjustment often takes place by means of the new accumulations +of each year, which direct themselves in preference +toward the more thriving trades. Even when a real transfer +of capital is necessary, it is by no means implied that any +of those who are engaged in the unprofitable employment +relinquish business and break up their establishments. The +numerous and multifarious channels of credit through which, +in commercial nations, unemployed capital diffuses itself over +the field of employment, flowing over in greater abundance +to the lower levels, are the means by which the equalization +is accomplished. The process consists in a limitation by one +class of dealers or producers and an extension by the other +of that portion of their business which is carried on with borrowed +capital. +</p> + +<quote rend='display'> +<q>Political economists say that capital sets toward the most +profitable trades, and that it rapidly leaves the less profitable +and non-paying trades. But in ordinary countries this is a slow +process, and some persons, who want to have ocular demonstrations +of abstract truths, have been inclined to doubt it because +they could not see it. The process would be visible +enough if you could only see the books of the bill-brokers and +the bankers. If the iron-trade ceases to be as profitable as +<pb n='223'/><anchor id='Pg223'/> +usual, less iron is sold; the fewer the sales the fewer the bills; +and in consequence the number of iron bills [at the banks] is +diminished. On the other hand, if, in consequence of a bad +harvest, the corn trade becomes on a sudden profitable, immediately +<q>corn bills</q> are created in large numbers, and, if good, +are discounted [at the banks]. Thus capital runs as surely +and instantly where it is most wanted, and where there is most +to be made of it, as water runs to find its level.</q><note place='foot'>Walter +Bagehot, <q>Lombard Street,</q> p. 13.</note> +</quote> + +<p> +In the case of an altogether declining trade, in which it +is necessary that the production should be, not occasionally +varied, but greatly and permanently diminished, or perhaps +stopped altogether, the process of extricating the capital is, +no doubt, tardy and difficult, and almost always attended with +considerable loss; much of the capital fixed in machinery, +buildings, permanent works, etc., being either not applicable +to any other purpose, or only applicable after expensive alterations; +and time being seldom given for effecting the change +in the mode in which it would be effected with least loss, +namely, by not replacing the fixed capital as it wears out. +There is besides, in totally changing the destination of a capital, +so great a sacrifice of established connection, and of acquired +skill and experience, that people are always very slow +in resolving upon it, and hardly ever do so until long after +a change of fortune has become hopeless. +</p> + +<p> +In general, then, although profits are very different to +different individuals, and to the same individual in different +years, there can not be much diversity at the same time and +place in the average profits of different employments (other +than the standing differences necessary to compensate for difference +of attractiveness), except for short periods, or when +some great permanent revulsion has overtaken a particular +trade. It is true that, to persons with the same amount of +original means, there is more chance of making a large fortune +in some employments than in others. But it would be +found that in those same employments bankruptcies also are +more frequent, and that the chance of greater success is balanced +by a greater probability of complete failure. +</p> + +</div> + +<pb n='224'/><anchor id='Pg224'/> + +<div> +<index index='toc'/> +<head>§ 4. The Cause of the Existence of any Profit; the Advances of Capitalists +consist of Wages of Labor.</head> + +<p> +The preceding remarks have, I hope, sufficiently +elucidated what is meant by the common phrase, <q>the ordinary +rate of profit,</q> and the sense in which, and the limitations +under which, this ordinary rate has a real existence. It +now remains to consider what causes determine its amount. +</p> + +<p> +The cause of profit is, that labor produces more than is required +for its support; the reason why capital yields a profit +is, because food, clothing, materials, and tools last longer than +the time which is required to produce them; so that if a capitalist +supplies a party of laborers with these things, on condition +of receiving all they produce, they will, in addition to +reproducing their own necessaries and instruments, have a +portion of their time remaining, to work for the capitalist. +We thus see that profit arises, not from the incident of exchange, +but from the productive power of labor; and the +general profit of the country is always what the productive +power of labor makes it, whether any exchange takes place +or not. I proceed, in expansion of the considerations thus +briefly indicated, to exhibit more minutely the mode in which +the rate of profit is determined. +</p> + +<p> +I assume, throughout, the state of things which, where +the laborers and capitalists are separate classes, prevails, with +few exceptions, universally; namely, that the capitalist advances +the whole expenses, including the entire remuneration +of the laborer. That he should do so is not a matter of +inherent necessity; the laborer might wait until the production +is complete for all that part of his wages which exceeds +mere necessaries, and even for the whole, if he has funds in +hand sufficient for his temporary support. But in the latter +case the laborer is to that extent really a capitalist, investing +capital in the concern, by supplying a portion of the funds +necessary for carrying it on; and even in the former case +he may be looked upon in the same light, since, contributing +his labor at less than the market price, he may be regarded +as lending the difference to his employer, and receiving it +back with interest (on whatever principle computed) from +the proceeds of the enterprise. +</p> + +<pb n='225'/><anchor id='Pg225'/> + +<p> +The capitalist, then, may be assumed to make all the +advances and receive all the produce. His profit consists of +the excess of the produce above the advances; his <emph>rate</emph> of +profit is the ratio which that excess bears to the amount +advanced. +</p> + +<quote rend='display'> +For example, if A advances 8,000 bushels of corn to laborers +in return for 10,000 yards of cloth (and if one bushel of +corn sells for the same sum as one yard of cloth), his profit +consists of 2,000 yards of cloth. The ratio of the excess, 2,000, +to 8,000, the outlay, or 25 per cent, is the <emph>rate</emph> of profit. It is +not the ratio of 2,000 to 10,000. +</quote> + +<p> +But what do the advances consist of? It is, for the present, +necessary to suppose that the capitalist does not pay +any rent; has not to purchase the use of any appropriated +natural agent. The nature of rent, however, we have not +yet taken into consideration; and it will hereafter appear +that no practical error, on the question we are now examining, +is produced by disregarding it. +</p> + +<p> +If, then, leaving rent out of the question, we inquire in +what it is that the advances of the capitalist, for purposes of +production, consist, we shall find that they consist of wages +of labor. +</p> + +<p> +A large portion of the expenditure of every capitalist +consists in the direct payment of wages. What does not consist +of this is composed of materials and implements, including +buildings. But materials and implements are produced +by labor; and as our supposed capitalist is not meant to represent +a single employment, but to be a type of the productive +industry of the whole country, we may suppose that he +makes his own tools and raises his own materials. He does +this by means of previous advances, which, again, consist +wholly of wages. If we suppose him to buy the materials +and tools instead of producing them, the case is not altered: +he then repays to a previous producer the wages which that +previous producer has paid. It is true he repays it to him +with a profit; and, if he had produced the things himself, he +himself must have had that profit on this part of his outlay +<pb n='226'/><anchor id='Pg226'/> +as well as on every other part. The fact, however, remains, +that in the whole process of production, beginning with the +materials and tools and ending with the finished product, all +the advances have consisted of nothing but wages, except +that certain of the capitalists concerned have, for the sake of +general convenience, had their share of profit paid to them +before the operation was completed. +</p> + +<quote rend='display'> +This idea may be more clear, perhaps, if we imagine a large +corporation, not only making woolen cloth, but owning sheep-ranches, +where the raw materials are produced; the shops +where all machinery is made; and who even produce on their +own property all the food, clothing, shelter, and consumption +of the laborers employed by them. A line of division may be +passed through the returns in all these branches of the industry, +separating what is wages from what is profit. Then it can +be easily imagined that all the returns on one side, representing +profits, go to capitalists, no matter whether they are thousands +in number, or only one capitalist typifying the rest, or a +single corporation acting for many small capitalists. +</quote> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_II_Chapter_V_Section_5'/> +<head>§ 5. The Rate of Profit depends on the Cost of Labor.</head> + +<p> +It thus appears that the two elements on which, and +which alone, the gains of the capitalists depend, are, first, the +magnitude of the produce, in other words, the productive +power of labor; and secondly, the proportion of that produce +obtained by the laborers themselves; the ratio which the remuneration +of the laborers bears to the amount they produce. +</p> + +<p> +We thus arrive at the conclusion of Ricardo and others, +that the rate of profits depends upon wages; rising as wages +fall, and falling as wages rise. In adopting, however, this +doctrine, I must insist upon making a most necessary alteration +in its wording. Instead of saying that profits depend +on wages, let us say (what Ricardo really meant) that they +depend on the <emph>cost of labor</emph>. +</p> + +<quote rend='display'> +This is an entirely different question from that concerning +the rate of wages before discussed (<ref target='Book_II_Chapter_II'>Book +II, Chap. II</ref>). That +had to do with the amount of the capital which each laborer, +on an average, received as real wages, and this average rate +was affected by the number of competitors for labor, as compared +with the existing capital, taking into account the nature +of the industries in a country. An increase of population, +bringing more laborers to compete for employment, will lower +<pb n='227'/><anchor id='Pg227'/> +the average amount of real wages received by each one; and a +decrease of population will bring about the reverse. The rate of +wages, however, now that we are considering the matter from +the point of view of the capitalist, is but one of the things to +be considered affecting <emph>cost of labor</emph>. The former question was +one as to the distribution of capital; the latter is one as to the +amount by which the total production is greater than the total +capital advanced. Since all capital consists of advances to labor, +the present inquiry is one in regard to the quantity of advances +compared with the quantity returned; that is, the relation of +the total capital to the total production arising from the use of +that capital. In the diagram before used (<ref target='Pg179'>p. 179</ref>) the question +is not how the contents of circle B are to be distributed, but the +relative size of circle B to circle A. In order to produce circle +A, it is necessary to advance what is represented by circle B. +</quote> + +<p> +Wages and the cost of labor; what labor brings in to +the laborer and what it costs to the capitalist are ideas +quite distinct, and which it is of the utmost importance to +keep so. For this purpose it is essential not to designate +them, as is almost always done, by the same name. Wages, +in public discussions, both oral and printed, being looked +upon from the same point of view of the payers, much +oftener than from that of the receivers, nothing is more common +than to say that wages are high or low, meaning only +that the cost of labor [to the capitalist] is high or low. The +reverse of this would be oftener the truth: the cost of labor +is frequently at its highest where wages are lowest. This +may arise from two causes. (1.) In the first place, the labor, +though cheap, may be inefficient. +</p> + +<quote rend='display'> +The facts presented by Mr. Brassey<note place='foot'><q>Work +and Wages.</q></note> very fully illustrate +this principle. Although French workmen in their ship-yards +receive less wages for the same kind of work than the English +workmen in English yards, yet it costs less per ton to build +ships in England than in France. The same correspondence +between high wages and efficient work was found to be true of +railway construction in different parts of the world. With +different character, varying amounts of industrial energy, varying +intelligence, and endurance, different people do not have +the same efficiency of labor. It is ascertained that inefficiency +is, as a rule, accompanied by low wages. Even though wages +paid for ordinary labor in constructing railways were in India +<pb n='228'/><anchor id='Pg228'/> +only from nine to twelve cents a day, and in England from +seventy-five to eighty-seven cents a day, yet it cost as much to +build a mile of railway in India as in England. The English +laborer gave a full equivalent for his higher wages. Moreover, +while an English weaver tends from two to three times as +many looms as his Russian competitor, the workman in the +United States, it is said, will tend even more than the Englishman. +In American sailing-vessels, also, a less number of sailors, +relatively to the tonnage, is required than in English sailing-ships. +Mr. Brassey, besides, came to the conclusion that the +working power, or efficiency, of ordinary English laborers was +to the French as five to three. +</quote> + +<p> +(2.) The other cause which renders wages and the cost of +labor no real criteria of one another is the varying costliness +of the articles which the laborer consumes. If these are +cheap, wages, in the sense which is of importance to the +laborer, may be high, and yet the cost of labor may be low; +if dear, the laborer may be wretchedly off, though his labor +may cost much to the capitalist. This last is the condition +of a country over-peopled in relation to its land; in which, +food being dear, the poorness of the laborer's real reward +does not prevent labor from costing much to the purchaser, +and low wages and low profits coexist. The opposite case +is exemplified in the United States of America. The laborer +there enjoys a greater abundance of comforts than in any +other country of the world, except some of the newest colonies; +but owing to the cheap price at which these comforts +can be obtained (combined with the great efficiency of the +labor), the cost of labor to the capitalist is considerably lower +than in Europe. It must be so, since the rate of profit is +higher; as indicated by the rate of interest, which is six per +cent at New York when it is three or three and a quarter +per cent in London. +</p> + +<p> +The cost of labor, then, is, in the language of mathematics, +a function of three variables: (1) the efficiency of labor; +(2) the wages of labor (meaning thereby the real reward [or +real wages] of the laborer); and (3) the greater or less cost<note place='foot'>The +reader is advised to consider, in connection with this, the former discussion +on the relation between wages and the price of food (pp. <ref target='Pg185'>185</ref>, +<ref target='Pg186'>186</ref>).</note> +<pb n='229'/><anchor id='Pg229'/> +at which the articles composing that real reward can be produced +or purchased. It is plain that the cost of labor to the +capitalist must be influenced by each of these three circumstances, +and by no others. These, therefore, are also the circumstances +which determine the rate of profit; and it can not +be in any way affected except through one or other of them. +</p> + +<quote rend='display'> +<p> +The efficiency of labor, in this connection, is highly important +in its practical aspects, and as affecting the labor question, +because as a function of cost of labor, that is, as an element +affecting the quantity of things advanced to the laborers +in comparison with the quantity of things returned to the employer, +it includes the whole influence of machinery, labor-saving +devices, and the results of invention. The quantity of +produce depends, for a given advance, on the kind of machinery, +the speed with which it is run, and on the general state of +the arts and industrial inventions. The extent to which the +productive capacity of a single laborer has been increased in +the United States has been almost incredible. Instead of +weaving cloth by hand, as was done a hundred years ago, +<q>one operative in Lowell, working one year, can produce the +cotton fabric needed for the year's supply of 1,500 to 1,800 +Chinese.</q> Moreover, there is no question as to the fact that +no nation in the world compares with ours in the power to invent, +construct, and manage the most ingenious and complicated +machinery. The inventive faculty belongs to every class +in our country; and, in studying cost of labor, it must be well +borne in mind that the efficiency of American labor, particularly +as combined with mechanical appliances, is one of the +great causes of our enormous production. The result of this, +for instance, has been that, without lowering profits, although +the price of cloth has been greatly reduced, employers have +been able to raise the wages of operatives, and shorten their +hours of labor, because machinery has so vastly increased the +production for a given outlay. As one of a few facts showing +this tendency in the last fifty years, note the following table, +taken from the books of the Namquit cotton-mill in Bristol, +Rhode Island: +</p> + +<table rend="latexcolumns: 'p{3cm} p{2cm} p{2cm}'; + tblcolumns: 'lw(35) r r'"> +<row><cell>Kind Of Labor.</cell><cell>1841.</cell><cell>1884.</cell></row> +<row><cell>Card-room help, per week</cell><cell>$3.28</cell><cell>$5.40</cell></row> +<row><cell>Card-strippers, per week</cell><cell>4.98</cell><cell>6.00</cell></row> +<row><cell>Weavers, per week</cell><cell>4.75</cell><cell>6.00</cell></row> +<row><cell>Carding-room overseer, per week</cell><cell>7.00</cell><cell>13.50</cell></row> +</table> + +<p> +The hours per week +have decreased in the +same time from 84 to 66, +while the product of the +mill in pounds has increased +25 per cent. It +may be unnecessary, perhaps, +to say that these figures represent the current wages in +<pb n='230'/><anchor id='Pg230'/> +other mills at the same periods; and that these facts can be +sustained by the records of other mills. +</p> + +<p> +In its economic effect we must also consider, under efficiency, +the whole question of natural advantages of soil, climate, +and natural resources. Laborers of the same skill, paid +the same real wages, of the same cost, will produce a vastly +greater amount of wheat in Dakota than in Vermont or England. +This is the chief reason why profits are so high in the +United States. In many industries we have very marked natural +advantages, which permits a high reward to labor, and yet +yields a high profit to the capitalist. This applies not merely +to agriculture, but to all the extractive industries, such as the +production of petroleum, wood, copper, etc. +</p> + +<p> +In short, the whole matter of ease and difficulty of production, +of high or low cost of production, taking it in the sense +of great or little sacrifice (compare carefully +<ref target='Book_III_Chapter_II_Section_4'>Book III, Chap. +II, § 4</ref>), comes in under the element of efficiency, in cost of +labor. The reader can not be too strongly urged to connect +different parts of the economic system together. And the +questions of Cost of Labor and Cost of Production are of +paramount importance to a proper understanding of political +economy. +</p> +</quote> + +<p> +If labor generally became more efficient, without being +more highly rewarded; if, without its becoming less efficient, +its remuneration fell, no increase taking place in the +cost of the articles composing that remuneration; or if those +articles became less costly, without the laborers obtaining +more of them; in any one of these three cases, profits would +rise. If, on the contrary, labor became less efficient (as it +might do from diminished bodily vigor in the people, destruction +of fixed capital, or deteriorated education); or if +the laborer obtained a higher remuneration, without any increased +cheapness in the things composing it; or if, without +his obtaining more, that which he did obtain became more +costly; profits, in all these cases, would suffer a diminution. +And there is no other combination of circumstances in which +the general rate of profit of a country, in all employments +indifferently, can either fall or rise. +</p> + +<quote rend='display'> +<p> +The connection of profit with the three constituents of cost +of labor may probably be better seen by aid of the following +illustration; it being premised that as yet money is not used, +<pb n='231'/><anchor id='Pg231'/> +and that the laborers are paid in the articles which their +money wages would have bought had money been used. For +simplicity we will suppose that all articles of the laborer's consumption +are represented by corn. Imagine a large woolen-mill +employing 500 men, and paying them in corn; and suppose +that one yard of woolen cloth exchanges for one bushel of corn +in the open market. In the beginning, with a given condition +of efficiency, suppose that each man produces on an average +1,200 yards of cloth, for which he is paid 1,000 bushels of corn: +</p> + +<p> +500 men, each producing 1,200 yards, give a total product of 600,000 yards.<lb/> +500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards.<lb/> +Profit: 100,000 yards. +</p> + +<p> +(1.) Now suppose a change increasing the efficiency of labor +to such an extent that each laborer produces 1,300 instead +of 1,200 yards, then the account will stand, if the other elements +remain unchanged: +</p> + +<p> +500 men, each producing 1,300 yards, give a total product of 650,000 yards.<lb/> +500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards.<lb/> +Profit: 150,000 yards. +</p> + +<p> +(2.) If efficiency and the cost of producing food remain +the same as at first, suppose a change to occur which raises +the quantity of corn each laborer receives from 1,000 to 1,100, +or, as it is called, increases his real wages—then the account +will be: +</p> + +<p> +500 men, each producing 1,200 yards, give a total product of 600,000 yards.<lb/> +500 men, each paid 1,100 bushels, cause an outlay of 550,000 yards.<lb/> +Profit: 50,000 yards. +</p> + +<p> +(3.) If efficiency and real wages remain the same, suppose +such an increase in the cost to the employers of obtaining +corn that they are obliged to give one and one tenth yard of +their goods for one bushel of corn (1,000 bushels of corn costing +them 1,100 yards of cloth), then the statement will read: +</p> + +<p> +500 men, each producing 1,200 yards, give a total product of 600,000 yards.<lb/> +500 men, each paid 1,000 bushels, cause an outlay of 550,000 yards.<lb/> +Profit: 50,000 yards. +</p> +</quote> + +</div> + +</div> + +<pb n='232'/><anchor id='Pg232'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_II_Chapter_VI'/> +<head>Chapter VI. Of Rent.</head> + +<div> +<index index='toc'/> +<head>§ 1. Rent the Effect of a Natural Monopoly.</head> + +<p> +The requisites of production being labor, capital, +and natural agents, the only person, besides the laborer and +the capitalist, whose consent is necessary to production, and +who can claim a share of the produce as the price of that +consent, is the person who, by the arrangements of society, +possesses exclusive power over some natural agent. The +land is the principal of the natural agents which are capable +of being appropriated, and the consideration paid for its use +is called rent. Landed proprietors are the only class, of any +numbers or importance, who have a claim to a share in the +distribution of the produce, through their ownership of something +which neither they nor any one else have produced. +If there be any other cases of a similar nature, they will be +easily understood, when the nature and laws of rent are +comprehended. +</p> + +<p> +It is at once evident that rent is the effect of a monopoly. +The reason why land-owners are able to require rent +for their land is, that it is a commodity which many want, +and which no one can obtain but from them. If all the land +of the country belonged to one person, he could fix the rent +at his pleasure. This case, however, is nowhere known to +exist; and the only remaining supposition is that of free +competition; the land-owners being supposed to be, as in +fact they are, too numerous to combine. +</p> + +<quote rend='display'> +The ratio of the land to the cultivators shows the limited +quantity of land. It is very desirable to keep the connection +<pb n='233'/><anchor id='Pg233'/> +of one part of the subject with another wherever possible. +<q>Agricultural rent, as it actually exists,</q> says Mr. +Cairnes,<note place='foot'><q>Logical Method,</q> p. 206.</note> +truly, <q>is not a consequence of the <emph>monopoly</emph> of the soil, but +of its diminishing productiveness.</q> The doctrine of rent depends +upon the law of diminishing returns; and it is only by +the pressure of population upon land that the lessened productiveness +of land, whether because of poorer qualities or poorer +situations, is made apparent. Or, to take things in their natural +sequence, an increase of population necessitates more food; +and this implies a resort to more expensive methods, or poorer +soils, so soon as land is pushed to the extent that it will not +yield an increased crop for the same application of labor and +capital as formerly. Different qualities of land, then, being +in cultivation at the same time, the better qualities must, of +course, yield a greater return than the poorer, and the conditions +then exist under which land pays rent. Those, therefore, +who admit the law of diminishing returns are inevitably led to +the doctrine of rent. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. No Land can pay Rent except Land of such Quality or Situation as exists in +less Quantity than the Demand.</head> + +<p> +A thing which is limited in quantity, even though +its possessors do not act in concert, is still a monopolized +article. But even when monopolized, a thing which is the +gift of nature, and requires no labor or outlay as the condition +of its existence, will, if there be competition among +the holders of it, command a price only if it exist in less +quantity than the demand. +</p> + +<p> +If the whole land of a country were required for cultivation, +all of it might yield a rent. But in no country of any +extent do the wants of the population require that all the +land, which is capable of cultivation, should be cultivated. +The food and other agricultural produce which the people +need, and which they are willing and able to pay for at a +price which remunerates the grower, may always be obtained +without cultivating all the land; sometimes without cultivating +more than a small part of it; the more fertile lands, +or those in the more convenient situations, being of course +preferred. There is always, therefore, some land which can +not, in existing circumstances, pay any rent; and no land +ever pays rent unless, in point of fertility or situation, it +belongs to those superior kinds which exist in less quantity +<pb n='234'/><anchor id='Pg234'/> +than the demand—which can not be made to yield all the +produce required for the community, unless on terms still +less advantageous than the resort to less favored soils. (1.) +The worst land which can be cultivated as a means of subsistence +is that which will just replace the seed and the food +of the laborers employed on it, together with what Dr. Chalmers +calls their secondaries; that is, the laborers required +for supplying them with tools, and with the remaining necessaries +of life. Whether any given land is capable of doing +more than this is not a question of political economy, but of +physical fact. The supposition leaves nothing for profits, +nor anything for the laborers except necessaries: the land, +therefore, can only be cultivated by the laborers themselves, +or else at a pecuniary loss; and, <foreign rend='italic'>a fortiori</foreign>, can not in +any contingency afford a rent. (2.) The worst land which can be +cultivated as an investment for capital is that which, after +replacing the seed, not only feeds the agricultural laborers +and their secondaries, but affords them the current rate of +wages, which may extend to much more than mere necessaries, +and leaves, for those who have advanced the wages of +these two classes of laborers, a surplus equal to the profit +they could have expected from any other employment of +their capital. (3.) Whether any given land can do more than +this is not merely a physical question, but depends partly +on the market value of agricultural produce. What the +land can do for the laborers and for the capitalist, beyond +feeding all whom it directly or indirectly employs, of course +depends upon what the remainder of the produce can be +sold for. The higher the market value of produce, the +lower are the soils to which cultivation can descend, consistently +with affording to the capital employed the ordinary +rate of profit. +</p> + +<p> +As, however, differences of fertility slide into one another +by insensible gradations; and differences of accessibility, +that is, of distance from markets do the same; and +since there is land so barren that it could not pay for its +cultivation at any price; it is evident that, whatever the +<pb n='235'/><anchor id='Pg235'/> +price may be, there must in any extensive region be some +land which at that price will just pay the wages of the cultivators, +and yield to the capital employed the ordinary +profit, and no more. Until, therefore, the price rises higher, +or until some improvement raises that particular land to a +higher place in the scale of fertility, it can not pay any rent. +It is evident, however, that the community needs the produce +of this quality of land; since, if the lands more fertile +or better situated than it could have sufficed to supply the +wants of society, the price would not have risen so high as +to render its cultivation profitable. This land, therefore, +will be cultivated; and we may lay it down as a principle +that, so long as any of the land of a country which is fit for +cultivation, and not withheld from it by legal or other factitious +obstacles, is not cultivated, the worst land in actual +cultivation (in point of fertility and situation together) pays +no rent. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. The Rent of Land is the Excess of its Return above the Return to the worst +Land in Cultivation.</head> + +<p> +If, then, of the land in cultivation, the part which +yields least return to the labor and capital employed on it +gives only the ordinary profit of capital, without leaving +anything for rent, a standard [i.e., the <q>margin of cultivation</q>] +is afforded for estimating the amount of rent which +will be yielded by all other land. Any land yields just as +much more than the ordinary profits of stock as it yields +more than what is returned by the worst land in cultivation. +The surplus is what the farmer can afford to pay as rent to +the landlord; and since, if he did not so pay it, he would +receive more than the ordinary rate of profit, the competition +of other capitalists, that competition which equalizes +the profits of different capitals, will enable the landlord to +appropriate it. The rent, therefore, which any land will +yield, is the excess of its produce, beyond what would be +returned to the same capital if employed on the worst land +in cultivation. +</p> + +<p> +It has been denied that there can be any land in cultivation +which pays no rent, because landlords (it is contended) +would not allow their land to be occupied without payment. +<pb n='236'/><anchor id='Pg236'/> +Inferior land, however, does not usually occupy, without +interruption, many square miles of ground; it is dispersed +here and there, with patches of better land intermixed, and +the same person who rents the better land obtains along +with it the inferior soils which alternate with it. He pays +a rent, nominally for the whole farm, but calculated on the +produce of those parts alone (however small a portion of +the whole) which are capable of returning more than the +common rate of profit. It is thus scientifically true that +the remaining parts pay no rent. +</p> + +<quote rend='display'> +This point seems to need some illustration. Suppose that +all the lands in a community are of five different grades of +productiveness. When the price of agricultural produce was +such that grades one, two, and three all came into cultivation, +lands of poorer quality would not be cultivated. When a man +rents a farm, he always gets land of varying degrees of fertility +within its limits. Now, in determining what he ought to +pay as rent, the farmer will agree to give that which will still +leave him a profit on his working capital; if in his fields he +finds land which would not enter into the question of rental, +because it did not yield more than the profit on working it, +after he rented the farm he would find it to his interest to cultivate +it, simply because it yielded him a profit, and because +he was not obliged to pay rent upon it; if required to pay rent +for it, he would lose the ordinary rate of profit, would have no +reason for cultivating it, of course, and would throw it out of +cultivation. Moreover, suppose that lands down to grade three +paid rent when A took the farm; now, if the price of produce +rises slightly, grade four may pay something, but possibly not +enough to warrant any rent going to a landlord. A will put +capital on it for this return, but certainly not until the price +warrants it; that is, not until the price will return him at least +the cost of working the land, <emph>plus</emph> the profit on his outlay. But +the community needed this land, or the price would not have +gone up to the point which makes possible its cultivation even +for a profit, without rent. There must always be somewhere +some land affected in just this way. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. —Or to the Capital employed in the least advantageous +Circumstances.</head> + +<p> +Let us, however, suppose that there were a validity +in this objection, which can by no means be conceded to it; +that, when the demand of the community had forced up food +to such a price as would remunerate the expense of producing +it from a certain quality of soil, it happened nevertheless +<pb n='237'/><anchor id='Pg237'/> +that all the soil of that quality was withheld from cultivation, +the increase of produce, which the wants of society required, +would for the time be obtained wholly (as it always is partially), +not by an extension of cultivation, but by an increased +application of labor and capital to land already cultivated. +</p> + +<p> +Now we have already seen that this increased application +of capital, other things being unaltered, is always attended +with a smaller proportional return. The rise of price enables +measures to be taken for increasing the produce, which could +not have been taken with profit at the previous price. The +farmer uses more expensive manures, or manures land which +he formerly left to nature; or procures lime or marl from a +distance, as a dressing for the soil; or pulverizes or weeds +it more thoroughly; or drains, irrigates, or subsoils portions +of it, which at former prices would not have paid the cost +of the operation; and so forth. The farmer or improver +will only consider whether the outlay he makes for the purpose +will be returned to him with the ordinary profit, and +not whether any surplus will remain for rent. Even, therefore, +if it were the fact that there is never any <emph>land</emph> taken +into cultivation, for which rent, and that too of an amount +worth taking into consideration, was not paid, it would be +true, nevertheless, that there is always some <emph>agricultural +capital</emph> which pays no rent, because it returns nothing beyond +the ordinary rate of profit: this capital being the portion +of capital last applied—that to which the last addition +to the produce was due; or (to express the essentials of the +case in one phrase) that which is applied in the least favorable +circumstances. But the same amount of demand and +the same price, which enable this least productive portion of +capital barely to replace itself with the ordinary profit, enable +every other portion to yield a surplus proportioned to +the advantage it possesses. And this surplus it is which +competition enables the landlord to appropriate. +</p> + +<quote rend='display'> +If land were all occupied, and of only one grade, the first +installment of labor and capital produced, we will say, twenty +bushels of wheat; when the price of wheat rose, and it became +<pb n='238'/><anchor id='Pg238'/> +profitable to resort to greater expense on the soil, a second installment +of the same amount of labor and capital when applied, +however, only yielded fifteen bushels more; a third, ten bushels +more; and a fourth, five bushels more. The soil now gives fifty +bushels only under the highest pressure. But, if it was profitable +to invest the same installment of labor and capital simply +for the five bushels that at first had received a return of twenty +bushels, the price must have gone up so that five bushels should +sell for as much as the twenty did formerly; so, +<foreign rend='italic'>mutatis mutandis</foreign>, +of installments second and third. So that if the demand +is such as to require all of the fifty bushels, the agricultural +capital which produced the five bushels will be the standard +according to which the rent of the capital, which grew twenty, +fifteen, and ten bushels respectively, is measured. The principle +is exactly the same as if equal installments of capital and +labor were invested on four different grades of land returning +twenty, fifteen, ten, and five bushels for each installment. Or, +as if in the table on <ref target='Pg240'>page 240</ref>, A, B, C, and D each represented +different installments of the same amount of labor and capital +put upon the same spot of ground, instead of being, as there, +put upon different grades of land. +</quote> + +<p> +The rent of all land is measured by the excess of the return +to the whole capital employed on it above what is necessary +to replace the capital with the ordinary rate of profit, +or, in other words, above what the same capital would yield +if it were all employed in as disadvantageous circumstances +as the least productive portion of it: whether that least productive +portion of capital is rendered so by being employed +on the worst soil, or by being expended in extorting more +produce from land which already yielded as much as it could +be made to part with on easier terms. +</p> + +<p> +It will be true that the farmer requires the ordinary rate +of profit on the whole of his capital; that whatever it returns +to him beyond this he is obliged to pay to the landlord, but +will not consent to pay more; that there is a portion of capital +applied to agriculture in such circumstances of productiveness +as to yield only the ordinary profits; and that the +difference between the produce of this and of any other capital +of similar amount is the measure of the tribute which that +other capital can and will pay, under the name of rent, to +the landlord. This constitutes a law of rent, as near the +<pb n='239'/><anchor id='Pg239'/> +truth as such a law can possibly be; though of course modified +or disturbed, in individual cases, by pending contracts, +individual miscalculations, the influence of habit, and even +the particular feelings and dispositions of the persons concerned. +</p> + +<quote rend='display'> +<p> +The law of rent, in the economic sense, operates in the +United States as truly as elsewhere, although there is no separate +class of landlords here. With us, almost all land is owned +by the cultivator; so that two functions, those of the landlord +and farmer, are both united in one person. Although one payment +is made, it is still just as distinctly made up of two parts, +one of which is a payment to the owner for the superior quality +of his soil, and the other a payment (to the same person, if the +owner is the cultivator) of profit on the farmer's working capital. +Land which in the United States will only return enough +to pay a profit on this capital can not pay any rent. And land +which can pay more than a profit on this working capital, returns +that excess as rent, even if the farmer is also the owner +and landlord. The principle which regulates the amount of +that excess—which is the essential point—is the principle which +determines the amount of economic rent, and it holds true in +the United States or Finland, provided only that different +grades of land are called into cultivation. The governing +principle is the same, no matter whether a payment is made to +one man as profit and to another as rent, or whether the two +payments are made to the same man in two capacities. It has +been urged that the law of rent does not hold in the United +States, because <q>the price of grain and other agricultural produce +has not risen in proportion to the increase of our numbers, +as it ought to have done if Ricardo's theory were true, but has +fallen, since 1830, though since that time our population has +been more than tripled.</q><note place='foot'><q>American +Political Economy,</q> p. 164.</note> This overlooks the fact that we +have not even yet taken up all our best agricultural lands, so +that for some products the law of diminishing productiveness +has not yet shown itself. The reason is, that the extension of +our railway system has only of late years brought the really +good grain-lands into cultivation. The fact that there has been +no rise in agricultural products is due to the enormous extent of +marvelously fertile grain-lands in the West, and to the cheapness +of transportation from those districts to the seaboard. +</p> + +<p> +For a general understanding of the law of rent the following +table will show how, under constant increase of population +(represented by four different advances of population, in the +<pb n='240'/><anchor id='Pg240'/> +first column), first the best and then the poorer lands are +brought into cultivation. We will suppose (1) that the most +fertile land, A, at first pays no rent; then (2), when more food +is wanted than land A can supply, it will be profitable to till +land B, but which, as yet, pays no rent. But if eighteen bushels +are a sufficient return to a given amount of labor and capital, +then when an equal amount of labor and capital engaged +on A returns twenty-four bushels, six of that are beyond the +ordinary profit, and form the rent on land A, and so on; C will +next be the line of comparison, and then D; as the poorer soils +are cultivated, the rent of A increases: +</p> +</quote> + +<table rend="latexcolumns: 'p{1.3cm} p{0.9cm} p{0.9cm} p{0.9cm} p{0.9cm} p{0.9cm} p{0.9cm} p{0.8cm} p{0.8cm}'; + tblcolumns: 'lw(8) rw(8) rw(8) rw(8) rw(8) rw(8) rw(8) rw(8) rw(8)'"> +<row><cell>Population Increase.</cell><cell>A</cell><cell></cell> + <cell>B</cell><cell></cell><cell>C</cell><cell></cell><cell>D</cell> + <cell></cell></row> +<row><cell></cell><cell>24 bushels</cell><cell></cell> + <cell>18 bushels</cell><cell></cell><cell>12 bushels</cell><cell></cell> + <cell>6 bushels</cell><cell></cell></row> +<row><cell></cell><cell>Total product</cell><cell>Rent in Bushels</cell> + <cell>Total product</cell><cell>Rent in Bushels</cell> + <cell>Total product</cell><cell>Rent in Bushels</cell> + <cell>Total product</cell><cell>Rent in Bushels</cell></row> +<row><cell>I.</cell><cell>24</cell><cell>0</cell><cell>..</cell><cell>..</cell> + <cell>..</cell><cell>..</cell><cell>..</cell><cell>..</cell></row> +<row><cell>II.</cell><cell>24</cell><cell>6</cell><cell>18</cell><cell>0</cell> + <cell>..</cell><cell>..</cell><cell>..</cell><cell>..</cell></row> +<row><cell>III.</cell><cell>24</cell><cell>12</cell><cell>18</cell><cell>6</cell> + <cell>12</cell><cell>0</cell><cell>..</cell><cell>..</cell></row> +<row><cell>IV.</cell><cell>24</cell><cell>18</cell><cell>18</cell><cell>12</cell> + <cell>12</cell><cell>6</cell><cell>6</cell><cell>0</cell></row> +</table> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Opposing Views of the Law of Rent.</head> + +<p> +Under the name of rent, many payments are commonly +included, which are not a remuneration for the original +powers of the land itself, but for capital expended on +it. The buildings are as distinct a thing from the farm as +the stock or the timber on it; and what is paid for them can +no more be called rent of land than a payment for cattle +would be, if it were the custom that the landlord should +stock the farm for the tenant. The buildings, like the cattle, +are not land, but capital, regularly consumed and reproduced; +and all payments made in consideration for them are properly +interest. +</p> + +<p> +But with regard to capital actually sunk in improvements, +and not requiring periodical renewal, but spent once for all +in giving the land a permanent increase of productiveness, +it appears to me that the return made to such capital loses +altogether the character of profits, and is governed by the +principles of rent. It is true that a landlord will not expend +capital in improving his estate unless he expects from the +improvement an increase of income surpassing the interest +<pb n='241'/><anchor id='Pg241'/> +of his outlay. Prospectively, this increase of income may +be regarded as profit; but, when the expense has been incurred +and the improvement made, the rent of the improved +land is governed by the same rules as that of the unimproved. +</p> + +<quote rend='display'> +Mr. Carey (as well as Bastiat) has declared that there is a +law of increasing returns from land. He points out that everything +now existing could be reproduced to-day at a less cost +than that involved in its original production, owing to our +advance in skill, knowledge, and all the arts of production; +that, for example, it costs less to make an axe now than it did +five hundred years ago; so also with a farm, since a farm of a +given amount of productiveness can be brought into cultivation +at less cost to-day than that originally spent upon it. +The gain of society has, we all admit, been such that we produce +almost everything at a less cost now than long ago; but +to class a farm and an axe together overlooks, in the most +remarkable way, the fact that land can not be created by labor +and capital, while axes can, and that too indefinitely. Nor can +the <emph>produce</emph> from the land be increased indefinitely at a diminishing +cost. This is sometimes denied by the appeal to facts: +<q>It can be abundantly proved that, if we take any two periods +sufficiently distant to afford a fair test, whether fifty or one +hundred or five hundred years, the production of the land +relatively to the labor employed upon it has progressively become +greater and greater.</q><note place='foot'>Rickards, +<q>Population and Capital,</q> p. 135.</note> But this does not prove that an +existing tendency to diminishing returns has not been more +than offset by the progress of the arts and improvements. +<q>The advance of a ship against wind and tide is [no] proof +that there is no wind and tide.</q> +</quote> + +<p> +In a work entitled <q>The Past, the Present, and the +Future,</q> Mr. Carey takes [a] ground of objection to the +Ricardo theory of rent, namely, that in point of historical +fact the lands first brought under cultivation are not the +most fertile, but the barren lands. <q>We find the settler invariably +occupying the high and thin lands requiring little +clearing and no drainage. With the growth of population +and wealth, other soils yielding a larger return to labor are +always brought into activity, with a constantly increasing +return to the labor expended upon them.</q> +</p> + +<p> +In whatever order the lands come into cultivation, those +<pb n='242'/><anchor id='Pg242'/> +which when cultivated yield the least return, in proportion +to the labor required for their culture, will always regulate +the price of agricultural produce; and all other lands will +pay a rent simply equivalent to the excess of their produce +over this minimum. Whatever unguarded expressions may +have been occasionally used in describing the law of rent, +these two propositions are all that was ever intended by it. +If, indeed, Mr. Carey could show that the return to labor +from the land, agricultural skill and science being supposed +the same, is not a diminishing return, he would overthrow a +principle much more fundamental than any law of rent. +But in this he has wholly failed. +</p> + +<quote rend='display'> +Another objection taken against the law of diminishing +returns, and so against the law of rent, is that the potential increase +of food, e.g., of a grain of wheat, is far greater than +that of man.<note place='foot'>Rickards, ibid., p. 75.</note> +No one disputes the fact that one grain of wheat +can reproduce itself more times than man, and that too in a +geometric increase; but not without land. A grain of wheat +needs land in which it can multiply itself, and this necessary +element of its increase is limited; and it is the very thing +which limits the multiplication of the grains of wheat. On +the same piece of land, one can not get more than what comes +from one act of reproduction in the grain. If one grain produces +100 of its kind, doubling the capital will not repeatedly +cause a geometric increase in the ratio of reproduction of each +grain on this same land, so that one grain, by one process, produces +of its kind 200, 400, 800, or 1,600, because you can not +multiply the land in any such ratio as would accompany this +potential reduplication of the grain. This objection would not +seem worth answering, were it not that it furnishes some difficulty +to really honest inquirers. +</quote> + +<p> +Others, again, allege as an objection against Ricardo, that +if all land were of equal fertility it might still yield a rent. +But Ricardo says precisely the same. It is also distinctly a +portion of Ricardo's doctrine that, even apart from differences +of situation, the land of a country supposed to be of +uniform fertility would, all of it, on a certain supposition, +pay rent, namely, if the demand of the community required +<pb n='243'/><anchor id='Pg243'/> +that it should all be cultivated, and cultivated beyond the +point at which a further application of capital begins to be +attended with a smaller proportional return. +</p> + +<quote rend='display'> +<p> +This is simply the question, before discussed, whether, if +only one class of land were cultivated, some agricultural capital +would pay rent or not. It all depends on the fact whether +population—and so the demand for food—has increased to the +point where it calls out a recognition of the diminishing productiveness +of the soil. In that case different capitals would +be invested, so that there would be different returns to the +same amount of capital; and the prior or more advantageous +investments of capital on the land would yield more than the +ordinary rate of profit, which could be claimed as rent. +</p> + +<p> +A. L. Perry<note place='foot'><q>Political Economy,</q> +p. 288.</note> admits the law of diminishing returns, but +holds that, <q>as land is capital, and as every form of capital +may be loaned or rented, and thus become fruitful in the hands +of another, the rent of land does not differ essentially in its +nature from the rent of buildings in cities, or from the interest +of money.</q> Henry George admits Ricardo's law of rent to its +full extent, but very curiously says: <q>Irrespective of the increase +of population, the effect of improvements in methods of +production and exchange is to increase rent.... The effect of +labor-saving improvements will be to increase the production +of wealth. Now, for the production of wealth, two things are +required, labor and land. Therefore, the effect of labor-saving +improvements will be to <emph>extend the demand for land</emph>, and, +wherever the limit of the quality of land in use is reached, to +bring into cultivation lands of less natural productiveness, or +to extend cultivation on the same lands to a point of lower +natural productiveness. And thus, while the primary effect of +labor-saving improvements is to increase the power of labor, +the secondary effect is to extend cultivation, and, where this +lowers the margin of cultivation, to increase rent.</q><note place='foot'><q>Progress +and Poverty,</q> pp. 220, 221.</note> Francis +Bowen<note place='foot'><q>American Political Economy,</q> +p. 164.</note> rejects Ricardo's law, and says, <q>Rent depends, not +on the increase, but on the distribution, of the population</q>—asserting +that the existence of large cities and towns determines +the amount of rent paid by neighboring land.<note place='foot'>For other +writers opposed to the doctrine of Rent as maintained by Ricardo +and Mill, see Bonamy Price, <q>Practical Political Economy,</q> chap. x; McLeod, +<q>Principles of Economic Philosophy,</q> chap. x; and J. E. T. Rogers, <q>Manual +of Political Economy,</q> chap. xii.</note> +</p> +</quote> + +</div> + +<pb n='244'/><anchor id='Pg244'/> + +<div> +<index index='toc'/> +<head>§ 6. Rent does not enter into the Cost of Production of +Agricultural Produce.</head> + +<p> +Rent does not really form any part of the expenses +of [agricultural] production, or of the advances of the capitalist. +The grounds on which this assertion was made are +now apparent. It is true that all tenant-farmers, and many +other classes of producers, pay rent. But we have now seen +that whoever cultivates land, paying a rent for it, gets in return +for his rent an instrument of superior power to other +instruments of the same kind for which no rent is paid. The +superiority of the instrument is in exact proportion to the +rent paid for it. If a few persons had steam-engines of superior +power to all others in existence, but limited by physical +laws to a number short of the demand, the rent which a +manufacturer would be willing to pay for one of these steam-engines +could not be looked upon as an addition to his outlay, +because by the use of it he would save in his other expenses +the equivalent of what it cost him: without it he could not +do the same quantity of work, unless at an additional expense +equal to the rent. The same thing is true of land. +The real expenses of production are those incurred on the +worst land, or by the capital employed in the least favorable +circumstances. This land or capital pays, as we have seen, +no rent, but the expenses to which it is subject cause all +other land or agricultural capital to be subjected to an equivalent +expense in the form of rent. Whoever does pay rent +gets back its full value in extra advantages, and the rent +which he pays does not place him in a worse position than, +but only in the same position as, his fellow-producer who pays +no rent, but whose instrument is one of inferior efficiency. +</p> + +<quote rend='display'> +Soils are of every grade: some, which if cultivated, might +replace the capital, but give no profit; some give a slight +but not an ordinary profit; some, the ordinary profit. That +is, <q>there is a point up to which it is profitable to cultivate, +and beyond which it is not profitable to cultivate. The price +of corn will not, for any long time, remain at a higher rate +than is sufficient to cover with ordinary profit the cost of that +portion of the general crop which is raised at greatest +expense.</q><note place='foot'>Cairnes, <q>Logical Method,</q> p. 199.</note> +For similar reasons the price will not remain at a +<pb n='245'/><anchor id='Pg245'/> +lower rate. If, then, the cost of production of grain is determined +by that land which replaces the capital, yields only the +ordinary profit, and pays no rent, rent forms no part of this +cost, since that land does not and can not pay any rent. +McLeod,<note place='foot'><q>Theory and Practice of Banking,</q> +vol. i, p. 13. Cf. Cairnes, <q>Logical Method,</q> p. 106.</note> +however, says it is not the cost of production which +regulates the value of agricultural produce, but the value which +regulates the cost. +</quote> + +</div> + +</div> + +</div> + +<pb n='249'/><anchor id='Pg249'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Book III. Exchange.</head> + +<div> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter I. Of Value.</head> + +<div> +<index index='toc'/> +<head>§ 1. Definitions of Value in Use, Exchange Value, and Price.</head> + +<p> +It is evident that, of the two great departments of +Political Economy, the production of wealth and its distribution, +the consideration of Value has to do with the latter +alone; and with that only so far as competition, and not +usage or custom, is the distributing agency. +</p> + +<p> +The use of a thing, in political economy, means its capacity +to satisfy a desire, or serve a purpose. Diamonds +have this capacity in a high degree, and, unless they had it, +would not bear any price. Value in use, or, as Mr. De Quincey +calls it, <hi rend='italic'>teleologic</hi> value, is the extreme limit of value in +exchange. The exchange value of a thing may fall short, to +any amount, of its value in use; but that it can ever exceed +the value in use implies a contradiction; it supposes that +persons will give, to possess a thing, more than the utmost +value which they themselves put upon it, as a means of gratifying +their inclinations. +</p> + +<p> +The word Value, when used without adjunct, always +means, in political economy, value in exchange. +</p> + +<p> +Exchange value requires to be distinguished from Price. +Writers have employed Price to express the value of a thing +in relation to money—the quantity of money for which it +will exchange. By the price of a thing, therefore, we shall +<pb n='250'/><anchor id='Pg250'/> +henceforth understand its value in money; by the value, or +exchange value of a thing, its general power of purchasing; +the command which its possession gives over purchasable +commodities in general. What is meant by command over +commodities in general? The same thing exchanges for a +greater quantity of some commodities, and for a very small +quantity of others. A coat may exchange for less bread this +year than last, if the harvest has been bad, but for more glass +or iron, if a tax has been taken off those commodities, or an +improvement made in their manufacture. Has the value of +the coat, under these circumstances, fallen or risen? It is +impossible to say: all that can be said is, that it has fallen in +relation to one thing, and risen in respect to another. Suppose, +for example, that an invention has been made in machinery, +by which broadcloth could be woven at half the +former cost. The effect of this would be to lower the value +of a coat, and, if lowered by this cause, it would be lowered +not in relation to bread only or to glass only, but to all purchasable +things, except such as happened to be affected at +the very time by a similar depressing cause. Those [changes] +which originate in the commodities with which we compare +it affect its value in relation to those commodities; but those +which originate in itself affect its value in relation to all +commodities. +</p> + +<p> +There is such a thing as a general rise of prices. All +commodities may rise in their money price. But there can +not be a general rise of values. It is a contradiction in +terms. A can only rise in value by exchanging for a greater +quantity of B and C; in which case these must exchange for +a smaller quantity of A. All things can not rise relatively +to one another. If one half of the commodities in the market +rise in exchange value, the very terms imply a fall of the +other half; and, reciprocally, the fall implies a rise. Things +which are exchanged for one another can no more all fall, or +all rise, than a dozen runners can each outrun all the rest, or +a hundred trees all overtop one another. A general rise or a +general fall of prices is merely tantamount to an alteration +<pb n='251'/><anchor id='Pg251'/> +in the value of money, and is a matter of complete indifference, +save in so far as it affects existing contracts for receiving +and paying fixed pecuniary amounts. +</p> + +<p> +Before commencing the inquiry into the laws of value +and price, I have one further observation to make. I must +give warning, once for all, that the cases I contemplate are +those in which values and prices are determined by competition +alone. In so far only as they are thus determined, can +they be reduced to any assignable law. The buyers must be +supposed as studious to buy cheap as the sellers to sell dear. +</p> + +<quote rend='display'> +The reader is advised to study the definitions of value given +by other writers. Cairnes<note place='foot'><q>Leading Principles,</q> +p. 11.</note> defines value as <q>the ratio in which +commodities in open market are exchanged against each other.</q> +F. A. Walker<note place='foot'><q>Political Economy,</q> p. +5.</note> holds that <q>value is the power which an article +confers upon its possessor, irrespective of legal authority or +personal sentiments, of commanding, in exchange for itself, +the labor, or the products of the labor, of others.</q> Carey<note place='foot'><q>Social +Science,</q> vol. i, p. 158.</note> +says, <q>Value is the measure of the resistance to be overcome +in obtaining those commodities or things required for our purposes—of +the power of nature over man.</q> Value is thus, with +him, the antithesis of wealth, which is (according to Carey) the +power of man over nature. In this school, value is the service +rendered by any one who supplies the article for the use +of another. This is also Bastiat's idea,<note place='foot'><q>Harmonies,</q> +p. 171.</note> <q><foreign lang='fr' rend='italic'>le rapport de deux +services échangés</foreign>.</q> Following Bastiat, A. L. +Perry<note place='foot'><q>Political Economy,</q> p. 126.</note> defines +value as <q>always and everywhere the relation of mutual purchase +established between two services by their exchange.</q> +Roscher<note place='foot'><q>Political Economy,</q> Introduction, +Chap. I, § 5.</note> explains exchange value as <q>the quality which makes +them exchangeable against other goods.</q> He also makes a +distinction between utility and value in use: <q>Utility is a +quality of things themselves, in relation, it is true, to human +wants. Value in use is a quality imputed to them, the result +of man's thought, or his view of them. Thus, for instance, in +a beleaguered city, the stores of food do not increase in utility, +but their value in use does.</q> Levasseur<note place='foot'><q>Précis +d'Économie politique,</q> p. 175.</note> regards value as <q>the +relation resulting from exchange</q>—<foreign lang='fr' rend='italic'>le +rapport resultant de l'échange</foreign>. Cherbuliez<note place='foot'><q>Précis +de la Science économique,</q> vol. i, p. 202.</note> asserts that <q>the +value of a product or +<pb n='252'/><anchor id='Pg252'/> +of a service can be expressed only as the products or services +which it obtains in exchange.... If I exchange the thing A +against B, A is the value of B, B is the value of A.</q> +Jevons<note place='foot'><q>Political Economy Primer,</q> p. 98.</note> +defines value as <q>proportion in exchange.</q> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Conditions of Value: Utility, Difficulty of Attainment, +and Transferableness.</head> + +<p> +That a thing may have any value in exchange, two +conditions are necessary. 1. It must be of some use; that is +(as already explained), it must conduce to some purpose, satisfy +some desire. No one will pay a price, or part with anything +which serves some of his purposes, to obtain a thing +which serves none of them. 2. But, secondly, the thing +must not only have some utility, there must also be some +difficulty in its attainment. +</p> + +<quote rend='display'> +The question is one as to the conditions essential to the existence +of any value. Very justly Cairnes<note place='foot'><q>Leading Principles,</q> +p. 15.</note> adds also a third +condition, <q>the possibility of transferring the possession of the +articles which are the subject of the exchange.</q> For instance, +a cargo of wheat at the bottom of the sea has value in use and +difficulty of attainment, but it is not transferable. Jevons (following +J. B. Say) maintains that <q>value depends entirely on +utility.</q> If utility means the power to satisfy a desire, things +which merely have utility and no difficulty of attainment could +have no exchange value.<note place='foot'><q>Theory of Political Economy,</q> pp. 82-91. +See Cairnes, ibid., pp. 17-19.</note> F. A. Walker<note place='foot'><q>Political +Economy,</q> p. 92.</note> believes that <q>value +depends wholly on the relation between demand and supply.</q> +Carey<note place='foot'><q>Social Science,</q> vol. ii, p. +335.</note> holds that value depends merely on the cost of reproduction +of the given article. Roscher<note place='foot'><q>Political Economy,</q> +Introduction, Chap. I, § 5.</note> finds that exchange value +is <q>based on a combination of value in use with cost value.</q> +Cherbuliez<note place='foot'><q>Précis,</q> p. 206.</note> +calls the conditions of value two, <q>the ability to +give satisfaction, and inability of attainment without effort. +The first element is subjective; it is determined wholly by the +needs or desires of the parties to the exchange. The second is +objective; it depends upon material considerations, which are +the conditions of the existence of the thing, and upon which the +needs of the persons exchanging have no influence whatever.</q> +It is, as usual, one of Cherbuliez's clear expositions. A. L. +Perry<note place='foot'><q>Political Economy,</q> p. 165.</note> +states that, <q>while value always takes its rise in the +<emph>desires</emph> of men, it is never realized except through the +<emph>efforts</emph> of men, and through these efforts as mutually exchanged.</q> +</quote> + +<pb n='253'/><anchor id='Pg253'/> + +<p> +The difficulty of attainment which determines value is +not always the same kind of difficulty: (1.) It sometimes +consists in an absolute limitation of the supply. There are +things of which it is physically impossible to increase the +quantity beyond certain narrow limits. Such are those wines +which can be grown only in peculiar circumstances of soil, climate, +and exposure. Such also are ancient sculptures; pictures +by the old masters; rare books or coins, or other articles of +antiquarian curiosity. Among such may also be reckoned +houses and building-ground, in a town of definite extent. +</p> + +<quote rend='display'> +De Quincey<note place='foot'><q>Logic of Political Economy.</q></note> +has presented some ingenious diagrams to +represent the operations of the two constituents of value in +each of the three following cases: U represents the +power of the article to satisfy some desire, and D +difficulty of attainment. In the first case, exchange +value is not hindered by D from going up to any +height, and so it rises and falls entirely according +to the force of U. D being practically infinite, +the horizontal line, exchange value, is not kept +down by D, but it rises just as far as U, the desires +of purchasers, may carry it. +</quote> + +<p rend='text-align: center'> + <figure url='images/value-1.png' rend='width: 50%'> + <figDesc>Illustration: Vertical line D, paralleled by shorter vertical +line U, D and U connected at top of U by horizontal line.</figDesc> + </figure> +</p> + +<p> +(2.) But there is another category (embracing the majority +of all things that are bought and sold), in which the obstacle +to attainment consists only in the labor and expense +requisite to produce the commodity. Without a certain +labor and expense it can not be had; but, when any one is +willing to incur these, there needs be no limit to the multiplication +of the product. If there were laborers enough and +machinery enough, cottons, woolens, or linens might be produced +by thousands of yards for every single yard now manufactured. +</p> + +<quote rend='display'> +In case (2) the horizontal line, representing +exchange value, follows the force of D entirely. +The utility of the article is very great, but the +value is only limited by the difficulty of obtaining +it. So far as U is concerned, exchange +value can go up a great distance, but will go no +higher than the point where the article can be +<pb n='254'/><anchor id='Pg254'/> +obtained. The dotted lines underneath the horizontal line indicate +that the exchange value of articles in this class tend to +fall in value. +</quote> + +<p rend='text-align: center'> + <figure url='images/value-2.png' rend='width: 50%'> + <figDesc>Illustration: Parallel vertical lines U and D, U being longer, joined +by several horizontal lines of Exchange Value.</figDesc> + </figure> +</p> + +<p> +(3.) There is a third case, intermediate between the two +preceding, and rather more complex, which I shall at present +merely indicate, but the importance of which in political +economy is extremely great. There are commodities which +can be multiplied to an indefinite extent by labor and expenditure, +but not by a fixed amount of labor and expenditure. +Only a limited quantity can be produced at a given +cost; if more is wanted, it must be produced at a greater +cost. To this class, as has been often repeated, agricultural +produce belongs, and generally all the rude produce of the +earth; and this peculiarity is a source of very important consequences; +one of which is the necessity of a limit to population; +and another, the payment of rent. +</p> + +<quote rend='display'> +In case (3) articles like agricultural produce have a very +great power to satisfy desires, and if scarce would +have a high value. So far as U is concerned, here +also, as in case (2), exchange value might mount +upward to almost any height, but it can go no +higher than D permits. In commodities of this +class, affected by the law of diminishing returns, +the tendency is for D to increase, and so for exchange +value to rise, as indicated by the dotted lines +above that of the exchange value. +</quote> + +<p rend='text-align: center'> + <figure url='images/value-3.png' rend='width: 50%'> + <figDesc>Illustration: Same as before.</figDesc> + </figure> +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_III_Chapter_I_Section_3'/> +<head>§ 3. Commodities limited in Quantity by the law of Demand and Supply: +General working of this Law.</head> + +<p> +These being the three classes, in one or other of +which all things that are bought and sold must take their +place, we shall consider them in their order. And first, of +things absolutely limited in quantity, such as ancient sculptures +or pictures. +</p> + +<p> +Of such things it is commonly said that their value depends +on their scarcity; others say that the value depends +on the demand and supply. But this statement requires +much explanation. The supply of a commodity is an intelligible +expression: it means the quantity offered for sale; +the quantity that is to be had, at a given time and place, by +those who wish to purchase it. But what is meant by the +demand? Not the mere desire for the commodity. A beggar +<pb n='255'/><anchor id='Pg255'/> +may desire a diamond; but his desire, however great, +will have no influence on the price. Writers have therefore +given a more limited sense to demand, and have defined +it, the wish to possess, combined with the power of +purchasing.<note place='foot'>Although here using demand +in its proper sense, a little later Mr. Mill defines +it as the <q>quantity demanded.</q> As he again uses it in the proper sense +in discussing excess of money (<ref target='Book_III_Chapter_V'>Book III, Chap. V</ref>), +supply (<ref target='Book_III_Chapter_XI'>Book III, Chap. XI</ref>), +and foreign trade (<ref target='Book_III_Chapter_XIV'>Book III, Chap. XIV</ref>), +I have omitted from his present exposition +his evidently inconsistent use of the word.</note> +To distinguish demand in this technical sense from +the demand which is synonymous with desire, they call the +former <emph>effectual</emph> demand. +</p> + +<quote rend='display'> +<p> +General supply consists in the commodities offered in exchange +for other commodities; general demand likewise, if no +money exists, consists in the commodities offered as purchasing +power in exchange for other commodities. That is, one can +not increase the demand for certain things without increasing +the supply of some articles which will be received in exchange +for the desired commodities. Demand is based upon the production +of articles having exchange value, in its economic +sense; and the measure of this demand is necessarily the quantity +of commodities offered in exchange for the desired goods. +General demand and supply are thus reciprocal to each other. +But as soon as money, or general purchasing power, is introduced, +Mr. Cairnes<note place='foot'><q>Leading Principles,</q> +p. 25.</note> defines <q>demand as the desire for commodities +or services, seeking its end by an offer of general purchasing +power; and supply, as the desire for general purchasing +power, seeking its end by an offer of specific commodities or +services.</q> But many persons find a difficulty because they +insist upon separating the idea of supply from that of demand, +owing to the fact that producers seem to be a distinct class in +the community, different from consumers. That they are in +reality the same persons can be easily explained by the following +statement: <q>A certain number of people, A, B, C, D, E, +F, etc., are engaged in industrial occupations—A produces for +B, C, D, E, F; B for A, C, D, E, F; C for A, B, D, E, F, and +so on. In each case the producer and the consumers are distinct, +and hence, by a very natural fallacy, it is concluded that +the whole body of consumers is distinct from the whole body of +producers, whereas they consist of precisely the same persons.</q> +</p> + +<p> +But in regard to demand and supply of particular commodities +(not general demand and supply), the increase of the demand +<pb n='256'/><anchor id='Pg256'/> +is not necessarily followed by an increased supply, or +<hi rend='italic'>vice versa</hi>. Out of the total production (which constitutes +general demand) a varying amount, sometimes more, sometimes +less, may be directed by the desires of men to the purchase of +some given thing. This should be borne in mind, in connection +with the future discussion of over-production. The identity +of general demand with general supply shows there can be +no general over-production: but so long as there exists the possibility +that the demand for a particular commodity may diminish +without a corresponding effect being thereby produced on +the supply of that commodity, by a necessary connection, we +see that there may be over-production of particular commodities; +that is, a production in excess of the demand. +</p> +</quote> + +<p> +The proper mathematical analogy [between demand and +supply] is that of an <emph>equation</emph>. If unequal at any moment, +competition equalizes them, and the manner in which this is +done is by an adjustment of the value. If the demand increases, +the value rises; if the demand diminishes, the value +falls; again, if the supply falls off, the value rises; and falls, +if the supply is increased. The rise or the fall continues +until the demand and supply are again equal to one another: +and the value which a commodity will bring in any market +is no other than the value which, in that market, gives a +demand just sufficient to carry off the existing or expected +supply. +</p> + +<p> +Mr. Cairnes<note place='foot'><q>Leading Principles,</q> +p. 108.</note> finally defined market value as the price +<q>which is sufficient, and no more than sufficient, to carry the +existing supply over, with such a surplus as circumstances +may render advisable, to meet the new supplies forthcoming,</q> +which is nothing more than a paraphrase of the words <q>existing +or expected supply</q> just used by Mr. Mill. It seems +unnecessary, therefore, that Mr. Cairnes should have added: +<q>According to Mr. Mill, the <emph>actual market price</emph> is the price +which equalizes supply and demand in a given market; as I +view the case, the <q>proper market price</q> is the price which +equalizes supply and demand, <emph>not</emph> as existing in the particular +market, but in the larger sense which I have assigned to the +terms. To this price the <emph>actual market price</emph> will, according +to my view, approximate, in proportion to the intelligence and +knowledge of the dealers.</q> +</p> + +<pb n='257'/><anchor id='Pg257'/> + +<p> +Adam Smith, who introduced the expression <q>effectual +demand,</q> employed it to denote the demand of those who +are willing and able to give for the commodity what he calls +its natural price—that is, the price which will enable it to be +permanently produced and brought to market.<note place='foot'>See his +chapter on <q>Natural and Market Price,</q> book i, chap. vii.</note> +</p> + +<p> +This, then, is the Law of Value, with respect to all commodities +not susceptible of being multiplied at pleasure. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Miscellaneous Cases falling under this Law.</head> + +<p> +There are but few commodities which are naturally +and necessarily limited in supply. But any commodity +whatever may be artificially so. The monopolist can fix the +value as high as he pleases, short of what the consumer either +could not or would not pay; but he can only do so by limiting +the supply. Monopoly value, therefore, does not depend +on any peculiar principle, but is a mere variety of the ordinary +case of demand and supply. +</p> + +<p> +Again, though there are few commodities which are at +all times and forever unsusceptible of increase of supply, +any commodity whatever may be temporarily so; and with +some commodities this is habitually the case. Agricultural +produce, for example, can not be increased in quantity before +the next harvest; the quantity of corn already existing in +the world is all that can be had for sometimes a year to +come. During that interval, corn is practically assimilated +to things of which the quantity can not be increased. In the +case of most commodities, it requires a certain time to increase +their quantity; and if the demand increases, then, +until a corresponding supply can be brought forward, that +is, until the supply can accommodate itself to the demand, +the value will so rise as to accommodate the demand to the +supply. +</p> + +<p> +There is another case the exact converse of this. There +are some articles of which the supply may be indefinitely +increased, but can not be rapidly diminished. There are +things so durable that the quantity in existence is at all times +very great in comparison with the annual produce. Gold +<pb n='258'/><anchor id='Pg258'/> +and the more durable metals are things of this sort, and +also houses. The supply of such things might be at once +diminished by destroying them; but to do this could only +be the interest of the possessor if he had a monopoly of the +article, and could repay himself for the destruction of a part +by the increased value of the remainder. The value, therefore, +of such things may continue for a long time so low, +either from excess of supply or falling off in the demand, as +to put a complete stop to further production; the diminution +of supply by wearing out being so slow a process that a +long time is requisite, even under a total suspension of production, +to restore the original value. During that interval +the value will be regulated solely by supply and demand, +and will rise very gradually as the existing stock wears out, +until there is again a remunerating value, and production +resumes its course. +</p> + +<quote rend='display'> +The total value of gold and silver in the world is variously +estimated at from $10,000,000,000 to $14,000,000,000; while +the annual production of both gold and silver in the world +during 1882<note place='foot'><q>Report of the Director of the Mint,</q> +1883, p. 69.</note> was only $212,000,000. The loss of gold by +abrasion is about 1/1000 annually, and of silver about 1/700, but +much depends on the size of the coin. A change in the annual +production of the precious metals can have a perceptible effect +on their value only after such a time as will permit the change +to affect the existing quantity in a way somewhat comparable +with its previous amount. The quantity, however, of wheat +produced is nearly all consumed between harvests; and the +annual supply bears a very large ratio to the existing quantity. +Consequently the price of wheat will be very seriously affected +by the quantity coming from the annual product. +</quote> + +<p> +Finally, there are commodities of which, though capable +of being increased or diminished to a great and even an unlimited +extent, the value never depends upon anything but +demand and supply. This is the case, in particular, with the +commodity Labor, of the value of which we have treated +copiously in the preceding book; and there are many cases +besides in which we shall find it necessary to call in this +<pb n='259'/><anchor id='Pg259'/> +principle to solve difficult questions of exchange value. This +will be particularly exemplified when we treat of International +Values; that is, of the terms of interchange between +things produced in different countries, or, to speak more generally, +in distant places. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Commodities which are Susceptible of Indefinite Multiplication without +Increase of Cost. Law of their Value Cost of Production.</head> + +<p> +When the production of a commodity is the effect of +labor and expenditure, whether the commodity is susceptible +of unlimited multiplication or not, there is a minimum value +which is the essential condition of its being permanently +produced. The value at any particular time is the result of +supply and demand, and is always that which is necessary +to create a market for the existing supply. But unless that +value is sufficient to repay the Cost of Production, and to +afford, besides, the ordinary expectation of profit, the commodity +will not continue to be produced. Capitalists will +not go on permanently producing at a loss. When such +profit is evidently not to be had, if people do not actually +withdraw their capital, they at least abstain from replacing +it when consumed. The cost of production, together with +the ordinary profit, may, therefore, be called the <emph>necessary</emph> +price or value of all things made by labor and capital. Nobody +willingly produces in the prospect of loss. +</p> + +<p> +When a commodity is not only made by labor and capital, +but can be made by them in indefinite quantity, this +Necessary Value, the minimum with which the producers +will be content, is also, if competition is free and active, the +maximum which they can expect. If the value of a commodity +is such that it repays the cost of production not only +with the customary but with a higher rate of profit, capital +rushes to share in this extra gain, and, by increasing the supply +of the article, reduces its value. This is not a mere supposition +or surmise, but a fact familiar to those conversant +with commercial operations. Whenever a new line of business +presents itself, offering a hope of unusual profits, and +whenever any established trade or manufacture is believed +to be yielding a greater profit than customary, there is sure +to be in a short time so large a production or importation of +<pb n='260'/><anchor id='Pg260'/> +the commodity as not only destroys the extra profit, but +generally goes beyond the mark, and sinks the value as much +too low as it had before been raised too high, until the over-supply +is corrected by a total or partial suspension of further +production. As already intimated,<note place='foot'><hi rend='italic'>Supra</hi>, +p. <ref target='Pg222'>222</ref>.</note> these variations in the +quantity produced do not presuppose or require that any +person should change his employment. Those whose business +is thriving, increase their produce by availing themselves +more largely of their credit, while those who are not +making the ordinary profit, restrict their operations, and (in +manufacturing phrase) work short time. In this mode is +surely and speedily effected the equalization, not of profits, +perhaps, but of the expectations of profit, in different occupations. +</p> + +<p> +As a general rule, then, things tend to exchange for one +another at such values as will enable each producer to be +repaid the cost of production with the ordinary profit; in +other words, such as will give to all producers the same rate +of profit on their outlay. But in order that the profit may +be equal where the outlay, that is, the cost of production, +is equal, things must on the average exchange for one another +in the ratio of their cost of production; things of +which the cost of production is the same, must be of the +same value. +</p> + +<quote rend='display'> +Mr. Mill has here used cost of production almost exactly +in the sense of cost of labor, and as excluding profit (while in +the next chapter he includes some part of profit in the analysis). +It will be well, for the sake of definiteness, to collect the +phrases above in which he describes cost of production: <q>Unless +that value is sufficient to repay the cost of production, and +to afford, <emph>besides</emph>, the ordinary expectation of profit, the commodity +will not continue to be produced</q>; <q>the cost of production, +<emph>together with</emph> the ordinary profit, may therefore be +called the <emph>necessary</emph> price, or value</q>; <q>it repays the cost of +production, not only <emph>with</emph> the customary, but <emph>with</emph> a higher +rate of profit</q>; <q>the cost of production with the ordinary +profit—in other words, such as will give to all producers the +same rate of profit on their outlay</q>; <q>that the profit may be +<pb n='261'/><anchor id='Pg261'/> +equal where <emph>the outlay, that is, the cost of production</emph>, is equal.</q> +This is a view which distinctly uses cost of production in the +sense of the outlay to the capitalist, or cost of labor. In no +other way can profit vary with <q>cost of production</q> than in the +sense that it is what a given article <q>costs to the capitalist</q>; +but that is Mr. Mill's definition of cost of labor (p. <ref target='Pg227'>227</ref>). +It is, however, very puzzling when in the next section he speaks of +<q>the natural value, that is, the cost of production.</q> Above, +value included cost of production and profit also. Having +thus pointed out what is Mr. Mill's conception of cost of production, +it will remain for us in the next chapter to consider +whether any other view of it is more satisfactory. +</quote> + +<p> +Adam Smith and Ricardo have called that value of a +thing which is proportional to its cost of production, its +Natural Value (or its Natural Price). They meant by this, +the point about which the value oscillates, and to which it +always tends to return; the center value, toward which, as +Adam Smith expresses it, the market value of a thing is +constantly gravitating; and any deviation from which is +but a temporary irregularity which, the moment it exists, +sets forces in motion tending to correct it. On an average +of years sufficient to enable the oscillations on one side of +the central line to be compensated by those on the other, +the market value agrees with the natural value; but it very +seldom coincides exactly with it at any particular time. The +sea everywhere tends to a level, but it never is at an exact +level; its surface is always ruffled by waves, and often agitated +by storms. It is enough that no point, at least in the +open sea, is permanently higher than another. Each place +is alternately elevated and depressed; but the ocean preserves +its level. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 6. The Value of these Commodities confirm, in the long run, to their +Cost of Production through the operation of Demand and Supply.</head> + +<p> +The latent influence by which the values of things +are made to conform in the long run to the cost of production +is the variation that would otherwise take place in the +supply of the commodity. The supply would be increased +if the thing continued to sell above the ratio of its cost of production, +and would be diminished if it fell below that ratio. +</p> + +<quote rend='display'> +If one dollar covers the expense of making one spade, then +when a spade, by virtue of a sudden demand, rises in value to one +<pb n='262'/><anchor id='Pg262'/> +dollar and ten cents, the manufacturers get an extra profit of +ten cents. This could not long remain so, because other capital +would enter this industry, and so increase the supply that +one spade would sell for only one dollar; then all would receive +the average profit. If, owing to a cessation of demand for +spades, the price fell to ninety cents, then the manufacturers +would lose ten cents on each one made and sold. Thereupon +they would cease to do a losing business, capital would be +withdrawn, and spades would not be made until the supply was +suited to the necessary expense of making them (one dollar). +In this way, whenever there is a departure of the value from +the normal cost, there is set in motion <hi rend='italic'>ipso facto</hi> a series of +forces which automatically restores the value to that cost. So +here again we see the nature of an economic law: the value +may not often correspond exactly with cost of production, but +there is a <emph>tendency</emph> in all values to conform to that cost, and +this tendency they irresistibly obey. A body possessing weight +does not move downward under all circumstances (stones may +be thrown upward), but the law of gravitation holds true, nevertheless. +</quote> + +<p> +There is no need that there should be any actual alteration +of supply; and when there is, the alteration, if permanent, +is not the cause but the consequence of the alteration +in value. If, indeed, the supply <emph>could</emph> not be increased, no +diminution in the cost of production would lower the value; +but there is by no means any necessity that it <emph>should</emph>. The +mere possibility often suffices; the dealers are aware of what +would happen, and their mutual competition makes them +anticipate the result by lowering the price. +</p> + +<quote rend='display'> +Before the electric light was yet known as a feasible means +of lighting (in 1878), the mere rumor of Edison's invention, +before it was made public, and long before it became practicable, +caused a serious fall in the price of gas stocks. +</quote> + +<p> +It is, therefore, strictly correct to say that the value of +things which can be increased in quantity at pleasure does +not depend (except accidentally, and during the time necessary +for production to adjust itself) upon demand and supply; +on the contrary, demand and supply depend upon it. +There is a demand for a certain quantity of the commodity +at its natural or cost value, and to that the supply in the +long run endeavors to conform. +</p> + +<pb n='263'/><anchor id='Pg263'/> + +<quote rend='display'> +Mr. Cairnes<note place='foot'><q>Leading Principles,</q> p. +41.</note> fitly says: <q>The supply of a commodity always +tends to adapt itself to the demand at the normal price. +I may here say briefly that by the normal price of a commodity +I mean that price which suffices, and no more than suffices, +to yield to the producers what is considered to be the +average and usual remuneration on such sacrifices as they +undergo.</q> +</quote> + +<p> +When at any time it fails of so conforming, it is either +from miscalculation, or from a change in some of the elements +of the problem; either in the natural value, that is, +in the cost of production, or in the demand, from an alteration +in public taste, or in the number or wealth of the consumers. +If a value different from the natural value be necessary +to make the demand equal to the supply, the market +value will deviate from the natural value; but only for a +time, for the permanent tendency of supply is to conform +itself to the demand which is found by experience to exist +for the commodity when selling at its natural value. If the +supply is either more or less than this, it is so accidentally, +and affords either more or less than the ordinary rate of +profit, which, under free and active competition, can not +long continue to be the case. +</p> + +<p> +To recapitulate: demand and supply govern the value +of all things which can not be indefinitely increased; except +that even for them, when produced by industry, there is a +minimum value, determined by the cost of production. But +in all things which admit of indefinite multiplication, demand +and supply only determine the perturbations of value +during a period which can not exceed the length of time +necessary for altering the supply. While thus ruling the +oscillations of value, they themselves obey a superior force, +which makes value gravitate toward Cost of Production, and +which would settle it and keep it there, if fresh disturbing +influences were not continually arising to make it again deviate. +</p> + +</div> + +</div> + +<pb n='264'/><anchor id='Pg264'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter II. Ultimate Analysis Of Cost Of Production.</head> + +<div> +<index index='toc'/> +<head>§ 1. Of Labor, the principal Element in Cost of Production.</head> + +<p> +The component elements of Cost of Production have +been set forth in the First Part of this +inquiry.<note place='foot'><ref target='Book_I_Chapter_I_Section_2'>Book I, +Chap. I, § 2</ref>.</note> The principal +of them, and so much the principal as to be nearly the +sole, was found to be Labor. What the production of a thing +costs to its producer, or its series of producers, is the labor +expended in producing it. If we consider as the producer +the capitalist who makes the advances, the word Labor may +be replaced by the word Wages: what the produce costs to +him, is the wages which he has had to pay. At the first +glance, indeed, this seems to be only a part of his outlay, +since he has not only paid wages to laborers, but has likewise +provided them with tools, materials, and perhaps buildings. +These tools, materials, and buildings, however, were produced +by labor and capital; and their value, like that of the +article to the production of which they are subservient, depends +on cost of production, which again is resolvable into +labor. The cost of production of broadcloth does not wholly +consist in the wages of weavers; which alone are directly +paid by the cloth-manufacturer. It consists also of the wages +of spinners and wool-combers, and, it may be added, of shepherds, +all of which the clothier has paid for in the price of +yarn. It consists, too, of the wages of builders and brick-makers, +which he has reimbursed in the contract price of +erecting his factory. It partly consists of the wages of machine-makers, +iron-founders, and miners. And to these must +be added the wages of the carriers who transported any of +<pb n='265'/><anchor id='Pg265'/> +the means and appliances of the production to the place +where they were to be used, and the product itself to the +place where it is to be sold. +</p> + +<quote rend='display'> +Confirmation is here given, in the above words, of the +opinion that, in Mr. Mill's mind, Cost of Production was looked +at wholly from the stand-point of the capitalist, and was identical +with Cost of Labor to the capitalist. +</quote> + +<p> +The value of commodities, therefore, depends principally +(we shall presently see whether it depends solely) on the +quantity of labor required for their production, including +in the idea of production that of conveyance to the market. +But since the cost of production to the capitalist is not labor +but wages, and since wages may be either greater or less, the +quantity of labor being the same, it would seem that the +value of the product can not be determined solely by the +quantity of labor, but by the quantity together with the remuneration, +and that values must partly depend on wages. +</p> + +<p> +Now the relation of one thing to another can not be altered +by any cause which affects them both alike. A rise or fall of +general wages is a fact which affects all commodities in the +same manner, and therefore affords no reason why they should +exchange for each other in one rather than in another proportion. +Though there is no such thing as a general rise of +values, there is such a thing as a general rise of prices. As +soon as we form distinctly the idea of values, we see that +high or low wages can have nothing to do with them; but +that high wages make high prices, is a popular and widely +spread opinion. The whole amount of error involved in this +proposition can only be seen thoroughly when we come to +the theory of money; at present we need only say that if it +be true, there can be no such thing as a real rise of wages; +for if wages could not rise without a proportional rise of the +price of everything, they could not, for any substantial purpose, +rise at all. It must be remembered, too, that general +high prices, even supposing them to exist, can be of no use +to a producer or dealer, considered as such; for, if they increase +his money returns, they increase in the same degree +<pb n='266'/><anchor id='Pg266'/> +all his expenses. There is no mode in which capitalists can +compensate themselves for a high cost of labor, through any +action on values or prices. It can not be prevented from +taking its effect in low profits. If the laborers really get +more, that is, get the produce of more labor, a smaller percentage +must remain for profit. +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_III_Chapter_II_Section_2'/> +<head>§ 2. Wages affect Values, only if different in different employments; +<q>non-competing groups.</q></head> + +<p> +Although, however, <emph>general</emph> wages, whether high or +low, do not affect values, yet if wages are higher in one employment +than another, or if they rise or fall permanently in +one employment without doing so in others, these inequalities +do really operate upon values. Things, for example, +which are made by skilled labor, exchange for the produce +of a much greater quantity of unskilled labor, for no reason +but because the labor is more highly paid. We have before +remarked that the difficulty of passing from one class of employments +to a class greatly superior has hitherto caused the +wages of all those classes of laborers who are separated from +one another by any very marked barrier to depend more +than might be supposed upon the increase of the population +of each class considered separately, and that the inequalities +in the remuneration of labor are much greater than could +exist if the competition of the laboring people generally +could be brought practically to bear on each particular employment. +It follows from this that wages in different employments +do not rise or fall simultaneously, but are, for +short and sometimes even for long periods, nearly independent +of one another. All such disparities evidently alter the +<emph>relative</emph> cost of production of different commodities, and will +therefore be completely represented in their natural or average +value. +</p> + +<quote rend='display'> +This is again a clear recognition of the influence of Mr. +Cairnes's theory of <q>non-competing groups.</q><note place='foot'>See +<hi rend='italic'>supra</hi>, p. <ref target='Pg210'>210</ref>.</note> +</quote> + +<p> +Wages do enter into value. The relative <emph>wages</emph> of the +labor necessary for producing different commodities affect +their value just as much as the relative <emph>quantities</emph> of labor. +<pb n='267'/><anchor id='Pg267'/> +It is true, the absolute wages paid have no effect upon values; +but neither has the absolute quantity of labor. If that were +to vary simultaneously and equally in all commodities, values +would not be affected. If, for instance, the general efficiency +of all labor were increased, so that all things without exception +could be produced in the same quantity as before with a +smaller amount of labor, no trace of this general diminution +of cost of production would show itself in the values of commodities. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Profits an element in Cost of Production.</head> + +<p> +Thus far of labor or wages as an element in cost of +production. But in our analysis, in the First Book, of the +requisites of production, we found that there is another necessary +element in it besides labor. There is also capital; and +this being the result of abstinence, the produce, or its value, +must be sufficient to remunerate, not only all the labor required, +but the abstinence of all the persons by whom the +remuneration of the different classes of laborers was advanced. +The return from abstinence is Profit. And profit, +we have also seen, is not exclusively the surplus remaining +to the capitalist after he has been compensated for his outlay, +but forms, in most cases, no unimportant part of the outlay +itself. The flax-spinner, part of whose expenses consists of +the purchase of flax and of machinery, has had to pay, in +their price, not only the wages of the labor by which the flax +was grown and the machinery made, but the profits of the +grower, the flax-dresser, the miner, the iron-founder, and the +machine-maker. All these profits, together with those of +the spinner himself, were again advanced by the weaver, in +the price of his material—linen yarn; and along with them +the profits of a fresh set of machine-makers, and of the miners +and iron-workers who supplied them with their metallic +material. All these advances form part of the cost of production +of linen. Profits, therefore, as well as wages, enter +into the cost of production which determines the value of +the produce. +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_III_Chapter_II_Section_4'/> +<head>§ 4. Cost of Production properly represented by sacrifice, or cost, to the +Laborer as well as to the Capitalist; the relation of this conception to the +Cost of Labor.</head> + +<quote rend='display'> +<p> +In discussing Cost of Labor (<hi rend='italic'>supra</hi>, pp. +<ref target='Pg225'>225</ref>, <ref target='Pg226'>226</ref>), Mr. +Mill found that the advances of the immediate producer consisted +<pb n='268'/><anchor id='Pg268'/> +not only of wages, but also of tools, materials, etc., in the +price of which he was including the profits of an auxiliary capitalist +who advanced the capital for making these tools, etc. +But, then, if a line of division were to be passed down through +all these advances, separating wages from profits, he urged that, +if all the capitalists (auxiliary and immediate both) were one, +all the advances of the capitalist might be considered as wages. +Profits did not form a part of the outlay to the capitalists in +the former analysis. And this seems correct enough. Now, +however, he suggests that the outlay of the immediate producers +should include the profit of the auxiliary capitalist. More +than this, Mr. Mill now includes in cost to the capitalist the +profit of the immediate capitalist. For example, in his illustration +of the manufacture of linen, he includes not merely +the profit of the auxiliary capital engaged in spinning and +weaving, but the profit of the immediate and last capitalist, the +linen-manufacturer, also. This includes in the cost of producing +an article a profit not realized until after the commodity is +produced. +</p> + +<p> +It is now time to give a more correct idea of cost of production. +Every one admits, for example, that the <q>cost of production</q> +of wheat is less in the United States than in England. If, +for instance, three men with a capital of one hundred dollars may +on a plot of ground, A, in the United States produce one hundred +bushels of wheat, it will happen that the same men and capital +will only produce sixty bushels on ground, B, in England. +</p> + +<p rend='text-align: center'> + <figure url='images/cost-of-production.png' rend='width: 80%'> + <figDesc>Illustration: Cost of Production.</figDesc> + </figure> +</p> + +<p> +In ordinary language, then, we say that the cost of production +is greater in England than in the United States, because the +same labor and capital here produce one hundred bushels for +sixty in England; or, what amounts to the same thing, that less +labor and capital could produce sixty bushels in the United +States than sixty bushels in England. If we suppose that one +fourth of the crop is profit, and three fourths is assigned to +wages in both countries, then in the United States the one +hundred dollars of capital receives twenty-five bushels of profit, +while in England it receives only fifteen; and the three men +receive as wages in the United States twenty-five bushels each, +while in England they receive only fifteen bushels each. The +first important induction to be made is that where cost of production +<pb n='269'/><anchor id='Pg269'/> +is low, wages and profits are high. The high productiveness +of extractive industries in the United States is the +reason why wages and profits are higher here than in older +countries. +</p> + +<p> +Now the second important question is, Is cost of production +made up of wages and profits, and is it true that the cost rises +with a rise of wages and profits? Certainly not. Wages and +profits are both higher in the United States than in England, +but no one is so absurd as to say that the cost of production of +wheat (as above explained) is higher here than there. It is +exactly because cost of production of wheat is lower in the +United States that wages and profits measured in wheat are +higher here than in England. Therefore, it can not be granted, +as Mr. Mill expounds the doctrine, that cost of production is +made up of wages and profits. When we speak of an increased +cost of production of a given article, we mean that its +production requires more labor and capital than before; and of +a decrease in cost of production, that it requires less labor and +capital than before; meaning by <q>more labor</q> that a given +quality of labor is exerted for a longer or shorter time, and by +<q>more capital</q> that a greater or less quantity of wealth abstained +from is employed for a longer or shorter time; or, in +other words, that laborers and capitalists undergo more or less +sacrifice in exertion and abstinence, respectively, to attain a +given result. This is the contribution to cost of production +made by Mr. Cairnes, and briefly defined as follows: <q>In the +case of labor, the cost of producing a given commodity will be +represented by the number of average laborers employed in its +production—regard at the same time being had to the severity +of the work and the degree of risk it involves—multiplied by +the duration of their labors. In that of abstinence, the principle +is analogous; the sacrifice will be measured by the quantity of +wealth abstained from, taken in connection with the risk incurred, +and multiplied by the duration of the abstinence.</q><note place='foot'><q>Leading +Principles,</q> part i, chap. iii, p. 87.</note> +</p> + +<p> +This view of cost of production takes into consideration, +in the act of production, what Mr. Mill does not include, the +cost, or real sacrifice, to the laborer as well as to the capitalist. +It may, then, be well to state the relations of cost of production, +taken in this better sense, to value. +</p> + +<p> +Within competing groups, where there is free choice for +labor and capital to select the most remunerative occupations, +the hardest and most disagreeable employments will be +best paid, and the wages and profits will be in proportion to +the sacrifice involved in each case. If so, the amount paid +in wages and profits represents the sacrifices in each case. +<pb n='270'/><anchor id='Pg270'/> +Now, the aggregate product of an industry is the source from +which is drawn its wages and profits: the aggregate wages +and profits, therefore, must vary with the value of the total +product. If the total value depart from the sum hitherto sufficient +to pay the given wages and profits, then some will be +paid proportionally less than their sacrifice. The value of a +commodity, therefore, within the competing group, must conform +to the costs of production. If, for example (<hi rend='italic'>a</hi>), the value +at any time were such as not to give the laborer the usual +equivalent for his sacrifice, he would change his employment +to another within the group where he could get it; if (<hi rend='italic'>b</hi>) the +share of the capitalist were at any time insufficient to give him +the usual reward for his abstinence, he would change the investment +of his capital. Therefore, within such limits as allow a +free competition of labor and capital, value must conform itself +to cost of production. +</p> + +<p> +Not so, however, with the products of non-competing industrial +groups. As shown by Mr. Mill, labor does not pass freely +from one employment to another; and it must be said that +capital does not either, although vastly more ready to move +than labor. In a large and thinly settled country capital does +not move freely over the whole area of industry; if it did, different +rates of profit would not prevail, as we all know they +do, in the United States. Now, as before stated, the total +value of the commodities resulting from the exertions of each +group of producers is the source from which wages and profits +are drawn. The aggregate wages and profits in each industry +will vary with the value of the aggregate products. But this +total value depends upon what it will exchange for of the +products of other groups; that is, this value depends on the +reciprocal demand of one group for the commodities of the +other groups, as compared with the demand of the other groups +for its products. For example, although cost of production is +low in group A, if the demand from outside groups were to be +strong, the exchange value of A's products would rise, and A +would get more of other goods in exchange; that is, the total +produce is large, but a second increment, arising from a higher +exchange value, is to be shared among A's laborers and capitalists. +A few years ago, about 1878-1879, the value of wheat in +the United States rose because of the increased demand from +Europe, where the harvests had been unusually deficient. +There had been no falling off in the productiveness of the +farming industry of the United States to cause the increased +price; but the relative demand of other industrial groups for +wheat, the product of the farming industry, raised the exchange +value of wheat, and so increased the industrial rewards +of those engaged as laborers and capitalists in farming. So +<pb n='271'/><anchor id='Pg271'/> +it is to be concluded that since there is no free movement of +labor and capital between non-competing groups, wages and +profits may constantly remain at rates which are not in correspondence +with the actual sacrifice, or cost, to labor and capital +in different groups; hence, their products do not exchange for +each other in proportion to their costs of production. Reciprocal +demand is the law of their value. +</p> + +<p> +It will be said, at once, that the foregoing conception of +cost of production is entirely opposed to the language of practical +men of affairs. They constantly speak of higher or lower +wages as increasing their cost of production, or as affecting +their ability to compete with foreigners. So universal a usage +implies a foundation of truth which demands attention. Wages +do represent cost to the capitalist, that is, the chief part of the +outlay he makes in order to get a given return; but we have +already seen this, and, in the language of Political Economy, +termed it <q>cost of labor</q> to the capitalist. When the business +world use the phrase cost of production, they use it in the +sense of cost of labor, as hitherto explained. When they are +obliged by strikers to pay more wages, they say that it increases +their <q>cost of production,</q> meaning the cost to them of getting +their product, and that it affects their profits. This, then, +will show that there is no objection to be urged, in its true +sense, against the phrase cost of production, arising from its +misuse in the common language of business. +</p> + +<p> +The real connection between the proper conception of cost +of production and cost of labor is, however, worth attention. +It touches cost of labor through that one of its elements called +<q>efficiency of labor.</q> The more productive an industry is, the +higher its wages and profits may be, and it is exactly at this +point that more attention should be given to the relations of +labor and capital. If productiveness can be increased, higher +wages as well as higher profits are possible. The proper understanding +of the idea that where cost of production is low +wages and profits are high, throws a flood of light on many +industrial questions in the United States. In the connection +in which it stands, as I have shown, to cost of labor, it means +that if commodities can be produced at a less sacrifice to labor +and capital by the use of machinery and new processes, higher +wages are consistent with a lower price of the given product. +It explains the fact that, owing to skill or natural resources, +labor, although paid much higher rates, can produce articles +cheaper than laborers who are less highly paid. Mr. Brassey<note place='foot'><q>Work +and Wages.</q></note> +has pointed out that English wages are higher than on the +Continent; and yet England, through low cost of production, +<pb n='272'/><anchor id='Pg272'/> +owing to skill, natural resources, etc., can produce so much +more of commodities for a given outlay that (while keeping +her usual rate of profit) she can generally undersell her competitors +who employ cheaper labor. The same observations +apply to the United States; but the question of foreign competition +will be further discussed (<ref target='Book_III_Chapter_XX'>Book III, Chap. XX</ref>) +after we have studied international trade and values. +</p> + +<p> +<q>And here it may be well to state precisely what is to be +understood by a <q>fluctuation of the market,</q> as distinguished +from those changes of normal price which we have been considering. +Normal price, as we have seen, is governed, according +to the circumstances of the case [as to whether there is +free industrial competition or not], by one or other of two +causes—cost of production and reciprocal demand. A change +in normal price, therefore, is a change which is the consequence +of an alteration in one or other of these conditions. So long +as the determining condition—be it cost of production or reciprocal +demand—remains constant, the normal price must be considered +as remaining constant; but, the normal price remaining +constant, the market price (which, as we have seen, depends +on the opinion of dealers respecting the state of supply and +demand in relation to the particular article) may undergo a +change—may deviate, that is to say, either upward or downward +from the normal level. Such changes of price, occurring +while the permanent conditions of production remain unaffected, +can only be temporary, calling into action, as they do, +forces which at once tend to restore the normal state of things: +they may therefore be properly described as <q>fluctuations of +the market.</q></q><note place='foot'><q>Leading Principles,</q> p. 136.</note> +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. When profits vary from Employment to Employment, or are spread over +unequal lengths of Time, they affect Values accordingly.</head> + +<p> +Value, however, being purely relative, can not depend +upon absolute profits, no more than upon absolute +wages, but upon relative profits only. High general profits +can not, any more than high general wages, be a cause of +high values, because high general values are an absurdity and +a contradiction. In so far as profits enter into the cost of +production of all things, they can not affect the value of any. +It is only by entering in a greater degree into the cost of +production of some things than of others, that they can have +any influence on value. +</p> + +<p> +Profits, however, may enter more largely into the conditions +of production of one commodity than of another, even +<pb n='273'/><anchor id='Pg273'/> +though there be no difference in the <emph>rate</emph> of profit between +the two employments. The one commodity may be called +upon to yield a profit during a longer period of time than +the other. The example by which this case is usually illustrated +is that of wine. Suppose a quantity of wine and a +quantity of cloth, made by equal amounts of labor, and that +labor paid at the same rate. The cloth does not improve by +keeping; the wine does. Suppose that, to attain the desired +quality, the wine requires to be kept five years. The producer +or dealer will not keep it, unless at the end of five +years he can sell it for as much more than the cloth as +amounts to five years' profit, accumulated at compound interest. +The wine and the cloth were made by the same original +outlay. Here, then, is a case in which the natural values, +relatively to one another, of two commodities, do not conform +to their cost of production alone, but to their cost of production +<emph>plus</emph> something else—unless, indeed, for the sake of +generality in the expression, we include the profit which the +wine-merchant foregoes during the five years, in the cost of +production of the wine, looking upon it as a kind of additional +outlay, over and above his other advances, for which +outlay he must be indemnified at last. +</p> + +<quote rend='display'> +Regarding cost of production as the amounts of labor and +abstinence required in production, and not as Mr. Mill regards +it, as the amounts of wages and profits, the above is simply a +case where, in the production of wine, there is a longer <emph>duration +of the abstinence</emph> than in the production of cloth. If there +is a free movement of labor and capital between the two industries, +they will exchange for each other in proportion to the +sacrifices involved; so that the wine would exchange for more +of cloth, because there was more sacrifice undergone. The +same explanation also holds good in the following illustration: +</quote> + +<p> +All commodities made by machinery are assimilated, at +least approximately, to the wine in the preceding example. +In comparison with things made wholly by immediate labor, +profits enter more largely into their cost of production. +Suppose two commodities, A and B, each requiring a year +for its production, by means of a capital which we will on +<pb n='274'/><anchor id='Pg274'/> +this occasion denote by money, and suppose it to be £1,000. +A is made wholly by immediate labor, the whole £1,000 +being expended directly in wages. B is made by means +of labor which cost £500 and a machine which cost £500, +and the machine is worn out by one year's use. The two +commodities will be of exactly the same value, which, if +computed in money, and if profits are 20 per cent per annum, +will be £1,200. But of this £1,200, in the case of A, +only £200, or one sixth, is profit; while in the case of B +there is not only the £200, but as much of £500 (the price +of the machine) as consisted of the profits of the machine-maker; +which, if we suppose the machine also to have taken +a year for its production, is again one sixth. So that in the +case of A only one sixth of the entire return is profit, while +in B the element of profit comprises not only a sixth of the +whole, but an additional sixth of a large part. +</p> + +<p> +From the unequal proportion in which, in different employments, +profits enter into the advances of the capitalist, +and therefore into the returns required by him, two consequences +follow in regard to value. (1). One is, that commodities +do not exchange in the ratio simply of the quantities of +labor required to produce them; not even if we allow for +the unequal rates at which different kinds of labor are permanently +remunerated. +</p> + +<p> +(2.) A second consequence is, that every rise or fall of general +profits will have an effect on values. Not, indeed, by +raising or lowering them generally (which, as we have so often +said, is a contradiction and an impossibility), but by altering +the proportion in which the values of things are affected by +the unequal lengths of time for which profit is due. When +two things, though made by equal labor, are of unequal value +because the one is called upon to yield profit for a greater +number of years or months than the other, this difference of +value will be greater when profits are greater, and less when +they are less. The wine which has to yield five years' profit +more than the cloth will surpass it in value much more if +profits are forty per cent than if they are only twenty. +</p> + +<pb n='275'/><anchor id='Pg275'/> + +<p> +It follows from this that even a general rise of wages, +when it involves a real increase in the cost of labor, does in +some degree influence values. It does not affect them in the +manner vulgarly supposed, by raising them universally; but +an increase in the cost of labor lowers profits, and therefore +lowers in natural values the things into which profits enter +in a greater proportion than the average, and raises those +into which they enter in a less proportion than the average. +All commodities in the production of which machinery bears +a large part, especially if the machinery is very durable, are +lowered in their relative value when profits fall; or, what +is equivalent, other things are raised in value relatively to +them. This truth is sometimes expressed in a phraseology +more plausible than sound, by saying that a rise of wages +raises the value of things made by labor in comparison with +those made by machinery. But things made by machinery, +just as much as any other things, are made by labor—namely, +the labor which made the machinery itself—the only difference +being that profits enter somewhat more largely into the +production of things for which machinery is used, though +the principal item of the outlay is still labor. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 6. Occasional Elements in Cost of Production; taxes and ground-rent.</head> + +<p> +Cost of Production consists of several elements, some +of which are constant and universal, others occasional. The +universal elements of cost of production are the wages of +the labor, and the profits of the capital. The occasional elements +are taxes, and any extra cost occasioned by a scarcity +value of some of the requisites. Besides the natural and +necessary elements in cost of production—labor and profits—there +are others which are artificial and casual, as, for instance, +a tax. The taxes on hops and malt are as much a +part of the cost of production of those articles as the wages +of the laborers. The expenses which the law imposes, as +well as those which the nature of things imposes, must be +reimbursed with the ordinary profit from the value of the +produce, or the things will not continue to be produced. +But the influence of taxation on value is subject to the same +conditions as the influence of wages and of profits. It is not +<pb n='276'/><anchor id='Pg276'/> +general taxation, but differential taxation, that produces the +effect. If all productions were taxed so as to take an equal +percentage from all profits, relative values would be in no +way disturbed. If only a few commodities were taxed, their +value would rise; and if only a few were left untaxed, their +value would fall. +</p> + +<p> +But the case in which scarcity value chiefly operates in +adding to cost of production is the case of natural agents. +These, when unappropriated, and to be had for the taking, +do not enter into the cost of production, save to the extent +of the labor which may be necessary to fit them for use. +Even when appropriated, they do not (as we have already +seen) bear a value from the mere fact of the appropriation, +but only from scarcity—that is, from limitation of supply. +But it is equally certain that they often do bear a scarcity +value. +</p> + +<p> +No one can deny that rent sometimes enters into cost of +production [of other than agricultural products]. If I buy +or rent a piece of ground, and build a cloth-manufactory on +it, the ground-rent forms legitimately a part of my expenses +of production, which must be repaid by the product. And +since all factories are built on ground, and most of them in +places where ground is peculiarly valuable, the rent paid for +it must, on the average, be compensated in the values of all +things made in factories. In what sense it is true that rent +does not enter into the cost of production or affect the value +of <emph>agricultural</emph> produce will be shown in the succeeding +chapter. +</p> + +<quote rend='display'> +These occasional elements in cost of production, such as +taxes, insurance, ground-rent, etc., are to be considered as just +so much of an increase in the quantity of capital required for +the operation involved in the particular production, and, consequently, +result in an increased cost of production, because +there is either more abstinence, or abstinence for a longer time, +to be rewarded. These elements, therefore, if they are not universal +(or common to all articles), will affect the exchange value +of commodities, wherever there is a free competition. +</quote> + +</div> + +</div> + +<pb n='277'/><anchor id='Pg277'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_III'/> +<head>Chapter III. Of Rent, In Its Relation To Value.</head> + +<div> +<index index='toc'/> +<anchor id='Book_III_Chapter_III_Section_1'/> +<head>§ 1. Commodities which are susceptible of indefinite Multiplication, but not +without increase of Cost. Law of their Value, Cost of Production in the most +unfavorable existing circumstances.</head> + +<p> +We have investigated the laws which determine the +value of two classes of commodities—the small class which, +being limited to a definite quantity, have their value entirely +determined by demand and supply, save that their cost of +production (if they have any) constitutes a minimum below +which they can not permanently fall; and the large class, +which can be multiplied <hi rend='italic'>ad libitum</hi> by labor and capital, and +of which the cost of production fixes the maximum as well +as the minimum at which they can permanently exchange [if +there be free competition]. But there is still a third kind of +commodities to be considered—those which have, not one, +but several costs of production; which can always be increased +in quantity by labor and capital, but not by the same +amount of labor and capital; of which so much may be produced +at a given cost, but a further quantity not without a +greater cost. These commodities form an intermediate class, +partaking of the character of both the others. The principal +of them is agricultural produce. We have already made +abundant reference to the fundamental truth that in agriculture, +the state of the art being given, doubling the labor +does not double the produce; that, if an increased quantity +of produce is required, the additional supply is obtained at +a greater cost than the first. Where a hundred quarters of +corn are all that is at present required from the lands of a +given village, if the growth of population made it necessary +to raise a hundred more, either by breaking up worse land +now uncultivated, or by a more elaborate cultivation of the +land already under the plow, the additional hundred, or +some part of them, at least, might cost double or treble as +much per quarter as the former supply. +</p> + +<pb n='278'/><anchor id='Pg278'/> + +<p> +If the first hundred quarters were all raised at the same +expense (only the best land being cultivated), and if that +expense would be remunerated with the ordinary profit by +a price of 20<hi rend='italic'>s.</hi> the quarter, the natural price of wheat, so +long as no more than that quantity was required, would be +20<hi rend='italic'>s.</hi>; and it could only rise above or fall below that price +from vicissitudes of seasons, or other casual variations in supply. +But if the population of the district advanced, a time +would arrive when more than a hundred quarters would be +necessary to feed it. We must suppose that there is no +access to any foreign supply. By the hypothesis, no more +than a hundred quarters can be produced in the district, unless +by either bringing worse land into cultivation, or altering +the system of culture to a more expensive one. Neither +of these things will be done without a rise in price. This +rise of price will gradually be brought about by the increasing +demand. So long as the price has risen, but not risen +enough to repay with the ordinary profit the cost of producing +an additional quantity, the increased value of the +limited supply partakes of the nature of a scarcity value. +Suppose that it will not answer to cultivate the second best +land, or land of the second degree of remoteness, for a less +return than 25<hi rend='italic'>s.</hi> the quarter; and that this price is also necessary +to remunerate the expensive operations by which an +increased produce might be raised from land of the first +quality. If so, the price will rise, through the increased demand, +until it reaches 25<hi rend='italic'>s.</hi> That will now be the natural +price; being the price without which the quantity, for which +society has a demand at that price, will not be produced. At +that price, however, society can go on for some time longer; +could go on perhaps forever, if population did not increase. +The price, having attained that point, will not again permanently +recede (though it may fall temporarily from accidental +abundance); nor will it advance further, so long as society +can obtain the supply it requires without a second increase +of the cost of production. +</p> + +<p> +In the case supposed, different portions of the supply of +<pb n='279'/><anchor id='Pg279'/> +corn have different costs of production. Though the twenty, +or fifty, or one hundred and fifty quarters additional have +been produced at a cost proportional to 25<hi rend='italic'>s.</hi>, the original +hundred quarters per annum are still produced at a cost only +proportional to 20<hi rend='italic'>s.</hi> This is self-evident, if the original and +the additional supply are produced on different qualities of +land. It is equally true if they are produced on the same +land. Suppose that land of the best quality, which produced +one hundred quarters at 20<hi rend='italic'>s.</hi>, has been made to produce one +hundred and fifty by an expensive process, which it would +not answer to undertake without a price of 25<hi rend='italic'>s.</hi> The cost +which requires 25<hi rend='italic'>s.</hi> is incurred for the sake of fifty quarters +alone: the first hundred might have continued forever to +be produced at the original cost, and with the benefit, on +that quantity, of the whole rise of price caused by the increased +demand: no one, therefore, will incur the additional +expense for the sake of the additional fifty, unless they alone +will pay for the whole of it. The fifty, therefore, will be +produced at their natural price, proportioned to the cost of +their production; while the other hundred will now bring in +5<hi rend='italic'>s.</hi> a quarter more than their natural price—than the price +corresponding to, and sufficing to remunerate, their lower +cost of production. +</p> + +<p> +If the production of any, even the smallest, portion of +the supply requires as a necessary condition a certain price, +that price will be obtained for all the rest. We are not able +to buy one loaf cheaper than another because the corn from +which it was made, being grown on a richer soil, has cost less +to the grower. The value, therefore, of an article (meaning +its natural, which is the same with its average value) is determined +by the cost of that portion of the supply which is +produced and brought to market at the greatest expense. +This is the Law of Value of the third of the three classes +into which all commodities are divided. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Such commodities, when Produced in circumstances more favorable, yield a +Rent equal to the difference of Cost.</head> + +<p> +If the portion of produce raised in the most unfavorable +circumstances obtains a value proportioned to its cost +of production; all the portions raised in more favorable circumstances, +<pb n='280'/><anchor id='Pg280'/> +selling as they must do at the same value, obtain +a value more than proportioned to their cost of production. +</p> + +<p> +The owners, however, of those portions of the produce +enjoy a privilege; they obtain a value which yields them +more than the ordinary profit. The advantage depends on +the possession of a natural agent of peculiar quality, as, for +instance, of more fertile land than that which determines the +general value of the commodity; and when this natural +agent is not owned by themselves, the person who does +own it is able to exact from them, in the form of rent, the +whole extra gain derived from its use. We are thus brought +by another road to the Law of Rent, investigated in the concluding +chapter of the Second Book. Rent, we again see, +is the difference between the unequal returns to different +parts of the capital employed on the soil. Whatever surplus +any portion of agricultural capital produces, beyond +what is produced by the same amount of capital on the +worst soil, or under the most expensive mode of cultivation, +which the existing demands of society compel a recourse to, +that surplus will naturally be paid as rent from that capital, +to the owner of the land on which it is employed. +</p> + +<quote rend='display'> +<p> +The discussion of rent is here followed wholly from the +point of view of value, while before (<ref target='Book_II_Chapter_VI'>Book II, +Chap. VI</ref>) the +law of rent was reached through a limitation of the quantity +of land due to the influence of population. In the former case +the rent and produce were stated in bushels. By introducing +price now (as the convenient symbol of value), instead of the +separate increased demands of population in our illustration +than used (p. <ref target='Pg240'>240</ref>), it will be seen how the same operation, +looking at it solely in respect to value, brings us to the same law: +</p> +</quote> + +<table rend="latexcolumns: 'p{1.3cm} p{0.9cm} p{0.9cm} p{0.9cm} p{0.9cm} p{0.9cm} p{0.9cm} p{0.9cm}'; + tblcolumns: 'lw(8) rw(8) rw(8) rw(8) rw(8) rw(8) rw(8) rw(8)'"> +<row><cell>Price per Bushel.</cell><cell>A</cell><cell></cell> + <cell>B</cell><cell></cell><cell>C</cell><cell></cell><cell>D</cell></row> +<row><cell></cell><cell>24 bushels</cell><cell></cell> + <cell>18 bushels</cell><cell></cell><cell>12 bushels</cell><cell></cell> + <cell>6 bushels</cell></row> +<row><cell></cell><cell>Total value of product.</cell><cell>Rent.</cell> + <cell>Total value of product.</cell><cell>Rent.</cell> + <cell>Total value of product.</cell><cell>Rent.</cell> + <cell>Total value of product.</cell></row> +<row><cell>$1.00</cell><cell>$24.00</cell><cell>$0.00</cell> + <cell>....</cell><cell>....</cell><cell>....</cell><cell>....</cell> + <cell>....</cell></row> +<row><cell>$1.33</cell><cell>$32.00</cell><cell>$8.00</cell> + <cell>$24.00</cell><cell>$0.00</cell><cell>....</cell><cell>....</cell> + <cell>....</cell></row> +<row><cell>$2.00</cell><cell>$48.00</cell><cell>$24.00</cell> + <cell>$36.00</cell><cell>$12.00</cell><cell>$24.00</cell><cell>$0.00</cell> + <cell>....</cell></row> +<row><cell>$4.00</cell><cell>$96.00</cell><cell>$72.00</cell> + <cell>$72.00</cell><cell>$48.00</cell><cell>$48.00</cell><cell>$24.00</cell> + <cell>$24.00</cell></row> +</table> + +<pb n='281'/><anchor id='Pg281'/> + +<p> +It was long thought by political economists, among the +rest even by Adam Smith, that the produce of land is always +at a monopoly value, because (they said), in addition +to the ordinary rate of profit, it always yields something +further for rent. This we now see to be erroneous. A thing +can not be at a monopoly value when its supply can be increased +to an indefinite extent if we are only willing to +incur the cost. As long as there is any land fit for cultivation, +which at the existing price can not be profitably cultivated +at all, there must be some land a little better, which +will yield the ordinary profit, but allow nothing for rent: +and that land, if within the boundary of a farm, will be +cultivated by the farmer; if not so, probably by the proprietor, +or by some other person on sufferance. Some such +land at least, under cultivation, there can scarcely fail to be. +</p> + +<p> +Rent, therefore, forms no part of the cost of production +which determines the value of agricultural produce. The +land or the capital most unfavorably circumstanced among +those actually employed, pays no rent, and that land or capital +determines the cost of production which regulates the +value of the whole produce. Thus rent is, as we have already +seen, no cause of value, but the price of the privilege +which the inequality of the returns to different portions of +agricultural produce confers on all except the least favored +portion. +</p> + +<p> +Rent, in short, merely equalizes the profits of different +farming capitals, by enabling the landlord to appropriate +all extra gains occasioned by superiority of natural advantages. +If all landlords were unanimously to forego their +rent, they would but transfer it to the farmers, without +benefiting the consumer; for the existing price of corn +would still be an indispensable condition of the production +of part of the existing supply, and if a part obtained that +price the whole would obtain it. Rent, therefore, unless +artificially increased by restrictive laws, is no burden on +the consumer: it does not raise the price of corn, and is no +otherwise a detriment to the public than inasmuch as if the +<pb n='282'/><anchor id='Pg282'/> +state had retained it, or imposed an equivalent in the shape +of a land-tax, it would then have been a fund applicable to +general instead of private advantage. +</p> + +<quote rend='display'> +The nationalization of the land, consequently, would not +benefit the laboring-classes a whit through lowering the price +to them, or any consumer, of food or agricultural produce. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Rent of Mines and Fisheries and ground-rent of Buildings, and cases of gain +analogous to Rent.</head> + +<p> +Agricultural productions are not the only commodities +which have several different costs of production at once, +and which, in consequence of that difference, and in proportion +to it, afford a rent. Mines are also an instance. Almost +all kinds of raw material extracted from the interior +of the earth—metals, coals, precious stones, etc.—are obtained +from mines differing considerably in fertility—that +is, yielding very different quantities of the product to the +same quantity of labor and capital. There are, perhaps, +cases in which it is impossible to extract from a particular +vein, in a given time, more than a certain quantity of ore, +because there is only a limited surface of the vein exposed, +on which more than a certain number of laborers can not be +simultaneously employed. But this is not true of all mines. +In collieries, for example, some other cause of limitation +must be sought for. In some instances the owners limit the +quantity raised, in order not too rapidly to exhaust the mine; +in others there are said to be combinations of owners, to keep +up a monopoly price by limiting the production. Whatever +be the causes, it is a fact that mines of different degrees of +richness are in operation, and since the value of the produce +must be proportional to the cost of production at the worst +mine (fertility and situation taken together), it is more than +proportional to that of the best. All mines superior in produce +to the worst actually worked will yield, therefore, a +rent equal to the excess. They may yield more; and the +worst mine may itself yield a rent. Mines being comparatively +few, their qualities do not graduate gently into one +another, as the qualities of land do; and the demand may be +such as to keep the value of the produce considerably above +the cost of production at the worst mine now worked, without +<pb n='283'/><anchor id='Pg283'/> +being sufficient to bring into operation a still worse. +During the interval, the produce is really at a scarcity value. +</p> + +<p> +Fisheries are another example. Fisheries in the open sea +are not appropriated, but fisheries in lakes or rivers almost +always are so, and likewise oyster-beds or other particular +fishing-grounds on coasts. We may take salmon-fisheries as +an example of the whole class. Some rivers are far more +productive in salmon than others. None, however, without +being exhausted, can supply more than a very limited demand. +All others, therefore, will, if appropriated, afford a +rent equal to the value of their superiority. +</p> + +<p> +Both in the case of mines and of fisheries, the natural +order of events is liable to be interrupted by the opening of +a new mine, or a new fishery, of superior quality to some of +those already in use. In this case, when things have permanently +adjusted themselves, the result will be that the scale +of qualities which supply the market will have been cut +short at the lower end, while a new insertion will have been +made in the scale at some point higher up; and the worst +mine or fishery in use—the one which regulates the rents +of the superior qualities and the value of the commodity—will +be a mine or fishery of better quality than that by +which they were previously regulated. +</p> + +<p> +The ground-rent of a building, and the rent of a garden +or park attached to it, will not be less than the rent which +the same land would afford in agriculture, but may be greater +than this to an indefinite amount; the surplus being either +in consideration of beauty or of convenience, the convenience +often consisting in superior facilities for pecuniary gain. +Sites of remarkable beauty are generally limited in supply, +and therefore, if in great demand, are at a scarcity value. +Sites superior only in convenience are governed as to their +value by the ordinary principles of rent. The ground-rent +of a house in a small village is but little higher than the rent +of a similar patch of ground in the open fields. +</p> + +<quote rend='display'> +<p> +Suppose the various kinds of land to be represented by the +alphabet; that those below O pay no agricultural rent, and that +<pb n='284'/><anchor id='Pg284'/> +all lands increase in fertility and situation as we approach the +beginning of the alphabet, but which, as far up as K, are used +in agriculture; that higher than K all are more profitably used +for building purposes, viz.: +</p> + +<p> +A, B, C, ... | K, L, M, N, O, | ... X, Y, Z. +</p> + +<p> +Now it will happen that land is chosen for building purposes +irrespective of its fertility for agricultural purposes. It will +not be true, as some may think, that no land will be used for +building until it will pay a ground-rent greater than the greatest +agricultural rent paid by any piece of land. It is not true, +for example, if N be selected for a building-lot, that it must +pay a ground-rent as high as the agricultural rent of K, the +most fertile land cultivated in agriculture. It must pay a +ground-rent higher only than it itself would pay, if cultivated. +It is only necessary that it pay more than the same (not better) +land would pay as rent if used only in agriculture. +</p> +</quote> + +<p> +The rents of wharfage, dock, and harbor room, water-power, +and many other privileges, may be analyzed on similar +principles. Take the case, for example, of a patent or +exclusive privilege for the use of a process by which the +cost of production is lessened. If the value of the product +continues to be regulated by what it costs to those who are +obliged to persist in the old process, the patentee will make +an extra profit equal to the advantage which his process possesses +over theirs. This extra profit is essentially similar to +rent, and sometimes even assumes the form of it, the patentee +allowing to other producers the use of his privilege in consideration +of an annual payment. +</p> + +<p> +The extra gains which any producer or dealer obtains +through superior talents for business, or superior business +arrangements, are very much of a similar kind. If all his +competitors had the same advantages, and used them, the +benefit would be transferred to their customers through the +diminished value of the article; he only retains it for himself +because he is able to bring his commodity to market at +a lower cost, while its value is determined by a higher.<note place='foot'>F. A. +Walker (<q>Political Economy,</q> pp. 248-259) expands this idea, and +makes it the pivotal part of his whole theory of distribution among laborers, +capitalists, and landlords.</note> +</p> + +</div> + +<pb n='285'/><anchor id='Pg285'/> + +<div> +<index index='toc'/> +<head>§ 4. <hi rend='italic'>Résumé</hi> of the laws of value of each of the three +classes of commodities.</head> + +<p> +A general <hi rend='italic'>résumé</hi> of the laws of value, where a free +movement of labor and capital exists, may now be briefly made +in the following form: +</p> + +<p> +Exchange value has three conditions, viz.:<lb/> +1. Utility, or ability to satisfy a desire (U).<lb/> +2. Difficulty of attainment (D), according to which there are three classes of +commodities.<lb/> +3. Transferableness. +</p> + +<p> +Of the second condition, there are three classes:<lb/> +1. Those limited in supply—e.g., ancient pictures or monopolized articles.<lb/> +2. Those whose supply is capable of indefinite increase by the use of +labor and capital.<lb/> +3. Those whose supply is gained at a gradually increasing cost, under the law +of diminishing returns. +</p> + +<p> +Of those limited in supply, their value is regulated by Demand and Supply. +The only limit is U. +</p> + +<p> +Of those whose supply is capable of indefinite increase, their normal and permanent +value is regulated by Cost of Production, and their temporary or market value is +regulated by Demand and Supply, oscillating around Cost of Production (which consists +of the amount of labor and abstinence required). +</p> + +<p> +Of those whose supply is gained at a gradually increasing cost, their normal value is +regulated by the Cost of Production of that portion of the whole amount of the whole +amount needed, which is brought to market at the greatest expense, and their market +value is regulated by Demand and Supply (as in class 2). +</p> + +<p> +If there be no free competition between industries, then the +value of those commodities which has been said, in the above +classification, to depend on cost of production, will be governed +by the law of Reciprocal Demand. +</p> + +</div> + +</div> + +<pb n='286'/><anchor id='Pg286'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_IV'/> +<head>Chapter IV. Of Money.</head> + +<div> +<index index='toc'/> +<head>§ 1. The three functions of Money—a Common Denominator of Value, +a Medium of Exchange, a <q>Standard of Value</q>.</head> + +<p> +Having proceeded thus far in ascertaining the general +laws of Value, without introducing the idea of Money +(except occasionally for illustration), it is time that we should +now superadd that idea, and consider in what manner the +principles of the mutual interchange of commodities are +affected by the use of what is termed a Medium of Exchange. +</p> + +<quote rend='display'> +<p> +As Professor Jevons<note place='foot'><q>Money and the Mechanism of +Exchange,</q> chap. iii.</note> has pointed out, money performs three +distinct services, capable of being separated by the mind, and +worthy of separate definition and explanation: +</p> + +<p> +1. A Common Measure, or Common Denominator, of Value. +</p> + +<p> +2. A Medium of Exchange. +</p> + +<p> +3. A Standard of Value. +</p> + +<p> +F. A. Walker,<note place='foot'><q>Political Economy,</q> +p. 127.</note> however, says: <q>Money is the medium of +exchange. Whatever performs this function, does this work, +is money, no matter what it is made of.... That which does +the money-work is the money-thing.</q> +</p> +</quote> + +<p> +(1.) [If we had no money] the first and most obvious [inconvenience] +would be the want of a <emph>common measure for +values</emph> of different sorts. If a tailor had only coats, and +wanted to buy bread or a horse, it would be very troublesome +to ascertain how much bread he ought to obtain for a coat, +or how many coats he should give for a horse. The calculation +must be recommenced on different data every time he +bartered his coats for a different kind of article, and there +could be no current price or regular quotations of value. As +it is much easier to compare different lengths by expressing +<pb n='287'/><anchor id='Pg287'/> +them in a common language of feet and inches, so it is much +easier to compare values by means of a common language of +[dollars and cents]. +</p> + +<quote rend='display'> +<p> +The need of a common denominator of values (an excellent +term, introduced by Storch), to whose terms the values of all +other commodities may be reduced, and so compared, is as +great as that the inhabitants of the different States of the +United States should have a common language as a means by +which ideas could be communicated to the whole nation. A +man may have a horse, whose value he wishes to compare in +some common term with the value of his house, although he +might not wish to sell either. A valuation by the State for +taxation could not exist but for this common denominator, or +register, of value. +</p> + +<p> +(2.) The second function is that of a medium of exchange. +The distinction between this function and the common denominator +of value is that the latter measures value, the former +transfers value. The man owning the horse, after having measured +its value by comparison with a given thing, may now wish +to exchange it for other things. This discloses the need of another +quality in money. +</p> +</quote> + +<p> +The inconveniences of barter are so great that, without +some more commodious means of effecting exchanges, the +division of employments could hardly have been carried to +any considerable extent. A tailor, who had nothing but +coats, might starve before he could find any person having +bread to sell who wanted a coat: besides, he would not want +as much bread at a time as would be worth a coat, and the +coat could not be divided. Every person, therefore, would +at all times hasten to dispose of his commodity in exchange +for anything which, though it might not be fitted to his own +immediate wants, was in great and general demand, and +easily divisible, so that he might be sure of being able to +purchase with it whatever was offered for sale. The thing +which people would select to keep by them for making purchases +must be one which, besides being divisible and generally +desired, does not deteriorate by keeping. This reduces +the choice to a small number of articles. +</p> + +<quote rend='display'> +<p> +This need is well explained by the following facts furnished +by Professor Jevons: <q>Some years since, Mademoiselle Zélie, +<pb n='288'/><anchor id='Pg288'/> +a singer of the Théâtre Lyrique at Paris, made a professional +tour round the world, and gave a concert in the Society Islands. +In exchange for an air from <q>Norma</q> and a few other songs, +she was to receive a third part of the receipts. When counted, +her share was found to consist of three pigs, twenty-three turkeys, +forty-four chickens, five thousand cocoanuts, besides considerable +quantities of bananas, lemons, and oranges. In the +Society Islands, however, pieces of money were very scarce; +and, as mademoiselle could not consume any considerable portion +of the receipts herself, it became necessary in the mean +time to feed the pigs and poultry with the fruit.</q><note place='foot'><q>Money +and the Mechanism of Exchange,</q> p. 1.</note> +</p> + +<p> +(3.) The third function desired of money is what is usually +termed a <q>standard of value.</q> It is, perhaps, better expressed +by F. A. Walker<note place='foot'><q>Political Economy,</q> +p. 144.</note> as a <q>standard of deferred payments.</q> Its +existence is due to the desire to have a means of comparing the +purchasing power of a commodity at one time with its purchasing +power at another distant time; that is, that for long contracts, +exchanges may be in unchanged ratios at the beginning +and at the end of the contracts. There is no distinction between +this function and the first, except one arising from the +introduction of <emph>time</emph>. At the same time and place, the <q>standard +of value</q> is given in the common denominator of value. +</p> +</quote> + +<p> +A Measure of Value,<note place='foot'>The substance of Mr. Mill's former chapter, +XV (Book III), is here inserted +in its direct connection with the functions of money.</note> +in the ordinary sense of the word +measure, would mean something by comparison with which +we may ascertain what is the value of any other thing. +When we consider, further, that value itself is relative, and +that two things are necessary to constitute it, independently +of the third thing which is to measure it, we may define a +Measure of Value to be something, by comparing with which +any two other things, we may infer their value in relation +to one another. +</p> + +<p> +In this sense, any commodity will serve as a measure of +value at a given time and place; since we can always infer +the proportion in which things exchange for one another, +when we know the proportion in which each exchanges for +any third thing. To serve as a convenient measure of value +is one of the functions of the commodity selected as a medium +<pb n='289'/><anchor id='Pg289'/> +of exchange. It is in that commodity that the values +of all other things are habitually estimated. +</p> + +<p> +But the desideratum sought by political economists is +not a measure of the value of things at the same time and +place, but a measure of the value of the same thing at different +times and places: something by comparison with +which it may be known whether any given thing is of +greater or less value now than a century ago, or in this +country than in America or China. To enable the money +price of a thing at two different periods to measure the +quantity of things in general which it will exchange for, the +same sum of money must correspond at both periods to the +same quantity of things in general—that is, money must +always have the same exchange value, the same general purchasing +power. Now, not only is this not true of money, or +of any other commodity, but we can not even suppose any +state of circumstances in which it would be true. +</p> + +<quote rend='display'> +<p> +It being very clear that money, or the precious metals, do +not themselves remain absolutely stable in value for long periods, +the only way in which a <q>standard of value</q> can be properly +established is by the proposed <q>multiple standard of +value,</q> stated as follows: +</p> + +<p> +<q>A number of articles in general use—corn, beef, potatoes, +wool, cotton, silk, tea, sugar, coffee, indigo, timber, iron, coal, +and others—shall be taken, in a definite quantity of each, so +many pounds, or bushels, or cords, or yards, to form a standard +required. The value of these articles, in the quantities specified, +and all of standard quality, shall be ascertained monthly +or weekly by Government, and the total sum [in money] which +would then purchase this bill of goods shall be, thereupon, +officially promulgated. Persons may then, if they choose, make +their contracts for future payments in terms of this multiple +or tabular standard.</q><note place='foot'>F. A. Walker, +<q>Political Economy,</q> p. 363. A German, Count Soden +(1805), Joseph Lowe (1822), and G. Poulett Scrope (1833), proposed this scheme. +See Jevons, <q>Money and the Mechanism of Exchange,</q> chap. xxv.</note> +A, who had borrowed $1,000 of B in +1870 for ten years, would make note of the total money value +of all these articles composing the multiple standard, which we +will suppose is $125 in 1870. Consequently, A would promise +to pay B eight multiple units in ten years (that is, eight times +$125, or $1,000). But, if other things change in value relatively +<pb n='290'/><anchor id='Pg290'/> +to money during these ten years, the same sum of money—$1,000—in +1880 will not return to B the same just amount +of purchasing power which he parted with in 1870. Now, if, +in 1880, when his note falls due, the government list is examined, +and it is found that commodities in general have fallen in +value relatively to gold, the multiple unit will not amount to +as much gold as it did in 1870; perhaps each unit may be +rated only at $100. In that case, A is obliged to pay back but +eight multiple units, which costs him only $800 in money, while +B receives from A the same amount of purchasing power over +other commodities which he loaned to him. B had no just claim +to ten units, since the fall of all commodities relatively to gold +was not due to his exertions. On the other hand, if, between +1870 and 1880, prices had risen, <hi rend='italic'>mutatis mutandis</hi>, the eight +units would have cost A more than $1,000 in gold; but he would +have been justly obliged to return the same amount of purchasing +power to B which he received from him. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Gold and Silver, why fitted for those purposes.</head> + +<p> +By a tacit concurrence, almost all nations, at a very +early period, fixed upon certain metals, and especially gold +and silver, to serve this purpose. No other substances unite +the necessary qualities in so great a degree, with so many +subordinate advantages. These were the things which it +most pleased every one to possess, and which there was most +certainty of finding others willing to receive in exchange +for any kind of produce. They were among the most imperishable +of all substances. They were also portable, and, +containing great value in small bulk, were easily hid; a consideration +of much importance in an age of insecurity. +Jewels are inferior to gold and silver in the quality of +divisibility; and are of very various qualities, not to be accurately +discriminated without great trouble. Gold and silver +are eminently divisible, and, when pure, always of the +same quality; and their purity may be ascertained and certified +by a public authority. +</p> + +<p> +Jevons<note place='foot'><q>Money and the Mechanism of Exchange,</q> +p. 31.</note> has more fully stated the requisites for a perfect +money as— +</p> + +<list type='ordered'> +<item>1. Value.</item> +<item>2. Portability.</item> +<item>3. Indestructibility.</item> +<item>4. Homogeneity.</item> +<item>5. Divisibility.</item> +<item>6. Stability of value.</item> +<item>7. Cognizability.</item> +</list> + +<pb n='291'/><anchor id='Pg291'/> + +<p> +Accordingly, though furs have been employed as money +in some countries, cattle in others, in Chinese Tartary cubes +of tea closely pressed together, the shells called cowries on +the coast of Western Africa, and in Abyssinia at this day +blocks of rock-salt, gold and silver have been generally preferred +by nations which were able to obtain them, either by +industry, commerce, or conquest. To the qualities which +originally recommended them, another came to be added, +the importance of which only unfolded itself by degrees. +Of all commodities, they are among the least influenced by +any of the causes which produce fluctuations of value. No +commodity is quite free from such fluctuations. Gold and +silver have sustained, since the beginning of history, one +great permanent alteration of value, from the discovery of +the American mines. +</p> + +<p> +In the present age the opening of new sources of supply, +so abundant as the Ural Mountains, California, and Australia, +may be the commencement of another period of decline, on +the limits of which it would be useless at present to speculate. +But, on the whole, no commodities are so little exposed +to causes of variation. They fluctuate less than almost +any other things in their cost of production. And, from +their durability, the total quantity in existence is at all times +so great in proportion to the annual supply, that the effect +on value even of a change in the cost of production is not +sudden: a very long time being required to diminish materially +the quantity in existence, and even to increase it very +greatly not being a rapid process. Gold and silver, therefore, +are more fit than any other commodity to be the subject +of engagements for receiving or paying a given quantity +at some distant period. +</p> + +<quote rend='display'> +Since Mr. Mill wrote, two great changes in the production +of the precious metals have occurred. The discoveries of gold, +briefly referred to by him, have led to an enormous increase of +the existing fund of gold (see chart <ref target='Chart_IX'>No. IX</ref>, +<ref target='Book_III_Chapter_VI'>Chap. VI</ref>), and a +fall in the value of gold within twenty years after the discoveries, +according to Mr. Jevons's celebrated study,<note place='foot'><q>A Serious +Fall in the Value of Gold</q> (1863).</note> of from nine +<pb n='292'/><anchor id='Pg292'/> +to fifteen per cent. Another change took place, a change in +the value, of silver, in 1876, which has resulted in a permanent +fall of its value since that time (see chart <ref target='Chart_X'>No. X</ref>, +<ref target='Book_III_Chapter_VII'>Chap. VII</ref>). +Before that date, silver sold at about 60<hi rend='italic'>d.</hi> +per ounce in the central market of the world, London; and now it remains about +52<hi rend='italic'>d.</hi> per ounce, although it once fell to +47<hi rend='italic'>d.</hi>, in July, 1876. In +spite of Mr. Mill's expressions of confidence in their stability of +value—although certainly more stable than other commodities—the +events of the last thirty-five years have fully shown that +neither gold nor silver—silver far less than gold—can successfully +serve as a perfect <q>standard of value</q> for any considerable +length of time. +</quote> + +<p> +When gold and silver had become virtually a medium +of exchange, by becoming the things for which people generally +sold, and with which they generally bought, whatever +they had to sell or to buy, the contrivance of coining obviously +suggested itself. By this process the metal was +divided into convenient portions, of any degree of smallness, +and bearing a recognized proportion to one another; and the +trouble was saved of weighing and assaying at every change +of possessors—an inconvenience which, on the occasion of +small purchases, would soon have become insupportable. +Governments found it their interest to take the operation +into their own hands, and to interdict all coining by private +persons. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Money a mere contrivance for facilitating exchanges, which does not +affect the laws of value.</head> + +<p> +It must be evident, however, that the mere introduction +of a particular mode of exchanging things for one +another, by first exchanging a thing for money, and then exchanging +the money for something else, makes no difference +in the essential character of transactions. It is not with +money that things are really purchased. Nobody's income +(except that of the gold or silver miner) is derived from the +precious metals. The [dollars or cents] which a person receives +weekly or yearly are not what constitutes his income; +they are a sort of tickets or orders which he can present for +payment at any shop he pleases, and which entitle him to receive +a certain value of any commodity that he makes choice +of. The farmer pays his laborers and his landlord in these +tickets, as the most convenient plan for himself and them; +<pb n='293'/><anchor id='Pg293'/> +but their real income is their share of his corn, cattle, and +hay, and it makes no essential difference whether he distributes +it to them directly, or sells it for them and gives +them the price. There can not, in short, be intrinsically a +more insignificant thing, in the economy of society, than +money; except in the character of a contrivance for sparing +time and labor. It is a machine for doing quickly and commodiously +what would be done, though less quickly and +commodiously, without it; and, like many other kinds of +machinery, it only exerts a distinct and independent influence +of its own when it gets out of order. +</p> + +<p> +The introduction of money does not interfere with the +operation of any of the Laws of Value laid down in the preceding +chapters. The reasons which make the temporary or +market value of things depend on the demand and supply, +and their average and permanent values upon their cost of +production, are as applicable to a money system as to a system +of barter. Things which by barter would exchange for +one another will, if sold for money, sell for an equal amount +of it, and so will exchange for one another still, though the +process of exchanging them will consist of two operations +instead of only one. The relations of commodities to one +another remain unaltered by money; the only new relation +introduced is their relation to money itself; how much or +how little money they will exchange for; in other words, +how the Exchange Value of money itself is determined. +Money is a commodity, and its value is determined like that +of other commodities, temporarily by demand and supply, +permanently and on the average by cost of production. +</p> + +</div> + +</div> + +<pb n='294'/><anchor id='Pg294'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_V'/> +<head>Chapter V. Of The Value Of Money, As Dependent On Demand And Supply.</head> + +<div> +<index index='toc'/> +<head>§ 1. Value of Money, an ambiguous expression.</head> + +<p> +The Value of Money is to appearance an expression as +precise, as free from possibility of misunderstanding, as any +in science. The value of a thing is what it will exchange +for; the value of money is what money will exchange for, +the purchasing power of money. If prices are low, money +will buy much of other things, and is of high value; if prices +are high, it will buy little of other things, and is of low +value. The value of money is inversely as general prices; +falling as they rise, and rising as they fall. When one person +lends to another, as well as when he pays wages or rent +to another, what he transfers is not the mere money, but a +right to a certain value of the produce of the country, to be +selected at pleasure; the lender having first bought this +right, by giving for it a portion of his capital. What he +really lends is so much capital; the money is the mere instrument +of transfer. But the capital usually passes from the +lender to the receiver through the means either of money, or +of an order to receive money, and at any rate it is in money +that the capital is computed and estimated. Hence, borrowing +capital is universally called borrowing money; the loan +market is called the money market; those who have their +capital disposable for investment on loan are called the moneyed +class; and the equivalent given for the use of capital, +or, in other words, interest, is not only called the interest of +money, but, by a grosser perversion of terms, the value of +money. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. The Value of Money depends on its quantity.</head> + +<p> +The value or purchasing power of money depends, +<pb n='295'/><anchor id='Pg295'/> +in the first instance, on demand and supply. But demand +and supply, in relation to money, present themselves in a +somewhat different shape from the demand and supply of +other things. +</p> + +<p> +The supply of a commodity means the quantity offered +for sale. But it is not usual to speak of offering money for +sale. People are not usually said to buy or sell money. +This, however, is merely an accident of language. In point +of fact, money is bought and sold like other things, whenever +other things are bought and sold <emph>for</emph> money. Whoever sells +corn, or tallow, or cotton, buys money. Whoever buys bread, +or wine, or clothes, sells money to the dealer in those articles. +The money with which people are offering to buy, is money +offered for sale. The supply of money, then, is the quantity +of it which people are wanting to lay out; that is, all the +money they have in their possession, except what they are +hoarding, or at least keeping by them as a reserve for future +contingencies. The supply of money, in short, is all the +money in <emph>circulation</emph> at the time. +</p> + +<p> +The demand for money, again, consists of all the goods +offered for sale. Every seller of goods is a buyer of money, +and the goods he brings with him constitute his demand. +The demand for money differs from the demand for other +things in this, that it is limited only by the means of the +purchaser. +</p> + +<quote rend='display'> +In this last statement Mr. Mill is misled by his former definition +of demand as <q>quantity demanded.</q> He has the true idea +of demand in this case regarding money; but the demand for +money does not, as he thinks, differ from the demand for other +things, inasmuch as, in our corrected view of demand for other +things (p. <ref target='Pg255'>255</ref>), it was found that the demand for other things +than money was also limited by the means of the purchaser.<note place='foot'>F. A. +Walker defines the demand for money as <q>the occasion for the use +of money in effecting exchanges; in other words, it is the amount of money-work +to be done</q> (<q>Political Economy,</q> p. 133); and the supply of money as +<q>the money-force available to do the money-work which the demand for money +indicates as required to be done, in the given community, at the given time. The +supply of money is measured by ... the amount of money and the rapidity of +circulation</q> (ibid., p. 136).</note> +</quote> + +<pb n='296'/><anchor id='Pg296'/> + +<p> +As the whole of the goods in the market compose the +demand for money, so the whole of the money constitutes +the demand for goods. The money and the goods are seeking +each other for the purpose of being exchanged. They +are reciprocally supply and demand to one another. It is +indifferent whether, in characterizing the phenomena, we +speak of the demand and supply of goods, or the supply and +the demand of money. They are equivalent expressions. +</p> + +<p> +Supposing the money in the hands of individuals to be +increased, the wants and inclinations of the community collectively +in respect to consumption remaining exactly the +same, the increase of demand would reach all things equally, +and there would be a universal rise of prices. Let us rather +suppose, therefore, that to every pound, or shilling, or penny +in the possession of any one, another pound, shilling, or +penny were suddenly added. There would be an increased +money demand, and consequently an increased money value, +or price, for things of all sorts. This increased value would +do no good to any one; would make no difference, except +that of having to reckon [dollars and cents] in higher numbers. +It would be an increase of values only as estimated in +money, a thing only wanted to buy other things with; and +would not enable any one to buy more of them than before. +Prices would have risen in a certain ratio, and the value of +money would have fallen in the same ratio. +</p> + +<p> +It is to be remarked that this ratio would be precisely +that in which the quantity of money had been increased. If +the whole money in circulation was doubled, prices would be +doubled. If it was only increased one fourth, prices would +rise one fourth. There would be one fourth more money, all +of which would be used to purchase goods of some description. +When there had been time for the increased supply +of money to reach all markets, or (according to the conventional +metaphor) to permeate all the channels of circulation, +all prices would have risen one fourth. But the general rise +of price is independent of this diffusing and equalizing process. +Even if some prices were raised more, and others less, +<pb n='297'/><anchor id='Pg297'/> +the average rise would be one fourth. This is a necessary +consequence of the fact that a fourth more money would +have been given for only the same quantity of goods. <emph>General</emph> +prices, therefore, would in any case be a fourth higher. +</p> + +<p> +So that the value of money, other things being the same, +varies inversely as its quantity; every increase of quantity +lowering the value, and every diminution raising it, in a ratio +exactly equivalent. This, it must be observed, is a property +peculiar to money. We did not find it to be true of commodities +generally, that every diminution of supply raised +the value exactly in proportion to the deficiency, or that +every increase lowered it in the precise ratio of the excess. +Some things are usually affected in a greater ratio than that +of the excess or deficiency, others usually in a less; because, +in ordinary cases of demand, the desire, being for the thing +itself, may be stronger or weaker; and the amount of what +people are willing to expend on it, being in any case a limited +quantity, may be affected in very unequal degrees by +difficulty or facility of attainment. But in the case of +money, which is desired as the means of universal purchase, +the demand consists of everything which people have to sell; +and the only limit to what they are willing to give, is the +limit set by their having nothing more to offer. The whole +of the goods being in any case exchanged for the whole of +the money which comes into the market to be laid out, they +will sell for less or more of it, exactly according as less or +more is brought. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. —Together with the Rapidity of Circulation.</head> + +<p> +It might be supposed that there is always in circulation +in a country a quantity of money equal in value to the +whole of the goods then and there on sale. But this would +be a complete misapprehension. The money laid out is +equal in value to the goods it purchases; but the quantity of +money laid out is not the same thing with the quantity in +circulation. As the money passes from hand to hand, the +same piece of money is laid out many times before all the +things on sale at one time are purchased and finally removed +from the market; and each pound or dollar must be counted +<pb n='298'/><anchor id='Pg298'/> +for as many pounds or dollars as the number of times it +changes hands in order to effect this object. +</p> + +<p> +If we assume the quantity of goods on sale, and the number +of times those goods are resold, to be fixed quantities, the +value of money will depend upon its quantity, together with +the average number of times that each piece changes hands +in the process. The whole of the goods sold (counting each +resale of the same goods as so much added to the goods) have +been exchanged for the whole of the money, multiplied by +the number of purchases made on the average by each piece. +Consequently, the amount of goods and of transactions being +the same, the value of money is inversely as its quantity +multiplied by what is called the rapidity of circulation. And +the quantity of money in circulation is equal to the money +value of all the goods sold, divided by the number which +expresses the rapidity of circulation. +</p> + +<quote rend='display'> +<p> +This may be expressed in mathematical language, where V +is the value of money, Q is the quantity in circulation, and R +the number expressing the rapidity of circulation, as follows: +</p> + +<p> +V = 1 / (Q × R). +</p> +</quote> + +<p> +The phrase, rapidity of circulation, requires some comment. +It must not be understood to mean the number of +purchases made by each piece of money in a given time. +Time is not the thing to be considered. The state of society +may be such that each piece of money hardly performs more +than one purchase in a year; but if this arises from the +small number of transactions—from the small amount of +business done, the want of activity in traffic, or because +what traffic there is mostly takes place by barter—it constitutes +no reason why prices should be lower, or the value of +money higher. The essential point is, not how often the +same money changes hands in a given time, but how often +it changes hands in order to perform a given amount of +traffic. We must compare the number of purchases made +by the money in a given time, not with the time itself, but +with the goods sold in that same time. If each piece of +<pb n='299'/><anchor id='Pg299'/> +money changes hands on an average ten times while goods +are sold to the value of a million sterling, it is evident that +the money required to circulate those goods is £100,000. +And, conversely, if the money in circulation is £100,000, and +each piece changes hands, by the purchase of goods, ten times +in a month, the sales of goods for money which take place +every month must amount, on the average, to £1,000,000. +[The essential point to be considered is] the average number +of purchases made by each piece in order to affect a given +pecuniary amount of transactions. +</p> + +<quote rend='display'> +<q>There is no doubt that the rapidity of circulation varies +very much between one country and another. A thrifty people +with slight banking facilities, like the French, Swiss, Belgians, +and Dutch, hoard coin much more than an improvident +people like the English, or even a careful people, with a perfect +banking system, like the Scotch. Many circumstances, +too, affect the rapidity of circulation. Railways and rapid +steamboats enable coin and bullion to be more swiftly remitted +than of old; telegraphs prevent its needless removal, and the +acceleration of the mails has a like effect.</q> <q>So different are +the commercial habits of different peoples, that there evidently +exists no proportion whatever between the amount of currency +in a country and the aggregate of the exchanges which can be +effected by it.</q><note place='foot'>Jevons, <q>Money and +the Mechanism of Exchange,</q> pp. 336, 339.</note> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Explanations and Limitations of this Principle.</head> + +<p> +The proposition which we have laid down respecting +the dependence of general prices upon the quantity of money +in circulation must be understood as applying only to a state +of things in which money—that is, gold or silver—is the exclusive +instrument of exchange, and actually passes from +hand to hand at every purchase, credit in any of its shapes +being unknown. When credit comes into play as a means +of purchasing, distinct from money in hand, we shall hereafter +find that the connection between prices and the amount +of the circulating medium is much less direct and intimate, +and that such connection as does exist no longer admits of +so simple a mode of expression. That an increase of the +quantity of money raises prices, and a diminution lowers +them, is the most elementary proposition in the theory of +<pb n='300'/><anchor id='Pg300'/> +currency, and without it we should have no key to any of +the others. In any state of things, however, except the +simple and primitive one which we have supposed, the +proposition is only true, other things being the same. +</p> + +<p> +It is habitually assumed that whenever there is a greater +amount of money in the country, or in existence, a rise of +prices must necessarily follow. But this is by no means an +inevitable consequence. In no commodity is it the quantity +in existence, but the quantity offered for sale, that determines +the value. Whatever may be the quantity of money +in the country, only that part of it will affect prices which +goes into the market of commodities, and is there actually +exchanged against goods. Whatever increases the amount +of this portion of the money in the country tends to raise +prices. +</p> + +<quote rend='display'> +This statement needs modification, since the change in the +amounts of specie in the bank reserves, particularly of England +and the United States, determines the amount of credit +and purchasing power granted, and so affects prices in that +way; but prices are affected not by this specie being actually +exchanged against goods. +</quote> + +<p> +It frequently happens that money to a considerable +amount is brought into the country, is there actually invested +as capital, and again flows out, without having ever +once acted upon the markets of commodities, but only upon +the market of securities, or, as it is commonly though improperly +called, the money market. +</p> + +<p> +A foreigner landing in the country with a treasure might +very probably prefer to invest his fortune at interest; which +we shall suppose him to do in the most obvious way by becoming +a competitor for a portion of the stock, railway debentures, +mercantile bills, mortgages, etc., which are at all +times in the hands of the public. By doing this he would +raise the prices of those different securities, or in other +words would lower the rate of interest; and since this +would disturb the relation previously existing between the +rate of interest on capital in the country itself and that in +<pb n='301'/><anchor id='Pg301'/> +foreign countries, it would probably induce some of those +who had floating capital seeking employment to send it +abroad for foreign investment, rather than buy securities at +home at the advanced price. As much money might thus +go out as had previously come in, while the prices of commodities +would have shown no trace of its temporary presence. +This is a case highly deserving of attention; and it is +a fact now beginning to be recognized that the passage of +the precious metals from country to country is determined +much more than was formerly supposed by the state of the +loan market in different countries, and much less by the state +of prices. +</p> + +<p> +If there be, at any time, an increase in the number of +money transactions, a thing continually liable to happen +from differences in the activity of speculation, and even in +the time of year (since certain kinds of business are transacted +only at particular seasons), an increase of the currency +which is only proportional to this increase of transactions, +and is of no longer duration, has no tendency to raise prices. +</p> + +<quote rend='display'> +For example, bankers in Eastern cities each year send in +the autumn to the West, as the crops are gathered, very large +sums of money, to settle transactions in the buying and selling +of grain, wool, etc., but it again flows back to the great centers +of business in a short time, in payment of purchases from +Eastern merchants. +</quote> + +</div> + +</div> + +<pb n='302'/><anchor id='Pg302'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_VI'/> +<head>Chapter VI. Of The Value Of Money, As Dependent On Cost Of Production.</head> + +<div> +<index index='toc'/> +<head>§ 1. The value of Money, in a state of Freedom, conforms to the value of the +Bullion contained in it.</head> + +<p> +But money, no more than commodities in general, +has its value definitely determined by demand and supply. +The ultimate regulator of its value is Cost of Production. +</p> + +<p> +We are supposing, of course, that things are left to themselves. +Governments have not always left things to themselves. +It was, until lately, the policy of all governments to +interdict the exportation and the melting of money; while, +by encouraging the exportation and impeding the importation +of other things, they endeavored to have a stream of +money constantly flowing in. By this course they gratified +two prejudices: they drew, or thought that they drew, more +money into the country, which they believed to be tantamount +to more wealth; and they gave, or thought that they +gave, to all producers and dealers, high prices, which, though +no real advantage, people are always inclined to suppose to +be one. +</p> + +<p> +We are, however, to suppose a state, not of artificial regulation, +but of freedom. In that state, and assuming no charge +to be made for coinage, the value of money will conform to +the value of the bullion of which it is made. A pound-weight +of gold or silver in coin, and the same weight in an ingot, +will precisely exchange for one another. On the supposition +of freedom, the metal can not be worth more in the state of +bullion than of coin; for as it can be melted without any loss +of time, and with hardly any expense, this would of course +be done until the quantity in circulation was so much diminished +<pb n='303'/><anchor id='Pg303'/> +as to equalize its value with that of the same weight in +bullion. It may be thought, however, that the coin, though +it can not be of less, may be, and being a manufactured article +will naturally be, of greater value than the bullion contained +in it, on the same principle on which linen cloth is +of more value than an equal weight of linen yarn. This +would be true, were it not that Government, in this country +and in some others, coins money gratis for any one who furnishes +the metal. If Government, however, throws the expense +of coinage, as is reasonable, upon the holder, by making +a charge to cover the expense (which is done by giving back +rather less in coin than has been received in bullion, and is +called levying a seigniorage), the coin will rise, to the extent +of the seigniorage, above the value of the bullion. If the +mint kept back one per cent, to pay the expense of coinage, +it would be against the interest of the holders of bullion to +have it coined, until the coin was more valuable than the +bullion by at least that fraction. The coin, therefore, would +be kept one per cent higher in value, which could only be +by keeping it one per cent less in quantity, than if its coinage +were gratuitous. +</p> + +<quote rend='display'> +In the United States there was no charge for seigniorage +on gold and silver to 1853, when one half of one per cent was +charged as interest on the delay if coin was immediately delivered +on the deposit of bullion; in 1873 it was reduced to +one fifth of one per cent; and in 1875, by a provision of the +Resumption Act, it was wholly abolished (the depositor, however, +paying for the copper alloy). For the trade-dollars, as +was consistent with their being only coined ingots and not legal +money, a seigniorage was charged equal simply to the expense +of coinage, which was one and a quarter per cent at +Philadelphia, and one and a half per cent at San Francisco on +the tale value. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. —Which is determined by the cost of production.</head> + +<p> +The value of money, then, conforms permanently, +and in a state of freedom almost immediately, to the value +of the metal of which it is made; with the addition, or not, +of the expenses of coinage, according as those expenses are +borne by the individual or by the state. +</p> + +<p> +To the majority of civilized countries gold and silver are +<pb n='304'/><anchor id='Pg304'/> +foreign products: and the circumstances which govern the +values of foreign products present some questions which we +are not yet ready to examine. For the present, therefore, +we must suppose the country which is the subject of our inquiries +to be supplied with gold and silver by its own mines +[as in the case of the United States], reserving for future +consideration how far our conclusions require modification +to adapt them to the more usual case. +</p> + +<p> +Of the three classes into which commodities are divided—those +absolutely limited in supply, those which may be +had in unlimited quantity at a given cost of production, and +those which may be had in unlimited quantity, but at an +increasing cost of production—the precious metals, being the +produce of mines, belong to the third class. Their natural +value, therefore, is in the long run proportional to their cost +of production in the most unfavorable existing circumstances, +that is, at the worst mine which it is necessary to work in +order to obtain the required supply. A pound weight of +gold will, in the gold-producing countries, ultimately tend +to exchange for as much of every other commodity as is +produced at a cost equal to its own; meaning by its own +cost the cost in labor and expense at the least productive +sources of supply which the then existing demand makes it +necessary to work. The average value of gold is made to +conform to its natural value in the same manner as the values +of other things are made to conform to their natural value. +Suppose that it were selling above its natural value; that is, +above the value which is an equivalent for the labor and expense +of mining, and for the risks attending a branch of industry +in which nine out of ten experiments have usually +been failures. A part of the mass of floating capital which +is on the lookout for investment would take the direction +of mining enterprise; the supply would thus be increased, +and the value would fall. If, on the contrary, it were selling +below its natural value, miners would not be obtaining +the ordinary profit; they would slacken their works; if the +depreciation was great, some of the inferior mines would +<pb n='305'/><anchor id='Pg305'/> +perhaps stop working altogether: and a falling off in the +annual supply, preventing the annual wear and tear from +being completely compensated, would by degrees reduce the +quantity, and restore the value. +</p> + +<p> +When examined more closely, the following are the details +of the process: If gold is above its natural or cost +value—the coin, as we have seen, conforming in its value +to the bullion—money will be of high value, and the prices +of all things, labor included, will be low. These low prices +will lower the expenses of all producers; but, as their returns +will also be lowered, no advantage will be obtained by any +producer, except the producer of gold; whose returns from +his mine, not depending on price, will be the same as before, +and, his expenses being less, he will obtain extra profits, and +will be stimulated to increase his production. <hi rend='italic'>E converso</hi>, +if the metal is below its natural value; since this is as much +as to say that prices are high, and the money expenses of all +producers unusually great; for this, however, all other producers +will be compensated by increased money returns; the +miner alone will extract from his mine no more metal than +before, while his expenses will be greater: his profits, therefore, +being diminished or annihilated, he will diminish his +production, if not abandon his employment. +</p> + +<p> +In this manner it is that the value of money is made to +conform to the cost of production of the metal of which it is +made. It may be well, however, to repeat (what has been +said before) that the adjustment takes a long time to effect, +in the case of a commodity so generally desired and at the +same time so durable as the precious metals. Being so +largely used, not only as money but for plate and ornament, +there is at all times a very large quantity of these metals in +existence: while they are so slowly worn out that a comparatively +small annual production is sufficient to keep up +the supply, and to make any addition to it which may be +required by the increase of goods to be circulated, or by the +increased demand for gold and silver articles by wealthy consumers. +Even if this small annual supply were stopped entirely, +<pb n='306'/><anchor id='Pg306'/> +it would require many years to reduce the quantity +so much as to make any very material difference in prices. +The quantity may be increased much more rapidly than it +can be diminished; but the increase must be very great before +it can make itself much felt over such a mass of the +precious metals as exists in the whole commercial world. +And hence the effects of all changes in the conditions of +production of the precious metals are at first, and continue +to be for many years, questions of quantity only, with little +reference to cost of production. More especially is this the +case when, as at the present time, many new sources of supply +have been simultaneously opened, most of them practicable +by labor alone, without any capital in advance beyond +a pickaxe and a week's food, and when the operations are as +yet wholly experimental, the comparative permanent productiveness +of the different sources being entirely unascertained. +</p> + +<quote rend='display'> +<p> +For the facts in regard to the production of the precious metals, +see the investigation by Dr. Adolf +Soetbeer,<note place='foot'><q>Edelmetall-Production,</q> in Petermann's +<q>Mittheilungen,</q> Ergänzungsheft, +No. 57.</note> from which +Chart IX has been taken. It is worthy of careful study. The +figures in each period, at the top of the respective spaces, give the +average annual production during those years. The last period +has been added by me from figures taken from the reports of +the Director of the United States Mint. Other accessible +sources, for the production of the precious metals, are the +tables in the appendices to the Report of the Committee to +the House of Commons on the <q>Depreciation of Silver</q> +(1876); the French official Procès-Verbaux of the International +Monetary Conference of 1881, which give Soetbeer's +figures to a later date than his publication above mentioned; +the various papers in the British parliamentary documents; +and the reports of the director of our mint. Since 1850 more +gold has been produced than in the whole period preceding, +from 1492 to 1850. Previous to 1849 the annual average product +of gold, out of the total product of both gold and silver, +was thirty-six per cent; for the twenty-six years ending in +1875, it has been seventy and one half per cent. The result +has been a rise in gold prices certainly down to 1862,<note place='foot'>See +Jevons's <q>A Serious Fall in the Value of Gold.</q></note> as shown +by the following chart. +<pb n='308'/><anchor id='Pg308'/> +It will be observed how much +higher the prices rose +during the depression after 1858 +than it was during a period of +similar conditions after 1848. +The result, it may be said, was +predicted by Chevalier.<note place='foot'>In his book +<q>De la Baisse probable de l'Or</q> (1859). See also Cairnes's +<q>Essays.</q> For authorities on the new gold, see Robinson's <q>California</q> (Larkin's +and Mason's Reports, pp. 17, 33); Executive Documents of United States, +1848, I, 1; Westgarth's <q>Colony of Victoria,</q> pp. 122, 315; Wood, <q>Sixteen +Months in the Gold Diggings,</q> p. 125; Lalor's <q>Cyclopædia,</q> II, p. 851; +Walker, <q>Money,</q> part i, chaps. vii, viii. For the probable effects, see <q>North +American Review,</q> October, 1852; Tooke's <q>History of Prices,</q> vi, p. 224; +<q>Statistical Journal,</q> 1878, p. 230; Levasseur, <q>Question de l'Or.</q> As to how +far the value of gold was lowered, Jevons, <q>Serious Fall,</q> etc.; <q>Statistical +Journal,</q> 1865; ibid., 1869, p. 445; and Giffen's <q>Essays in Finance,</q> +p. 82.</note> +</p> +</quote> + +<anchor id='Chart_IX'/> +<p> +Chart IX. +</p> + +<p> +<hi rend='italic'>Chart showing the Production of the Precious Metals, +according to Value, from 1493 to 1879.</hi> +</p> + +<table rend="latexcolumns: 'p{2cm} p{1.8cm} p{1.8cm} p{1.8cm}'; + tblcolumns: 'lw(5) r r r'"> +<row><cell>Years.</cell><cell>Silver.</cell><cell>Gold.</cell><cell>Total.</cell></row> +<row><cell>1493-1520</cell><cell>$2,115,000</cell><cell>$4,045,500</cell> + <cell>$6,160,500</cell></row> +<row><cell>1521-1544</cell><cell>4,059,000</cell><cell>4,994,000</cell> + <cell>9,053,000</cell></row> +<row><cell>1545-1560</cell><cell>14,022,000</cell><cell>5,935,500</cell> + <cell>19,957,500</cell></row> +<row><cell>1561-1580</cell><cell>13,477,500</cell><cell>4,770,750</cell> + <cell>18,248,250</cell></row> +<row><cell>1581-1600</cell><cell>18,850,500</cell><cell>5,147,500</cell> + <cell>23,998,000</cell></row> +<row><cell>1601-1620</cell><cell>19,030,500</cell><cell>5,942,750</cell> + <cell>24,973,250</cell></row> +<row><cell>1621-1640</cell><cell>17,712,000</cell><cell>5,789,250</cell> + <cell>23,501,250</cell></row> +<row><cell>1641-1660</cell><cell>16,483,500</cell><cell>6,117,000</cell> + <cell>22,600,500</cell></row> +<row><cell>1661-1680</cell><cell>15,165,000</cell><cell>6,458,750</cell> + <cell>21,623,750</cell></row> +<row><cell>1681-1700</cell><cell>15,385,500</cell><cell>7,508,500</cell> + <cell>22,894,000</cell></row> +<row><cell>1701-1720</cell><cell>16,002,000</cell><cell>8,942,000</cell> + <cell>24,944,000</cell></row> +<row><cell>1721-1740</cell><cell>19,404,000</cell><cell>13,308,250</cell> + <cell>32,712,250</cell></row> +<row><cell>1741-1760</cell><cell>23,991,500</cell><cell>17,165,500</cell> + <cell>41,157,000</cell></row> +<row><cell>1761-1780</cell><cell>29,373,250</cell><cell>14,441,750</cell> + <cell>43,815,000</cell></row> +<row><cell>1781-1800</cell><cell>39,557,750</cell><cell>12,408,500</cell> + <cell>51,966,250</cell></row> +<row><cell>1801-1810</cell><cell>40,236,750</cell><cell>12,400,000</cell> + <cell>52,636,750</cell></row> +<row><cell>1811-1820</cell><cell>24,334,750</cell><cell>7,983,000</cell> + <cell>32,317,750</cell></row> +<row><cell>1821-1830</cell><cell>20,725,250</cell><cell>9,915,750</cell> + <cell>30,641,000</cell></row> +<row><cell>1831-1840</cell><cell>26,840,250</cell><cell>14,151,500</cell> + <cell>40,991,750</cell></row> +<row><cell>1841-1850</cell><cell>35,118,750</cell><cell>38,194,250</cell> + <cell>73,313,000</cell></row> +<row><cell>1851-1855</cell><cell>39,875,250</cell><cell>137,766,750</cell> + <cell>177,642,000</cell></row> +<row><cell>1856-1860</cell><cell>40,724,500</cell><cell>143,725,250</cell> + <cell>184,449,750</cell></row> +<row><cell>1861-1865</cell><cell>49,551,750</cell><cell>129,123,250</cell> + <cell>178,675,000</cell></row> +<row><cell>1866-1870</cell><cell>60,258,750</cell><cell>133,850,000</cell> + <cell>194,108,750</cell></row> +<row><cell>1871-1875</cell><cell>88,624,000</cell><cell>119,045,750</cell> + <cell>207,669,750</cell></row> +<row><cell>1876-1879</cell><cell>110,575,000</cell><cell>119,710,000</cell> + <cell>230,285,000</cell></row> +</table> + +<p rend='text-align: center'> + <figure url='images/gold-prices.png' rend='width: 40%'> + <head>Chart showing rise of average gold prices after the gold +discoveries of 1849 to 1862.</head> + <figDesc>Illustration: Rise of Average Gold Prices.</figDesc> + </figure> +</p> + +<quote rend='display'> +<p> +The fall of prices from 1873 +to 1879, owing to the commercial +panic in the former year, +however, is regarded, somewhat +unjustly, in my opinion, as an +evidence of an appreciation of +gold. Mr. Giffen's paper in +the <q>Statistical Journal,</q> vol. +xlii, is the basis on which Mr. +Goschen founded an argument +in the <q>Journal of the Institute +of Bankers</q> (London), May, +1883, and which attracted considerable +attention. On the other +side, see Bourne, <q>Statistical +Journal,</q> vol. xlii. The claim +that the value of gold has risen +seems particularly hasty, especially +when we consider that after +the panics of 1857 and 1866 +the value of money rose, for reasons +not affecting gold, respectively +fifteen and twenty-five +per cent. +</p> + +<p> +The very thing for which the precious metals are most recommended +for use as the materials of money—their <emph>durability</emph>—is +also the very thing which has, for all practical purposes, +excepted them from the law of cost of production, and caused +<pb n='309'/><anchor id='Pg309'/> +their value to depend practically upon the law of demand and +supply. Their durability is the reason of the vast accumulations +in existence, and this it is which makes the annual product +very small in relation to the whole existing supply, and so +prevents its value from conforming, except after a long term +of years, to the cost of production of the annual supply. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. This law, how related to the principle laid down in the preceding +chapter.</head> + +<p> +Since, however, the value of money really conforms, +like that of other things, though more slowly, to its cost of +production, some political economists have objected altogether +to the statement that the value of money depends on +its quantity combined with the rapidity of circulation, which, +they think, is assuming a law for money that does not exist +for any other commodity, when the truth is that it is governed +by the very same laws. To this we may answer, in +the first place, that the statement in question assumes no +peculiar law. It is simply the law of demand and supply, +which is acknowledged to be applicable to all commodities, +and which, in the case of money, as of most other things, is +controlled, but not set aside, by the law of cost of production, +since cost of production would have no effect on value +if it could have none on supply. But, secondly, there really +is, in one respect, a closer connection between the value of +money and its quantity than between the values of other +things and their quantity. The value of other things conforms +to the changes in the cost of production, without requiring, +as a condition, that there should be any actual +alteration of the supply: the potential alteration is sufficient; +and, if there even be an actual alteration, it is but a +temporary one, except in so far as the altered value may +make a difference in the demand, and so require an increase +or diminution of supply, as a consequence, not a cause, of the +alteration in value. Now, this is also true of gold and silver, +considered as articles of expenditure for ornament and luxury; +but it is not true of money. If the permanent cost of +production of gold were reduced one fourth, it might happen +that there would not be more of it bought for plate, +gilding, or jewelry, than before; and if so, though the value +would fall, the quantity extracted from the mines for these +<pb n='310'/><anchor id='Pg310'/> +purposes would be no greater than previously. Not so with +the portion used as money: that portion could not fall in +value one fourth unless actually increased one fourth; for, +at prices one fourth higher, one fourth more money would +be required to make the accustomed purchases; and, if this +were not forthcoming, some of the commodities would be +without purchasers, and prices could not be kept up. Alterations, +therefore, in the cost of production of the precious +metals do not act upon the value of money except just in +proportion as they increase or diminish its quantity; which +can not be said of any other commodity. It would, therefore, +I conceive, be an error, both scientifically and practically, to +discard the proposition which asserts a connection between +the value of money and its quantity. +</p> + +<quote rend='display'> +There are cases, however, in which the <emph>potential</emph> change of +the precious metals affects their value as money in the same +way that it affects the value of other things. Such a case +was the change in the value of silver in 1876. The usual causes +assigned for that serious fall in value were the greatly increased +production from the mines of Nevada; the demonetization of +silver by Germany; and the decreased demand for export to +India. It is true that the exports of silver from England to +India fell off from about $32,000,000 in 1871-1872 to about +$23,000,000 in 1874-1875; but none of the increased Nevada +silver was exported from the United States to London, nor had Germany +put more than $30,000,000 of her silver on the market;<note place='foot'><q>Report +of the House of Commons on Depreciation of Silver,</q> 1876, p. v.</note> +and yet the price of silver so fell that the depreciation +amounted to 20-¼ per cent as compared with the average price +between 1867 and 1872. The change in value, however, took +place without any corresponding change in the actual quantity +in circulation. The relation between prices and the quantities +of the precious metals is, therefore, not so exact, certainly as +regards silver, as Mr. Mill would have us believe; and thus +their values conform more nearly to the general law of Demand +and Supply in the same way that it affects things other than +money. +</quote> + +<p> +It is evident, however, that the cost of production, in +the long run, regulates the quantity; and that every country +(temporary fluctuation excepted) will possess, and have in +<pb n='311'/><anchor id='Pg311'/> +circulation, just that quantity of money which will perform +all the exchanges required of it, consistently with maintaining +a value conformable to its cost of production. The +prices of things will, on the average, be such that money +will exchange for its own cost in all other goods: and, precisely +because the quantity can not be prevented from affecting +the value, the quantity itself will (by a sort of self-acting +machinery) be kept at the amount consistent with that standard +of prices—at the amount necessary for performing, at +those prices, all the business required of it. +</p> + +</div> + +</div> + +<pb n='312'/><anchor id='Pg312'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_VII'/> +<head>Chapter VII. Of A Double Standard And Subsidiary Coins.</head> + +<div> +<index index='toc'/> +<head>§ 1. Objections to a Double Standard.</head> + +<p> +Though the qualities necessary to fit any commodity +for being used as money are rarely united in any considerable +perfection, there are two commodities which possess +them in an eminent and nearly an equal degree—the two +precious metals, as they are called—gold and silver. Some +nations have accordingly attempted to compose their circulating +medium of these two metals indiscriminately. +</p> + +<p> +There is an obvious convenience in making use of the +more costly metal for larger payments, and the cheaper one +for smaller; and the only question relates to the mode in +which this can best be done. The mode most frequently +adopted has been to establish between the two metals a fixed +proportion [to decide by law, for example, that sixteen +grains of silver should be equivalent to one grain of gold]; +and it being left free to every one who has a [dollar] to pay, +either to pay it in the one metal or in the other. +</p> + +<p> +If [their] natural or cost values always continued to bear +the same ratio to one another, the arrangement would be unobjectionable. +This, however, is far from being the fact. +Gold and silver, though the least variable in value of all +commodities, are not invariable, and do not always vary +simultaneously. Silver, for example, was lowered in permanent +value more than gold by the discovery of the American +mines; and those small variations of value which take place +occasionally do not affect both metals alike. Suppose such +a variation to take place—the value of the two metals relatively +to one another no longer agreeing with their rated +<pb n='313'/><anchor id='Pg313'/> +proportion—one or other of them will now be rated below its +bullion value, and there will be a profit to be made by melting +it. +</p> + +<p> +Suppose, for example, that gold rises in value relatively +to silver, so that the quantity of gold in a sovereign is now +worth more than the quantity of silver in twenty shillings. +Two consequences will ensue. No debtor will any longer +find it his interest to pay in gold. He will always pay in +silver, because twenty shillings are a legal tender for a debt +of one pound, and he can procure silver convertible into +twenty shillings for less gold than that contained in a sovereign. +The other consequence will be that, unless a sovereign +can be sold for more than twenty shillings, all the +sovereigns will be melted, since as bullion they will purchase +a greater number of shillings than they exchange for as coin. +The converse of all this would happen if silver, instead of +gold, were the metal which had risen in comparative value. +A sovereign would not now be worth so much as twenty +shillings, and whoever had a pound to pay would prefer paying +it by a sovereign; while the silver coins would be collected +for the purpose of being melted, and sold as bullion +for gold at their real value—that is, above the legal valuation. +The money of the community, therefore, would never +really consist of both metals, but of the one only which, at +the particular time, best suited the interest of debtors; and +the standard of the currency would be constantly liable to +change from the one metal to the other, at a loss, on each +change, of the expense of coinage on the metal which fell +out of use. +</p> + +<quote rend='display'> +This is the operation by which is carried into effect the law +of Sir Thomas Gresham (a merchant of the time of Elizabeth) +to the purport that <q>money of less value drives out money of +more value,</q> where both are legal payments among individuals. +A celebrated instance is that where the clipped coins of England +were received by the state on equal terms with new and +perfect coin before 1695. They hanged men and women, but +they did not prevent the operation of Gresham's law and the +disappearance of the perfect coins. When the state refused the +clipped coins at legal value, by no longer receiving them in payment +<pb n='314'/><anchor id='Pg314'/> +of taxes, the trouble ceased.<note place='foot'>See Macaulay, +<q>History of England,</q> chap. xxi.</note> Jevons gives a striking +illustration of the same law: <q>At the time of the treaty of +1858 between Great Britain, the United States, and Japan, +which partially opened up the last country to European traders, +a very curious system of currency existed in Japan. The most +valuable Japanese coin was the kobang, consisting of a thin +oval disk of gold about two inches long, and one and a quarter +inch wide, weighing two hundred grains, and ornamented in a +very primitive manner. It was passing current in the towns of +Japan for four silver itzebus, but was worth in English money +about 18<hi rend='italic'>s.</hi> 5<hi rend='italic'>d.</hi>, +whereas the silver itzebu was equal only to +about 1<hi rend='italic'>s.</hi> 4<hi rend='italic'>d.</hi> +[four itzebus being worth in English money 5<hi rend='italic'>s.</hi> +4<hi rend='italic'>d.</hi>]. The earliest European traders enjoyed a rare opportunity +for making profit. By buying up the kobangs at the native +rating they trebled their money, until the natives, perceiving +what was being done, withdrew from circulation the remainder +of the gold.</q><note place='foot'><q>Money and the Mechanism of +Exchange,</q> p. 84.</note> +</quote> + +<p> +It appears, therefore, that the value of money is liable to +more frequent fluctuations when both metals are a legal tender +at a fixed valuation than when the exclusive standard of +the currency is either gold or silver. Instead of being only +affected by variations in the cost of production of one metal, +it is subject to derangement from those of two. The particular +kind of variation to which a currency is rendered +more liable by having two legal standards is a fall of value, +or what is commonly called a depreciation, since practically +that one of the two metals will always be the standard of +which the real has fallen below the rated value. If the tendency +of the metals be to rise in value, all payments will be +made in the one which has risen least; and, if to fall, then +in that which has fallen most. +</p> + +<quote rend='display'> +<p> +While liable to <q>more frequent fluctuations,</q> prices do not +follow the <emph>extreme</emph> fluctuations of both metals, as some suppose, +and as is shown by the following diagram.<note place='foot'>Jevons, +ibid., p. 138.</note> A represents the +line of the value of gold, and B of silver, relatively to some +third commodity represented by the horizontal line. Superposing +these curves, C would show the line of <emph>extreme</emph> variations, +while since prices would follow the metal which <emph>falls</emph> in +<pb n='315'/><anchor id='Pg315'/> +value, D would show the actual course of variations. While +the fluctuations are more frequent in D, they are less extreme +than in C. +</p> + +<p rend='text-align: center'> + <figure url='images/double-standard.png' rend='width: 50%'> + <head>Chart showing the line of prices under a double standard.</head> + <figDesc>Illustration.</figDesc> + </figure> +</p> + +</quote> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_III_Chapter_VII_Section_2'/> +<head>§ 2. The use of the two metals as money, and the management of Subsidiary +Coins.</head> + +<p> +The plan of a double standard is still occasionally +brought forward by here and there a writer or orator as a +great improvement in currency. +</p> + +<p> +It is probable that, with most of its adherents, its chief +merit is its tendency to a sort of depreciation, there being at +all times abundance of supporters for any mode, either open +or covert, of lowering the standard. [But] the advantage +without the disadvantages of a double standard seems to be +best obtained by those nations with whom one only of the +two metals is a legal tender, but the other also is coined, and +allowed to pass for whatever value the market assigns to it. +</p> + +<p> +When this plan is adopted, it is naturally the more costly +metal which is left to be bought and sold as an article of +commerce. But nations which, like England, adopt the +more costly of the two as their standard, resort to a different +expedient for retaining them both in circulation, namely (1), +to make silver a legal tender, but only for small payments. +In England no one can be compelled to receive silver in payment +for a larger amount than forty shillings. With this +regulation there is necessarily combined another, namely (2), +that silver coin should be rated, in comparison with gold, +somewhat above its intrinsic value; that there should not +<pb n='316'/><anchor id='Pg316'/> +be, in twenty shillings, as much silver as is worth a sovereign; +for, if there were, a very slight turn of the market +in its favor would make it worth more than a sovereign, and +it would be profitable to melt the silver coin. The overvaluation +of the silver coin creates an inducement to buy +silver and send it to the mint to be coined, since it is given +back at a higher value than properly belongs to it; this, +however, has been guarded against (3) by limiting the quantity +of the silver coinage, which is not left, like that of gold, +to the discretion of individuals, but is determined by the +Government, and restricted to the amount supposed to be required +for small payments. The only precaution necessary +is, not to put so high a valuation upon the silver as to hold +out a strong temptation to private coining. +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_III_Chapter_VII_Section_3'/> +<head>§ 3. The experience of the United States with a double standard from +1792 to 1883.</head> + +<quote rend='display'> +<p> +The experience of the United States with a double +standard, extending as it does from 1792 to 1873 without a +break, and from 1878 to the present time, is a most valuable +source of instruction in regard to the practical working of bimetallism. +While we have nominally had a double standard, +in reality we have either had one alone, or been in a transition +from one to the other standard; and the history of our coinage +strikingly illustrates the truth that the natural values of the +two metals, in spite of all legislation, so vary relatively to each +other that a constant ratio can not be maintained for any +length of time; and that <q>the poor money drives out the +good,</q> according to Gresham's statement. For clearness, the +period may be divided, in accordance with the changes of legislation, +into four divisions: +</p> + +<p> +I. 1792-1834. Transition from gold to silver. +</p> + +<p> +II. 1834-1853. Transition from silver to gold. +</p> + +<p> +III. 1853-1878. Single gold currency (except 1862-1879, +the paper period). +</p> + +<p> +IV. 1878-1884. Transition from gold to silver. +</p> + +<p> +I. With the establishment of the mint, Hamilton agreed +upon the use of both gold and silver in our money, at a ratio +of 15 to 1: that is, that the amount of pure silver in a dollar +should be fifteen times the weight of gold in a dollar. So, +while the various Spanish dollars then in circulation in the +United States seemed to contain on the average about 371-¼ +grains of pure silver, and since Hamilton believed the relative +market value of gold and silver to be about 1 to 15, he +put 1/15 of 371-¼ grains, or 24-¾ grains of pure gold, into the +gold dollar. It was the best possible example of the bimetallic +<pb n='317'/><anchor id='Pg317'/> +system to be found, and the mint ratio was intended to conform +to the market ratio. If this conformity could have been maintained, +there would have been no disturbance. But a cause was +already in operation affecting the supply of one of the metals—silver—wholly +independent of legislation, and without correspondingly +affecting gold. +</p> + +<p> +Two periods of production of silver, in which the production +of silver was great relatively to gold, stand out prominently +in the history of that metal. (1) One was the enormous +yield from the mines of the New World, continuing from 1545 +to about 1640, and (2) the only other period of great production +at all comparable with it (that is, as regards the production +of silver relatively to gold) was that lasting from 1780 to +1820, due to the richness of the Mexican silver-mines. The +first period of ninety-five years was longer than the second, +which was only forty years; yet while about forty-seven times +as much silver as gold was produced on an average during the +first period, the average annual amount of silver produced +relatively to gold was probably a little greater from 1780 to +1820. The effect of the first period in lowering the relation +of silver to gold is well recognized in the history of the precious +metals (see <ref target='Chart_X'>Chart X</ref> for the fall in the value of silver +relatively to gold); that the effect of the second period on the +value of silver has not been greater than was actually caused—it +has not been small—is explicable only by the laws of the +value of money. If you let the same amount of water into a +small reservoir which you let into a large one, the level of the +former will be raised more than the level of the latter. The +great production of the first period was added to a very small +existing stock of silver; that of the second period was added +to a stock increased by the great previous production just mentioned. +The smallness of the annual product relatively to the +total quantity existing in the world requires some time, even +for a production of silver forty-seven times greater than the +gold production, to take its effect on the value of the total +silver stock in existence. The effect of this process was beginning +to be felt soon after the United States decided on a double +standard. For this reason the value of silver was declining about +1800, and, although the annual silver product fell off seriously +after 1820, the value of silver continued to decline even after +that time, because the increased production, dating back to +1780, was just beginning to make itself felt. Thus we have +the phenomenon—which seems very difficult for some persons +to understand—of a falling off in the annual production of silver, +accompanied by a decrease in its value relatively to gold. +</p> + +<p> +This diminishing value of silver began to affect the coinage +of the United States as early as 1811, and by 1820 the +<pb n='319'/><anchor id='Pg319'/> +disappearance of gold was everywhere commented upon. The +process by which this result is produced is a simple one, and +is adopted as soon as a margin of profit is seen arising from a +divergence between the mint and market ratios. In 1820 the +market ratio of gold to silver was 1 to 15.7—that is, the amount +of gold in a dollar (24-¾ grains) would exchange for 15.7 times +as many grains of silver in the market, in the form of bullion; +while at the mint, in the form of coin, it would exchange for +only 15 times as many grains of silver. A broker having 1,000 +gold dollars could buy with them in the market silver bullion +enough (1,000 × 15.7 grains) to have coined, when presented +at the mint, 1,000 dollars in silver pieces, and yet have left +over as a profit by the operation 700 grains of silver. So long +as this can be done, silver (the cheapest money) will be presented +at the mint, and gold (the dearest money) will become +an article of merchandise too valuable to be used as money +when the cheaper silver is legally as good. The best money, +therefore, disappears from circulation, as it did in the United +States before 1820, owing to the fall in the value of silver. It +is to be said, that it has been seriously urged by some writers +that silver did not fall, but that gold rose, in value, owing to +the demand of England for resumption in 1819.<note place='foot'>See S. Dana Horton, +<q>Gold and Silver,</q> 1877, p. 84, <hi rend='italic'>et seq.</hi></note> Chronology +kills this view; for the change in the value of silver began too +early to have been due to English measures, even if conclusive +reasons have not been given above why silver should naturally +have fallen in value. +</p> + +<anchor id='Chart_X'/> +<p rend='text-align: center'> + <figure url='images/chartx.png' rend='width: 80%'> + <head>Chart X. Chart showing the Changes in the Relative Values of +Gold and Silver from 1501 to 1880. From 1501 to 1680 a space is allotted to each +20 years; from 1681 to 1871, to each 10 years; from 1876 to 1880, to each year.</head> + <figDesc>Illustration.</figDesc> + </figure> +</p> + +<p> +II. The change in the relative values of gold and silver finally +forced the United States to change their mint ratio in 1834. +Two courses were open to us: (1) either to increase the quantity +of silver in the dollar until the dollar of silver was intrinsically +worth the gold in the gold dollar; or (2) debase the +gold dollar-piece until it was reduced in value proportionate to +the depreciation of silver since 1792. The latter expedient, +without any seeming regard to the effect on contracts and the +integrity of our monetary standard, was adopted: 6.589 per +cent was taken out of the gold dollar, leaving it containing +23.22 grains of pure gold; and as the silver dollar remained +unchanged (371-¼ grains) the mint ratio established was 1 to +15.988, or, as commonly stated, 1 to 16. Did this correspond +with the market ratio then existing? No. Having seen the +former steady fall in silver, and believing that it would continue, +Congress hoped to anticipate any further fall by making +the mint ratio of gold to silver a little larger than the market +ratio. This was done by establishing the mint ratio of 1 to +15.988, while the market ratio in 1834 was 1 to 15.73. Here, +<pb n='320'/><anchor id='Pg320'/> +again, appeared the difficulty arising from the attempt to balance +a ratio on a movable fulcrum. It will be seen that the +act of 1834 set at work forces for another change in the coinage—forces +of a similar kind, but working in exactly the opposite +direction to those previous to 1834. A dollar of gold coin +would now exchange for more grains of silver at the mint +(15.98) than it would in the form of bullion in the market +(15.73). Therefore it would be more profitable to put gold into +coin than exchange it as bullion. Gold was sent to the mint, +while silver began to be withdrawn from circulation, silver +now being more valuable as bullion than as coin. By 1840 a +silver dollar was worth 102 cents in gold.<note place='foot'>See +Linderman, <q>Money and Legal Tender,</q> p. 161.</note> This movement, +which was displacing silver with gold, received a surprising +and unexpected impetus by the gold discoveries of California +and Australia in 1849, before mentioned, and made gold less +valuable relatively to silver, by lowering the value of gold. +Here, again, was another natural cause, independent of legislation, +and not to be foreseen, altering the value of one of the +precious metals, and in exactly the opposite direction from that +in the previous period, when silver was lowered by the increase +from the Mexican mines. In 1853 a silver dollar was worth +104 cents in gold (i.e., of a gold dollar containing 23.22 grains); +but, some years before, all silver dollars had disappeared from +use, and only gold was in circulation. For a large part of this +period we had in reality a single standard of gold, the other +metal not being able to stay in the currency. +</p> + +<p> +III. After our previous experience, the impossibility of retaining +both metals in the coinage together, on equal terms, +now came to be generally recognized, and was accepted by +Congress in the legislation of 1853. This act made no further +changes intended to adapt the mint to the market ratios, but +remained satisfied with the gold circulation. But hitherto no +regard had been paid to the principles on which a subsidiary +coinage is based, as explained by Mr. Mill in the last section +(<ref target='Book_III_Chapter_VII_Section_2'>§ 2</ref>). +The act of 1853, while acquiescing in the single gold +standard, had for its purpose the readjustment of the subsidiary +coins, which, together with silver dollar-pieces, had all +gone out of circulation. Before this, two halves, four quarters, +or ten dimes contained the same quantity of pure silver as +the dollar-piece (371-¼ grains); therefore, when it became profitable +to withdraw the dollar-pieces and substitute gold, it gave +exactly the same profit to withdraw two halves or four quarters +in silver. For this reason all the subsidiary silver had +gone out of circulation, and there was no <q>small change</q> in +the country. The legislation of 1853 rectified this error: (1) +<pb n='321'/><anchor id='Pg321'/> +by reducing the quantity of pure silver in a dollar's worth of +subsidiary coin to 345.6 grains. By making so much less an +amount of silver equal to a dollar of small coins, it was more +valuable in that shape than as bullion, and there was no reason +for melting it, or withdrawing it (since even if gold and silver +changed considerably in their relative values, 345.6 grains of +silver could not easily rise sufficiently to become equal in +value to a gold dollar, when 371-¼ grains were worth only 104 +cents of the gold dollar); (2) this over-valuation of silver in +subsidiary coin would cause a great flow of silver to the mint, +since silver would be more valuable in subsidiary coin than as +bullion; but this was prevented by the provision (section 4 of +the act of 1853) that the amount or the small coinage should be +limited according to the discretion of the Secretary of the +Treasury; and, (3) in order that the overvalued small coinage +might not be used for purposes other than for effecting change, +its legal-tender power was restricted to payments not exceeding +five dollars. This system, a single gold standard for large, +and silver for small, payments, continued without question, and +with great convenience, until the days of the war, when paper +money (1862-1879) drove out (by its cheapness, again) both +gold and silver. Paper was far cheaper than the cheapest of +the two metals. +</p> + +<p rend='text-align: center'> + <figure url='images/relative-gold-silver.png' rend='width: 60%'> + <head>Relative values of gold and silver, by months, in 1876.</head> + <figDesc>Illustration.</figDesc> + </figure> +</p> + +<p> +The mere fact that the silver dollar-piece had not circulated +since even long before 1853 led the authorities to drop +out the provisions for the coinage of silver dollars and in 1873 +remove it from the list of legal coins (at the ratio of 1 to 15.98, +<pb n='322'/><anchor id='Pg322'/> +the obsolete ratio fixed as far back as 1834). This is what +is known as the <q>demonetization</q> of silver. It had no effect +on the circulation of silver dollars, since none were in use, and +had not been for more than twenty-five years. There had been +no desire up to this time to use silver, since it was more expensive +than gold; indeed, it is somewhat humiliating to our sense +of national honor to reflect that it was not until silver fell so +surprisingly in value (in 1876) that the agitation for its use in +the coinage arose. When a silver dollar was worth 104 cents, +no one wanted it as a means of liquidating debts; when it +came to be worth 86 cents, it was capable of serving debtors +even better than the then appreciating greenbacks. Thus, while +from 1853 (and even before) we had legally two standards, +of both gold and silver, but really only one, that of gold, from +1873 to 1878 we had both legally and really only one standard, +that of gold. +</p> + +<p> +It might be here added, that I have spoken of the silver +dollar as containing 371-¼ grains of pure silver. Of course, +alloy is mixed with the pure silver, sufficient, in 1792, to +make the original dollar weigh 416 grains in all, its <q>standard</q> +weight. In 1837 the amount of alloy was changed from +1/12 to 1/10 of the standard weight, which (as the 371-¼ grains of +pure silver were unchanged) gave the total weight of the dollar +as 412-½ grains, whence the familiar name assigned to this piece. +In 1873, moreover, the mint was permitted to put its stamp and +devices—to what was not money at all, but a <q>coined ingot</q>—on +378 grains of pure silver (420 grains, standard), known as +the <q>trade-dollar.</q> It was intended by this means to make +United States silver more serviceable in the Asiatic trade. +Oriental nations care almost exclusively for silver in payments. +The Mexican silver dollar contained 377-¼ grains of pure silver; +the Japanese yen, 374-4/10; and the United States dollar, 371-¼. +By making the <q>trade-dollar</q> slightly heavier than any coin +used in the Eastern world, it would give our silver a new market; +and the United States Government was simply asked to +certify to the fineness and weight by coining it, provided the +owners of silver paid the expenses of coinage. Inadvertently +the trade-dollar was included in the list of coins in the act of +1873 which were legal tender for payments of five dollars, but, +when this was discovered, it was repealed in 1876. So that the +trade-dollar was not a legal coin, in any sense (although it contained +more silver than the 412-½-grains dollar). They ceased +to be coined in 1878, to which time there had been made $35,959,360. +</p> + +<p> +IV. In February, 1878, an indiscreet and unreasonable movement +induced Congress to authorize the recoinage of the silver +dollar-piece at the obsolete ratio of 1834 (1 to 15.98), while the +<pb n='323'/><anchor id='Pg323'/> +market ratio was 1 to 17.87. So extraordinary a reversal of all +sound principles and such blindness to our previous experience +could be explained only by a desire to force this country to +use a silver coinage only, and had its origin with the owners +of silver-mines, aided by the desires of debtors for a cheap +unit in which to absolve themselves from their indebtedness. +There was no pretense of setting up a double standard about +it; for it was evident to the most ignorant that so great a disproportion +between the mint and market ratios must inevitably +lead to the disappearance of gold entirely. This would happen, +if owners could bring their silver freely, in any amounts, to +the mint for coinage (<q>Free Coinage</q>), and so exchange silver +against gold coin for the purpose of withdrawing gold, since +gold would exchange for less as coin than as bullion. This +immediate result was prevented by a provision in the law, +which prevented the <q>free coinage</q> of silver, and required the +Government itself to buy silver and coin at least $2,000,000 in +silver each month. This retarded, but will not ultimately prevent, +the change from the present gold to a single silver standard. +At the rate of $24,000,000 a year, it is only a question +of time when the Treasury will be obliged to pay out, for +its regular disbursements on the public debt, silver in such +amounts as will drive gold out of circulation. In February, +1884, it was feared that this was already at hand, and was +practically reached in the August following. Unless a repeal +of the law is reached very soon, the uncomfortable spectacle +will be seen of a gradual disarrangement of prices, and consequently +of trade, arising from a change of the standard. +</p> + +<p> +In order that the alternate movements of silver and gold to +the mint for coinage may be seen, there is appended a statement +of the coinage<note place='foot'>Director of the Mint, Report, 1883, p. 49, +and Linderman, ibid., p. 173.</note> during the above periods, which well +shows the effects of Gresham's law. +</p> + +<table rend="latexcolumns: 'p{2.0cm} p{1.4cm} p{1.6cm} p{1.6cm}'; + tblcolumns: 'lw(25) r r r'"> +<row><cell>Ratio in the mint and in the market.</cell> + <cell>Period.</cell><cell>Gold coinage.</cell> + <cell>Silver dollars coined.</cell></row> +<row><cell>1:15 (silver lower in market)</cell><cell>1792-1834</cell> + <cell>$11,825,890</cell><cell>$36,275,077</cell></row> +<row><cell>1:15.98 (gold lower in market)</cell><cell>1834-1853</cell> + <cell>224,965,730</cell><cell>42,936,294</cell></row> +<row><cell>1:15.98 (gold lower in market)</cell><cell>1853-1873</cell> + <cell>544,864,921</cell><cell>5,538,948</cell></row> +<row><cell>Single gold standard.</cell><cell>1873-1878</cell> + <cell>166,253,816</cell><cell>........</cell></row> +<row><cell>1:15.98 (silver lower, but no free coinage)</cell><cell>1878-1883</cell> + <cell>354,019,865</cell><cell>147,255,899</cell></row> +</table> + +<p> +From this it will be seen that there has been an enforced +coinage by the Treasury, of almost twice as many silver dollars +<pb n='324'/><anchor id='Pg324'/> +since 1878 as were coined in all the history of the mint +before, since the establishment of the Government. +</p> + +<p> +It may, perhaps, be asked why the silver dollar of 412-½ +grains, being worth intrinsically only from 86 to 89 cents, does +not depreciate to that value. The Government buys the silver, +owns the coin, and holds all that it can not induce the public +to receive voluntarily; so that but a part of the total coinage +is out of the Treasury. And most of the coins issued are returned +for deposit and silver certificates received in return. +There being no free coinage, and no greater amount in circulation +than satisfies the demand for change, instead of small +bills, the dollar-pieces will circulate at their full value, on the +principle of subsidiary coin, even though overvalued. And the +silver certificates practically go through a process of constant +redemption by being received for customs dues equally with +gold. When they become too great in quantity to be needed +for such purposes, then we may look for the depreciation with +good reason.<note place='foot'>See <q>Atlantic Monthly,</q> +<q>The Silver Danger,</q> May, 1884.</note> +</p> + +<p> +There are, then, the following kinds of legal tender in the +United States in 1884: (1) Gold coins (if not below tolerance); +(2) the silver dollar of 412-½ grains; (3) United States notes +(except for customs and interest on the public debt); (4) subsidiary +silver coinage, to the amount of five dollars; and (5) +minor coins, to the amount of twenty-five cents. +</p> + +<p> +The question of a double standard has provoked no little +vehement discussion and has called forth a considerable literature +since the fall of silver in 1876. A body of opinion exists, +best represented in this country by F. A. Walker and S. D. +Horton, that the relative values of gold and silver may be kept +unchanged, in spite of all natural causes, by the force of law, +which, provided that enough countries join in the plan, shall +fix the ratio of exchange in the coinage for all great commercial +countries, and by this means keep the coinage ratio equivalent +to the bullion ratio. The difficulty with this scheme, even +if it were wholly sufficient, has thus far been in the obstacles +to international agreement. After several international monetary +conferences, in 1867, 1878, and 1881, the project seems +now to have been practically abandoned by all except the most +sanguine. (For a fuller list of authorities on bimetallism, see +<ref target='Appendix_I'>Appendix I</ref>.) +</p> +</quote> + +</div> + +</div> + +<pb n='325'/><anchor id='Pg325'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter VIII. Of Credit, As A Substitute For Money.</head> + +<div> +<index index='toc'/> +<head>§ 1. Credit not a creation but a Transfer of the means of Production.</head> + +<p> +Credit has a great, but not, as many people seem to +suppose, a magical power; it can not make something out of +nothing. How often is an extension of credit talked of as +equivalent to a creation of capital, or as if credit actually +were capital! It seems strange that there should be any +need to point out that, credit being only permission to use +the capital of another person, the means of production can +not be increased by it, but only transferred. If the borrower's +means of production and of employing labor are increased +by the credit given him, the lender's are as much +diminished. The same sum can not be used as capital both +by the owner and also by the person to whom it is lent; it +can not supply its entire value in wages, tools, and materials, +to two sets of laborers at once. It is true that the capital +which A has borrowed from B, and makes use of in his +business, still forms a part of the wealth of B for other purposes; +he can enter into arrangements in reliance on it, and +can borrow, when needful, an equivalent sum on the security +of it; so that to a superficial eye it might seem as if both +B and A had the use of it at once. But the smallest consideration +will show that, when B has parted with his capital to +A, the use of it as capital rests with A alone, and that B has +no other service from it than in so far as his ultimate claim +upon it serves him to obtain the use of another capital from +a third person, C. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. In what manner it assists Production.</head> + +<p> +But, though credit is never anything more than a +transfer of capital from hand to hand, it is generally, and +<pb n='326'/><anchor id='Pg326'/> +naturally, a transfer to hands more competent to employ the +capital efficiently in production. If there were no such +thing as credit, or if, from general insecurity and want of +confidence, it were scantily practiced, many persons who +possess more or less of capital, but who from their occupations, +or for want of the necessary skill and knowledge, can +not personally superintend its employment, would derive no +benefit from it: their funds would either lie idle, or would +be, perhaps, wasted and annihilated in unskillful attempts +to make them yield a profit. All this capital is now lent at +interest, and made available for production. Capital thus +circumstanced forms a large portion of the productive resources +of any commercial country, and is naturally attracted +to those producers or traders who, being in the greatest +business, have the means of employing it to most advantage, +because such are both the most desirous to obtain it and able +to give the best security. Although, therefore, the productive +funds of the country are not increased by credit, they +are called into a more complete state of productive activity. +As the confidence on which credit is grounded extends +itself, means are developed by which even the smallest portions +of capital, the sums which each person keeps by him to +meet contingencies, are made available for productive uses. +The principal instruments for this purpose are banks of deposit. +Where these do not exist, a prudent person must keep +a sufficient sum unemployed in his own possession to meet +every demand which he has even a slight reason for thinking +himself liable to. When the practice, however, has +grown up of keeping this reserve not in his own custody, +but with a banker, many small sums, previously lying idle, +become aggregated in the banker's hands; and the banker, +being taught by experience what proportion of the amount +is likely to be wanted in a given time, and knowing that, if +one depositor happens to require more than the average, +another will require less, is able to lend the remainder, that +is, the far greater part, to producers and dealers: thereby +adding the amount, not indeed to the capital in existence, +<pb n='327'/><anchor id='Pg327'/> +but to that in employment, and making a corresponding addition +to the aggregate production of the community. +</p> + +<p> +While credit is thus indispensable for rendering the +whole capital of the country productive, it is also a means +by which the industrial talent of the country is turned to +better account for purposes of production. Many a person +who has either no capital of his own, or very little, but who +has qualifications for business which are known and appreciated +by some possessors of capital, is enabled to obtain +either advances in money, or, more frequently, goods on +credit, by which his industrial capacities are made instrumental +to the increase of the public wealth. +</p> + +<p> +Such are, in the most general point of view, the uses of +credit to the productive resources of the world. But these +considerations only apply to the credit given to the industrious +classes—to producers and dealers. Credit given by +dealers to unproductive consumers is never an addition, but +always a detriment, to the sources of public wealth. It +makes over in temporary use, not the capital of the unproductive +classes to the productive, but that of the productive +to the unproductive. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Function of Credit in economizing the use of Money.</head> + +<p> +But a more intricate portion of the theory of Credit +is its influence on prices; the chief cause of most of the mercantile +phenomena which perplex observers. In a state of +commerce in which much credit is habitually given, <emph>general +prices at any moment depend much more upon the state of +credit than upon the quantity of money</emph>. For credit, though +it is not productive power, is purchasing power; and a person +who, having credit, avails himself of it in the purchase +of goods, creates just as much demand for the goods, and +tends quite as much to raise their price, as if he made an +equal amount of purchases with ready money. +</p> + +<p> +The credit which we are now called upon to consider, as +a distinct purchasing power, independent of money, is of +course not credit in its simplest form, that of money lent by +one person to another, and paid directly into his hands; for, +when the borrower expends this in purchases, he makes the +<pb n='328'/><anchor id='Pg328'/> +purchases with money, not credit, and exerts no purchasing +power over and above that conferred by the money. The +forms of credit which create purchasing power are those in +which no money passes at the time, and very often none +passes at all, the transaction being included with a mass of +other transactions in an account, and nothing paid but a balance. +This takes place in a variety of ways, which we shall +proceed to examine, beginning, as is our custom, with the +simplest. +</p> + +<p> +First: Suppose A and B to be two dealers, who have +transactions with each other both as buyers and as sellers. +A buys from B on credit. B does the like with respect to +A. At the end of the year, the sum of A's debts to B is +set against the sum of B's debts to A, and it is ascertained +to which side a balance is due. This balance, which may be +less than the amount of many of the transactions singly, and +is necessarily less than the sum of the transactions, is all that +is paid in money; and perhaps even this is not paid, but +carried over in an account current to the next year. A +single payment of a hundred pounds may in this manner +suffice to liquidate a long series of transactions, some of +them to the value of thousands. +</p> + +<p> +But, secondly: The debts of A to B may be paid without +the intervention of money, even though there be no reciprocal +debts of B to A. A may satisfy B by making over to +him a debt due to himself from a third person, C. This is +conveniently done by means of a written instrument, called +a bill of exchange, which is, in fact, a transferable order by +a creditor upon his debtor, and when <emph>accepted</emph> by the debtor, +that is, authenticated by his signature, becomes an acknowledgment +of debt. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Bills of Exchange.</head> +<p> +Bills of exchange were first introduced to save the +expense and risk of transporting the precious metals from +place to place. +</p> + +<p> +The trade between New York and Liverpool affords a constant +illustration of the uses of a bill of exchange. Suppose that +A in New York ships a cargo of wheat, worth $100,000, or +<pb n='329'/><anchor id='Pg329'/> +£20,000, to B in Liverpool; also suppose that C in Liverpool +(independently of the negotiations of A and B) ships, about +the same time, a cargo of steel rails to D in New York, also +worth £20,000. Without the use of bills of exchange, B would +have been obliged to send £20,000 in gold across the Atlantic, +and so would D, at the risk of loss to both. By the device of +bills of exchange the goods +are really bartered against +each other, and all transmission +of money saved. +</p> + +<p rend='text-align: center'> + <figure url='images/bill-of-exchange.png' rend='width: 50%'> + <figDesc>Illustration.</figDesc> + </figure> +</p> + +<p> +A has money due to him in +Liverpool, and he sells his +claim to this money to any +one who wants to make a payment in Liverpool. Going to +his banker (the middle-man between exporters and importers +and the one who deals in such bills) he finds there D, inquiring +for some one who has a claim to money in Liverpool, since D +owes C in Liverpool for his cargo of steel rails. A makes out +a paper title to the £20,000 which B owes him (i.e., a bill of exchange) +and by selling it to D gets immediately his £20,000 there +in New York. The form in which this is done is as follows: +</p> + +<quote rend='display'> +<p> +<hi rend='smallcaps'>New York</hi>, <hi rend='italic'>January 1, 1884</hi>. +</p> + +<p> +At sight [or sixty days after date] of this first bill of exchange +(second and third unpaid), pay to the order of D [the +importer of steel rails] £20,000, value received, and charge the +same to the account of +</p> + +<p> +[Signed] A [exporter of wheat].<lb/> +To B [buyer of wheat],<lb/> +Liverpool, Eng. +</p> +</quote> + +<p> +D has now paid $100,000, or £20,000, to A for a title to +money across the Atlantic in Liverpool, and with this title he +can pay his debt to C for the rails. D indorses the bill of exchange, +as follows: +</p> + +<quote rend='display'> +<p> +Pay to the order of C [the seller of steel rails], Liverpool, +value in account. D [importer of steel rails]. +</p> + +<p> +To B [the buyer of wheat]. +</p> +</quote> + +<p> +By this means D transfers his title to the £20,000 to C, +sends the bill across by mail (<q>first</q> in one steamer, <q>second</q> +in another, to insure certain transmission) to C, who then calls +upon B to pay him the £20,000 instead of B sending it across +the Atlantic to A; and all four persons have made their payments +the more safely by the use of this convenient device. +This is the simplest form of the transaction, and it does not +change the principle on which it is based, when, as is the case, +a banker buys the bills of A, and sells the bills to D—since A +typifies all exporters and D all importers. +</p> + +<pb n='330'/><anchor id='Pg330'/> + +<p> +Bills of exchange having been found convenient as means +of paying debts at distant places without the expense of +transporting the precious metals, their use was afterward +greatly extended from another motive. It is usual in every +trade to give a certain length of credit for goods bought: +three months, six months, a year, even two years, according +to the convenience or custom of the particular trade. A +dealer who has sold goods, for which he is to be paid in six +months, but who desires to receive payment sooner, draws a +bill on his debtor payable in six months, and gets the bill +discounted by a banker or other money-lender, that is, transfers +the bill to him, receiving the amount, minus interest for +the time it has still to run. It has become one of the chief +functions of bills of exchange to serve as a means by which +a debt due from one person can thus be made available for +obtaining credit from another. +</p> + +<quote rend='display'> +Bills of exchange are drawn between the various cities of +the United States. In the West, the factor who is purchasing +grain or wool for a New York firm draws on his New York +correspondents, and this bill (usually certified to by the bill of +lading) is presented for discount at the Western banks; and, +if there are many bills, funds are possibly sent westward to +meet these demands. But the purchases of the West in New +York will serve, even if a little later in time, somewhat to offset +this drain; and the funds will again move eastward, as goods +move westward, practically bartered against each other by the +use of bills. There is, however, less movement of funds of late, +now that Western cities have accumulated more capital of their +own. +</quote> + +<p> +The notes given in consequence of a real sale of goods +can not be considered as on that account <emph>certainly</emph> representing +any actual property. Suppose that A sells £100 worth +of goods to B at six months' credit, and takes a bill at six +months for it; and that B, within a month after, sells the +same goods, at a like credit, to C, taking a like bill; and +again, that C, after another month, sells them to D, taking +a like bill, and so on. There may then, at the end of six +months, be six bills of £100 each existing at the same time, +and every one of these may possibly have been discounted. +<pb n='331'/><anchor id='Pg331'/> +Of all these bills, then, only one represents any actual property. +</p> + +<p> +The extent of a man's actual sales forms some limit to +the amount of his real notes; and, as it is highly desirable in +commerce that credit should be dealt out to all persons in +some sort of regular and due proportion, the measure of a +man's actual sales, certified by the appearance of his bills +drawn in virtue of those sales, is some rule in the case, +though a very imperfect one in many respects. When a +bill drawn upon one person is paid to another (or even to +the same person) in discharge of a debt or a pecuniary claim, +it does something for which, if the bill did not exist, money +would be required: it performs the functions of currency. +This is a use to which bills of exchange are often applied. +</p> + +<p> +Many bills, both domestic and foreign, are at last presented +for payment quite covered with indorsements, each +of which represents either a fresh discounting, or a pecuniary +transaction in which the bill has performed the functions +of money. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Promissory Notes.</head> + +<p> +A third form in which credit is employed as a substitute +for currency is that of promissory notes. +</p> + +<quote rend='display'> +<p> +The difference between a bill of exchange and a promissory +note is, that the former is an order for the payment of money, +while the latter is a promise to pay money. In a note the +promissor is primarily liable; in a bill the drawer becomes liable +only after an ineffectual resort to the drawee. +</p> + +<p> +In the United States a Western merchant who buys $1,000 +worth of cotton goods, for instance, of a Boston commission-house +on credit, customarily gives his note for the amount, and +this note is put upon the market, or presented at a bank for +discount. This plan, however, puts all risk upon the one who +discounted the note. In the United States such promissory +notes are the forms of credit most used between merchants and +buyers. The custom, however, is quite different in England +and Germany (and generally, it is stated, on the Continent), +where bills of exchange are employed in cases where we use a +promissory note. A house in London sells $1,000 worth of cotton +goods to A, in Carlisle, on a credit of sixty days, draws a bill +of exchange on A, which is a demand upon A to pay in a given +time (e.g., sixty days), and if <q>accepted</q> by him is a legal obligation. +The London house takes this bill (perhaps adding its own +<pb n='332'/><anchor id='Pg332'/> +firm name as indorsers to the paper), and presents it for discount +at a London bank. This now explains why it is that, +when a particular industry is prosperous and many goods are +sold, there is more <q>paper</q> offered for discount at the banks +(cf. p. <ref target='Pg222'>222</ref>), and why capital flows readily in that direction. +</p> +</quote> + +<p> +It is chiefly in the latter form [promissory notes] that it +has become, in commercial countries, an express occupation +to issue such substitutes for money. Dealers in money wish +to lend, not their capital merely, but their credit, and not +only such portion of their credit as consists of funds actually +deposited with them, but their power of obtaining credit +from the public generally, so far as they think they can safely +employ it. This is done in a very convenient manner by +lending their own promissory notes payable to bearer on demand—the +borrower being willing to accept these as so much +money, because the credit of the lender makes other people +willingly receive them on the same footing, in purchases or +other payments. These notes, therefore, perform all the +functions of currency, and render an equivalent amount of +money, which was previously in circulation, unnecessary. +As, however, being payable on demand, they may be at any +time returned on the issuer, and money demanded for them, +he must, on pain of bankruptcy, keep by him as much money +as will enable him to meet any claims of that sort which can +be expected to occur within the time necessary for providing +himself with more; and prudence also requires that he +should not attempt to issue notes beyond the amount which +experience shows can remain in circulation without being +presented for payment. +</p> + +<p> +The convenience of this mode of (as it were) coining +credit having once been discovered, governments have +availed themselves of the same expedient, and have issued +their own promissory notes in payment of their expenses; +a resource the more useful, because it is the only mode in +which they are able to borrow money without paying interest. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 6. Deposits and Checks.</head> + +<p> +A fourth mode of making credit answer the purposes +of money, by which, when carried far enough, money +<pb n='333'/><anchor id='Pg333'/> +may be very completely superseded, consists in making payments +by checks. The custom of keeping the spare cash reserved +for immediate use, or against contingent demands, in +the hands of a banker, and making all payments, except +small ones, by orders on bankers, is in this country spreading +to a continually larger portion of the public. If the +person making the payment and the person receiving it +keep their money with the same banker, the payment takes +place without any intervention of money, by the mere transfer +of its amount in the banker's books from the credit of the +payer to that of the receiver. If all persons in [New York] +kept their cash at the same banker's, and made all their payments +by means of checks, no money would be required or +used for any transactions beginning and terminating in [New +York]. This ideal limit is almost attained, in fact, so far +as regards transactions between [wholesale] dealers. It is +chiefly in the retail transactions between dealers and consumers, +and in the payment of wages, that money or bank-notes +now pass, and then only when the amounts are small. +As for the merchants and larger dealers, they habitually +make all payments in the course of their business by checks. +They do not, however, all deal with the same banker, and, +when A gives a check to B, B usually pays it not into the +same but into some other bank. But the convenience of +business has given birth to an arrangement which makes all +the banking-houses of [a] city, for certain purposes, virtually +one establishment. A banker does not send the checks which +are paid into his banking-house to the banks on which they +are drawn, and demand money for them. There is a building +called the Clearing-House, to which every [member of +the association] sends, each afternoon, all the checks on other +bankers which he has received during the day, and they are +there exchanged for the checks on him which have come +into the hands of other bankers, the balances only being paid +in money; or even these not in money, but in checks. +</p> + +<quote rend='display'> +<p> +A clearing-house is simply a circular railing containing as +many openings as there are banks in the association; a clerk +<pb n='334'/><anchor id='Pg334'/> +from each bank presents, in the form of a bundle of checks, at +his opening, all the claims of his bank against all others, and +notes the total amount; a clerk inside takes the checks, distributes +each check to the clerk of the bank against whom it +is drawn, and all that are left at his opening constitute the +total demands of all the other banks against itself; and this +sum total is set off against the given bank's demands upon the +others. The difference, for or against the bank, as the case +may be, may then be settled by a check.<note place='foot'>See +<q>International Review,</q> September, 1876; and for some further explanation +of banks, see <q>Atlantic Monthly,</q> 1882, pp. 196, 695, 696.</note> +</p> + +<p> +The total amount of exchanges made through the New +York Clearing-House in 1883 was $40,293,165,258 (or about +twenty-five times the total of our national debt in that year), +and the balances paid in money were only 3.9 per cent of the +exchanges.<note place='foot'><q>Report of the Comptroller +of the Currency,</q> 1883, p. 34.</note> +For valuable explanations on this subject, consult +Jevons, <q>Money and the Mechanism of Exchange,</q> Chapters +XIX-XXIII. The explanation of the functions of a bank, +Chapter XX, is very good. +</p> +</quote> + +</div> + +</div> + +<pb n='335'/><anchor id='Pg335'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter IX. Influence Of Credit On Prices.</head> + +<div> +<index index='toc'/> +<head>§ 1. What acts on prices is Credit, in whatever shape given.</head> + +<p> +Having now formed a general idea of the modes in +which credit is made available as a substitute for money, we +have to consider in what manner the use of these substitutes +affects the value of money, or, what is equivalent, the prices +of commodities. It is hardly necessary to say that the permanent +value of money—the natural and average prices of +commodities—are not in question here. These are determined +by the cost of producing or of obtaining the precious +metals. An ounce of gold or silver will in the long run exchange +for as much of every other commodity as can be produced +or imported at the same cost with itself. And an +order, or note of hand, or bill payable at sight, for an ounce +of gold, while the credit of the giver is unimpaired, is worth +neither more nor less than the gold itself. +</p> + +<p> +It is not, however, with ultimate or average, but with +immediate and temporary prices that we are now concerned. +These, as we have seen, may deviate very widely from the +standard of cost of production. Among other causes of +fluctuation, one we have found to be the quantity of money +in circulation. Other things being the same, an increase of +the money in circulation raises prices; a diminution lowers +them. If more money is thrown into circulation than the +quantity which can circulate at a value conformable to its +cost of production, the value of money, so long as the excess +lasts, will remain below the standard of cost of production, +and general prices will be sustained above the natural rate. +</p> + +<p> +But we have now found that there are other things, such +<pb n='336'/><anchor id='Pg336'/> +as bank-notes, bills of exchange, and checks, which circulate +as money, and perform all the functions of it, and the question +arises, Do these various substitutes operate on prices in +the same manner as money itself? I apprehend that bank-notes, +bills, or checks, as such, do not act on prices at all. +What does act on prices is Credit, in whatever shape given, +and whether it gives rise to any transferable instruments +capable of passing into circulation or not. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Credit a purchasing Power, similar to Money.</head> + +<p> +Money acts upon prices in no other way than by +being tendered in exchange for commodities. The demand +which influences the prices of commodities consists of the +money offered for them. Money not in circulation has no +effect on prices. +</p> + +<p> +In the case, however, of payment by checks, the purchases +are, at any rate, made, though not with the money in +the buyer's possession, yet with money to which he has a +right. But he may make purchases with money which he +only expects to have, or even only pretends to expect. He +may obtain goods in return for his acceptances payable at a +future time, or on his note of hand, or on a simple book-credit—that +is, on a mere promise to pay. All these purchases +have exactly the same effect on price as if they were +made with ready money. The amount of purchasing power +which a person can exercise is composed of all the money +in his possession or due to him, and of all his credit. For +exercising the whole of this power he finds a sufficient motive +only under peculiar circumstances, but he always possesses +it; and the portion of it which he at any time does +exercise is the measure of the effect which he produces on +price. +</p> + +<p> +Suppose that, in the expectation that some commodity +will rise in price, he determines not only to invest in it all +his ready money, but to take up on credit, from the producers +or importers, as much of it as their opinion of his +resources will enable him to obtain. Every one must see +that by thus acting he produces a greater effect on price +than if he limited his purchases to the money he has actually +<pb n='337'/><anchor id='Pg337'/> +in hand. He creates a demand for the article to the full +amount of his money and credit taken together, and raises +the price proportionally to both. And this effect is produced, +though none of the written instruments called substitutes +for currency may be called into existence; though the +transaction may give rise to no bill of exchange, nor to the +issue of a single bank-note. The buyer, instead of taking a +mere book-credit, might have given a bill for the amount, +or might have paid for the goods with bank-notes borrowed +for that purpose from a banker, thus making the purchase +not on his own credit with the seller, but on the banker's +credit with the seller, and his own with the banker. Had he +done so, he would have produced as great an effect on price +as by a simple purchase to the same amount on a book-credit, +but no greater effect. The credit itself, not the form and +mode in which it is given, is the operating cause. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Great extensions and contractions of Credit. Phenomena of a +commercial crisis analyzed.</head> + +<p> +The inclination of the mercantile public to increase +their demand for commodities by making use of all or much +of their credit as a purchasing power depends on their expectation +of profit. When there is a general impression +that the price of some commodity is likely to rise from an +extra demand, a short crop, obstructions to importation, or +any other cause, there is a disposition among dealers to increase +their stocks in order to profit by the expected rise. +This disposition tends in itself to produce the effect which +it looks forward to—a rise of price; and, if the rise is considerable +and progressive, other speculators are attracted, +who, so long as the price has not begun to fall, are willing +to believe that it will continue rising. These, by further +purchases, produce a further advance, and thus a rise of +price, for which there were originally some rational grounds, +is often heightened by merely speculative purchases, until it +greatly exceeds what the original grounds will justify. After +a time this begins to be perceived, the price ceases to rise, +and the holders, thinking it time to realize their gains, are +anxious to sell. Then the price begins to decline, the holders +rush into the market to avoid a still greater loss, and, +<pb n='338'/><anchor id='Pg338'/> +few being willing to buy in a falling market, the price falls +much more suddenly than it rose. Those who have bought +at a higher price than reasonable calculation justified, and +who have been overtaken by the revulsion before they had +realized, are losers in proportion to the greatness of the fall +and to the quantity of the commodity which they hold, or +have bound themselves to pay for. +</p> + +<p> +This is the ideal extreme case of what is called a commercial +crisis. There is said to be a commercial crisis when +a great number of merchants and traders at once either have, +or apprehend that they shall have, a difficulty in meeting +their engagements. The most usual cause of this general +embarrassment is the recoil of prices after they have been +raised by a spirit of speculation, intense in degree, and extending +to many commodities. When, after such a rise, the +reaction comes and prices begin to fall, though at first perhaps +only through the desire of the holders to realize, speculative +purchases cease; but, were this all, prices would only +fall to the level from which they rose, or to that which is +justified by the state of the consumption and of the supply. +They fall, however, much lower; for as, when prices were +rising, and everybody apparently making a fortune, it was +easy to obtain almost any amount of credit, so now, when +everybody seems to be losing, and many fail entirely, it is +with difficulty that firms of known solidity can obtain even +the credit to which they are accustomed, and which it is the +greatest inconvenience to them to be without, because all +dealers have engagements to fulfill, and, nobody feeling sure +that the portion of his means which he has intrusted to +others will be available in time, no one likes to part with +ready money, or to postpone his claim to it. To these rational +considerations there is superadded, in extreme cases, +a panic as unreasoning as the previous over-confidence; +money is borrowed for short periods at almost any rate of +interest, and sales of goods for immediate payment are made +at almost any sacrifice. Thus general prices, during a commercial +revulsion, fall as much below the usual level as +<pb n='339'/><anchor id='Pg339'/> +during the previous period of speculation they have risen +above it; the fall, as well as the rise, originating not in anything +affecting money, but in the state of credit. +</p> + +<quote rend='display'> +<p> +Professor Jevons seriously advanced a theory that, inasmuch +as the harvests of the world were the causes of good or +bad trade, and that their deficiency would regularly be followed +by commercial distress, then a periodic cause of bad +harvests, if found, would explain the constant recurrence of +commercial crises. This cause he claimed to have found in +the sun-spots, which periodically deprive the crops of that +source of growth which is usually furnished by the sun when +no spots appear.<note place='foot'>See <q>Nature,</q> xix, +33, 588.</note> It has not received general acceptance. +</p> + +<p> +In the United States financial disasters have occurred in +1814, 1819, 1825, 1837-1839, 1857, and 1873. Those of 1837 +and 1873 seem to have been the most serious in their effects; +but this field, so far as scientific study is concerned, has not +been fully worked, and much remains to be learned about these +crises in the United States. The crisis of 1873 was due to +excessive railway-building. It was testified<note place='foot'>See +Walker's <q>Money,</q> p. 473.</note> concerning the +New York banks in 1873 that <q>their capital needed for legitimate +purposes was practically lent out on certain iron rails, +railroad-ties, bridges, and rolling-stock, <emph>called</emph> railroads, many +of them laid down in places where these materials were practically +useless.</q> +</p> + +<p> +Under the effects due to swift communication by steam, +but especially to the electric telegraph, modern credit is a very +different thing from what it was fifty years ago. Now, a +shock on the Bourse at Vienna is felt the same day at Paris, +London, and New York. A commercial crisis in one great +money-center is felt at every other point in the world which +has business connections with it. Moreover, as Cherbuliez<note place='foot'>Vol. i, +p. 302. See Sumner's <q>History of American Currency</q> and Walker's +<q>Money</q> for much valuable material.</note> +says: <q>A country is more subject to crises the more advanced +is its economical development. There are certain maladies +which attack only grown-up persons who have reached a certain +degree of vigor and maturity.</q> +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Influence of the different forms of Credit on Prices.</head> + +<p> +It does not, indeed, follow that credit <emph>will</emph> be more +used because it <emph>can</emph> be. When the state of trade holds out +no particular temptation to make large purchases on credit, +dealers will use only a small portion of the credit-power, +and it will depend only on convenience whether the portion +<pb n='340'/><anchor id='Pg340'/> +which they use will be taken in one form or in another. +One single exertion of the credit-power in the form of (1) +book-credit, is only the foundation of a single purchase; but, +if (2) a bill is drawn, that same portion of credit may serve +for as many purchases as the number of times the bill +changes hands; while (3) every bank-note issued renders +the credit of the banker a purchasing power to that amount +in the hands of all the successive holders, without impairing +any power they may possess of effecting purchases on their +own credit. Credit, in short, has exactly the same purchasing +power with money; and as money tells upon prices +not simply in proportion to its amount, but to its amount +multiplied by the number of times it changes hands, so also +does credit; and credit transferable from hand to hand is in +that proportion more potent than credit which only performs +one purchase. +</p> + +<p> +There is a form of credit transactions (4) by checks on +bankers, and transfers in a banker's books, which is exactly +parallel in every respect to bank-notes, giving equal facilities +to an extension of credit, and capable of acting on prices quite +as powerfully. A bank, instead of lending its notes to a merchant +or dealer, might open an account with him, and credit +the account with the sum it had agreed to advance, on an +understanding that he should not draw out that sum in any +other mode than by drawing checks against it in favor of +those to whom he had occasion to make payments. These +checks might possibly even pass from hand to hand like +bank-notes; more commonly, however, the receiver would +pay them into the hands of his own banker, and when he +wanted the money would draw a fresh check against it; and +hence an objector may urge that as the original check would +very soon be presented for payment, when it must be paid +either in notes or in coin, notes or coin to an equal amount +must be provided as the ultimate means of liquidation. It +is not so, however. The person to whom the check is transferred +may perhaps deal with the same banker, and the +check may return to the very bank on which it was drawn. +</p> + +<pb n='341'/><anchor id='Pg341'/> + +<p> +This is very often the case in country districts; if so, no +payment will be called for, but a simple transfer in the +banker's books will settle the transaction. If the check is +paid into a different bank, it will not be presented for payment, +but liquidated by set-off against other checks; and, +in a state of circumstances favorable to a general extension +of banking credits, a banker who has granted more credit, +and has therefore more checks drawn on him, will also have +more checks on other bankers paid to him, and will only +have to provide notes or cash for the payment of balances; +for which purpose the ordinary reserve of prudent bankers, +one third of their liabilities, will abundantly suffice. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. On what the use of Credit depends.</head> + +<p> +The credit given to any one by those with whom he +deals does not depend on the quantity of bank-notes or coin +in circulation at the time, but on their opinion of his solvency. +If any consideration of a more general character +enters into their calculation, it is only in a time of pressure +on the loan market, when they are not certain of being themselves +able to obtain the credit on which they have been accustomed +to rely; and even then, what they look to is the +general state of the loan market, and not (preconceived theory +apart) the amount of bank-notes. So far, as to the willingness +to <emph>give</emph> credit. And the willingness of a dealer to +<emph>use</emph> his credit depends on his expectations of gain, that is, on +his opinion of the probable future price of his commodity; +an opinion grounded either on the rise or fall already going +on, or on his prospective judgment respecting the supply +and the rate of consumption. When a dealer extends his +purchases beyond his immediate means of payment, engaging +to pay at a specified time, he does so in the expectation +either that the transaction will have terminated favorably +before that time arrives, or that he shall then be in possession +of sufficient funds from the proceeds of his other transactions. +The fulfillment of these expectations depends upon +prices, but not specially upon the amount of bank-notes. +It is obvious, however, that prices do not depend on money, +but on purchases. Money left with a banker, and not drawn +<pb n='342'/><anchor id='Pg342'/> +against, or drawn against for other purposes than buying +commodities, has no effect on prices, any more than credit +which is not used. Credit which <emph>is</emph> used to purchase commodities +affects prices in the same manner as money. Money +and credit are thus exactly on a par in their effect on prices. +</p> + +<quote rend='display'> +It is often seen, in our large cities, that money is very plentiful, +but no one seems to wish its use (that is, no one with safe +securities). Inability to find investments and to find industries +in which the rate of profit is satisfactory—all of which +depends on the business character and activity of the people—will +prevent credit from being used, no matter how many +bank-notes, or greenbacks, or how much gold there is in the +country. It is impossible to make people invest, simply by increasing +the number of counters by which commodities are +exchanged against each other; that is, by increasing the money. +The reason why more credit is wanted is because men see that +increased production is possible of a kind that will find other +commodities ready to be offered (i.e., demand) in exchange for +that production. Normal credit, therefore, on a healthy basis, +increases and slackens with the activity or dullness of trade. +Speculation, or the wild extension of credit, on the other hand, +is apt to be begotten by a plethora of money, which has induced +low rates for loans, and moves with the uncertain waves +of popular impression. By normal credit we mean that the +wealth represented by the credit is really at the disposal of the +borrowers; in a crisis, the quantity of wealth supposed to be +represented by credit is very much greater than that at the +disposal of the lenders.<note place='foot'>See Cherbuliez, vol. i, p. 299.</note> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 6. What is essential to the idea of Money?</head> + +<p> +There has been a great amount of discussion and +argument on the question whether several of these forms of +credit, and in particular whether bank-notes, ought to be +considered as money. It seems to be an essential part of +the idea of money that it be legal tender. An inconvertible +paper which is legal tender is universally admitted to be +money; in the French language the phrase +<foreign lang='fr' rend='italic'>papier-monnaie</foreign> +actually <emph>means</emph> inconvertibility, convertible notes being merely +<foreign lang='fr' rend='italic'>billets à porteur</foreign>. +An instrument which would be deprived +of all value by the insolvency of a corporation can +not be money in any sense in which money is opposed to +credit. It either is not money, or it is money and credit too. +</p> + +<pb n='343'/><anchor id='Pg343'/> + +<quote rend='display'> +It would seem, from all study of the essentials of money +(<ref target='Book_III_Chapter_IV'>Book III, Chapter IV</ref>), +that the necessary part of the idea of +money is that it should have value in itself. No one parts with +valuable commodities for a medium of exchange which does not +possess value; and we have seen that Legislatures can not control +the natural value of even the precious metals by giving +them legal-tender power. Much less could it be done for paper +money. Paper, therefore, may, as an instrument of credit, be +a substitute for money; but, in accordance with the above test, +it can not properly be considered as money in the full sense. +Of course, paper money, checks, etc., perform some of the functions +of money equally well with the precious metals. F. A. +Walker holds that anything is money which performs money-work; +but he excludes checks from his catalogue of things +which may serve as money. It is practically of little importance, +however, what we include under money, so long as its +functions are well understood; it is merely a question of nomenclature, +and need not disturb us. +</quote> + +</div> + +</div> + +<pb n='344'/><anchor id='Pg344'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_X'/> +<head>Chapter X. Of An Inconvertible Paper Currency.</head> + +<div> +<index index='toc'/> +<head>§ 1. What determines the value of an inconvertible paper money?</head> + +<p> +After experience had shown that pieces of paper, of +no intrinsic value, by merely bearing upon them the written +profession of being equivalent to a certain number of francs, +dollars, or pounds, could be made to circulate as such, and +to produce all the benefit to the issuers which could have +been produced by the coins which they purported to represent, +governments began to think that it would be a happy +device if they could appropriate to themselves this benefit, +free from the condition to which individuals issuing such +paper substitutes for money were subject, of giving, when +required, for the sign, the thing signified. They determined +to try whether they could not emancipate themselves +from this unpleasant obligation, and make a piece of +paper issued by them pass for a pound, by merely calling +it a pound, and consenting to receive it in payment of the +taxes. +</p> + +<p> +In the case supposed, the functions of money are performed +by a thing which derives its power of performing +them solely from convention; but convention is quite sufficient +to confer the power; since nothing more is needful to +make a person accept anything as money, and even at any +arbitrary value, than the persuasion that it will be taken +from him on the same terms by others. The only question +is, what determines the value of such a currency, since it can +not be, as in the case of gold and silver (or paper exchangeable +for them at pleasure), the cost of production. +</p> + +<pb n='345'/><anchor id='Pg345'/> + +<p> +We have seen, however, that even in the case of metallic +currency, the immediate agency in determining its value +is its quantity. If the quantity, instead of depending on +the ordinary mercantile motives of profit and loss, could be +arbitrarily fixed by authority, the value would depend on +the fiat of that authority, not on cost of production. The +quantity of a paper currency not convertible into the metals +at the option of the holder <emph>can</emph> be arbitrarily fixed, +especially if the issuer is the sovereign power of the +state. The value, therefore, of such a currency is entirely +arbitrary. +</p> + +<quote rend='display'> +<p> +The value of paper money is, of course, primarily and mainly +dependent on the quantity issued. The general level of +value depends on the <emph>quantity</emph>; but we also find that deviations +from this general level, in the direction of further depreciation +than could be due to quantity alone, is caused by any +event which shakes the confidence of any one that he may get +the existing value for his paper. The <q>convention</q> by which +real value (the essential idea of money) was associated with +this paper in the minds of all is thereby broken. +<emph>Fiat</emph> money—that +is, a piece of paper, not containing a promise to pay a +dollar, but a simple declaration that this is a dollar—therefore, +separates the paper from any connection with value. And yet +we see that <emph>fiat</emph> money has some, although a fluctuating, value +at certain times: if the State receives it for taxes, if it is a legal +acquittal of obligations, then, to that extent, a certain quantity +of it is given a value equal to the wealth represented by the +taxes, or the debts. Jevons remarks on this point<note place='foot'><q>Money +and the Mechanism of Exchange,</q> p. 232.</note> that, if +<q>the quantity of notes issued was kept within such moderate +limits that any one wishing to realize the metallic value of the +notes could find some one wanting to pay taxes, and therefore +willing to give coin for notes,</q> stability of value might be secured. +If there is more in circulation than performs these functions, +it will depreciate in the proportion of the <emph>quantity</emph> to the +extent of the uses assigned to it; so that the relation of quantity +to uses is the only thing which can give value to <emph>fiat</emph> money, +but beyond a certain point in the issues other forces than mere +quantity begin to affect the value. Although the paper is not +even a promise to pay value, the form of expression on its face, +or the term used as its designation, generally tends, under the +force of convention and habit, to give a popular value to paper. +</p> + +<pb n='346'/><anchor id='Pg346'/> + +<p> +Although the State may not promise to pay a dollar, yet, wherever +such paper money carries any purchasing power with it +(which has very seldom happened, and then only for short periods), +it will be found that there is a vague popular understanding +that the State intends, at some time or other, to redeem the +notes with value in coin to some amount. In the early cases of +irredeemable money in our colonies, the income of taxes, or similar +resources, were promised as a means of redemption. To some—although +a slight—extent, the idea of value was associated +with such paper. The actual quantity issued did not measure +the depreciation. The paper did depreciate with increased issues. +But only in so far as the increased issues proved to the +community that there was less and less possibility of ever receiving +value for them did they depreciate. In other words, we come +to the familiar experience, known to many, of a paper money depending +for its value on the opinions of men in the country. This +was partially true, even of our own greenbacks, which were not +<hi rend='italic'>fiat</hi> money, but promises to pay (although not then redeemable), +as may be seen by the movement of the line in <ref target='Chart_XII'>Chart XII</ref> +(p. <ref target='Pg359'>359</ref>), which represents +the fluctuations of our paper money during +the civil war. The upward movement of the line, which indicates +the premium on gold during our late war, of course represents +correspondingly the depreciation of the paper. Every +victory or defeat of the Union arms raised or lowered the premium +on gold; it was the register of the opinion of the people as to +the value to be associated with the paper. The second and third +resorts to issues of greenbacks were regarded as confessions of +financial distress; it was this which produced the effect on their +value. It was not only the quantity but also that which caused +the issue of the quantity. It is, of course, clear that the value of +a paper money like the greenbacks, which were the promises to +pay of a rich country, would bear a definite relation to the actual +quantity issued; and this is to be seen by the generally +higher level of the line on the chart, showing a steadily diminishing +purchasing power as the issues increased. But the thing +which weighed largely in people's minds was the possibility of +ultimate redemption; and the premium on gold was practically +a register of the <q>betting</q> on this possibility. In 1878, when +Secretary Sherman's reserve was seen to be increasing to an +effective amount, and when it became evident that he would +have the means (i.e., the value represented by all the paper +that was likely to be presented) to resume on the day set, January +1, 1879, the premium gradually faded away. The general +shifting of the level to a lower stage in this later period was +not due to any decrease in the quantity outstanding, because +the contraction had been stopped in 1868, and that consequent +on the resumption act in May, 1878. +</p> +</quote> + +<pb n='347'/><anchor id='Pg347'/> + +<p> +Suppose that, in a country of which the currency is +wholly metallic, a paper currency is suddenly issued, to the +amount of half the metallic circulation; not by a banking +establishment, or in the form of loans, but by the Government, +in payment of salaries and purchase of commodities. +The currency being suddenly increased by one half, all prices +will rise, and, among the rest, the prices of all things made +of gold and silver. An ounce of manufactured gold will become +more valuable than an ounce of gold coin, by more +than that customary difference which compensates for the +value of the workmanship; and it will be profitable to melt +the coin for the purpose of being manufactured, until as +much has been taken from the currency by the subtraction +of gold as had been added to it by the issue of paper. Then +prices will relapse to what they were at first, and there will +be nothing changed, except that a paper currency has been +substituted for half of the metallic currency which existed +before. Suppose, now, a second emission of paper; the +same series of effects will be renewed; and so on, until the +whole of the metallic money has disappeared [see Chart +No. <ref target='Chart_XIV'>XIV</ref>, +<ref target='Book_III_Chapter_XV'>Chap. XV</ref>, for the exportation of gold from the +United States after the issue of our paper money in 1862]: +that is, if paper be issued of as low a denomination as +the lowest coin; if not, as much will remain as convenience +requires for the smaller payments. The addition +made to the quantity of gold and silver disposable for +ornamental purposes will somewhat reduce, for a time, the +value of the article; and as long as this is the case, even +though paper has been issued to the original amount of +the metallic circulation, as much coin will remain in circulation +along with it as will keep the value of the currency +down to the reduced value of the metallic material; +but the value having fallen below the cost of production, a +stoppage or diminution of the supply from the mines will +enable the surplus to be carried off by the ordinary agents of +destruction, after which the metals and the currency will +recover their natural value. We are here supposing, as we +<pb n='348'/><anchor id='Pg348'/> +have supposed throughout, that the country has mines of its +own, and no commercial intercourse with other countries; +for, in a country having foreign trade, the coin which is rendered +superfluous by an issue of paper is carried off by a +much prompter method. +</p> + +<quote rend='display'> +Mr. Mill's statement, that, if paper be not issued of as low +a denomination as the lowest coin, <q>as much will remain as +convenience requires for the smaller payments,</q> will not hold +true. During our recent experiment of depreciated paper, the +depreciation was such as to drive out the subsidiary silver coins, +by July, 1862, and we were forced to supply their place by a +fractional paper currency. By an amendment inserted June 17, +1862, into the act authorizing a second issue of $150,000,000 of +greenbacks, it was ordered <q>that no note shall be issued for +the fractional part of a dollar, and not more than $35,000,000 +shall be of lower denominations than five dollars</q> (act, finally +passed July 11, 1862). Although there were no fractional +notes, yet one-dollar notes drove out subsidiary silver, simply +because the paper had depreciated to a value below that of the +345.6 grains of silver in two halves or four quarters of a dollar. +By July 2d the disappearance of small coin was distinctly noted. +Let the value of gold be represented by 100; and a dollar of +small silver coin (345.6 grains), relatively to a gold dollar, +by 96. Now, if paper depreciates to 90, relatively to gold, it +will drive out the subsidiary silver at 96, in accordance with +Gresham's law. +</quote> + +<p> +Up to this point the effects of a paper currency are substantially +the same, whether it is convertible into specie or +not. It is when the metals have been completely superseded +and driven from circulation that the difference between +convertible and inconvertible paper begins to be operative. +When the gold or silver has all gone from circulation, +and an equal amount of paper has taken its place, +suppose that a still further issue is superadded. The same +series of phenomena recommences: prices rise, among the +rest the prices of gold and silver articles, and it becomes an +object, as before, to procure coin, in order to convert it into +bullion. There is no longer any coin in circulation; but, if +the paper currency is convertible, coin may still be obtained +from the issuers in exchange for notes. All additional notes, +therefore, which are attempted to be forced into circulation +<pb n='349'/><anchor id='Pg349'/> +after the metals have been completely superseded, will return +upon the issuers in exchange for coin; and they will not be +able to maintain in circulation such a quantity of convertible +paper as to sink its value below the metal which it represents. +It is not so, however, with an inconvertible currency. +To the increase of that (if permitted by law) there is no +check. The issuers may add to it indefinitely, lowering its +value and raising prices in proportion; they may, in other +words, depreciate the currency without limit. +</p> + +<p> +Such a power, in whomsoever vested, is an intolerable +evil. All variations in the value of the circulating medium +are mischievous: they disturb existing contracts and expectations, +and the liability to such changes renders every pecuniary +engagement of long date entirely precarious. The person +who buys for himself, or gives to another, an annuity +of one [hundred dollars], does not know whether it will be +equivalent to [two hundred or to fifty dollars] a few years +hence. Great as this evil would be if it depended only on +accident, it is still greater when placed at the arbitrary disposal +of an individual or a body of individuals, who may +have any kind or degree of interest to be served by an artificial +fluctuation in fortunes, and who have at any rate a +strong interest in issuing as much as possible, each issue +being in itself a source of profit—not to add, that the issuers +may have, and, in the case of a government paper, always +have, a direct interest in lowering the value of the +currency, because it is the medium in which their own debts +are computed. +</p> + +<quote rend='display'> +The United States Supreme Court had decided in December, +1870, by the second legal-tender decision, that the issue of +greenbacks (inconvertible from 1862 to 1879) was constitutional +during a time of war; but it was thought that the reissue of +these notes since the war, when no war emergency could be +pleaded, was unconstitutional. This view, however, was met by +the unfortunate decision of the Supreme Court, delivered by +Justice Gray, March, 1884, which announced the doctrine that +the expediency of an issue of legal-tender paper money was to +be determined solely by Congress; and that, if Congress judged +the issue expedient, it was within the limits of those provisions +<pb n='350'/><anchor id='Pg350'/> +of the Constitution (section 8), which gave Congress the means +to do whatever was <q>necessary and proper</q> to carry out the +powers expressly granted to it. Nothing now can prevent +Congress, should it choose to do so, from issuing paper money +of any description whatever, even if of absolutely no value. +The disaster that might be brought upon the country by a +rising tide of repudiation among debtors, taking its effect +through a facile and plastic Congress (as in the case of the +silver coinage in 1878), is appalling to reflect upon. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. If regulated by the price of Bullion, as inconvertible Currency +might be safe, but not Expedient.</head> + +<p> +In order that the value of the currency may be +secure from being altered by design, and may be as little as +possible liable to fluctuation from accident, the articles least +liable of all known commodities to vary in their value, the +precious metals, have been made in all civilized countries +the standard of value for the circulating medium; and no +paper currency ought to exist of which the value can not be +made to conform to theirs. Nor has this fundamental maxim +ever been entirely lost sight of, even by the governments +which have most abused the power of creating inconvertible +paper. If they have not (as they generally have) professed +an intention of paying in specie at some indefinite future +time, they have at least, by giving to their paper issues the +names of their coins, made a virtual, though generally a false, +profession of intending to keep them at a value corresponding +to that of the coins. This is not impracticable, even +with an inconvertible paper. There is not, indeed, the self-acting +check which convertibility brings with it. But there +is a clear and unequivocal indication by which to judge +whether the currency is depreciated, and to what extent. +That indication is the price of the precious metals. When +holders of paper can not demand coin to be converted into +bullion, and when there is none left in circulation, bullion +rises and falls in price like other things; and if it is above +the mint price—if an ounce of gold, which would be coined +into the equivalent of [$18.60], is sold for [$20 or $25] in +paper—the value of the currency has sunk just that much +below what the value of a metallic currency would be. If, +therefore, the issue of inconvertible paper were subjected to +<pb n='351'/><anchor id='Pg351'/> +strict rules, one rule being that, whenever bullion rose above +the mint price, the issues should be contracted until the +market price of bullion and the mint price were again in +accordance, such a currency would not be subject to any +of the evils usually deemed inherent in an inconvertible +paper. +</p> + +<p> +But, also, such a system of currency would have no advantages +sufficient to recommend it to adoption. An inconvertible +currency, regulated by the price of bullion, would +conform exactly, in all its variations, to a convertible one; +and the only advantage gained would be that of exemption +from the necessity of keeping any reserve of the precious +metals, which is not a very important consideration, especially +as a government, so long as its good faith is not suspected, +need not keep so large a reserve as private issuers, +being not so liable to great and sudden demands, since there +never can be any real doubt of its solvency. +</p> + +<quote rend='display'> +The United States since 1879 finds that a reserve of from +$130,000,000 to $140,000,000 is a sufficient reserve for outstanding +notes to the amount of $346,000,000, and greenbacks +are now at a par with gold. +</quote> + +<p> +Against this small advantage is to be set, in the first place, +the possibility of fraudulent tampering with the price of +bullion for the sake of acting on the currency, in the manner +of the fictitious sales of corn, to influence the averages, +so much and so justly complained of while the corn laws +were in force. But a still stronger consideration is the importance +of adhering to a simple principle, intelligible to +the most untaught capacity. Everybody can understand +convertibility; every one sees that what can be at any moment +exchanged for five [dollars] is worth five [dollars]. +Regulation by the price of bullion is a more complex idea, +and does not recommend itself through the same familiar +associations. There would be nothing like the same confidence, +by the public generally, in an inconvertible currency +so regulated, as in a convertible one: and the most instructed +person might reasonably doubt whether such a rule would be +<pb n='352'/><anchor id='Pg352'/> +as likely to be inflexibly adhered to. The grounds of the +rule not being so well understood by the public, opinion +would probably not enforce it with as much rigidity, and, +in any circumstances of difficulty, would be likely to turn +against it; while to the Government itself a suspension of +convertibility would appear a much stronger and more extreme +measure than a relaxation of what might possibly +be considered a somewhat artificial rule. There is therefore +a great preponderance of reasons in favor of a convertible, +in preference to even the best regulated inconvertible, +currency. The temptation to over-issue, in certain +financial emergencies, is so strong, that nothing is admissible +which can tend, in however slight a degree, to weaken the +barriers that restrain it. +</p> + +<quote rend='display'> +The French Government, in the Franco-Prussian War +(1870), issued inconvertible paper on this plan, as explained +by Mr. Mill; but, acting through the Bank of France, they conducted +their issues so successfully that the notes never depreciated +more than about one half of one per cent. But this +was a very rare management of inconvertible paper, since the +issues were actually limited as the price of gold in paper rose +above par. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Examination of the doctrine that an inconvertible Current is safe, +if representing actual Property.</head> + +<p> +Projectors every now and then start up, with plans +for curing all the economical evils of society by means of an +unlimited issue of inconvertible paper. There is, in truth, a +great charm in the idea. To be able to pay off the national +debt, defray the expenses of government without taxation, +and, in fine, to make the fortunes of the whole community, +is a brilliant prospect, when once a man is capable of believing +that printing a few characters on bits of paper will do it. +The philosopher's stone could not be expected to do more.<note place='foot'>For +John Law's famous scheme (1718-1720) in France, called the <q>Mississippi +Bubble,</q> the best authority is Levasseur's <q>Système de Law</q> (1854). +Also consult M. Thiers's <q>The Mississippi Bubble</q> (translated by F. F. Fiske, +1859); Steuart's <q>Political Economy</q> (1767); and McLeod's <q>Dictionary of +Political Economy,</q> article on <q>Banking in France.</q></note> +</p> + +<p> +As these projects, however often slain, always resuscitate, +it is not superfluous to examine one or two of the fallacies +<pb n='353'/><anchor id='Pg353'/> +by which the schemers impose upon themselves. One of the +commonest is, that a paper currency can not be issued in excess +so long as every note issued <emph>represents</emph> property, or has +a <emph>foundation</emph> of actual property to rest on. These phrases, +of representing and resting, seldom convey any distinct or +well-defined idea; when they do, their meaning is no more +than this—that the issuers of the paper must <emph>have</emph> property, +either of their own, or intrusted to them, to the value of all +the notes they issue, though for what purpose does not very +clearly appear; for, if the property can not be claimed +in exchange for the notes, it is difficult to divine in what +manner its mere existence can serve to uphold their value. +I presume, however, it is intended as a guarantee that +the holders would be finally reimbursed, in case any untoward +event should cause the whole concern to be wound +up. On this theory there have been many schemes for +<q>coining the whole land of the country into money</q> and +the like. +</p> + +<p> +In so far as this notion has any connection at all with +reason, it seems to originate in confounding two entirely distinct +evils, to which a paper currency is liable. One is, the +insolvency of the issuers; which, if the paper is grounded +on their credit—if it makes any promise of payment in cash, +either on demand or at any future time—of course deprives +the paper of any value which it derives from the promise. +To this evil paper credit is equally liable, however moderately +used; and against it, a proviso that all issues should +be <q>founded on property,</q> as for instance that notes should +only be issued on the security of some valuable thing, expressly +pledged for their redemption, would really be efficacious +as a precaution. But the theory takes no account of +another evil, which is incident to the notes of the most solvent +firm, company, or government; that of being depreciated +in value from being issued in excessive quantity. The +assignats, during the French Revolution, were an example of +a currency grounded on these principles. The assignats +<q>represented</q> an immense amount of highly valuable property, +<pb n='354'/><anchor id='Pg354'/> +namely, the lands of the crown, the church, the monasteries, +and the emigrants; amounting possibly to half the +territory of France. They were, in fact, orders or assignments +on this mass of land. The revolutionary government +had the idea of <q>coining</q> these lands into money; but, to +do them justice, they did not originally contemplate the immense +multiplication of issues to which they were eventually +driven by the failure of all other financial resources. They +imagined that the assignats would come rapidly back to the +issuers in exchange for land, and that they should be able to +reissue them continually until the lands were all disposed +of, without having at any time more than a very moderate +quantity in circulation. Their hope was frustrated: the land +did not sell so quickly as they expected; buyers were not +inclined to invest their money in possessions which were +likely to be resumed without compensation if the revolution +succumbed; the bits of paper which represented land, becoming +prodigiously multiplied, could no more keep up their +value than the land itself would have done if it had all been +brought to market at once; and the result was that it at last +required an assignat of five hundred francs to pay for a cup +of coffee. +</p> + +<p> +The example of the assignats has been said not to be conclusive, +because an assignat only represented land in general, +but not a definite quantity of land. To have prevented their +depreciation, the proper course, it is affirmed, would have +been to have made a valuation of all the confiscated property +at its metallic value, and to have issued assignats up to, but +not beyond, that limit; giving to the holders a right to demand +any piece of land, at its registered valuation, in exchange +for assignats to the same amount. There can be no +question about the superiority of this plan over the one actually +adopted. Had this course been followed, the assignats +could never have been depreciated to the inordinate degree +they were; for—as they would have retained all their purchasing +power in relation to land, however much they might +have fallen in respect to other things—before they had lost +<pb n='355'/><anchor id='Pg355'/> +very much of their market value, they would probably +have been brought in to be exchanged for land. It must +be remembered, however, that their not being depreciated +would presuppose that no greater number of them +continued in circulation than would have circulated if they +had been convertible into cash. However convenient, therefore, +in a time of revolution, this currency convertible into +land on demand might have been, as a contrivance for +selling rapidly a great quantity of land with the least possible +sacrifice, it is difficult to see what advantage it would +have, as the permanent system of a country, over a currency +convertible into coin; while it is not at all difficult to +see what would be its disadvantages, since land is far more +variable in value than gold and silver; and besides, land, to +most persons, being rather an incumbrance than a desirable +possession, except to be converted into money, people would +submit to a much greater depreciation before demanding +land, than they will before demanding gold or silver.<note place='foot'>For +the best brief account of the issues of assignats, see President A. D. +White's <q>Paper Money Inflation in France.</q> See also F. A. Walker, <q>Money,</q> +pp. 336-347; Bazot's <q>Assignats</q>; and Alison's <q>History of the French +Revolution,</q> vol. ii, p. 606.</note> +</p> + +<quote rend='display'> +It has been said that the assignats circulated without legal-tender +power. They were received by the French treasury, +and a law was passed condemning a man to six years in irons +for exchanging gold or silver for assignats at a greater than +the nominal or face value of the latter. The subsequent issues, +called <foreign lang='fr' rend='italic'>mandats</foreign>, +did not <emph>represent</emph> land, but were directly exchangeable +for the land. Even that kind of money is no more +valuable than a proportional amount of tax receipts for land. +In a very short time <foreign lang='fr' rend='italic'>mandats</foreign> +were worth 1/1000 of their face +value, and assignats very much less. The assignats, moreover, +were not limited in quantity to the money value of the lands +they represented. By 1796, 45,000,000,000 francs of assignats +had been issued. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Experiments with paper Money in the United States.</head> + +<quote rend='display'> +<p> +The experience of the colonies before our Revolution +is rich in warning examples of the over-issue of inconvertible +paper money. Those of Rhode Island<note place='foot'>See +<q>Some Account of the Bills of Credit or Paper Money of Rhode Island, +1710-1786,</q> in <q>Rhode Island Historical Tracts,</q> No. 8 (1880), by E. S. Potter +and S. S. Rider.</note> and the Province +<pb n='356'/><anchor id='Pg356'/> +of Massachusetts<note place='foot'>See Felt's <q>History +of Massachusetts Currency.</q> Consult also Minot, +Hutchinson, and Gouge. Walker, <q>Money,</q> and Sumner, <q>History of American +Currency,</q> have given considerable accounts of paper experiments in the +United States, and should be well studied.</note> +are the most conspicuous, perhaps, because +we have better knowledge of them, but other colonies +suffered in as great a degree. The experience of the latter +illustrates as well as any, perhaps, not only the general theory +of inconvertible paper, but the device of supporting the paper +by paying interest upon the notes. Although the issues +since 1690 had depreciated, in 1702 £10,000 more notes were +issued, because, as it was said, there was a scarcity of money. +It is always noticeable that the more issues of paper money +there are made, the more there is a cry of scarcity, much like +the thirst of a hard drinker after the first exhilaration has +passed off. On the new issues five per cent interest was paid, +and even excises and imposts were set aside as security for their +payment. The year 1709 saw a new expedition to Canada, and +saw also the broken promises of the province, when £20,000 +more notes were put out; the collection of the taxes with which +to pay the notes was deferred in 1707 for two years; in 1709 +deferred for four years; in 1710 for five years; in 1711 for six +years. By 1712 they had depreciated thirty per cent, when the +charm of legal tender was thrown around them, but to no purpose. +The idea of value was not associated with them in people's +minds, and they put no faith in promises. The usual result +took place. People divided politically on the money question, +and parties began to agitate for banks which should issue notes +based on real estate, or for loans from the state to private persons +at interest to be paid annually. Such facts show the train +of evils following the first innocent departure from the maintenance +of a currency equivalent to coin. The people forgot, or +did not know, the nature of money, or the offices it performed. +They did not understand that creating paper money did not +create wealth. This experiment closed only in 1750 (March +31st), when the province had courage enough to resume specie +payments. The effect was to transfer the West India trade +from paper-issuing colonies to Massachusetts, and to produce +a steady prosperity in her business interests. +</p> + +<anchor id='Chart_XI'/> +<p rend='text-align: center'> + <figure url='images/chartxi.png' rend='width: 80%'> + <head>Chart XI. Continental Currency, Issue and Depreciation.</head> + <figDesc>Illustration: Chart XI.</figDesc> + </figure> +</p> + +<p> +The issue of paper money as a means of making a forced +loan from the people, when there seem to be no other means of +getting funds, has been fully illustrated in our country by the +Continental currency issued during our Revolution. It is not, +however, considered that this is also accompanied by a process +by which every debtor takes <q>a forced contribution from his +creditor.</q> Congress had no power to tax, and the separate +<pb n='358'/><anchor id='Pg358'/> +States would not do it; and this has been considered as the excuse +for making issues of that well-known paper money, which +has given rise to the familiar by-word for absence of value, +<q>not worth a Continental.</q> Without going into details,<note place='foot'>See +Walker, <q>Money,</q> p. 329.</note> in one +year, 1779, Congress issued $140,000,000, worth in coin only +$7,000,000. They, however, bravely declared that paper had +not depreciated, but that the price of coin had gone up! +Legal attempts were made to repress the premium on silver; +but resolutions do not create wealth as fast as money can be +printed. The depreciation went on more rapidly than the issues +(see <ref target='Chart_XI'>Chart No. XI</ref>, in which the black line represents the +amounts of issues, and the broken line the depreciation of paper, +starting at 100); and, finally, March 18, 1780, Congress decided +to admit a depreciation, and resumed in silver at the +rate of one dollar in silver for forty in paper. +</p> + +<p> +The question of government issues<note place='foot'>See J. +J. Knox's <q>United States Notes</q> (1884); the Finance Reports during +and since the war to 1879; Spaulding's <q>Financial History of the War</q> +(1869); Bowen's <q>American Political Economy,</q> chap. xv; <q>Chapters of Erie,</q> +by H. Adams and F. A. Walker; and the voluminous pages of the <q>Congressional +Globe.</q> For the decisions in the legal-tender cases, see <q>Banker's Magazine,</q> +1869-1870, p. 712, and 1871-1872, pp. 752, 780. A collection of statutes +affecting United States finance, especially since 1860, has been made in +a small pamphlet, by Professor C. F. Dunbar (published by Sever, Cambridge, +Massachusetts).</note> of paper money again +came up in the United States in 1862, during the civil war, +and part of our present currency is the result of the policy +then adopted. The first step—the one that generally costs—however, +was taken July 17, 1861, when the Treasury issued +$50,000,000 of <q>demand notes,</q> not bearing interest. These +notes, however, were not made legal tender. They could be used +in payment of salaries and other dues from the United States. +It may be well to state that the Treasury balanced the arguments +for and against the issues of paper at the beginning of the experiment, +and we can see how these views were realized as we +go along. In favor of paper issues it was urged that we could +borrow a large amount without interest, as in the case of +the Continental currency; that there would be no expense beyond +the coin necessary for keeping the paper at par; and +that the country would gain a uniform currency. On the other +hand, it was seen that there might be temptations to issue without +provisions for redemption; that even if a fund were kept, +a disturbance of the money market would precipitate a demand +for coin, and all upon this single fund; and, lastly, that there +were all the dangers of over-issue. Secretary Chase<note place='foot'>Report +of 1861.</note> then decided +<pb n='359'/><anchor id='Pg359'/> +against paper issues. Government bonds, however, did +not sell, and the attempt of the banks toward the end of 1861 +to carry $150,000,000 of bonds brought on a suspension of specie +payments, December 31, 1861. Without any taxation policy, +the country drifted along, until in a spasm of dread at +seeing an empty Treasury, Congress passed the legal-tender +act (February 25, 1862), issuing $150,000,000 of paper in the +form of promises to pay. A committee of bankers showed that +the issue could have been avoided by selling bonds at their +market price; but Congress would not sell them below par. +No necessity for the issues of paper need have arrived. In +four months another issue of $150,000,000 was authorized +(July 11, 1862); and a third issue of a like amount (March 3, +1863), in all $450,000,000. The depreciation took place (see +<ref target='Chart_XII'>Chart No. XII</ref>), +for, as Secretary Chase anticipated, no provision +was made for redemption. They were made legal tender, +but this <q>essential idea</q> did not preserve their value; nor +did the provision that they be received for taxes (except customs), +avail for this purpose. +</p> + +<p> +The effects of the depreciation were as evil as can well be +imagined. (1) The expenses of the Government were increased +by the rise in prices, so that (2) our national debt became +hundreds of millions larger than it need have been; (3) a +vicious speculation in gold began, leading to the unsettling of +legitimate trade and to greater variations in prices; (4) the existence +of depreciated paper later gave rise to all the dishonest +schemes for paying the coin obligations of the United States +in cheap issues, to the ruin of its credit and honor; and (5) it +has practically become a settled part of our circulation, and a +possible source of danger. +</p> + +<p> +Of the whole $450,000,000, $50,000,000 were set aside as a +reserve for temporary deposits; but in July, 1864, $431,000,000 +were in circulation. At this time (June 30, 1864) Congress, +retaining distinctly the feeling that the issue of paper was but +a temporary measure, forbade any further issues. Secretary +McCulloch, immediately on the close of the war, began to contract, +and, by a resolution of the lower branch in Congress +(December 18, 1865), a cordial concurrence in the measures for +contraction was manifested. Of course, the return from the +path of inflated credit and high prices was painful, and Congress +began to feel the pressure of its constituents. Had they +not yielded, much of the severity of the crisis of 1873 might +have been avoided; but (April 12, 1866) they forbade any +greater contraction than $4,000,000 a month. Here was a lack +of courage not foreseen by Secretary Chase. This was again +shown (February 4, 1868) by a law which absolutely forbade +the Secretary to further reduce the currency, which now stood +<pb n='360'/><anchor id='Pg360'/> +at $356,000,000. This marks an important change in the attitude +of the Government, as compared with 1862. After the +panic of 1873, the paper evil produced its usual effect in the +cry for more money, and, as in the Province of Massachusetts +in 1712, parties divided on the question of inflation or contraction. +A bill to expand the Government issues to $400,000,000 +(and the national-bank notes also to $400,000,000) actually +passed both Houses of Congress, and we were fortunately saved +from it only by the veto of President Grant (April 22, 1874). +This was another landmark in the history of our paper money. +Secretary Richardson, however, had already, without authority, +reissued $26,000,000 of the $44,000,000 withdrawn by Secretary +McCulloch, and the amount outstanding was thus +$382,000,000. A compromise measure was passed (June 20, +1874), which retained this amount in the circulation. +</p> + +<p> +When the resumption act was passed (January 14, 1875), +the provision that, for every $100 of new national-bank notes +issued, $80 of United States notes should be retired, resulted in +a contraction of the latter from $382,000,000 to $346,000,000. +The reason of this was, that there was no provision for the increase +of United States notes when national banks withdrew +their own issues; and after the crisis many banks naturally did +so. The culmination of the policy of Congress came in a law +(May 31, 1878) which absolutely forbade all further retirement +of United States notes, and we are now left at the present +time with an inelastic limit of $346,000,000. Finally, in 1877 +and 1878, Secretary Sherman, aided by a most fortunate state +of foreign trade, began to accumulate gold in order to carry +out the provisions of the resumption act, which required him +to resume specie payments on January 1, 1879. He successfully +collected $133,000,000 of gold, and on December 17, 1878, +the premium on gold disappeared, and resumption was accomplished +quietly on the day appointed, without a jar to business. +</p> + +<p> +But it is a significant fact that even after all the evils inflicted +on our country by over-issues, in spite of the temptation +to misuse paper money if it is in any way permitted, in spite of +all the warnings of history, there seems to be a dangerous acquiescence +in the presence of government paper money in our +currency. It is an open pitfall, tempting to evils whenever +sudden emergencies arise. It ought not to be allowed to remain +any longer. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Examination of the gain arising from the increase and issue of paper +Currency.</head> + +<p> +Another of the fallacies from which the advocates +of an inconvertible currency derive support is the notion +that an increase of the currency quickens industry. Mr. +Attwood maintained that a rise of prices produced by an increase +<pb n='361'/><anchor id='Pg361'/> +of paper currency stimulates every producer to his +utmost exertions, and brings all the capital and labor of the +country into complete employment; and that this has invariably +happened in all periods of rising prices, when the rise +was on a sufficiently great scale. I presume, however, that +the inducement which, according to Mr. Attwood, excited +this unusual ardor in all persons engaged in production +must have been the expectation of getting more of commodities +generally, more real wealth, in exchange for the produce +of their labor, and not merely more pieces of paper. This +expectation, however, must have been, by the very terms of +the supposition, disappointed, since, all prices being supposed +to rise equally, no one was really better paid for his goods +than before. It calculates on finding the whole world persisting +forever in the belief that more pieces of paper are +more riches, and never discovering that, with all their paper, +they can not buy more of anything than they could before. +At the periods which Mr. Attwood mistook for times of +prosperity, and which were simply (as all periods of high +prices, under a convertible currency, must be) times of speculation, +the speculators did not think they were growing rich +because the high prices would last, but because they would +not last, and because whoever contrived to realize while they +did last would find himself, after the recoil, in possession of +a greater number of [dollars], without their having become +of less value. +</p> + +<p> +Hume's version of the doctrine differed in a slight degree +from Mr. Attwood's. He thought that all commodities would +not rise in price simultaneously, and that some persons therefore +would obtain a real gain, by getting more money for +what they had to sell, while the things which they wished to +buy might not yet have risen. And those who would reap +this gain would always be (he seems to think) the first comers. +It seems obvious, however, that, for every person who +thus gains more than usual, there is necessarily some other +person who gains less. The loser, if things took place as +Hume supposes, would be the seller of the commodities +<pb n='362'/><anchor id='Pg362'/> +which are slowest to rise; who, by the supposition, parts +with his goods at the old prices, to purchasers who have +already benefited by the new. This seller has obtained for +his commodity only the accustomed quantity of money, while +there are already some things of which that money will no +longer purchase as much as before. If, therefore, he knows +what is going on, he will raise his price, and then the buyer +will not have the gain, which is supposed to stimulate his +industry. But if, on the contrary, the seller does not know +the state of the case, and only discovers it when he finds, in +laying his money out, that it does not go so far, he then obtains +less than the ordinary remuneration for his labor and +capital; and, if the other dealer's industry is encouraged, it +should seem that his must, from the opposite cause, be impaired. +</p> + +<p> +An issue of notes is a manifest gain to the issuers, who, +until the notes are returned for payment, obtain the use of +them as if they were a real capital; and, so long as the notes +are no permanent addition to the currency, but merely supersede +gold or silver to the same amount, the gain of the +issuer is a loss to no one; it is obtained by saving to the +community the expense of the more costly material. But, if +there is no gold or silver to be superseded—if the notes are +added to the currency, instead of being substituted for the +metallic part of it—all holders of currency lose, by the depreciation +of its value, the exact equivalent of what the issuer +gains. A tax is virtually levied on them for his benefit. +</p> + +<p> +But besides the benefit reaped by the issuers, or by others +through them, at the expense of the public generally, there +is another unjust gain obtained by a larger class—namely, by +those who are under fixed pecuniary obligations. All such +persons are freed, by a depreciation of the currency, from a +portion of the burden of their debts or other engagements; +in other words, part of the property of their creditors is +gratuitously transferred to them. On a superficial view it +may be imagined that this is an advantage to industry; since +the productive classes are great borrowers, and generally owe +<pb n='363'/><anchor id='Pg363'/> +larger debts to the unproductive (if we include among the +latter all persons not actually in business) than the unproductive +classes owe to them, especially if the national debt +be included. It is only thus that a general rise of prices can +be a source of benefit to producers and dealers, by diminishing +the pressure of their fixed burdens. And this might be +accounted an advantage, if integrity and good faith were of +no importance to the world, and to industry and commerce +in particular. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 6. <hi rend='italic'>Résumé</hi> of the subject of money.</head> + +<quote rend='display'> +<p> +Before passing on to another branch of our subject, it +may be a gain to clearer ideas to collect in the form of the following +classification the main points discussed +(in Chaps. <ref target='Book_III_Chapter_IV'>IV</ref> +to <ref target='Book_III_Chapter_X'>X</ref>) +under money and credit, in continuance of a similar +classification of value: +</p> + +<pb n='364'/><anchor id='Pg364'/> + +<lg> +<l>Money measures and transfers value.:</l> +<l>(1.) Hence best served by the precious metals, on account +of their peculiar qualities.</l> +<l>(2.) Depends for its value, in the long run, on the cost of +production at the worst mine worked (Class III); but +practically on demand and supply (Class I). And (if no credit +exists) its value changes exactly with the supply, which +is expressed by V = 1/(Q × R)</l> +<l>(3.) Under two legal standards, obeys Gresham's law—e.g., +experience of Japan and the United States.</l> +<l>(4.) Substitutes for money, called <emph>credit</emph> (which is not capital, +but calls out inactive capital).</l> +</lg> + +<p> +Of these substitutes for money, (1) Use of credit depends not on quality of coin +and notes, and (2) Various kinds of credit. +</p> + +<p> +Of those various kinds of credit, there are (1) Book credits, (2) Bills of +exchange, (3) Promissory notes, and (4) checks processed via clearing-house. +</p> + +<p> +Of the promissory notes, they are of either (1) Individuals, (2) Banks (Coin Banks +or Land Banks, etc.), or +(3) Governments. +</p> + +<p> +Of Government notes, there are (1) Convertible or (2) Inconvertible. +</p> + +</quote> + +</div> + +</div> + +<pb n='365'/><anchor id='Pg365'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_XI'/> +<head>Chapter XI. Of Excess Of Supply.</head> + +<div> +<index index='toc'/> +<head>§ 1. The theory of a general Over-Supply of Commodities stated.</head> + +<p> +After the elementary exposition of the theory of +money contained in the last few chapters, we shall return to +a question in the general theory of Value which could not +be satisfactorily discussed until the nature and operations of +Money were in some measure understood, because the errors +against which we have to contend mainly originate in a misunderstanding +of those operations. +</p> + +<p> +Because the phenomenon of over-supply and consequent +inconvenience or loss to the producer or dealer may exist in +the case of any one commodity whatever, many persons, including +some distinguished political economists,<note place='foot'>Mr. Malthus, +Dr. Chalmers, M. de Sismondi, and various minor writers. +It is especially likely that, in times of commercial depression, the journals of +the day will contain arguments to show a general over-production.</note> have thought +that it may exist with regard to all commodities; that there +may be a general over-production of wealth; a supply of +commodities in the aggregate surpassing the demand; and a +consequent depressed condition of all classes of producers. +</p> + +<p> +The doctrine appears to me to involve so much inconsistency +in its very conception that I feel considerable difficulty +in giving any statement of it which shall be at once clear and +satisfactory to its supporters. They agree in maintaining +that there may be, and sometimes is, an excess of productions +in general beyond the demand for them; that when +this happens, purchasers can not be found at prices which +will repay the cost of production with a profit; that there +ensues a general depression of prices or values (they are seldom +<pb n='366'/><anchor id='Pg366'/> +accurate in discriminating between the two), so that +producers, the more they produce, find themselves the poorer +instead of richer; and Dr. Chalmers accordingly inculcates +on capitalists the practice of a moral restraint in reference +to the pursuit of gain, while Sismondi deprecates machinery +and the various inventions which increase productive power. +They both maintain that accumulation of capital may proceed +too fast, not merely for the moral but for the material +interest of those who produce and accumulate; and they +enjoin the rich to guard against this evil by an ample unproductive +consumption. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. The supply of commodities in general can not exceed the power +of Purchase.</head> + +<p> +When these writers speak of the supply of commodities +as outrunning the demand, it is not clear which of +the two elements of demand they have in view—the desire +to possess, or the means of purchase; whether their meaning +is that there are, in such cases, more consumable products in +existence than the public desires to consume, or merely more +than it is able to pay for. In this uncertainty, it is necessary +to examine both suppositions. +</p> + +<quote rend='display'> +It will be here noticed that Mr. Mill uses demand in the +sense for which we contended it should be used +(<ref target='Book_III_Chapter_I_Section_3'>Book III, +Chap. I, § 3</ref>), and not as <q>quantity demanded.</q> The present +discussion of over-production should also be connected by the +student with the former reference to it, +<ref target='Book_I_Chapter_IV_Section_2'>Book I, Chap. IV, § 2</ref>. +</quote> + +<p> +First, let us suppose that the quantity of commodities +produced is not greater than the community would be glad +to consume; is it, in that case, possible that there should be +a deficiency of demand for all commodities for want of the +means of payment? Those who think so can not have considered +what it is which constitutes the means of payment +for commodities. It is simply commodities. Each person's +means of paying for the productions of other people consists +of those which he himself possesses. All sellers are +inevitably and <hi rend='italic'>ex vi termini</hi> buyers. Could we suddenly +double the productive powers of the country, we should +double the supply of commodities in every market; but we +should, by the same stroke, double the purchasing power. +</p> + +<pb n='367'/><anchor id='Pg367'/> + +<p> +Everybody would bring a double demand as well as supply; +everybody would be able to buy twice as much, because +every one would have twice as much to offer in exchange. +It is probable, indeed, that there would now be a superfluity +of certain things. Although the community would willingly +double its aggregate consumption, it may already have as +much as it desires of some commodities, and it may prefer +to do more than double its consumption of others, or to exercise +its increased purchasing power on some new thing. +If so, the supply will adapt itself accordingly, and the values +of things will continue to conform to their cost of production. +At any rate, it is a sheer absurdity that all things +should fall in value, and that all producers should, in consequence, +be insufficiently remunerated. If values remain the +same, what becomes of prices is immaterial, since the remuneration +of producers does not depend on how much money, +but on how much of consumable articles, they obtain for +their goods. Besides, money is a commodity; and, if all +commodities are supposed to be doubled in quantity, we +must suppose money to be doubled too, and then prices +would no more fall than values would. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. There can never be a lack of Demand arising from lack of Desire to +Consume.</head> + +<p> +A general over-supply, or excess of all commodities +above the demand, so far as demand consists in means of +payment, is thus shown to be an impossibility. But it may, +perhaps, be supposed that it is not the ability to purchase, +but the desire to possess, that falls short, and that the general +produce of industry may be greater than the community +desires to consume—the part, at least, of the community +which has an equivalent to give. +</p> + +<p> +This is much the most plausible form of the doctrine, +and does not, like that which we first examined, involve a +contradiction. There may easily be a greater quantity of +any particular commodity than is desired by those who have +the ability to purchase, and it is abstractedly conceivable +that this might be the case with all commodities. The error +is in not perceiving that, though all who have an equivalent +to give <emph>might</emph> be fully provided with every consumable +<pb n='368'/><anchor id='Pg368'/> +article which they desire, the fact that they go on adding to +the production proves that this is not <emph>actually</emph> the case. Assume +the most favorable hypothesis for the purpose, that of +a limited community, every member of which possesses as +much of necessaries and of all known luxuries as he desires, +and, since it is not conceivable that persons whose wants +were completely satisfied would labor and economize to obtain +what they did not desire, suppose that a foreigner +arrives and produces an additional quantity of something +of which there was already enough. Here, it will be said, is +over-production. True, I reply; over-production of that +particular article. The community wanted no more of that, +but it wanted something. The old inhabitants, indeed, +wanted nothing; but did not the foreigner himself want +something? When he produced the superfluous article, was +he laboring without a motive? He has produced—but the +wrong thing instead of the right. He wanted, perhaps, +food, and has produced watches, with which everybody was +sufficiently supplied. The new-comer brought with him into +the country a demand for commodities equal to all that he +could produce by his industry, and it was his business to see +that the supply he brought should be suitable to that demand. +If he could not produce something capable of exciting +a new want or desire in the community, for the satisfaction +of which some one would grow more food and give +it to him in exchange, he had the alternative of growing +food for himself, either on fresh land, if there was any unoccupied, +or as a tenant, or partner, or servant of some former +occupier, willing to be partially relieved from labor. He +has produced a thing not wanted, instead of what was +wanted, and he himself, perhaps, is not the kind of producer +who is wanted—but there is no over-production; production +is not excessive, but merely ill-assorted. We saw before +that whoever brings additional commodities to the market +brings an additional power of purchase; we now see that he +brings also an additional desire to consume, since if he had +not that desire he would not have troubled himself to produce. +<pb n='369'/><anchor id='Pg369'/> +Neither of the elements of demand, therefore, can +be wanting when there is an additional supply, though it is +perfectly possible that the demand may be for one thing, and +the supply may, unfortunately, consist of another. +</p> + +<quote rend='display'> +It is not sufficiently borne in mind, also, that the whole +progress of civilization results in a differentiation of new wants +and desires. To take but a single instance, with the growth of +the artistic sense the articles of common use change their entire +form; and the advances in the arts disclose new commodities +which satisfy the world's desires, and for these new +satisfactions people are willing to work and produce in order +to attain them. With education also comes a wider horizon +and a more refined perception of taste, which creates wants for +new things for which the mind before had no desires. A little +reflection, therefore, must inevitably lead us to see that no person, +no community, ever had, or probably ever will have, all its +wants satisfied. So far as we know man, it does not seem possible +that there will ever be a falling off in demand, because of +a satiety of all material satisfactions. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Origin and Explanation of the notion of general Over-Supply.</head> + +<p> +I have already described the state of the markets for +commodities which accompanies what is termed a commercial +crisis. At such times there is really an excess of all +commodities above the money demand: in other words, +there is an under-supply of money. From the sudden annihilation +of a great mass of credit, every one dislikes to part +with ready money, and many are anxious to procure it at +any sacrifice. Almost everybody, therefore, is a seller, and +there are scarcely any buyers: so that there may really be, +though only while the crisis lasts, an extreme depression of +general prices, from what may be indiscriminately called a +glut of commodities or a dearth of money. But it is a great +error to suppose, with Sismondi, that a commercial crisis is +the effect of a general excess of production. It is simply +the consequence of an excess of speculative purchases. It is +not a gradual advent of low prices, but a sudden recoil from +prices extravagantly high: its immediate cause is a contraction +of credit, and the remedy is, not a diminution of supply, +but the restoration of confidence. It is also evident +that this temporary derangement of markets is an evil only +<pb n='370'/><anchor id='Pg370'/> +because it is temporary. The fall being solely of money +prices, if prices did not rise again no dealer would lose, +since the smaller price would be worth as much to him as +the larger price was before. In no matter does this phenomenon +answer to the description which these celebrated +economists have given of the evil of over-production. That +permanent decline in the circumstances of producers, for +want of markets, which those writers contemplate, is a conception +to which the nature of a commercial crisis gives no +support. +</p> + +<p> +The other phenomenon from which the notion of a general +excess of wealth and superfluity of accumulation seems +to derive countenance is one of a more permanent nature, +namely, the fall of profits and interest which naturally takes +place with the progress of population and production. The +cause of this decline of profit is the increased cost of maintaining +labor, which results from an increase of population +and of the demand for food, outstripping the advance of +agricultural improvement. This important feature in the +economical progress of nations will receive full consideration +and discussion in the succeeding book.<note place='foot'><ref +target='Book_IV_Chapter_II'>Book IV, Chap. II</ref>.</note> It is obviously +a totally different thing from a want of market for commodities, +though often confounded with it in the complaints +of the producing and trading classes. The true interpretation +of the modern or present state of industrial economy is, +that there is hardly any amount of business which may not +be done, if people will be content to do it on small profits; +and this all active and intelligent persons in business perfectly +well know: but even those who comply with the necessities +of their time grumble at what they comply with, +and wish that there were less capital,<note place='foot'>This +is practically the argument of a little book, <q>Excessive Saving a Cause +of Commercial Distress</q> (1884), by Uriel H. Crocker.</note> or, as they express it, +less competition, in order that there might be greater profits. +Low profits, however, are a different thing from deficiency +<pb n='371'/><anchor id='Pg371'/> +of demand, and the production and accumulation which +merely reduce profits can not be called excess of supply or +of production. What the phenomenon really is, and its +effects and necessary limits, will be seen when we treat of +that express subject. +</p> + +</div> + +</div> + +<pb n='372'/><anchor id='Pg372'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter XII. Of Some Peculiar Cases Of Value.</head> + +<div> +<index index='toc'/> +<head>§ 1. Values of commodities which have a joint cost of production.</head> + +<p> +The general laws of value, in all the more important +cases of the interchange of commodities in the same +country, have now been investigated. We examined, first, +the case of monopoly, in which the value is determined by +either a natural or an artificial limitation of quantity, that +is, by demand and supply: secondly, the case of free competition, +when the article can be produced in indefinite quantity +at the same cost; in which case the permanent value is +determined by the cost of production, and only the fluctuations +by supply and demand: thirdly, a mixed case, that of +the articles which can be produced in indefinite quantity, +but not at the same cost; in which case the permanent value +is determined by the greatest cost which it is necessary to +incur in order to obtain the required supply: and, lastly, +we have found that money itself is a commodity of the third +class; that its value, in a state of freedom, is governed by +the same laws as the values of other commodities of its +class; and that prices, therefore, follow the same laws as +values. +</p> + +<p> +From this it appears that demand and supply govern the +fluctuations of values and prices in all cases, and the permanent +values and prices of all things of which the supply is +determined by any agency other than that of free competition: +but that, under the <hi rend='italic'>régime</hi> of competition, things are, +on the average, exchanged for each other at such values, and +sold at such prices, as afford equal expectation of advantage +to all classes of producers; which can only be when things +<pb n='373'/><anchor id='Pg373'/> +exchange for one another in the ratio of their cost of production. +</p> + +<quote rend='display'> +Here, again, is a distinct recognition of the true meaning of +cost of production, and its ruling influence within a competing +group, which has been seen in its full significance by Mr. +Cairnes. +</quote> + +<p> +It sometimes happens [however] that two different commodities +have what may be termed a joint cost of production. +They are both products of the same operation, or set +of operations, and the outlay is incurred for the sake of both +together, not part for one and part for the other. The same +outlay would have to be incurred for either of the two, if the +other were not wanted or used at all. There are not a few +instances of commodities thus associated in their production. +For example, coke and coal-gas are both produced from the +same material, and by the same operation. In a more partial +sense, mutton and wool are an example; beef, hides, and tallow; +calves and dairy produce; chickens and eggs. Cost of +production can have nothing to do with deciding the value +of the associated commodities relatively to each other. It +only decides their joint value. Cost of production does not +determine their prices, but the sum of their prices. A principle +is wanting to apportion the expenses of production between +the two. +</p> + +<p> +Since cost of production here fails us, we must revert to +a law of value anterior to cost of production, and more +fundamental, the law of demand and supply. The law is, +that the demand for a commodity varies with its value, and +that the value adjusts itself so that the demand shall be +equal to the supply. This supplies the principle of repartition +which we are in quest of. +</p> + +<p> +Suppose that a certain quantity of gas is produced and +sold at a certain price, and that the residuum of coke is +offered at a price which, together with that of the gas, repays +the expenses with the ordinary rate of profit. Suppose, +too, that, at the price put upon the gas and coke respectively, +the whole of the gas finds an easy market, without +<pb n='374'/><anchor id='Pg374'/> +either surplus or deficiency, but that purchasers can not +be found for all the coke corresponding to it. The coke will +be offered at a lower price in order to force a market. But +this lower price, together with the price of the gas, will not +be remunerating; the manufacture, as a whole, will not pay +its expenses with the ordinary profit, and will not, on these +terms, continue to be carried on. The gas, therefore, must +be sold at a higher price, to make up for the deficiency on +the coke. The demand consequently contracting, the production +will be somewhat reduced; and prices will become +stationary when, by the joint effect of the rise of gas and +the fall of coke, so much less of the first is sold, and so much +more of the second, that there is now a market for all the +coke which results from the existing extent of the gas-manufacture. +</p> + +<p> +Or suppose the reverse case; that more coke is wanted +at the present prices than can be supplied by the operations +required by the existing demand for gas. Coke, being now +in deficiency, will rise in price. The whole operation will +yield more than the usual rate of profit, and additional capital +will be attracted to the manufacture. The unsatisfied +demand for coke will be supplied; but this can not be done +without increasing the supply of gas too; and, as the existing +demand was fully supplied already, an increased quantity can +only find a market by lowering the price. Equilibrium will +be attained when the demand for each article fits so well +with the demand for the other, that the quantity required of +each is exactly as much as is generated in producing the +quantity required of the other. +</p> + +<p> +When, therefore, two or more commodities have a joint +cost of production, their natural values relatively to each +other are those which will create a demand for each, in the +ratio of the quantities in which they are sent forth by the +productive process. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Values of the different kinds of agricultural produce.</head> + +<p> +Another case of value which merits attention is +that of the different kinds of agricultural produce. The case +would present nothing peculiar, if different agricultural products +<pb n='375'/><anchor id='Pg375'/> +were either grown indiscriminately and with equal advantage +on the same soils, or wholly on different soils. The +difficulty arises from two things: first, that most soils are +fitter for one kind of produce than another, without being +absolutely unfit for any; and, secondly, the rotation of crops. +</p> + +<p> +For simplicity, we will confine our supposition to two +kinds of agricultural produce; for instance, wheat and oats. +If all soils were equally adapted for wheat and for oats, both +would be grown indiscriminately on all soils, and their relative +cost of production, being the same everywhere, would +govern their relative value. If the same labor which grows +three quarters of wheat on any given soil would always +grow on that soil five quarters of oats, the three and the five +quarters would be of the same value. The fact is, that both +wheat and oats can be grown on almost any soil which is +capable of producing either. +</p> + +<p> +It is evident that each grain will be cultivated in preference +on the soils which are better adapted for it than for +the other; and, if the demand is supplied from these alone, +the values of the two grains will have no reference to one +another. But when the demand for both is such as to require +that each should be grown not only on the soils peculiarly +fitted for it, but on the medium soils which, without +being specifically adapted to either, are about equally suited +for both, the cost of production on those medium soils will +determine the relative value of the two grains; while the +rent of the soils specifically adapted to each will be regulated +by their productive power, considered +with reference to that one [grain] +alone to which they are peculiarly applicable. +Thus far the question presents +no difficulty, to any one to whom the +general principles of value are familiar. +</p> + +<p rend='text-align: center'> + <figure url='images/agricultural-produce.png' rend='width: 80%'> + <figDesc>Illustration: Agricultural Produce.</figDesc> + </figure> +</p> + +<quote rend='display'> +This may be easily shown by a diagram, +in which A represents the grade of +land best adapted for oats; B, C, D, respectively, +lands of diminishing productiveness for oats, until +<pb n='376'/><anchor id='Pg376'/> +E is reached, which is, perhaps, equally good for oats or wheat; +<hi rend='italic'>a</hi>, <hi rend='italic'>b</hi>, +<hi rend='italic'>c</hi>, <hi rend='italic'>d</hi>, +and E likewise represent the wheat-lands, the best +beginning with <hi rend='italic'>a</hi>. The rent of A, or B, is determined by a +comparison with whatever grade of land planted in oats is cultivated +at the least return, as E, for example. So, if all the +wheat-lands are cultivated, land <hi rend='italic'>a</hi>, +or <hi rend='italic'>b</hi>, is compared with E, +but in regard to the capacity of E to produce wheat. +</quote> + +<p> +It may happen, however, that the demand for one of the +two, as for example wheat, may so outstrip the demand for +the other, as not only to occupy the soils specially suited for +wheat, but to engross entirely those equally suitable to both, +and even encroach upon those which are better adapted to +oats. To create an inducement for this unequal apportionment +of the cultivation, wheat must be relatively dearer, and +oats cheaper, than according to the cost of their production +on the medium land. Their relative value must be in proportion +to the cost on that quality of land, whatever it may +be, on which the comparative demand for the two grains +requires that both of them should be grown. If, from the +state of the demand, the two cultivations meet on land more +favorable to one than to the other, that one will be cheaper +and the other dearer, in relation to each other and to things +in general, than if the proportional demand were as we at +first supposed. +</p> + +<quote rend='display'> +As in the diagram just mentioned, if the demand for wheat +forces its cultivation downward not only on to land E, suited +to either indifferently, but, still farther on, to lands still less +adapted for wheat (although good land for oats), wheat may +be pushed down one stem of the V and up the other to D, or +even to C. Then the value of wheat will be regulated by the +cost of production on C, and the rent will be determined by a +comparison between the productiveness of <hi rend='italic'>a</hi>, +<hi rend='italic'>b</hi>, etc. (running +downward through E), with C. The price of wheat will be +high relatively to oats, which are now cultivated only on lands, +A, B, better suited to growing oats, and whose cost of production +on C is much less than on D or E. +</quote> + +<p> +Here, then, we obtain a fresh illustration, in a somewhat +different manner, of the operation of demand, not as an occasional +disturber of value, but as a permanent regulator of +it, conjoined with, or supplementary to, cost of production. +</p> + +</div> + +</div> + +<pb n='377'/><anchor id='Pg377'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter XIII. Of International Trade.</head> + +<div> +<index index='toc'/> +<head>§ 1. Cost of Production not a regulator of international values. +Extension of the word <q>international.</q></head> + +<p> +Some things it is physically impossible to produce, +except in particular circumstances of heat, soil, water, or atmosphere. +But there are many things which, though they +could be produced at home without difficulty, and in any +quantity, are yet imported from a distance. The explanation +which would be popularly given of this would be, that it is +cheaper to import than to produce them: and this is the true +reason. But this reason itself requires that a reason be given +for it. Of two things produced in the same place, if one is +cheaper than the other, the reason is that it can be produced +with less labor and capital, or, in a word, at less cost. Is this +also the reason as between things produced in different +places? Are things never imported but from places where +they can be produced with less labor (or less of the other +element of cost, time) than in the place to which they are +brought? Does the law, that permanent value is proportioned +to cost of production, hold good between commodities +produced in distant places, as it does between those produced +in adjacent places? +</p> + +<p> +We shall find that it does not. A thing may sometimes +be sold cheapest, by being produced in some other place +than that at which it can be produced with the smallest +amount of labor and abstinence. +</p> + +<p> +This could not happen between adjacent places. If the +north bank of the Thames possessed an advantage over the +south bank in the production of shoes, no shoes would be +produced on the south side; the shoemakers would remove +themselves and their capitals to the north bank, or would +have established themselves there originally; for, being competitors +<pb n='378'/><anchor id='Pg378'/> +in the same market with those on the north side, +they could not compensate themselves for their disadvantage +at the expense of the consumer; the amount of it would fall +entirely on their profits; and they would not long content +themselves with a smaller profit, when, by simply crossing a +river, they could increase it. But between distant places, +and especially between different countries, profits may continue +different; because persons do not usually remove themselves +or their capitals to a distant place without a very +strong motive. If capital removed to remote parts of the +world as readily, and for as small an inducement, as it moves +to another quarter of the same town—if people would transport +their manufactories to America or China whenever they +could save a small percentage in their expenses by it—profits +would be alike (or equivalent) all over the world, and all +things would be produced in the places where the same labor +and capital would produce them in greatest quantity and of +best quality. A tendency may, even now, be observed toward +such a state of things: capital is becoming more and +more cosmopolitan; there is so much greater similarity of +manners and institutions than formerly, and so much less +alienation of feeling, among the more civilized countries, +that both population and capital now move from one of +those countries to another on much less temptation than +heretofore. But there are still extraordinary differences, +both of wages and of profits, between different parts of the +world. +</p> + +<p> +Between all distant places, therefore, in some degree, but +especially between different countries (whether under the +same supreme government or not), there may exist great inequalities +in the return to labor and capital, without causing +them to move from one place to the other in such quantity as +to level those inequalities. The capital belonging to a country +will, to a great extent, remain in the country, even if +there be no mode of employing it in which it would not be +more productive elsewhere. Yet even a country thus circumstanced +might, and probably would, carry on trade with +<pb n='379'/><anchor id='Pg379'/> +other countries. It would export articles of some sort, even +to places which could make them with less labor than itself; +because those countries, supposing them to have an advantage +over it in all productions, would have a greater advantage +in some things than in others, and would find it their +interest to import the articles in which their advantage was +smallest, that they might employ more of their labor and +capital on those in which it was greatest. +</p> + +<quote rend='display'> +It might seem that a special theory of value is required +for international trade, as compared with domestic trade, for +the particular reason that in the former there exists <emph>no free +movement of labor and capital</emph> from one trading country to +another. But we shall see that no new theory is necessary. +As before pointed out,<note place='foot'><ref +target='Book_III_Chapter_II_Section_4'>Book III, Chap. II, +§ 4</ref>.</note> commodities exchange for each other +at their relative costs wherever there is that free competition +which insures perfect facility of movement for labor and capital. +It has been usually assumed that capital and labor move +freely as between different parts of the same country, but +not between different countries. This, however, is not consistent +with the facts. We saw that there were non-competing +industrial groups within the same nation. Mr. Mill here, +in a pointed way, suggests this, when he speaks of <q>distant +places.</q> The addition, therefore, made to Mr. Mill's exposition +by Mr. Cairnes<note place='foot'><q>Leading Principles,</q> +pp. 302-307.</note> is, that the word <q>international</q> (in +default of a better term) should be applied to those conditions +either within a country, or between two countries, which, +because of the actual immobility of labor and capital from one +occupation to another, furnishes a substantial interference with +industrial competition. The obstacles to the free movement of +labor and capital which produce the conditions called <q>international</q> +are: 1. <q>Geographical distance; 2. Difference in +political institutions; 3. Difference in language, religion, and +social customs—in a word, in forms of civilization.</q> These +differences exist between Maine and Montana; or even between +two adjoining States, Ohio and Kentucky, one a free +and the other an old slave State. Labor and capital have not +in the past moved freely even across Mason and Dixon's line. +There is, therefore, no treatment of international trade and +values separate from the laws of value already laid down concerning +non-competing groups, since there is also no free competition +between all the industrial groups within a country. +</quote> + +</div> + +<pb n='380'/><anchor id='Pg380'/> + +<div> +<index index='toc'/> +<head>§ 2. Interchange of commodities between distance places determined by +differences not in their absolute, but in the comparative, costs of +production.</head> + +<p> +As I have said elsewhere<note place='foot'><q>Essays on some Unsettled +Questions of Political Economy,</q> Essay I.</note> after Ricardo (the thinker +who has done most toward clearing up this subject),<note place='foot'>I at one +time believed Mr. Ricardo to have been the sole author of the doctrine +now universally received by political economists, on the nature and measure +of the benefit which a country derives from foreign trade. But Colonel Torrens, +by the republication of one of his early writings, <q>The Economists refuted,</q> +has established at least a joint claim with Mr. Ricardo to the origination of the +doctrine, and an exclusive one to its earliest +publication.—<hi rend='smallcaps'>Mill</hi>.</note> <q>it is +not a difference in the <emph>absolute</emph> cost of production which +determines the interchange, but a difference in the <emph>comparative</emph> +cost. It may be to our advantage to procure iron from +Sweden in exchange for cottons, even although the mines of +England as well as her manufactories should be more productive +than those of Sweden; for if we have an advantage of +one half in cottons, and only an advantage of a quarter in +iron, and could sell our cottons to Sweden at the price which +Sweden must pay for them if she produced them herself, we +should obtain our iron with an advantage [over Sweden] of +one half, as well as our cottons. We may often, by trading +with foreigners, obtain their commodities at a smaller expense +of labor and capital than they cost to the foreigners +themselves. The bargain is still advantageous to the foreigner, +because the commodity which he receives in exchange, +though it has cost us less, would have cost him +more.</q> +</p> + +<quote rend='display'> +<p> +This may be illustrated as follows: +</p> +</quote> + +<table rend="latexcolumns: 'p{1cm} p{2.5cm} p{2.5cm}'; + tblcolumns: 'lw(10) lw(20) lw(20)'"> +<row><cell>Articles interchanged.</cell><cell>England.</cell><cell>Sweden.</cell></row> +<row><cell>Cotton.</cell> + <cell>10 days' labor produces <hi rend='italic'>x</hi> yds.</cell> + <cell>15 days' labor produces <hi rend='italic'>x</hi> yds.</cell></row> +<row><cell>Iron.</cell> + <cell>12 days' labor produces <hi rend='italic'>y</hi> cwts.</cell> + <cell>15 days' labor produces <hi rend='italic'>y</hi> cwts.</cell></row> +</table> + +<quote rend='display'> +<p> +Here England has the advantage over Sweden in both cotton +and iron, since she can produce <hi rend='italic'>x</hi> yards of cotton in ten +days' labor to fifteen days in Sweden, and <hi rend='italic'>y</hi> cwts. of iron in +twelve days' labor to fifteen days in Sweden. The ship which +takes <hi rend='italic'>x</hi> yards of cotton to Sweden, and there exchanges it, as +may be done, for <hi rend='italic'>y</hi> cwts. of iron, brings back to England that +which cost Sweden fifteen days' labor, while the cotton with +<pb n='381'/><anchor id='Pg381'/> +which the iron was bought cost England only ten days' labor. +So that England also got her iron at an advantage over Sweden +of one half of ten days' labor; and yet England had an absolute +advantage over Sweden in iron of a less amount (i.e., of +one fourth of twelve days' labor). It is to be distinctly understood +that by difference in <emph>comparative cost</emph> we mean a difference +in the comparative cost of producing two or more articles +in the <emph>same country</emph>, and not the difference of cost of the same +article in the different trading countries. In this example, for +instance, it is the difference in the comparative costs in England +of both cotton and iron (not the different costs of cotton +in England and Sweden) which gives the reason for the existence +of the foreign trade. +</p> +</quote> + +<p> +To illustrate the cases in which interchange of commodities +will not, and those in which it will, take place between +two countries, the supposition may be made that the United +States has an advantage over England in the production both +of iron and of corn. It may first be supposed that the advantage +is of equal amount in both commodities; the iron +and the corn, each of which required 100 days' labor in the +United States, requiring each 150 days' labor in England. +It would follow that the iron of 150 days' labor in England, +if sent to the United States, would be equal to the iron of +100 days' labor in the United States; if exchanged for corn, +therefore, it would exchange for the corn of only 100 days' +labor. But the corn of 100 days' labor in the United States +was supposed to be the same quantity with that of 150 days' +labor in England. With 150 days' labor in iron, therefore, +England would only get as much corn in the United States +as she could raise with 150 days' labor at home; and she +would, in importing it, have the cost of carriage besides. In +these circumstances no exchange would take place. In this +case the comparative costs of the two articles in England and +in the United States were supposed to be the same, though +the absolute costs were different; on which supposition we +see that there would be no labor saved to either country by +confining its industry to one of the two productions and importing +the other. +</p> + +<p> +It is otherwise when the comparative and not merely +<pb n='382'/><anchor id='Pg382'/> +the absolute costs of the two articles are different in the two +countries. If, while the iron produced with 100 days' labor +in the United States was produced with 150 days' labor in +England, the corn which was produced in the United States +with 100 days' labor could not be produced in England with +less than 200 days' labor, an adequate motive to exchange +would immediately arise. With a quantity of iron which +England produced with 150 days' labor, she would be able to +purchase as much corn in the United States as was there produced +with 100 days' labor; but the quantity which was there +produced with 100 days' labor would be as great as the quantity +produced in England with 200 days' labor. By importing +corn, therefore, from the United States, and paying for +it with iron, England would obtain for 150 days' labor what +would otherwise cost her 200, being a saving of 50 days' +labor on each repetition of the transaction; and not merely a +saving to England, but a saving absolutely; for it is not obtained +at the expense of the United States, who, with corn +that cost her 100 days' labor, has purchased iron which, if +produced at home, would have cost her the same. The +United States, therefore, on this supposition, loses nothing; +but also she derives no advantage from the trade, the imported +iron costing her as much as if it were made at home. +To enable the United States to gain anything by the interchange, +something must be abated from the gain of England: +the corn produced in the United States by 100 days' labor +must be able to purchase from England more iron than the +United States could produce by that amount of labor; more, +therefore, than England could produce by 150 days' labor, +England thus obtaining the corn which would have cost her +200 days at a cost exceeding 150, though short of 200. +England, therefore, no longer gains the whole of the labor +which is saved to the two jointly by trading with one another.<note place='foot'>I +have in this illustration retained almost the exact words quoted by Mr. +Mill from his father's book, James Mill's <q>Elements of Political Economy,</q> but +altered it by changing the trade from Poland to the United States, and by speaking +of iron instead of cloth.</note> +</p> + +<pb n='383'/><anchor id='Pg383'/> + +<quote rend='display'> +<p> +The case in which both England and the United States +would gain from the trade may be thus briefly shown: +</p> + +<table rend="latexcolumns: 'p{1cm} p{2.5cm} p{2.5cm}'; + tblcolumns: 'lw(10) lw(20) lw(20)'"> +<row><cell>Articles interchanged.</cell><cell>United States.</cell> + <cell>England.</cell></row> +<row><cell>Corn.</cell> + <cell>100 days' labor produces <hi rend='italic'>x</hi> bus.</cell> + <cell>200 days' labor produces <hi rend='italic'>x</hi> bus.</cell></row> +<row><cell>Iron.</cell> + <cell>125 days' labor produces <hi rend='italic'>y</hi> tons.</cell> + <cell>150 days' labor produces <hi rend='italic'>y</hi> tons.</cell></row> +</table> + +<p> +The ship which carries <hi rend='italic'>x</hi> bushels of corn from the United +States to England can there exchange it for at least <hi rend='italic'>y</hi> tons of +iron (costing England 150 days' labor, since <hi rend='italic'>x</hi> bushels in England +would cost 200 days' labor), and bring it home, gaining for the +United States the difference between the 100 days' labor in +corn, paid for the <hi rend='italic'>y</hi> tons of iron, and the 125 days which the +iron would have cost here if produced at home. In this case +the United States has an advantage over England in both corn +and iron, but still an international trade will spring up, because +the United States will derive a gain owing to the less cost of +corn as compared with the cost of iron. Our <emph>comparative</emph> advantage +is in corn. England, also, by sending to the United +States <hi rend='italic'>y</hi> tons of iron, gets +in return for it <hi rend='italic'>x</hi> bushels of corn. +To produce the corn herself would have cost her 200 days' labor, +but she bought that corn by only 150 days' labor spent on +iron. England's <emph>comparative</emph> advantage is in iron. Then both +countries will gain. +</p> + +<p> +Mr. Bowen<note place='foot'><q>American Political +Economy,</q> p. 481.</note> gives an instance of international trade where +one country has the advantage in both of the commodities +entering into the exchange: <q>The inhabitants of Barbadoes, +favored by their tropical climate and fertile soil, can raise +provisions cheaper than we can in the United States. And +yet Barbadoes buys nearly all her provisions from this country. +Why is this so? Because, though Barbadoes has the +advantage over us in the ability to raise provisions cheaply, +she has a still greater advantage over us in her power to produce +sugar and molasses. If she has an advantage of one +fourth in raising provisions, she has an advantage of one half +in regard to products exclusively tropical; and it is better +for her to employ all her labor and capital in that branch +of production in which her advantage is greatest. She can +thus, by trading with us, obtain our breadstuffs and meat at a +smaller expense of labor and capital than they cost ourselves. +If, for instance, a barrel of flour costs ten days' labor in the +United States and only eight days' labor in Barbadoes, the +people of Barbadoes can still profitably buy the flour from this +<pb n='384'/><anchor id='Pg384'/> +country, if they can pay for it with sugar which cost them only +six days' labor; and the people of this country can profitably +sell them the flour, or buy from them the sugar, provided the +sugar, if raised in the United States, would cost eleven days' +labor.... The United States receive sugar, which would have +cost them eleven days' labor, by paying for it with flour which +costs them but ten days. Barbadoes receives flour, which would +have cost her eight days' labor, by paying for it with sugar +which costs her but six days. If Barbadoes produced both +commodities with greater facility, but greater in precisely the +same degree, there would be no motive for interchange.</q> +</p> + +<p> +It may be said, however, that in practice no business-man +considers the question of <q>comparative cost</q> in making shipments +of goods abroad; that all he thinks of is whether the +price here, for example, is less than it is in London. And yet +the very fact that the prices are less here implies that gold is +of high value relatively to the given commodity; while in +London, if money is to be sent back in payment, and if prices +are high there, that implies that gold is there of less comparative +value than commodities, and consequently that gold is the +cheapest article to send to the United States. The doctrine, +then, is as true of gold, or the precious metals, as it is of other +commodities.<note place='foot'>For a fuller discussion of this +question see Cairnes, <q>Leading Principles,</q> p. 319, ff.</note> +It may be stated in the following language of +Mr. Cairnes: <q>The proximate condition determining international +exchange is the state of comparative prices in the exchanging +countries as regards the commodities which form +the subject of the trade. But comparative prices within +the limits of each country are determined by two distinct +principles—within the range of effective industrial competition, +by cost of production; outside that range, by reciprocal +demand.</q><note place='foot'><q>Leading Principles,</q> p. 323.</note> +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. The direct benefits of commerce consist in increased Efficiency of +the productive powers of the World.</head> + +<p> +From this exposition we perceive in what consists +the benefit of international exchange, or, in other words, +foreign commerce. Setting aside its enabling countries to +obtain commodities which they could not themselves produce +at all, its advantage consists in a more efficient employment +of the productive forces of the world. If two countries +which traded together attempted, as far as was physically +possible, to produce for themselves what they now import +from one another, the labor and capital of the two countries +<pb n='385'/><anchor id='Pg385'/> +would not be so productive, the two together would not obtain +from their industry so great a quantity of commodities, +as when each employs itself in producing, both for itself and +for the other, the things in which its labor is relatively most +efficient. The addition thus made to the produce of the two +combined constitutes the advantage of the trade. It is possible +that one of the two countries may be altogether inferior +to the other in productive capacities, and that its labor and +capital could be employed to greatest advantage by being removed +bodily to the other. The labor and capital which +have been sunk in rendering Holland habitable would have +produced a much greater return if transported to America or +Ireland. The produce of the whole world would be greater, +or the labor less, than it is, if everything were produced +where there is the greatest absolute facility for its production. +But nations do not, at least in modern times, emigrate +<hi rend='italic'>en masse</hi>; and, while the labor and capital of a country remain +in the country, they are most beneficially employed in +producing, for foreign markets as well as for its own, the +things in which it lies under the least disadvantage, if there +be none in which it possesses an advantage. +</p> + +<quote rend='display'> +<p> +The fundamental ground on which all trade, or all exchange +of commodities, rests, is division of labor, or separation of employments. +Beyond the ordinary gain from division of labor, +arising from increased dexterity, there exist gains arising from +the development of <q>the special capacities or resources possessed +by particular individuals or localities.</q> International +exchanges call out chiefly the special advantages offered by +particular <emph>localities</emph> for the prosecution of particular industries. +</p> + +<p> +<q>The only case, indeed, in which <emph>personal aptitudes</emph> go for +much in the commerce of nations is where the nations concerned +occupy different grades in the scale of civilization.... +The most striking example which the world has ever seen of a +foreign trade determined by the peculiar personal qualities of +those engaged in ministering to it is that which was furnished +by the Southern States of the American Union previous to the +abolition of slavery. The effect of that institution was to give +a very distinct industrial character to the laboring population +of those States which unfitted them for all but a very limited +number of occupations, but gave them a certain special fitness +for these. Almost the entire industry of the country was consequently +<pb n='386'/><anchor id='Pg386'/> +turned to the production of two or three crude commodities, +in raising which the industry of slaves was found to +be effective; and these were used, through an exchange with +foreign countries, as the means of supplying the inhabitants +with all other requisites.... In the main, however, it would +seem that this cause [personal aptitudes] does not go for very +much in international commerce.</q><note place='foot'>Cairnes, +<q>Leading Principles,</q> p. 301.</note> +</p> + +<p> +In brief, then, international trade is but an extension of the +principle of division of labor; and the gains to increased productiveness, +arising from the latter, are exactly the same as +those from the former. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. —Not in a Vent for exports, nor in the gains of Merchants.</head> + +<p> +According to the doctrine now stated, the only direct +advantage of foreign commerce consists in the imports. A +country obtains things which it either could not have produced +at all, or which it must have produced at a greater +expense of capital and labor than the cost of the things +which it exports to pay for them. It thus obtains a more +ample supply of the commodities it wants, for the same labor +and capital; or the same supply, for less labor and capital, +leaving the surplus disposable to produce other things. The +vulgar theory disregards this benefit and deems the advantage +of commerce to reside in the exports: as if not what a country +obtains, but what it parts with, by its foreign trade, was +supposed to constitute the gain to it. An extended market +for its produce—an abundant consumption for its goods—a +vent for its surplus—are the phrases by which it has been +customary to designate the uses and recommendations of +commerce with foreign countries. This notion is intelligible, +when we consider that the authors and leaders of opinion on +mercantile questions have always hitherto been the selling +class. It is in truth a surviving relic of the Mercantile +Theory, according to which, money being the only wealth, +selling, or, in other words, exchanging goods for money, +was (to countries without mines of their own) the only +way of growing rich—and importation of goods, that is to +say, parting with money, was so much subtracted from the +benefit. +</p> + +<pb n='387'/><anchor id='Pg387'/> + +<p> +The notion that money alone is wealth has been long +defunct, but it has left many of its progeny behind it. Adam +Smith's theory of the benefit of foreign trade was, that it +afforded an outlet for the surplus produce of a country, and +enabled a portion of the capital of the country to replace itself +with a profit. The expression, surplus produce, seems +to imply that a country is under some kind of necessity of +producing the corn or cloth which it exports; so that the +portion which it does not itself consume, if not wanted and +consumed elsewhere, would either be produced in sheer +waste, or, if it were not produced, the corresponding portion +of capital would remain idle, and the mass of productions in +the country would be diminished by so much. Either of +these suppositions would be entirely erroneous. The country +produces an exportable article in excess of its own wants +from no inherent necessity, but as the cheapest mode of supplying +itself with other things. If prevented from exporting +this surplus, it would cease to produce it, and would no +longer import anything, being unable to give an equivalent; +but the labor and capital which had been employed in producing +with a view to exportation would find employment +in producing those desirable objects which were previously +brought from abroad; or, if some of them could not be produced, +in producing substitutes for them. These articles +would, of course, be produced at a greater cost than that of +the things with which they had previously been purchased +from foreign countries. But the value and price of the +articles would rise in proportion; and the capital would +just as much be replaced, with the ordinary profit, from +the returns, as it was when employed in producing for the +foreign market. The only losers (after the temporary inconvenience +of the change) would be the consumers of the +heretofore imported articles, who would be obliged either +to do without them, consuming in lieu of them something +which they did not like as well, or to pay a higher price +for them than before. +</p> + +<p> +If it be said that the capital now employed in foreign +<pb n='388'/><anchor id='Pg388'/> +trade could not find employment in supplying the home +market, I might reply that this is the fallacy of general +over-production, discussed in a former chapter; but the thing +is in this particular case too evident to require an appeal to +any general theory. We not only see that the capital of the +merchant would find employment, but we see what employment. +There would be employment created, equal to that +which would be taken away. Exportation ceasing, importation +to an equal value would cease also, and all that part +of the income of the country which had been expended in +imported commodities would be ready to expend itself on +the same things produced at home, or on others instead of +them. Commerce is virtually a mode of cheapening production; +and in all such cases the consumer is the person +ultimately benefited; the dealer, in the end, is sure to get +his profit, whether the buyer obtains much or little for his +money. +</p> + +<quote rend='display'> +<hi rend='italic'>E converso</hi>, if for any reason, such as a removal of duties, +capital should be withdrawn from the production of articles +consumed at home, and imported commodities should entirely +take their place, the very importation of the foreign commodities +would imply that an increased corresponding production +was going on in this country with which to pay for the imported +goods. The capital thus thrown out of employment in an +industry in which we had no comparative advantage (when +competition became free) would necessarily be employed in +the industries in which we had an advantage, and would supply—and +the transferred capital would be the only means of supplying—the +commodities which would be sent abroad to pay +for those, which by the supposition are now imported, but were +formerly produced at home. The result is a greater productiveness +of industry, and so a greater sum from which both labor +and capital may be rewarded. Whenever capital, unrestrained +by artificial support, leaves one employment as unprofitable, it +means that that employment is naturally, and in itself, less +productive than the usual run of other industries in the country, +and so less profitable to both labor and capital than the +majority of other occupations. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Indirect benefits of Commerce, Economical and Moral; still +greater than the Direct.</head> + +<p> +Such, then, is the direct economical advantage of +foreign trade. But there are, besides, indirect effects, which +must be counted as benefits of a high order. (1) One is, the +<pb n='389'/><anchor id='Pg389'/> +tendency of every extension of the market to improve the +processes of production. A country which produces for a +larger market than its own can introduce a more extended +division of labor, can make greater use of machinery, and +is more likely to make inventions and improvements in the +processes of production. Whatever causes a greater quantity +of anything to be produced in the same place tends to the +general increase of the productive powers of the +world.<note place='foot'><ref target='Book_I_Chapter_VI_Section_4'>Book I, +chap. VI, § 4</ref>.</note> +There is (2) another consideration, principally applicable to +an early stage of industrial advancement. The opening of +a foreign trade, by making them acquainted with new objects, +or tempting them by the easier acquisition of things +which they had not previously thought attainable, sometimes +works a sort of industrial revolution in a country whose resources +were previously undeveloped for want of energy and +ambition in the people; inducing those who were satisfied +with scanty comforts and little work to work harder for the +gratification of their new tastes, and even to save, and accumulate +capital, for the still more complete satisfaction of +those tastes at a future time. +</p> + +<p> +But (3) the economical advantages of commerce are surpassed +in importance by those of its effects which are intellectual +and moral. It is hardly possible to overrate the +value, in the present low state of human improvement, of +placing human beings in contact with persons dissimilar to +themselves, and with modes of thought and action unlike +those with which they are familiar. Commerce is now, +what war once was, the principal source of this contact. +Such communication has always been, and is peculiarly in +the present age, one of the primary sources of progress. +Finally, (4) commerce first taught nations to see with goodwill +the wealth and prosperity of one another. Before, the +patriot, unless sufficiently advanced in culture to feel the +world his country, wished all countries weak, poor, and ill-governed +but his own: he now sees in their wealth and +<pb n='390'/><anchor id='Pg390'/> +progress a direct source of wealth and progress to his own +country. It is commerce which is rapidly rendering war +obsolete, by strengthening and multiplying the personal interests +which are in natural opposition to it. And it may +be said without exaggeration that the great extent and rapid +increase of international trade, in being the principal guarantee +of the peace of the world, is the great permanent security +for the uninterrupted progress of the ideas, the institutions, +and the character of the human race. +</p> + +</div> + +</div> + +<pb n='391'/><anchor id='Pg391'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_XIV'/> +<head>Chapter XIV. Of International Values.</head> + +<div> +<index index='toc'/> +<head>§ 1. The values of imported commodities depend on the Terms of +international interchange.</head> + +<p> +The values of commodities produced at the same +place, or in places sufficiently adjacent for capital to move +freely between them—let us say, for simplicity, of commodities +produced in the same country—depend (temporary fluctuations +apart) upon their cost of production. But the value +of a commodity brought from a distant place, especially from +a foreign country, does not depend on its cost of production +in the place from whence it comes. On what, then, does it +depend? The value of a thing in any place depends on the +cost of its acquisition in that place; which, in the case of an +imported article, means the cost of production of the thing +which is exported to pay for it. +</p> + +<p> +If, then, the United States imports wine from Spain, +giving for every pipe of wine a bale of cloth, the exchange +value of a pipe of wine in the United States will not depend +upon what the production of the wine may have cost in +Spain, but upon what the production of the cloth has cost in +the United States. Though the wine may have cost in Spain +the equivalent of only ten days' labor, yet, if the cloth costs +in the United States twenty days' labor, the wine, when +brought to the United States, will exchange for the produce +of twenty days' American labor, <emph>plus</emph> the cost of carriage, +including the usual profit on the importer's capital during +the time it is locked up and withheld from other employment.<note place='foot'>I have +changed the illustration from England to the United States in this +example.</note> +</p> + +<p> +The value, then, in any country, of a foreign commodity, +<pb n='392'/><anchor id='Pg392'/> +depends on the quantity of home produce which must be +given to the foreign country in exchange for it. In other +words, the values of foreign commodities depend on the +terms of international exchange. What, then, do these depend +upon? What is it which, in the case supposed, causes +a pipe of wine from Spain to be exchanged with the United +States for exactly that quantity of cloth? We have seen +that it is not their cost of production. If the cloth and the +wine were both made in Spain, they would exchange at their +cost of production in Spain; if they were both made in the +United States, they would [possibly] exchange at their cost +of production in the United States: but all the cloth being +made in the United States, and all the wine in Spain, they +are in circumstances to which we have already determined +that the law of cost of production is not applicable. We +must accordingly, as we have done before in a similar embarrassment, +fall back upon an antecedent law, that of supply +and demand; and in this we shall again find the solution of +our difficulty. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. The values of foreign commodities depend, not upon Cost of Production, +but upon Reciprocal Demand and Supply.</head> + +<quote rend='display'> +<p> +It has been previously explained that the conditions +called. <q>international</q> are those, either within a nation, or those +existing between two separate nations, which are such as to +prevent the free movement of labor and capital from one group +of industries to another, or from one locality to another distant +one. Even if woolen cloth could be made cheaper in England +than in the United States, we know that neither capital nor +labor would easily leave the United States for England, although +it might go from Rhode Island to Massachusetts under +similar inducements. If shoes can be made with less advantage +in Providence than in Lynn, the shoe industry will come +to Lynn; but it does not follow that the English shoe industry +would come to Lynn, even if the advantages of the latter were +greater than those in England. If there be no obstacle to the +free movement of labor and capital between places or occupations, +and if some place or occupation can produce at a less +cost than another place or occupation, then there will be a +migration of the instruments of production. Since there is +no free movement of labor and capital between one country +and another, then two countries stand in the same relation as +that of two <q>non-competing groups</q> within the same country, +as before explained. When this fact is once fully grasped, the +<pb n='393'/><anchor id='Pg393'/> +subject of international values becomes very simple. It does +not differ from the question of those domestic values for which +we found<note place='foot'><ref target='Book_III_Chapter_II_Section_4'>Book +III, Chap. II, § 4</ref>.</note> that the dependence on cost of production would +not hold, but that their values were governed by reciprocal demand +and supply. +</p> + +<p> +Attention should be drawn to the real nature of the present +inquiry. It is not here a question as to what causes international +<emph>trade</emph> between two countries: that has been treated in +the preceding chapter, and has been found to be a difference +in the comparative cost. The question now is one of <emph>exchange +value</emph>, that is, for how much of other commodities a given +commodity will exchange. The reasons for the trade are supposed +to exist; but we now want to know what the law is which +determines the proportions of the exchange. Why does one +article exchange for more or less of another? Not, as we have +seen, because one costs more or less to produce than the other. +</p> + +<p> +In the trade between the United States and England in +iron and corn, formerly referred to (p. <ref target='Pg383'>383</ref>), +it was seen that a +100 days' labor of corn buys from England iron which would +have cost the United States 125 days' labor. England sends +150 days' labor of iron and buys from the United States corn +which would have cost her 200 days' labor. But what rule +fixes the proportions between 100 and 125 for the United +States, and between 150 and 200 for England, at which the +exchanges will take place? The trade increases the productiveness +of both countries, but in what ratio will the two countries +share this gain? The answer is, briefly, in <emph>the ratio set +by reciprocal demand and supply</emph>, that is, the relative strength, +as compared with each other, of the demands of the two countries +respectively for iron and corn. This, however, may be +capable of explanation in a simple form. +</p> + +<p> +A has spades, and B has oats, to dispose of; and each wishes +to get the article belonging to the other. Will A give one spade +for one bushel of oats, or for two? Will B give two bushels of +oats for one spade? That depends upon how strong a desire A +has for oats; the intensity of his demand may induce him to +give two spades for one bushel. But the exchange also depends +upon B. If he has no great need for spades, and A has a strong +desire for oats, B will get more spades for oats than otherwise, +possibly two spades for one bushel of oats; that is, oats will +have a larger exchange value. If, on the other hand, A cares +less for oats than B does for spades, then the exchange will result +in an increased value of spades relatively to oats. When +two commodities exchange against each other, their exchange +values will depend entirely upon the relative intensity of the demand +<pb n='394'/><anchor id='Pg394'/> +on each side for the other commodity. And this simple +form of the statement of reciprocal demand and supply is also +the law of international values. +</p> + +<p> +If instead of spades and oats we substitute iron and corn, +and let the trade be between England and the United States, +the quantity of corn required to buy a given quantity of iron +will depend upon the relative demands of England for corn +and of the United States for iron. Something may cut off +England's demand for our breadstuffs, and they will then +have a less exchange value relatively to iron (if we keep up our +demand), and their prices will fall. But if, on the other hand, +England has poor harvests, and consequently a great demand +for corn, and if our demand for iron is not excessive at the +same time, then our breadstuffs will rise in value. And this +was precisely what happened from 1877 to 1879. Now, in the +above illustration of corn and iron, how can we know whether +or not <hi rend='italic'>x</hi> bushels of corn (the produce of 100 days' labor in the +United States) will exchange for exactly <hi rend='italic'>y</hi> tons of English +iron? That, again, will depend upon the reciprocal demands +of the two countries for corn and iron respectively. Moreover, +it will have been already observed that the ratio of exchange +is not capable of being ascertained exactly, since it varies +with changing conditions, namely, the desires of the people +of the two countries, together with their means of purchase. +</p> + +<p> +But yet these variations are capable of ascertainment as +regards their extreme limits. The reciprocal demand can not +carry the exchange value in either country beyond the line set +by the cost of production of the article. For instance, an urgent +need in England for corn (if the United States has a light +demand for English iron) can not carry the ratio of exchange +to a point such that England will offer so much more than 150 +days' labor in iron for <hi rend='italic'>x</hi> bushels of American corn that it will +go beyond 200 days' labor in iron. It will be seen at once, then, +if that were the case, that England would produce the corn +herself; and that she would then have no gain whatever from +the trade. The ratio of exchange will thus be limited by the +reciprocal demand on one side to the cost of production (200 +days' labor) of English corn. On the other hand, if the supposition +were reversed, and the United States had a great demand +for iron, but England had little need for our corn, then +we would not offer more than 125 days' labor of corn for <hi rend='italic'>y</hi> tons +of iron, because for that expenditure of labor we could produce +the iron ourselves. +</p> + +<p> +In the above examples we have considered the case of a +trade in corn and iron only. If corn were to typify all our +goods wanted by England, and iron all English goods wanted +by the United States, the conclusions would be exactly the +<pb n='395'/><anchor id='Pg395'/> +same. The ratios of a myriad of things, each governed by its +particular reciprocal demand, exchanging against each other, +give a general result by which the goods sent out exchange +against the goods brought back at such rates as are fixed by +the reciprocal demands acting on all the goods. Goods are payments +for goods; the ratio of exchange depends on reciprocal +demand and supply. If we now add more countries to the example, +we simply increase the number of persons (although in +different countries) wanting our goods, as set off against our +demands for the goods of this greater number of persons. If +France, Germany, and England all want our corn, we must +have some demand for the goods of France, Germany, and England +also; and the same law of reciprocal demand gives the +ratio of interchange. That this explanation is consistent with +the facts is to be seen when we notice how eagerly the exporters +of American staples watch the conditions which increase +or diminish the foreign demand for these commodities, looking +at them as the causes which directly affect their exchange value, +or price. +</p> +</quote> + +<p> +When cost of carriage is added, it will increase the price +of corn to England and of iron to the United States. But, as +every one knows, an increase of price affects the demand; and, +as the demand on each side is affected, a new ratio of exchange +will finally be reached consistent with the strength of desires +on each side. Who, therefore, will pay the most of the cost +of carriage England or the United States? That will, again, +depend on whether England has the greatest relative demand +for American goods, as compared with the demand of the +United States for English goods. +</p> + +<p> +No absolute rule, therefore, can be laid down for the +division of the cost, no more than for the division of the advantage; +and it does not follow that, in whatever ratio the +one is divided, the other will be divided in the same. It is +impossible to say, if the cost of carriage could be annihilated, +whether the producing or the importing country would be +most benefited. This would depend on the play of international +demand. +</p> + +<p> +Cost of carriage has one effect more. But for it, every +commodity would (if trade be supposed free) be either regularly +imported or regularly exported. A country would +make nothing for itself which it did not also make for other +countries. But in consequence of cost of carriage there are +many things, especially bulky articles, which every, or almost +<pb n='396'/><anchor id='Pg396'/> +every, country produces within itself. After exporting the +things in which it can employ itself most advantageously, +and importing those in which it is under the greatest disadvantage, +there are many lying between, of which the relative +cost of production in that and in other countries differs so +little that the cost of carriage would absorb more than the +whole saving in cost of production which would be obtained +by importing one and exporting another. This is the case +with numerous commodities of common consumption, including +the coarser qualities of many articles of food and +manufacture, of which the finer kinds are the subject of +extensive international traffic. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. —As illustrated by trade in cloth and linen between England +and Germany.</head> + +<quote rend='display'> +Mr. Mill still further illustrates the operation of the law +of reciprocal demand by the case of a trade between England +and Germany in cloth and linen, as follows: +</quote> + +<p> +<q>Suppose that ten yards of broadcloth cost in England as +much labor as fifteen yards of linen, and in Germany as +much as twenty.</q> This supposition then being made, it +would be the interest of England to import linen from Germany, +and of Germany to import cloth from England. +<q rend='pre'>When each country produced both commodities for itself, +ten yards of cloth exchanged for fifteen yards of linen in +England, and for twenty in Germany. They will now exchange +for the same number of yards of linen in both. For +what number? If for fifteen yards, England will be just as +she was, and Germany will gain all. If for twenty yards, +Germany will be as before, and England will derive the +whole of the benefit. If for any number intermediate between +fifteen and twenty, the advantage will be shared between +the two countries. If, for example, ten yards of cloth +exchange for eighteen of linen, England will gain an advantage +of three yards on every fifteen, Germany will save two +out of every twenty. The problem is, what are the causes +which determine the proportion in which the cloth of England +and the linen of Germany will exchange for each other? +Let us suppose, then, that by the effect of what Adam Smith +<pb n='397'/><anchor id='Pg397'/> +calls the higgling of the market, ten yards of cloth, in both +countries, exchange for seventeen yards of linen.</q> +</p> + +<p> +<q rend='pre'>The demand for a commodity, that is, the quantity of +it which can find a purchaser, varies, as we have before remarked, +according to the price. In Germany the price of +ten yards of cloth is now seventeen yards of linen, or whatever +quantity of money is equivalent in Germany to seventeen +yards of linen. Now, that being the price, there is +some particular number of yards of cloth, which will be in +demand, or will find purchasers, at that price. There is +some given quantity of cloth, more than which could not be +disposed of at that price; less than which, at that price, +would not fully satisfy the demand. Let us suppose this +quantity to be 1,000 times ten yards.</q> +</p> + +<p> +<q rend='pre'>Let us now turn our attention to England. There the +price of seventeen yards of linen is ten yards of cloth, or +whatever quantity of money is equivalent in England to ten +yards of cloth. There is some particular number of yards of +linen which, at that price, will exactly satisfy the demand, +and no more. Let us suppose that this number is 1,000 +times seventeen yards.</q> +</p> + +<p> +<q rend='pre'>As seventeen yards of linen are to ten yards of cloth, so +are 1,000 times seventeen yards to 1,000 times ten yards. +At the existing exchange value, the linen which England +requires will exactly pay for the quantity of cloth which, on +the same terms of interchange, Germany requires. The demand +on each side is precisely sufficient to carry off the supply +on the other. The conditions required by the principle +of demand and supply are fulfilled, and the two commodities +will continue to be interchanged, as we supposed them to be, +in the ratio of seventeen yards of linen for ten yards of +cloth.</q> +</p> + +<p> +<q rend='pre'>But our suppositions might have been different. Suppose +that, at the assumed rate of interchange, England had +been disposed to consume no greater quantity of linen than +800 times seventeen yards; it is evident that, at the rate supposed, +this would not have sufficed to pay for the 1,000 times +<pb n='398'/><anchor id='Pg398'/> +ten yards of cloth which we have supposed Germany to require +at the assumed value. Germany would be able to procure +no more than 800 times ten yards at that price. To +procure the remaining 200, which she would have no means +of doing but by bidding higher for them, she would offer +more than seventeen yards of linen in exchange for ten yards +of cloth; let us suppose her to offer eighteen. At this price, +perhaps, England would be inclined to purchase a greater +quantity of linen. She would consume, possibly, at that +price, 900 times eighteen yards. On the other hand, cloth +having risen in price, the demand of Germany for it would +probably have diminished. If, instead of 1,000 times ten +yards, she is now contented with 900 times ten yards, these +will exactly pay for the 900 times eighteen yards of linen +which England is willing to take at the altered price; the +demand on each side will again exactly suffice to take off the +corresponding supply; and ten yards for eighteen will be the +rate at which, in both countries, cloth will exchange for linen.</q> +</p> + +<p> +<q>The converse of all this would have happened if, instead +of 800 times seventeen yards, we had supposed that +England, at the rate of ten for seventeen, would have taken +1,200 times seventeen yards of linen. In this case, it is England +whose demand is not fully supplied; it is England who, +by bidding for more linen, will alter the rate of interchange +to her own disadvantage; and ten yards of cloth will fall, in +both countries, below the value of seventeen yards of linen. +By this fall of cloth, or, what is the same thing, this rise of +linen, the demand of Germany for cloth will increase, and +the demand of England for linen will diminish, till the rate +of interchange has so adjusted itself that the cloth and the +linen will exactly pay for one another; and, when once this +point is attained, values will remain without further alteration.</q> +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. The conclusion states in the Equation of International Demand.</head> + +<p> +<q>It may be considered, therefore, as established, that +when two countries trade together in two commodities, the +exchange value of these commodities relatively to each other +will adjust itself to the inclinations and circumstances of the +consumers on both sides, in such manner that the quantities +<pb n='399'/><anchor id='Pg399'/> +required by each country, of the articles which it imports +from its neighbor, shall be exactly sufficient to pay for one +another. As the inclinations and circumstances of consumers +can not be reduced to any rule, so neither can the proportions +in which the two commodities will be interchanged. We +know that the limits within which the variation is confined +are the ratio between their costs of production in the one +country and the ratio between their costs of production in +the other. Ten yards of cloth can not exchange for more +than twenty yards of linen, nor for less than fifteen. But +they may exchange for any intermediate number. The ratios, +therefore, in which the advantage of the trade may be divided +between the two nations are various. The circumstances on +which the proportionate share of each country more remotely +depends admit only of a very general indication.</q> +</p> + +<p> +If, therefore, it be asked what country draws to itself the +greatest share of the advantage of any trade it carries on, the +answer is, the country for whose productions there is in other +countries the greatest demand, and a demand the most susceptible +of increase from additional cheapness. In so far as +the productions of any country possess this property, the +country obtains all foreign commodities at less cost. It gets +its imports cheaper, the greater the intensity of the demand +in foreign countries for its exports. It also gets its +imports cheaper, the less the extent and intensity of its own +demand for them. The market is cheapest to those whose +demand is small. A country which desires few foreign productions, +and only a limited quantity of them, while its own +commodities are in great request in foreign countries, will +obtain its limited imports at extremely small cost, that is, in +exchange for the produce of a very small quantity of its labor +and capital. +</p> + +<p> +The law which we have now illustrated may be appropriately +named the Equation of International Demand. It +may be concisely stated as follows: The produce of a country +exchanges for the produce of other countries at such values +as are required in order that the whole of her exports may +<pb n='400'/><anchor id='Pg400'/> +exactly pay for the whole of her imports. This law of International +Values is but an extension of the more general law +of Value, which we called the Equation of Supply and Demand.<note place='foot'><ref +target='Book_III_Chapter_I_Section_3'>Book +III, Chap. I, § 3</ref>.</note> +We have seen that the value of a commodity always +so adjusts itself as to bring the demand to the exact level of +the supply. But all trade, either between nations or individuals, +is an interchange of commodities, in which the things +that they respectively have to sell constitute also their means +of purchase: the supply brought by the one constitutes his +demand for what is brought by the other. So that supply +and demand are but another expression for reciprocal demand; +and to say that value will adjust itself so as to equalize +demand with supply, is, in fact, to say that it will adjust +itself so as to equalize the demand on one side with the demand +on the other. +</p> + +<quote rend='display'> +The <emph>tendency</emph> of imports to balance exports may be seen +from Chart <ref target='Chart_XIII'>No. XIII</ref>, on the next page, which shows the +relation between the exports and imports solely of merchandise, +and exclusive of specie, to and from the United States. From +1850 to 1860, after the discoveries of the precious metals in +this country, we sent great quantities of gold and silver out of +the country, purely as merchandise, so that, if we should include +the precious metals among the exports in those years, +the total exports would more nearly equal the total imports. +The transmission of gold at that time was effected exactly as +that of other merchandise; so that to the date of the civil +war there was a very evident equilibrium between exports and +imports. Then came the war, with the period of extravagance +and speculation following, which led to great purchases abroad, +and which was closed only by the panic of 1873. Since then +more exports than imports were needed to pay for the great +purchases of the former period; and the epoch of great exports, +from 1875 to 1883, balanced the opposite conditions in +the period preceding. It would seem, therefore, that we had +reached a normal period about the year 1882.<note place='foot'>See +<q>Statistical Abstract,</q> 1883, pp. 32, 33.</note> A fuller statement +as to the fluctuations of exports and imports about the +equilibrium will be given when the introduction of money in +international trade is made. The full statement must also include +the financial account. +</quote> + +<pb n='401'/><anchor id='Pg401'/> + +<anchor id='Chart_XIII'/> +<p rend='text-align: center'> + <figure url='images/chartxiii.png' rend='width: 80%'> + <head>Chart XIII. <hi rend='italic'>Value of Merchandise</hi> <hi rend='smallcaps'>imported</hi> +<hi rend='italic'>into (dotted line) and</hi> <hi rend='smallcaps'>exported</hi> +<hi rend='italic'>from (black line) the United States from 1835 to 1883</hi>.</head> + <figDesc>Illustration: Chart XIII.</figDesc> + </figure> +</p> + +</div> + +<pb n='402'/><anchor id='Pg402'/> + +<div> +<index index='toc'/> +<head>§ 5. The cost to a country of its imports depends not only on the ratio of +exchange, but on the efficiency of its labor.</head> + +<p> +We now pass to another essential part of the theory +of the subject. There are two senses in which a country obtains +commodities cheaper by foreign trade: in the sense of +value and in the sense of cost: (1.) It gets them cheaper in +the first sense, by their falling in value relatively to other +things; the same quantity of them exchanging, in the country, +for a smaller quantity than before of the other produce of +the country. To revert to our original figures [of the trade +with Germany in cloth and linen]: in England, all consumers +of linen obtained, after the trade was opened, seventeen +or some greater number of yards for the same quantity +of all other things for which they before obtained only +fifteen. The degree of cheapness, in this sense of the term, +depends on the laws of International Demand, so copiously +illustrated in the preceding sections. (2.) But, in the other +sense, that of cost, a country gets a commodity cheaper +when it obtains a greater quantity of the commodity with +the same expenditure of labor and capital. In this sense +of the term, cheapness in a great measure depends upon a +cause of a different nature: a country gets its imports cheaper, +in proportion to the general productiveness of its domestic +industry; to the general efficiency of its labor. The labor +of one country may be, as a whole, much more efficient than +that of another: all or most of the commodities capable of +being produced in both may be produced in one at less +absolute cost than in the other; which, as we have seen, will +not necessarily prevent the two countries from exchanging +commodities. The things which the more favored country +will import from others are, of course, those in which it is +least superior; but, by importing them, it acquires, even in +those commodities, the same advantage which it possesses +in the articles it gives in exchange for them. What her +imports cost to her is a function of two variables: (1) the +quantity of her own commodities which she gives for them, +and (2) the cost of those commodities. Of these, the +last alone depends on the efficiency of her labor; the first +depends on the law of international values; that is, on the +<pb n='403'/><anchor id='Pg403'/> +intensity and extensibility of the foreign demand for her +commodities, compared with her demand for foreign commodities. +</p> + +<quote rend='display'> +<p> +The great productiveness of any industry in our country +has thus two results: (1) it gives a larger total out of which +labor and capital at home can receive greater rewards; and +(2) the commodities being cheaper in comparison than other +commodities not so easily produced, furnish the very articles +which are most likely to be sent abroad, in accordance +with the doctrine of comparative cost. In the United States, +those things in the production of which labor and capital are +most efficient, and so earn the largest rewards, are precisely the +articles entering most largely into our foreign trade. That is, +we get foreign articles cheaper precisely because these exports +cost us less in labor and capital. These, of course, since we +inhabit a country whose natural resources are not yet fully +worked, are largely the products of the extractive industries, +as may be seen by the following table of the value of goods +entering to the greatest extent into our foreign export trade in +1883: +</p> + +<table rend="latexcolumns: 'p{3cm} p{2cm}'; + tblcolumns: 'lw(25) lw(20)'"> +<row><cell>Raw cotton</cell><cell>$247,328,721</cell></row> +<row><cell>Breadstuffs</cell><cell>208,040,850</cell></row> +<row><cell>Provisions and animals</cell><cell>118,177,555</cell></row> +<row><cell>Mineral oils</cell><cell>40,555,492</cell></row> +<row><cell>Wood</cell><cell>26,793,708</cell></row> +<row><cell>Tobacco</cell><cell>22,095,229</cell></row> +</table> + +<p> +These six classes of commodities are arranged in the order +in which they enter into our export trade, and are the six which +come first and highest in the list. +</p> +</quote> + +</div> + +</div> + +<pb n='404'/><anchor id='Pg404'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_XV'/> +<head>Chapter XV. Of Money Considered As An Imported Commodity.</head> + +<div> +<index index='toc'/> +<head>§ 1. Money imported on two modes; as a Commodity, and as a medium +of Exchange.</head> + +<p> +The degree of progress which we have now made +in the theory of foreign trade puts it in our power to supply +what was previously deficient in our view of the theory +of money; and this, when completed, will in its turn enable +us to conclude the subject of foreign trade. +</p> + +<p> +Money, or the material of which it is composed, is, in +Great Britain, and in most other countries, a foreign commodity. +Its value and distribution must therefore be regulated, +not by the law of value which obtains in adjacent +places, but by that which is applicable to imported commodities—the +law of international values. +</p> + +<p> +In the discussion into which we are now about to enter, +I shall use the terms money and the precious metals indiscriminately. +This may be done without leading to any error; +it having been shown that the value of money, when it +consists of the precious metals, or of a paper currency convertible +into them on demand, is entirely governed by the +value of the metals themselves: from which it never permanently +differs, except by the expense of coinage, when +this is paid by the individual and not by the state. +</p> + +<p> +Money is brought into a country in two different ways. +It is imported (chiefly in the form of bullion) like any other +merchandise, as being an advantageous article of commerce. +It is also imported in its other character of a medium of +exchange, to pay some debt due to the country, either for +goods exported or on any other account. The existence of +these two distinct modes in which money flows into a country, +<pb n='405'/><anchor id='Pg405'/> +while other commodities are habitually introduced only +in the first of these modes, occasions somewhat more of complexity +and obscurity than exists in the case of other commodities, +and for this reason only is any special and minute +exposition necessary. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. As a commodity, it obeys the same laws of Value as other imported +Commodities.</head> + +<p> +In so far as the precious metals are imported in the +ordinary way of commerce, their value must depend on the +same causes, and conform to the same laws, as the value of +any other foreign production. It is in this mode chiefly that +gold and silver diffuse themselves from the mining countries +into all other parts of the commercial world. They are the +staple commodities of those countries, or at least are among +their great articles of regular export; and are shipped on +speculation, in the same manner as other exportable commodities. +The quantity, therefore, which a country (say +England) will give of its own produce, for a certain quantity +of bullion, will depend, if we suppose only two countries and +two commodities, upon the demand in England for bullion, +compared with the demand in the mining country (which we +will call the United States<note place='foot'>This +substitution has been made for Brazil.</note>) for what England has to give. +</p> + +<p> +The bullion required by England must exactly pay for +the cottons or other English commodities required by the +United States. If, however, we substitute for this simplicity +the degree of complication which really exists, the equation +of international demand must be established not between the +bullion wanted in England and the cottons or broadcloth +wanted in the United States, but between the whole of the +imports of England and the whole of her exports. The demand +in foreign countries for English products must be +brought into equilibrium with the demand in England for +the products of foreign countries; and all foreign commodities, +bullion among the rest, must be exchanged against +English products in such proportions as will, by the effect +they produce on the demand, establish this equilibrium. +</p> + +<p> +There is nothing in the peculiar nature or uses of the +<pb n='406'/><anchor id='Pg406'/> +precious metals which should make them an exception to the +general principles of demand. So far as they are wanted for +purposes of luxury or the arts, the demand increases with +the cheapness, in the same irregular way as the demand for +any other commodity. So far as they are required for +money, the demand increases with the cheapness in a perfectly +regular way, the quantity needed being always in inverse +proportion to the value. This is the only real difference, +in respect to demand, between money and other things. +</p> + +<p> +Money, then, if imported solely as a merchandise, will, +like other imported commodities, be of lowest value in the +countries for whose exports there is the greatest foreign +demand, and which have themselves the least demand for +foreign commodities. To these two circumstances it is, however, +necessary to add two others, which produce their effect +through cost of carriage. The cost of obtaining bullion is +compounded of two elements; the goods given to purchase +it and the expense of transport; of which last, the bullion +countries will bear a part (though an uncertain part) in the +adjustment of international values. The expense of transport +is partly that of carrying the goods to the bullion countries, +and partly that of bringing back the bullion; both these +items are influenced by the distance from the mines; and +the former is also much affected by the bulkiness of the +goods. Countries whose exportable produce consists of the +finer manufactures obtain bullion, as well as all other foreign +articles, <hi rend='italic'>cæteris paribus</hi>, at less expense than countries which +export nothing but bulky raw produce. +</p> + +<p> +To be quite accurate, therefore, we must say: The countries +whose exportable productions (1) are most in demand +abroad, and (2) contain greatest value in smallest bulk, (3) +which are nearest to the mines, and (4) which have least demand +for foreign productions, are those in which money +will be of lowest value, or, in other words, in which prices +will habitually range the highest. If we are speaking not +of the value of money, but of its cost (that is, the quantity +of the country's labor which must be expended to obtain it), +<pb n='407'/><anchor id='Pg407'/> +we must add (5) to these four conditions of cheapness a fifth +condition, namely, <q>whose productive industry is the most +efficient.</q> This last, however, does not at all affect the value +of money, estimated in commodities; it affects the general +abundance and facility with which all things, money and +commodities together, can be obtained.<note place='foot'>See close of last chapter.</note> +</p> + +<quote rend='display'> +The accompanying Chart, <ref target='Chart_XIV'>No. XIV</ref>, on the next page, gives +the excess of exports from the United States of gold and silver +coin and bullion over imports, and the excess of imports over +exports. The movement of the line above the horizontal baseline +shows distinctly how largely we have been sending the +precious metals abroad from our mines, simply as a regular +article of export, like merchandise. From 1850 to 1879 the +exports are clearly not in the nature of payments for trade +balances; since it indicates a steady movement out of the +country (with the exception of the first year of the war, when +gold came to this country). The phenomenal increase of specie +exports during the war, and until 1879, was due to the fact +that we had a depreciated paper currency, which sent the +metals out of the country as merchandise. This chart should +be studied in connection with Chart <ref target='Chart_XIII'>No. XIII</ref>. +</quote> + +<anchor id='Chart_XIV'/> +<p rend='text-align: center'> + <figure url='images/chartxiv.png' rend='width: 80%'> + <head>Chart XIV. <hi rend='italic'>Chart showing the Excess of Exports and Imports of Gold +and Silver Coin and Bullion, from and into the United States, from +1835 to 1883. The line when above the base-line shows the excess of exports; when +below, the excess of imports.</hi></head> + <figDesc>Illustration: Chart XIV.</figDesc> + </figure> +</p> + +<p> +From the preceding considerations, it appears that those +are greatly in error who contend that the value of money, +in countries where it is an imported commodity, must be +entirely regulated by its value in the countries which produce +it; and can not be raised or lowered in any permanent +manner unless some change has taken place in the cost of +production at the mines. On the contrary, any circumstance +which disturbs the equation of international demand with +respect to a particular country not only may, but must, +affect the value of money in that country—its value at the +mines remaining the same. The opening of a new branch +of export trade from England; an increase in the foreign +demand for English products, either by the natural course +of events or by the abrogation of duties; a check to the +demand in England for foreign commodities, by the laying +on of import duties in England or of export duties elsewhere; +these and all other events of similar tendency would +<pb n='409'/><anchor id='Pg409'/> +make the imports of England (bullion and other things taken +together) no longer an equivalent for the exports; and the +countries which take her exports would be obliged to offer +their commodities, and bullion among the rest, on cheaper +terms, in order to re-establish the equation of demand; and +thus England would obtain money cheaper, and would acquire +a generally higher range of prices. A country which, +from any of the causes mentioned, gets money cheaper, obtains +all its other imports cheaper likewise. +</p> + +<p> +It is by no means necessary that the increased demand +for English commodities, which enables England to supply +herself with bullion at a cheaper rate, should be a demand +in the mining countries. England might export nothing +whatever to those countries, and yet might be the country +which obtained bullion from them on the lowest terms, provided +there were a sufficient intensity of demand in other +foreign countries for English goods, which would be paid +for circuitously, with gold and silver from the mining countries. +The whole of its exports are what a country exchanges +against the whole of its imports, and not its exports +and imports to and from any one country. +</p> + +</div> + +</div> + +<pb n='410'/><anchor id='Pg410'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter XVI. Of The Foreign Exchanges.</head> + +<div> +<index index='toc'/> +<head>§ 1. Money passes from country to country as a Medium of Exchange, +through the Exchanges.</head> + +<p> +We have thus far considered the precious metals as +a commodity, imported like other commodities in the common +course of trade, and have examined what are the circumstances +which would in that case determine their value. +But those metals are also imported in another character, that +which belongs to them as a medium of exchange; not as an +article of commerce, to be sold for money, but as themselves +money, to pay a debt, or effect a transfer of property. +</p> + +<p> +Money is sent from one country to another for various +purposes: the most usual purpose, however, is that of payment +for goods. To show in what circumstances money +actually passes from country to country for this or any of +the other purposes mentioned, it is necessary briefly to state +the nature of the mechanism by which international trade is +carried on, when it takes place not by barter but through the +medium of money. +</p> + +<p> +In practice, the exports and imports of a country not +only are not exchanged directly against each other, but often +do not even pass through the same hands. Each is separately +bought and paid for with money. We have seen, however, +that, even in the same country, money does not actually pass +from hand to hand each time that purchases are made with +it, and still less does this happen between different countries. +The habitual mode of paying and receiving payment for +commodities, between country and country, is by bills of +exchange. +</p> + +<p> +A merchant in the United States, A, has exported American +<pb n='411'/><anchor id='Pg411'/> +commodities, consigning them to his correspondent, B, in +England. Another merchant in England, C, has exported +English commodities, suppose of equivalent value, to a merchant, +D, in the United States. It is evidently unnecessary +that B in England should send money to A in the United +States, and that D in the United States should send an equal +sum of money to C in England. The one debt may be applied +to the payment of +the other, and the double +cost and risk of carriage +be thus saved. A draws +a bill on B for the amount +which B owes to him: D, +having an equal amount to pay in England, buys this bill from +A, and sends it to C, who, at the expiration of the number of +days which the bill has to run, presents it to B for payment. +Thus the debt due from England to the United States, and +the debt due from the United States to England, are both +paid without sending an ounce of gold or silver from one +country to the other.<note place='foot'>I have also +changed the illustrations in this chapter so as to apply to the +United States.</note> +</p> + +<p rend='text-align: center'> + <figure url='images/foreign-exchange.png' rend='width: 80%'> + <figDesc>Illustration.</figDesc> + </figure> +</p> + +<p> +This implies (if we exclude for the present any other +international payments than those occurring in the course +of commerce) that the exports and imports exactly pay for +one another, or, in other words, that the equation of international +demand is established. When such is the fact, the +international transactions are liquidated without the passage +of any money from one country to the other. But, if there +is a greater sum due from the United States to England +than is due from England to the United States, or <hi rend='italic'>vice versa</hi>, +the debts can not be simply written off against one another. +After the one has been applied, as far as it will go, toward +covering the other, the balance must be transmitted in the +precious metals. In point of fact, the merchant who has the +amount to pay will even then pay for it by a bill. When a +person has a remittance to make to a foreign country, he does +<pb n='412'/><anchor id='Pg412'/> +not himself search for some one who has money to receive +from that country, and ask him for a bill of exchange. In +this, as in other branches of business, there is a class of middle-men +or brokers, who bring buyers and sellers together, +or stand between them, buying bills from those who have +money to receive, and selling bills to those who have money +to pay. When a customer comes to a broker for a bill on +Paris or Amsterdam, the broker sells to him perhaps the +bill he may himself have bought that morning from a merchant, +perhaps a bill on his own correspondent in the foreign +city; and, to enable his correspondent to pay, when due, all +the bills he has granted, he remits to him all those which he +has bought and has not resold. In this manner these brokers +take upon themselves the whole settlement of the pecuniary +transactions between distant places, being remunerated by a +small commission or percentage on the amount of each bill +which they either sell or buy. Now, if the brokers find that +they are asked for bills, on the one part, to a greater amount +than bills are offered to them on the other, they do not on +this account refuse to give them; but since, in that case, +they have no means of enabling the correspondents on whom +their bills are drawn to pay them when due, except by transmitting +part of the amount in gold or silver, they require +from those to whom they sell bills an additional price, sufficient +to cover the freight and insurance of the gold and +silver, with a profit sufficient to compensate them for their +trouble and for the temporary occupation of a portion of +their capital. This premium (as it is called) the buyers are +willing to pay, because they must otherwise go to the expense +of remitting the precious metals themselves, and it is +done cheaper by those who make doing it a part of their +especial business. But, though only some of those who have +a debt to pay would have actually to remit money, all will +be obliged, by each other's competition, to pay the premium; +and the brokers are for the same reason obliged to pay it to +those whose bills they buy. The reverse of all this happens, +if, on the comparison of exports and imports, the country, +<pb n='413'/><anchor id='Pg413'/> +instead of having a balance to pay, has a balance to receive. +The brokers find more bills offered to them than are sufficient +to cover those which they are required to grant. Bills +on foreign countries consequently fall to a discount; and the +competition among the brokers, which is exceedingly active, +prevents them from retaining this discount as a profit for +themselves, and obliges them to give the benefit of it to +those who buy the bills for purposes of remittance. +</p> + +<p> +When the United States had the same number of dollars +to pay to England which England had to pay to her, one set +of merchants in the United States would want bills, and +another set would have bills to dispose of, for the very same +number of dollars; and consequently a bill on England for +$1,000 would sell for exactly $1,000, or, in the phraseology +of merchants, the exchange would be at par. As England +also, on this supposition, would have an equal number of +dollars to pay and to receive, bills on the United States would +be at par in England, whenever bills on England were at par +in the United States. +</p> + +<p> +If, however, the United States had a larger sum to pay to +England than to receive from her, there would be persons +requiring bills on England for a greater number of dollars +than there were bills drawn by persons to whom money was +due. A bill on England for $1,000 would then sell for more +than $1,000, and bills would be said to be at a premium. +The premium, however, could not exceed the cost and risk +of making the remittance in gold, together with a trifling +profit; because, if it did, the debtor would send the gold +itself, in preference to buying the bill. +</p> + +<p> +If, on the contrary, the United States had more money +to receive from England than to pay, there would be bills +offered for a greater number of dollars than were wanted for +remittance, and the price of bills would fall below par: a +bill for $1,000 might be bought for somewhat less than +$1,000, and bills would be said to be at a discount. +</p> + +<p> +When the United States has more to pay than to receive, +England has more to receive than to pay, and <hi rend='italic'>vice versa</hi>. +<pb n='414'/><anchor id='Pg414'/> +When, therefore, in the United States, bills on England bear +a premium, then, in England, bills on the United States are +at a discount; and, when bills on England are at a discount +in the United States, bills on the United States are at a premium +in England. If they are at par in either country, they +are so, as we have already seen, in both.<note place='foot'>The examples +in this and the next section have been altered so as to apply +to the United States.</note> +</p> + +<p> +Thus do matters stand between countries, or places which +have the same currency. So much of barbarism, however, +still remains in the transactions of the most civilized nations, +that almost all independent countries choose to assert their +nationality by having, to their own inconvenience and that +of their neighbors, a peculiar currency of their own. To our +present purpose this makes no other difference than that, +instead of speaking of <emph>equal</emph> sums of money, we have to +speak of <emph>equivalent</emph> sums. By equivalent sums, when both +currencies are composed of the same metal, are meant sums +which contain exactly the same quantity of the metal, in +weight and fineness. +</p> + +<quote rend='display'> +<p> +The quantity of gold in the English pound is equivalent to +$4.8666+ of our gold coins. If the bills offered are about equal +to those wanted, a claim to a pound in England will sell for $4.86. +If many are wanted, and but few to be had, their price will go +up, of course; but it can not go more than a small fraction beyond +$4.90, since about 3-¼ cents is sufficient to cover the brokerage, +insurance, and freight per pound sterling in a shipment +of gold to London. Therefore, in order to get money to a +creditor in London, no one will pay more for a pound in the +form of a bill than he will be obliged to pay for sending it across +in the form of bullion. Bills of exchange, then, can not rise in +price beyond the point ($4.90 +) since, rather than pay a higher +sum for a bill, gold will be sent. This point is called the <q>shipping-point</q> +of gold. When the exchanges are at $4.90, it will +be found that gold is going abroad. On the other hand, when +the supply of bills is greater than the demand, their price will +fall. A man having a bill on London to sell—i.e., a claim to a +pound in London—will not sell it at a price here lower than +$4.86, by more than the expense of bringing the gold itself +across. Since this expense is about 3-¼ cents, bills can not fall +below about $4.83. When exchange is at that price, it will be +<pb n='415'/><anchor id='Pg415'/> +found that gold is coming to the United States from England. +This price is the <q>shipping-point</q> for imports of gold. This, +of course, applies to sight-bills only. +</p> + +<p> +Formerly, we computed exchange on a scale of percentages, +the real par being about 109. This was given up after the war. +</p> +</quote> + +<p> +When bills on foreign countries are at a premium, it is +customary to say that the exchanges are against the country, +or unfavorable to it. In order to understand these phrases, +we must take notice of what <q>the exchange,</q> in the language +of merchants, really means. It means the power which the +money of the country has of purchasing the money of other +countries. Supposing $4.86 to be the exact par of exchange, +then when it requires more than $1,000 to buy a bill of £205, +$1,000 of American money are worth less than their real +equivalent of English money: and this is called an exchange +unfavorable to the United States. The only persons in the +United States, however, to whom it is really unfavorable are +those who have money to pay in England, for they come into +the bill market as buyers, and have to pay a premium; but +to those who have money to receive in England the same +state of things is favorable; for they come as sellers and receive +the premium. The premium, however, indicates that +a balance is due by the United States, which must be eventually +liquidated in the precious metals; and since, according +to the old theory, the benefit of a trade consisted in bringing +money into the country, this prejudice introduced the practice +of calling the exchange favorable when it indicated a +balance to receive, and unfavorable when it indicated one to +pay; and the phrases in turn tended to maintain the prejudice. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Distinction between Variations in the Exchanges which are self-adjusting +and those which can only be rectified through Prices.</head> + +<p> +It might be supposed at first sight that when the +exchange is unfavorable, or, in other words, when bills are +at a premium, the premium must always amount to a full +equivalent for the cost of transmitting money. But a small +excess of imports above exports, or any other small amount +of debt to be paid to foreign countries, does not usually +affect the exchanges to the full extent of the cost and risk of +transporting bullion. The length of credit allowed generally +permits, on the part of some of the debtors, a postponement +<pb n='416'/><anchor id='Pg416'/> +of payment, and in the mean time the balance may turn the +other way, and restore the equality of debts and credits without +any actual transmission of the metals. And this is the +more likely to happen, as there is a self-adjusting power in +the variations of the exchange itself. Bills are at a premium +because a greater money value has been imported than exported. +But the premium is itself an extra profit to those +who export. Besides the price they obtain for their goods, +they draw for the amount and gain the premium. It is, on +the other hand, a diminution of profit to those who import. +Besides the price of the goods, they have to pay a premium +for remittance. So that what is called an unfavorable exchange +is an encouragement to export, and a discouragement +to import. And if the balance due is of small amount, and +is the consequence of some merely casual disturbance in the +ordinary course of trade, it is soon liquidated in commodities, +and the account adjusted by means of bills, without the +transmission of any bullion. Not so, however, when the +excess of imports above exports, which has made the exchange +unfavorable, arises from a permanent cause. In that +case, what disturbed the equilibrium must have been the +state of prices, and it can only be restored by acting on +prices. It is impossible that prices should be such as to invite +to an excess of imports, and yet that the exports should +be kept permanently up to the imports by the extra profit on +exportation derived from the premium on bills; for, if the +exports were kept up to the imports, bills would not be at a +premium, and the extra profit would not exist. It is through +the prices of commodities that the correction must be administered. +</p> + +<p> +Disturbances, therefore, of the equilibrium of imports +and exports, and consequent disturbances of the exchange, +may be considered as of two classes: the one casual or accidental, +which, if not on too large a scale, correct themselves +through the premium on bills, without any transmission of +the precious metals; the other arising from the general state +of prices, which can not be corrected without the subtraction +<pb n='417'/><anchor id='Pg417'/> +of actual money from the circulation of one of the countries, +or an annihilation of credit equivalent to it. +</p> + +<p> +It remains to observe that the exchanges do not depend +on the balance of debts and credits with each country separately, +but with all countries taken together. The United +States may owe a balance of payments to England; but it +does not follow that the exchange with England will be +against the United States, and that bills on England will be +at a premium; because a balance may be due to the United +States from Holland or Hamburg, and she may pay her debts +to England with bills on those places; which is technically +called arbitration of exchange. There is some little additional +expense, partly commission and partly loss of interest +in settling debts in this circuitous manner, and to the extent +of that small difference the exchange with one country may +vary apart from that with others. +</p> + +<quote rend='display'> +<p> +A common use of bills of exchange is that by which, when +three countries are concerned, two of them may strike a balance +through the third, if both countries +have dealings with that third +country. New York merchants may +buy of China, but China may not be +buying of New York, although both +may have dealings with London. +</p> + +<p rend='text-align: center'> + <figure url='images/balance-of-debts.png' rend='width: 80%'> + <figDesc>Illustration.</figDesc> + </figure> +</p> + + +<p> +A, we will suppose, is a buyer of +£1,000 worth of tea from F, in Hong-Kong; +B is an exporter of wheat +(£1,000) to C in London; D has sent +£1,000 worth of cotton goods to E +in Hong-Kong. A can now pay F +through London without the transmission +of coin. A buys B's claim +on C for £1,000, and sends it to F. +E wishes to pay D in London for +the cotton goods he bought of him; +therefore, he buys from F for £1,000 +the claim he now holds (i.e., a bill of exchange on London) +against C for £1,000. E sends it to D, and, when D collects it +from C, the whole circle of exchanges is completed without the +transmission of the precious metals. +</p> +</quote> + +</div> + +</div> + +<pb n='418'/><anchor id='Pg418'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter XVII. Of The Distribution Of The Precious Metals Through +The Commercial World.</head> + +<div> +<index index='toc'/> +<head>§ 1. The substitution of money for barter makes no difference in exports +and imports, nor in the Law of international Values.</head> + +<p> +Having now examined the mechanism by which the +commercial transactions between nations are actually conducted, +we have next to inquire whether this mode of conducting +them makes any difference in the conclusions respecting international +values, which we previously arrived at on the +hypothesis of barter. +</p> + +<p> +The nearest analogy would lead us to presume the negative. +We did not find that the intervention of money and +its substitutes made any difference in the law of value as applied +to adjacent places. Things which would have been +equal in value if the mode of exchange had been by barter +are worth equal sums of money. The introduction of money +is a mere addition of one more commodity, of which the value +is regulated by the same laws as that of all other commodities. +We shall not be surprised, therefore, if we find that international +values also are determined by the same causes under a +money and bill system as they would be under a system of +barter, and that money has little to do in the matter, except +to furnish a convenient mode of comparing values. +</p> + +<p> +All interchange is, in substance and effect, barter; whoever +sells commodities for money, and with that money buys +other goods, really buys those goods with his own commodities. +And so of nations: their trade is a mere exchange of +exports for imports; and, whether money is employed or not, +things are only in their permanent state when the exports +and imports exactly pay for each other. When this is the +<pb n='419'/><anchor id='Pg419'/> +case, equal sums of money are due from each country to the +other, the debts are settled by bills, and there is no balance +to be paid in the precious metals. The trade is in a state +like that which is called in mechanics a condition of stable +equilibrium. +</p> + +<p> +But the process by which things are brought back to this +state when they happen to deviate from it is, at least outwardly, +not the same in a barter system and in a money system. +Under the first, the country which wants more imports +than its exports will pay for must offer its exports at +a cheaper rate, as the sole means of creating a demand for +them sufficient to re-establish the equilibrium. When money +is used, the country seems to do a thing totally different. +She takes the additional imports at the same price as before, +and, as she exports no equivalent, the balance of payments +turns against her; the exchange becomes unfavorable, and +the difference has to be paid in money. This is, in appearance, +a very distinct operation from the former. Let us see +if it differs in its essence, or only in its mechanism. +</p> + +<p> +Let the country which has the balance to pay be the +United States,<note place='foot'>I have +changed the names of the countries in the illustrations contained in +this chapter, but have not further altered the language beyond the occasional +change of a pronoun.</note> and the country which receives it, England. +By this transmission of the precious metals, the quantity of +the currency is diminished in the United States, and increased +in England. This I am at liberty to assume. We are now +supposing that there is an excess of imports over exports, +arising from the fact that the equation of international demand +is not yet established: that there is at the ordinary +prices a permanent demand in the United States for more +English goods than the American goods required in England +at the ordinary prices will pay for. When this is the case, +if a change were not made in the prices, there would be a +perpetually renewed balance to be paid in money. The imports +require to be permanently diminished, or the exports +to be increased, which can only be accomplished through +<pb n='420'/><anchor id='Pg420'/> +prices; and hence, even if the balances are at first paid from +hoards, or by the exportation of bullion, they will reach the +circulation at last, for, until they do, nothing can stop the +drain. +</p> + +<p> +When, therefore, the state of prices is such that the equation +of international demand can not establish itself, the +country requiring more imports than can be paid for by the +exports, it is a sign that the country has more of the precious +metals, or their substitutes, in circulation, than can permanently +circulate, and must necessarily part with some of them +before the balance can be restored. The currency is accordingly +contracted: prices fall, and, among the rest, the prices +of exportable articles; for which, accordingly, there arises, +in foreign countries, a greater demand: while imported commodities +have possibly risen in price, from the influx of +money into foreign countries, and at all events have not participated +in the general fall. But, until the increased cheapness +of American goods induces foreign countries to take a +greater pecuniary value, or until the increased dearness (positive +or comparative) of foreign goods makes the United +States take a less pecuniary value, the exports of the United +States will be no nearer to paying for the imports than before, +and the stream of the precious metals which had begun +to flow out of the United States will still flow on. This +efflux will continue until the fall of prices in the United +States brings within reach of the foreign market some commodity +which the United States did not previously send +thither; or, until the reduced price of the things which she +did send has forced a demand abroad for a sufficient quantity +to pay for the imports, aided perhaps by a reduction of +the American demand for foreign goods, through their enhanced +price, either positive or comparative. +</p> + +<p> +Now, this is the very process which took place on our +original supposition of barter. Not only, therefore, does the +trade between nations tend to the same equilibrium between +exports and imports, whether money is employed or not, but +the means by which this equilibrium is established are essentially +<pb n='421'/><anchor id='Pg421'/> +the same. The country whose exports are not sufficient +to pay for her imports offers them on cheaper terms, until +she succeeds in forcing the necessary demand: in other +words, the equation of international demand, under a money +system as well as under a barter system, is the law of international +trade. Every country exports and imports the very +same things, and in the very same quantity, under the one +system as under the other. In a barter system, the trade +gravitates to the point at which the sum of the imports exactly +exchanges for the sum of the exports: in a money system, +it gravitates to the point at which the sum of the imports +and the sum of the exports exchange for the same +quantity of money. And, since things which are equal to the +same thing are equal to one another, the exports and imports +which are equal in money price would, if money were not +used, precisely exchange for one another.<note place='foot'><p>The +subjoined extract from the separate essay [<q>Some Unsettled Questions +of Political Economy</q>] previously referred to will give some assistance in +following the course of the phenomena. It is adapted to the imaginary case +used for illustration throughout that essay, the case of a trade between England +and Germany in cloth and linen. +</p> +<p> +<q rend='pre'>We may, at first, make whatever supposition we will with respect to the +value of money. Let us suppose, therefore, that, before the opening of the +trade, the price of cloth is the same in both countries, namely, six shillings per +yard. As ten yards of cloth were supposed to exchange in England for fifteen +yards of linen, in Germany for twenty, we must suppose that linen is sold in +England at four shillings per yard, in Germany at three. Cost of carriage and +importer's profit are left, as before, out of consideration.</q> +</p> +<p> +<q rend='pre'>In this state of prices, cloth, it is evident, can not yet be exported from +England into Germany; but linen can be imported from Germany into England. +It will be so; and, in the first instance, the linen will be paid for in money.</q> +</p> +<p> +<q rend='pre'>The efflux of money from England and its influx into Germany will raise +money prices in the latter country, and lower them in the former. Linen will +rise in Germany above three shillings per yard, and cloth above six shillings. +Linen in England, being imported from Germany, will (since cost of carriage is +not reckoned) sink to the same price as in that country, while cloth will fall below +six shillings. As soon as the price of cloth is lower in England than in +Germany, it will begin to be exported, and the price of cloth in Germany will +fall to what it is in England. As long as the cloth exported does not suffice to +pay for the linen imported, money will continue to flow from England into Germany, +and prices generally will continue to fall in England and rise in Germany.</q> +</p> +<p> +<q rend='pre'>By the fall, however, of cloth in England, cloth will fall in Germany +also, and the demand for it will increase. By the rise of linen in Germany, linen must +rise in England also, and the demand for it will diminish. As cloth fell in price +and linen rose, there would be some particular price of both articles at which +the cloth exported and the linen imported would exactly pay for each other. +At this point prices would remain, because money would then cease to move out +of England into Germany. What this point might be would entirely depend +upon the circumstances and inclinations of the purchasers on both sides. If the +fall of cloth did not much increase the demand for it in Germany, and the rise +of linen did not diminish very rapidly the demand for it in England, much +money must pass before the equilibrium is restored; cloth would fall very much, +and linen would rise, until England, perhaps, had to pay nearly as much for it as +when she produced it for herself. But, if, on the contrary, the fall of cloth +caused a very rapid increase of the demand for it in Germany, and the rise of +linen in Germany reduced very rapidly the demand in England from what it was +under the influence of the first cheapness produced by the opening of the trade, +the cloth would very soon suffice to pay for the linen, little money would pass +between the two countries, and England would derive a large portion of the +benefit of the trade. We have thus arrived at precisely the same conclusion, in +supposing the employment of money, which we found to hold under the supposition +of barter.</q> +</p> +<p> +<q rend='pre'>In what shape the benefit accrues to the two nations from the trade is clear +enough. Germany, before the commencement of the trade, paid six shillings +per yard for broadcloth; she now obtains it at a lower price. This, however, is +not the whole of her advantage. As the money-prices of all her other commodities +have risen, the money-incomes of all her producers have increased. This is +no advantage to them in buying from each other, because the price of what they +buy has risen in the same ratio with their means of paying for it: but it is an +advantage to them in buying anything which has not risen, and, still more, anything +which has fallen. They, therefore, benefit as consumers of cloth, not +merely to the extent to which cloth has fallen, but also to the extent to which +other prices have risen. Suppose that this is one tenth. The same proportion +of their money-incomes as before will suffice to supply their other wants; and +the remainder, being increased one tenth in amount, will enable them to purchase +one tenth more cloth than before, even though cloth had not fallen: but +it has fallen; so that they are doubly gainers. They purchase the same quantity +with less money, and have more to expend upon their other wants.</q> +</p> +<p> +<q rend='pre'>In England, on the contrary, general money-prices have fallen. Linen, +however, has fallen more than the rest, having been lowered in price by importation +from a country where it was cheaper; whereas the others have fallen only +from the consequent efflux of money. Notwithstanding, therefore, the general +fall of money-prices, the English producers will be exactly as they were in all +other respects, while they will gain as purchasers of linen.</q> +</p> +<p> +<q>The greater the efflux of money required to restore the equilibrium, the +greater will be the gain of Germany, both by the fall of cloth and by the rise of +her general prices. The less the efflux of money requisite, the greater will be +the gain of England; because the price of linen will continue lower, and her +general prices will not be reduced so much. It must not, however, be imagined +that high money-prices are a good, and low money-prices an evil, in themselves. +But, the higher the general money-prices in any country, the greater will be that +country's means of purchasing those commodities, which, being imported from +abroad, are independent of the causes which keep prices high at home.</q> +</p> +<p> +<q>In practice, the cloth and the linen would not, as here supposed, be at the +same price in England and in Germany: each would be dearer in money-price +in the country which imported than in that which produced it, by the amount of +the cost of carriage, together with the ordinary profit on the importer's capital +for the average length of time which elapsed before the commodity could be disposed +of. But it does not follow that each country pays the cost of carriage of +the commodity it imports; for the addition of this item to the price may operate +as a greater check to demand on one side than on the other; and the equation +of international demand, and consequent equilibrium of payments, may not be +maintained. Money would then flow out of one country into the other, until, in +the manner already illustrated, the equilibrium was restored: and, when this +was effected, one country would be paying more than its own cost of carriage, +and the other less.</q>—<hi rend='smallcaps'>Mill</hi>. +</p></note> +</p> + +</div> + +<pb n='422'/><anchor id='Pg422'/> + +<div> +<index index='toc'/> +<head>§ 2. The preceding Theorem further illustrated.</head> + +<p> +Let us proceed to [examine] to what extent the benefit +of an improvement in the production of an exportable +article is participated in by the countries importing it. +</p> + +<p> +The improvement may either consist in the cheapening +of some article which was already a staple production of the +country, or in the establishment of some new branch of industry, +or of some process rendering an article exportable +which had not till then been exported at all. It will be +convenient to begin with the case of a new export, as being +somewhat the simpler of the two. +</p> + +<pb n='423'/><anchor id='Pg423'/> + +<p> +The first effect is that the article falls in price, and a +demand arises for it abroad. This new exportation disturbs +the balance, turns the exchanges, money flows into the country +(which we shall suppose to be the United States), and +continues to flow until prices rise. This higher range of +prices will somewhat check the demand in foreign countries +for the new article of export; and will diminish the demand +which existed abroad for the other things which the United +States was in the habit of exporting. The exports will thus +be diminished; while at the same time the American public, +<pb n='424'/><anchor id='Pg424'/> +having more money, will have a greater power of purchasing +foreign commodities. If they make use of this increased +power of purchase, there will be an increase of imports; +and by this, and the check to exportation, the equilibrium +of imports and exports will be restored. The result to foreign +countries will be, that they have to pay dearer than before +for their other imports, and obtain the new commodity +cheaper than before, but not so much cheaper as the United +States herself does. I say this, being well aware that the +article would be actually at the very same price (cost of carriage +excepted) in the United States and in other countries. +The cheapness, however, of the article is not measured solely +by the money-price, but by that price compared with the +money-incomes of the consumers. The price is the same to +the American and to the foreign consumers; but the former +pay that price from money-incomes which have been increased +by the new distribution of the precious metals; +while the latter have had their money-incomes probably diminished +by the same cause. The trade, therefore, has not +imparted to the foreign consumer the whole, but only a portion, +of the benefit which the American consumer has derived +from the improvement; while the United States has +also benefited in the prices of foreign commodities. Thus, +then, any industrial improvement which leads to the opening +of a new branch of export trade benefits a country not +only by the cheapness of the article in which the improvement +has taken place, but by a general cheapening of all imported +products. +</p> + +<p> +Let us now change the hypothesis, and suppose that the +improvement, instead of creating a new export from the +United States, cheapens an existing one. Let the commodity +in which there is an improvement be [cotton] cloth. The +first effect of the improvement is that its price falls, and +there is an increased demand for it in the foreign market. +But this demand is of uncertain amount. Suppose the foreign +consumers to increase their purchases in the exact ratio +of the cheapness, or, in other words, to lay out in cloth the +<pb n='425'/><anchor id='Pg425'/> +same sum of money as before; the same aggregate payment +as before will be due from foreign countries to the United +States; the equilibrium of exports and imports will remain +undisturbed, and foreigners will obtain the full advantage of +the increased cheapness of cloth. But if the foreign demand +for cloth is of such a character as to increase in a greater +ratio than the cheapness, a larger sum than formerly will be +due to the United States for cloth, and when paid will raise +American prices, the price of cloth included; this rise, however, +will affect only the foreign purchaser, American incomes +being raised in a corresponding proportion; and the +foreign consumer will thus derive a less advantage than the +United States from the improvement. If, on the contrary, +the cheapening of cloth does not extend the foreign demand +for it in a proportional degree, a less sum of debts than before +will be due to the United States for cloth, while there +will be the usual sum of debts due from the United States +to foreign countries; the balance of trade will turn against +the United States, money will be exported, prices (that of +cloth included) will fall, and cloth will eventually be cheapened +to the foreign purchaser in a still greater ratio than the +improvement has cheapened it to the United States. These +are the very conclusions which [would be] deduced on the +hypothesis of barter.<note place='foot'>See Book III, Chap. +XVIII, § 5, of Mill's original work.</note> +</p> + +<p> +The result of the preceding discussion can not be better +summed up than in the words of Ricardo.<note place='foot'><q>Principles +of Political Economy and Taxation,</q> third edition, p. 143.</note> <q>Gold and silver +having been chosen for the general medium of circulation, +they are, by the competition of commerce, distributed +in such proportions among the different countries of the +world as to accommodate themselves to the natural traffic +which would take place if no such metals existed, and the +trade between countries were purely a trade of barter.</q> Of +this principle, so fertile in consequences, previous to which +the theory of foreign trade was an unintelligible chaos, Mr. +<pb n='426'/><anchor id='Pg426'/> +Ricardo, though he did not pursue it into its ramifications, +was the real originator. +</p> + +<quote rend='display'> +On the principles of trade which we have before explained, +the same rule will apply to the distribution of money in different +parts of the same country, especially of a large country +with various kinds of production, like the United States. The +medium of exchange will, by the competition of commerce, be +distributed in such proportions among the different parts of the +United States, by natural laws, as to accommodate itself to the +number of transactions which would take place if no such medium +existed. For this reason, we find more money in the so-called +great financial centers, because there are more exchanges +of goods there. In sparsely settled parts of the West there +will be less money precisely because there are fewer transactions +than in the older and more settled districts. So that there +could be no worse folly than the following legislation of Congress +to distribute the national-bank circulation: <q>That $150,000,000 +of the entire amount of circulating notes authorized to +be issued shall be apportioned to associations in the States, in +the District of Columbia, and in the Territories, <emph>according to +representative population</emph></q> (act of March 3, 1865). +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. The precious metals, as money, are of the same Value, and distribute themselves +according to the same Law, with the precious metals as a Commodity.</head> + +<p> +It is now necessary to inquire in what manner this +law of the distribution of the precious metals by means of +the exchanges affects the exchange value of money itself; +and how it tallies with the law by which we found that the +value of money is regulated when imported as a mere article +of merchandise. +</p> + +<p> +The causes which bring money into or carry it out of a +country (1) through the exchanges, to restore the equilibrium +of trade, and which thereby raise its value in some countries +and lower it in others, are the very same causes on which +the local value of money would depend, if it were never imported +except (2) as a merchandise, and never except directly +from the mines. When the value of money in a country is +permanently lowered (1) [as a medium of exchange] by an +influx of it through the balance of trade, the cause, if it is +not diminished cost of production, must be one of those +causes which compel a new adjustment, more favorable to the +country, of the equation of international demand—namely, +either an increased demand abroad for her commodities, or +<pb n='427'/><anchor id='Pg427'/> +a diminished demand on her part for those of foreign countries. +Now, an increased foreign demand for the commodities +of a country, or a diminished demand in the country for +imported commodities, are the very causes which, on the +general principles of trade, enable a country to purchase all +imports, and consequently (2) the precious metals, at a lower +value. There is, therefore, no contradiction, but the most +perfect accordance, in the results of the two different modes +[(1) as a medium of exchange; and (2) as merchandise] in +which the precious metals may be obtained. When money +[as a medium of exchange] flows from country to country +in consequence of changes in the international demand for +commodities, and by so doing alters its own local value, it +merely realizes, by a more rapid process, the effect which +would otherwise take place more slowly by an alteration in +the relative breadth of the streams by which the precious +metals [as merchandise] flow into different regions of the +earth from the mining countries. As, therefore, we before +saw that the use of money as a medium of exchange does +not in the least alter the law on which the values of other +things, either in the same country or internationally, depend, +so neither does it alter the law of the value of the precious +metals itself; and there is in the whole doctrine of international +values, as now laid down, a unity and harmony which +are a strong collateral presumption of truth. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. International payments entering into the <q>financial account.</q></head> + +<p> +Before closing this discussion, it is fitting to point +out in what manner and degree the preceding conclusions are +affected by the existence of international payments not originating +in commerce, and for which no equivalent in either +money or commodities is expected or received—such as a +tribute, or remittances, or interest to foreign creditors, or a +government expenditure abroad. +</p> + +<p> +To begin with the case of barter. The supposed annual +remittances being made in commodities, and being exports +for which there is to be no return, it is no longer requisite +that the imports and exports should pay for one another; on +the contrary, there must be an annual excess of exports over +<pb n='428'/><anchor id='Pg428'/> +imports, equal to the value of the remittance. If, before +the country became liable to the annual payment, foreign +commerce was in its natural state of equilibrium, it will now +be necessary, for the purpose of effecting the remittances, +that foreign countries should be induced to take a greater +quantity of exports than before, which can only be done by +offering those exports on cheaper terms, or, in other words, +by paying dearer for foreign commodities. The international +values will so adjust themselves that, either by greater exports +or smaller imports, or both, the requisite excess on the +side of exports will be brought about, and this excess will +become the permanent state. The result is, that a country +which makes regular payments to foreign countries, besides +losing what it pays, loses also something more, by the less +advantageous terms on which it is forced to exchange its +productions for foreign commodities. +</p> + +<p> +The same results follow on the supposition of money. +Commerce being supposed to be in a state of equilibrium +when the obligatory remittances begin, the first remittance +is necessarily made in money. This lowers prices in the +remitting country, and raises them in the receiving. The +natural effect is, that more commodities are exported than +before, and fewer imported, and that, on the score of commerce +alone, a balance of money will be constantly due from +the receiving to the paying country. When the debt thus +annually due to the tributary country becomes equal to the +annual tribute or other regular payment due from it, no further +transmission of money takes place; the equilibrium of +exports and imports will no longer exist, but that of payments +will; the exchange will be at par, the two debts will +be set off against one another, and the tribute or remittance +will be virtually paid in goods. The result to the interests of +the two countries will be as already pointed out—the paying +country will give a higher price for all that it buys from the +receiving country, while the latter, besides receiving the +tribute, obtains the exportable produce of the tributary +country at a lower price. +</p> + +<pb n='429'/><anchor id='Pg429'/> + +<quote rend='display'> +It has been seen, as in Chart <ref target='Chart_XIII'>No. XIII</ref>, that, considering +the exports and imports merely as merchandise, there is, in +fact, no actual equilibrium at any given time in accordance +with the equation of International Demand. Another element, +the <q>financial account</q> between the United States and foreign +countries, must be considered before we can know all the factors +necessary to bring about the equation. If we had been borrowing +largely of England, Holland, and Germany, we should +owe a regular annual sum as interest, and our exports must, as +a rule, be exactly that much more (under right and normal +conditions) than the imports. Or, take another case, if capital +is borrowed in Europe for railways in the United States, this +capital generally comes over in the form of imports of various +kinds; but, if our exports are not sufficient at once to balance +the increased imports, we go in debt for a time—or, in other +words, in order to establish the balance, we send United States +securities abroad instead of actual exports. This shipment of +securities is not seen and recorded as among the exports; and +so we find a period, like that during and after the war, from +1862 to 1873, of a vast excess of imports. Since 1873 the +country has been practically paying the indebtedness incurred +in the former period; and there has been a vast excess of exports +over imports, and an apparent discrepancy in the equilibrium. +But our government bonds and other securities have +been coming back to us, producing a return current to balance +the excessive exports.<note place='foot'>For an +exceedingly good study on the conditions of our foreign trade down +to 1873, and a prophecy of the panic of 1873, see Cairnes, <q>Leading Principles,</q> +pp. 364-374.</note> In brief, the use of securities and various +forms of indebtedness permits the period of actual payment +to be deferred, so that an excess of imports at one time may be +offset by an excess of exports at another, and generally a later, +time. Moreover, the large expenses of people traveling in +Europe will require us to remit abroad in the form of exports +more than would ordinarily balance our imports by the amount +spent by the travelers. The financial operations, therefore, +between the United States and foreign countries, must be well +considered in striking the equation between our exports and +imports. As formulated by Mr. Cairnes,<note place='foot'><q>Leading +Principles,</q> p. 357.</note> the Equation of +International Demand should be stated more broadly, as follows: +<q>The state of international demand which results in +commercial equilibrium is realized when the reciprocal demand +of trading countries produces such a relation of exports and +imports among them as enables each country by means of her +exports to discharge <emph>all her foreign liabilities</emph>.</q> If we were a +great lending instead of a great borrowing country, we should +have, as a rule, a permanent excess of imports. +</quote> + +</div> + +</div> + +<pb n='430'/><anchor id='Pg430'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter XVIII. Influence Of The Currency On The Exchanges And On +Foreign Trade.</head> + +<div> +<index index='toc'/> +<head>§ 1. Variations in the exchange, which originate in the Currency.</head> + +<p> +In our inquiry into the laws of international trade, +we commenced with the principles which determine international +exchanges and international values on the hypothesis +of barter. We next showed that the introduction of +money, as a medium of exchange, makes no difference in +the laws of exchanges and of values between country and +country, no more than between individual and individual: +since the precious metals, under the influence of those same +laws, distribute themselves in such proportions among the +different countries of the world as to allow the very same +exchanges to go on, and at the same values, as would be +the case under a system of barter. We lastly considered +how the value of money itself is affected by those alterations +in the state of trade which arise from alterations +either in the demand and supply of commodities or in their +cost of production. It remains to consider the alterations +in the state of trade which originate not in commodities but +in money. +</p> + +<p> +Gold and silver may vary like other things, though they +are not so likely to vary as other things in their cost of production. +The demand for them in foreign countries may +also vary. It may increase by augmented employment of +the metals for purposes of art and ornament, or because the +increase of production and of transactions has created a +greater amount of business to be done by the circulating +medium. It may diminish, for the opposite reasons; or, +<pb n='431'/><anchor id='Pg431'/> +from the extension of the economizing expedients by which +the use of metallic money is partially dispensed with. +These changes act upon the trade between other countries +and the mining countries, and upon the value of the precious +metals, according to the general laws of the value of +imported commodities: which have been set forth in the +previous chapters with sufficient fullness. +</p> + +<p> +What I propose to examine in the present chapter is not +those circumstances affecting money which alter the permanent +conditions of its value, but the effects produced on international +trade by casual or temporary variations in the +value of money, which have no connection with any causes +affecting its permanent value. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Effect of a sudden increase of a metallic Currency, or of the sudden +creation of Bank-Notes or other substitutes for Money.</head> + +<p> +Let us suppose in any country a circulating medium +purely metallic, and a sudden casual increase made to it; for +example, by bringing into circulation hoards of treasure, +which had been concealed in a previous period of foreign invasion +or internal disorder. The natural effect would be a +rise of prices. This would check exports and encourage imports; +the imports would exceed the exports, the exchanges +would become unfavorable, and a newly acquired stock of +money would diffuse itself over all countries with which the +supposed country carried on trade, and from them, progressively, +through all parts of the commercial world. The +money which thus overflowed would spread itself to an equal +depth over all commercial countries. For it would go on +flowing until the exports and imports again balanced one +another; and this (as no change is supposed in the permanent +circumstances of international demand) could only be +when the money had diffused itself so equally that prices had +risen in the same ratio in all countries, so that the alteration +of price would be for all practical purposes ineffective, and +the exports and imports, though at a higher money valuation, +would be exactly the same as they were originally. +This diminished value of money throughout the world (at +least if the diminution was considerable) would cause a suspension, +or at least a diminution, of the annual supply from +<pb n='432'/><anchor id='Pg432'/> +the mines, since the metal would no longer command a value +equivalent to its highest cost of production. The annual +waste would, therefore, not be fully made up, and the usual +causes of destruction would gradually reduce the aggregate +quantity of the precious metals to its former amount; after +which their production would recommence on its former +scale. The discovery of the treasure would thus produce +only temporary effects; namely, a brief disturbance of international +trade until the treasure had disseminated itself +through the world, and then a temporary depression in the +value of the metal below that which corresponds to the cost +of producing or of obtaining it; which depression would +gradually be corrected by a temporarily diminished production +in the producing countries and importation in the importing +countries. +</p> + +<p> +The same effects which would thus arise from the discovery +of a treasure accompany the process by which bank-notes, +or any of the other substitutes for money, take the place +of the precious metals. Suppose<note place='foot'>The illustrations +in this chapter have also been changed, but only so far as +to make them apply to the United States.</note> that the United States +possessed a currency, wholly metallic, of $200,000,000, and +that suddenly $200,000,000 of bank-notes were sent into circulation. +If these were issued by bankers, they would be +employed in loans, or in the purchase of securities, and would +therefore create a sudden fall in the rate of interest, which +would probably send a great part of the $200,000,000 of gold +out of the country as capital, to seek a higher rate of interest +elsewhere, before there had been time for any action on prices. +But we will suppose that the notes are not issued by bankers, +or money-lenders of any kind, but by manufacturers, in the +payment of wages and the purchase of materials, or by the +Government [as, e.g., greenbacks] in its ordinary expenses, so +that the whole amount would be rapidly carried into the markets +for commodities. The following would be the natural +order of consequences: All prices would rise greatly. Exportation +would almost cease; importation would be prodigiously +<pb n='433'/><anchor id='Pg433'/> +stimulated. A great balance of payments would +become due, the exchanges would turn against the United +States, to the full extent of the cost of exporting money; +and the surplus coin would pour itself rapidly forth, over the +various countries of the world, in the order of their proximity, +geographically and commercially, to the United States. +</p> + +<quote rend='display'> +A study of Chart <ref target='Chart_XIV'>No. XIV</ref> will show how exactly this +description fits the case of our country, when the rise of prices +stimulated imports of merchandise (see Chart <ref target='Chart_XIII'>No. XIII</ref>) in +1862, and sent gold out of the country. +</quote> + +<p> +The efflux would continue until the currencies of all countries +had come to a level; by which I do not mean, until +money became of the same value everywhere, but until the +differences were only those which existed before, and which +corresponded to permanent differences in the cost of obtaining +it. When the rise of prices had extended itself in an +equal degree to all countries, exports and imports would +everywhere revert to what they were at first, would balance +one another, and the exchanges would return to par. If such +a sum of money as $200,000,000, when spread over the whole +surface of the commercial world, were sufficient to raise the +general level in a perceptible degree, the effect would be of +no long duration. No alteration having occurred in the general +conditions under which the metals were procured, either +in the world at large or in any part of it, the reduced value +would no longer be remunerating, and the supply from the +mines would cease partially or wholly, until the $200,000,000 +were absorbed.<note place='foot'>I am here +supposing a state of things in which gold and silver mining are +a permanent branch of industry, carried on under known conditions; and not +the present state of uncertainty, in which gold-gathering is a game of chance, +prosecuted (for the present) in the spirit of an adventure, not in that of a regular +industrial pursuit.—<hi rend='smallcaps'>Mill.</hi> +It is, however, worth recalling that gold and silver +mining have not been—for large effects on the value of the metals—anything +like a permanent branch of industry, but that, in the main, great additions have +been obtained suddenly and by chance discoveries.—J. L. L.</note> +</p> + +<p> +Effects of another kind, however, will have been produced: +$200,000,000, which formerly existed in the unproductive +<pb n='434'/><anchor id='Pg434'/> +form of metallic money, have been converted into +what is, or is capable of becoming, productive capital. This +gain is at first made by the United States at the expense +of other countries, who have taken her superfluity of this +costly and unproductive article off her hands, giving for it an +equivalent value in other commodities. By degrees the loss +is made up to those countries by diminished influx from the +mines, and finally the world has gained a virtual addition +of $200,000,000 to its productive resources. Adam Smith's +illustration, though so well known, deserves for its extreme +aptness to be once more repeated. He compares the substitution +of paper in the room of the precious metals to the construction +of a highway through the air, by which the ground +now occupied by roads would become available for agriculture. +As in that case a portion of the soil, so in this a part +of the accumulated wealth of the country, would be relieved +from a function in which it was only employed in rendering +other soils and capitals productive, and would itself become +applicable to production; the office it previously fulfilled +being equally well discharged by a medium which costs +nothing. +</p> + +<p> +The value saved to the community by thus dispensing +with metallic money is a clear gain to those who provide the +substitute. They have the use of $200,000,000 of circulating +medium which have cost them only the expense of an +engraver's plate. If they employ this accession to their fortunes +as productive capital, the produce of the country is +increased and the community benefited, as much as by any +other capital of equal amount. Whether it is so employed +or not depends, in some degree, upon the mode of issuing it. +If issued by the Government, and employed in paying off +debt, it would probably become productive capital. The +Government, however, may prefer employing this extraordinary +resource in its ordinary expenses; may squander it uselessly, +or make it a mere temporary substitute for taxation +to an equivalent amount; in which last case the amount is +saved by the tax-payers at large, who either add it to their +<pb n='435'/><anchor id='Pg435'/> +capital or spend it as income. When [a part of the] paper +currency is supplied, as in our own country, by banking +companies, the amount is almost wholly turned into productive +capital; for the issuers, being at all times liable to be +called upon to refund the value, are under the strongest inducements +not to squander it, and the only cases in which it +is not forthcoming are cases of fraud or mismanagement. A +banker's profession being that of a money-lender, his issue +of notes is a simple extension of his ordinary occupation. +He lends the amount to farmers, manufacturers, or dealers, +who employ it in their several businesses. So employed, it +yields, like any other capital, wages of labor, and profits of +stock. The profit is shared between the banker, who receives +interest, and a succession of borrowers, mostly for +short periods, who, after paying the interest, gain a profit in +addition, or a convenience equivalent to profit. The capital +itself in the long run becomes entirely wages, and, when +replaced by the sale of the produce, becomes wages again; +thus affording a perpetual fund, of the value of $200,000,000, +for the maintenance of productive labor, and increasing the +annual produce of the country by all that can be produced +through the means of a capital of that value. To this gain +must be added a further saving to the country, of the annual +supply of the precious metals necessary for repairing the +wear and tear, and other waste, of a metallic currency. +</p> + +<p> +The substitution, therefore, of paper for the precious +metals should always be carried as far as is consistent with +safety, no greater amount of metallic currency being retained +than is necessary to maintain, both in fact and in +public belief, the convertibility of the paper. +</p> + +<p> +But since gold wanted for exportation is almost invariably +drawn from the reserves of the banks, and is never likely +to be taken directly from the circulation while the banks +remain solvent, the only advantage which can be obtained +from retaining partially a metallic currency for daily purposes +is, that the banks may occasionally replenish their +reserves from it. +</p> + +</div> + +<pb n='436'/><anchor id='Pg436'/> + +<div> +<index index='toc'/> +<head>§ 3. Effect of the increase of an inconvertible paper Currency. +Real and nominal exchange.</head> + +<p> +When metallic money had been entirely superseded +and expelled from circulation, by the substitution of +an equal amount of bank-notes, any attempt to keep a still +further quantity of paper in circulation must, if the notes are +convertible [into gold], be a complete failure. +</p> + +<quote rend='display'> +This brings up the whole question at issue between the +<q>Currency Principle</q> and the <q>Banking Principle.</q> The +latter, maintained by Fullerton, Wilson, Price, and Tooke +(in his later writings), held that, if notes were convertible, the +value of notes could not differ from the value of the metal +into which they were convertible; while the former, advocated +by Lord Overstone, G. W. Norman, Colonel Torrens, Tooke +(in his earlier writings), and Sir Robert Peel, implied that +even a convertible paper was liable to over-issues. This last +school brought about the Bank Act of 1844.<note place='foot'>See +Walker, <q>Money,</q> Chap. XIX.</note> +</quote> + +<p> +[A] new issue would again set in motion the same train +of consequences by which the gold coin had already been expelled. +The metals would, as before, be required for exportation, +and would be for that purpose demanded from the +banks, to the full extent of the superfluous notes, which thus +could not possibly be retained in circulation. If, indeed, the +notes were inconvertible, there would be no such obstacle to +the increase in their quantity. An inconvertible paper acts in +the same way as a convertible, while there remains any coin +for it to supersede; the difference begins to manifest itself +when all the coin is driven from circulation (except what may +be retained for the convenience of small change), and the +issues still go on increasing. When the paper begins to exceed +in quantity the metallic currency which it superseded, +prices of course rise; things which were worth $25 in metallic +money become worth $30 in inconvertible paper, or +more, as the case may be. But this rise of price will not, as +in the cases before examined, stimulate import and discourage +export. The imports and exports are determined by the +metallic prices of things, not by the paper prices; and it is +only when the paper is exchangeable at pleasure for the +metals that paper prices and metallic prices must correspond. +</p> + +<pb n='437'/><anchor id='Pg437'/> + +<p> +Let us suppose that the United States is the country +which has the depreciated paper. Suppose that some American +production could be bought, while the currency was still +metallic, for $25, and sold in England for $27.50, the difference +covering the expense and risk, and affording a profit to +the merchant. On account of the depreciation, this commodity +will now cost in the United States $30, and can not be sold +in England for more than $27.50, and yet it will be exported +as before. Why? Because the $27.50 which the exporter +can get for it in England is not depreciated paper, but gold +or silver; and since in the United States bullion has risen +in the same proportion with other things—if the merchant +brings the gold or silver to the United States, he can sell his +$27.50 [in coin] for $33 [in paper], and obtain as before 10 +per cent for profit and expenses. +</p> + +<p> +It thus appears that a depreciation of the currency does +not affect the foreign trade of the country: this is carried +on precisely as if the currency maintained its value. But, +though the trade is not affected, the exchanges are. When +the imports and exports are in equilibrium, the exchange, in +a metallic currency, would be at par; a bill on England for +the equivalent of $25 would be worth $25. But $25, or the +quantity of gold contained in them, having come to be +worth in the United States $30, it follows that a bill on +England for $25 will be worth $30. When, therefore, the +<emph>real</emph> exchange is at par, there will be a <emph>nominal</emph> exchange +against the country of as much per cent as the amount of +the depreciation. If the currency is depreciated 10, 15, or +20 per cent, then in whatever way the real exchange, arising +from the variations of international debts and credits, may +vary, the quoted exchange will always differ 10, 15, or 20 +per cent from it. However high this nominal premium may +be, it has no tendency to send gold out of the country for +the purpose of drawing a bill against it and profiting by the +premium; because the gold so sent must be procured, not +from the banks and at par, as in the case of a convertible +currency, but in the market, at an advance of price equal +<pb n='438'/><anchor id='Pg438'/> +to the premium. In such cases, instead of saying that the +exchange is unfavorable, it would be a more correct representation +to say that the par has altered, since there is now +required a larger quantity of American currency to be +equivalent to the same quantity of foreign. The exchanges, +however, continue to be computed according to the metallic +par. The quoted exchanges, therefore, when there is a depreciated +currency, are compounded of two elements or factors: +(1) the real exchange, which follows the variations of +international payments, and (2) the nominal exchange, which +varies with the depreciation of the currency, but which, +while there is any depreciation at all, must always be unfavorable. +Since the amount of depreciation is exactly measured +by the degree in which the market price of bullion +exceeds the mint valuation, we have a sure criterion to determine +what portion of the quoted exchange, being referable +to depreciation, may be struck off as nominal, the result +so corrected expressing the real exchange. +</p> + +<p> +The same disturbance of the exchanges and of international +trade which is produced by an increased issue of convertible +bank-notes is in like manner produced by those extensions +of credit which, as was so fully shown in a preceding +chapter, have the same effect on prices as an increase of +the currency. Whenever circumstances have given such an +impulse to the spirit of speculation as to occasion a great increase +of purchases on credit, money prices rise, just as much as +they would have risen if each person who so buys on credit had +bought with money. All the effects, therefore, must be similar. +As a consequence of high prices, exportation is checked +and importation stimulated; though in fact the increase of +importation seldom waits for the rise of prices which is the +consequence of speculation, inasmuch as some of the great articles +of import are usually among the things in which speculative +overtrading first shows itself. There is, therefore, in +such periods, usually a great excess of imports over exports; +and, when the time comes at which these must be paid for, +the exchanges become unfavorable and gold flows out of the +<pb n='439'/><anchor id='Pg439'/> +country. This efflux of gold takes effect on prices [by withdrawing +gold from the reserves of the banks, and so by stopping +loans and the use of credit, or purchasing power]: its +effect is to make them recoil downward. The recoil once begun, +generally becomes a total rout, and the unusual extension +of credit is rapidly exchanged for an unusual contraction +of it. Accordingly, when credit has been imprudently +stretched, and the speculative spirit carried to excess, the turn +of the exchanges and consequent pressure on the banks to +obtain gold for exportation are generally the proximate cause +of the catastrophe. +</p> + +<quote rend='display'> +A glance at Chart <ref target='Chart_XIII'>No. XIII</ref> will give illustration to the +situation here described. After the war, and until 1873, while +the United States was under the influence of high prices and a +speculation which has been seldom equaled in our history, the +resulting great excess of imports became very striking. It +was an unhealthy and abnormal condition of trade. The sudden +reversal of the trade by the crisis in 1873 is equally striking, +and, as prices fell, exports began to increase. The effect +on international trade of a collapse of credit is thus clearly +marked by the lines on the chart. +</quote> + +</div> + +</div> + +<pb n='440'/><anchor id='Pg440'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter XIX. Of The Rate Of Interest.</head> + +<div> +<index index='toc'/> +<head>§ 1. The Rate of Interest depends on the Demand and Supply of Loans.</head> + +<p> +The two topics of Currency and Loans, though in +themselves distinct, are so intimately blended in the phenomena +of what is called the money market, that it is impossible +to understand the one without the other, and in many +minds the two subjects are mixed up in the most inextricable +confusion. +</p> + +<p> +In the preceding book<note place='foot'><ref target='Book_II_Chapter_V_Section_1'>Book +II, Chap. V, § 1</ref>.</note> we defined the relation in which +interest stands to profit. We found that the gross profit of +capital might be distinguished into three parts, which are respectively +the remuneration for risk, for trouble, and for the +capital itself, and may be termed insurance, wages of superintendence, +and interest. After making compensation for +risk, that is, after covering the average losses to which capital +is exposed either by the general circumstances of society +or by the hazards of the particular employment, there remains +a surplus, which partly goes to repay the owner of the +capital for his abstinence, and partly the employer of it for +his time and trouble. How much goes to the one and how +much to the other is shown by the amount of the remuneration +which, when the two functions are separated, the owner +of capital can obtain from the employer for its use. This is +evidently a question of demand and supply. Nor have demand +and supply any different meaning or effect in this case +from what they have in all others. The rate of interest will +be such as to equalize the demand for loans with the supply +<pb n='441'/><anchor id='Pg441'/> +of them. It will be such that, exactly as much as some +people are desirous to borrow at that rate, others shall be +willing to lend. If there is more offered than demanded, interest +will fall; if more is demanded than offered, it will rise; +and in both cases, to the point at which the equation of supply +and demand is re-established. +</p> + +<p> +The desire to borrow and the willingness to lend are +more or less influenced by every circumstance which affects +the state or prospects of industry or commerce, either generally +or in any of their branches. The rate of interest, therefore, +on good security, which alone we have here to consider +(for interest in which considerations of risk bear a part may +swell to any amount), is seldom, in the great centers of money +transactions, precisely the same for two days together; as is +shown by the never-ceasing variations in the quoted prices +of the funds and other negotiable securities. Nevertheless, +there must be, as in other cases of value, some rate which +(in the language of Adam Smith and Ricardo) may be called +the natural rate; some rate about which the market rate oscillates, +and to which it always tends to return. This rate +partly depends on the amount of accumulation going on in +the hands of persons who can not themselves attend to the +employment of their savings, and partly on the comparative +taste existing in the community for the active pursuits of +industry, or for the leisure, ease, and independence of an +annuitant. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Circumstances which Determine the Permanent Demand and Supply of Loans.</head> + +<p> +In [ordinary] circumstances, the more thriving producers +and traders have their capital fully employed, and many +are able to transact business to a considerably greater extent +than they have capital for. These are naturally borrowers: +and the amount which they desire to borrow, and can give +security for, constitutes the demand for loans on account of +productive employment. To these must be added the loans +required by Government, and by land-owners, or other unproductive +consumers who have good security to give. This +constitutes the mass of loans for which there is an habitual +demand. +</p> + +<pb n='442'/><anchor id='Pg442'/> + +<p> +Now, it is conceivable that there might exist, in the hands +of persons disinclined or disqualified for engaging personally +in business, (1) a mass of capital equal to, and even exceeding, +this demand. In that case there would be an habitual +excess of competition on the part of lenders, and the rate of +interest would bear a low proportion to the rate of profit. +Interest would be forced down to the point which would +either tempt borrowers to take a greater amount of loans than +they had a reasonable expectation of being able to employ in +their business, or would so discourage a portion of the lenders +as to make them either forbear to accumulate or endeavor +to increase their income by engaging in business on their own +account, and incurring the risks, if not the labors, of industrial +employment. +</p> + +<quote rend='display'> +The low rates of interest, rather, tempt people to take some +additional risk, and enter into investments which offer a higher +rate of dividends; so that a period of low interest is a time +when speculative enterprises find victims, and then by bad and +worthless investments much of the loanable funds is actually +lost; thereby reducing the total quantity of loans more nearly +to that demand which will give an ordinary rate of interest. +</quote> + +<p> +(2.) On the other hand, the capital owned by persons who +prefer lending it at interest, or whose avocations prevent +them from personally superintending its employment, may +be short of the habitual demand for loans. It may be in +great part absorbed by the investments afforded by the public +debt and by mortgages, and the remainder may not be +sufficient to supply the wants of commerce. If so, the rate +of interest will be raised so high as in some way to re-establish +the equilibrium. When there is only a small difference +between interest and profit, many borrowers may no longer +be willing to increase their responsibilities and involve their +credit for so small a remuneration: or some, who would otherwise +have engaged in business, may prefer leisure, and become +lenders instead of borrowers: or others, under the +inducement of high interest and easy investment for their +capital, may retire from business earlier, and with smaller +fortunes, than they otherwise would have done. +</p> + +<pb n='443'/><anchor id='Pg443'/> + +<p> +Or, lastly, instead of [capital] being afforded by persons +not in business, the affording it may itself become a business. +A portion of the capital employed in trade may be supplied +by a class of professional money-lenders. These money-lenders, +however, must have more than a mere interest; they +must have the ordinary rate of profit on their capital, risk +and all other circumstances being allowed for. [For] it can +never answer, to any one who borrows for the purposes of his +business, to pay a full profit for capital from which he will +only derive a full profit: and money-lending, as an employment, +for the regular supply of trade, can not, therefore, be +carried on except by persons who, in addition to their own +capital, can lend their credit, or, in other words, the capital +of other people. A bank which lends its notes lends capital +which it borrows from the community, and for which it pays +no interest. +</p> + +<quote rend='display'> +Of late years, however, banks are generally not permitted +to issue notes on their simple credit. That privilege has been +so often abused in this country that now, in the national banking +system, a separate part of the resources are set aside for +the security of the circulating notes (as is also true of the Bank +of England since 1844). It is not generally true, then, that +banks now create the means to make loans by issuing notes +by which they borrow capital from the community without paying +interest. They do, however, depend almost entirely on deposits. +</quote> + +<p> +A bank of deposit lends capital which it collects from the +community in small parcels, sometimes without paying any +interest, and, if it does pay interest, it still pays much less +than it receives; for the depositors, who in any other way +could mostly obtain for such small balances no interest worth +taking any trouble for, are glad to receive even a little. Having +this subsidiary resource, bankers are enabled to obtain, +by lending at interest, the ordinary rate of profit on their +own capital. The disposable capital deposited in banks, together +with the funds belonging to those who, either from +necessity or preference, live upon the interest of their property, +constitute the general loan fund of the country; and +<pb n='444'/><anchor id='Pg444'/> +the amount of this aggregate fund, when set against the habitual +demands of producers and dealers, and those of the Government +and of unproductive consumers, determines the permanent +or average rate of interest, which must always be +such as to adjust these two amounts to one another.<note place='foot'>I do +not include in the general loan fund of the country the capitals, large +as they sometimes are, which are habitually employed in speculatively buying +and selling the public funds and other +securities.—<hi rend='smallcaps'>Mill.</hi></note> But, +while the whole of this mass of lent capital takes effect upon +the <emph>permanent</emph> rate of interest, the <emph>fluctuations</emph> depend almost +entirely upon the portion which is in the hands of +bankers; for it is that portion almost exclusively which, +being lent for short times only, is continually in the market +seeking an investment. The capital of those who live on +the interest of their own fortunes has generally sought and +found some fixed investment, such as the public funds, +mortgages, or the bonds of public companies, which investment, +except under peculiar temptations or necessities, is not +changed. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Circumstances which Determine the Fluctuations.</head> + +<p> +Fluctuations in the rate of interest arise from variations +either in the demand for loans or in the supply. The +supply is liable to variation, though less so than the demand. +The willingness to lend is greater than usual at the commencement +of a period of speculation, and much less than +usual during the revulsion which follows. In speculative +times, money-lenders as well as other people are inclined to +extend their business by stretching their credit; they lend +more than usual (just as other classes of dealers and producers +employ more than usual) of capital which does not +belong to them. Accordingly, these are the times when the +rate of interest is low; though for this too (as we shall immediately +see) there are other causes. During the revulsion, +on the contrary, interest always rises inordinately, because, +while there is a most pressing need on the part of many +persons to borrow, there is a general disinclination to lend.<note place='foot'>The +rate of interest at such crises in New York has several times risen to +400 or 500 per cent per annum.</note> +</p> + +<pb n='445'/><anchor id='Pg445'/> + +<p> +This disinclination, when at its extreme point, is called a +panic. It occurs when a succession of unexpected failures +has created in the mercantile, and sometimes also in the non-mercantile +public, a general distrust in each other's solvency; +disposing every one not only to refuse fresh credit, except +on very onerous terms, but to call in, if possible, all credit +which he has already given. Deposits are withdrawn from +banks; notes are returned on the issuers in exchange for specie; +bankers raise their rate of discount, and withhold their +customary advances; merchants refuse to renew mercantile +bills. At such times the most calamitous consequences were +formerly experienced from the attempt of the law to prevent +more than a certain limited rate of interest from being given +or taken. Persons who could not borrow at five per cent +had to pay, not six or seven, but ten or fifteen per cent, to +compensate the lender for risking the penalties of the law; +or had to sell securities or goods for ready money at a still +greater sacrifice. +</p> + +<quote rend='display'> +The pernicious and hurtful custom exists in various States +in this country of making any interest beyond a certain rate +illegal. When it is remembered that legitimate business is +often largely done on credit—until the proceeds of goods sold +on credit are collected—the rate of interest from day to day is +very important to trade. So, when there is a sudden demand +for loans, a rate higher than the legal one will certainly be +paid, and the law violated, if the getting of a loan is absolutely +necessary to save the borrower from commercial ruin. The effect +of a legal rate is to stop loans at the very time when loans +are most essential to the business public. It would be far better +to adopt such a sliding scale as exists at great European banks, +which allows the rate of interest to rise with the demand. No +one, then, with good security, need want loans if he is willing +to pay the high rates; and those not really in need will defer +their demand until the sudden emergency is past. Already in +New York the legal penalty has been removed for loaning at +higher than the legal rates when charged upon call-loans; and +it has mitigated the extreme fluctuations of the rate in a market +when financial necessity is contending against the law. +</quote> + +<p> +Except at such periods, the amount of capital disposable on +loan is subject to little other variation than that which arises +from the gradual process of accumulation; which process, +<pb n='446'/><anchor id='Pg446'/> +however, in the great commercial countries, is sufficiently +rapid to account for the almost periodical recurrence of these +fits of speculation; since, when a few years have elapsed +without a crisis, and no new and tempting channel for investment +has been opened in the mean time, there is always +found to have occurred in those few years so large an increase +of capital seeking investment as to have lowered considerably +the rate of interest, whether indicated by the prices of securities +or by the rate of discount on bills; and this diminution +of interest tempts the possessors to incur hazards in hopes of +a more considerable return. +</p> + +<p> +The demand for loans varies much more largely than the +supply, and embraces longer cycles of years in its aberrations. +A time of war, for example, is a period of unusual draughts +on the loan market. The Government, at such times, generally +incurs new loans, and, as these usually succeed each +other rapidly as long as the war lasts, the general rate of interest +is kept higher in war than in peace, without reference +to the rate of profit, and productive industry is stinted of its +usual supplies. +</p> + +<quote rend='display'> +The United States during the late war found that it could +not borrow at even six or seven per cent. By receiving depreciated +paper at par for its bonds it really agreed to pay six +gold dollars on each loan of one hundred dollars in paper +(worth, perhaps, at the worst only forty gold dollars), which +was equivalent to fifteen per cent. This high rate was largely +due to the weakened credit of the Government; but still it +remains true that the rate was higher because the United +States was in the market as a competitor for large loans. Now +the Government can refund its bonds at three per cent. +</quote> + +<p> +Nor does the influence of these loans altogether cease when +the Government ceases to contract others; for those already +contracted continue to afford an investment for a greatly +increased amount of the disposable capital of the country, +which, if the national debt were paid off, would be added to +the mass of capital seeking investment, and (independently +of temporary disturbance) could not but, to some extent, permanently +lower the rate of interest. +</p> + +<pb n='447'/><anchor id='Pg447'/> + +<quote rend='display'> +The rapid payment of the public debt by the United States, +$137,823,253 in 1882-1883, and more than $100,000,000 in 1883-1884, +has taken away the former investment for enormous sums +of loanable funds, and to the same extent increased the supply +in the market. Without doubt this aids in making the present +rate of interest a very low one. Whether the rate will remain +<q>permanently lower,</q> however, will depend upon whether the +field of investment in the United States is already practically +occupied. We believe it is not. +</quote> + +<p> +The same effect on interest which is produced by government +loans for war expenditure is produced by the sudden +opening of any new and generally attractive mode of permanent +investment. The only instance of the kind in recent +history, on a scale comparable to that of the war loans, is the +absorption of capital in the construction of railways. This +capital must have been principally drawn from the deposits +in banks, or from savings which would have gone into deposit, +and which were destined to be ultimately employed +in buying securities from persons who would have employed +the purchase-money in discounts or other loans at interest: +in either case, it was a draft on the general loan fund. It +is, in fact, evident that, unless savings were made expressly +to be employed in railway adventure, the amount thus employed +must have been derived either from the actual capital +of persons in business or from capital which would have +been lent to persons in business. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. The Rate of Interest not really Connected with the value of Money, +but often confounded with it.</head> + +<p> +From the preceding considerations it would be seen, +even if it were not otherwise evident, how great an error it +is to imagine that the rate of interest bears any necessary +relation to the quantity or value of the money in circulation. +An increase of the currency has in itself no effect, and is +incapable of having any effect, on the rate of interest. A +paper currency issued by Government in the payment of its +ordinary expenses, in however great excess it may be issued, +affects the rate of interest in no manner whatever. It +diminishes, indeed, the power of money to buy commodities, +but not the power of money to buy money. If a hundred +dollars will buy a perpetual annuity of four dollars a year, a +<pb n='448'/><anchor id='Pg448'/> +depreciation which makes the hundred dollars worth only +half as much as before has precisely the same effect on the +four dollars, and therefore can not alter the relation between +the two. Unless, indeed, it is known and reckoned upon +that the depreciation will only be temporary; for people +certainly might be willing to lend the depreciated currency +on cheaper terms if they expected to be repaid in money of +full value. +</p> + +<p> +In considering the effect produced by the proceedings of +banks in encouraging the excesses of speculation, an immense +effect is usually attributed to their issues of notes, but until +of late hardly any attention was paid to the management of +their deposits, though nothing is more certain than that their +imprudent extensions of credit take place more frequently +by means of their deposits than of their issues. Says Mr. +Tooke: <q>Supposing all the deposits received by a banker to +be in coin, is he not, just as much as the issuing banker, exposed +to the importunity of customers, whom it may be impolitic +to refuse, for loans or discounts, or to be tempted by +a high interest; and may he not be induced to encroach so +much upon his deposits as to leave him, under not improbable +circumstances, unable to meet the demands of his depositors?</q> +</p> + +<quote rend='display'> +In truth, the most difficult questions of banking center +around the functions of discount and deposit. The separation +of the Issue from the Banking Department by the act of 1844, +which renewed the charter of the Bank of England, makes this +perfectly clear. After entirely removing from their effect on +credit all influences due to issues, England has had the same +difficulties to encounter as before, which shows that the real +question is concerned with the two essential functions of banking—discount +and deposit. Since 1844, there have been the +commercial disturbances of 1847, 1857, 1866, and 1873. Although +no expansion of notes, without a corresponding deposit +of specie, is possible. +</quote> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_III_Chapter_XIX_Section_5'/> +<head>§ 5. The Rate of Interest determines the price of land and of Securities.</head> + +<p> +Before quitting the general subject of this chapter, +I will make the obvious remark that the rate of interest +determines the value and price of all those salable articles +which are desired and bought, not for themselves, but for +<pb n='449'/><anchor id='Pg449'/> +the income which they are capable of yielding. The public +funds, shares in joint-stock companies, and all descriptions +of securities, are at a high price in proportion as the rate of +interest is low. They are sold at the price which will give +the market rate of interest on the purchase-money, with +allowance for all differences in the risk incurred, or in any +circumstance of convenience. +</p> + +<p> +The price of land, mines, and all other fixed sources of +income, depends in like manner on the rate of interest. Land +usually sells at a higher price, in proportion to the income +afforded by it, than the public funds, not only because it is +thought, even in [England], to be somewhat more secure, +but because ideas of power and dignity are associated with +its possession. But these differences are constant, or nearly +so; and, in the variations of price, land follows, +<foreign lang='la' rend='italic'>cæteris paribus</foreign>, +the permanent (though, of course, not the daily) variations +of the rate of interest. When interest is low, land will +naturally be dear; when interest is high, land will be cheap. +</p> + +<quote rend='display'> +<p> +A lot of land, which fifty years ago gave an annual return +of $100, if ten per cent was then the common rate of interest, +would sell for $1,000. If the return from the land remains +the same ($100) to-day, and if the usual rate of interest is +now five per cent, the same piece of land, therefore, would sell +for $2,000, since $100 is five per cent of $2,000. +</p> + +<p> +The price of a bond, it may be said, also varies with the +time it has to run. At the same rate of interest, a bond running +for a long term of years is better for an investment than +one for a short term. The lumberman, who looks at two trees +of <emph>equal diameter</emph> at the base, estimates the total value of each +according to the <emph>height</emph> of the tree. Then, again, a bond running +for a short term may be worth less than one for a long +term, even though the first bears a higher rate of interest. +That is, to resume the illustration, one tree, not rising very +high, although <emph>larger</emph> at the bottom, may not contain so many +square feet as another, with perhaps a <emph>less</emph> diameter at the bottom, +but which stretches much higher up into the air. +</p> +</quote> + +</div> + +</div> + +<pb n='450'/><anchor id='Pg450'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_XX'/> +<head>Chapter XX. Of The Competition Of Different Countries In The Same Market.</head> + +<div> +<index index='toc'/> +<head>§ 1. Causes which enable one Country to undersell another.</head> + +<p> +In the phraseology of the Mercantile System, there +is no word of more frequent recurrence or more perilous import +than the word <emph>underselling</emph>. To undersell other countries—not +to be undersold by other countries—were spoken +of, and are still very often spoken of, almost as if they were +the sole purposes for which production and commodities +exist. +</p> + +<quote rend='display'> +Nations may, like individual dealers, be competitors, with +opposite interests, in the markets of some commodities, while +in others they are in the more fortunate relation of reciprocal +customers. The benefit of commerce does not consist, as it +was once thought to do, in the commodities sold; but, since +the commodities sold are the means of obtaining those which +are bought, a nation would be cut off from the real advantage +of commerce, the imports, if it could not induce other +nations to take any of its commodities in exchange; and in +proportion as the competition of other countries compels it +to offer its commodities on cheaper terms, on pain of not +selling them at all, the imports which it obtains by its foreign +trade are procured at greater cost. +</quote> + +<p> +One country (A) can only undersell another (B) in a +given market, to the extent of entirely expelling her from it, +on two conditions: (1) In the first place, she (A) must have +a greater advantage than the second country (B) in the production +of the article exported by both; meaning by a greater +advantage (as has been already so fully explained) not absolutely, +<pb n='451'/><anchor id='Pg451'/> +but in comparison with other commodities; and (2) +in the second place, such must be her (A's) relation with the +customer-country in respect to the demand for each other's +products, and such the consequent state of international +values, as to give away to the customer-country more than +the whole advantage possessed by the rival country (B); otherwise +the rival will still be able to hold her ground in the +market. +</p> + +<quote rend='display'> +Let us suppose a trade between England and the United +States, in iron and wheat. England being capable of producing +ten cwts. of iron at the same cost as fifteen bushels of +wheat, the United States at the same cost as twenty bushels, +and the two commodities being exchanged between the two +countries (cost of carriage apart) at some intermediate rate, say +ten for seventeen. The United States could not be permanently +undersold in the English market, and expelled from it, +unless by a country (such as India) which offered not merely +more than seventeen, but more than twenty bushels of wheat +for ten cwts. of iron. Short of that, the competition would +only oblige the United States to pay dearer for iron, but would +not disable her from exporting wheat. The country, therefore, +which could undersell the United States, must, in the first +place, be able to produce wheat at less cost, compared with +iron, than the United States herself; and, in the next place, +must have such a demand for iron, or other English commodities, +as would compel her, even when she became sole occupant +of the market, to give a greater advantage to England than the +United States could give by resigning the whole of hers; to +give, for example, twenty-one bushels for ten cwts. For if +not—if, for example, the equation of international demand, +after the United States was excluded, gave a ratio of eighteen +for ten—the United States would be now the underselling nation; +and there would be a point, perhaps nineteen for ten, at +which both countries would be able to maintain their ground, +and to sell in England enough wheat to pay for the iron, or +other English commodities, for which, on these newly adjusted +terms of interchange, they had a demand. In like manner, +England, as an exporter of iron, could only be driven from the +American market by some rival whose superior advantages in +the production of iron enabled her, and the intensity of whose +demand for American produce compelled her, to offer ten cwts. +of iron, not merely for less than seventeen bushels of wheat, +but for less than fifteen. In that case, England could no +longer carry on the trade without loss; but, in any case short +<pb n='452'/><anchor id='Pg452'/> +of this, she would merely be obliged to give to the United +States more iron for less wheat than she had previously given.<note place='foot'>In +this illustration I have retained as nearly as possible the form of that +given by Mr. Mill for the trade between England and Germany in cloth and linen.</note> +</quote> + +<p> +It thus appears that the alarm of being permanently +undersold may be taken much too easily; may be taken +when the thing really to be anticipated is not the loss of the +trade, but the minor inconvenience of carrying it on at a +diminished advantage; an inconvenience chiefly falling on +the consumers of foreign commodities, and not on the producers +or sellers of the exported article. It is no sufficient +ground of apprehension to the [American] producers, to find +that some other country can sell [wheat] in foreign markets, +at some particular time, a trifle cheaper than they can themselves +afford to do in the existing state of prices in [the +United States]. Suppose them to be temporarily unsold, and +their exports diminished; the imports will exceed the exports, +there will be a new distribution of the precious metals, +prices will fall, and, as all the money expenses of the +[American] producers will be diminished, they will be able +(if the case falls short of that stated in the preceding paragraph) +again to compete with their rivals. +</p> + +<p> +The loss which [the United States] will incur will not fall +upon the exporters, but upon those who consume imported +commodities; who, with money incomes reduced in amount, +will have to pay the same or even an increased price for all +things produced in foreign countries. +</p> + +<quote rend='display'> +But the business world would regard what was going on +under economic laws as a great and dreaded disaster, if it +meant that prices were to fall, and gold leave the country. +Those holding large stocks of goods would for that time suffer; +and so, at first, it might really happen that <q>exporters,</q> in the +sense of exporting agents (not the producers, perhaps, of the +exportable article), would incur a loss. In the end, of course, +the consumers of imports suffer. But, temporarily, and on the +face of it, exporters do lose. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. High wages do not prevent one Country from underselling another.</head> + +<p> +According to the preceding doctrine, a country can +not be undersold in any commodity, unless the rival country +<pb n='453'/><anchor id='Pg453'/> +has a stronger inducement than itself for devoting its labor +and capital to the production of the commodity; arising +from the fact that by doing so it occasions a greater saving +of labor and capital, to be shared between itself and its customers—a +greater increase of the aggregate produce of the +world. The underselling, therefore, though a loss to the +undersold country, is an advantage to the world at large; the +substituted commerce being one which economizes more of +the labor and capital of mankind, and adds more to their collective +wealth, than the commerce superseded by it. The +advantage, of course, consists in being able to produce the +commodity of better quality, or with less labor (compared +with other things); or perhaps not with less labor, but in +less time; with a less prolonged detention of the capital employed. +This may arise from greater natural advantages +(such as soil, climate, richness of mines); superior capability, +either natural or acquired, in the laborers; better division of +labor, and better tools, or machinery. But there is no place +left in this theory for the case of lower wages. This, however, +in the theories commonly current, is a favorite cause +of underselling. We continually hear of the disadvantage +under which the [American] producer labors, both in foreign +markets and even in his own, through the lower wages paid +by his foreign rivals. These lower wages, we are told, enable, +or are always on the point of enabling, them to sell at +lower prices, and to dislodge the [American] manufacturer +from all markets in which he is not artificially protected. +</p> + +<quote rend='display'> +<p> +It will be remembered that, as we have before seen, international +trade, in actual practice, depends on comparative prices +within the same country (even though the exporter may not +consciously make a comparison). We send wheat abroad, because +it is low in price relatively to certain manufactured goods; +that is, we send the wheat, but we do not send the manufactured +goods. But, so far, this is considering only the comparative +prices in the same country. Yet we shall fail to realize in +actual practice the application of the above principles, when we +use the terms prices and money, if we do not admit that there +is in the matter of underselling a comparison, also, between the +absolute price of the goods in one country and the absolute +<pb n='454'/><anchor id='Pg454'/> +price of the same goods in the competing country. For example, +wheat is not shipped to England unless the price is +lower here than there. If India or Morocco were to send wheat +into the English market in close competition with the United +States, and the price were to fall in London, it would mean that, +if we continued our shipments of wheat to England, we must +part with our wheat at a less advantage in the international +exchange. In the illustration already used, we must, for example, +offer more than seventeen bushels of wheat for ten cwts. +of iron. The fall in the price of wheat, without any change in +that of iron, implies the necessity of offering a greater quantity +of wheat for the same quantity of iron, perhaps nineteen or +twenty bushels for ten cwts. of iron. If the price went so low +as to require twenty-one bushels to pay for ten cwts. of iron, +then we should be entirely undersold; and the price here as +compared with the price in London would be an indication of +the fact. So that the comparison of prices here with prices +abroad is merely a register of the terms at which our international +exchanges are performed; but not the cause of the existence +of the international trade. If the price falls so low in +a foreign market that we can not sell wheat there, it simply +means that we have reached in the exchange ratios the limit of +our comparative advantages in wheat and iron; so that we are +obliged to offer twenty or more bushels of wheat for ten cwts. +of iron. +</p> + +<p> +But in all this it must be noted that this price must include +the return to capital also, and that it must be equal to +the usual reward for capital in other competing industries, +that is, the ordinary rate of profit. In exporting wheat from +the United States the capital engaged will insist on getting +the rate of profit to be found in other occupations to which +the capital can go, in the United States. Now, the price, +if it stands for the value (which is supposed to be governed +by cost of production in this case), is the sum out of which +wages and profits are paid. If the price were to fall in the +foreign market, then there might not be the means with which +to pay the usual rate of wages and the usual rate of profit +also. Then we should probably hear of complaints by the +shippers that there is no profit in the exportation of wheat, and +of a falling off in the trade. In other words, as the capitalist +is the one who manages the operation, and is the one first affected, +the diminution of advantage in foreign trade arising +from competition, generally shows itself first in lessened profits. +The price, then, is the means by which we determine +whether a certain article gives us that comparative advantage +which will insure a gain from international trade. +</p> + +<p> +An exportable article whose price in this country is low—since +<pb n='455'/><anchor id='Pg455'/> +it is for this reason selected as an export—is one whose +cost is low. If the cost be low, it means that the industry +is very productive; that the same capital and labor produce +more for their exertion in this than in other industries. And +yet it is precisely in the most productive industries that higher +wages and profits can be, and are, paid. Although each article +is sold at a low price, the great quantity produced makes +the total sum, or value, out of which the industrial rewards, +profits, and wages, are paid, large. That is, the price may be +very low (lower, also, in direct comparison with prices abroad) +and yet pay the rate of wages and profits current in this country. +Consequently, although wages and profits may be very +high (relatively to older countries) in those industries of the +United States whose productiveness is great, yet the very fact +of this low cost, and consequently this low price (where competition +is effective), is that which fits the commodity for exportation. +We are, therefore, inevitably led to a position in +which we see that high wages and low prices naturally go +together in an exportable commodity. In practice, certainly, +the high wages do not, by raising the price, prevent us, by comparing +our price with English prices, from sending goods +abroad—because we send goods abroad from our most productive +employments. As an illustration of this principle, it is +found that the leading exports of the United States, in 1883, +were cotton, breadstuffs, provisions, tobacco, mineral oils, and +wood. +</p> + +<p> +But, since a direct comparison is in practice made between +prices here and prices in England (for example), in order to +determine whether the trade can be a profitable one, we constantly +hear it said that we can not send goods abroad because +our labor is so dear. It need scarcely be observed that we do +not hear this from those engaged in any of the extractive industries +just mentioned as furnishing large exports, which are +admittedly very productive; it is generally heard in regard to +certain kinds of manufactured goods. The difficulty arises +not with regard to articles in which we have the greatest advantage +in productiveness, but those in which we have a less +advantage. If the majority of occupations are so productive +as to assure a generally high reward to labor and capital +throughout the country, these less advantageously situated industries—not +being so productive as others (either from lack +of skill or good management, or high cost of machinery and +materials, or peculiarities of climate, or heavy taxation)—can +not pay the usual high reward to labor, and at the same time +get for the capitalist the same high reward he can everywhere +else receive at home. For, at a price low enough to warrant an +exportation, the quantity made by a given amount of labor and +<pb n='456'/><anchor id='Pg456'/> +capital does not yield a total value so great as is given in the +majority of other occupations to the same amount of labor and +capital, and out of which the usual high wages and profits can +be paid. The less productiveness of an industry, compared with +other industries in the same country, then, is the real cause which +prevents it from competing with foreign countries consistently +with receiving the ordinary rate of profit. It is the high rate +of profits as well as the high rate of wages common in the +country which prevents selling abroad. It is absurd to say +that it is only high wages: it is just as much high profits. +Of course, if the less productive industries wish to compete +with England, and if they pay—as we know they must—the +high rate of wages due to the general productiveness of our +country's industries, they must submit to less profits for the +pleasure of having that particular desire. It is not possible that +we should produce everything equally well here; nor is it possible +that England should produce everything equally well. If +we wish to send any goods at all to England, we must receive +some goods from her. In order to get the gain arising from +our productiveness, we must earnestly wish that England should +have some commodity also in which she has a comparative advantage, +in order that any trade whatever may exist. It is not, +however, worth while, in my opinion, to go on in this discussion +to consider the position of those who would shut us off +from any and all foreign trade. +</p> + +<p> +Our present high wages should be a cause for congratulation, +because they are due to the generally high productiveness of our +resources, or, in other words, due to low cost; and it is to be +hoped that they may long continue high. We do not seem to +be in imminent danger of not having goods which we can export +in quantities which will buy for us all we may wish to import +from abroad. (See Chart <ref target='Chart_XIII'>No. XIII</ref>, and note the vast +increase of exports at the same time that wages are known to be higher in +this country than abroad.) So long as wages continue high, we +may possibly be unwilling to see gratified that false and ignorant +desire which leads some people to think that we ought to +produce, equally well with any competitor in the world, everything +that is made. If, as was pointed out under the discussion +on cost of labor,<note place='foot'><ref target='Book_II_Chapter_V_Section_5'>Book +II, Chap. V, § 5</ref>.</note> we must necessarily connect with efficiency +of labor all natural advantages under which labor works, +it is easy to see that high wages are entirely consistent with +low prices; and that high wages do not prevent us to-day from +having an hitherto unequaled export trade. Even if all wages +and all profits were lower, it would, however, affect all industries +alike, and some would still be more productive relatively +<pb n='457'/><anchor id='Pg457'/> +to others, and the same inequality would remain. If, however, +we learn to use our materials better, use machinery with more +effect on the quantity produced, adapt our industries to our +climate, get the raw products more cheaply, free ourselves from +excessive and unreasonable taxation, it would be difficult to +say what commodities we might not be able eventually to +manufacture in competition with the rest of the world. For +we have scarcely ever, as a country, had the advantage of such +conditions to aid us in our foreign trade. +</p> + +<p> +Mr. Mill now goes on to consider the suggestive fact that +wages are higher in England than on the Continent, and yet +that the English have no difficulty in underselling their Continental +rivals. +</p> +</quote> + +<p> +Before examining this opinion on grounds of principle, +it is worth while to bestow a moment's consideration upon +it as a question of fact. Is it true that the wages of manufacturing +labor are lower in foreign countries than in England, +in any sense in which low wages are an advantage to +the capitalist? The artisan of Ghent or Lyons may earn less +wages in a day, but does he not do less work? Degrees of +efficiency considered, does his labor cost less to his employer? +Though wages may be lower on the Continent, is not the +Cost of Labor, which is the real element in the competition, +very nearly the same? That it is so seems the opinion of +competent judges, and is confirmed by the very little difference +in the rate of profit between England and the Continental +countries. But, if so, the opinion is absurd that English +producers can be undersold by their Continental rivals +from this cause. It is only in America that the supposition +is <foreign lang='la' rend='italic'>prima facie</foreign> +admissible. In America wages are much +higher than in England, if we mean by wages the daily earnings +of a laborer; but the productive power of American +labor is so great—its efficiency, combined with the favorable +circumstances in which it is exerted, makes it worth so much +to the purchaser—that the Cost of Labor is lower in America +than in England; as is proved by the fact that the general +rate of profits and of interest is very much higher. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Low wages enable a Country to undersell another, when Peculiar to certain +branches of Industry.</head> + +<p> +But is it true that low wages, even in the sense of +low Cost of Labor, enable a country to sell cheaper in the +<pb n='458'/><anchor id='Pg458'/> +foreign market? I mean, of course, low wages which are +common to the whole productive industry of the country. +</p> + +<p> +If wages, in any of the departments of industry which +supply exports, are kept, artificially or by some accidental +cause, below the general rate of wages in the country, this +is a real advantage in the foreign market. It lessens the +<emph>comparative</emph> cost of production of those articles in relation +to others, and has the same effect as if their production required +so much less labor. Take, for instance, the case of +the United States in respect to certain commodities. In that +country tobacco and cotton, two great articles of export, are +produced by slave-labor, while food and manufactures generally +are produced by free laborers, who either work on +their own account or are paid by wages. In spite of the +inferior efficiency of slave-labor, there can be no reasonable +doubt that, in a country where the wages of free labor are +so high, the work executed by slaves is a better bargain to +the capitalist. To whatever extent it is so, this smaller cost +of labor, being not general, but limited to those employments, +is just as much a cause of cheapness in the products, +both in the home and in the foreign market, as if they had +been made by a less quantity of labor. If the slaves in the +Southern States were emancipated, and their wages rose to +the general level of the earnings of free labor in America, +that country might be obliged to erase some of the slave-grown +articles from the catalogue of its exports, and would +certainly be unable to sell any of them in the foreign market +at the present price. Their cheapness is partly an artificial +cheapness, which may be compared to that produced by a +bounty on production or on exportation; or, considering the +means by which it is obtained, an apter comparison would be +with the cheapness of stolen goods. +</p> + +<anchor id='Chart_XV'/> +<p rend='text-align: center'> + <figure url='images/chartxv.png' rend='width: 80%'> + <head>Chart XV.</head> + <figDesc>Illustration: Chart XV.</figDesc> + </figure> +</p> + +<quote rend='display'> +How far Mr. Mill was in error may be seen by Chart <ref target='Chart_XV'>No. +XV</ref>, which shows the enormous increase of cotton production +under the <hi rend='italic'>régime</hi> of free labor as compared with that +of slave-labor in the United States. The abolition of slavery +has been an economic gain to the South. Moreover, the exports +of raw cotton have increased from 644,327,921 pounds in +<pb n='460'/><anchor id='Pg460'/> +1869, to 2,288,075,062 pounds in 1883; while for corresponding +years the exports of tobacco increased from 181,527,630 to +235,628,360 pounds. In other words, exports of tobacco were +increased by 30 per cent, and those of raw cotton by no less +than 255 per cent. Besides, the prices of cotton and tobacco +are no higher now than before 1850. +</quote> + +<p> +An advantage of a similar economical, though of a very +different moral character, is that possessed by domestic manufactures; +fabrics produced in the leisure hours of families +partially occupied in other pursuits, who, not depending for +subsistence on the produce of the manufacture, can afford to +sell it at any price, however low, for which they think it +worth while to take the trouble of producing. The workman +of Zürich is to-day a manufacturer, to-morrow again an +agriculturist, and changes his occupations with the seasons in +a continual round. Manufacturing industry and tillage advance +hand in hand, in inseparable alliance, and in this union +of the two occupations the secret may be found why the +simple and unlearned Swiss manufacturer can always go on +competing and increasing in prosperity in the face of those +extensive establishments fitted out with great economic and +(what is still more important) intellectual resources. +</p> + +<p> +In the case of these domestic manufactures, the comparative +cost of production, on which the interchange between +countries depends, is much lower than in proportion to the +quantity of labor employed. The work-people, looking to +the earnings of their loom for a part only, if for any part, +of their actual maintenance, can afford to work for a less remuneration +than the lowest rate of wages which can permanently +exist in the employments by which the laborer has to +support the whole expense of a family. Working, as they +do, not for an employer but for themselves, they may be +said to carry on the manufacture at no cost at all, except the +small expense of a loom and of the material; and the limit +of possible cheapness is not the necessity of living by their +trade, but that of earning enough by the work to make that +social employment of their leisure hours not disagreeable. +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_III_Chapter_XX_Section_4'/> +<head>§ 4. —But not when common to All.</head> + +<p> +These two cases, of slave-labor and of domestic +<pb n='461'/><anchor id='Pg461'/> +manufactures, exemplify the conditions under which low +wages enable a country to sell its commodities cheaper in +foreign markets, and consequently to undersell its rivals, or +to avoid being undersold by them. But no such advantage +is conferred by low wages when common to all branches of +industry. General low wages never caused any country to +undersell its rivals, nor did general high wages ever hinder +it from doing so. +</p> + +<p> +To demonstrate this, we must turn to an elementary +principle which was discussed in a former +chapter.<note place='foot'><ref target='Book_II_Chapter_II_Section_3'>Book +II, Chap. II, § 3</ref>.</note> General +low wages do not cause low prices, nor high wages high +prices, within the country itself. General prices are not +raised by a rise of wages, any more than they would be +raised by an increase of the quantity of labor required in +all production. Expenses which affect all commodities equally +have no influence on prices. If the maker of broadcloth +or cutlery, and nobody else, had to pay higher wages, the +price of his commodity would rise, just as it would if he had +to employ more labor; because otherwise he would gain less +profit than other producers, and nobody would engage in the +employment. But if everybody has to pay higher wages, +or everybody to employ more labor, the loss must be submitted +to; as it affects everybody alike, no one can hope to get +rid of it by a change of employment; each, therefore, resigns +himself to a diminution of profits, and prices remain +as they were. In like manner, general low wages, or a general +increase in the productiveness of labor, does not make +prices low, but profits high. If wages fall (meaning here +by wages the cost of labor), why, on that account, should the +producer lower his price? He will be forced, it may be +said, by the competition of other capitalists who will crowd +into his employment. But other capitalists are also paying +lower wages, and by entering into competition with him +they would gain nothing but what they are gaining already. +The rate, then, at which labor is paid, as well as the quantity +<pb n='462'/><anchor id='Pg462'/> +of it which is employed, affects neither the value nor the +price of the commodity produced, except in so far as it is +peculiar to that commodity, and not common to commodities +generally. +</p> + +<quote rend='display'> +However, without there being any change in the productiveness +of any industry, if the price of the article should rise, +for instance, from an increased demand, that would make the +total value arising from the products of the industry larger in +its purchasing power, and so there would be a larger sum to +be divided among labor and capital. If there be free competition, +more capital would move into this one industry under +the hope of larger profits, and so wages would rise. Therefore, +it is possible that high wages and high prices may go together, +but not as cause and effect. In fact, the change in +price generally precedes the change in wages. On the other +hand, while low wages are not the cause of low prices nor +high wages of high prices, yet the two may be found together, +as both due to a common cause, viz., the small or great value +of the total product.<note place='foot'>Cf. Cairnes, <q>Leading +Principles,</q> p. 209.</note> +</quote> + +<p> +Since low wages are not a cause of low prices in the +country itself, so neither do they cause it to offer its commodities +in foreign markets at a lower price. It is quite +true that, if the cost of labor is lower in America than in +England, America could sell her cottons to Cuba at a lower +price than England, and still gain as high a profit as the +English manufacturer. But it is not with the profit of the +English manufacturer that the American cotton-spinner will +make his comparison; it is with the profits of other American +capitalists. These enjoy, in common with himself, the +benefit of a low cost of labor, and have accordingly a high +rate of profit. This high profit the cotton-spinner must also +have: he will not content himself with the English profit. +It is true he may go on for a time at that lower rate, rather +than change his employment; and a trade may be carried +on, sometimes for a long period, at a much lower profit than +that for which it would have been originally engaged in. +Countries which have a low cost of labor and high profits do +not for that reason undersell others, but they do oppose a +<pb n='463'/><anchor id='Pg463'/> +more obstinate resistance to being undersold, because the producers +can often submit to a diminution of profit without +being unable to live, and even to thrive, by their business. +But this is all which their advantage does for them; and in +this resistance they will not long persevere when a change +of times which may give them equal profits with the rest of +their countrymen has become manifestly hopeless. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Low profits as affecting the carrying Trade.</head> + +<p> +It is worth while also to notice a third class of small, +but in this case mostly independent communities, which have +supported and enriched themselves almost without any productions +of their own (except ships and marine equipments), +by a mere carrying-trade, and commerce of entrepot; by buying +the produce of one country, to sell it at a profit in another. +Such were Venice and the Hanse Towns. +</p> + +<p> +When the Venetians became the agents of the general +commerce of Southern Europe, they had scarcely any competitors: +the thing would not have been done at all without +them, and there was really no limit to their profits except +the limit to what the ignorant feudal nobility could and +would give for the unknown luxuries then first presented to +their sight. At a later period competition arose, and the +profit of this operation, like that of others, became amenable +to natural laws. The carrying-trade was taken up by Holland, +a country with productions of its own and a large accumulated +capital. The other nations of Europe also had +now capital to spare, and were capable of conducting their +foreign trade for themselves: but Holland, having, from the +variety of circumstances, a lower rate of profit at home, could +afford to carry for other countries at a smaller advance on +the original cost of the goods than would have been required +by their own capitalists; and Holland, therefore, engrossed +the greatest part of the carrying-trade of all those countries +which did not keep it to themselves by navigation laws,<note place='foot'>For +a brief bibliography on our own Navigation Laws and the Shipping +Question, see <ref target='Appendix_I'>Appendix I</ref>.</note> constructed, +like those of England, for the express purpose. +</p> + +<pb n='464'/><anchor id='Pg464'/> + +<quote rend='display'> +In the United States, early in the century, a retaliatory +policy against England gave us a body of navigation laws +copied after the mediæval statutes of England and the Continent, +which still remain on the statute-book. They do not +permit an American to buy a vessel abroad and sail it under +our flag without paying enormous duties; a provision which +is intended to foster ship-building in the United States. Even +with this legislation, ships, as a fact, are not built here for +the foreign trade; and our ship-builders practically supply +the coasting-trade only (which is not open to foreigners). The +ability to buy ships anywhere, and enter them to registry under +our flag free of duty, is what is meant by the demand for +<q>free ships.</q> This, however, has to do with ship-building. But +ship-owning or ship-sailing, is quite distinct from it. The +ability to get as great a return from capital and labor invested +in a ship as from other occupations open to Americans is another +thing. Even if we had <q>free ships,</q> the higher returns in other +industries in our country, particularly as regards profits, might +cause capitalists naturally to neglect a less for a more productive +business. In 1884 Congress has very properly taken +away many vexatious restrictions upon ships, which diminished +the returns from ship-sailing, and it remains to be seen whether +we can thereby regain any of our foreign carrying-trade. At +present we have a very small tonnage even in that part of the +shipping engaged in carrying our own goods. +</quote> + +</div> + +</div> + +<pb n='465'/><anchor id='Pg465'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_III_Chapter_XXI'/> +<head>Chapter XXI. Of Distribution, As Affected By Exchange.</head> + +<div> +<index index='toc'/> +<head>§ 1. Exchange and money make no Difference in the law of Wages.</head> + +<p> +The division of the produce among the three classes, +laborers, capitalists, and landlords, when considered without +any reference to exchange, appeared to depend on certain +general laws. It is fit that we should now consider whether +these same laws still operate, when the distribution takes +place through the complex mechanism of exchange and +money; or whether the properties of the mechanism interfere +with and modify the presiding principles. +</p> + +<p> +The primary division of the produce of human exertion +and frugality is, as we have seen, into three shares—wages, +profits, and rents; and these shares are portioned out, to the +persons entitled to them, in the form of money and by a +process of exchange; or, rather, the capitalist, with whom in +the usual arrangements of society the produce remains, pays +in money, to the other two sharers, the market value of their +labor and land. If we examine on what the pecuniary value +of labor and the pecuniary value of the use of land depend, +we shall find that it is on the very same causes by which we +found that wages and rent would be regulated if there were +no money and no exchange of commodities. +</p> + +<p> +It is evident, in the first place, that the law of wages is +not affected by the existence or non-existence of exchange or +money. Wages depend on the ratio between population and +capital [taking into account the nature of a country's industries]; +and would do so if all the capital in the world were +the property of one association, or if the capitalists among +<pb n='466'/><anchor id='Pg466'/> +whom it is shared maintained each an establishment for the +production of every article consumed in the community, exchange +of commodities having no existence. As the ratio +between capital and population, everywhere but in new colonies, +depends on the strength of the checks by which the +too rapid increase of population is restrained, it may be said, +popularly speaking, that wages depend on the checks to population; +that, when the check is not death by starvation or +disease, wages depend on the prudence of the laboring people; +and that wages in any country are habitually at the +lowest rate to which in that country the laborer will suffer +them to be depressed rather than put a restraint upon multiplication. +</p> + +<p> +What is here meant, however, by wages, is the laborer's +real scale of comfort; the quantity he obtains of the things +which nature or habit has made necessary or agreeable to +him: wages in the sense in which they are of importance to +the receiver. In the sense in which they are of importance +to the payer, they do not depend exclusively on such simple +principles. Wages in the first sense, the wages on which the +laborer's comfort depends, we will call real wages, or wages +in kind. Wages in the second sense we may be permitted +to call, for the present, money wages; assuming, as it is allowable +to do, that money remains for the time an invariable +standard, no alteration taking place in the conditions under +which the circulating medium itself is produced or obtained. +If money itself undergoes no variation in cost, the money +price of labor is an exact measure of the cost of labor, and +may be made use of as a convenient symbol to express it +[if the efficiency of labor also be supposed to remain the +same]. +</p> + +<p> +The money wages of labor are a compound result of two +elements: first, real wages, or wages in kind, or, in other +words, the quantity which the laborer obtains of the ordinary +articles of consumption; and, secondly, the money prices +of those articles. In all old countries—all countries in which +the increase of population is in any degree checked by the +<pb n='467'/><anchor id='Pg467'/> +difficulty of obtaining subsistence—the habitual money price +of labor is that which will just enable the laborers, one +with another, to purchase the commodities without which +they either can not or will not keep up the population at its +customary rate of increase. Their standard of comfort being +given (and by the standard of comfort in a laboring class is +meant that rather than forego which they will abstain from +multiplication), money wages depend on the money price, +and therefore on the cost of production, of the various articles +which the laborers habitually consume: because, if their +wages can not procure them a given quantity of these, their +increase will slacken and their wages rise. Of these articles, +food and other agricultural produce are so much the principal +as to leave little influence to anything else. +</p> + +<p> +It is at this point that we are enabled to invoke the aid +of the principles which have been laid down in this Third +Part. The cost of production of food and agricultural produce +has been analyzed in a preceding chapter. It depends +on the productiveness of the least fertile land, or of the least +productively employed portion of capital, which the necessities +of society have as yet put in requisition for agricultural +purposes. The cost of production of the food grown in +these least advantageous circumstances determines, as we +have seen, the exchange value and money price of the whole. +In any given state, therefore, of the laborers' habits, their +money wages depend on the productiveness of the least fertile +land, or least productive agricultural capital: on the point +which cultivation has reached in its downward progress—in +its encroachments on the barren lands, and its gradually increased +strain upon the powers of the more fertile. Now, +the force which urges cultivation in this downward course +is the increase of people; while the counter-force, which +checks the descent, is the improvement of agricultural science +and practice, enabling the same soil to yield to the same +labor more ample returns. The costliness of the most costly +part of the produce of cultivation is an exact expression of +the state, at any given moment, of the race which population +<pb n='468'/><anchor id='Pg468'/> +and agricultural skill are always running against each +other. +</p> + +<quote rend='display'> +It will be noted, in this exposition, that Mr. Mill has in view +an old country, with a population so dense that numbers are +always pressing close upon subsistence; that their wages are +so low as to give the laborers little more than the necessary +wants of life. That these are not the economic conditions in +the United States goes without saying. First of all, the margin +of cultivation is high: only soils of high productiveness +are in cultivation, and the returns to labor and capital are, consequently, +very large. High wages are found together with +low prices of food. The existing population is not so numerous +as to require for the cultivation of food any but lands of a +very high grade of fertility. The ability to command a high +reward for labor (as compared with European industries), owing +to the general prevalence of high returns in the United States, +has resulted in the establishment of a higher standard for our +laborers. The standard being relatively so high, there is no +intimate connection between the increase of population here +and the price of food; for, as a rule, wages are not so low that +any change in the cost of producing food would require checks +upon population. There is a considerable margin above necessaries, +in the laborer's real wages in the United States, which +may go for comforts, decencies, and amusements. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. In the law of Rent.</head> + +<p> +The degree of productiveness of this extreme margin +is an index to the existing state of the distribution of the +produce among the three classes, of laborers, capitalists, and +landlords. When the demand of an increasing population +for more food can not be satisfied without extending cultivation +to less fertile land, or incurring additional outlay, with +a less proportional return, on land already in cultivation, it is +a necessary condition of this increase of agricultural produce +that the value and price of that produce must first rise. The +price of food will always on the average be such that the +worst land, and the least productive installment of the capital +employed on the better lands, shall just replace the expenses +with the ordinary profit. If the least favored land and capital +just do thus much, all other land and capital will yield an +extra profit, equal to the proceeds of the extra produce due +to their superior productiveness; and this extra profit becomes, +by competition, the prize of the landlords. Exchange +<pb n='469'/><anchor id='Pg469'/> +and money, therefore, make no difference in the law of rent: +it is the same as we +originally<note place='foot'><ref target='Book_III_Chapter_III_Section_1'>Book +III, Chap. III, § 1</ref>.</note> found it. Rent is the extra +return made to agricultural capital when employed with peculiar +advantages; the exact equivalent of what those advantages +enable the producers to economize in the cost of production: +the value and price of the produce being regulated +by the cost of production to those producers who have no +advantages; by the return to that portion of agricultural +capital the circumstances of which are the least favorable. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. —Nor in the law of Profits.</head> + +<p> +Wages and rent being thus regulated by the same +principles when paid in money, as they would be if apportioned +in kind, it follows that Profits are so likewise. For +the surplus, after replacing wages and paying rent, constitutes +Profits. +</p> + +<p> +We found, in the last chapter of the Second Book, that +the advances of the capitalist, when analyzed to their ultimate +elements, consist either in the purchase or maintenance +of labor, or in the profits of former capitalists; and that, +therefore, profits in the last resort depend upon the Cost of +Labor, falling as that rises, and rising as it falls. Let us endeavor +to trace more minutely the operation of this law. +</p> + +<p> +There are two modes in which the Cost of Labor, which +is correctly represented (money being supposed invariable as +well as efficiency) by the money wages of the laborer, may +be increased. The laborer may obtain greater comforts; +wages in kind—real wages—may rise. Or the progress of +population may force down cultivation to inferior soils and +more costly processes; thus raising the cost of production, +the value, and the price, of the chief articles of the laborer's +consumption. On either of these suppositions the rate of +profit will fall. +</p> + +<p> +If the laborer obtains more abundant commodities only +by reason of their greater cheapness, if he obtains a greater +quantity, but not on the whole a greater cost, real wages +will be increased, but not money wages, and there will be +<pb n='470'/><anchor id='Pg470'/> +nothing to affect the rate of profit. But, if he obtains a +greater quantity of commodities of which the cost of production +is not lowered, he obtains a greater cost; his money +wages are higher. The expense of these increased money +wages falls wholly on the capitalist. There are no conceivable +means by which he can shake it off. It may be said—it +used formerly to be said—that he will get rid of it by raising +his price. But this opinion we have already, and more +than once, fully refuted.<note place='foot'><hi rend='italic'>Supra</hi>, +Book III, <ref target='Book_III_Chapter_II_Section_2'>Chap. II, § 2</ref>, +and <ref target='Book_III_Chapter_XX_Section_4'>Chap. XX, § 4</ref>.</note> +</p> + +<p> +The doctrine, indeed, that a rise of wages causes an +equivalent rise of prices, is, as we formerly observed, self-contradictory: +for, if it did so, it would not be a rise of +wages; the laborer would get no more of any commodity +than he had before, let his money wages rise ever so much; +a rise of real wages would be an impossibility. This being +equally contrary to reason and to fact, it is evident that a rise +of money wages does not raise prices; that high wages are +not a cause of high prices. A rise of general wages falls on +profits. There is no possible alternative. +</p> + +<p> +Having disposed of the case in which the increase of +money wages, and of the Cost of Labor, arises from the +laborer's obtaining more ample wages in kind, let us now +suppose it to arise from the increased cost of production of +the things which he consumes, owing to an increase of population +unaccompanied by an equivalent increase of agricultural +skill. The augmented supply required by the population +would not be obtained, unless the price of food rose +sufficiently to remunerate the farmer for the increased cost +of production. The farmer, however, in this case sustains a +twofold disadvantage. He has to carry on his cultivation +under less favorable conditions of productiveness than before. +For this, as it is a disadvantage belonging to him only as a +farmer, and not shared by other employers, he will, on the +general principles of value, be compensated by a rise of the +price of his commodity; indeed, until this rise has taken +<pb n='471'/><anchor id='Pg471'/> +place, he will not bring to market the required increase of +produce. But this very rise of price involves him in another +necessity, for which he is not compensated. He must pay +higher money wages to his laborers [if they retain the same +quantity of real wages]. This necessity, being common to +him with all other capitalists, forms no ground for a rise of +price. The price will rise, until it has placed him in as good +a situation, in respect of profits, as other employers of labor; +it will rise so as to indemnify him for the increased labor +which he must now employ in order to produce a given +quantity of food; but the increased wages of that labor are +a burden common to all, and for which no one can be indemnified. +It will be paid wholly from profits. +</p> + +<p> +Thus we see that increased wages, when common to all +descriptions of productive laborers, and when really representing +a greater Cost of Labor, are always and necessarily +at the expense of profits. And by reversing the cases, we +should find in like manner that diminished wages, when +representing a really diminished Cost of Labor, are equivalent +to a rise of profits. But the opposition of pecuniary +interest thus indicated between the class of capitalists and +that of laborers is to a great extent only apparent. Real +wages are a very different thing from the Cost of Labor, and +are generally highest at the times and places where, from +the easy terms on which the land yields all the produce as +yet required from it, the value and price of food being low, +the cost of labor to the employer, notwithstanding its ample +remuneration, is comparatively cheap, and the rate of profit +consequently high, as at present in the United States. We +thus obtain a full confirmation of our original theorem that +Profits depend on the Cost of Labor: or, to express the +meaning with still greater accuracy, the rate of profit and +the cost of labor vary inversely as one another, and are joint +effects of the same agencies or causes. +</p> + +</div> + +</div> + +</div> + +<pb n='475'/><anchor id='Pg475'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Book IV. Influence Of The Progress Of Society On Production And +Distribution.</head> + +<div> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_IV_Chapter_I'/> +<head>Chapter I. Influence Of The Progress Of Industry And Population +On Values And Prices.</head> + +<div> +<index index='toc'/> +<head>§ 1. Tendency of the progress of society toward increased Command over the +powers of Nature; increased Security, and increased Capacity of Co-Operation.</head> + +<p> +In the leading countries of the world, and in all others +as they come within the influence of those leading countries, +there is at least one progressive movement which continues +with little interruption from year to year and from generation +to generation—a progress in wealth; an advancement +in what is called material prosperity. All the nations which +we are accustomed to call civilized increase gradually in production +and in population: and there is no reason to doubt +that not only these nations will for some time continue so to +increase, but that most of the other nations of the world, +including some not yet founded, will successively enter upon +the same career. It will, therefore, be our first object to +examine the nature and consequences of this progressive +change, the elements which constitute it, and the effects it +produces on the various economical facts of which we have +been tracing the laws, and especially on wages, profits, rents, +values, and prices. +</p> + +<p> +Of the features which characterize this progressive economical +movement of civilized nations, that which first excites +attention, through its intimate connection with the phenomena +of Production, is the perpetual, and, so far as human +foresight can extend (1), the unlimited, growth of man's +<pb n='476'/><anchor id='Pg476'/> +power over nature. Our knowledge of the properties and +laws of physical objects shows no sign of approaching its +ultimate boundaries: it is advancing more rapidly, and in a +greater number of directions at once, than in any previous +age or generation, and affording such frequent glimpses of +unexplored fields beyond as to justify the belief that our +acquaintance with nature is still almost in its infancy. +</p> + +<p> +Another change, which has always hitherto characterized, +and will assuredly continue to characterize, the progress of +civilized society, is (2) a continual increase of the security of +person and property. Of this increased security, one of the +most unfailing effects is a great increase both of production +and of accumulation. Industry and frugality can not exist +where there is not a preponderant probability that those who +labor and spare will be permitted to enjoy. +</p> + +<p> +One of the changes which most infallibly attend the +progress of modern society is, (3) an improvement in the +business capacities of the general mass of mankind. I do +not mean that the practical sagacity of an individual human +being is greater than formerly. What is lost in the separate +efficiency of each is far more than made up by the greater +capacity of united action. Works of all sorts, impracticable +to the savage or the half-civilized, are daily accomplished by +civilized nations, not by any greatness of faculties in the +actual agents, but through the fact that each is able to rely +with certainty on the others for the portion of the work +which they respectively undertake. The peculiar characteristic, +in short, of civilized beings, is the capacity of co-operation; +and this, like other faculties, tends to improve by practice, +and becomes capable of assuming a constantly wider +sphere of action. +</p> + +<p> +[This progress affords] space and scope for an indefinite +increase of capital and production, and for the increase of +population which is its ordinary accompaniment. That the +growth of population will overpass the increase of production, +there is not much reason to apprehend. It is, however, +quite possible that there might be a great progress in industrial +<pb n='477'/><anchor id='Pg477'/> +improvement, and in the signs of what is commonly +called national prosperity; a great increase of aggregate +wealth, and even, in some respects, a better distribution of +it; that not only the rich might grow richer, but many of +the poor might grow rich, that the intermediate classes might +become more numerous and powerful, and the means of enjoyable +existence be more and more largely diffused, while +yet the great class at the base of the whole might increase in +numbers only, and not in comfort nor in cultivation. We +must, therefore, in considering the effects of the progress of +industry, admit as a supposition, however greatly we deprecate +as a fact, an increase of population as long-continued, as +indefinite, and possibly even as rapid, as the increase of production +and accumulation. +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_IV_Chapter_I_Section_2'/> +<head>§ 2. Tendency to a Decline of the Value and Cost of Production of all +Commodities.</head> + +<p> +The changes which the progress of industry causes +or presupposes in the circumstances of production are necessarily +attended with changes in the values of commodities. +</p> + +<p> +The permanent values of all things which are neither +under a natural nor under an artificial monopoly depend, as +we have seen, on their cost of production. (1.) But the increasing +power which mankind are constantly acquiring over +nature increases more and more the efficiency of human exertion, +or, in other words, diminishes cost of production. All +inventions by which a greater quantity of any commodity +can be produced with the same labor, or the same quantity +with less labor, or which abridge the process, so that the +capital employed needs not be advanced for so long a time, +lessen the cost of production of the commodity. As, however, +value is relative, if inventions and improvements in +production were made in all commodities, and all in the same +degree, there would be no alteration in values. +</p> + +<p> +As for prices, in these circumstances they would be affected +or not, according as the improvements in production +did or did not extend to the precious metals. If the materials +of money were an exception to the general diminution +of cost of production, the values of all other things would fall +in relation to money—that is, there would be a fall of general +<pb n='478'/><anchor id='Pg478'/> +prices throughout the world. But if money, like other +things, and in the same degree as other things, were obtained +in greater abundance and cheapness, prices would be no more +affected than values would. +</p> + +<quote rend='display'> +<p> +As regards the precious metals, it is to be said that since +1850 there has been a vast increase in their amount, and probably +in greater proportion than the need arising from increased +transactions. This is certainly true of silver; and it is admitted +to be true of gold as late as about 1865. It has been asserted +by Mr. Goschen that since then, especially since 1873, gold has +not existed in a quantity that would permit it to keep its +former proportions to commodities, and that it had appreciated. +An appreciation, of course, would show itself in lower gold +prices. On the other hand, gold has, as I think, not appreciated. +Prices, even in the collapse of credit after the panic of 1873 +down to 1879, were not quite so low as in 1845-1850, as is seen +by the following table taken from the London <q>Economist</q>—2,200 +indicating the price of a given number of articles in 1845-1850, +as the basis of the table with which the prices of other +years are compared: +</p> + +<table rend="latexcolumns: 'p{3cm} p{3cm}'; + tblcolumns: 'lw(20) lw(20)'"> +<row><cell>Year.</cell><cell>Index numbers.</cell></row> +<row><cell>1845-1850</cell><cell>2,200</cell></row> +<row><cell>1857, July 1</cell><cell>2,996</cell></row> +<row><cell>1858, January 1</cell><cell>2,612</cell></row> +<row><cell>1865</cell><cell>3,575</cell></row> +<row><cell>1866</cell><cell>3,564</cell></row> +<row><cell>1867</cell><cell>3,024</cell></row> +<row><cell>1868</cell><cell>2,682</cell></row> +<row><cell>1869</cell><cell>2,666</cell></row> +<row><cell>1870</cell><cell>2,689</cell></row> +<row><cell>1871</cell><cell>2,590</cell></row> +<row><cell>1872</cell><cell>2,835</cell></row> +<row><cell>1873</cell><cell>2,947</cell></row> +<row><cell>1874 (Depression)</cell><cell>2,891</cell></row> +<row><cell>1875 (Depression)</cell><cell>2,778</cell></row> +<row><cell>1876 (Depression)</cell><cell>2,711</cell></row> +<row><cell>1877 (Depression)</cell><cell>2,723</cell></row> +<row><cell>1878 (Depression)</cell><cell>2,529</cell></row> +<row><cell>1879 (Depression)</cell><cell>2,202</cell></row> +<row><cell>1880</cell><cell>2,538</cell></row> +<row><cell>1881</cell><cell>2,376</cell></row> +<row><cell>1882</cell><cell>2,435</cell></row> +<row><cell>1883</cell><cell>2,343</cell></row> +</table> + +<p> +But the progress of society, particularly in the direction of +improved and cheapened processes of manufacturing, has vastly +lowered the cost of a great number of articles of common consumption. +The process has been already seen in the diminished +charge for railway transportation (see Chart <ref target='Chart_V'>No. V</ref>). +Moreover, the years of a depression are exactly those in which there +is always a forced economy, and generally form a period in +which cheapening goes on at its best. Hence, if prices have had +a tendency to fall, owing to the lowered cost of production consequent +on improvements—and if they are not, as a rule, lower +than in 1850—it shows that they are still supported by the +high tide of the great gold production of this century. And +<pb n='479'/><anchor id='Pg479'/> +even the access to more fertile land in the world has acted to +prevent an increase in the prices of agricultural products such as +would offset the fall of manufactured goods. That is, the fact +that prices have not fallen as much as might be expected, indicates +that the gold has prevented the lower costs due to the +progress of industry from being fully seen. +</p> +</quote> + +<p> +Improvements in production are not the only circumstance +accompanying the progress of industry, which tends +to diminish the cost of producing, or at least of obtaining, +commodities. (2.) Another circumstance is the increase of +intercourse between different parts of the world. As commerce +extends, and the ignorant attempts to restrain it by +tariffs become obsolete, commodities tend more and more to +be produced in the places in which their production can be +carried on at the least expense of labor and capital to mankind. +(3.) Much will also depend on the increasing migration +of labor and capital to unoccupied parts of the earth, of +which the soil, climate, and situation are found, by the ample +means of exploration now possessed, to promise not only a +large return to industry, but great facilities of producing +commodities suited to the markets of old countries. Much +as the collective industry of the earth is likely to be increased +in efficiency by the extension of science and of the industrial +arts, a still more active source of increased cheapness of production +will be found, probably, for some time to come, in +the gradually unfolding consequences of Free Trade, and in +the increasing scale on which Emigration and Colonization +will be carried on. +</p> + +<p> +From the causes now enumerated, unless counteracted by +others, the progress of things enables a country to obtain, at +less and less of real cost, not only its own productions but +those of foreign countries. Indeed, whatever diminishes the +cost of its own productions, when of an exportable character, +enables it, as we have already seen, to obtain its imports at +less real cost. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. —except the products of Agriculture and Mining, which have a +tendency to Rise.</head> + +<p> +Are no causes of an opposite character, brought into +operation by the same progress, sufficient in some cases not +only to neutralize but to overcome the former, and convert +<pb n='480'/><anchor id='Pg480'/> +the descending movement of cost of production into an +ascending movement? We are already aware that there are +such causes, and that, in the case of the most important +classes of commodities, food, and materials, there is a tendency +diametrically opposite to that of which we have been +speaking. The cost of production of these commodities +tends to increase. +</p> + +<p> +This is not a property inherent in the commodities themselves. +If population were stationary, and the produce of +the earth never needed to be augmented in quantity, there +would be no cause for greater cost of production.<note place='foot'>Henry +George, however, asserts that, <q>irrespective of the increase of +population, the effect of improvements in methods of production and exchange +is to increase rent</q> (<q>Progress and Poverty,</q> p. 220).</note> The only +products of industry which, if population did not increase, +would be liable to a real increase of cost of production, are +those which, depending on a material which is not renewed, +are either wholly or partially exhaustible, such as coal, and +most if not all metals; for even iron, the most abundant as +well as most useful of metallic products, which forms an ingredient +of most minerals and of almost all rocks, is susceptible +of exhaustion so far as regards its richest and most tractable +ores. +</p> + +<p> +When, however, population increases, as it has never yet +failed to do, then comes into effect that fundamental law +of production from the soil on which we have so frequently +had occasion to expatiate, the law that increased labor, in +any given state of agricultural skill, is attended with a less +than proportional increase of produce. The cost of production +of the fruits of the earth increases, +<foreign lang='la' rend='italic'>cæteris paribus</foreign>, with +every increase of the demand. +</p> + +<quote rend='display'> +<p> +Mr. Cairnes has made some essential contributions to the +discussion of changes of value arising from the progress of +society:<note place='foot'><q>Leading Principles,</q> Part I, +chap. v.</note> <q>When a colony establishes itself in a new country, +the course of its industrial development naturally follows the +character of the opportunities offered to industrial enterprise +<pb n='481'/><anchor id='Pg481'/> +by the environment. These will, of course, vary a good deal, +according to the part of the world in which the new society +happens to be placed; but, speaking broadly, they will be such +as to draw the bulk of the industrial activity of the new people +into some one or more of those branches of industry which +have been conveniently designated <q>extractive.</q> Agriculture, +pastoral and mining pursuits, and the cutting of lumber, are +among the principal of such industries.</q> To these pursuits +apply <q rend='pre'>that law of Political Economy, or, more properly, of +physical nature, which Mr. Mill has rightly characterized as +the most important proposition in economic science—the law, +as he phrased it, of <q>diminishing productiveness.</q> It may be +thus briefly stated: In any given state of the arts of production, +the returns to human industry employed upon natural +agents will, up to a certain point, be the maximum which +those natural agents, cultivated with the degree of skill +brought to bear upon them, are capable of yielding; but, after +this point has been passed, though an increased application of +labor and capital will obtain an increased return, it will not +obtain a proportionally increased return; on the contrary, +every further increase of outlay—always assuming that the +skill employed in applying it continues the same as before—will +be attended with a return constantly diminishing.... +What I am now concerned to show is the manner in which, +with the progress of society, the law in question affects the +course of normal<note place='foot'>For the distinction between +normal and market values, see <hi rend='italic'>supra</hi>, +<ref target='Book_III_Chapter_II_Section_4'>Book III, Chap. II, § 4</ref>, and p. +<ref target='Pg269'>269</ref>.</note> values in all commodities coming under its +influence.</q> +</p> + +<p> +<q>The class of commodities in the production of which the +facilities possessed by new communities, as compared with old, +attain their greatest height, are those of which timber and +meat may be taken as the type, and comprises such articles as +wool, game, furs, hides, horns, pitch, resin, etc. The circumstance +which most powerfully affects the course of values in +the products of extractive industry, and in the commodities +just referred to among the rest, is the degree in which they +admit of being transported from place to place—that is to say, +their <emph>portableness</emph>—depending, as it does, partly on their durability +and partly on their bulk.</q> It is found that, taking timber +and meat as a type—one possessing portableness in a vastly +greater degree than the other—in the early settlement of a +new country, the portable article, like timber, at once rises in +price <q>to a level lower than that prevailing in old countries only +by the cost of transport</q>; on the other hand, perishable articles +like meat are <q>confined for a market, if not to the immediate +<pb n='482'/><anchor id='Pg482'/> +locality where it is produced, at least to the bordering countries; +and, being raised in new countries at very low cost, their +value during the early stages of their growth is necessarily +low. But, as population advances, and agriculture encroaches +on the natural pasture-lands originally available for the rearing +of cattle, still more as it becomes necessary to cultivate land +for the purpose of pasture, the cost of meat constantly rises.</q> +As population increases there will be an increased demand for +dairy-products, eggs, small fruits, fresh vegetables, milk, etc., +and thereby it becomes more profitable to employ land near +populous centers for such perishable products than for the +products of large farming. Almost every one, who knows the +high prices of butter, eggs, and vegetables in large cities as +compared with their prices in country districts, is familiar with +the phenomena which illustrate this principle. Moreover, as a +denser population settles on our Western prairies, now given +over to ranches and vast pasturing-grounds for cattle—since +cattle in general require a large extent of land—the cost of +meat will rise. The prices of perishable articles, therefore, +will rise without any limit except that set by increasing numbers, +and can not be kept down by the force of competition +from other distant places, as is the case with such easily transportable +things as timber and wool. What has been said of the +transportableness of meat, however, is to be modified somewhat +by the introduction of improved processes of transporting +meat in refrigerator-cars; but there still exist commodities +of which meat was only taken as a type. +</p> +</quote> + +<p> +No tendency of a like kind exists with respect to manufactured +articles. The tendency is in the contrary direction. +The larger the scale on which manufacturing operations are +carried on, the more cheaply they can in general be performed. +As manufactures, however, depend for their materials +either upon agriculture, or mining, or the spontaneous +produce of the earth, manufacturing industry is subject, in +respect of one of its essentials, to the same law as agriculture. +But the crude material generally forms so small a portion of +the total cost that any tendency which may exist to a progressive +increase in that single item is much overbalanced +by the diminution continually taking place in all the other +elements; to which diminution it is impossible at present to +assign any limit. +</p> + +<p> +It follows that the exchange values of manufactured articles, +<pb n='483'/><anchor id='Pg483'/> +compared with the products of agriculture and of +mines, have, as population and industry advance, a certain +and decided tendency to fall. Money being a product of +mines, it may also be laid down as a rule that manufactured +articles tend, as society advances, to fall in money price. +The industrial history of modern nations, especially during +the last hundred years, fully bears out this assertion. +</p> + +<quote rend='display'> +<p> +In regard to manufactures, as opposed to raw products, it +is to be remarked <q>that, as the course of price in the field of +raw products is, on the whole, upward, so in that of manufactured +goods the course is, not less strikingly, in the opposite +direction. The reasons of this are exceedingly plain. In the +first place, <emph>division of labor</emph>—the first and most powerful of +all cheapeners of production, but for which there is in extractive +industry but very limited scope—finds in manufacturing +industry an almost unbounded range for its application; and, +secondly, it is in manufacturing industry also that <emph>machinery</emph>, +the other great cheapener of production, admits of being employed +on the largest scale, and has, in fact, been employed +with the most signal success. It follows at once from these +facts, taken in connection with the further fact that industrial +invention does not take place <foreign lang='la' rend='italic'>per saltum</foreign>, +but gradually—one +invention ever treading on the heels of another—and that its +advance seems to be subject to no limitation; it follows, I say, +from these considerations, that that portion of the cost of manufactured +goods which properly belongs to the manufacturing +process must, with the progress of society, undergo constant +diminution.... In all the great branches of manufacturing +industry the portion of the cost incurred in the manufacturing +process bears in general a large proportion to that represented +by the raw material, while the influence of industrial +invention, in reducing this portion of the cost, is, as every one +knows, great and unremitting in its action.</q> +</p> + +<p> +As has been said, <q>the two great cheapeners of production +are division of labor and machinery, and the degree in which +these admit of being applied to manufacture is mainly dependent +upon the scale on which the manufacturing process is carried +on. Those manufactures, therefore, that are produced +upon a large scale are the sort of manufactures in which we +may expect the greatest reduction in cost; in which, therefore, +the fall in price, with the progress of society, will be +most marked. But the manufactures which are produced upon +the largest scale are those for which there exists the largest +demand—that is to say, are those which enter most extensively +into the consumption of the great mass of people. They are +<pb n='484'/><anchor id='Pg484'/> +also, I may add, those in which a fall in price is apt to stimulate +a great increase of demand. All the common kinds of +clothing, furniture, and utensils fall within the scope of this +remark; and it is in these, rather than in the commodities consumed +exclusively or mainly by the richer classes, that we should, +accordingly, expect to find the greatest marvels of cheapening.</q> +But the articles of common consumption are those in +which <q>the amount of manufacture bestowed upon them bears +a smaller proportion to the raw material than is the case with +the more elaborate manufactures. Such coarser manufactures, +therefore, would feel the effects of the advancing cost of the +raw material more sensibly than the refined sorts. Nevertheless, +it can not be supposed to compensate the advantages due +to the causes I have pointed out which fall to the share of the +commoner sorts. It is in this class of goods that the most remarkable +reductions in price have been accomplished in the +past, and it is in them, probably, that we shall witness in the +future the greatest results of the same kind.</q> +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_IV_Chapter_I_Section_4'/> +<head>§ 4. —that tendency from time to time Counteracted by Improvements in +Production.</head> + +<p> +Whether agricultural produce increases in absolute +as well as comparative cost of production depends on the +conflict of the two antagonist agencies—increase of population +and improvement in agricultural skill. In some, perhaps +in most, states of society (looking at the whole surface +of the earth), both agricultural skill and population are either +stationary, or increase very slowly, and the cost of production +of food, therefore, is nearly stationary. In a society +which is advancing in wealth, population generally increases +faster than agricultural skill, and food consequently tends to +become more costly; but there are times when a strong impulse +sets in toward agricultural improvement. Such an impulse +has shown itself in Great Britain during the last fifteen +or twenty years [before 1847]. In England and Scotland +agricultural skill has of late increased considerably faster +than population, insomuch that food and other agricultural +produce, notwithstanding the increase of people, can be +grown at less cost than they were thirty years ago; and the +abolition of the Corn Laws has given an additional stimulus +to the spirit of improvement. In some other countries, and +particularly in France, the improvement of agriculture gains +ground still more decidedly upon population, because though +<pb n='485'/><anchor id='Pg485'/> +agriculture, except in a few provinces, advances slowly, +population advances still more slowly, and even with increasing +slowness, its growth being kept down, not by poverty, +which is diminishing, but by prudence. +</p> + +<quote rend='display'> +Moreover, the cheapened cost of transportation has admitted +to England and the Continent the wheat supplies of our +Western States at a low price even after having been carried to +transatlantic markets. New methods of getting food-supplies +from foreign countries act equally with improvements at home. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Effect of the Progress of Society in moderating fluctuations of Value.</head> + +<p> +Thus far, of the effect of the progress of society on +the permanent or average values and prices of commodities. +It remains to be considered in what manner the same progress +affects their fluctuations. Concerning the answer to this +question there can be no doubt. It tends in a very high degree +to diminish them. +</p> + +<p> +In poor and backward societies, as in the East, and in +Europe during the middle ages, extraordinary differences in +the price of the same commodity might exist in places not +very distant from each other, because the want of roads and +canals, the imperfection of marine navigation, and the insecurity +of communications generally, prevented things from +being transported from the places where they were cheap +to those where they were dear. The things most liable to +fluctuations in value, those directly influenced by the seasons, +and especially food, were seldom carried to any great +distances. In most years, accordingly, there was, in some +part or other of any large country, a real dearth; while a +deficiency at all considerable, extending to the whole world, +is [now] a thing almost unknown. In modern times, therefore, +there is only dearth, where there formerly would have +been famine, and sufficiency everywhere when anciently +there would have been scarcity in some places and superfluity +in others. +</p> + +<p> +The same change has taken place with respect to all other +articles of commerce. The safety and cheapness of communications, +which enable a deficiency in one place to be supplied +from the surplus of another, at a moderate or even a +<pb n='486'/><anchor id='Pg486'/> +small advance on the ordinary price, render the fluctuations +of prices much less extreme than formerly. This effect is +much promoted by the existence of large capitals, belonging +to what are called speculative merchants, whose business it +is to buy goods in order to resell them at a profit. These +dealers naturally buying things when they are cheapest, and +storing them up to be brought again into the market when +the price has become unusually high, the tendency of their +operations is to equalize price, or at least to moderate its inequalities. +The prices of things are neither so much depressed +at one time, nor so much raised at another, as they would be +if speculative dealers did not exist. +</p> + +<quote rend='display'> +Mr. Mill uses the term <q>speculative</q> in a different sense +from that which is customary in this country. Merchants who +buy outright and store up grain are not speculators in the +sense in which the word is used with us; but those gamblers +who purchase, <q>for future delivery,</q> grain which they never +see, and which they sell in the same way, are here known as +speculators. +</quote> + +<p> +It appears, then, that the fluctuations of values and prices +arising from variations of supply, or from alterations in real +(as distinguished from speculative) demand, may be expected +to become more moderate as society advances. With regard +to those which arise from miscalculation, and especially from +the alternations of undue expansion and excessive contraction +of credit, which occupy so conspicuous a place among +commercial phenomena, the same thing can not be affirmed +with equal confidence. Such vicissitudes, beginning with +irrational speculation and ending with a commercial crisis, +have not hitherto become either less frequent or less violent +with the growth of capital and extension of industry. Rather +they may be said to have become more so, in consequence, +as is often said, of increased competition, but, as I prefer to +say, of a lower rate of profits and interest, which makes capitalists +dissatisfied with the ordinary course of safe mercantile +gains. The connection of this low rate of profit with the +advance of population and accumulation is one of the points +to be illustrated in the ensuing chapters. +</p> + +<pb n='487'/><anchor id='Pg487'/> + +<quote rend='display'> +<p> +Mr. Cairnes also adds some investigations as to the fluctuations +of value: <q rend='pre'>Hitherto I have examined the derivative laws +of value in so far only as they are exemplified in the movements +of <emph>normal</emph> prices. It will be interesting now to consider +whether it is possible to discover in the movements of <emph>market</emph> +prices any corresponding phenomena.</q> +</p> + +<p> +<q rend='pre'>Taking manufactures first, it is evident at once that, as +regards conditions of protection, the circumstances of the case +are such as to secure, in general, (1.) great rapidity and great +certainty in bringing commodities to market. A deal table +may be made in a few hours, a piece of cloth in a few weeks, +and a moderate-sized house in a month or little more. Tables, +cloth, and houses may be produced with certainty in any quantity +required. It results from this that it is scarcely possible +that, under ordinary circumstances, the selling price of a product +of manufacture should for any long time much exceed its +normal price. (2.) The nature of manufactures is, in general, +such as to fit them admirably for distant transport. Any considerable +elevation of price, therefore, is pretty certain to attract +supplies from remote sources. (3.) Further, considered in +their relation to human needs, I think it may be said of manufactured +goods, that either the need for them is not very urgent, +or, where it happens to be so, substitutes ... may easily be +found. From all these circumstances it results that an advance +in the price ... either attracts supplies, or deters purchasers, ... +preventing any great departure from the usual terms of +the market.</q> +</p> + +<p> +<q>Turning now to the products of agricultural, pastoral, or, +more generally, <q>extractive</q> industry, we find the circumstances +under which this class of goods is brought to market +in all respects extremely different from those which we have +just examined, and such as to permit a much wider margin of +deviation for the market from the normal price. Here the +period of production is longer, the result of the process much +more uncertain, the commodity at once more perishable and +less portable, and human requirements in relation to it are mostly +of a more urgent kind: (1.) The shortest period within which +additions can be made to the supply of food and raw material +of the vegetable kind is in general a year, and, if the commodity +be of animal origin, the minimum is considerably larger. +(2.) Again, the farmer may decide upon the breadth of ground +to be devoted to a particular crop, or upon the number of cattle +he will maintain; but the actual returns will vary according +to the season, and may prove far in excess or far in defect +of his calculations. These circumstances all present obstacles +to the adjustment of supply and demand, and consequently +tend to produce frequent and extensive deviations of the market +<pb n='488'/><anchor id='Pg488'/> +from the normal price. Nor are the other conditions of the +case such as to neutralize the influence of such disturbing agencies. +(3.) The nature, indeed, of some of the principal agricultural +products fits them sufficiently well for distant transport, +and so far tends to correct fluctuations of price. But, on +the other hand, (4.) the relation of these products to human +wants is such as greatly to enhance that tendency to violent +fluctuation incident to the conditions of their production. More +especially is this the case with the commodity, whatever it may +be, which forms the staple food of a people. For observe the +peculiar nature of human requirements with reference to such +a commodity. They are of this kind, that, given the number of +a population, the quantity of the staple food required is nearly +a fixed quantity, and this almost irrespective of price. Except +among the poorest, increased cheapness will not stimulate a +larger consumption; while, on the other hand, all, at any cost +within the range of their means, will obtain their usual supply. +The consequence is that, when even a moderate deficiency or +excess occurs in the supply of the staple food of a people, in +the one case (<hi rend='italic'>a</hi>), the competition of consumers for their usual +quantum of food rapidly forces up the price far out of proportion +to the diminution in the supply; in the other (<hi rend='italic'>b</hi>), no one +being inclined to increase his usual consumption, the competition +of sellers, in their eagerness to find a market for the superfluous +portion of the supply, is equally powerful to depress it.</q> +</p> +</quote> + +</div> + +</div> + +<pb n='489'/><anchor id='Pg489'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_IV_Chapter_II'/> +<head>Chapter II. Influence Of The Progress Of Industry And Population On +Rents, Profits, And Wages.</head> + +<div> +<index index='toc'/> +<head>§ 1. Characteristic features of industrial Progress.</head> + +<p> +Continuing the inquiry into the nature of the economical +changes taking place in a society which is in a state +of industrial progress, we shall next consider what is the +effect of that progress on the distribution of the produce +among the various classes who share in it. We may confine +our attention to the system of distribution which is the most +complex, and which virtually includes all others—that in +which the produce of manufactures is shared between two +classes, laborers and capitalists, and the produce of agriculture +among three, laborers, capitalists, and landlords. +</p> + +<p> +The characteristic features of what is commonly meant +by industrial progress resolve themselves mainly into three, +increase of capital, increase of population, and improvements +in production; understanding the last expression, in its +widest sense, to include the process of procuring commodities +from a distance, as well as that of producing them. It +will be convenient to set out by considering each of the three +causes, as operating separately; after which we can suppose +them combined in any manner we think fit.<note place='foot'>Before +beginning this discussion the reader is advised to review the relation +of profits to cost of labor, and the dependence of the latter on its three +factors, <ref target='Book_II_Chapter_V_Section_5'>Book II, Chap. V, § 5</ref>.</note> +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. First two cases, Population and Capital increasing, the arts of +production stationary.</head> + +<quote rend='display'> +<p> +For the sake of clearness we will form two general +groups of these causes: +</p> + +<p> +A. <hi rend='italic'>The Influence of Population and Capital</hi> +(<hi rend='italic'>Improvements +remaining stationary</hi>). +</p> + +<p> +B. <hi rend='italic'>The Influence of Improvements</hi> +(<hi rend='italic'>Population and Capital +remaining stationary</hi>). +</p> + +<pb n='490'/><anchor id='Pg490'/> + +<p> +We will first take up A, and under this division make for +convenience two separate suppositions: +</p> + +<p> +I. The first is that, while Population is advancing, Capital +is stationary. By this means we can study separately the operation +of one of the factors of societary progress, Population, and +see its influence on rents, profits, and wages. There being only +the same given quantity of wealth in the form of capital to +be now distributed among more laborers (1), real wages must +fall; whereupon, if the same capital purchases more labor, and +obtains more produce (2), profits rise. Now, if the laborers +were so well off before as to suffer the reduction of wages to +take place not in their food, but in their other comforts, then, +if each laborer uses as much food as before, and if, as by the +supposition, there are more laborers, an increased quantity of +food will be required from the soil. This supply can be produced +only at a greater cost, and, as inferior soils are called +into cultivation (3), rents will rise. This last action (3), however, +will have an influence on the rise of profits (2). For it +was only by a reduction of real wages that profits rose; but if +the cost of food, that is, the real wages, have since risen, then +one of the elements entering into cost of labor has risen, and +in so far will offset the fall of real wages; so that profits will +not gain so much as if rents had not risen. The result of this +first supposition, then, is, that the landlord is the chief gainer: +</p> + +<p> +I. (1.) Wages fall.<lb/> +(2.) Profits rise (less if rents rise).<lb/> +(3.) Rents rise. +</p> + +<p> +II. We will now take up the second supposition under A, +that while Capital is advancing Population remains stationary. +Then, of course (1), wages will rise; and, as there is no improvement +to cheapen the cost of their real wages, there will +be an increase in cost of labor to the capitalist, and (2) profits +will fall. If, now, the laborers, being better off, demand +more food, the new food would cost more, as the margin of +cultivation was pushed down, and (3) rents would inevitably +rise. But not only have the laborers received more real wages, +but since that change the cost, as just described, of these real +wages has increased. Therefore (2), profits would fall still +more than by the rise of real wages. In this supposition, consequently, +while the laborer gains, so does the landlord: +</p> + +<p> +II. (1.) Wages rise.<lb/> +(2.) Profits fall (more if rents rise).<lb/> +(3.) Rents rise. +</p> + +<p> +A. It is easy for us now to take into our view the total +effects under A, and see what the combined action of I and +<pb n='491'/><anchor id='Pg491'/> +II would be. That is, if both Capital and Population (improvements +remaining stationary) increase, what will be the +effect on Wages, Profits, and Rent? Of course, we must suppose +that Capital and Population just keep pace with each +other; and in that case (1) real wages remain the same, each +laborer receiving the same quantity and same quality of commodities +as before. Hence, if each laborer receives the same +quantity as before, and there are many more laborers, there +will be an increased demand put upon the soil for food, poorer +soils will be cultivated, and the cost of the products will rise. +So (3) rents rise. But if each laborer receives the same quantity +of real wages as before, and the cost of them has risen, as +just explained, an increased cost of labor will result which +must come out of profits. (2) Profits will fall. So that the +results of A upon distribution, taken separately from B, are +that the owner of capital loses; but the owner of land again +gains. +</p> + +<p> +A. (1.) Wages the same.<lb/> +(2.) Profits fall.<lb/> +(3.) Rents rise. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. The arts of production advancing, capital and population stationary.</head> + +<quote rend='display'> +<p> +Now, let us go back to our first general group of +causes, B—an advance in the arts of production (while capital +and population remain stationary). We can now study by +themselves the effect of improvements on wages, profits, and +rent. The general effects arising from the extended introduction +of machinery into agriculture and manufactures, the +lowered cost of transportation by steam, have been to lessen +the value of articles consumed chiefly by the laboring-classes. +For the sake of clearness, imagine that the improvement comes +suddenly. The first effect will be to lower the value and price +of articles entering into the real wages of the laborers; and, if +those consist mostly of food, there will be a rise in the margin +of cultivation and a fall in rents (3). It has been previously +shown<note place='foot'><ref target='Book_I_Chapter_IX'>Book I, Chap. +IX</ref></note> that improvements retard, or put back, the law of +diminishing returns from land (or in manufactures compensate +for it), and so lower rents. The poorest soil cultivated is now of +a better grade than before, and the produce is yielded at a less +cost and value; so that the land with which the best grades are +compared, to determine the rent, is not separated from the best +grades by so wide a gap. It would at first blush seem, then, +that the interests of the landlord were antagonistic to improvements, +since they lower rents; but, in practice, it is not so, as +we shall soon see. +</p> + +<p> +We have seen that improvements cheapen the price of articles +<pb n='492'/><anchor id='Pg492'/> +entering into the real wages of the laborer. Having had +a given sum as money wages before the change, then, when +the sudden change of improvements came, it lowered prices to +the laborer, and the same money wages bought more (1) real +wages. If nothing more happened, we could see that improvements +raised real wages—without lowering (2) profits (because +cost of labor remains the same, since the lowered cost of the +articles consumed was exactly in proportion to the increase of +real wages). And, if the laborers chose to retain this higher +standard, this would be the situation. Sadly enough, however, +in practice they are apt to be satisfied with the old standard; +and the amount of real wages to give the old standard of living +can be had now for less money wages. While only the +same number, without any increase, can live at the new (higher) +standard, a larger number can live at the old (lower) standard. +In short, the obstacles to an increase of population will be removed +by the possession of higher money wages. After a +generation, it is very probable that a larger number of laborers +will be in existence living at the same (or possibly a slightly +higher) standard of real wages, and money wages will have +fallen. +</p> + +<p> +Now we can understand better than before what would be +the practical result of the causes under B. (3.) Rent has fallen; +money wages have fallen (even if (2) real wages have not); +and, since real wages have not fallen in the proportion that +their cost has been reduced, (2) profits will have risen. The +general result of the causes under B alone, acting as just described, +will then be: +</p> + +<p> +B. (1.) Real wages remain the same; money wages less.<lb/> +(2.) Profits rise.<lb/> +(3.) Rents fall. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Theoretical results, if all three Elements progressive.</head> + +<quote rend='display'> +<p> +We have considered, on the one hand, under A, the +manner in which the distribution of the produce into rent, +profits, and wages is affected by the ordinary increase of Population +and Capital; and on the other, under B, how it is affected +by improvements in production, and more especially in agriculture, +as follows: +</p> + +<p> +A. (1.) Wages the same. B. (1.) Real wages the same, money wages less.<lb/> +A. (2.) Profits fall. B. (2.) Profits rise.<lb/> +A. (3.) Rents rise. B. (3.) Rents fall. +</p> + +<p> +The effects are clearly contrasted. Under A, we see a tendency +to a rise of rents (3), an increased cost of labor, and a fall +of profits (2); under B, a fall of rents (3), a diminished cost of +labor, and a rise of profits (2). We have, therefore, analyzed +<pb n='493'/><anchor id='Pg493'/> +the forces belonging to the progress of industry, and found two +distinct and antagonistic forces, working against each other. +If, at any period, improvements (B) advance faster than population +and capital (A), rent and money wages will tend downward +and profits upward. If, on the other hand, population +advances faster than improvements (B) either the laborers will +submit to a reduction in the quantity or quality of their food, +or, if not, rent and money wages will progressively rise, and +profits will fall. +</p> + +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Practical Results.</head> + +<quote rend='display'> +This, however, is not the final and practical result. +We have hitherto supposed that improvements, B, come suddenly. +In point of fact, agricultural skill is slowly diffused, +and inventions and discoveries are, in general, only occasional, +not continuous in their action, as is the increase of capital and +population. Inasmuch as it seldom happens that improvement +has so much the start of population and capital as actually to +lower rent, or raise the rate of profits, population almost everywhere +<q>treads close on the heels of agricultural improvement,</q> +and effaces its effects as fast as they are produced. +</quote> + +<p> +The reason why agricultural improvement seldom lowers +rent is, that it seldom cheapens food, but only prevents it +from growing dearer; and seldom, if ever, throws land out +of cultivation, but only enables worse and worse land to be +taken in for the supply of an increasing demand. What is +sometimes called the natural state of a country which is but +half cultivated, namely, that the land is highly productive, +and food obtained in great abundance by little labor, is only +true of unoccupied countries colonized by a civilized people. +In the United States the worst land in cultivation is of a high +quality (except sometimes in the immediate vicinity of markets +or means of conveyance, where a bad quality is compensated +by a good situation); and even if no further improvements +were made in agriculture or locomotion, cultivation +would have many steps yet to descend, before the increase +of population and capital would be brought to a stand; but +in Europe five hundred years ago, though so thinly peopled +in comparison to the present population, it is probable that +the worst land under the plow was, from the rude state of +agriculture, quite as unproductive as the worst land now cultivated, +and that cultivation had approached as near to the +ultimate limit of profitable tillage in those times as in the +<pb n='494'/><anchor id='Pg494'/> +present. What the agricultural improvements since made +have really done is, by increasing the capacity of production +of land in general, to enable tillage to extend downward to +a much worse natural quality of land than the worst which +at that time would have admitted of cultivation by a capitalist +for profit; thus rendering a much greater increase of capital +and population possible, and removing always a little and +a little further off the barrier which restrains them; population +meanwhile always pressing so hard against the barrier +that there is never any visible margin left for it to seize, +every inch of ground made vacant for it by improvement +being at once filled up by its advancing columns. Agricultural +improvement may thus be considered to be not so much +a counter-force conflicting with increase of population as a +partial relaxation of the bonds which confine that increase. +</p> + +<quote rend='display'> +Now, since improvements enable a much poorer quality of +land to be ultimately cultivated, under the constant pressure of +the increase of population and capital, improvements enable +rent (3) in the end to rise gradually to a much higher limit than +it could otherwise have attained. +</quote> + +<p> +If a great agricultural improvement were suddenly introduced, +it might throw back rent for a considerable space, leaving it +to regain its lost ground by the progress of population and +capital, and afterward to go on further. But taking place, +as such improvement always does, very gradually, it causes no +retrograde movement of either rent or cultivation; it merely +enables the one to go on rising, and the other extending, long +after they must otherwise have stopped. +</p> + +<quote rend='display'> +<p> +Inasmuch as, in point of fact, B never gets the start of A, +but follows along with A, the general result will be that which +we found true under A—a rise of rents (3), and increased cost +of labor to the capitalist, arising from an increased cost of laborers' +subsistence and a fall of profits (2). The effect of a more +rapid advance of improvements, at any one time, will temporarily +better the condition of the laborers and also raise +profits; but, if it is followed immediately by an increase of +population, the land-owners will reap the benefits of the improvement +in the rise of rent. The final result, then, is as follows: +</p> + +<pb n='495'/><anchor id='Pg495'/> + +<p> +(1.) Real wages, probably higher.<lb/> +(2.) Profits fall.<lb/> +(3.) Rents rise. +</p> + +<p> +It is possible that a different combination from the above +may sometimes occur in the causes which underlie the progress +of society: (1.) There may be a period in which capital is increasing +more rapidly than population, and when there seems +to be an era of industrial improvements also. Then both wages +and profits will be high, and it will be a period of general +satisfaction. (2.) If capital goes on increasing, but improvements +are few, wages will rise; but profits must suffer a fall. In +this country, where population has not yet increased so as to +press seriously against subsistence, and where capital increases +with incredible swiftness, these cases are often exemplified. +The extraordinary resources of the newer States have permitted +an unlimited increase of population, and capital has found no +difficulty in finding an investment. But yet those States which +have been burdened with the disabilities of the old slave +<foreign lang='fr' rend='italic'>régime</foreign> +are far behind the others. The changes in the rank of the +States, in respect of population, at each decade, as seen in Chart +No. XVI, are suggestive. +</p> + +<pb n='496'/><anchor id='Pg496'/> + +<p rend='text-align: center'> + <figure url='images/chartxvi.png' rend='width: 80%'> + <head>Chart XVI. <hi rend='italic'>Changes of the Rank of the States in +the Scale of Relative Population, from 1790 to 1880.</hi></head> + <figDesc>Illustration: Chart XVI.</figDesc> + </figure> +</p> + +</quote> + +</div> + +</div> + +<pb n='497'/><anchor id='Pg497'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_IV_Chapter_III'/> +<head>Chapter III. Of The Tendency Of Profits To A Minimum.</head> + +<div> +<index index='toc'/> +<head>§ 1. Different Theories as to the fall of Profits.</head> + +<p> +The tendency of profits to fall as society advances, +which has been brought to notice in the preceding chapter, +was early recognized by writers on industry and commerce; +but, the laws which govern profits not being then understood, +the phenomenon was ascribed to a wrong cause. Adam +Smith considered profits to be determined by what he called +the competition of capital. In Adam Smith's opinion, the +manner in which the competition of capital lowers profits is by +lowering prices; that being usually the mode in which an +increased investment of capital in any particular trade lowers +the profits of that trade. But, if this was his meaning, he +overlooked the circumstance that the fall of price, which, if +confined to one commodity, really does lower the profits of +the producer, ceases to have that effect as soon as it extends to +all commodities; because, when all things have fallen, nothing +has really fallen, except nominally; and, even computed in +money, the expenses of every producer have diminished as +much as his returns. Unless, indeed, labor be the one commodity +which has not fallen in money price, when all other +things have: if so, what has really taken place is a rise of +wages; and it is that, and not the fall of prices, which has +lowered the profits of capital. There is another thing which +escaped the notice of Adam Smith; that the supposed universal +fall of prices, through increased competition of capitals, +is a thing which can not take place. Prices are not determined +by the competition of the sellers only, but also by that +of the buyers; by demand as well as supply. The demand +which affects money prices consists of all the money in the +<pb n='498'/><anchor id='Pg498'/> +hands of the community destined to be laid out in commodities; +and, as long as the proportion of this to the commodities +is not diminished, there is no fall of general prices. Now, +howsoever capital may increase, and give rise to an increased +production of commodities, a full share of the capital will be +drawn to the business of producing or importing money, and +the quantity of money will be augmented in an equal ratio +with the quantity of commodities. For, if this were not the +case, and if money, therefore, were, as the theory supposes, +perpetually acquiring increased purchasing power, those who +produced or imported it would obtain constantly increasing +profits; and this could not happen without attracting labor +and capital to that occupation from other employments. If +a general fall of prices and increased value of money were +really to occur, it could only be as a consequence of increased +cost of production, from the gradual exhaustion of the mines. +</p> + +<p> +It is not tenable, therefore, in theory, that the increase +of capital produces, or tends to produce, a general decline of +money prices. Neither is it true that any general decline of +prices, as capital increased, has manifested itself in fact. The +only things observed to fall in price with the progress of society +are those in which there have been improvements in production, +greater than have taken place in the production of the +precious metals; as, for example, all spun and woven fabrics. +Other things, again, instead of falling, have risen in price, +because their cost of production, compared with that of gold +and silver, has increased. Among these are all kinds of food, +comparison being made with a much earlier period of history. +The doctrine, therefore, that competition of capital lowers +profits by lowering prices, is incorrect in fact, as well as +unsound in principle. +</p> + +<p> +Mr. Wakefield, in his Commentary on Adam Smith, and +his important writings on Colonization, takes a much clearer +view of the subject, and arrives, through a substantially correct +series of deductions, at practical conclusions which appear +to me just and important. Mr. Wakefield's explanation +of the fall of profits is briefly this: Production is limited not +<pb n='499'/><anchor id='Pg499'/> +solely by the quantity of capital and of labor, but also by the +extent of the <q>field of employment.</q> The field of employment +for capital is twofold: the land of the country, and the +capacity of foreign markets to take its manufactured commodities. +On a limited extent of land, only a limited quantity +of capital can find employment at a profit. As the quantity +of capital approaches this limit, profit falls; when the limit +is attained, profit is annihilated, and can only be restored +through an extension of the field of employment, either by +the acquisition of fertile land, or by opening new markets in +foreign countries, from which food and materials can be purchased +with the products of domestic capital.<note place='foot'>Mr. Mill +commended, as the most scientific treatment of the subject with +which he had met, an <q>Essay on the Effects of Machinery,</q> by William Ellis, +<q>Westminster Review,</q> January, 1826.</note> +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. What determines the minimum rate of Profit?</head> + +<p> +There is at every time and place some particular rate +of profit which is the lowest that will induce the people of +that country and time to accumulate savings, and to employ +those savings productively. This minimum rate of profit +varies according to circumstances. It depends on two elements: +One is the strength of the effective desire of accumulation; +the comparative estimate, made by the people of that +place and era, of future interests when weighed against present. +This element chiefly affects the inclination to save. +The other element, which affects not so much the willingness +to save as the disposition to employ savings productively, is +the degree of security of capital engaged in industrial operations. +In employing any funds which a person may possess +as capital on his own account, or in lending it to others to be +so employed, there is always some additional risk over and +above that incurred by keeping it idle in his own custody. +This extra risk is great in proportion as the general state of +society is insecure: it may be equivalent to twenty, thirty, +or fifty per cent, or to no more than one or two; something +however, it must always be; and for this the expectation of +profit must be sufficient to compensate. +</p> + +<pb n='500'/><anchor id='Pg500'/> + +<p> +There would be adequate motives for a certain amount +of saving, even if capital yielded no profit. There would be +an inducement to lay by in good times a provision for bad; +to reserve something for sickness and infirmity, or as a +means of leisure and independence in the latter part of life, +or a help to children in the outset of it. Savings, however, +which have only these ends in view, have not much tendency +to increase the amount of capital permanently in existence. +The savings by which an addition is made to the national +capital usually emanate from the desire of persons to improve +what is termed their condition in life, or to make a +provision for children or others, independent of their exertions. +Now, to the strength of these inclinations it makes a +very material difference how much of the desired object can +be effected by a given amount and duration of self-denial; +which again depends on the rate of profit. And there is in +every country some rate of profit below which persons in +general will not find sufficient motive to save for the mere +purpose of growing richer, or of leaving others better off +than themselves. Any accumulation, therefore, by which the +general capital is increased, requires as its necessary condition +a certain rate of profit—a rate which an average person will +deem to be an equivalent for abstinence, with the addition +of a sufficient insurance against risk. +</p> + +<p> +I have already observed that this minimum rate of profit, +less than which is not consistent with the further increase of +capital, is lower in some states of society than in others; and +I may add that the kind of social progress characteristic of +our present civilization tends to diminish it: (1.) In the +first place, one of the acknowledged effects of that progress +is an increase of general security. Destruction by wars and +spoliation by private or public violence are less and less to +be apprehended. The risks attending the investment of savings +in productive employment require, therefore, a smaller +rate of profit to compensate for them than was required a +century ago, and will hereafter require less than at present. +(2.) In the second place, it is also one of the consequences of +<pb n='501'/><anchor id='Pg501'/> +civilization that mankind become less the slaves of the moment, +and more habituated to carry their desires and purposes +forward into a distant future. This increase of providence +is a natural result of the increased assurance with +which futurity can be looked forward to; and is, besides, +favored by most of the influences which an industrial life +exercises over the passions and inclinations of human nature. +In proportion as life has fewer vicissitudes, as habits become +more fixed, and great prizes are less and less to be hoped for +by any other means than long perseverance, mankind become +more willing to sacrifice present indulgence for future objects. +But, though the minimum rate of profit is liable to +vary, and though to specify exactly what it is would at any +given time be impossible, such a minimum always exists; +and, whether it be high or low, when once it is reached, no +further increase of capital can for the present take place. +The country has then attained what is known to political +economists under the name of the stationary state. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. In old and opulent countries, profits habitually near to the minimum.</head> + +<p> +We now arrive at the fundamental proposition +which this chapter is intended to inculcate. When a country +has long possessed a large production, and a large net +income to make savings from, and when, therefore, the +means have long existed of making a great annual addition +to capital (the country not having, like America, a large reserve +of fertile land still unused), it is one of the characteristics +of such a country that the rate of profit is habitually +within, as it were, a hand's breadth of the minimum, and +the country, therefore, on the very verge of the stationary +state. My meaning is, that it would require but a short time +to reduce profits to the minimum, if capital continued to increase +at its present rate, and no circumstances having a tendency +to raise the rate of profit occurred in the mean time. +</p> + +<p> +In England, the ordinary rate of interest on government +securities, in which the risk is next to nothing, may be estimated +at a little more than three per cent: in all other investments, +therefore, the interest or profit calculated upon +(exclusively of what is properly a remuneration for talent +<pb n='502'/><anchor id='Pg502'/> +or exertion) must be as much more than this amount as is +equivalent to the degree of risk to which the capital is +thought to be exposed. Let us suppose that in England +even so small a net profit as one per cent, exclusive of insurance +against risk, would constitute a sufficient inducement +to save, but that less than this would not be a sufficient inducement. +I now say that the mere continuance of the +present annual increase of capital, if no circumstance occurred +to counteract its effect, would suffice in a small +number of years to reduce the rate of net profit to one per +cent. +</p> + +<p> +To fulfill the conditions of the hypothesis, we must suppose +an entire cessation of the exportation of capital for foreign +investment. We must suppose the entire savings of the +community to be annually invested in really productive employment +within the country itself, and no new channels +opened by industrial inventions, or by a more extensive substitution +of the best-known processes for inferior ones. +</p> + +<p> +The difficulty in finding remunerative employment every +year for so much new capital would not consist in any want +of a market. If the new capital were duly shared among +many varieties of employment, it would raise up a demand +for its own produce, and there would be no cause why any +part of that produce should remain longer on hand than +formerly. What would really be, not merely difficult, but +impossible, would be to employ this capital without submitting +to a rapid reduction of the rate of profit. +</p> + +<p> +As capital increased, population either would also increase, +or it would not. If it did not, wages would rise, and +a greater capital would be distributed in wages among the +same number of laborers. There being no more labor than +before, and no improvements to render the labor more efficient, +there would not be any increase of the produce; and, +as the capital, however largely increased, would only obtain +the same gross return, the whole savings of each year would +be exactly so much subtracted from the profits of the next +and of every following year. +</p> + +<pb n='503'/><anchor id='Pg503'/> + +<p rend='text-align: center'> + <figure url='images/capital-vessel.png' rend='width: 50%'> + <figDesc>Illustration.</figDesc> + </figure> +</p> + +<quote rend='display'> +This can be illustrated by supposing that the whole capital +is handed out to the producers in a vessel which is returned +full at the end of the period of production with the +original outlay, plus an advance called profit. B C represents +the total outlay, A C the total produce, and A B the profit on +B C. Now, since the conditions of production remain +the same, the same number of laborers can produce, +as before, no more than A C; even though in the +second year some of last year's profit, represented +by D B, is saved and added to the outlay by the +capitalist. If D C is now the outlay of capital, the +profit can only be A C, minus D C, or A D; that +is, the profit of the second year is diminished by +D B, exactly the amount of savings of the year before. And +this would be repeated each successive year, each saving added +to B C being <q>exactly so much subtracted from the profits +of the next and of every following year.</q> +</quote> + +<p> +It is hardly necessary to say that in such circumstances +profits would very soon fall to the point at which further increase +of capital would cease. An augmentation of capital, +much more rapid than that of population, must soon reach +its extreme limit, unless accompanied by increased efficiency +of labor (through inventions and discoveries, or improved +mental and physical education), or unless some of the idle +people, or of the unproductive laborers, became productive. +</p> + +<p> +If population did increase with the increase of capital +and in proportion to it, the fall of profits would still be inevitable. +Increased population implies increased demand +for agricultural produce. In the absence of industrial improvements, +this demand can only be supplied at an increased +cost of production, either by cultivating worse land, +or by a more elaborate and costly cultivation of the land +already under tillage. The cost of the laborer's subsistence +is therefore increased, and, unless the laborer submits to a +deterioration of his condition, profits must fall. In an old +country like England, if, in addition to supposing all improvement +in domestic agriculture suspended, we suppose +that there is no increased production in foreign countries for +the English market, the fall of profits would be very rapid. +If both these avenues to an increased supply of food were +<pb n='504'/><anchor id='Pg504'/> +closed, and population continued to increase, as it is said to +do, at the rate of a thousand a day, all waste land which +admits of cultivation in the existing state of knowledge +would soon be cultivated, and the cost of production and +price of food would be so increased that, if the laborers received +the increased money wages necessary to compensate +for their increased expenses, profits would very soon reach +the minimum. The fall of profits would be retarded if +money wages did not rise, or rose in a less degree; but the +margin which can be gained by a deterioration of the laborers' +condition is a very narrow one: in general, they <emph>can not</emph> +bear much reduction; when they can, they have also a higher +standard of necessary requirements, and <emph>will</emph> not. On the +whole, therefore, we may assume that in such a country as +England, if the present annual amount of savings were to +continue, without any of the counteracting circumstances +which now keep in check the natural influence of those savings +in reducing profit, the rate of profit would speedily attain +the minimum, and all further accumulation of capital +would for the present cease. +</p> + +<quote rend='display'> +Mr. Carey, on the other hand, asserts the existence of a law +of increasing returns from land, and that, while wages are +constantly increasing with the progress of society, there is a +diminution in the rate of profit, although the increasing returns +permit an increase of absolute, if not of proportional, profit. +That is, although wages increase more in proportion than profit, +there is still a larger gross amount to be divided among capitalists +as profit, out of a larger product. +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. —prevented from reaching it by commercial revulsions.</head> + +<p> +What, then, are these counteracting circumstances +which, in the existing state of things, maintain a tolerably +equal struggle against the downward tendency of profits, and +prevent the great annual savings which take place in this +country from depressing the rate of profit much nearer to +that lowest point to which it is always tending, and which, +left to itself, it would so promptly attain? The resisting +agencies are of several kinds. +</p> + +<p> +First among them is the waste of capital in periods of +overtrading and rash speculation, and in the commercial revulsions +<pb n='505'/><anchor id='Pg505'/> +by which such times are always followed. Mines +are opened, railways or bridges made, and many other works +of uncertain profit commenced, and in these enterprises much +capital is sunk which yields either no return, or none adequate +to the outlay. Factories are built and machinery +erected beyond what the market requires, or can keep in +employment. Even if they are kept in employment, the +capital is no less sunk; it has been converted from circulating +into fixed capital, and has ceased to have any influence +on wages or profits. Besides this, there is a great unproductive +consumption of capital during the stagnation which +follows a period of general overtrading. Establishments are +shut up, or kept working without any profit. Such are the +effects of a commercial revulsion; and that such revulsions +are almost periodical is a consequence of the very tendency +of profits which we are considering. By the time a few +years have passed over without a crisis, so much additional +capital has been accumulated that it is no longer possible to +invest it at the accustomed profit; all public securities rise +to a high price, the rate of interest on the best mercantile +security falls very low, and the complaint is general among +persons in business that no money is to be made. But the +diminished scale of all safe gains inclines persons to give a +ready ear to any projects which hold out, though at the risk +of loss, the hope of a higher rate of profit; and speculations +ensue, which, with the subsequent revulsions, destroy, or +transfer to foreigners, a considerable amount of capital, produce +a temporary rise of interest and profit, make room for +fresh accumulations, and the same round is recommenced. +</p> + +<p> +This, doubtless, is one considerable cause which arrests +profits in their descent to the minimum, by sweeping away +from time to time a part of the accumulated mass by which +they are forced down. But this is not, as might be inferred +from the language of some writers, the principal cause. If +it were, the capital of the country would not increase; but +in England it does increase greatly and rapidly. This is +shown by the increasing productiveness of almost all taxes, +<pb n='506'/><anchor id='Pg506'/> +by the continual growth of all the signs of national wealth, +and by the rapid increase of population, while the condition +of the laborers certainly is not on the whole declining.<note place='foot'>Although +their needs now attract more attention through the extension of +newspapers and cheap books, the condition of the laboring-class is certainly +better than it was fifty years ago. See Mr. Robert Giffen's <q>Progress of the +Working-Classes in the Last Half-Century</q> (1884), referred to in +<ref target='Book_IV_Chapter_V_Section_1'>Book IV, Chap. V, § 1</ref>.</note> +</p> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_IV_Chapter_III_Section_5'/> +<head>§ 5. —by improvements in Production.</head> + +<p> +This brings us to the second of the counter-agencies, +namely, improvements in production. These evidently have +the effect of extending what Mr. Wakefield terms the field +of employment, that is, they enable a greater amount of capital +to be accumulated and employed without depressing the +rate of profit; provided always that they do not raise, to a +proportional extent, the habits and requirements of the laborer. +If the laboring-class gain the full advantage of the +increased cheapness, in other words, if money wages do not +fall, profits are not raised, nor their fall retarded. But, if the +laborers people up to the improvement in their condition, +and so relapse to their previous state, profits will rise. All +inventions which cheapen any of the things consumed by the +laborers, unless their requirements are raised in an equivalent +degree, in time lower money wages, and, by doing so, enable +a greater capital to be accumulated and employed, before +profits fall back to what they were previously. +</p> + +<p> +Improvements which only affect things consumed exclusively +by the richer classes do not operate precisely in the +same manner. The cheapening of lace or velvet has no +effect in diminishing the cost of labor; and no mode can be +pointed out in which it can raise the rate of profit, so as to +make room for a larger capital before the minimum is attained. +It, however, produces an effect which is virtually +equivalent; it lowers, or tends to lower, the minimum itself. +In the first place, increased cheapness of articles of consumption +promotes the inclination to save, by affording to all consumers +a surplus which they may lay by, consistently with +their accustomed manner of living. In the next place, whatever +<pb n='507'/><anchor id='Pg507'/> +enables people to live equally well on a smaller income +inclines them to lay by capital for a lower rate of profit. If +people can live on an independence of [$1,000] a year in the +same manner as they formerly could on one of [$2,000], some +persons will be induced to save in hopes of the one, who +would have been deterred by the more remote prospect of +the other. All improvements, therefore, in the production +of almost any commodity tend in some degree to widen the +interval which has to be passed before arriving at the stationary +state. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 6. —by the importation of cheap Necessaries and Implements.</head> + +<p> +Equivalent in effect to improvements in production +is the acquisition of any new power of obtaining cheap commodities +from foreign countries. If necessaries are cheapened, +whether they are so by improvements at home or importation +from abroad, is exactly the same thing to wages +and profits. Unless the laborer obtains and, by an improvement +of his habitual standard, keeps the whole benefit, the +cost of labor is lowered and the rate of profit raised. As +long as food can continue to be imported for an increasing +population without any diminution of cheapness, so long the +declension of profits through the increase of population and +capital is arrested, and accumulation may go on without making +the rate of profit draw nearer to the minimum. And on +this ground it is believed by some that the repeal of the corn +laws has opened to [England] a long era of rapid increase of +capital with an undiminished rate of profit. +</p> + +<p> +Before inquiring whether this expectation is reasonable, +one remark must be made, which is much at variance with +commonly received notions. Foreign trade does not necessarily +increase the field of employment for capital. When +foreign trade makes room for more capital at the same +profit, it is by enabling the necessaries of life, or the habitual +articles of the laborer's consumption, to be obtained +at smaller cost. It may do this in two ways: by the importation +either of those commodities themselves, or of the means +and appliances for producing them. Cheap iron has, in a +certain measure, the same effect on profits and the cost of +<pb n='508'/><anchor id='Pg508'/> +labor as cheap corn, because cheap iron makes cheap tools for +agriculture and cheap machinery for clothing. But a foreign +trade, which neither directly nor by any indirect consequence +increases the cheapness of anything consumed by the laborers, +does not, any more than an invention or discovery in the +like case, tend to raise profits or retard their fall; it merely +substitutes the production of goods for foreign markets in +the room of the home production of luxuries, leaving the employment +for capital neither greater nor less than before. +</p> + +<p> +It must, of course, be supposed that, with the increase of +capital, population also increases; for, if it did not, the consequent +rise of wages would bring down profits, in spite of any +cheapness of food. Suppose, then, that the population of +Great Britain goes on increasing at its present rate, and demands +every year a supply of imported food considerably beyond +that of the year preceding. This annual increase in the +food demanded from the exporting countries can only be +obtained either by great improvements in their agriculture, or +by the application of a great additional capital to the growth +of food. The former is likely to be a very slow process, from +the rudeness and ignorance of the agricultural classes in the +food-exporting countries of Europe, while the British colonies +and the United States are already in possession of most of the +improvements yet made, so far as suitable to their circumstances. +There remains, as a resource, the extension of cultivation. +And on this it is to be remarked that the capital by +which any such extension can take place is mostly still to be +created. In Poland, Russia, Hungary, Spain, the increase of +capital is extremely slow. In America it is rapid, but not +more rapid than the population. The principal fund at present +available for supplying this country with a yearly increasing +importation of food is that portion of the annual savings +of America which has heretofore been applied to increasing +the manufacturing establishments of the United States, and +which free trade in corn may possibly divert from that purpose +to growing food for our market. This limited source of +supply, unless great improvements take place in agriculture, +<pb n='509'/><anchor id='Pg509'/> +can not be expected to keep pace with the growing demand +of so rapidly increasing a population as that of Great Britain; +and, if our population and capital continue to increase with +their present rapidity, the only mode in which food can continue +to be supplied cheaply to the one is by sending the +other abroad to produce it. +</p> + +<anchor id='Chart_XVII'/> +<p> +Chart XVII. +<hi rend='italic'>Grain-Crops of the United States.</hi> +</p> + +<table rend="latexcolumns: 'p{3cm} p{2cm}'; + tblcolumns: 'lw(10) lw(20)'"> +<row><cell>Year.</cell><cell>Bushels.</cell></row> +<row><cell>1865</cell><cell>1,127,499,187</cell></row> +<row><cell>1866</cell><cell>1,343,027,868</cell></row> +<row><cell>1867</cell><cell>1,329,729,400</cell></row> +<row><cell>1868</cell><cell>1,450,789,000</cell></row> +<row><cell>1869</cell><cell>1,491,412,100</cell></row> +<row><cell>1870</cell><cell>1,629,027,600</cell></row> +<row><cell>1871</cell><cell>1,528,776,100</cell></row> +<row><cell>1872</cell><cell>1,664,331,600</cell></row> +<row><cell>1873</cell><cell>1,538,892,891</cell></row> +<row><cell>1874</cell><cell>1,455,180,200</cell></row> +<row><cell>1875</cell><cell>2,032,235,300</cell></row> +<row><cell>1876</cell><cell>1,962,821,600</cell></row> +<row><cell>1877</cell><cell>2,178,934,646</cell></row> +<row><cell>1878</cell><cell>2,302,254,950</cell></row> +<row><cell>1879</cell><cell>2,434,884,541</cell></row> +<row><cell>1880</cell><cell>2,448,079,181</cell></row> +<row><cell>1881</cell><cell>2,699,394,496</cell></row> +<row><cell>1882</cell><cell>2,699,394,496</cell></row> +<row><cell>1883</cell><cell>2,623,319,089</cell></row> +</table> + +<quote rend='display'> +Not even Americans have any adequate knowledge of the +productive capacity of the United States. The grain-fields +are not yet all occupied; and we can easily produce the total +cotton consumption of the world on that quantity of land in +Texas alone by which the whole cultivable area of that State +exceeds the corresponding area of the empire of Austria-Hungary +(see Chart <ref target='Chart_XVIII'>No. XVIII</ref>, which shows the remarkable +proportion of land possessed by the United States as compared +with European countries); and the exports of agricultural +food from the United States are now six times what they +were in 1850, about the time when Mr. Mill made the above +statements. Immense areas of our soil have not yet been +<pb n='510'/><anchor id='Pg510'/> +broken by the plow, and the quantities of cereals grown in the +United States seem to be steadily increasing. In fact, the +greatest grain-crop yet grown in this country was that of 1882. +The comparison of the crops of late years with those just succeeding +the war (as seen in Chart <ref target='Chart_XVII'>No. XVII</ref>) shows a very suggestive +increase; since it indicates where employment has +been given to vast numbers of laborers, and where investment +has been found for our rapidly growing capital.<note place='foot'>A comparison +of Chart <ref target='Chart_XVII'>No. XVII</ref> with Chart +<ref target='Chart_VI'>No. VI</ref> will furnish some +means of learning whether the building of railways has gone on faster than is +warranted by the increase of our crops (see <hi rend='italic'>supra</hi>, pp. +<ref target='Pg138'>138</ref>).</note> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 7. —by the emigration of Capital.</head> + +<p> +This brings us to the last of the counter-forces which +check the downward tendency of profits in a country whose +capital increases faster than that of its neighbors, and whose +profits are therefore nearer to the minimum. This is, the +perpetual overflow of capital into colonies or foreign countries, +to seek higher profits than can be obtained at home. I +believe this to have been for many years one of the principal +causes by which the decline of profits in England has been +arrested. It has a twofold operation: In the first place, it +does what a fire, or an inundation, or a commercial crisis +would have done—it carries off a part of the increase of capital +from which the reduction of profits proceeds; secondly, +the capital so carried off is not lost, but is chiefly employed +either in founding colonies, which become large exporters of +cheap agricultural produce, or in extending and perhaps improving +the agriculture of older communities. +</p> + +<p> +In countries which are further advanced in industry and +population, and have therefore a lower rate of profit, than +others, there is always, long before the actual minimum is +reached, a practical minimum, viz., when profits have fallen +so much below what they are elsewhere that, were they to +fall lower, all further accumulations would go abroad. As +long as there are old countries where capital increases very +rapidly, and new countries where profit is still high, profits +in the old countries will not sink to the rate which would +put a stop to accumulation: the fall is stopped at the point +which sends capital abroad. +</p> + +</div> + +</div> + +<pb n='511'/><anchor id='Pg511'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Book_IV_Chapter_IV'/> +<head>Chapter IV. Consequences Of The Tendency Of Profits To A Minimum, +And The Stationary State.</head> + +<div> +<index index='toc'/> +<head>§ 1. Abstraction of Capital not necessarily a national loss.</head> + +<p> +The theory of the effect of accumulation on profits +must greatly abate, or rather, altogether destroy, in countries +where profits are low, the immense importance which used +to be attached by political economists to the effects which an +event or a measure of government might have in adding to +or subtracting from the capital of the country. We have +now seen that the lowness of profits is a proof that the spirit +of accumulation is so active, and that the increase of capital +has proceeded at so rapid a rate, as to outstrip the two counter-agencies, +improvements in production and increased supply +of cheap necessaries from abroad. A sudden abstraction +of capital, unless of inordinate amount, [would not] have +any real effect in impoverishing the country. After a few +months or years, there would exist in the country just as +much capital as if none had been taken away. The abstraction, +by raising profits and interest, would give a fresh +stimulus to the accumulative principle, which would speedily +fill up the vacuum. Probably, indeed, the only effect that +would ensue would be that for some time afterward less +capital would be exported, and less thrown away in hazardous +speculation. +</p> + +<p> +In the first place, then, this view of things greatly weakens, +in a wealthy and industrious country, the force of the +economical argument against the expenditure of public +money for really valuable, even though industriously unproductive, +purposes. In poor countries, the capital of the +country requires the legislator's sedulous care; he is bound +<pb n='512'/><anchor id='Pg512'/> +to be most cautious of encroaching upon it, and should favor +to the utmost its accumulation at home, and its introduction +from abroad. But in rich, populous, and highly cultivated +countries, it is not capital which is the deficient element, but +fertile land; and what the legislator should desire and promote, +is not a greater aggregate saving, but a greater return +to savings, either by improved cultivation, or by access to +the produce of more fertile lands in other parts of the +globe. +</p> + +<p> +The same considerations enable us to throw aside as unworthy +of regard one of the common arguments against emigration +as a means of relief for the laboring-class. Emigration, +it is said, can do no good to the laborers, if, in order to +defray the cost, as much must be taken away from the capital +of the country as from its population. If one tenth of +the laboring people of England were transferred to the colonies, +and along with them one tenth of the circulating capital +of the country, either wages, or profits, or both, would be +greatly benefited, by the diminished pressure of capital and +population upon the fertility of the land. The landlords +alone would sustain some loss of income; and even they, +only if colonization went to the length of actually diminishing +capital and population, but not if it merely carried off +the annual increase. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. In opulent countries, the extension of machinery not detrimental but +beneficial to Laborers.</head> + +<p> +From the same principles we are now able to arrive +at a final conclusion respecting the effects which machinery, +and generally the sinking of capital for a productive purpose, +produce upon the immediate and ultimate interests of +the laboring-class. The characteristic property of this class +of industrial improvements is the conversion of circulating +capital into fixed: and it was shown in the first +book<note place='foot'><ref target='Book_I_Chapter_V_Section_2'>Book I, +Chap. V, § 2</ref>.</note> that, +in a country where capital accumulates slowly, the introduction +of machinery, permanent improvements of land, and +the like, might be, for the time, extremely injurious; since +the capital so employed might be directly taken from the +<pb n='513'/><anchor id='Pg513'/> +wages fund, the subsistence of the people and the employment +for labor curtailed, and the gross annual produce of +the country actually diminished. But in a country of great +annual savings and low profits no such effects need be apprehended. +It merely draws off at one orifice what was already +flowing out at another; or, if not, the greater vacant +space left in the reservoir does but cause a greater quantity +to flow in. Accordingly, in spite of the mischievous derangements +of the money market which have been occasioned +by the great sums in process of being sunk in railways, I +can not agree with those who apprehend any mischief, from +this source, to the productive resources of the country. Not +on the absurd ground (which to any one acquainted with the +elements of the subject needs no confutation) that railway +expenditure is a mere transfer of capital from hand to hand, +by which nothing is lost or destroyed. This is true of what +is spent in the purchase of the land; a portion too of what is +paid to agents, counsels, engineers, and surveyors, is saved +by those who receive it, and becomes capital again: but what +is laid out in the <hi rend='italic'>bona fide</hi> construction of the railway itself +is lost and gone; when once expended, it is incapable of ever +being paid in wages or applied to the maintenance of laborers +again; as a matter of account, the result is, that so much +food and clothing and tools have been consumed, and the +country has got a railway instead. +</p> + +<p> +It already appears, from these considerations, that the +conversion of circulating capital into fixed, whether by railways, +or manufactories, or ships, or machinery, or canals, or +mines, or works of drainage and irrigation, is not likely, in +any rich country, to diminish the gross produce or the +amount of employment for labor. There is hardly any increase +of fixed capital which does not enable the country to +contain eventually a larger circulating capital than it otherwise +could possess and employ within its own limits; for there +is hardly any creation of fixed capital which, when it proves +successful, does not cheapen the articles on which wages are +habitually expended. +</p> + +<pb n='514'/><anchor id='Pg514'/> + +<quote rend='display'> +As regards the effects upon the material condition of the +wages-receiving class, since it seems clear that capital increases +faster than improvements, and probably faster even than population, +it follows that in countries where the laboring-classes +are evidently growing in intelligence, they gain in wages with +the progress of society. Such certainly seems to be the teaching +of Mr. Giffen's late studies (see +<ref target='Book_IV_Chapter_III_Section_5'>Book IV, Chap. III, § 5</ref>). +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Stationary state of wealth and population dreaded by some writers, but +not in itself undesirable.</head> + +<p> +Toward what ultimate point is society tending by its +industrial progress? When the progress ceases, in what condition +are we to expect that it will leave mankind? +</p> + +<p> +It must always have been seen, more or less distinctly, by +political economists, that the increase of wealth is not boundless; +that at the end of what they term the progressive state +lies the stationary state, that all progress in wealth is but a +postponement of this, and that each step in advance is an approach +to it. We have now been led to recognize that this +ultimate goal is at all times near enough to be fully in view; +that we are always on the verge of it, and that, if we have +not reached it long ago, it is because the goal itself flies before +us. The richest and most prosperous countries would +very soon attain the stationary state, if no further improvements +were made in the productive arts, and if there were a +suspension of the overflow of capital from those countries +into the uncultivated or ill-cultivated regions of the earth. +Adam Smith always assumes that the condition of the mass +of the people, though it may not be positively distressed, +must be pinched and stinted in a stationary condition of +wealth, and can only be satisfactory in a progressive state. +The doctrine that, to however distant a time incessant struggling +may put off our doom, the progress of society must +<q>end in shallows and in miseries,</q> far from being, as many +people still believe, a wicked invention of Mr. Malthus, was +either expressly or tacitly affirmed by his most distinguished +predecessors, and can only be successfully combated on his +principles. +</p> + +<p> +Even in a progressive state of capital, in old countries, a +conscientious or prudential restraint on population is indispensable, +to prevent the increase of numbers from outstripping +<pb n='515'/><anchor id='Pg515'/> +the increase of capital, and the condition of the classes +who are at the bottom of society from being deteriorated. +Where there is not, in the people, or in some very large proportion +of them, a resolute resistance to this deterioration—a +determination to preserve an established standard of comfort—the +condition of the poorest class sinks, even in a progressive +state, to the lowest point which they will consent to endure. +The same determination would be equally effectual +to keep up their condition in the stationary state, and would +be quite as likely to exist. +</p> + +<p> +I can not, therefore, regard the stationary state of capital +and wealth with the unaffected aversion so generally manifested +toward it by political economists of the old school. I +am inclined to believe that it would be, on the whole, a +very considerable improvement on our present condition. +</p> + +<p> +It is only in the backward countries of the world that +increased production is still an important object; in those +most advanced, what is economically needed is a better distribution, +of which one indispensable means is a stricter restraint +on population. On the other hand, we may suppose +this better distribution of property attained, by the +joint effect of the prudence and frugality of individuals, +and of a system of legislation favoring equality of fortunes, +so far as is consistent with the just claim of the individual +to the fruits, whether great or small, of his or her +own industry. We may suppose, for instance (according +to the suggestion thrown out in a former +chapter<note place='foot'><ref target='Book_II_Chapter_I_Section_6'>Book II, +Chap. I, § 6</ref>.</note>), a limitation +of the sum which any one person may acquire by +gift or inheritance, to the amount sufficient to constitute +a moderate independence. Under this twofold influence, +society would exhibit these leading features: a well-paid +and affluent body of laborers; no enormous fortunes, except +what were earned and accumulated during a single +lifetime; but a much larger body of persons than at present, +not only exempt from the coarser toils, but with sufficient +<pb n='516'/><anchor id='Pg516'/> +leisure, both physical and mental, from mechanical details, to +cultivate freely the graces of life, and afford examples of +them to the classes less favorably circumstanced for their +growth. This condition of society, so greatly preferable to +the present, is not only perfectly compatible with the stationary +state, but, it would seem, more naturally allied with that +state than with any other. +</p> + +<p> +There is room in the world, no doubt, and even in old +countries, for a great increase of population, supposing the +arts of life to go on improving, and capital to increase. But +even if innocuous, I confess I see very little reason for desiring +it. The density of population necessary to enable mankind +to obtain, in the greatest degree, all the advantages +both of co-operation and of social intercourse, has, in all the +most populous countries, been attained. If the earth must +lose that great portion of its pleasantness which it owes to +things that the unlimited increase of wealth and population +would extirpate from it, for the mere purpose of enabling it +to support a larger but not a better or a happier population, +I sincerely hope, for the sake of posterity, that they will be +content to be stationary, long before necessity compels them +to it. +</p> + +<p> +It is scarcely necessary to remark that a stationary condition +of capital and population implies no stationary state of +human improvement. Even the industrial arts might be as +earnestly and as successfully cultivated, with this sole difference, +that instead of serving no purpose but the increase of +wealth, industrial improvements would produce their legitimate +effect, that of abridging labor. Hitherto it is questionable +if all the mechanical inventions yet made have lightened +the day's toil of any human being. They have enabled a +greater population to live the same life of drudgery and imprisonment, +and an increased number of manufacturers and +others to make fortunes. They have increased the comforts +of the middle classes. +</p> + +<quote rend='display'> +<p> +The statement that inventions have not <q>lightened the day's +toil of any human being</q> has been persistently misquoted +<pb n='517'/><anchor id='Pg517'/> +by many persons and has been taken out of its connection. +Mr. Mill distinctly holds that the laborer's lot could have +been improved had there been any limitation of population; +that it is the constant growth of population as society progresses +which destroys the gains afforded to the laboring-classes +by improvements. But it is quite certain that the material +facts of Mr. Mill's statement are no longer true. In the +United States wages have risen, with an additional gain in +lower prices; and Mr. Giffen shows the same progress in England. +Moreover, travelers on the Continent speak of a similar +movement already noticeable there. Mr. Giffen's statement in +his comparison<note place='foot'><q>Progress of the Working-Classes +in the Last Half-Century</q> (1884), page 8.</note> with fifty years ago, is as follows: +</p> + +<p> +<q>While the money wages have increased as we have seen, +the hours of labor have diminished. It is difficult to estimate +what the extent of this diminution has been, but collecting one +or two scattered notices I should be inclined to say very nearly +20 per cent. There has been at least this reduction in the textile, +engineering, and house-building trades. The workman +gets from 50 to 100 per cent more money for 20 per cent less +work; in round figures he has gained from 70 to 120 per cent +in fifty years in money return. It is just possible, of course, +that the workman may do as much, or nearly as much, in the +shorter period as he did in his longer hours. Still, there is the +positive gain in his being less time at his task, which many of +the classes still tugging lengthily day by day at the oar would +appreciate.</q> +</p> +</quote> + +</div> + +</div> + +<pb n='518'/><anchor id='Pg518'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter V. On The Possible Futurity Of The Laboring-Classes.</head> + +<div> +<index index='toc'/> +<anchor id='Book_IV_Chapter_V_Section_1'/> +<head>§ 1. The possibility of improvement while Laborers remain merely receivers +of Wages.</head> + +<quote rend='display'> +<p> +There has probably never been a time when more attention +has been called to the material and social conditions of +the working-classes than in the last few years. The great increase +of literature and the extension of the newspaper has +brought to every reader, even where public and private charities +have not sent eye-witnesses into direct contact with distress, +a more explicit knowledge of the working-classes than +ever before. The revelation of existing poverty and misery is, +often wrongly, taken to be a proof of the increasing degradation +of the working-men, and the cause has been ascribed to the +grasping cruelty of capitalists. Instances of injustice arising +from the relations of employers and employed will occur so +long as human nature remains imperfect. But the world hopes +that some other relation than that of master and workman may +be evolved in which not only many admitted wrongs may be +avoided, but also new forces may be applied to raise the laborer +out of his dependence on other classes in the community. +</p> + +<p> +We are, at present, living under a +<foreign lang='fr' rend='italic'>régime</foreign> of private property +and competition. But certainly the progress of the laborer +is not that which can excite enthusiastic hopes for the future, +so long as he remains a mere receiver of wages. The progress +of industrial improvements has resulted, says Mr. Cairnes, in <q>a +temporary improvement of the laborer's condition, followed +by an increase of population and an enlarged demand for the +cheapened commodity.... Laborers' commodities, however, +are for the most part commodities of raw produce, or in which +the raw material constitutes the chief element of the value +(clothing is, in truth, the only important exception); and of +all such commodities it is the well-known law that an augmentation +of quantity can only be obtained, other things being +the same, at an increasing proportional cost. Thus, it has happened +that the gain in productiveness obtained by improved +processes has, after a generation, to a great extent been lost—lost, +<pb n='519'/><anchor id='Pg519'/> +that is to say, for any benefit that can be derived from +it in favor of wages and profits.... The large addition to +the wealth of the country has gone neither to profits nor to +wages, nor yet to the public at large [as consumers], but to +swell a fund ever growing even while its proprietors sleep—the +rent-roll of the owners of the soil.... The aggregate return +from the land has immensely increased; but the cost of +the costliest portion of the produce, which is that which determines +the price of the whole, remains pretty nearly as it was. +Profits, therefore, have not risen at all, and the real remuneration +of the laborer, taking the whole field of labor, in but a +slight degree—at all events in a degree very far from commensurate +with the general progress of industry.</q><note place='foot'><q>Leading +Principles,</q> pp. 278-280.</note> +</p> + +<p> +Under these conditions, it seems that the only hope of an +improvement for the laboring-classes lies in the limitation of +population—or at least in an increase of numbers less than the +increase of capital and improvements. It is possible, however, +that Mr. Cairnes, with many others, has failed to recognize the +full extent of the improvement which is taking place in the +wages of the laborer under the existing social order. Although +we hear much of the wrongs of the working-men—and they no +doubt exist—yet it is unquestionable that their condition has +vastly improved within the last fifty years; largely, in my opinion, +because improvements have outstripped population, and because +wide areas of fertile land in new and peaceful countries +have drawn off the surplus population in the older countries, +and because the available spots in the newer countries like the +United States have not yet been covered over with a population +sufficiently dense to keep real wages anything below a +relatively high standard. The facts to substantiate this opinion, +so far as regards Great Britain, are to be found in a recent +investigation<note place='foot'><q>Progress of the Working-Classes +in the Last Half-Century</q> (1884), being +his inaugural address as President of the London Statistical Society, November +20, 1883.</note> by Mr. Giffen, the statistician of the English +Board of Trade. For a very considerable reduction in hours +of daily labor, the workman now receives wages on an average +about 70 per cent higher than fifty years ago, as may be seen +by the following table: +</p> +</quote> + +<pb n='520'/><anchor id='Pg520'/> + +<table rend="latexcolumns: 'p{2.6cm} p{2cm} p{1.3cm} p{1.3cm} p{2cm}'; + tblcolumns: 'lw(15) lw(10) lw(10) lw(10) lw(10)'"> +<row><cell>Occupation.</cell><cell>Place.</cell> + <cell>Wages fifty years ago, per week.</cell> + <cell>Wages, present time, per week.</cell> + <cell>Increase or decrease, amount, per cent.</cell></row> +<row><cell>Carpenters</cell><cell>Manchester</cell><cell>24 0</cell> + <cell>34 0</cell><cell>10 0 (+) 42</cell></row> +<row><cell></cell><cell>Glasgow</cell><cell>14 0</cell><cell>26 0</cell> + <cell>12 0 (+) 85</cell></row> +<row><cell>Bricklayers</cell><cell>Manchester<note place='foot'>1825.</note></cell> + <cell>24 0</cell><cell>36 0</cell><cell>12 0 (+) 50</cell></row> +<row><cell></cell><cell>Glasgow</cell><cell>15 0</cell><cell>27 0</cell> + <cell>12 0 (+) 80</cell></row> +<row><cell>Masons</cell><cell>Manchester<note place='foot'>1825.</note></cell> + <cell>24 0</cell><cell>29 10</cell><cell>5 10 (+) 24</cell></row> +<row><cell></cell><cell>Glasgow</cell><cell>14 0</cell><cell>23 8</cell> + <cell>9 8 (+) 69</cell></row> +<row><cell>Miners</cell><cell>Staffordshire</cell><cell>2 8<note place='foot'>Wages +per day.</note></cell><cell>4 0<note place='foot'>Wages per day.</note></cell> + <cell>1 4 (+) 50</cell></row> +<row><cell>Pattern-weavers</cell><cell>Huddersfield</cell><cell>16 0</cell> + <cell>25 0</cell><cell>9 0 (+) 55</cell></row> +<row><cell>Wool-scourers</cell><cell>"</cell><cell>17 0</cell><cell>22 0</cell> + <cell>5 0 (+) 30</cell></row> +<row><cell>Mule-spinners</cell><cell>"</cell><cell>25 6</cell><cell>30 0</cell> + <cell>4 6 (+) 20</cell></row> +<row><cell>Weavers</cell><cell>"</cell><cell>12 0</cell><cell>26 0</cell> + <cell>14 0 (+) 115</cell></row> +<row><cell>Warpers and beamers</cell><cell>"</cell><cell>17 0</cell> + <cell>27 0</cell><cell>10 0 (+) 58</cell></row> +<row><cell>Winders and reelers</cell><cell>"</cell><cell>6 0</cell> + <cell>11 0</cell><cell>5 0 (+) 83</cell></row> +<row><cell>Weavers (men)</cell><cell>Bradford</cell><cell>8 3</cell> + <cell>20 6</cell><cell>12 3 (+) 150</cell></row> +<row><cell>Reeling and warping</cell><cell>"</cell><cell>7 9</cell><cell>15 6</cell> + <cell>7 9 (+) 100</cell></row> +<row><cell>Spinning (children)</cell><cell>"</cell><cell>4 5</cell><cell>11 6</cell> + <cell>7 1 (+) 160</cell></row> +</table> + +<quote rend='display'> +<p> +With increased wages, prices are not much higher than fifty +years ago. But the clearest evidence as to their bettered material +condition is to be found in the following table, which +shows the amount of food consumed per head by the total population +of Great Britain: +</p> + +<table rend="latexcolumns: 'p{3cm} p{2cm} p{2cm}'; + tblcolumns: 'lw(20) lw(10) lw(10)'"> +<row><cell>Articles.</cell><cell>1840.</cell><cell>1881.</cell></row> +<row><cell>Bacon and hams, Pounds.</cell><cell>0.01</cell><cell>13.93</cell></row> +<row><cell>Butter, Pounds.</cell><cell>1.05</cell><cell>6.36</cell></row> +<row><cell>Cheese, Pounds.</cell><cell>0.92</cell><cell>5.77</cell></row> +<row><cell>Currants and raisins, Pounds.</cell><cell>1.45</cell><cell>4.34</cell></row> +<row><cell>Eggs, No.</cell><cell>3.63</cell><cell>21.65</cell></row> +<row><cell>Potatoes, Pounds.</cell><cell>0.01</cell><cell>12.5</cell></row> +<row><cell>Rice, Pounds.</cell><cell>0.90</cell><cell>16.32</cell></row> +<row><cell>Cocoa, Pounds.</cell><cell>0.08</cell><cell>0.31</cell></row> +<row><cell>Coffee, Pounds.</cell><cell>1.08</cell><cell>0.89</cell></row> +<row><cell>Corn, wheat, and wheat-flour, Pounds.</cell><cell>42.47</cell> + <cell>216.92</cell></row> +<row><cell>Raw sugar, Pounds.</cell><cell>15.20</cell><cell>58.92</cell></row> +<row><cell>Refined sugar, Pounds.</cell><cell>Nil.</cell><cell>8.44</cell></row> +<row><cell>Tea, Pounds.</cell><cell>1.22</cell><cell>4.58</cell></row> +<row><cell>Tobacco, Pounds.</cell><cell>0.86</cell><cell>1.41</cell></row> +<row><cell>Wine, Gallons.</cell><cell>0.25</cell><cell>0.45</cell></row> +<row><cell>Spirits, Gallons.</cell><cell>0.97</cell><cell>1.08</cell></row> +<row><cell>Malt, Bushels.</cell><cell>1.59</cell><cell>1.91<note place='foot'>Year +1878.</note></cell></row> +</table> + +<p> +The question then at once arises, whether capital has been +shown by the statistics to have gained accordingly, or whether +there has been a proportionally less increase than in wages. +<pb n='521'/><anchor id='Pg521'/> +Says Mr. Giffen: <q>If the return to capital had doubled, as the +wages of the working-classes appear to have doubled, the aggregate +income of the capitalist classes returned to the income-tax +would now be £800,000,000 instead of £400,000,000.... +The capitalist, as such, gets a low interest for his money, and +the aggregate returns to capital is not a third part of the aggregate +income of the country, which may be put at not less than +£1,200,000,000.</q> It is found, moreover—as a suggestion that +property is more generally diffused—that while there were +25,368 estates entered to probate in 1838, of an average value +of £2,160 each, there were 55,359 estates in 1882 of an average +value of £2,500 each. +</p> + +<p> +But yet the vast increase of wealth made possible by improvements +and the growth of capital would have bettered the +condition of all still more had population been somewhat more +limited. As it is, the material gain has been large in spite of +an increase in the population from 16,500,000 in 1831 to nearly +30,000,000 in 1881. In other words, the landlords have been +great gainers, while the laborers have intercepted much more +than Mr. Cairnes supposed. +</p> + +<p> +There are at hand some very striking data relating to the +United States which point in the same direction as those of Mr. +Giffen. Charts No. <ref target='Chart_XIX'>XIX</ref> and +<ref target='Chart_XX'>XX</ref> show vividly how far the +increased productiveness of an industry, arising from greater +skill and greater efficiency of labor in the connection of improved +machinery, has enabled manufacturers to steadily lower +the price of their goods, and yet increase the wages paid to +their operatives. What was true of these two cotton-mills +was true of others within New England; for the rate of wages +paid by these mills was the rate current in the country in 1830 +and in 1884. While each spindle and loom has become vastly +more effective, we see by Chart No. <ref target='Chart_XIX'>XIX</ref> +that the average production +of each operative constantly increased from 4,321 yards +per year in 1830, to 28,032 yards in 1884; and this it was +which made possible the corresponding increase in the rate of +wages from $164 in 1830, to $290 in 1884. The sum of $290 a +year as an average for each operative, is a stipend too small to +cause any general satisfaction; but he must be gloomy indeed +who does not see that $290 is a cheerful possession as compared +with $164. There is, then, abundant ground for believing that +in the past fifty years the condition of the working-classes in +the United States has been materially improved. The diminishing +proportion of the price which goes to the capital is a +significant fact, and illustrates the tendency of profits to fall +with the increase of capital.<note place='foot'>These mills have +not been able to pay ten per cent regularly, +as mentioned in Chart No. <ref target='Chart_XIX'>XIX</ref>, +but it has merely been supposed that ten per cent were demanded +by capital, in order to show that, for such a dividend, it required a +diminishing proportion of the price to meet that estimate.</note> +The same truth seems to be +<pb n='522'/><anchor id='Pg522'/> +seen in the table given in a previous +chapter,<note place='foot'><ref target='Book_II_Chapter_V_Section_5'>Book II, +Chap. V, § 5</ref>; see also <q>North American Review,</q> May, 1884, p. +517.</note> where the wages +have been increased, but the hours have fallen per day from +thirteen to eleven since 1840. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_IV_Chapter_V_Section_2'/> +<head>§ 2.—through small holdings, by which the landlord's gain is shared.</head> + +<quote rend='display'> +<p> +So far we have considered the chances for improvement +in an industrial order in which the present separation of +capitalists from laborers is maintained. But this does not take +into account that future time when cultivation in the United +States shall be forced down upon inferior land, and no more +remains to be occupied, and when capital may no longer increase +as fast as population. What must be the ultimate outlook +for wages-receivers? Or, more practically, what is the +outlook now for those who are wages-receivers, and for whom +a more equitable distribution of the product seems desirable? +How can they escape the thralldom of dependence on the accumulations +of others? +</p> + +<p> +In this connection, and of primary importance, is the avenue +opened to all holders of small properties to share in the increase +which goes to owners of land. It has been seen that +owners of the soil constantly gain from the inevitable tendencies +of industrial progress. If one large owner gains, why should +not the increment be the same if ten owners held the property +instead of one? The more the land is subdivided, the more +the vast increase arising from rent will be shared by a larger +number. This, in my opinion, is the strongest reason for the +encouragement of small holdings in every country. The greater +the extension of small properties among the working-class, the +more will they gain a share of that part of the product which goes +to the owner of land by the persistent increase of population. +If, then, the gain arising from improvements is largely passed +to the credit of land-owners, as Mr. Cairnes believes, it should +be absolutely necessary to spread among the working-classes +the doctrine that if they own their own homes, and buy the +land they live on, to that extent will they <q>grow rich while +they sleep,</q> independently of their other exertions. Land worth +$500 to-day when bought by the savings of a laborer, besides +the self-respect<note place='foot'>For the influences of small +properties in restraining an undue increase of population, see +<hi rend='italic'>supra</hi>, p. <ref target='Pg119'>119</ref>. +For a more general account of the benefits arising +from such holdings, consult Mill's original work, Book II, Chaps. VI and +VII, and T. E. Cliffe Leslie's <q>Land Systems.</q></note> +it gives him, will increase in value with the +<pb n='523'/><anchor id='Pg523'/> +density of population, and become worth $600 or more without +other sacrifice of his. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. —through co-operation, by which the manager's wages are shared.</head> + +<quote rend='display'> +<p> +It will be found, however, that, of the various industrial +rewards, profits tend to diminish, meaning by <q>profits</q> +only the interest and insurance given for abstinence and risk in +the use of capital; but that the manager's wages (wages of superintendence) +are larger than is commonly supposed in relation +to other industrial rewards, owing to the position of monopoly +practically held by such executive ability as is competent to +successfully manage large business interests. To the laborer +this large payment to the manager seems to be paid for the +possession of capital. This we now know to be wrong. The +manager's wages are payments of exactly the same nature as +any laborer's wages. It makes no difference whether wages are +paid for manual or mental labor. The payment to capital, purely +as such, known as interest (with insurance for risk), is unmistakably +decreasing, even in the United States. And yet we see +men gain by industrial operations enormous rewards; but these +returns are in their essence solely manager's wages. For in +many instances, as hitherto discussed, we have seen that the +manager is not the owner of the capital he employs. To what +does this lead us? Inevitably to the conclusion that the laborer, +if he would become something more than a receiver of +wages, in the ordinary sense, must himself move up in the +scale of laborers until he reaches the skill and power also to +command manager's wages. The importance of this principle +to the working-man can not be exaggerated, and there flows +from it important consequences to the whole social condition +of the lower classes. It leads us directly to the means by +which the lower classes may raise themselves to a higher position—the +actual details of which, of course, are difficult, but, +as they are not included in political economy, they must be left +to sociology—and forms the essential basis of hope for any +proper extension of productive co-operation. In short, co-operation +owes its existence to the possibility of dividing the manager's +wages, to a greater or less degree, among the so-called +wages-receivers, or the <q>laboring-class.</q> And it is from this +point of view that co-operation is seen more truly and fitly +than in any other way. For it is to be said that in some of +its forms co-operation gives the most promising economic results +as regards the condition of the laborer which have yet +been reached in the long discussion upon the relations of labor +and capital. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Distributive Co-operation.</head> + +<quote rend='display'> +<p> +It will be my object, then, to describe the chief forms in +which the co-operative principle has manifested itself. These +may be said, in general, to be four: (1) distributive co-operation, +by which goods already produced are bought and sold to +<pb n='524'/><anchor id='Pg524'/> +members without the aid of retail dealers; (2) productive co-operation, +by which associations are formed for producing and +manufacturing goods for the market; (3) partial productive +co-operation in the form of industrial partnerships between laborers +and employers, without dispensing with the latter; and +(4) co-operative, or People's, banks. There are, of course, many +other forms in which the principle of co-operation has been +applied; but these four are probably the most characteristic. +</p> + +<p> +Distributive co-operation is at once the simplest and the +most successful form, not merely because it requires less for capital +than any other for its inception, but also because it calls +for less business and executive capacity. The number of persons +capable of managing a small retail store is vastly greater +than the class fit to assume control of the very complex duties +involved in the care of wholesale houses—or, at all events, of +mills and factories. Distributive co-operation has its origin in +the fact that the expenses of a middle-man between the producer +and consumer may be entirely dispensed with, and in +the fact that more capital had collected in the business of distribution +than could economically be so employed. Its educating +power on the men concerned in teaching them to save, +in showing the need of business methods, and in instilling the +elements of industrial management, is of no little importance. +It is, therefore, the best gateway to any further or more difficult +co-operative experiments—such experiments as can be attempted +only after the proper capital is saved, and the necessary +executive capacity is discovered, or developed by training. +In England co-operation began its history in distributive +stores, and has finally led to such a stimulus of self-help in the +laborer, that now co-operative gymnasiums, libraries, gardens, +and other results have proved the wisdom of calling upon the +laborers for their own exertions. Under the system which +separates employers and the employed, high wages are not +found to be the only boon which the receivers could wish; for +it is sometimes found that the best-paid workmen are the most +unwise and intemperate.<note place='foot'>Cf. E. L. Godkin, +<q>North American Review,</q> 1868, p. 150.</note> For the most ignorant and unskilled +of the workmen in the lowest strata the object would seem to +be to give not merely more wages, but give more in such a way +as might excite new and better motives, a desire as well as a +possibility of improvement. Self-help must be stimulated, not +deadened by stifling dependence on a class of superiors, or on +the state. The extraordinary growth of co-operation is one of +the most cheering signs of modern times. Distributive co-operation +originated in Rochdale, in England, about 1844, with +a few laborers desirous of saving themselves from the high +prices paid for poor provisions. By uniting, they purchased +<pb n='525'/><anchor id='Pg525'/> +tea by the chest, sugar by the hogshead, which they sold to +each member at market prices. They were surprised to find +a large profit by the operation, which they divided proportionally +to the capital subscribed. Others soon joined them; they +took a store-room, and in 1882 there were 10,894 members, with +a share capital of $1,576,215, and with realized profits in that +year of $162,885. They have erected expensive steam flour-mills, +and the society occupies eighteen branch establishments +in Rochdale. Libraries containing more than 15,000 volumes, +and classes in science, language, and the technical arts, attended +by 500 students, have been maintained. The extension of the +Rochdale store led to the necessity of a wholesale establishment +of their own. It is now a large institution with branches +in London and Newcastle. <q>It owns manufactories in London, +Manchester, Newcastle, Leicester, Durham, and Crumpsall; +and it has depots in Cork, Limerick, Kilmallock, Waterford, +Tipperary, Tralee, and Armagh, for the purchase of butter, potatoes, +and eggs. It has buyers in New York and Copenhagen, +and it owns two steamships. It has a banking department +with a turn-over of more than £12,000,000 annually.</q><note place='foot'>Fawcett, +<q>Manual of Political Economy</q> (last edition), chapter on Co-operation.</note> +</p> + +<p> +The following figures for England and Wales tell their own +story as to the progress of co-operation:<note place='foot'>Giffen, +<q>Progress of the Working-Classes in the Last Half-Century,</q> p. 19.</note> +</p> + +<table rend="latexcolumns: 'p{3cm} p{2cm} p{2cm}'; + tblcolumns: 'lw(20) lw(10) lw(10)'"> +<row><cell></cell><cell>1862.</cell><cell>1881.</cell></row> +<row><cell>Number of members</cell><cell>90,000</cell><cell>525,000</cell></row> +<row><cell>Capital: Share</cell><cell>428,000</cell><cell>5,881,000</cell></row> +<row><cell>Capital: Loan</cell><cell>55,000</cell><cell>1,267,000</cell></row> +<row><cell>Sales</cell><cell>2,333,000</cell><cell>20,901,000</cell></row> +<row><cell>Net profit</cell><cell>165,000</cell><cell>1,617,000</cell></row> +</table> + +<p> +Several persons each subscribe a sum to make up the share +capital of a store, and a person is selected to take charge of the +purchase and care of the goods. The advantages of the plan +are: (1) A division among the co-operators of all the net profits +of the retail trade; (2) a saving in advertisements, since members +are always purchasers without solicitation; (3) no loss by +bad debts, since only cash sales are permitted; and (4) security +against fraud as to the character of the goods, because there is +no inducement to make gains by adulterations. It is often +found that the capital is turned over ten times in the course of +a year; while the cost of management in the wholesale Rochdale +stores does not amount to one per cent on the returns. +</p> + +<pb n='526'/><anchor id='Pg526'/> + +<p> +The arrangement of obligations in due order of their priority, +which has been recommended by Mr. Holyoake,<note place='foot'><q>History +of Co-operation in England</q> (2 vols., 1879), p. 105.</note> is as +follows: of funds in the store, payment should be made, (1) of +the expenses of management; (2) of interest due on all loans; +(3) of an amount equivalent to ten per cent of the value of the +fixed stock to cover the annual depreciation from wear and +tear; (4) of dividends on the subscribed capital of the members;<note place='foot'>Mr. +Holyoake (<q>History of Co-operation in England,</q> p. 99) quotes as follows +from another's experience: <q>My own pass-book shows that I paid on November +3d, of last year (1860), £1 to become a member of a co-operative store. +I have paid nothing since, and I am now credited with £3 16<hi rend='italic'>s.</hi> +6<hi rend='italic'>d.</hi>, nearly three +hundred per cent on my capital in a single year. Of course, that arises from +my purchases having been large in proportion to my investment. In a co-operative +store you get five per cent upon the money which you invest as a +shareholder; and, if the store be well conducted, you will get seven and a half +per cent addition.</q></note> +(5) of such a sum as may be necessary for an extension +of the business; (6) of two and a half per cent of the remaining +profit, after all the above items are provided for, for educational +purposes; (7) of the residue, and that only, among all +the persons employed, and members of the store, in proportion +to the amount of their wages, or of their respective purchases +during the quarter.<note place='foot'>For a +full account of the proper steps to be taken in establishing a store, +with many practical details, see Charles Barnard's <q>Co-operation as a Business,</q> +p. 119.</note> The payment of dividends to customers +on their purchases seems now to be considered an essential element +of success. +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Productive Co-Operation.</head> + +<quote rend='display'> +<p> +Productive co-operation presents many serious difficulties, +the chief of which is the need of managing ability. +Some one in the association must know the wholesale markets +well, the expectation of crops connected with his materials +used, the proper time to buy; he must know the processes of +the special production thoroughly, the best machinery, the +best adaptation of labor to the given end; he must know the +whims of purchasers, and be ready to change his products accordingly—in +short, a man eminently fitted for success in his +own factory is essential to the profitable management of one +belonging to a body of co-operators. It has been already seen +how large a variation in profit is due to manager's wages; and +it is very often only his skill, prudence, and experience that +make the difference between a failure and a success in business. +Unless co-operators are willing to pay as large a sum +for the services of a good manager as he could get in his own +<pb n='527'/><anchor id='Pg527'/> +establishment, they can not secure the talent which will make +their venture succeed.<note place='foot'>Cf. Walker, +<q>Wages Question,</q> p. 276.</note> +</p> + +<p> +In France the national workshops of Louis Blanc, established +in 1848, were a failure. Nowhere has it been more +clearly seen that state help has been disastrous than in France, +where the Constituent Assembly voted 3,000,000 francs for co-operative +experiments, all of which failed. Curiously enough, +distributive co-operation has not succeeded in France, because, +owing to a wide-spread dislike of the wages system, workmen +will try nothing less than productive schemes. And their success +in this has been no greater than might be expected, when +inexperience is put to a task beyond its powers.<note place='foot'>Godkin, +<q>North American Review,</q> 1868.</note> +</p> + +<p> +In Great Britain and the United States there have been some +successful experiments in production; and Mr. Holyoake<note place='foot'><q>History +of Co-operation,</q> vol. ii, chap. ix.</note> holds +that, although workmen certainly do begrudge the manager's +salary, productive associations are possible when managed by +a board of elected directors. He urges, moreover, that, as in +distributive co-operation, if profits are shared with customers, +there will be insured both popularity and continuity of custom +without the cost of advertising, and such expenses as those +of travelers and commissions. The plan of actual operations +upon which successes have been reached in England seems to +be briefly this: (1) To save capital, chiefly through co-operative +associations; (2) to purchase or lease premises; (3) to +engage managers, accountants, and officers at the ordinary +salaries which such men can command in the market according +to their ability; (4) to borrow capital on the credit of +the association; (5) to pay upon capital subscribed by members +the same rate of interest as that upon borrowed capital; +(6) to regard as profit only that which remains after making +payment for rent, materials, wages, all business outlays, and +interest on capital; and (7) to divide the profits according to +the salaries of all officers, wages of workmen, and purchases of +customers. Those mills and factories which have sprung out +of the extension of distributive associations, as at Rochdale, +seem, and naturally so, to have been most successful. They +have gradually trained themselves somewhat for the work, and +their customers were beforehand secured. That is, where the +difficulties of the manager's function have been lessened, they +have a better chance of success. And yet it must be said that +productive associations will gain largely from the efficiency of +the labor when working for its own interest; and this is an important +consideration to be urged in favor of such associations. +</p> + +<pb n='528'/><anchor id='Pg528'/> +<p> +The Sun Mill,<note place='foot'>Holyoake, <q>History of Co-operation,</q> +p. 131.</note> at Oldham, England, was established for +spinning cotton in 1861 by the exertions of some co-operative +bodies. Beginning with a share capital of $250,000, and a loan +capital of a like amount, it set 80,000 spindles in operation. In +1874 they had a share capital of $375,000 (all subscribed except +$1,000), and an equal amount of loan capital, while the +whole plant was estimated as worth $615,000. Two and a half +per cent per annum has been set apart for the depreciation in +the value of the mill, and seven and a half per cent for the machinery; +so that in the first ten years a total sum of $160,000 +was set aside for depreciation of the property. The profits +have varied from two to forty per cent; and, while only five +per cent interest was paid on the loan capital, large dividends +were made on the share capital. During the last few years the +Sun Mill has on an average realized a profit of 12-½ per cent, +although it is known that the cotton trade has suffered during +this time from a serious depression. +</p> + +<p> +Many experiments, however, have proved failures; and sometimes, +when they are successful (as in the case of the Hatters' +Association in Newark, New Jersey<note place='foot'>Godkin, +<q>North American Review,</q> 1868.</note>), the workmen have no desire +to share their benefits with others, and practically form a +corporation by themselves. The mere fact that they do sometimes +succeed is an important thing. Then, too, they have an +opportunity of securing by salaries that executive ability in the +community which exists separate from the possession of capital. +And in these days, in large corporations, the manager is +not necessarily (although he often is) a large owner of capital. +The last annual report of the Co-operative Congress (1882) +shows the existence in England and Scotland of productive +associations for the manufacture of cloth, flannel, fustian, +hosiery, quilts, worsted, nails, watches, linen, and silk, as well +as those for engineering, printing, and quarrying; and these +were but a few of them.<note place='foot'>Pp. 27, 31, 32.</note> +</p> + +<p> +In the United States there have been some successes as well +as failures. In January, 1872, a number of machinists and +other working-men organized in the town of Beaver Falls, Pennsylvania, +a Co-operative Foundry Association for the manufacture +of stoves, hollow-ware, and fine castings. On a small capital +of only $4,000 they have steadily prospered, paid the market +rate of wages, and also paid annual dividends, over and above +all expenses and interest on the plant, of from twelve to fifteen +per cent. In 1867 thirty workmen started a co-operative foundry +in Somerset, Massachusetts, with a capital of about $14,000. +<pb n='529'/><anchor id='Pg529'/> +In the years 1874-1875 the company spent $5,400 for new +flasks and patterns, and yet showed a net gain of $11,914. In +1876 it had a capital of $30,000, and a surplus fund of +$28,924.<note place='foot'>Barnard, +<q>Co-operation as a Business,</q> pp. 150-152.</note> +</p> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 6. Industrial Partnership.</head> + +<quote rend='display'> +<p> +The difficulties of productive co-operation arising from +the need of skilled management, together with the existing unsatisfactory +relation between employers and laborers when +wholly separate from each other, have led to a most promising +plan of industrial partnership by which the manager retains +the control of the business operations, but shares his profits +with the workmen. The gain through increased efficiency, +greater economy, and superior workmanship, recoups the manager +for the voluntary subtraction from his share, and yet +the laborers receive an additional share; but more than this, +it educates the laborer in industrial methods, discloses the difficulties +of management, and stimulates him to saving habits +and greater regularity of work. This system is particularly +adapted to reaching those laborers who would not themselves +rise to the demands of productive co-operation. +</p> + +<p> +The principle was tried on one of the Belgian railways. +<q>Ninety-five kilogrammes of coke were consumed for every +league of distance run, but this was known to be more than +necessary; but how to remedy the evil was the problem. A +bonus of 3-½<hi rend='italic'>d.</hi> on every hectolitre of coke saved on this average +of ninety-five to the league was offered to the men concerned, +and this trifling bonus worked the miracle. The work was +done equally well, or better, with forty-eight kilogrammes of +coke instead of ninety-five; just one half, or nearly, saved by +careful work, at an expense of probably less than one tenth of +the saving.</q><note place='foot'>Holyoake, +<q>History of Co-operation,</q> p. 235.</note> +</p> + +<p> +The experiment which has attracted most attention in the +past has been that of the Messrs. Briggs, at their collieries in +Yorkshire, England.<note place='foot'>See Thornton, +<q>On Labor,</q> p. 370. Also see <q>Parliamentary Documents,</q> +1868, 1869, xxxi; <q>Trades-Unions of England,</q> by the Count de Paris; Brassey's +<q>Work and Wages,</q> chap. xiii.</note> The relations between the owners and +the laborers were as bad as they could well be. <q>All coal-masters +is devils, and Briggs is the prince of devils,</q> ran the +talk of the miners, when they did not choose to send letters +threatening to shoot the owners. In 1865 Messrs. Briggs tried +the plan of an industrial partnership with their men, purely +from business considerations. Seventy per cent of the cost of +raising coal consisted of wages, and fully fifteen per cent of +materials which were habitually wasted. The whole property +<pb n='530'/><anchor id='Pg530'/> +was valued, and divided into shares of $50 each, of which the +owners retained two thirds, together with the control of the business. +The remaining one third of the shares was offered to +the employés. If any subscriber was too poor to pay $50 for a +share, the subsequent dividends and payments were to be applied +to purchasing the share. After reserving a fair allowance +for expenses, like the redemption of capital, whenever the remaining +profits exceeded ten per cent on the capital, that excess +was to be divided into two equal parts, one of which was +to be distributed among all persons employed by the company +in proportion to their wages, and the other was to be retained +by the capital. In previous years but once had they made ten +per cent profit on their capital, and twice only five per cent. +In the first year after the new system came into operation, the +total profits were fourteen per cent, and the four per cent of +excess was divided, two to the laborers' bonus, and two to the +capital, so that capital received twelve per cent. In the second +year the profits were sixteen per cent, in the third year seventeen +per cent; the first year the work-people received in addition +to their wages $9,000, in the second $13,500, in the third +$15,750. The moral effect was striking. Work was done +regularly, forbearance was exercised, habits improved, and the +faces of the men were set toward improvement in life. The +scheme worked successfully for years, but was finally ended +by the pressure of the outside trades-unions, who compelled the +workmen to give up the arrangement. +</p> + +<p> +A similar experiment was tried by the Messrs. Brewster, +carriage-manufacturers, of New York. They offered to their +workmen ten per cent of their profits, before any allowance +was made for interest on the capital invested, or before any +payment was made for the services of the firm as managers. +In one year as much as $11,000 was divided among the laborers. +Again, as in the case of the Briggs colliery, the experiment +was brought to an end by an unreasoning submission to +the pressure of outside workmen during a strike.<note place='foot'>See Walker, +<q>Wages Question,</q> p. 283. Also see Mill, Book IV, Chap. +VII, § 5, for an account of M. Leclaire's experiments in France with +house-painters.</note> +</p> + +<p> +But, all in all, industrial partnership<note place='foot'><p>See also +Von Böhmert, <q>Gewinnbetheiligung,</q> second edition, 1878, and +Jevons's <q>Methods of Social Reform</q> (1883). Professor Jevons (<q>The State in +Relation to Labor,</q> pp. 146, 147) has given a brief bibliography, which I reproduce +here: +</p> +<p> +Charles Babbage, <q>Economy of Manufactures,</q> chap. xxvi; H. C. Briggs, +<q>Social Science Association,</q> 1869; H. C. and A. Briggs, <q>Evidence before +the Trades-Union Commission,</q> March 4, 1868, Questions 12,485 to 12,753 +[Parliamentary Documents]; <q>The Industrial Partnerships Record</q>; Pare, +<q>Co-operative Agriculture</q> (Longmans) 1870; Jean Billon, <q>Participation des +Ouvriers aux Bénéfices des Patrons,</q> Genève, 1877; Fougerousse, <q>Patrons et +Ouvriers de Paris</q> (Chaix), 1880; Sedley Taylor, <q>Society of Arts Journal,</q> +February 18, 1881, vol. xxix, pp. 260-270; also in <q>Nineteenth Century,</q> May, +1881, pp. 802-811, <q>On Profit-Sharing</q>; J. C. Van Marken, <q>La Question +Ouvrière: Essai de Solution Pratique</q> (Chaix) 1881.</p></note> offers a great field for +<pb n='531'/><anchor id='Pg531'/> +that kind of improvement which is worth more than a mere +increase of wages, and seems to make it possible to reach the +heavy weight of sluggishness among the lower and more hopeless +strata of society. And it is possible that it will stir in +them the powers which may afterward find employment in +the harder problems of productive co-operation.<note place='foot'>In his +last edition of his <q>Manual,</q> Professor Fawcett thus describes a +co-operative experiment in agriculture: <q>The one that has attracted the most +attention was made nearly forty years since by Mr. Gurdon, on his estate at +Assington, near Sudbury, in Suffolk. Mr. Gurdon was so much impressed with +the miserable condition of the agricultural laborers who were employed on his +estate, that he was prompted to do something on their behalf. When, therefore, +one of his farms became vacant, he offered to let it at the ordinary rent, +£150 a year, to the laborers who worked upon it. As they, of course, had not +sufficient capital to cultivate it, he in the first instance loaned them the requisite +stock and implements. The laborers were, in fact, formed into a company in +which there were eleven shares, and no laborer was permitted to hold more +than one share. The plan was so eminently successful that in a few years sufficient +had been saved out of the profits to repay all that had been advanced, +and the stock and implements became the property of the laborers. Each +share greatly increased in value. Mr. Gurdon was so much encouraged, not +only by the pecuniary advantages secured to the laborers, but also by the general +improvement effected in their condition, that some years afterward he let +another and a larger farm on similar terms. Although no statement of accounts +has ever been published, the remarkable pecuniary advantages secured +to the laborers is proved by the fact that, after enjoying at least as high wages +as were paid in the district, they were able in a few years to become the owners +of a valuable property, consisting of the stock and implements on the farms. +One of the most significant and hopeful circumstances connected with the +experiment is, that it was not carried out by a picked body of men; and if so +much could be done by laborers who were probably among the worst educated +in the country, it maybe fairly concluded, that when the intelligence of our rural +population has been better developed, co-operation may be applied in a more +complete form to agriculture, and with even more striking results than were +obtained at Assington.... In the description which has been frequently given +of the system of peasant proprietorship, it is shown how powerfully the industry +of the laborer is stimulated by the feeling of property. When he cultivates +his own plot of ground, he exerts himself to the utmost, because he knows that +he will enjoy all that is yielded by his labor. Each year, with the extended use +of machinery in agriculture, it is becoming more advantageous to carry on farming +on a large scale. When, therefore, co-operative agriculture becomes practicable, +land may be cultivated by associations of laborers, and thus many of the +advantages associated with the system of peasant proprietorship may be secured, +while at the same time the disadvantages of small farming may be avoided. The +progress toward co-operative agriculture will no doubt be slow and gradual.</q></note> +</p> + +</quote> + +</div> + +<pb n='532'/><anchor id='Pg532'/> + +<div> +<index index='toc'/> +<head>§ 7. People's Banks.</head> + +<quote rend='display'> +<p> +In Germany the struggle between the two theories—self-help +and state-help—was fought out by Schultze-Delitsch—that +is, Schultze of Delitsch, a town in Saxony—and Lasalle, and +the victory given to the former. Schultze-Delitsch, as a consequence, +was successful in directing the co-operative principle in +Germany to giving workmen credit in purchasing tools, etc., +when he had no security but his character. This form of co-operation +works to give the energetic and industrious workmen +a lever by which, through the possession of credit, they can +raise themselves to the position of small capitalists, and thus +widen the field of possible improvement. While the former +schemes of co-operation described above have given the wages-receivers +a share of the unearned increment from land, and +tend to give them a share of the manager's wages, the plan of +Schultze was to assist them to gain a share in the advantages +belonging to the possession of capital. The capital was to be +accumulated by their own exertions, and, in his scheme depended +on the principle of self-help. The following is the plan of +banks adopted: +</p> + +<p> +<q>Every member is obliged to make a certain weekly payment +into the common stock. As soon as it reaches a certain +sum he is allowed to raise a loan exceeding his share in the inverse +ratio of the amount of his deposit. For instance, after +he has deposited one dollar, he is allowed to borrow five or six; +but, if he had deposited twenty dollars, he is allowed only to +borrow thirty. The security he is compelled to offer is his own +and that of two other members of the association, who become +jointly and severally liable. He may have no assets whatever +beyond the amount of his deposits, nor may his guarantors; +the bank relies simply on the character of the three, and the +two securities rely on the character of their principal; and the +remarkable fact is, that the security has been found sufficient, +that the interest of the men in the institutions and the fear of +the opinion of their fellows has produced a display of honesty +and punctuality such as perhaps is not to be found in the history +of any other banking institutions. Such is the confidence +inspired by these institutions that they hold on deposit, or as +loans from third parties, an amount exceeding by more than +three fourths the total amount of their own capital. The +<pb n='533'/><anchor id='Pg533'/> +monthly contributions of the members may be as low as ten +cents, but the amount which each member is allowed to have +in some banks is not more than seven or eight dollars, in none +more than three hundred dollars. He has a right to borrow to +the full amount of his deposit without giving security; if he +desires to borrow a larger sum, he must furnish security in the +manner we have described. The liability of the members is +unlimited. The plan of limiting the liability to the amount +of the capital deposited was tried at first, but it inspired no +confidence, and the enterprise did not succeed till every member +was made generally liable. Each member, on entering, is +obliged to pay a small fee, which goes toward forming or +maintaining a reserve fund, apart from the active capital. The +profits are derived from the interest paid by borrowers, which +amounts to from eight to ten per cent, which may not sound +very large in our ears, but in Germany is very high. Not over +five per cent is paid on capital borrowed from outsiders. All +profits are distributed in dividends among the members of the +association, in the proportion of the amount of their deposits—after +the payment of the expenses of management, of course—and +the apportionment of a certain percentage to the reserve-fund. +Every member, as we have said, has a right to borrow +to the extent of his deposit without security; but then, if he +seeks to borrow more, whether he shall obtain any loan, and, if +so, how large a one, is decided by the board of management, +who are guided in making their decision just as all bank officers +are—by a consideration of the circumstances of the bank +as well as those of the borrower. All the affairs of the association +are discussed and decided in the last resort by a general +assembly composed of all the members.</q><note place='foot'>Godkin, +<q>North American Review,</q> 1868. Also see Hermann Schultze-Delitsch, +<q>Die Entwickelung des Genossenschaftswesens in Deutschland</q> (1870). +This eminent philanthropist died April 29, 1883. For other forms of co-operation, +building associations, etc., see Barnard, <q>Co-operation as a Business</q>; +Pajot, <q>Du Progrès par les Sociétés de Secours Mutuels</q> (1878).</note> +The main part of +the capital loaned by the banks is obtained from outside sources +on the credit of the associations. In 1865 there were 961 +of these institutions in Germany; in 1877 there were 1,827, +with over 1,000,000 members, owning $40,000,000 of capital, +with $100,000,000 more on loan, and doing a business of +$550,000,000.<note place='foot'>See <q>Economics +of Industry,</q> by Mr. and Mrs. Marshall, p. 223.</note> +</p> +</quote> + +</div> + +</div> + +</div> + +<pb n='537'/><anchor id='Pg537'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Book V. On The Influence Of Government.</head> + +<div> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter I. On The General Principles Of Taxation.</head> + +<div> +<index index='toc'/> +<head>§ 1. Four fundamental rules of Taxation.</head> + +<p> +One of the most disputed questions, both in political +science and in practical statesmanship at this particular period, +relates to the proper limits of the functions and agency +of governments. +</p> + +<p> +We shall first consider the economical effects arising from +the manner in which governments perform their necessary +and acknowledged functions. +</p> + +<p> +We shall then pass to certain governmental interferences +of what I have termed the optional kind (i.e., overstepping +the boundaries of the universally acknowledged functions) +which have heretofore taken place, and in some cases still +take place, under the influence of false general theories. +</p> + +<p> +The first of these divisions is of an extremely miscellaneous +character: since the necessary functions of government, +and those which are so manifestly expedient that they have +never or very rarely been objected to, are too various to be +brought under any very simple classification. We commence, +[under] the first head, with the theory of Taxation. +</p> + +<p> +The qualities desirable, economically speaking, in a +system of taxation, have been embodied by Adam Smith in +four maxims or principles, which, having been generally concurred +in by subsequent writers, may be said to have become +<pb n='538'/><anchor id='Pg538'/> +classical, and this chapter can not be better commenced than +by quoting them:<note place='foot'><q>Wealth of Nations,</q> Book V, chap. ii.</note> +</p> + +<p> +<q rend='pre'>1. The subjects of every state ought to contribute to the +support of the government, as nearly as possible in proportion +to their respective abilities: that is, in proportion to the +revenue which they respectively enjoy under the protection of +the state. In the observation or neglect of this maxim consists +what is called the equality or inequality of taxation.</q> +</p> + +<p> +<q rend='pre'>2. The tax which each individual is bound to pay ought +to be certain, and not arbitrary. The time of payment, the +manner of payment, the quantity to be paid, ought all to be +clear and plain to the contributor, and to every other person. +The certainty of what each individual ought to pay is, in taxation, +a matter of so great importance, that a very considerable +degree of inequality, it appears, I believe, from the experience +of all nations, is not near so great an evil as a very +small degree of uncertainty.</q> +</p> + +<p> +<q rend='pre'>3. Every tax ought to be levied at the time, or in the +manner, in which it is most likely to be convenient for the +contributor to pay it. Taxes upon such consumable goods as +are articles of luxury are all finally paid by the consumer, +and generally in a manner that is very convenient to him. +He pays them little by little, as he has occasion to buy the +goods. As he is at liberty, too, either to buy or not to buy, +as he pleases, it must be his own fault if he ever suffers any +considerable inconvenience from such taxes.</q> +</p> + +<p> +<q>4. Every tax ought to be so contrived as both to take +out and to keep out of the pockets of the people as little as +possible over and above what it brings into the public treasury +of the state. A tax may either take out or keep out of the +pockets of the people a great deal more than it brings into +the public treasury in the four following ways: First, the +levying of it may require a great number of officers, whose +salaries may eat up the greater part of the produce of the tax, +and whose perquisites may impose another additional tax upon +<pb n='539'/><anchor id='Pg539'/> +the people.</q> Secondly, it may divert a portion of the labor +and capital of the community from a more to a less productive +employment. <q>Thirdly, by the forfeitures and other +penalties which those unfortunate individuals incur who +attempt unsuccessfully to evade the tax it may frequently +ruin them, and thereby put an end to the benefit which the +community might have derived from the employment of their +capitals. An injudicious tax offers a great temptation to +smuggling. Fourthly, by subjecting the people to the frequent +visits and the odious examination of the tax-gatherers it +may expose them to much unnecessary trouble, vexation, and +oppression</q>: to which may be added that the restrictive +regulations to which trades and manufactures are often subjected, +to prevent evasion of a tax, are not only in themselves +troublesome and expensive, but often oppose insuperable obstacles +to making improvements in the processes. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Grounds of the principle of Equality of Taxation.</head> + +<p> +The first of the four points, equality of taxation, +requires to be more fully examined, being a thing often imperfectly +understood, and on which many false notions have +become to a certain degree accredited, through the absence of +any definite principles of judgment in the popular mind. +</p> + +<p> +For what reason ought equality to be the rule in matters +of taxation? For the reason that it ought to be so in +all affairs of government. A government ought to make no +distinction of persons or classes in the strength of their claims +on it. If any one bears less than his fair share of the burden, +some other person must suffer more than his share. +Equality of taxation, therefore, as a maxim of politics, means +equality of sacrifice. It means apportioning the contribution +of each person toward the expenses of government, so that +he shall feel neither more nor less inconvenience from his +share of the payment than every other person experiences +from his. There are persons, however, who regard the taxes +paid by each member of the community as an equivalent +for value received, in the shape of service to himself; and +they prefer to rest the justice of making each contribute in +proportion to his means upon the ground that he who has +<pb n='540'/><anchor id='Pg540'/> +twice as much property to be protected receives, on an accurate +calculation, twice as much protection, and ought, on the +principles of bargain and sale, to pay twice as much for it. +Since, however, the assumption that government exists solely +for the protection of property is not one to be deliberately +adhered to, some consistent adherents of the <hi rend='italic'>quid pro quo</hi> +principle go on to observe that protection being required for +persons as well as property, and everybody's person receiving +the same amount of protection, a poll-tax of a fixed sum per +head is a proper equivalent for this part of the benefits of +government, while the remaining part, protection to property, +should be paid for in proportion to property. But, in the +first place, it is not admissible that the protection of persons +and that of property are the sole purposes of government. In +the second place, the practice of setting definite values on +things essentially indefinite, and making them a ground of +practical conclusions, is peculiarly fertile in the false views +of social questions. It can not be admitted that to be protected +in the ownership of ten times as much property is to +be ten times as much protected. If we wanted to estimate +the degrees of benefit which different persons derive from +the protection of government, we should have to consider +who would suffer most if that protection were withdrawn: to +which question, if any answer could be made, it must be, that +those would suffer most who were weakest in mind or body, +either by nature or by position. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Should the same percentage be levied on all amounts of Income?</head> + +<p> +Setting out, then, from the maxim that equal sacrifices +ought to be demanded from all, we have next to inquire +whether this is in fact done, by making each contribute the +same percentage on his pecuniary means. Many persons +maintain the negative, saying that a tenth part taken from a +small income is a heavier burden than the same fraction deducted +from one much larger; and on this is grounded the +very popular scheme of what is called a graduated property-tax, +viz., an income-tax in which the percentage rises with +the amount of the income. +</p> + +<p> +On the best consideration I am able to give to this question, +<pb n='541'/><anchor id='Pg541'/> +it appears to me that the portion of truth which the +doctrine contains arises principally from the difference between +a tax which can be saved from luxuries and one which +trenches, in ever so small a degree, upon the necessaries of +life. To take a thousand a year from the possessor of ten +thousand would not deprive him of anything really conducive +either to the support or to the comfort of existence; and, +if such <emph>would</emph> be the effect of taking five pounds from one +whose income is fifty, the sacrifice required from the last is +not only greater than, but entirely incommensurable with, +that imposed upon the first. The mode of adjusting these +inequalities of pressure which seems to be the most equitable +is that recommended by Bentham, of leaving a certain minimum +of income, sufficient to provide the necessaries of life, +untaxed. Suppose [$250] a year to be sufficient to provide +the number of persons ordinarily supported from a single income +with the requisites of life and health, and with protection +against habitual bodily suffering, but not with any indulgence. +This then should be made the minimum, and incomes +exceeding it should pay taxes not upon their whole amount, +but upon the surplus. If the tax be ten per cent, an income +of [$300] should be considered as a net income of [$50], and +charged with [$5] a year, while an income of [$5,000] should +be charged as one of [$4,750]. An income not exceeding +[$250] should not be taxed at all, either directly or by taxes +on necessaries; for, as by supposition this is the smallest +income which labor ought to be able to command, the government +ought not to be a party to making it smaller. +</p> + +<p> +Both in England and on the Continent a graduated property-tax +(<foreign lang='fr' rend='italic'>l'impôt progressif</foreign>) has been advocated, on the +avowed ground that the state should use the instrument of +taxation as a means of mitigating the inequalities of wealth. +I am as desirous as any one that means should be taken to +diminish those inequalities, but not so as to relieve the prodigal +at the expense of the prudent. To tax the larger incomes +at a higher percentage than the smaller is to lay a tax on +industry and economy; to impose a penalty on people for +<pb n='542'/><anchor id='Pg542'/> +having worked harder and saved more than their neighbors. +It is not the fortunes which are earned, but those which are +unearned, that it is for the public good to place under limitation. +With respect to the large fortunes acquired by gift or +inheritance, the power of bequeathing is one of those privileges +of property which are fit subjects for regulation on +grounds of general expediency; and I have already +suggested,<note place='foot'><ref target='Book_II_Chapter_I_Section_6'>Book II, +Chap. I, § 6</ref>.</note> +as the most eligible mode of restraining the accumulation +of large fortunes in the hands of those who have +not earned them by exertion, a limitation of the amount +which any one person should be permitted to acquire by gift, +bequest, or inheritance. I conceive that inheritances and +legacies, exceeding a certain amount, are highly proper subjects +for taxation; and that the revenue from them should +be as great as it can be made without giving rise to evasions, +by donation <foreign rend='italic'>inter vivos</foreign> or concealment of property, +such as it would be impossible adequately to check. The principle +of graduation (as it is called), that is, of levying a larger percentage +on a larger sum, though its application to general +taxation would be in my opinion objectionable, seems to me +both just and expedient as applied to legacy and inheritance +duties. +</p> + +<p> +The objection to a graduated property-tax applies in an +aggravated degree to the proposition of an exclusive tax on +what is called <q>realized property,</q> that is, property not +forming a part of any capital engaged in business, or rather +in business under the superintendence of the owner; as land, +the public funds, money lent on mortgage, and shares in +stock companies. Except the proposal of applying a sponge +to the national debt, no such palpable violation of common +honesty has found sufficient support in this country, during +the present generation, to be regarded as within the domain +of discussion. It has not the palliation of a graduated property-tax, +that of laying the burden on those best able to bear +it; for <q>realized property</q> includes the far larger portion of +<pb n='543'/><anchor id='Pg543'/> +the provision made for those who are unable to work, and +consists, in great part, of extremely small fractions. I can +hardly conceive a more shameless pretension than that the +major part of the property of the country, that of merchants, +manufacturers, farmers, and shopkeepers, should be exempted +from its share of taxation; that these classes should only +begin to pay their proportion after retiring from business, +and if they never retire should be excused from it altogether. +But even this does not give an adequate idea of the injustice +of the proposition. The burden thus exclusively thrown on +the owners of the smaller portion of the wealth of the community +would not even be a burden on that <emph>class</emph> of persons +in perpetual succession, but would fall exclusively on those +who happened to compose it when the tax was laid on. As +land and those particular securities would thenceforth yield +a smaller net income, relatively to the general interest of +capital and to the profits of trade, the balance would rectify +itself by a permanent depreciation of those kinds of property. +Future buyers would acquire land and securities at a reduction +of price, equivalent to the peculiar tax, which tax they +would, therefore, escape from paying; while the original +possessors would remain burdened with it even after parting +with the property, since they would have sold their land or +securities at a loss of value equivalent to the fee-simple of +the tax. Its imposition would thus be tantamount to the +confiscation for public uses of a percentage of their property +equal to the percentage laid on their income by the tax. +</p> + +<quote rend='display'> +The above proposition has been extended, by those in the +United States who appeal to class prejudice, to a proposal to +tax the incomes of those who hold government bonds. It so +happened that, for example, the six dollars income on a one-hundred-dollar +bond of the United States was not, in the war +period, deemed a sufficient equivalent for the risk of loaning +one hundred dollars to the state; and Congress, therefore, +agreed to relieve them of taxation. It is the same thing to a +lender if he receive six per cent directly from the Government, +or if he receive seven per cent, and is obliged to pay back +one per cent to the treasury in the form of taxation; but to the +Government it is another thing, because if it sell a taxed bond +<pb n='544'/><anchor id='Pg544'/> +at seven per cent interest, it does not receive back the whole of +the one per cent tax, but the one per cent tax less the expense +of levying it. In other words the Government, in the latter +case, pays six per cent interest plus the cost of levying the tax; +and consequently borrowed more cheaply in the form of an untaxed +bond, as was the hope when the provision was made. If, +then, a tax were now to be put upon the bonds, it would fall +exclusively on the present holders of them; for, since it diminishes +the net income from the bond, it lowers the selling price +of the bond itself, as before +explained.<note place='foot'><ref target='Book_III_Chapter_XIX_Section_5'>Book +III, Chap. XIX, § 5</ref>.</note> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Should the same percentage be levied on Perpetual and on Terminable +Incomes?</head> + +<p> +Whether the profits of trade may not rightfully be +taxed at a lower rate than incomes derived from interest or +rent is part of the more comprehensive question whether life-incomes +should be subjected to the same rate of taxation as +perpetual incomes; whether salaries, for example, or annuities, +or the gains of professions, should pay the same percentage +as the income from inheritable property. +</p> + +<p> +The existing tax [in England] treats all kinds of incomes +exactly alike,<note place='foot'>A higher rate is now imposed on +landed than on professional incomes.</note> taking its [fivepence] in the pound as well +from the person whose income dies with him as from the +landholder, stockholder, or mortgagee, who can transmit his +fortune undiminished to his descendants. This is a visible +injustice; yet it does not arithmetically violate the rule that +taxation ought to be in proportion to means. When it is said +that a temporary income ought to be taxed less than a permanent +one, the reply is irresistible that it is taxed less: for +the income which lasts only ten years pays the tax only ten +years, while that which lasts forever pays forever. The +claim in favor of terminable incomes does not rest on grounds +of arithmetic, but of human wants and feelings. It is not +because the temporary annuitant has smaller means, but because +he has greater necessities, that he ought to be assessed +at a lower rate. +</p> + +<p> +In spite of the nominal equality of income, A, an annuitant +of £1,000 a year, can not so well afford to pay £100 out +of it as B, who derives the same annual sum from heritable +property; A having usually a demand on his income which +<pb n='545'/><anchor id='Pg545'/> +B has not, namely, to provide by saving for children or +others; to which, in the case of salaries or professional gains, +must generally be added a provision for his own later years; +while B may expend his whole income without injury to his +old age, and still have it all to bestow on others after his +death. If A, in order to meet these exigencies, must lay by +£300 of his income, to take £100 from him as income-tax is +to take £100 from £700, since it must be retrenched from +that part only of his means which he can afford to spend +on his own consumption. Were he to throw it ratably on +what he spends and on what he saves, abating £70 from his +consumption and £30 from his annual saving, then indeed +his immediate sacrifice would be proportionally the same as +B's; but then his children or his old age would be worse provided +for in consequence of the tax. The capital sum which +would be accumulated for them would be one tenth less, and +on the reduced income afforded by this reduced capital they +would be a second time charged with income-tax; while B's +heirs would only be charged once. +</p> + +<p> +The principle, therefore, of equality of taxation, interpreted +in its only just sense, equality of sacrifice, requires +that a person who has no means of providing for old age, or +for those in whom he is interested, except by saving from +income, should have the tax remitted on all that part of +his income which is really and <hi rend='italic'>bona fide</hi> applied to that +purpose. +</p> + +<p> +If, indeed, reliance could be placed on the conscience of +the contributors, or sufficient security taken for the correctness +of their statements by collateral precautions, the proper +mode of assessing an income-tax would be to tax only the +part of income devoted to expenditure, exempting that +which is saved. For when saved and invested (and all savings, +speaking generally, are invested) it thenceforth pays +income-tax on the interest or profit which it brings, notwithstanding +that it has already been taxed on the principal. +Unless, therefore, savings are exempted from income-tax, +the contributors are twice taxed on what they save, and only +<pb n='546'/><anchor id='Pg546'/> +once on what they spend. To tax the sum invested, and +afterward tax also the proceeds of the investment, is to tax +the same portion of the contributor's means twice over. +</p> + +<p> +No income-tax is really just from which savings are not +exempted; and no income-tax ought to be voted without +that provision, if the form of the returns and the nature of +the evidence required could be so arranged as to prevent +the exemption from being taken fraudulent advantage of, +by saving with one hand and getting into debt with the other, +or by spending in the following year what had been passed +tax-free as saving in the year preceding. But, if no plan can +be devised for the exemption of actual savings, sufficiently +free from liability to fraud, it is necessary, as the next thing +in point of justice, to take into account, in assessing the tax, +what the different classes of contributors <emph>ought</emph> to save. In +fixing the proportion between the two rates, there must inevitably +be something arbitrary; perhaps a deduction of one +fourth in favor of life-incomes would be as little objectionable +as any which could be made. +</p> + +<p> +Of the net profits of persons in business, a part, as before +observed, may be considered as interest on capital, and of a +perpetual character, and the remaining part as remuneration +for the skill and labor of superintendence. The surplus beyond +interest depends on the life of the individual, and even +on his continuance in business, and is entitled to the full +amount of exemption allowed to terminable incomes. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. The increase of the rent of land from natural causes a fit subject of +peculiar Taxation.</head> + +<p> +Suppose that there is a kind of income which constantly +tends to increase, without any exertion or sacrifice on +the part of the owners: those owners constituting a class in +the community, whom the natural course of things progressively +enriches, consistently with complete passiveness on their +own part. In such a case it would be no violation of the +principles on which private property is grounded, if the state +should appropriate this increase of wealth, or part of it, as it +arises. This would not properly be taking anything from +anybody; it would merely be applying an accession of wealth, +created by circumstances, to the benefit of society, instead of +<pb n='547'/><anchor id='Pg547'/> +allowing it to become an unearned appendage to the riches +of a particular class. +</p> + +<p> +Now, this is actually the case with rent. The ordinary +progress of a society which increases in wealth is at all times +tending to augment the incomes of landlords; to give them +both a greater amount and a greater proportion of the wealth +of the community, independently of any trouble or outlay +incurred by themselves. They grow richer, as it were, in +their sleep, without working, risking, or economizing. What +claim have they, on the general principle of social justice, +to this accession of riches? In what would they have been +wronged if society had, from the beginning, reserved the +right of taxing the spontaneous increase of rent, to the highest +amount required by financial exigencies? The only admissible +mode of proceeding would be by a general measure. +The first step should be a valuation of all the land in the +country. The present value of all land should be exempt +from the tax; but after an interval had elapsed, during +which society had increased in population and capital, a +rough estimate might be made of the spontaneous increase +which had accrued to rent since the valuation was made. +Of this the average price of produce would be some criterion: +if that had risen, it would be certain that rent had increased, +and (as already shown) even in a greater ratio than the rise +of price. On this and other data, an approximate estimate +might be made how much value had been added to the land +of the country by natural causes; and in laying on a general +land-tax, which for fear of miscalculation should be considerably +within the amount thus indicated, there would be an +assurance of not touching any increase of income which might +be the result of capital expended or industry exerted by the +proprietor. +</p> + +<p> +With reference to such a tax, perhaps a safer criterion +than either a rise of rents or a rise of the price of corn, +would be a general rise in the price of land. It would be +easy to keep the tax within the amount which would reduce +the market value of land below the original valuation; and +<pb n='548'/><anchor id='Pg548'/> +up to that point, whatever the amount of the tax might be, +no injustice would be done to the proprietors. +</p> + +<quote rend='display'> +In 1870 Mr. Mill became President of the Land Tenure Association, +one of whose objects was: <q>To claim for the benefit +of the State the Interception by Taxation of the Future Unearned +Increase of the Rent of Land (so far as the same can be +ascertained), or a great part of that increase, which is continually +taking place, without any effort or outlay by the proprietors, +merely through the growth of population and wealth; +reserving to owners the option of relinquishing their property +to the state at the market value which it may have acquired at +the time when this principle may be adopted by the Legislature.</q> +It is urged against this plan that, if the Government +take for itself the increase from rent, it should also make compensation +for loss arising from declining rents, whenever there +happens to be any readjustment of values in land.<note place='foot'>Cf. Walker, +<q>Land and Rent,</q> page 134.</note> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 6. Taxes falling on Capital not necessarily objectionable.</head> + +<p> +In addition to the preceding rules, another general +rule of taxation is sometimes laid down—namely, that it +should fall on income and not on capital. +</p> + +<p> +To provide that taxation shall fall entirely on income, +and not at all on capital, is beyond the power of any system +of fiscal arrangements. There is no tax which is not partly +paid from what would otherwise have been saved; no tax, +the amount of which, if remitted, would be wholly employed +in increased expenditure, and no part whatever laid by as an +addition to capital. All taxes, therefore, are in some sense +partly paid out of capital; and in a poor country it is impossible +to impose any tax which will not impede the increase of +the national wealth. But, in a country where capital abounds +and the spirit of accumulation is strong, this effect of taxation +is scarcely felt. To take from capital by taxation what +emigration would remove, or a commercial crisis destroy, is +only to do what either of those causes would have done—namely, +to make a clear space for further saving. +</p> + +<p> +I can not, therefore, attach any importance, in a wealthy +country, to the objection made against taxes on legacies and +inheritances, that they are taxes on capital. It is perfectly +true that they are so. As Ricardo observes, if £100 are taken +<pb n='549'/><anchor id='Pg549'/> +from any one in a tax on houses or on wine, he will probably +save it, or a part of it, by living in a cheaper house, consuming +less wine, or retrenching from some other of his expenses; +but, if the same sum be taken from him because he +has received a legacy of £1,000, he considers the legacy as +only £900, and feels no more inducement than at any other +time (probably feels rather less inducement) to economize in +his expenditure. The tax, therefore, is wholly paid out of +capital; and there are countries in which this would be a +serious objection. But, in the first place, the argument can +not apply to any country which has a national debt and devotes +any portion of revenue to paying it off, since the produce +of the tax, thus applied, still remains capital, and is +merely transferred from the tax-payer to the fund-holder. +But the objection is never applicable in a country which +increases rapidly in wealth. +</p> + +</div> + +</div> + +<pb n='550'/><anchor id='Pg550'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter II. Of Direct Taxes.</head> + +<div> +<index index='toc'/> +<head>§ 1. Direct taxes either on income or expenditure.</head> + +<p> +Taxes are either direct or indirect. A direct tax is +one which is demanded from the very persons who, it is intended +or desired, should pay it. Indirect taxes are those +which are demanded from one person in the expectation and +intention that he shall indemnify himself at the expense of +another: such as the excise or customs. The producer or +importer of a commodity is called upon to pay tax on it, not +with the intention to levy a peculiar contribution upon him, +but to tax through him the consumers of the commodity, +from whom it is supposed that he will recover the amount +by means of an advance in price. +</p> + +<p> +Direct taxes are either on income or on expenditure. +Most taxes on expenditure are indirect, but some are direct, +being imposed, not on the producer or seller of an article, +but immediately on the consumer. A house-tax, for example, +is a direct tax on expenditure, if levied, as it usually is, +on the occupier of the house. If levied on the builder or +owner, it would be an indirect tax. A window-tax is a +direct tax on expenditure; so are the taxes on horses and +carriages. +</p> + +<p> +The sources of income are rent, profits, and wages. This +includes every sort of income, except gift or plunder. Taxes +may be laid on any one of the three kinds of income, or a +uniform tax on all of them. We will consider these in their +order. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Taxes on rent.</head> + +<p> +A tax on rent falls wholly on the landlord. There +<pb n='551'/><anchor id='Pg551'/> +are no means by which he can shift the burden upon any +one else. It does not affect the value or price of agricultural +produce, for this is determined by the cost of production in +the most unfavorable circumstances, and in those circumstances, +as we have so often demonstrated, no rent is paid. +</p> + +<p> +This, however, is, in strict exactness, only true of the +rent which is the result either of natural causes, or of improvements +made by tenants. When the landlord makes +improvements which increase the productive power of his +land, he is remunerated for them by an extra payment from +the tenant; and this payment, which to the landlord is properly +a profit on capital, is blended and confounded with rent. +A tax on rent, if extending to this portion of it, would discourage +landlords from making improvements; but whatever +hinders improvements from being made in the manner +in which people prefer to make them, will often prevent +them from being made at all; and on this account a tax on +rent would be inexpedient unless some means could be devised +of excluding from its operation that portion of the +nominal rent which may be regarded as landlord's profit. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. —on profits.</head> + +<p> +A tax on profits, like a tax on rent, must, at least in +its immediate operation, fall wholly on the payer. All profits +being alike affected, no relief can be obtained by a change +of employment. If a tax were laid on the profits of any +one branch of productive employment, the tax would be +virtually an increase of the cost of production, and the value +and price of the article would rise accordingly; by which +the tax would be thrown upon the consumers of the commodity, +and would not affect profits. But a general and +equal tax on all profits would not affect general prices, and +would fall, at least in the first instance, on capitalists alone. +</p> + +<p> +There is, however, an ulterior effect, which, in a rich and +prosperous country, requires to be taken into account. It +may operate in two different ways: (1.) The curtailment of +profit, and the consequent increased difficulty in making a +fortune or obtaining a subsistence by the employment of +capital, may act as a stimulus to inventions, and to the use +<pb n='552'/><anchor id='Pg552'/> +of them when made. If improvements in production are +much accelerated, and if these improvements cheapen, directly +or indirectly, any of the things habitually consumed +by the laborer, profits may rise, and rise sufficiently to make +up for all that is taken from them by the tax. In that case +the tax will have been realized without loss to any one, the +produce of the country being increased by an equal, or what +would in that case be a far greater, amount. The tax, however, +must even in this case be considered as paid from profits, +because the receivers of profits are those who would be +benefited if it were taken off. +</p> + +<p> +But (2.) though the artificial abstraction of a portion of +profits would have a real tendency to accelerate improvements +in production, no considerable improvements might +actually result, or only of such a kind as not to raise general +profits at all, or not to raise them so much as the tax had +diminished them. If so, the rate of profit would be brought +closer to that practical minimum to which it is constantly approaching. +At its first imposition the tax falls wholly on +profits; but the amount of increase of capital, which the tax +prevents, would, if it had been allowed to continue, have +tended to reduce profits to the same level; and at every +period of ten or twenty years there will be found less difference +between profits as they are and profits as they would +in that case have been, until at last there is no difference, +and the tax is thrown either upon the laborer or upon the +landlord. The real effect of a tax on profits is to make the +country possess at any given period a smaller capital and a +smaller aggregate production, and to make the stationary +state be attained earlier, and with a smaller sum of national +wealth. +</p> + +<p> +Even in countries which do not accumulate so fast as to +be always within a short interval of the stationary state, it +seems impossible that, if capital is accumulating at all, its +accumulation should not be in some degree retarded by the +abstraction of a portion of its profit; and, unless the effect +in stimulating improvements be a full counterbalance, it is +<pb n='553'/><anchor id='Pg553'/> +inevitable that a part of the burden will be thrown off the +capitalist, upon the laborer or the landlord. One or other +of these is always the loser by a diminished rate of accumulation. +If population continues to increase as before, the +laborer suffers; if not, cultivation is checked in its advance, +and the landlords lose the accession of rent which would +have accrued to them. The only countries in which a tax on +profits seems likely to be permanently a burden on capitalists +exclusively are those in which capital is stationary, because +there is no new accumulation. In such countries the +tax might not prevent the old capital from being kept up +through habit, or from unwillingness to submit to impoverishment, +and so the capitalists might continue to bear the +whole of the tax. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. —on Wages.</head> + +<p> +We now turn to Taxes on Wages. The incidence of +these is very different, according as the wages taxed as those +of ordinary unskilled labor, or are the remuneration of such +skilled or privileged employments, whether manual or intellectual, +as are taken out of the sphere of competition by a +natural or conferred monopoly. +</p> + +<p> +I have already remarked that, in the present low state of +popular education, all the higher grades of mental or educated +labor are at a monopoly price, exceeding the wages of +common workmen in a degree very far beyond that which is +due to the expense, trouble, and loss of time required in +qualifying for the employment. Any tax levied on these +gains, which still leaves them above (or not below) their just +proportion, falls on those who pay it; they have no means of +relieving themselves at the expense of any other class. The +same thing is true of ordinary wages, in cases like that of the +United States, or of a new colony, where, capital increasing +as rapidly as population can increase, wages are kept up by +the increase of capital, and not by the adherence of the laborers +to a fixed standard of comforts. In such a case, some +deterioration of their condition, whether by a tax or otherwise, +might possibly take place without checking the increase +of population. The tax would in that case fall on the laborers +<pb n='554'/><anchor id='Pg554'/> +themselves, and would reduce them prematurely to that +lower state to which, on the same supposition with regard to +their habits, they would in any case have been reduced ultimately, +by the inevitable diminution in the rate of increase +of capital, through the occupation of all the fertile land. +</p> + +<p> +Some will object that, even in this case, a tax on wages +can not be detrimental to the laborers, since the money raised +by it, being expended in the country, comes back to the laborers +again through the demand for labor. Without, however, +reverting to general principles, we may rely on an obvious +<foreign lang='la' rend='italic'>reductio ad absurdum</foreign>. +If to take money from the laborers +and spend it in commodities is giving it back to the laborers, +then, to take money from other classes, and spend it in the +same manner, must be giving it to the laborers; consequently, +the more a government takes in taxes, the greater will be the +demand for labor, and the more opulent the condition of the +laborers—a proposition the absurdity of which no one can +fail to see. +</p> + +<p> +In the condition of most communities, wages are regulated +by the habitual standard of living to which the laborers adhere, +and on less than which they will not multiply. +Where there exists such a standard, a tax on wages will indeed +for a time be borne by the laborers themselves; but, unless +this temporary depression has the effect of lowering the standard +itself, the increase of population will receive a check, +which will raise wages, and restore the laborers to their previous +condition. On whom, in this case, will the tax fall? +A rise of wages occasioned by a tax must, like any other increase +of the cost of labor, be defrayed from profits. To +attempt to tax day-laborers, in an old country, is merely to +impose an extra tax upon all employers of common labor; +unless the tax has the much worse effect of permanently lowering +the standard of comfortable subsistence in the minds +of the poorest class. +</p> + +<p> +We find in the preceding considerations an additional +argument for the opinion, already expressed, that direct taxation +should stop short of the class of incomes which do not +<pb n='555'/><anchor id='Pg555'/> +exceed what is necessary for healthful existence. These +very small incomes are mostly derived from manual labor; +and, as we now see, any tax imposed on these, either permanently +degrades the habits of the laboring-class, or falls +on profits, and burdens capitalists with an indirect tax, in +addition to their share of the direct taxes; which is doubly +objectionable, both as a violation of the fundamental rule of +equality, and for the reasons which, as already shown, render +a peculiar tax on profits detrimental to the public wealth, +and consequently to the means which society possesses of +paying any taxes whatever. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. —on Income.</head> + +<p> +We now pass, from taxes on the separate kinds of +income, to a tax attempted to be assessed fairly upon all +kinds; in other words, an Income-Tax. The discussion of +the conditions necessary for making this tax consistent with +justice has been anticipated in the last chapter. We shall +suppose, therefore, that these conditions are complied with. +They are, first, that incomes below a certain amount should +be altogether untaxed. This minimum should not be higher +than the amount which suffices for the necessaries of the existing +population. The second condition is, that incomes +above the limit should be taxed only in proportion to the +surplus by which they exceed the limit. Thirdly, that all +sums saved from income and invested should be exempt +from the tax; or, if this be found impracticable, that life-incomes +and incomes from business and professions should be +less heavily taxed than inheritable incomes. +</p> + +<p> +An income-tax, fairly assessed on these principles, would +be, in point of justice, the least exceptionable of all taxes. +The objection to it, in the present state of public morality, +is the impossibility of ascertaining the real incomes of +the contributors. Notwithstanding, too, what is called the +inquisitorial nature of the tax, no amount of inquisitorial +power which would be tolerated by a people the most disposed +to submit to it could enable the revenue officers to +assess the tax from actual knowledge of the circumstances +of contributors. Rents, salaries, annuities, and all fixed incomes, +<pb n='556'/><anchor id='Pg556'/> +can be exactly ascertained. But the variable gains +of professions, and still more the profits of business, which +the person interested can not always himself exactly ascertain, +can still less be estimated with any approach to fairness by a +tax-collector. The main reliance must be placed, and always +has been placed, on the returns made by the person +himself. The tax, therefore, on whatever principles of equality +it may be imposed, is in practice unequal in one of the +worst ways, falling heaviest on the most conscientious. +</p> + +<p> +It is to be feared, therefore, that the fairness which belongs +to the principle of an income-tax can not be made to +attach to it in practice. This consideration would lead us to +concur in the opinion which, until of late, has usually prevailed—that +direct taxes on income should be reserved as +an extraordinary resource for great national emergencies, in +which the necessity of a large additional revenue overrules +all objections. +</p> + +<p> +The difficulties of a fair income-tax have elicited a proposition +for a direct tax of so much per cent, not on income +but on expenditure; the aggregate amount of each person's +expenditure being ascertained as the amount of income now +is, from statements furnished by the contributors themselves. +The only security would still be the veracity of individuals, +and there is no reason for supposing that their +statements would be more trustworthy on the subject of their +expenses than on that of their revenues. The taxes on expenditure +at present in force, either in this or in other countries, +fall only on particular kinds of expenditure, and differ +no otherwise from taxes on commodities than in being paid +directly by the person who consumes or uses the article, +instead of being advanced by the producer or seller, and +reimbursed in the price. The taxes on horses and carriages, +on dogs, on servants, are of this nature. They evidently fall +on the persons from whom they are levied—those who use +the commodity taxed. A tax of a similar description, and +more important, is a house-tax, which must be considered at +somewhat greater length. +</p> + +</div> + +<pb n='557'/><anchor id='Pg557'/> + +<div> +<index index='toc'/> +<head>§ 6. A House-Tax.</head> + +<p> +The rent of a house consists of two parts, the ground-rent, +and what Adam Smith calls the building-rent. The +first is determined by the ordinary principles of rent. It is +the remuneration given for the use of the portion of land +occupied by the house and its appurtenances; and varies +from a mere equivalent for the rent which the ground would +afford in agriculture to the monopoly rents paid for advantageous +situations in populous thoroughfares. The rent of +the house itself, as distinguished from the ground, is the +equivalent given for the labor and capital expended on the +building. The fact of its being received in quarterly or +half-yearly payments makes no difference in the principles +by which it is regulated. It comprises the ordinary profit +on the builder's capital, and an annuity, sufficient at the current +rate of interest, after paying for all repairs chargeable +on the proprietor, to replace the original capital by the time +the house is worn out, or by the expiration of the usual term +of a building-lease. +</p> + +<p> +A tax of so much per cent on the gross rent falls on both +those portions alike. The more highly a house is rented, the +more it pays to the tax, whether the quality of the situation +or that of the house itself is the cause. The incidence, however, +of these two portions of the tax must be considered +separately. +</p> + +<p> +As much of it as is a tax on building-rent must ultimately +fall on the consumer, in other words, the occupier. +For, as the profits of building are already not above the ordinary +rate, they would, if the tax fell on the owner and not +on the occupier, become lower than the profits of untaxed +employments, and houses would not be built. It is probable, +however, that for some time after the tax was first imposed, +a great part of it would fall, not on the renter, but +on the owner of the house. A large proportion of the consumers +either could not afford, or would not choose, to pay +their former rent with the tax in addition, but would content +themselves with a lower scale of accommodation. Houses, +therefore, would be for a time in excess of the demand. The +<pb n='558'/><anchor id='Pg558'/> +consequence of such excess, in the case of most other articles, +would be an almost immediate diminution of the supply; +but so durable a commodity as houses does not rapidly diminish +in amount. New buildings, indeed, of the class for +which the demand had decreased, would cease to be erected, +except for special reasons; but in the mean time the temporary +superfluity would lower rents, and the consumers would +obtain, perhaps, nearly the same accommodation as formerly, +for the same aggregate payment, rent and tax together. By +degrees, however, as the existing houses wore out, or as increase +of population demanded a greater supply, rents would +again rise; until it became profitable to recommence building, +which would not be until the tax was wholly transferred +to the occupier. In the end, therefore, the occupier bears +that portion of a tax on rent which falls on the payment +made for the house itself, exclusively of the ground it stands +on. +</p> + +<p> +The case is partly different with the portion which is a +tax on ground-rent. As taxes on rent, properly so called, +fall on the landlord, a tax on ground-rent, one would suppose, +must fall on the ground-landlord, at least after the expiration +of the building-lease. It will not, however, fall +wholly on the landlord, unless with the tax on ground-rent +there is combined an equivalent tax on agricultural rent. +The lowest rent of land let for building is very little above +the rent which the same ground would yield in agriculture: +since it is reasonable to suppose that land, unless in case of +exceptional circumstances, is let or sold for building as soon +as it is decidedly worth more for that purpose than for cultivation. +If, therefore, a tax were laid on ground-rents without +being also laid on agricultural rents, it would, unless of +trifling amount, reduce the return from the lowest ground-rents +below the ordinary return from land, and would check +further building quite as effectually as if it were a tax on +building-rents, until either the increased demand of a growing +population, or a diminution of supply by the ordinary +causes of destruction, had raised the rent by a full equivalent +<pb n='559'/><anchor id='Pg559'/> +for the tax. But whatever raises the lowest ground-rents +raises all others, since each exceeds the lowest by the market +value of its peculiar advantages. If, therefore, the tax on +ground-rents were a fixed sum per square foot, the more +valuable situations paying no more than those least in request, +this fixed payment would ultimately fall on the occupier. +Suppose the lowest ground-rent to be $50 per acre, +and the highest $5,000, a tax of $5 per acre on ground-rents +would ultimately raise the former to $55, and the latter consequently +to $5,005, since the difference of value between +the two situations would be exactly what it was before: the +annual $5, therefore, would be paid by the occupier. But a +tax on ground-rent is supposed to be a portion of a house-tax +which is not a fixed payment, but a percentage on the rent. +The cheapest site, therefore, being supposed as before to pay +$5, the dearest would pay $500, of which only the $5 could +be thrown upon the occupier, since the rent would still be +only raised to $5,005. Consequently, $495 of the $500 levied +from the expensive site would fall on the ground-landlord.<note place='foot'>I have +changed the sums mentioned in this illustration into our own money.</note> +A house-tax thus requires to be considered in a double aspect, +as a tax on all occupiers of houses, and a tax on ground-rents. +</p> + +<p> +In the vast majority of houses the ground-rent forms +but a small proportion of the annual payment made for the +house, and nearly all the tax falls on the occupier. It is +only in exceptional cases, like that of the favorite situations +in large towns, that the predominant element in the rent of +the house is the ground-rent; and, among the very few kinds +of income which are fit subjects for peculiar taxation, these +ground-rents hold the principal place, being the most gigantic +example extant of enormous accessions of riches acquired +rapidly, and in many cases unexpectedly, by a few families, +from the mere accident of their possessing certain tracts of +land without their having themselves aided in the acquisition +by the smallest exertion, outlay, or risk. So far, therefore, +as a house-tax falls on the ground-landlord, it is liable +to no valid objection. +</p> + +<pb n='560'/><anchor id='Pg560'/> + +<p> +In so far as it falls on the occupier, if justly proportioned +to the value of the house, it is one of the fairest and most +unobjectionable of all taxes. No part of a person's expenditure +is a better criterion of his means, or bears, on the whole, +more nearly the same proportion to them. The equality of +this tax can only be seriously questioned on two grounds. +The first is, that a miser may escape it. This objection applies +to all taxes on expenditure; nothing but a direct tax +on income can reach a miser. The second objection is, that +a person may require a larger and more expensive house, not +from having greater means, but from having a larger family. +Of this, however, he is not entitled to complain, since having +a large family is at a person's own choice; and, so far as +concerns the public interest, is a thing rather to be discouraged +than promoted.<note place='foot'><p>Another common +objection is that large and expensive accommodation is +often required, not as a residence, but for business. But it is an admitted principle +that buildings, or portions of buildings, occupied exclusively for business, +such as shops, warehouses, or manufactories, ought to be exempted from house-tax. +</p> +<p> +It has been also objected that house-rent in the rural districts is much lower +than in towns, and lower in some towns and in some rural districts than in +others; so that a tax proportioned to it would have a corresponding inequality +of pressure. To this, however, it may be answered that, in places where house-rent +is low, persons of the same amount of income usually live in larger and +better houses, and thus expend in house-rent more nearly the same proportion +of their incomes than might at first sight appear. Or, if not, the probability +will be that many of them live in those places precisely because they are too +poor to live elsewhere, and have, therefore, the strongest claim to be taxed +lightly. In some cases it is precisely because the people are poor that house-rent +remains low.—<hi rend='smallcaps'>Mill.</hi></p></note> +</p> + +<p> +A valuation should be made of the house, not at what it +would sell for, but at what would be the cost of rebuilding +it, and this valuation might be periodically corrected by an +allowance for what it had lost in value by time, or gained by +repairs and improvements. The amount of the amended +valuation would form a principal sum, the interest of which, +at the current price of the public funds, would form the annual +value at which the building should be assessed to the tax. +</p> + +<pb n='561'/><anchor id='Pg561'/> + +<p> +As incomes below a certain amount ought to be exempt +from income-tax, so ought houses below a certain value from +house-tax, on the universal principle of sparing from all +taxation the absolute necessaries of healthful existence. In +order that the occupiers of lodgings, as well as of houses, +might benefit, as in justice they ought, by this exemption, it +might be optional with the owners to have every portion of +a house which is occupied by a separate tenant valued and +assessed separately. +</p> + +</div> + +</div> + +<pb n='562'/><anchor id='Pg562'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter III. Of Taxes On Commodities, Or Indirect Taxes.</head> + +<div> +<index index='toc'/> +<head>§ 1. A Tax on all commodities would fall on Profits.</head> + +<p> +By taxes on commodities are commonly meant those +which are levied either on the producers, or on the carriers +or dealers who intervene between them and the final purchasers +for consumption; the phrase being, by custom, confined +to indirect taxes—those which are advanced by one +person, to be, as is expected and intended, reimbursed by +another. +</p> + +<p> +Taxes on commodities are either on production within +the country, or on importation into it, or on conveyance or +sale within it, and are classed respectively as excise, customs, +or tolls and transit duties. To whichever class they belong, +and at whatever stage in the progress of the community +they may be imposed, they are equivalent to an increase of +the cost of production; using that term in its most enlarged +sense, which includes the cost of transport and distribution, +or, in common phrase, of bringing the commodity to market. +</p> + +<p> +When the cost of production is increased artificially by a +tax, the effect is the same as when it is increased by natural +causes. If only one or a few commodities are affected, their +value and price rise, so as to compensate the producer or +dealer for the peculiar burden; but if there were a tax on all +commodities, exactly proportioned to their value, no such +compensation would be obtained; there would neither be a +general rise of values, which is an absurdity, nor of prices, +which depend on causes entirely different. There would, +however, as Mr. McCulloch has pointed out, be a disturbance +<pb n='563'/><anchor id='Pg563'/> +of values, some falling, others rising, owing to a circumstance, +the effect of which on values and prices we formerly +discussed—the different durability of the capital employed +in different occupations. The gross produce of industry consists +of two parts; one portion serving to replace the capital +consumed, while the other portion is profit. Now, equal +capital in two branches of production must have equal expectations +of profit; but if a greater portion of the one than +of the other is fixed capital, or if that fixed capital is more +durable, there will be a less consumption of capital in the +year, and less will be required to replace it, so that the profit, +if absolutely the same, will form a greater proportion of the +annual returns. To derive from a capital of $1,000 a profit +of $100, the one producer may have to sell produce to the +value of $1,100, the other only to the value of $500. If on +these two branches of industry a tax be imposed of five per +cent <foreign lang='la' rend='italic'>ad valorem</foreign>, +the last will be charged only with $25, the +first with $55; leaving to the one $75 profit, to the other +only $45. To equalize, therefore, their expectation of profit, +the one commodity must rise in price, or the other must fall, +or both.<note place='foot'>I have here also changed the amounts +into our own money.</note> Commodities made chiefly by immediate labor +must rise in value, as compared with those which are chiefly +made by machinery. It is unnecessary to prosecute this +branch of the inquiry any further. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Taxes on particular commodities fall on the consumer.</head> + +<p> +A tax on any one commodity, whether laid on its +production, its importation, its carriage from place to place, +or its sale, and whether the tax be a fixed sum of money for +a given quantity of the commodity, or an +<foreign lang='la' rend='italic'>ad valorem</foreign> duty, +will, as a general rule, raise the value and price of the commodity +by at least the amount of the tax. There are few +cases in which it does not raise them by more than that +amount. In the first place, there are few taxes on production +on account of which it is not found or deemed necessary +to impose restrictive regulations on the manufacturers +or dealers, in order to check evasions of the tax. These +<pb n='564'/><anchor id='Pg564'/> +regulations are always sources of trouble and annoyance, and +generally of expense, for all of which, being peculiar disadvantages, +the producers or dealers must have compensation +in the price of their commodity. These restrictions also frequently +interfere with the processes of manufacture, requiring +the producer to carry on his operations in the way most +convenient to the revenue, though not the cheapest or most +efficient for purposes of production. Any regulations whatever, +enforced by law, make it difficult for the producer to +adopt new and improved processes. Further, the necessity +of advancing the tax obliges producers and dealers to carry +on their business with larger capitals than would otherwise +be necessary, on the whole of which they must receive the +ordinary rate of profit, though a part only is employed in +defraying the real expenses of production or importation. +The price of the article must be such as to afford a profit on +more than its natural value, instead of a profit on only its +natural value. Neither ought it to be forgotten that whatever +renders a larger capital necessary in any trade or business +limits the competition in that business, and, by giving +something like a monopoly to a few dealers, may enable +them either to keep up the price beyond what would afford +the ordinary rate of profit, or to obtain the ordinary rate of +profit with a less degree of exertion for improving and cheapening +their commodity. In these several modes, taxes on +commodities often cost to the consumer, through the increased +price of the article, much more than they bring into +the treasury of the state. There is still another consideration: +the higher price necessitated by the tax almost always +checks the demand for the commodity; and, since +there are many improvements in production which, to make +them practicable, require a certain extent of demand, such +improvements are obstructed, and many of them prevented +altogether. It is a well-known fact that the branches of +production in which fewest improvements are made are +those with which the revenue-officer interferes; and that +nothing, in general, gives a greater impulse to improvements +<pb n='565'/><anchor id='Pg565'/> +in the production of a commodity than taking off a tax which +narrowed the market for it. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Peculiar effects of taxes on Necessaries.</head> + +<p> +Such are the effects of taxes on commodities, considered +generally; but, as there are some commodities (those +composing the necessaries of the laborer) of which the values +have an influence on the distribution of wealth among different +classes of the community, it is requisite to trace the +effects of taxes on those particular articles somewhat further. +If a tax be laid, say on corn, and the price rises in proportion +to the tax, the rise of price may operate in two ways: First, +it may lower the condition of the laboring-classes; temporarily, +indeed, it can scarcely fail to do so. If it diminishes +their consumption of the produce of the earth, or makes +them resort to a food which the soil produces more abundantly, +and therefore more cheaply, it to that extent contributes +to throw back agriculture upon more fertile lands or less +costly processes, and to lower the value and price of corn; +which therefore ultimately settles at a price, increased not +by the whole amount of the tax, but by only a part of its +amount. Secondly, however, it may happen that the dearness +of the taxed food does not lower the habitual standard +of the laborer's requirements, but that wages, on the contrary, +through an action on population, rise, in shorter or longer +periods, so as to compensate the laborers for their portion of +the tax, the compensation being of course at the expense of +profits. Taxes on necessaries must thus have one of two +effects: either they lower the condition of the laboring-classes, +or they exact from the owners of capital, in addition to the +amount due to the state on their own necessaries, the amount +due on those consumed by the laborers. In the last case, the +tax on necessaries, like a tax on wages, is equivalent to a peculiar +tax on profits; which is, like all other partial taxation, unjust, +and is specially prejudicial to the increase of the national +wealth. +</p> + +<p> +It remains to speak of the effect on rent. Assuming +(what is usually the fact) that the consumption of food is not +diminished, the same cultivation as before will be necessary +<pb n='566'/><anchor id='Pg566'/> +to supply the wants of the community; the margin of cultivation, +to use Dr. Chalmers's expression, remains where it +was; and the same land or capital, which, as the least productive, +already regulated the value and price of the whole +produce, will continue to regulate them. The effect which a +tax on agricultural produce will have on rent depends on its +affecting or not affecting the difference between the return +to this least productive land or capital and the returns to +other lands and capitals. Now, this depends on the manner +in which the tax is imposed. If it is an +<foreign lang='la' rend='italic'>ad valorem</foreign> tax, or, +what is the same thing, a fixed proportion of the produce, +such as tithe for example, it evidently lowers corn-rents. For +it takes more corn from the better lands than from the worse, +and exactly in the degree in which they are better, land of +twice the productiveness paying twice as much to the tithe. +Whatever takes more from the greater of two quantities than +from the less, diminishes the difference between them. The +imposition of a tithe on corn would take a tithe also from +corn-rent: for, if we reduce a series of numbers by a tenth +each, the differences between them are reduced one tenth. +</p> + +<p> +For example, let there be five qualities of land, which +severally yield, on the same extent of ground and with the +same expenditure, 100, 90, 80, 70, and 60 bushels of wheat, +the last of these being the lowest quality which the demand +for food renders it necessary to cultivate. The rent of these +lands will be as follows: +</p> + +<p> +The land producing 100 bushels will yield a rent of 100-60, or 40 bushels.<lb/> +That producing 90 bushels, a rent of 90-60, or 30 bushels.<lb/> +That producing 80 bushels, a rent of 80-60, or 20 bushels.<lb/> +That producing 70 bushels, a rent of 70-60, or 10 bushels.<lb/> +That producing 60 bushels, will yield no rent. +</p> + +<p> +Now let a tithe be imposed, which takes from these five +pieces of land 10, 9, 8, 7, and 6 bushels respectively, the fifth +quality still being the one which regulates the price, but returning +to the farmer, after payment of tithe, no more than +54 bushels: +</p> + +<pb n='567'/><anchor id='Pg567'/> + +<p> +The land producing 100 bushels reduced to 90 will yield a rent of 90-54, or 36 +bushels.<lb/> +That producing 90 bushels reduced to 81, a rent of 81-54, or 27 bushels.<lb/> +That producing 80 bushels reduced to 72, a rent of 72-54, or 18 bushels.<lb/> +That producing 70 bushels reduced to 63, a rent of 63-54, or 9 bushels. +</p> + +<p> +and that producing 60 bushels, reduced to 54, will yield, as +before, no rent. So that the rent of the first quality of land +has lost four bushels; of the second, three; of the third, +two; and of the fourth, one: that is, each has lost exactly +one tenth. A tax, therefore, of a fixed proportion of the +produce lowers, in the same proportion, corn-rent. +</p> + +<p> +But it is only corn-rent that is lowered, and not rent estimated +in money, or in any other commodity. For, in the +same proportion as corn-rent is reduced in quantity, the corn +composing it is raised in value. Under the tithe, 54 bushels +will be worth in the market what 60 were before; and nine +tenths will in all cases sell for as much as the whole ten tenths +previously sold for. The landlords will therefore be compensated +in value and price for what they lose in quantity, and +will suffer only so far as they consume their rent in kind, or, +after receiving it in money, expend it in agricultural produce; +that is, they only suffer as consumers of agricultural produce, +and in common with all the other consumers. Considered as +landlords, they have the same income as before; the tithe, +therefore, falls on the consumer, and not on the landlord. +</p> + +<p> +The same effect would be produced on rent if the tax, +instead of being a fixed proportion of the produce, were a +fixed sum per quarter or per bushel. A tax which takes a +shilling for every bushel takes more shillings from one field +than from another, just in proportion as it produces more +bushels; and operates exactly like tithe, except that tithe is +not only the same proportion on all lands, but is also the same +proportion at all times, while a fixed sum of money per +bushel will amount to a greater or less proportion, according +as corn is cheap or dear. +</p> + +<p> +There are other modes of taxing agriculture, which would +affect rent differently. A tax proportioned to the rent would +<pb n='568'/><anchor id='Pg568'/> +fall wholly on the rent, and would not at all raise the price +of corn, which is regulated by the portion of the produce +that pays no rent. A fixed tax of so much per cultivated +acre, without distinction of value, would have effects directly +the reverse. Taking no more from the best qualities of land +than from the worst, it would leave the differences the same +as before, and consequently the same corn-rents, and the +landlords would profit to the full extent of the rise of price. +To put the thing in another manner: the price must rise +sufficiently to enable the worst land to pay the tax, thus enabling +all lands which produce more than the worst to pay +not only the tax, but also an increased rent to the landlords. +These, however, are not so much taxes on the produce of +land as taxes on the land itself. Taxes on the produce, +properly so called, whether fixed or +<foreign lang='la' rend='italic'>ad valorem</foreign>, do not affect +rent, but fall on the consumer, profits, however, generally +bearing either the whole or the greatest part of the portion +which is levied on the consumption of the laboring-classes. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. —how modified by the tendency of profits to a minimum.</head> + +<p> +The preceding is, I apprehend, a correct statement of +the manner in which taxes on agricultural produce operate +when first laid on. When, however, they are of old standing, +their effect may be different. Now, the effect of accumulation, +when attended by its usual accompaniment, an increase +of population, is to increase the value and price of +food, to raise rent, and to lower profits; that is, to do precisely +what is done by a tax on agricultural produce, except +that this does not raise rent. The tax, therefore, merely +anticipates the rise of price and fall of profits which would +have taken place ultimately through the mere progress of +accumulation, while it at the same time prevents, or at least +retards, that progress. If the rate of profit was such that +the effect of the tithe reduces it to the practical minimum, +after a lapse of time which would have admitted of a rise of +one tenth from the natural progress of wealth, the consumer +will be paying no more than he would have paid if the tithe +had never existed; he will have ceased to pay any portion +of it, and the person who will really pay it is the landlord, +<pb n='569'/><anchor id='Pg569'/> +whom it deprives of the increase of rent which would by that +time have accrued to him. At every successive point in this +interval of time, less of the burden will rest on the consumer, +and more of it on the landlord; and, in the ultimate result, +the minimum of profits will be reached with a smaller capital +and population and a lower rental than if the course of +things had not been disturbed by the imposition of the tax. +If, on the other hand, the tithe or other tax on agricultural +produce does not reduce profits to the minimum, but to +something above the minimum, accumulation will not be +stopped, but only slackened; and, if population also increases, +the twofold increase will continue to produce its effects—a +rise of the price of corn and an increase of rent. These consequences, +however, will not take place with the same rapidity +as if the higher rate of profit had continued. At the end +of twenty years the country will have a smaller population +and capital than, but for the tax, it would by that time have +had; the landlords will have a smaller rent, and the price of +corn, having increased less rapidly than it would otherwise +have done, will not be so much as a tenth higher than what, +if there had been no tax, it would by that time have become. +A part of the tax, therefore, will already have ceased to fall +on the consumer and devolved upon the landlord, and the +proportion will become greater and greater by lapse of time. +</p> + +<p> +But though tithes and other taxes on agricultural produce, +when of long standing, either do not raise the price of food +and lower profits at all, or, if at all, not in proportion to the +tax, yet the abrogation of such taxes, when they exist, does +not the less diminish price, and, in general, raise the rate of +profit. The abolition of a tithe takes one tenth from the +cost of production, and consequently from the price, of all +agricultural produce; and, unless it permanently raises the +laborer's requirements, it lowers the cost of labor and raises +profits. Rent, estimated in money or in commodities, generally +remains as before; estimated in agricultural produce, it +is raised. The country adds as much, by the repeal of a tithe, +to the margin which intervenes between it and the stationary +<pb n='570'/><anchor id='Pg570'/> +state as was cut off from that margin by the tithe when first +imposed. Accumulation is greatly accelerated, and, if population +also increases, the price of corn immediately begins to +recover itself and rent to rise, thus gradually transferring +the benefit of the remission from the consumer to the landlord. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. Effects of discriminating Duties.</head> + +<p> +We have hitherto inquired into the effects of taxes +on commodities, on the assumption that they are levied impartially +on every mode in which the commodity can be produced +or brought to market. Another class of considerations +is opened, if we suppose that this impartiality is not maintained, +and that the tax is imposed, not on the commodity, +but on some particular mode of obtaining it. +</p> + +<p> +Suppose that a commodity is capable of being made by +two different processes—as a manufactured commodity may +be produced either by hand or by steam-power—sugar may +be made either from the sugar-cane or from beet-root, cattle +fattened either on hay and green crops or on oil-cake and +the refuse of breweries. It is the interest of the community +that, of the two methods, producers should adopt that which +produces the best article at the lowest price. This being also +the interest of the producers, unless protected against competition, +and shielded from the penalties of indolence, the +process most advantageous to the community is that which, +if not interfered with by Government, they ultimately find it +to their advantage to adopt. Suppose, however, that a tax is +laid on one of the processes, and no tax at all, or one of +smaller amount, on the other. If the taxed process is the +one which the producers would not have adopted, the measure +is simply nugatory. But if the tax falls, as it is of +course intended to do, upon the one which they would have +adopted, it creates an artificial motive for preferring the untaxed +process, though the inferior of the two. If, therefore, +it has any effect at all, it causes the commodity to be produced +of worse quality, or at a greater expense of labor; it +causes so much of the labor of the community to be wasted, +and the capital employed in supporting and remunerating +<pb n='571'/><anchor id='Pg571'/> +that labor to be expended as uselessly as if it were spent in +hiring men to dig holes and fill them up again. This waste +of labor and capital constitutes an addition to the cost of +production of the commodity, which raises its value and price +in a corresponding ratio, and thus the owners of the capital +are indemnified. The loss falls on the consumers; though +the capital of the country is also eventually diminished, by +the diminution of their means of saving, and, in some degree, +of their inducements to save. +</p> + +<p> +The kind of tax, therefore, which comes under the general +denomination of a discriminating duty, transgresses the +rule that taxes should take as little as possible from the taxpayer +beyond what they bring into the treasury of the state. +A discriminating duty makes the consumer pay two distinct +taxes, only one of which is paid to the Government, and that +frequently the less onerous of the two. If a tax were laid +on sugar produced from the cane, leaving the sugar from +beet-root untaxed, then in so far as cane-sugar continued to +be used, the tax on it would be paid to the treasury, and +might be as unobjectionable as most other taxes; but if cane-sugar, +having previously been cheaper than beet-root sugar, +was now dearer, and beet-root sugar was to any considerable +amount substituted for it, and fields laid out and manufactories +established in consequence, the Government would gain +no revenue from the beet-root sugar, while the consumers of +it would pay a real tax. They would pay for beet-root sugar +more than they had previously paid for cane-sugar, and the +difference would go to indemnify producers for a portion of +the labor of the country actually thrown away, in producing +by the labor of (say) three hundred men what could be obtained +by the other process with the labor of two hundred. +</p> + +<quote rend='display'> +An interesting illustration, in late years, of the operation of +a discriminating duty is to be found in the case of different +grades of sugar imported into the United States. Our tariff +levied certain duties on different grades of sugar classified by +color, on the theory that color was a test of saccharine strength. +Cargoes were examined and compared with graded sugars hermetically +sealed in glass bottles and distributed by the Dutch +<pb n='572'/><anchor id='Pg572'/> +authorities, whence came the name of <q>Dutch standard.</q> +Grades from No. 1 (melado) to No. 10 must go to the refiner +before consumption; but the grades to No. 13, although +some might have gone into immediate consumption, were usually +sent to be manufactured into the highest grades of soft +and hard sugars. So long as the sugar was secured by evaporation +in open coppers, or by passing the molasses through a +layer of clay, saccharine strength and color went fairly well +together. But with the invention of the vacuum-pan and +the centrifugal wheel, by which the sugar is reduced through a +shorter and more effective process, sugar of a certain grade of +color by the Dutch standard contained a much greater degree +of sweetness than that produced by the old methods. Cuban +planters, therefore, were permitted to send sugar into this country +at a duty which was really levied on grades much inferior, +and so paid a less duty than other sugars. The products of +one country were discriminated against in favor of another. +The difficulty was settled by using the polariscope, which gave +an absolute chemical test of the sweetness, irrespective of color. +</quote> + +<p> +One of the commonest cases of discriminating duties is +that of a tax on the importation of a commodity capable of +being produced at home, unaccompanied by an equivalent +tax on the home production. A commodity is never permanently +imported, unless it can be obtained from abroad at a +smaller cost of labor and capital, on the whole, than is necessary +for producing it. If, therefore, by a duty on the importation, +it is rendered cheaper to produce the article than to +import it, an extra quantity of labor and capital is expended, +without any extra result. The labor is useless, and the capital +is spent in paying people for laboriously doing nothing. +All custom duties which operate as an encouragement to the +home production of the taxed article are thus an eminently +wasteful mode of raising a revenue. +</p> + +<p> +This character belongs in a peculiar degree to custom +duties on the produce of land, unless countervailed by excise +duties on the home production. Such taxes bring less into +the public treasury, compared with what they take from the +consumers, than any other imposts to which civilized nations +are usually subject. If the wheat produced in a country is +twenty millions of quarters, and the consumption twenty-one +millions, a million being annually imported, and if on this +<pb n='573'/><anchor id='Pg573'/> +million a duty is laid which raises the price ten shillings per +quarter, the price which is raised is not that of the million +only, but of the whole twenty-one millions. Taking the +most favorable but extremely improbable supposition, that +the importation is not at all checked, nor the home production +enlarged, the state gains a revenue of only half a million, +while the consumers are taxed ten millions and a half, +the ten millions being a contribution to the home growers, +who are forced by competition to resign it all to the landlords. +The consumer thus pays to the owners of land an additional +tax, equal to twenty times that which he pays to the +state. Let us now suppose that the tax really checks importation. +Suppose importation stopped altogether in ordinary +years; it being found that the million of quarters can be obtained, +by a more elaborate cultivation, or by breaking up +inferior land, at a less advance than ten shillings upon the previous +price—say, for instance, five shillings a quarter. The +revenue now obtains nothing, except from the extraordinary +imports which may happen to take place in a season of scarcity. +But the consumers pay every year a tax of five shillings +on the whole twenty-one millions of quarters, amounting to +£5,250,000 sterling. Of this the odd £250,000 goes to compensate +the growers of the last million of quarters for the labor +and capital wasted under the compulsion of the law. The +remaining £5,000,000 go to enrich the landlords as before. +</p> + +<p> +Such is the operation of what are technically termed +corn laws, when first laid on; and such continues to be their +operation so long as they have any effect at all in raising the +price of corn. The difference between a country without +corn laws and a country which has long had corn laws is not +so much that the last has a higher price or a larger rental, +but that it has the same price and the same rental with a +smaller aggregate capital and a smaller population. The imposition +of corn laws raises rents, but retards that progress +of accumulation which would in no long period have raised +them fully as much. The repeal of corn laws tends to lower +rents, but it unchains a force which, in a progressive state of +<pb n='574'/><anchor id='Pg574'/> +capital and population, restores and even increases the former +amount. +</p> + +<p> +What we have said of duties on importation generally is +equally applicable to discriminating duties which favor importation +from one place, or in one particular manner, in +contradistinction to others; such as the preference given to +the produce of a colony, or of a country with which there is +a commercial treaty; or the higher duties formerly imposed +by our navigation laws on goods imported in other than +British shipping. Whatever else may be alleged in favor +of such distinctions, whenever they are not nugatory, they +are economically wasteful. They induce a resort to a more +costly mode of obtaining a commodity in lieu of one less +costly, and thus cause a portion of the labor which the country +employs in providing itself with foreign commodities to +be sacrificed without return. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 6. Effects produced on international Exchange by Duties on Exports +and on Imports.</head> + +<p> +There is one more point, relating to the operation +of taxes on commodities conveyed from one country to +another, which requires notice: the influences which they +exert on international exchanges. Every tax on a commodity +tends to raise its price, and consequently to lessen the +demand for it in the market in which it is sold. All taxes +on international trade tend, therefore, to produce a disturbance, +and a readjustment of what we have termed the +equation of international demand. +</p> + +<p> +Taxes on foreign trade are of two kinds—taxes on imports +and on exports. On the first aspect of the matter it +would seem that both these taxes are paid by the consumers +of the commodity; that taxes on exports consequently fall +entirely on foreigners, taxes on imports wholly on the home +consumer. The true state of the case, however, is much +more complicated. +</p> + +<p> +<q>By taxing exports we may, in certain circumstances, +produce a division of the advantage of the trade more favorable +to ourselves. In some cases we may draw into our coffers, +at the expense of foreigners, not only the whole tax, +but more than the tax; in other cases we should gain exactly +<pb n='575'/><anchor id='Pg575'/> +the tax; in others, less than the tax. In this last case a part +of the tax is borne by ourselves; possibly the whole, possibly +even, as we shall show, more than the whole.</q> +</p> + +<p> +Reverting to the supposititious case employed of a trade +between England and the United States in iron and corn, +suppose that the United States taxes her export of corn, the +tax not being supposed high enough to induce England to +produce corn for herself. The price at which corn can be +sold in England is augmented by the tax. This will probably +diminish the quantity consumed. It may diminish it +so much that, even at the increased price, there will not be +required so great a money value as before. Or it may not +diminish it at all, or so little that, in consequence of the +higher price, a greater money value will be purchased than +before. In this last case, the United States will gain, at the +expense of England, not only the whole amount of the duty, +but more; for, the money value of her exports to England +being increased, while her imports remain the same, money +will flow into the United States from England. The price +of corn will rise in the United States, and consequently in +England; but the price of iron will fall in England, and consequently +in the United States. We shall export less corn +and import more iron, till the equilibrium is restored. It +thus appears (what is at first sight somewhat remarkable) +that, by taxing her exports, the United States would, in +some conceivable circumstances, not only gain from her +foreign customers the whole amount of the tax, but would +also get her imports cheaper. She would get them cheaper +in two ways, for she would obtain them for less money, and +would have more money to purchase them with. England, +on the other hand, would suffer doubly: she would have to +pay for her corn a price increased not only by the duty, but +by the influx of money into the United States, while the +same change in the distribution of the circulating medium +would leave her less money to purchase it with.<note place='foot'>This +illustration has also been changed, but only so far as to fit the trade +between England and the United States.</note> +</p> + +<pb n='576'/><anchor id='Pg576'/> + +<p> +This, however, is only one of three possible cases. If, +after the imposition of the duty, England requires so diminished +a quantity of corn that its total value is exactly the +same as before, the balance of trade would be undisturbed; +the United States will gain the duty, England will lose +it, and nothing more. If, again, the imposition of the duty +occasions such a falling off in the demand that England requires +a less pecuniary value than before, our exports will +no longer pay for our imports; money must pass from the +United States into England; and England's share of the +advantage of the trade will be increased. By the change in +the distribution of money, corn will fall in the United States, +and therefore it will, of course, fall in England. Thus England +will not pay the whole of the tax. From the same +cause, iron will rise in England, and consequently in the +United States. When this alteration of prices has so adjusted +the demand that the corn and the iron again pay for +one another, the result is that England has paid only a part +of the tax, and the remainder of what has been received +into our treasury has come indirectly out of the pockets of +our own consumers of iron, who pay a higher price for that +imported commodity in consequence of the tax on our exports, +while at the same time they, in consequence of the +efflux of money and the fall of prices, have smaller money +incomes wherewith to pay for the iron at that advanced price. +</p> + +<p> +It is not an impossible supposition that by taxing our exports +we might not only gain nothing from the foreigner, +the tax being paid out of our own pockets, but might even +compel our own people to pay a second tax to the foreigner. +Suppose, as before, that the demand of England for corn +falls off so much on the imposition of the duty that she requires +a smaller money value than before, but that the case +is so different with iron in the United States that when the +price rises the demand either does not fall off at all, or so +little that the money value required is greater than before. +The first effect of laying on the duty is, as before, that the +corn exported will no longer pay for the iron imported. +</p> + +<pb n='577'/><anchor id='Pg577'/> + +<p> +Money will therefore flow out of the United States into England. +One effect is to raise the price of iron in England, and +consequently in the United States. But this, by the supposition, +instead of stopping the efflux of money, only makes +it greater; because, the higher the price, the greater the +money value of the iron consumed. The balance, therefore, +can only be restored by the other effect, which is going on +at the same time, namely, the fall of corn in the American +and consequently in the English market. Even when corn +has fallen so low that its price with the duty is only equal to +what its price without the duty was at first, it is not a +necessary consequence that the fall will stop; for the same +amount of exportation as before will not now suffice to pay +the increased money value of the imports; and although +the English consumers have now not only corn at the old +price, but likewise increased money incomes, it is not certain +that they will be inclined to employ the increase of their incomes +in increasing their purchases of corn. The price of +corn, therefore, must perhaps fall, to restore the equilibrium, +more than the whole amount of the duty; England may be +enabled to import corn at a lower price when it is taxed +than when it was untaxed; and this gain she will acquire at +the expense of the American consumers of iron, who, in +addition, will be the real payers of the whole of what is received +at their own custom-house under the name of duties +on the export of corn. +</p> + +<p> +In general, however, there could be little doubt that a +country which imposed such taxes would succeed in making +foreign countries contribute something to its revenue; but, +unless the taxed article be one for which their demand is +extremely urgent, they will seldom pay the whole of the +amount which the tax brings in.<note place='foot'>Probably the +strongest known instance of a large revenue raised from foreigners +by a tax on exports is the opium-trade with China. The high price +of the article under the Government monopoly (which is equivalent to a high +export duty) has so little effect in discouraging its consumption that it is said +to have been occasionally sold in China for as much as its weight in +silver.—<hi rend='smallcaps'>Mill.</hi></note> +</p> + +<pb n='578'/><anchor id='Pg578'/> + +<quote rend='display'> +The result of this investigation may, then, be generally formulated +as follows: That country which has the strongest demand +for the commodities of other countries as compared with +the demand of other countries for its own commodities will +pay the burden of the export duty. +</quote> + +<p> +Thus far of duties on exports. We now proceed to the +more ordinary case of duties on imports: <q rend='pre'>We have had +an example of a tax on exports, that is, on foreigners, falling +in part on ourselves. We shall therefore not be surprised +if we find a tax on imports, that is, on ourselves, partly +falling upon foreigners.</q> +</p> + +<p> +<q rend='pre'>Instead of taxing the corn which we export, suppose +that we tax the iron which we import. The duty which we +are now supposing must not be what is termed a protecting +duty, that is, a duty sufficiently high to induce us to produce +the article at home. If it had this effect, it would destroy +entirely the trade both in corn and in iron, and both countries +would lose the whole of the advantage which they previously +gained by exchanging those commodities with one +another. We suppose a duty which might diminish the +consumption of the article, but which would not prevent us +from continuing to import, as before, whatever iron we did +consume.</q> +</p> + +<p> +<q rend='pre'>The equilibrium of trade would be disturbed if the imposition +of the tax diminished, in the slightest degree, the +quantity of iron consumed. For, as the tax is levied at our +own custom-house, the English exporter only receives the +same price as formerly, though the American consumer pays +a higher one. If, therefore, there be any diminution of the +quantity bought, although a larger sum of money may be +actually laid out in the article, a smaller one will be due from +the United States to England: this sum will no longer be an +equivalent for the sum due from England to the United +States for corn, the balance therefore must be paid in money. +Prices will fall in England and rise in the United States; +iron will fall in the English market; corn will rise in the +American. The English will pay a higher price for corn, +<pb n='579'/><anchor id='Pg579'/> +and will have smaller money incomes to buy it with; while +the Americans will obtain iron cheaper, that is, its price will +exceed what it previously was by less than the amount of the +duty, while their means of purchasing it will be increased by +the increase of their money incomes.</q> +</p> + +<p> +<q rend='pre'>If the imposition of the tax does not diminish the demand, +it will leave the trade exactly as it was before. We +shall import as much, and export as much; the whole of the +tax will be paid out of our own pockets.</q> +</p> + +<p> +<q>But the imposition of a tax on a commodity almost +always diminishes the demand more or less; and it can never, +or scarcely ever, increase the demand. It may, therefore, be +laid down as a principle that a tax on imported commodities, +when it really operates as a tax, and not as a prohibition +either total or partial, almost always falls in part upon the +foreigners who consume our goods; and that this is a mode +in which a nation may appropriate to itself, at the expense +of foreigners, a larger share than would otherwise belong to +it of the increase in the general productiveness of the labor +and capital of the world, which results from the interchange +of commodities among nations.</q> +</p> + +<p> +Those are, therefore, in the right who maintain that +taxes on imports are partly paid by foreigners; but they are +mistaken when they say that it is by the foreign producer. +It is not on the person from whom we buy, but on all those +who buy from us, that a portion of our custom duties spontaneously +falls. It is the foreign consumer of our exported +commodities who is obliged to pay a higher price for them +because we maintain revenue duties on foreign goods. +</p> + +<p> +There are but two cases in which duties on commodities +can in any degree, or in any manner, fall on the producer. +One is, when the article is a strict monopoly, and at a scarcity +price. The price in this case being only limited by the desires +of the buyer—the sum obtained for the restricted supply being +the utmost which the buyers would consent to give rather +than go without it—if the treasury intercepts a part of this, +the price can not be further raised to compensate for the tax, +<pb n='580'/><anchor id='Pg580'/> +and it must be paid from the monopoly profits. A tax on +rare and high-priced wines will fall wholly on the growers, or +rather, on the owners of the vineyards. The second case, in +which the producer sometimes bears a portion of the tax, is +more important: the case of duties on the produce of land +or of mines. These might be so high as to diminish materially +the demand for the produce, and compel the abandonment +of some of the inferior qualities of land or mines. Supposing +this to be the effect, the consumers, both in the country +itself and in those which dealt with it, would obtain the produce +at smaller cost; and a part only, instead of the whole, +of the duty would fall on the purchaser, who would be indemnified +chiefly at the expense of the land-owners or mine-owners +in the producing country. +</p> + +<p> +Duties on importation may, then, be divided <q rend='pre'>into two +classes: (1) those which have the effect of encouraging some +particular branch of domestic industry [protective duties], +(2) and those which have not [revenue duties]. The former +are purely mischievous, both to the country imposing them +and to those with whom it trades. They prevent a saving of +labor and capital, which, if permitted to be made, would be +divided in some proportion or other between the importing +country and the countries which buy what that country does +or might export.</q> +</p> + +<p> +<q rend='pre'>The other class of duties are those which do not encourage +one mode of procuring an article at the expense of +another, but allow interchange to take place just as if the +duty did not exist, and to produce the saving of labor which +constitutes the motive to international as to all other commerce. +Of this kind are duties on the importation of any +commodity which could not by any possibility be produced +at home, and duties not sufficiently high to counterbalance +the difference of expense between the production of the article +at home and its importation. Of the money which is +brought into the treasury of any country by taxes of this last +description, a part only is paid by the people of that country; +the remainder by the foreign consumers of their goods.</q> +</p> + +<pb n='581'/><anchor id='Pg581'/> + +<p> +<q rend='pre'>Nevertheless, this latter kind of taxes are in principle +as ineligible as the former, though not precisely on the same +ground. A protecting duty can never be a cause of gain, +but always and necessarily of loss, to the country imposing +it, just so far as it is efficacious to its end. A non-protecting +duty, on the contrary, would in most cases be a source of +gain to the country imposing it, in so far as throwing part +of the weight of its taxes upon other people is a gain; but +it would be a means which it could seldom be advisable to +adopt, being so easily counteracted by a precisely similar +proceeding on the other side.</q> +</p> + +<p> +<q rend='pre'>If the United States, in the case already supposed, +sought to obtain for herself more than her natural share of +the advantage of the trade with England, by imposing a +duty upon iron, England would only have to impose a duty +upon corn sufficient to diminish the demand for that article +about as much as the demand for iron had been diminished +in the United States by the tax. Things would then be as +before, and each country would pay its own tax—unless, +indeed, the sum of the two duties exceeded the entire advantage +of the trade, for in that case the trade and its +advantage would cease entirely.</q> +</p> + +<p> +<q>There would be no advantage, therefore, in imposing +duties of this kind with a view to gain by them in the manner +which has been pointed out. But, when any part of the +revenue is derived from taxes on commodities, these may +often be as little objectionable as the rest. It is evident, +too, that considerations of reciprocity, which are quite unessential +when the matter in debate is a protecting duty, are +of material importance when the repeal of duties of this +other description is discussed. A country can not be expected +to renounce the power of taxing foreigners unless +foreigners will in return practice toward itself the same forbearance. +The only mode in which a country can save +itself from being a loser by the revenue duties imposed by +other countries on its commodities is, to impose corresponding +revenue duties on theirs. Only it must take care that +<pb n='582'/><anchor id='Pg582'/> +those duties be not so high as to exceed all that remains of +the advantage of the trade, and put an end to importation +altogether, causing the article to be either produced at home, +or imported from another and a dearer market.</q> +</p> + +<quote rend='display'> +By <q>reciprocity</q> is meant that, when one country admits +goods free of duty from a second country, this latter country +will also admit the commodities of the former free of duty; +or, as is often the case, if not free of duty, at a less than the +usual rate. Until the last few years we have had a reciprocity +treaty with Canada, but it is not now in force; and an arrangement +for closer commercial relations with Mexico is now under +consideration. +</quote> + +</div> + +</div> + +<pb n='583'/><anchor id='Pg583'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter IV. Comparison Between Direct And Indirect Taxation.</head> + +<div> +<index index='toc'/> +<head>§ 1. Arguments for and against direct Taxation.</head> + +<p> +Are direct or indirect taxes the most eligible? A +man dislikes not so much the payment as the act of paying. +He dislikes seeing the face of the tax-collector, and being +subjected to his peremptory demand. Perhaps, too, the +money which he is required to pay directly out of his pocket +is the only taxation which he is quite sure that he pays at +all. That a tax of two shillings per pound on tea, or of +three shillings per bottle on wine, raises the price of each +pound of tea and bottle of wine which he consumes, by that +and more than that amount, can not, indeed, be denied; it is +the fact, and is intended to be so, and he himself, at times, is +perfectly aware of it; but it makes hardly any impression on +his practical feelings and associations, serving to illustrate +the distinction between what is merely known to be true and +what is felt to be so. The unpopularity of direct taxation, +contrasted with the easy manner in which the public consent +to let themselves be fleeced in the prices of commodities, has +generated in many friends of improvement a directly opposite +mode of thinking to the foregoing. They contend that +the very reason which makes direct taxation disagreeable +makes it preferable. Under it every one knows how much +he really pays; and, if he votes for a war, or any other expensive +national luxury, he does so with his eyes open to +what it costs him. If all taxes were direct, taxation would +be much more perceived than at present, and there would be +a security, which now there is not, for economy in the public +expenditure. +</p> + +<pb n='584'/><anchor id='Pg584'/> + +<p> +Although this argument is not without force, its weight +is likely to be constantly diminishing. The real incidence +of indirect taxation is every day more generally understood +and more familiarly recognized. The mere distinction between +paying money directly to the tax-collector and contributing +the same sum through the intervention of the tea-dealer +or the wine-merchant no longer makes the whole +difference between dislike or opposition and passive acquiescence. +</p> + +<p> +If our present revenue [of $400,000,000 in 1883] were all +raised by direct taxes, an extreme dissatisfaction would certainly +arise at having to pay so much; but while men's +minds are so little guided by reason, as such a change of +feeling from so irrelevant a cause would imply, so great an +aversion to taxation might not be an unqualified good. Of +the [$400,000,000] in question, nearly [$60,000,000] are +pledged, under the most binding obligations, to those whose +property has been borrowed and spent by the state; and, +while this debt remains unredeemed, a greatly increased impatience +of taxation would involve no little danger of a +breach of faith. That part, indeed, of the public expenditure +which is devoted to the maintenance of civil and military +establishments [$206,000,000] (that is, all except the interest +of the national debt), affords, in many of its details, ample +scope for retrenchment. If so great an addition were made +to the public dislike of taxation as might be the consequence +of confining it to the direct form, the classes who profit by +the misapplication of public money might probably succeed +in saving that by which they profit, at the expense of that +which would only be useful to the public. +</p> + +<p> +There is, however, a frequent plea in support of indirect +taxation, which must be altogether rejected as grounded on +a fallacy. We are often told that taxes on commodities are +less burdensome than other taxes, because the contributor +can escape from them by ceasing to use the taxed commodity. +He certainly can, if that be his object, deprive the Government +of the money; but he does so by a sacrifice of his own +<pb n='585'/><anchor id='Pg585'/> +indulgences, which (if he chose to undergo it) would equally +make up to him for the same amount taken from him by +direct taxation. Suppose a tax laid on wine, sufficient to add +[$25] to the price of the quantity of wine which he consumes +in a year. He has only (we are told) to diminish his consumption +of wine by [$25], and he escapes the burden. True, but +if the [$25], instead of being laid on wine, had been taken +from him by an income-tax, he could, by expending [$25] +less in wine, equally save the amount of the tax, so that the +difference between the two cases is really illusory. If the +Government takes from the contributor [$25] a year, whether +in one way or another, exactly that amount must be retrenched +from his consumption to leave him as well off as before; and +in either way the same amount of sacrifice, neither more nor +less, is imposed on him. +</p> + +<p> +On the other hand, it is some advantage on the side of +indirect taxes that what they exact from the contributor is +taken at a time and in a manner likely to be convenient to +him. It is paid at a time when he has at any rate a payment +to make; it causes, therefore, no additional trouble, nor (unless +the tax be on necessaries) any inconvenience but what is +inseparable from the payment of the amount. He can also, +except in the case of very perishable articles, select his own +time for laying in a stock of the commodity, and consequently +for payment of the tax. The producer or dealer who advances +these taxes is, indeed, sometimes subjected to inconvenience; +but, in the case of imported goods, this inconvenience +is reduced to a minimum by what is called the Warehousing +System, under which, instead of paying the duty at +the time of importation, he is only required to do so when +he takes out the goods for consumption, which is seldom +done until he has either actually found, or has the prospect +of immediately finding, a purchaser. +</p> + +<p> +The strongest objection, however, to raising the whole or +the greater part of a large revenue by direct taxes, is the impossibility +of assessing them fairly without a conscientious +co-operation on the part of the contributors, not to be hoped +<pb n='586'/><anchor id='Pg586'/> +for in the present low state of public morality. In the case +of an income-tax, we have already seen that, unless it be found +practicable to exempt savings altogether from the tax, the +burden can not be apportioned with any tolerable approach +to fairness upon those whose incomes are derived from business +or professions; and this is in fact admitted by most of +the advocates of direct taxation who, I am afraid, generally +get over the difficulty by leaving those classes untaxed, and +confining their projected income-tax to <q>realized property,</q> +in which form it certainly has the merit of being a very easy +form of plunder. But enough has been said in condemnation +of this expedient. We have seen, however, that a house-tax +is a form of direct taxation not liable to the same objections +as an income-tax, and indeed liable to as few objections +of any kind as perhaps any of our indirect taxes. But it +would be impossible to raise, by a house-tax alone, the greatest +part of the revenue, without producing a very objectionable +overcrowding of the population, through the strong +motive which all persons would have to avoid the tax by restricting +their house accommodation. +</p> + +<p> +A certain amount of revenue may, as we have seen, be +obtained without injustice by a peculiar tax on rent. Besides +(1) the land-tax,<note place='foot'>A land-tax is, +to its extent, an evidence that the state claims a certain +right in the soil, and that it stands to the contributor, as it were, in the place of +a landlord. This tax, however, is generally so small that it does not materially +diminish the rent of land. So far as it goes, it is a tax on +rent.</note> and (2) an equivalent for the revenue +derived from stamp duties on the conveyance of land, some +further taxation might, I have contended, at some future +period be imposed, (3) to enable the state to participate in +the progressive increase of the incomes of landlords from +natural causes. (4) Legacies and inheritances, we have also +seen, ought to be subjected to taxation sufficient to yield a +considerable revenue. With these taxes, and (5) a house-tax +of suitable amount, we should, I think, have reached the +prudent limits of direct taxation. The remainder of the +revenue would have to be provided by taxes on consumption, +<pb n='587'/><anchor id='Pg587'/> +and the question is, which of these are the least objectionable. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. What forms of indirect taxation are most eligible?</head> + +<p> +There are some forms of indirect taxation which +must be peremptorily excluded. (1.) Taxes on commodities, +for revenue purposes, must not operate as protecting duties, +but must be levied impartially on every mode in which the +articles can be obtained, whether produced in the country +itself, or imported. (2.) An exclusion must also be put upon +all taxes on the necessaries of life, or on the materials or instruments +employed in producing those necessaries. Such +taxes are always liable to encroach on what should be left +untaxed, the incomes barely sufficient for healthful existence; +and on the most favorable supposition, namely, that +wages rise to compensate the laborers for the tax, it operates +as a peculiar tax on profits, which is at once unjust and +detrimental to national wealth.<note place='foot'>Some argue +that the materials and instruments of all production should be +exempt from taxation; but these, when they do not enter into the production +of necessaries, seem as proper subjects of taxation as the finished article. It is +chiefly with reference to foreign trade that such taxes have been considered injurious. +Internationally speaking, they may be looked upon as export duties, +and, unless in cases in which an export duty is advisable, they should be accompanied +with an equivalent drawback on exportation. But there is no sufficient +reason against taxing the materials and instruments used in the production of +anything which is itself a fit object of +taxation.—<hi rend='smallcaps'>Mill.</hi></note> What remain are taxes on +luxuries. And these have some properties which strongly +recommend them. In the first place, they can never, by +any possibility, touch those whose whole income is expended +on necessaries; while they do reach those by whom what +is required for necessaries is expended on indulgences. In +the next place, they operate in some cases as a useful, and +the only useful, kind of sumptuary law. A great portion of +the expense of the higher and middle classes in most countries +is not incurred for the sake of the pleasure afforded by +the things on which the money is spent, but from regard to +opinion, and an idea that certain expenses are expected from +them, as an appendage of station; and I can not but think +that expenditure of this sort is a most desirable subject of +<pb n='588'/><anchor id='Pg588'/> +taxation. When a thing is bought, not for its use but for +its costliness, cheapness is no recommendation. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. Practical rules for indirect taxation.</head> + +<p> +In order to reduce as much as possible the inconveniences, +and increase the advantages, incident to taxes +on commodities, the following are the practical rules which +suggest themselves: 1. To raise as large a revenue as conveniently +may be, from those classes of luxuries which have +most connection with vanity, and least with positive enjoyment; +such as the more costly qualities of all kinds of personal +equipment and ornament. But with regard to horses +and carriages, as there are many persons to whom, from health +or constitution, these are not so much luxuries as necessaries, +the tax paid by those who have but one riding-horse, or but +one carriage, especially of the cheaper descriptions, should +be low; while taxation should rise very rapidly with the +number of horses and carriages, and with their costliness. +2. Whenever possible, to demand the tax, not from the producer, +but directly from the consumer, since, when levied on +the producer, it raises the price always by more, and often +by much more, than the mere amount of the tax. 3. But +as the only indirect taxes which yield a large revenue are +those which fall on articles of universal or very general consumption, +and as it is therefore necessary to have some taxes +on real luxuries, that is, on things which afford pleasure in +themselves, and are valued on that account rather than for +their cost, these taxes should, if possible, be so adjusted as +to fall with the same proportional weight on small, on moderate, +and on large incomes. This is not an easy matter; since +the things which are the subjects of the more productive +taxes are in proportion more largely consumed by the poorer +members of the community than by the rich. Tea, coffee, +sugar, tobacco, fermented drinks, can hardly be so taxed +that the poor shall not bear more than their due share of the +burden. Something might be done by making the duty on +the superior qualities, which are used by the richer consumers, +much higher in proportion to the value; but in some +cases the difficulty of at all adjusting the duty to the value, +<pb n='589'/><anchor id='Pg589'/> +so as to prevent evasion, is said, with what truth I know not, +to be insuperable; so that it is thought necessary to levy the +same fixed duty on all the qualities alike. 4. As far as is +consistent with the preceding rules, taxation should rather +be concentrated on a few articles than diffused over many, +in order that the expenses of collection may be smaller, and +that as few employments as possible may be burdensomely +and vexatiously interfered with. 5. Among luxuries of general +consumption, taxation should by preference attach itself +to stimulants, because these, though in themselves as legitimate +indulgences as any others, are more liable than most +others to be used in excess, so that the check to consumption, +naturally arising from taxation, is on the whole better +applied to them than to other things. 6. As far as other +considerations permit, taxation should be confined to imported +articles, since these can be taxed with a less degree of +vexatious interference, and with fewer incidental bad effects, +than when a tax is levied on the field or on the workshop. +Custom duties are, <foreign lang='la' rend='italic'>cæteris paribus</foreign>, +much less objectionable +than excise: but they must be laid only on things which +either can not, or at least will not, be produced in the country +itself; or else their production there must be prohibited +(as in England is the case with tobacco), or subjected to an +excise duty of equivalent amount. 7. No tax ought to be +kept so high as to furnish a motive to its evasion, too strong +to be counteracted by ordinary means of prevention; and +especially no commodity should be taxed so highly as to raise +up a class of lawless characters—smugglers, illicit distillers, +and the like. +</p> + +<quote rend='display'> +<p> +The experience of the United States is pregnant with lessons +in this direction. During the war we imposed an internal-revenue +tax on distilled spirits of so large an amount that it not +only produced less revenue than a smaller tax would have done, +but it created gigantic frauds, public corruption, and infinite +devices to escape the payment. The following table will show +how the production, as indicated by the tax, fell off when the +tax was excessive. It forced evasions by distillers. It has been +found by various experiences that with a less rate the revenue +is largely increased. +</p> + +<pb n='590'/><anchor id='Pg590'/> + +<table rend="latexcolumns: 'l r p{2cm} l'; + tblcolumns: 'lw(15) lw(10) lw(10) lw(20)'"> +<row><cell>Year.</cell><cell>Revenue.</cell> + <cell>Production indicated by the tax (gallons).</cell> + <cell>Amount of tax.</cell></row> +<row><cell>1862-1863</cell><cell>$3,200,000</cell><cell>16,000,000</cell> + <cell>July, 1862, 20 c. per gallon.</cell></row> +<row><cell>1867-1868</cell><cell>14,200,000</cell><cell>7,000,000</cell> + <cell>Jan., 1865, $2 per gallon.</cell></row> +<row><cell>1868-1869</cell><cell>34,200,000</cell><cell>16,000,000</cell> + <cell>July, 1868, 50 c. per gallon.</cell></row> +<row><cell>1869-1870</cell><cell>39,200,000</cell><cell>18,000,000</cell> + <cell></cell></row> +</table> + +<p> +The actual amount reached by taxation is very much less +than that known to be actually used by from ten to fifteen +millions of gallons, or nearly one half the product. The openness +of the frauds can be judged by the fact that proof spirits +were <q>openly sold in the market, and even quoted in price-currents, +at from five to fifteen cents less per gallon than the +rate of tax and the average cost of manufacture.</q><note place='foot'>See Lalor's +<q>Cyclopædia,</q> article <q>Distilled Spirits,</q> by David A. Wells.</note> +</p> +</quote> + +<p> +In what manner the finer articles of manufacture, consumed +by the rich, might most advantageously be taxed, I +must leave to be decided by those who have the requisite +practical knowledge. The difficulty would be, to effect it +without an inadmissible degree of interference with production. +In countries which, like the United States, import +the principal part of the finer manufactures which they consume, +there is little difficulty in the matter; and, even where +nothing is imported but the raw material, that may be taxed, +especially the qualities of it which are exclusively employed +for the fabrics used by the richer class of consumers. Thus, +in England a high custom duty on raw silk would be consistent +with principle; and it might perhaps be practicable +to tax the finer qualities of cotton or linen yarn, whether +spun in the country itself or imported. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. Taxation systems of the United States and other Countries.</head> + +<quote rend='display'> +<p> +It will now well repay study to examine Chart <ref target='Chart_XXI'>No. +XXI</ref>, which shows in what manner the United States have +raised their revenues, and to consider how far the right rules +of taxation have been followed. +</p> + +<p> +I. For means of comparison, I shall give the last annual +budget of the United States in order to make clear from what +sources the country derives its revenues: +</p> + +<pb n='591'/><anchor id='Pg591'/> + +<anchor id='Chart_XXI'/> +<p> +Chart XXI. +</p> + +<p> +United States Budget, Year Ending June 30, 1883. +</p> + +<p> +[In millions and tenths of millions.] +</p> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell><hi rend='italic'>Receipts:</hi></cell><cell></cell></row> +<row><cell>Customs</cell><cell>$214.7</cell></row> +<row><cell>Internal revenue</cell><cell>144.7</cell></row> +<row><cell>Direct tax</cell><cell>.1</cell></row> +<row><cell>Sale of public lands</cell><cell>7.9</cell></row> +<row><cell>Miscellaneous</cell><cell>30.8</cell></row> +<row><cell>Net ordinary receipts</cell><cell>$398.2</cell></row> +</table> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell><hi rend='italic'>Expenditures:</hi></cell><cell></cell></row> +<row><cell>War Department</cell><cell>$48.9</cell></row> +<row><cell>Navy Department</cell><cell>15.3</cell></row> +<row><cell>Indians</cell><cell>7.3</cell></row> +<row><cell>Pensions</cell><cell>66.0</cell></row> +<row><cell>Miscellaneous</cell><cell>68.7</cell></row> +<row><cell>Net ordinary expenditures</cell><cell>$206.2</cell></row> +<row><cell>Interest on public debt</cell><cell>59.2</cell></row> +<row><cell>Total</cell><cell>$265.4</cell></row> +</table> + +<p> +This leaves a surplus of $132,839,444 above all expenditures, +and our problem is now where to reduce taxation. The annual +interest charge is lessening with the payment of the public +debt, having fallen from its highest figure of $143,781,591 in +1867, to $59,160,131 in 1883.<note place='foot'><q>United +States Statistical Abstract,</q> 1883, pp. 2, 3.</note> +Our national taxation is practically +all indirect, that of internal taxation being chiefly levied +on tobacco and distilled spirits, and our customs falling on +almost all articles which can be imported, materials as well as +manufactures. +</p> + +<p> +In the United States direct taxation on real and personal +property is very generally levied for State, county, and municipal +purposes. In fact, nearly all the perceptible taxation is +the property tax, and, inasmuch as the State and county tax is +very light, the burden is almost always owing to municipal and +town expenditures. People do not seem to be aware of the +enormous national burden, because the taxes are indirect, and +only increase the prices of commodities. Other countries, it +will be seen, make a greater use of direct taxation than the +United States. In fact, the comparison of the ways by which +different countries collect their revenues may naturally show +us where we may gain by their experience. +</p> + +<p> +II. The English system is especially interesting, because, +after having had an extended scheme of customs duties, they +abandoned it, and raised their revenue, some on imported articles, +<pb n='592'/><anchor id='Pg592'/> +it is true (generally on those which could not be produced +in England), but by the income-tax, and other forms.<note place='foot'>The +old condition of things was well described by Sydney Smith: <q>We +must pay taxes upon every article which enters into the mouth or covers the +back, or is placed under the foot. Taxes upon everything which is pleasant to +see, hear, feel, smell, and taste. Taxes upon warmth, light, and locomotion. +Taxes upon everything upon earth and the waters under the earth. On everything +that comes from abroad or is grown at home. Taxes on raw material. +Taxes on every value that is added to it by the industry of man. Taxes on the +sauce which pampers man's appetite and the drug which restores him to health. +On the ermine which decorates the judge and the rope which hangs the criminal. +On the brass nails of the coffin and on the ribbons of the bride. At bed or at +board, couchant or levant, we must pay. The beardless youth manages his +taxed horse with a taxed bridle on a taxed road, and the dying Englishman, +pouring his medicine (which has paid 7 per cent) into a spoon (which has paid +30 per cent), throws himself back upon his chintz bed (which has paid 22 per +cent), makes his will, and expires in the arms of the apothecary (who has paid +£100 for the privilege of putting him to death). His whole property is then +taxed from 2 to 10 per cent; besides the probate, large fees are demanded for +burying him in the chancel: his virtues are handed down to posterity on taxed +marble, and he is then gathered to his fathers to be taxed no more.</q></note> +</p> + +<p> +In 1842 Sir Robert Peel found 1,200 articles subject to customs-duties. +He began (1) by removing all prohibitions; (2) +by reducing duties on raw materials to 5 per cent or less; (3) +by limiting the rates on partially manufactured goods to 12 +per cent; and (4) those on wholly manufactured goods to 20 +per cent. Now customs-duties are levied only on beer, cards, +chiccory, chocolate, cocoa, coffee, dried fruit, plate, spirits, tea, +tobacco, and wine. The following budget gives the sources of +revenue for Great Britain:<note place='foot'><q>Financial +Reform Almanac,</q> 1883, pp. 107-109.</note> +</p> + +<p> +Budget Of Great Britain, 1883. +</p> + +<p> +[In millions and tenths of millions.] +</p> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell><hi rend='italic'>Receipts:</hi></cell><cell></cell></row> +<row><cell>Customs</cell><cell>$98.4</cell></row> +<row><cell>Excise (such as on tobacco and spirits)</cell><cell>134.9</cell></row> +<row><cell>Stamps</cell><cell>58.5</cell></row> +<row><cell>Land tax</cell><cell>5.2</cell></row> +<row><cell>House duty</cell><cell>8.9</cell></row> +<row><cell>Income tax</cell><cell>60.9</cell></row> +<row><cell>Post-Office</cell><cell>36.5</cell></row> +<row><cell>Telegraph</cell><cell>8.6</cell></row> +<row><cell>Crown lands</cell><cell>2.0</cell></row> +<row><cell>Interest (on loans, Suez Canal, etc.)</cell><cell>6.1</cell></row> +<row><cell>Miscellaneous</cell><cell>26.4</cell></row> +<row><cell>Total</cell><cell>$446.4</cell></row> +</table> + +<pb n='593'/><anchor id='Pg593'/> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell><hi rend='italic'>Expenditures:</hi></cell><cell></cell></row> +<row><cell>Interest on national debt</cell><cell>$148.4</cell></row> +<row><cell>Army, navy, etc.</cell><cell>157.1</cell></row> +<row><cell>Cost of revenue departments</cell><cell>45.1</cell></row> +<row><cell>Public works</cell><cell>9.1</cell></row> +<row><cell>Public departments, salaries, etc.</cell><cell>12.5</cell></row> +<row><cell>Law and justice</cell><cell>35.7</cell></row> +<row><cell>Education, science, and art</cell><cell>22.9</cell></row> +<row><cell>Colonial and consular</cell><cell>3.4</cell></row> +<row><cell>Civil list</cell><cell>2.0</cell></row> +<row><cell>Pensions</cell><cell>2.0</cell></row> +<row><cell>Miscellaneous</cell><cell>6.8</cell></row> +<row><cell>Total expenditures</cell><cell>$445.0</cell></row> +</table> + +<p> +From this it will be seen that in the land, income, and +house taxes, Great Britain raises by direct taxation about +$75,000,000, and in customs and excise, by indirect taxation, +about $233,000,000. +</p> + +<p> +III. The following is the system adopted by Germany +(Prussia): +</p> + +<p> +German Budget, 1881-1882. +</p> + +<p> +[In millions and tenths of millions.] +</p> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell><hi rend='italic'>Receipts:</hi></cell><cell></cell></row> +<row><cell>(1.) Property income from domains and forests</cell><cell>$11.7</cell></row> +<row><cell>From mines and salt-works</cell><cell>2.5</cell></row> +<row><cell>From railways</cell><cell>22.5</cell></row> +<row><cell>Miscellaneous</cell><cell>5.0</cell></row> +<row><cell></cell><cell>$41.7</cell></row> +<row><cell>(2.) Royal Lottery</cell><cell>1.0</cell></row> +<row><cell>(3.) Bureau of Justice</cell><cell>$12.7</cell></row> +<row><cell>Harbors and bridges</cell><cell>.5</cell></row> +<row><cell></cell><cell>13.2</cell></row> +<row><cell>(4.) Direct taxes</cell><cell>$35.5</cell></row> +<row><cell>(5.) Indirect taxes (for Prussia)</cell><cell>12.3</cell></row> +<row><cell>Total receipts</cell><cell>$103.6</cell></row> +</table> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell><hi rend='italic'>Expenditures:</hi></cell><cell></cell></row> +<row><cell>(1.) Civil list</cell><cell>3.0</cell></row> +<row><cell>(2.) Debt</cell><cell>25.0</cell></row> +<row><cell>(3.) Various ministries, schools, etc.</cell><cell>49.5</cell></row> +<row><cell>(4.) Pensions</cell><cell>4.0</cell></row> +<row><cell>(5.) Miscellaneous</cell><cell>19.5</cell></row> +<row><cell>Total expenditures<note place='foot'><q>Handbuch +der Verfassung und Verwaltung in Preussen und dem Deutschen +Reich,</q> by Graf Hue de Grais (second edition, 1882), p. 138.</note></cell> + <cell>$101.0</cell></row> +</table> + +<p> +The Prussian <emph>direct</emph> taxes include (1) a land-tax, (2) a house-tax, +(3) an income-tax, (4) a class-tax, (5) a trade-tax, and (6) +miscellaneous taxes. +</p> + +<pb n='594'/><anchor id='Pg594'/> + +<p> +IV. How the French supply themselves may be seen by the +following statement:<note place='foot'><q>Le Budget. Revenus +et Dépenses de la France,</q> by M. Block (1881), pp. +57, 82.</note> +</p> + +<p> +French Budget, 1881. +</p> + +<p> +[In millions and tenths of millions.] +</p> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell><hi rend='italic'>Receipts:</hi></cell><cell></cell></row> +<row><cell>Direct taxes</cell><cell>$75.9</cell></row> +<row><cell>Similar taxes</cell><cell>4.7</cell></row> +<row><cell>Registry, stamps, etc</cell><cell>135.1</cell></row> +<row><cell>Forests</cell><cell>7.6</cell></row> +<row><cell>Customs (and salt duty $3.5)</cell><cell>65.4</cell></row> +<row><cell>Indirect taxes (including tobacco)</cell><cell>209.7</cell></row> +<row><cell>Post-Office and telegraph</cell><cell>27.2</cell></row> +<row><cell>Miscellaneous</cell><cell>29.8</cell></row> +<row><cell>Total receipts</cell><cell>$555.4</cell></row> +</table> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell><hi rend='italic'>Expenditures:</hi></cell><cell></cell></row> +<row><cell>Public debt, etc.</cell><cell>$249.0</cell></row> +<row><cell>General functions of the ministries</cell><cell>243.7</cell></row> +<row><cell>Administrative expenses, cost of revenue collections, etc.</cell> + <cell>58.5</cell></row> +<row><cell>Miscellaneous</cell><cell>3.5</cell></row> +<row><cell>Total expenditures</cell><cell>$554.7</cell></row> +</table> + +<p> +The direct taxes are (1) on property; (2) one nearly like +our poll-tax together with a species of income-tax; (3) a tax +on doors and windows; and (4) one on licenses. +</p> + +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. A <hi rend='italic'>Résumé</hi> of the general principles of taxation.</head> + +<p> +After the manner of our classification and +<foreign lang='fr' rend='italic'>résumé</foreign> of +the subject of value and money, it may be convenient to here +insert a recapitulation of the various principles under the treatment +of taxation.<note place='foot'>Taken, with modifications, +from Milnes's <q>Problems in Political Economy,</q> +p. 377.</note> +</p> + +<pb n='595'/><anchor id='Pg595'/> + +<p> +Comparison Between Direct And Indirect Taxation. +</p> + +<p> +Adam Smith's <q>Canons of Taxation.</q>—A tax should be: I. <emph>Equal</emph> +(in amount of <emph>sacrifice</emph> entailed). II. <emph>Certain.</emph> +III. <emph>Timely.</emph> IV. <emph>All for the state.</emph> +</p> + +<p> +A Tax is either:<lb/> +Direct.<lb/> +Indirect (on commodities.) +</p> + +<p> +Direct taxes are:<lb/> +On Income.<lb/> +On Expenditure. +</p> + +<p> +Taxes on Income are:<lb/> +General.<lb/> +Special. +</p> + +<p> +General income taxes. +The best of taxes, if people were all honest. As it is, it falls +most heavily on the conscientious. Should be reserved for emergency. All +<emph>savings</emph> and a fixed amount in <emph>all</emph> incomes should +be exempt. +</p> + +<p> +Special taxes are on:<lb/> +Rent.<lb/> +Wages.<lb/> +Profits. +</p> + +<p> +Taxes on Rent. Agricultural rent is meant. It falls entirely on the landlord, and, if not +balanced by taxes on other classes, is unjust. May be blended with a tax on profits, if +on rent due to landlord's improvements. +</p> + +<p> +Taxes on Wages are:<lb/> +On Skilled.<lb/> +On Unskilled. +</p> + +<p> +Skilled wages are at a monopoly price, and taxes on them are paid by the laborers, so +long as wages are not reduced below their just proportion. +</p> + +<p> +Unskilled wages. (1) <hi rend='italic'>Population diminished by it.</hi> Paid by profits. +(2) <hi rend='italic'>Population left stationary.</hi> Shared between profits and +wages. (3) <hi rend='italic'>Population increasing in spite of it.</hi> Falls +entirely on wages. +</p> + +<p> +Taxes on Profits. May possible stimulate production, and is then a good all round, +contributing to the state, and leaving no one any poorer. If not, if profits are +really diminished by the tax, capital may be diminished also. +This (a) may, or (b) may not diminish population. If (a), then the margin of +cultivation ceases to be extended, and part of the tax, +<foreign lang='la' rend='italic'>pro tanto</foreign>, falls on the landlords. If (b), +then wages fall, and part of the tax falls on the laborer. Total result is a nearer +approach to the stationary state. +</p> + +<p> +Taxes on Expenditure are open to the same objections as the general income-tax. +They may be:<lb/> +Assessed taxes.<lb/> +House-tax. +</p> + +<p> +Assessed taxes, such as on servants, dogs, etc. These are rigidly <emph>direct</emph>. +</p> + +<p> +House-taxes are:<lb/> +On building-rent.<lb/> +On ground-rent. +</p> + +<p> +House-taxes on building-rent are paid by occupier. This tax is <emph>indirect</emph>. +</p> + +<p> +House-taxes on ground-rent are (1.) with, or (2.) without an equivalent tax +on agricultural rent. (1.) Are paid by ground landlord wholly, and +therefore <emph>direct</emph>. (2.) Are part by occupier, and therefore +<emph>indirect</emph>. +</p> + +<p> +Indirect taxes are: +Excise,<lb/> +Customs, or<lb/> +Tolls. +</p> + +<p> +Indirect taxes may be on (1.) Long or (2.) Short investments of capital. +</p> + +<p> +Indirect taxes on Long investments are always unadvisable, in view of Canon IV. +</p> + +<p> +Indirect taxes on Short investments are subject to the laws of indirect taxation. +1. Tax vanities rather than positive enjoyments (e.g., liveries rather than +servants). 2. The consumer and not the producer should pay the tax collector (Canon +IV). That is, collect the tax as near the actual consumer as possible. 3. Taxes on +real enjoyments to be kept as equal as possible for large and small means. 4. Tax as +few articles as possible. England taxes only a very small number of imports. +The United States taxes nearly everything imported. 5. Tax stimulants freely. +The United States collect $91,000,000 from spirits and liquors, and $42,000,000 from +tobacco (1883). 6. Tax imports of commodities not made at home, or whose home production +is under an excise (internal revenue) duty equal to the customs tax. 7. Keep the +rate of tax low, in order to get most revenue. +</p> + +</div> + +</div> + +<pb n='596'/><anchor id='Pg596'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter V. Of A National Debt.</head> + +<div> +<index index='toc'/> +<head>§ 1. Is it desirable to defray extraordinary public expenses by loans?</head> + +<p> +The question must now be considered, how far it is +right or expedient to raise money for the purposes of government, +not by laying on taxes to the amount required, but +by taking a portion of the capital of the country in the form +of a loan, and charging the public revenue with only the +interest. +</p> + +<p> +This question has already been touched upon in the First +Book.<note place='foot'><ref target='Book_I_Chapter_IV_Section_5'>Book I, +Chap. IV, § 5</ref>.</note> We remarked, that if the capital taken in loans is +abstracted from funds either engaged in production, or destined +to be employed in it, their diversion from that purpose +is equivalent to taking the amount from the wages of the +laboring-classes. Borrowing, in this case, is not a substitute +for raising the supplies within the year. A government +which borrows does actually take the amount within the +year, and that too by a tax exclusively on the laboring-classes, +than which it could have done nothing worse, if it +had supplied its wants by avowed taxation; and in that case +the transaction, and its evils, would have ended with the +emergency; while, by the circuitous mode adopted, the value +exacted from the laborers is gained, not by the state, but by +the employers of labor, the state remaining charged with the +debt besides, and with its interest in perpetuity. The system +of public loans, in such circumstances, may be pronounced +the very worst which, in the present state of civilization, +<pb n='597'/><anchor id='Pg597'/> +is still included in the catalogue of financial expedients. +</p> + +<p> +We, however, remarked that there are other circumstances +in which loans are not chargeable with these pernicious +consequences: namely, first, when what is borrowed is +foreign capital, the overflowings of the general accumulation +of the world; or, secondly, when it is capital which either +would not have been saved at all, unless this mode of investment +had been open to it, or, after being saved, would have +been wasted in unproductive enterprises, or sent to seek employment +in foreign countries. When the progress of accumulation +has reduced profits either to the ultimate or to the +practical minimum—to the rate less than which would either +put a stop to the increase of capital, or send the whole of +the new accumulations abroad—government may annually +intercept these new accumulations, without trenching on the +employment or wages of the laboring-classes in the country +itself, or perhaps in any other country. To this extent, +therefore, the loan system may be carried, without being liable +to the utter and peremptory condemnation which is due +to it when it overpasses this limit. What is wanted is an +index to determine whether, in any given series of years, as +during the last great war, for example, the limit has been +exceeded or not. +</p> + +<p> +Such an index exists, at once a certain and an obvious +one. Did the Government, by its loan operations, augment +the rate of interest? If it only opened a channel for capital +which would not otherwise have been accumulated, or which, +if accumulated, would not have been employed within the +country, this implies that the capital, which the Government +took and expended, could not have found employment +at the existing rate of interest. So long as the loans do no +more than absorb this surplus, they prevent any tendency +to a fall of the rate of interest, but they can not occasion +any rise. [But] To the full extent to which the loans of +government, during the war, caused the rate of interest to +exceed what it was before, and what it has been since, those +<pb n='598'/><anchor id='Pg598'/> +loans are chargeable with all the evils which have been described. +If it be objected that interest only rose because +profits rose, I reply that this does not weaken, but strengthens, +the argument. If the Government loans produced the +rise of profits by the great amount of capital which they absorbed, +by what means can they have had this effect, unless +by lowering the wages of labor? It will, perhaps, be said +that what kept profits high during the war was not the drafts +made on the national capital by the loans, but the rapid progress +of industrial improvements. This, in a great measure, +was the fact; and it, no doubt, alleviated the hardship to the +laboring-classes, and made the financial system which was +pursued less actively mischievous, but not less contrary to +principle. These very improvements in industry made room +for a larger amount of capital; and the Government, by +draining away a great part of the annual accumulations, did +not indeed prevent that capital from existing ultimately (for +it started into existence with great rapidity after the peace), +but prevented it from existing at the time, and subtracted +just so much, while the war lasted, from distribution among +productive laborers. If the Government had abstained from +taking this capital by loan, and had allowed it to reach the +laborers, but had raised the supplies which it required by a +direct tax on the laboring-classes, it would have produced (in +every respect but the expense and inconvenience of collecting +the tax) the very same economical effects which it did +produce, except that we should not now have had the debt. +The course it actually took was therefore worse than the +very worst mode which it could possibly have adopted of +raising the supplies within the year; and the only excuse, or +justification, which it admits of (so far as that excuse could be +truly pleaded) was hard necessity; the impossibility of raising +so enormous an annual sum by taxation, without resorting +to taxes which from their odiousness, or from the facility of +evasion, it would have been found impracticable to enforce.<note place='foot'>Although +Mr. Mill had reference to the French wars in the beginning of this +century, his words apply also to the circumstances of our own late war, +1861-1865.</note> +</p> + +<pb n='599'/><anchor id='Pg599'/> + +<p> +When government loans are limited to the overflowings +of the national capital, or to those accumulations which would +not take place at all unless suffered to overflow, they are at +least not liable to this grave condemnation. In this case, +therefore, the question really is, what it is commonly supposed +to be in all cases—namely, a choice between a great +sacrifice at once, and a small one indefinitely prolonged. On +this matter it seems rational to think that the prudence of a +nation will dictate the same conduct as the prudence of an +individual; to submit to as much of the privation immediately +as can easily be borne, and, only when any further burden +would distress or cripple them too much, to provide for +the remainder by mortgaging their future income. It is an +excellent maxim to make present resources suffice for present +wants; the future will have its own wants to provide for. +On the other hand, it may reasonably be taken into consideration +that, in a country increasing in wealth, the necessary +expenses of government do not increase in the same ratio as +capital or population; any burden, therefore, is always less +and less felt; and, since those extraordinary expenses of government +which are fit to be incurred at all are mostly beneficial +beyond the existing generation, there is no injustice in +making posterity pay a part of the price, if the inconvenience +would be extreme of defraying the whole of it by +the exertions and sacrifices of the generation which first +incurred it. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. Not desirable to redeem a national Debt by a general Contribution.</head> + +<p> +When a country, wisely or unwisely, has burdened +itself with a debt, is it expedient to take steps for redeeming +that debt? In principle it is impossible not to maintain +the affirmative. +</p> + +<p> +Two modes have been contemplated of paying off a national +debt: either at once by a general contribution, or +gradually by a surplus revenue. The first would be incomparably +the best, if it were practicable; and it would be +practicable if it could justly be done by assessment on property +alone. If property bore the whole interest of the debt, +property might, with great advantage to itself, pay it off; +<pb n='600'/><anchor id='Pg600'/> +since this would be merely surrendering to a creditor the +principal sum, the whole annual proceeds of which were +already his by law, and would be equivalent to what a +land-owner does when he sells part of his estate, to free the +remainder from a mortgage. But property, it need hardly +be said, does not pay, and can not justly be required to pay, +the whole interest of the debt. Whatever is the fitting contribution +from property to the general expenses of the state, +in the same, and in no greater proportion, should it contribute +toward either the interest or the repayment of the +national debt. This, however, if admitted, is fatal to any +scheme for the extinction of the debt by a general assessment +on the community. Persons of property could pay +their share of the amount by a sacrifice of property, and +have the same net income as before. +</p> + +<p rend='text-align: center'> + <figure url='images/debt-contributions.png' rend='width: 50%'> + <figDesc>Illustration.</figDesc> + </figure> +</p> + +<quote rend='display'> +If a person owns a property, A B, which returns him +$1,000 income, and if he pays $10 a year in taxes as his share +of interest on the public debt, suppose that part of his estate +represented by X, which returns him +annually $10 (and which return he +has annually handed over to the state), +to be carved out of it, and that he is +to be hereafter relieved of his share +of taxes. He would then, after having +paid the capitalized value (X) of that which was his share +of the annual tax to the state on account of the public debt, +have the same net income as before; for he was never able to +enjoy the income of X. +</quote> + +<p> +If those who have no accumulations, but only incomes, +were required to make up by a single payment the equivalent +of the annual charge laid on them by the taxes maintained +to pay the interest of the debt, they could only do so +by incurring a private debt equal to their share of the public +debt; while, from the insufficiency, in most cases, of the +security which they could give, the interest would amount +to a much larger annual sum than their share of that now +paid by the state. Besides, a collective debt defrayed by +taxes has, over the same debt parceled out among individuals, +the immense advantage that it is virtually a mutual insurance +<pb n='601'/><anchor id='Pg601'/> +among the contributors. If the fortune of a contributor +diminishes, his taxes diminish; if he is ruined, they +cease altogether, and his portion of the debt is wholly transferred +to the solvent members of the community. If it +were laid on him as a private obligation, he would still be +liable to it, even when penniless. +</p> + +<p> +When the state possesses property, in land or otherwise, +which there are not strong reasons of public utility for its +retaining at its disposal, this should be employed, as far as +it will go, in extinguishing debt. Any casual gain, or god-send, +is naturally devoted to the same purpose. Beyond this, +the only mode which is both just and feasible, of extinguishing +or reducing a national debt, is by means of a surplus +revenue. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. In what cases desirable to maintain a surplus revenue for the redemption +of Debt.</head> + +<p> +The desirableness, <hi rend='italic'>per se</hi>, of maintaining a surplus +for this purpose does not, I think, admit of a doubt. +</p> + +<p> +It is not, however, advisable in all cases to maintain a +surplus revenue for the extinction of debt. The advantage +of paying off the national debt is, that it would enable us +to get rid of the worst half of our taxation. But of this +worst half some portions must be worse than others, and to +get rid of those would be a greater benefit proportionally +than to get rid of the rest. If renouncing a surplus revenue +would enable us to dispense with a tax, we ought to consider +the very worst of all our taxes as precisely the one +which we are keeping up for the sake of ultimately abolishing +taxes not so bad as itself. In a country advancing in +wealth, whose increasing revenue gives it the power of ridding +itself from time to time of the most inconvenient portions +of its taxation, I conceive that the increase of revenue +should rather be disposed of by taking off taxes, than by +liquidating debt, as long as any very objectionable imposts +remain. In the present state of England, therefore, I hold +it to be good policy in the Government, when it has a surplus +of an apparently permanent character, to take off taxes, +provided these are rightly selected. Even when no taxes +remain but such as are not unfit to form part of a permanent +<pb n='602'/><anchor id='Pg602'/> +system, it is wise to continue the same policy by experimental +reductions of those taxes, until the point is discovered +at which a given amount of revenue can be raised +with the smallest pressure on the contributors. After this, +such surplus revenue as might arise from any further increase +of the produce of the taxes should not, I conceive, +be remitted, but applied to the redemption of debt. Eventually, +it might be expedient to appropriate the entire produce +of particular taxes to this purpose; since there would be +more assurance that the liquidation would be persisted in, if +the fund destined to it were kept apart, and not blended +with the general revenues of the state. The succession duties +would be peculiarly suited to such a purpose, since taxes +paid as they are, out of capital, would be better employed in +reimbursing capital than in defraying current expenditure. +If this separate appropriation were made, any surplus afterward +arising from the increasing produce of the other taxes, +and from the saving of interest on the successive portions +of debt paid off, might form a ground for a remission of +taxation. +</p> + +<quote rend='display'> +<p> +The relative amount of the United States public debt may +be seen, by Chart <ref target='Chart_XXII'>No. XXII</ref>, +from an early date down to 1880. +Since the war, the surplus revenue of the United States has +been constantly appropriated for the payment of the public +debt incurred during the late war, until, what with the reduction +of debt and the fall in the interest charge, our income is +now so much greater than expenditure that we are (1884) actually +in difficulties owing to the surplus. To the present time +the Treasury has been able to use its excess of receipts in redeeming +matured debt; but the rapidity of the payment has +been such that in two years or more no matured debt will exist +to be redeemed: $250,000,000 of 4-½ per cent bonds remain, but +they do not fall due until 1891; and the 4 per cent bonds to +the amount of $737,620,700 do not mature until 1907. Having +once raised a large revenue under war pressure, it seems very +difficult for people to understand now why heavy duties were +originally levied, and the extraordinary suggestion is often +made that the surplus should remain, and new channels of expenditure +should be made (such as enormous pensions), simply +in order to keep up the heavy taxation. The difficulty is, however, +that the unnecessary surplus exists because of customs +<pb n='603'/><anchor id='Pg603'/> +duties levied for war purposes. But the heavy burden of war +taxation ought not to be continued, adding to the cost of production +in all industries, without doing a greater wrong than +would be done by the passing—and only possible—trouble of a +redistribution of capital in a few cases; especially since that +distribution of capital will be one from less productive to more +productive industries; otherwise, no change would be made. +</p> + +<p> +The condition of foreign debts, and the progress made in +their reduction, may be studied in Chart <ref target='Chart_XXIII'>No. XXIII</ref>. +That of the United States is exceptional. The interest-bearing debt, +as given by the last report of the Secretary of the Treasury, +1883, has been reduced to $1,312,446,050, and the reduction is +more striking than is indicated in the chart for the year 1880. +</p> + +<pb n='604'/><anchor id='Pg604'/> + +<anchor id='Chart_XXIII'/> +<p rend='text-align: center'> + <figure url='images/chartxxiii.png' rend='width: 80%'> + <head>Chart XXIII. Reduction of National Debts in Various Countries.</head> + <figDesc>Illustration: Chart XXIII.</figDesc> + </figure> +</p> + +</quote> + +</div> + +</div> + +<pb n='605'/><anchor id='Pg605'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Chapter VI. Of An Interference Of Government Grounded On Erroneous Theories.</head> + +<div> +<index index='toc'/> +<head>§ 1. The doctrine of Protection to Native Industry.</head> + +<p> +We proceed to the functions of government which +belong to what I have termed, for want of a better designation, +the optional class; those which are sometimes assumed +by governments and sometimes not, and which it is not +unanimously admitted that they ought to exercise. We will +begin by passing in review false theories which have from +time to time formed the ground of acts of government more +or less economically injurious. +</p> + +<p> +Of these false theories, the most notable is the doctrine +of Protection to Native Industry—a phrase meaning the +prohibition, or the discouragement by heavy duties, of such +foreign commodities as are capable of being produced at +home. If the theory involved in this system had been correct, +the practical conclusions grounded on it would not +have been unreasonable. The theory was that, to buy things +produced at home was a national benefit, and the introduction +of foreign commodities generally a national loss. It +being at the same time evident that the interest of the consumer +is to buy foreign commodities in preference to domestic +whenever they are either cheaper or better, the interest +of the consumer appeared in this respect to be contrary to +the public interest; he was certain, if left to his own inclinations, +to do what according to the theory was injurious to +the public. +</p> + +<p> +It was shown, however, in our analysis of the effects of +international trade, as it had been often shown by former +<pb n='606'/><anchor id='Pg606'/> +writers, that the importation of foreign commodities, in the +common course of traffic, never takes place except when it +is, economically speaking, a national good, by causing the +same amount of commodities to be obtained at a smaller +cost of labor and capital to the country. To prohibit, therefore, +this importation, or impose duties which prevent it, is +to render the labor and capital of the country less efficient +in production than they would otherwise be, and compel a +waste of the difference between the labor and capital necessary +for the home production of the commodity and that +which is required for producing the things with which it +can be purchased from abroad. The amount of national +loss thus occasioned is measured by the excess of the price +at which the commodity is produced over that at which it +could be imported. In the case of manufactured goods the +whole difference between the two prices is absorbed in indemnifying +the producers for waste of labor, or of the capital +which supports that labor. Those who are supposed to +be benefited, namely, the makers of the protected articles +(unless they form an exclusive company, and have a monopoly +against their own countrymen as well as against foreigners), +do not obtain higher profits than other people. All is +sheer loss to the country as well as to the consumer. +</p> + +<quote rend='display'> +Of the industries in a country some are said to <q>need protection</q> +and others not—that is, those industries which are +carried on at a relative disadvantage are the only ones which +need protection in order that they may continue in operation. +By relative disadvantage is meant a greater relative cost, or +sacrifice, to the same amount of labor and capital. Those industries +which can not yield so great a value for the labor and +capital engaged in them as other more profitable industries are +those which are said to <q>need protection.</q> Wherever protective +duties exist it is implied by those who lay them on that +there production is carried on under more onerous conditions +than in other competing places or occupations. After duties +are thus supposed to have protected the less advantageously +situated occupations, it may be said that all industries will then +have an equal chance. <q>No doubt,</q> as Mr. Cairnes says, <q>they +would be equalized just as by compelling every one to move +about with a weight attached to his leg. The weight would, +<pb n='607'/><anchor id='Pg607'/> +indeed, be an impediment to locomotion, but, provided it were +in each case exactly proportioned to the strength of the limb +which drew it, no one ... would have any reason to complain. +No one would walk as fast as if his limbs were free, +but then his neighbor would be equally fettered, and, if it took +him twice as long to reach his destination as before, he would +at least have company on his journey.</q><note place='foot'>Cairnes, +<q>Leading Principles,</q> pp. 381, 382.</note> +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 2. —had its origin in the Mercantile System.</head> + +<p> +The restrictive and prohibitory policy was originally +grounded on what is called the Mercantile System, which, +representing the advantage of foreign trade to consist solely +in bringing money into the country, gave artificial encouragement +to exportation of goods, and discountenanced their +importation. The only exceptions to the system were those +required by the system itself. The materials and instruments +of production were the subject of a contrary policy, +directed, however, to the same end; they were freely imported, +and not permitted to be exported, in order that manufacturers, +being more cheaply supplied with the requisites +of manufacture, might be able to sell cheaper, and therefore +to export more largely. For a similar reason importation +was allowed and even favored, when confined to the productions +of countries which were supposed to take from the +country still more than it took from them, thus enriching it +by a favorable balance of trade. As part of the same system +colonies were founded, for the supposed advantage of +compelling them to buy our commodities, or at all events +not to buy those of any other country: in return for which +restriction we were generally willing to come under an +equivalent obligation with respect to the staple productions +of the colonists. The consequences of the theory were +pushed so far that it was not unusual even to give bounties +on exportation, and induce foreigners to buy from [England] +rather than from other countries by a cheapness which [England] +artificially produced, by paying part of the price for +them out of [their] own taxes. This is a stretch beyond the +point yet reached by any private tradesman in his competition +<pb n='608'/><anchor id='Pg608'/> +for business. No shopkeeper, I should think, ever +made a practice of bribing customers by selling goods to +them at a permanent loss, making it up to himself from +other funds in his possession. +</p> + +<p> +The principle of the Mercantile Theory is now given up +even by writers and governments who still cling to the +restrictive system. Whatever hold that system has over +men's minds, independently of the private interests exposed +to real or apprehended loss by its abandonment, is derived +from fallacies other than the old notion of the benefits of +heaping up money in the country. The most effective of +these is the specious plea of employing our own countrymen +and our national industry, instead of feeding and supporting +the industry of foreigners. The answer to this, from the +principles laid down in former chapters, is evident. Without +reverting to the fundamental theorem discussed in an +early part of the present +treatise,<note place='foot'><ref target='Book_I_Chapter_IV'>Book +I, Chap. IV</ref>.</note> respecting the nature and +sources of employment for labor, it is sufficient to say, what +has usually been said by the advocates of free trade, that the +alternative is not between employing our own people and +foreigners, but between employing one class and another of +our own people. The imported commodity is always paid +for, directly or indirectly, with the produce of our own industry: +that industry being, at the same time, rendered more +productive, since, with the same labor and outlay, we are +enabled to possess ourselves of a greater quantity of the article. +Those who have not well considered the subject are apt +to suppose that our exporting an equivalent in our own produce, +for the foreign articles we consume, depends on contingencies—on +the consent of foreign countries to make some +corresponding relaxation of their own restrictions, or on the +question whether those from whom we buy are induced by +that circumstance to buy more from us; and that, if these +things, or things equivalent to them, do not happen, the payment +must be made in money. Now, in the first place, there +<pb n='609'/><anchor id='Pg609'/> +is nothing more objectionable in a money payment than in +payment by any other medium, if the state of the market +makes it the most advantageous remittance; and the money +itself was first acquired, and would again be replenished, by +the export of an equivalent value of our own products. +But, in the next place, a very short interval of paying in +money would so lower prices as either to stop a part of the +importation, or raise up a foreign demand for our produce, +sufficient to pay for the imports. I grant that this disturbance +of the equation of international demand would be in +some degree to our disadvantage, in the purchase of other +imported articles; and that a country which prohibits some +foreign commodities, does, <hi rend='italic'>cæteris paribus</hi>, obtain those which +it does not prohibit at a less price than it would otherwise +have to pay. To express the same thing in other words: +a country which destroys or prevents altogether certain +branches of foreign trade, thereby annihilating a general +gain to the world, which would be shared in some proportion +between itself and other countries, does, in some circumstances, +draw to itself, at the expense of foreigners, a larger +share than would else belong to it of the gain arising from +that portion of its foreign trade which it suffers to subsist. +But even this it can only be enabled to do, if foreigners do +not maintain equivalent prohibitions or restrictions against its +commodities. In any case, the justice or expediency of destroying +one of two gains, in order to engross a rather larger share +of the other, does not require much discussion; the gain, +too, which is destroyed, being, in proportion to the magnitude +of the transactions, the larger of the two, since it is the one +which capital, left to itself, is supposed to seek by preference. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 3. —supported by pleas of national subsistence and national +defense.</head> + +<p> +Defeated as a general theory, the Protectionist doctrine +finds support in some particular cases from considerations +which, when really in point, involve greater interests +than mere saving of labor—the interests of national subsistence +and of national defense.<note place='foot'>Mr. Mill here takes up +political considerations, which are not properly to be +included in a purely economic treatment. (See the beginning +of <ref target='Book_IV_Chapter_VI_Section_6'>§ 6</ref>.)</note> The discussions on the +Corn <pb n='610'/><anchor id='Pg610'/> +Laws have familiarized everybody with the plea that we +ought to be independent of foreigners for the food of the +people; and the Navigation Laws were grounded, in theory +and profession, on the necessity of keeping up a <q>nursery of +seamen</q> for the navy. On this last subject I at once admit +that the object is worth the sacrifice; and that a country exposed +to invasion by sea, if it can not otherwise have sufficient +ships and sailors of its own to secure the means of +manning on an emergency an adequate fleet, is quite right in +obtaining those means, even at an economical sacrifice in point +of cheapness of transport. When the English navigation +laws were enacted, the Dutch, from their maritime skill and +their low rate of profit at home, were able to carry for other +nations, England included, at cheaper rates than those nations +could carry for themselves: which placed all other countries +at a great comparative disadvantage in obtaining experienced +seamen for their ships of war. The navigation laws, by +which this deficiency was remedied, and at the same time a +blow struck against the maritime power of a nation with +which England was then frequently engaged in hostilities, +were probably, though economically disadvantageous, politically +expedient. But English ships and sailors can now +navigate as cheaply as those of any other country, maintaining +at least an equal competition with the other maritime +nations even in their own trade. The ends which may once +have justified navigation laws require them no longer, and +afford no reason for maintaining this invidious exception +to the general rule of free trade. +</p> + +<quote rend='display'> +<p> +Since the introduction of steamships and the advance of invention +in naval contrivances, the plea for navigation laws on +the ground that they keep up a <q>nursery of seamen</q> for the +navy is practically obsolete. The <q>seaman</q> employed on the +modern naval ships more nearly resembles the artisan in a +manufacturing establishment; he need have but comparatively +little knowledge of the sea, since the days of sailing-vessels +have passed by, so far as naval warfare is concerned. Steam +and mechanical appliances now do what was before done by +wind and sail. +</p> + +<p> +While Mr. Mill thinks navigation laws were economically—that +<pb n='611'/><anchor id='Pg611'/> +is, so far as increase of wealth is concerned—disadvantageous, +yet he believes that they may have been <q>politically +expedient.</q> It is possible, for example, that retaliation by the +United States and other countries against England early in this +century brought about the remission of the English restrictions +on foreign shipping. But it is quite another thing to say that +such laws produced an ability to sail ships more cheaply. +That the English navigation acts of 1651 built up English shipping +is not supported by many proofs; whereas it is very +distinctly shown that English shipping languished and suffered +under them.<note place='foot'>See <q>Sketch of the History of Political Economy,</q> +<hi rend='italic'>supra</hi>, p. <ref target='Pg006'>6</ref>, +note 1.</note> Moreover, under the +<foreign lang='fr' rend='italic'>régime</foreign> of steam and iron +(which drew out England's peculiar advantages in iron and +coal), in all its history English shipping never prospered more +than it has since the abolition in 1849 of the navigation laws—events +which have taken place since Mr. Mill wrote. +</p> + +<p> +The United States is still weighed down by navigation laws +adapted to mediæval conditions, and the relics of a time when +retaliation was the cause of their enactment. So long as +wooden vessels did the carrying-trade, the natural advantages of +the United States gave us a proud position on the ocean. Now, +however, when it is a question of cheaper iron, steel, and coal for +vessels of iron and steel, we are at a possible disadvantage, and +the bulk of navigation laws proposed in these days are intended +to draw capital either by raising prices through duties on +ships and materials, or by outright bounties and subsidies from +industries in which we have advantages, to building ships. +And until of late no distinction has been made between ship-building +and ship-owning (or ship-sailing). Within the last +year (1884) many burdens on ship-sailing have been removed; +but even when we are permitted to sail ships on equal terms +with foreigners, we can not yet build them with as small a +cost as England (which is proved by the very demand of the +builders of iron vessels for the retention of protective duties), +and our laws do not as yet allow us to buy ships abroad and +sail them under our own flag.<note place='foot'>For bibliography +of the United States shipping question, see <ref target='Appendix_I'>Appendix +I</ref>.</note> +</p> +</quote> + +<p> +With regard to subsistence, the plea of the Protectionists +has been so often and so triumphantly met, that it requires +little notice here. That country is the most steadily as well +as the most abundantly supplied with food which draws its +supplies from the largest surface. It is ridiculous to found a +general system of policy on so improbable a danger as that of +being at war with all the nations of the world at once; or to +<pb n='612'/><anchor id='Pg612'/> +suppose that, even if inferior at sea, a whole country could +be blockaded like a town, or that the growers of food in +other countries would not be as anxious not to lose an advantageous +market as we should be not to be deprived of their +corn. +</p> + +<p> +In countries in which the system of Protection is declining, +but not yet wholly given up, such as the United States, +a doctrine has come into notice which is a sort of compromise +between free trade and restriction, namely, that protection +for protection's sake is improper, but that there is nothing +objectionable in having as much protection as may incidentally +result from a tariff framed solely for revenue. Even +in England regret is sometimes expressed that a <q>moderate +fixed duty</q> was not preserved on corn, on account of the +revenue it would yield. Independently, however, of the +general impolicy of taxes on the necessaries of life, this doctrine +overlooks the fact that revenue is received only on the +quantity imported, but that the tax is paid on the entire +quantity consumed. To make the public pay much, that the +treasury may receive a little, is no eligible mode of obtaining +a revenue. In the case of manufactured articles the doctrine +involves a palpable inconsistency. The object of the duty +as a means of revenue is inconsistent with its affording, even +incidentally, any protection. It can only operate as protection +in so far as it prevents importation, and to whatever +degree it prevents importation it affords no revenue. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 4. —on the ground of encouraging young industries; colonial policy.</head> + +<p> +The only case in which, on mere principles of political +economy, protecting duties can be defensible, is when +they are imposed temporarily (especially in a young and +rising nation) in hopes of naturalizing a foreign industry, in +itself perfectly suitable to the circumstances of the country. +The superiority of one country over another in a branch of +production often arises only from having begun it sooner. +There may be no inherent advantage on one part, or disadvantage +on the other, but only a present superiority of acquired +skill and experience. A country which has this skill +and experience yet to acquire may in other respects be better +<pb n='613'/><anchor id='Pg613'/> +adapted to the production than those which were earlier in +the field; and, besides, it is a just remark of Mr. Rae that +nothing has a greater tendency to promote improvements in +any branch of production than its trial under a new set of +conditions. But it can not be expected that individuals +should, at their own risk, or rather to their certain loss, introduce +a new manufacture, and bear the burden of carrying +it on, until the producers have been educated up to the level +of those with whom the processes are traditional. A protecting +duty, continued for a reasonable time, will sometimes be +the least inconvenient mode in which the nation can tax itself +for the support of such an experiment. But the protection +should be confined to cases in which there is good ground of +assurance that the industry which it fosters will after a time +be able to dispense with it; nor should the domestic producers +ever be allowed to expect that it will be continued to +them beyond the time necessary for a fair trial of what they +are capable of accomplishing. +</p> + +<quote rend='display'> +<p> +The great difficulty with this proposal is that it introduces +(what is inconsistent with Mr. Mill's general system) the Socialistic +basis of state-help, instead of self-help. If industries +will never support themselves, then, of course, it is a misappropriation +of the property of its citizens whenever a government +takes a slice by taxation from productive industries and +gives it to a less productive one to make up its deficiencies. The +only possible theory of protection to young industries is that, +if protected for a season, the industries may soon grow strong +and stand alone. Mr. Mill never contemplated anything else. +But the difficulty is constantly met with, in putting this theory +into practice, that the industry, once that it has learned to depend +on the help of the state, never reaches a stage when it is +willing to give up the assistance of the duties. Dependence on +legislation begets a want of self-reliance, and destroys the stimulus +to progress and good management. It is said: <q>There +has never been an instance in the history of the country where +the representatives of such industries, who have enjoyed protection +for a long series of years, have been willing to submit +to a reduction of the tariff, or have proposed it. But, on the +contrary, their demands for still higher and higher duties are +insatiable, and never intermitted.</q><note place='foot'>D. A. Wells, +<q>Cobden Club Essays,</q> second series, p. 533.</note> The question of fact, as +<pb n='614'/><anchor id='Pg614'/> +to whether or not the United States is indebted for its present +manufacturing position to protection when our industries were +young, seems to be capable of answer, and an answer which +shows that protection was imposed generally after the industries +got a foothold, and that very little assistance was derived +from the duties on imports.<note place='foot'>See F. W. Taussig's +<q>Protection to Young Industries as applied in the +United States</q> (1883).</note> +</p> + +<p> +The following explanation by Mr. Mill<note place='foot'>In a letter +written February 26, 1866, to Mr. Horace White, published in +the Chicago <q>Tribune,</q> and reprinted in the New York <q>Nation,</q> May 29, +1873.</note> of the meaning put +upon his argument of protection to young industries by those +who have applied it to the United States will be of no slight +interest: +</p> +</quote> + +<p> +<q>The passage has been made use of to show the inapplicability +of free trade to the United States, and for similar +purpose in the Australian colonies, erroneously in my opinion, +but certainly with more plausibility than can be the case +in the United States, for Australia really is a new country +whose capabilities for carrying on manufactures can not yet +be said to have been tested; but the manufacturing parts of +the United States—New England and Pennsylvania—are no +longer new countries; they have carried on manufactures on +a large scale, and with the benefit of high protecting duties, +for at least two generations; their operatives have had full +time to acquire the manufacturing skill in which those of +England had preceded them; there has been ample experience +to prove that the alleged inability of their manufactures +to compete in the American market with those of Great +Britain does not arise merely from the more recent date of +their establishment, but from the fact that American labor +and capital can, in the present circumstances of America, be +employed with greater return, and greater advantage to the +national wealth, in the production of other articles. I have +never for a moment recommended or countenanced any protecting +industry except for the purpose of enabling the protected +branch of industry, in a very moderate time, to become +independent of protection. That moderate time in the +<pb n='615'/><anchor id='Pg615'/> +United States has been exceeded, and if the cotton and iron +of America still need protection against those of the other +hemisphere, it is in my eyes a complete proof that they aught +not to have it, and that the longer it is continued the greater +the injustice and the waste of national resources will be.</q> +</p> + +<p> +There is only one part of the protectionist scheme which +requires any further notice: its policy toward colonies and +foreign dependencies; that of compelling them to trade exclusively +with the dominant country. A country which thus +secures to itself an extra foreign demand for its commodities, +undoubtedly gives itself some advantage in the distribution +of the general gains of the commercial world. Since, however, +it causes the industry and capital of the colony to be +diverted from channels which are proved to be the most productive, +inasmuch as they are those into which industry and +capital spontaneously tend to flow, there is a loss, on the +whole, to the productive powers of the world, and the mother-country +does not gain so much as she makes the colony lose. +If, therefore, the mother-country refuses to acknowledge any +reciprocity of obligations, she imposes a tribute on the colony +in an indirect mode, greatly more oppressive and injurious +than the direct. +</p> + +</div> + +<div> +<index index='toc'/> +<head>§ 5. —on the ground of high wages.</head> + +<quote rend='display'> +<p> +The discussion by Mr. Cairnes on the question of wages +as affected by the tariff is such that I have quoted it as fully as +possible: <q rend='pre'>The position taken in the United States is that protection +is only needed and only asked for where American industry +is placed under a disadvantage, as compared with the +industry of foreign countries.... The rates of wages measured +in money are higher in the United States than in Europe, +and, therefore, it is argued, the cost of producing commodities +is higher.... The high rates of wages in the United States +are not peculiar to any branch of industry, but are universal +throughout its whole range. If, therefore, a high rate of +wages proves a high cost of production, and a high cost of production +proves a need of protection, it follows that the farmers +of Illinois and the cotton-planters of the Southern States stand +in as much need of fostering legislation as the cotton-spinners +of New England or the iron-masters of Pennsylvania! A criterion +which leads to such results must, I think, be regarded as +sufficiently condemned. The fallacy is, in truth, ... that all +<pb n='616'/><anchor id='Pg616'/> +industries are not in each country equally favored or disfavored +by nature, and have not, therefore, equal need of this protecting +care. If American protectionists are not prepared to demand +protective duties in favor of the Illinois farmer against +the competition of his English rival, they are bound to admit +either that a high cost of production is not incompatible with +effective competition, or else that a high rate of wages does not +prove a high cost of production; and if this is not so in Illinois, +then I wish to know why the case should be different in +Pennsylvania or in New England. If a high rate of wages in +the first of these States be consistent with a low cost of production, +why may not a high rate of wages in Pennsylvania be +consistent with a low cost of producing coal and iron?</q> +</p> + +<p> +<q rend='pre'>The rate of wages, whether measured in money or in the +real remuneration of the laborer, affords an approximate criterion +of the cost of production,<note place='foot'>Business men constantly +use the term <q>cost of production</q> when in reality +they mean that which to the economist is expressed by <q>cost of labor.</q> If cost of +labor becomes higher, it takes from profits—the place where they feel the +difficulties of competition—but they say that the cost of production has risen: +the cost, to them, only has risen, that is, the <q>cost of labor,</q> not +<q>cost of production.</q></note> either of money, or of the commodities +that enter into the laborer's real remuneration, <emph>but in +a sense the inverse of that in which it is understood in the +argument under consideration</emph>: in other words, a high rate of +wages indicates not a high but a low cost of production.<note place='foot'>Cf. Cairnes, +<q>Leading Principles,</q> pp. 324-341; and <hi rend='italic'>supra</hi>, +<ref target='Book_III_Chapter_II_Section_4'>Book III, Chap. II, § 4</ref>.</note> ... +Thus in the United States the rate of wages is high, whether +measured in gold or in the most important articles of the laborer's +consumption—a fact which proves that the cost of producing +gold, as well as that of producing those other commodities, +is low in the United States.... I would ask [objectors] to +consider what are the true causes of the high remuneration of +American industry. It will surely be admitted that, in the last +resort, these resolve themselves into the one great fact of its +high productive power.... I must, therefore, contend that +the high scale of industrial remuneration in America, instead +of being evidence of a high cost of production in that country, +is distinctly evidence of a low cost of production—of a low +cost of production, that is to say, in the first place, of gold, and, +in the next, of the commodities which mainly constitute the +real wages of labor—a description which embraces at once the +most important raw materials of industry and the most important +articles of general consumption. As regards commodities +not included in this description, the criterion of wages stands +in no constant relation of any kind to their cost, and is, therefore, +<pb n='617'/><anchor id='Pg617'/> +simply irrelevant to the point at issue. And now we +may see what this claim for protection to American industry, +<emph>founded on the high scale of American remuneration</emph>, really +comes to: it is a demand for special legislative aid in consideration +of the possession of special industrial facilities—a complaint, +in short, against the exceptional bounty of nature.</q> +</p> + +<p> +<q>Perhaps I shall here be asked, How, if the case be so—if +the high rate of industrial remuneration in America be only +evidence of a low cost of production—the fact is to be explained, +since fact it undoubtedly is, that the people of the +United States are unable to compete in neutral markets, in the +sale of certain important wares, with England and other European +countries?<note place='foot'>The fact (sufficiently established +by Mr. Brassey) is not considered also that +England gives higher wages to operatives than the Continent, and yet England is +able to undersell France and Germany in neutral markets. It is evident, however, +that England can undersell only in occupations in which she has +advantages.</note> No one will say that the people of New England, +New York, and Pennsylvania, are deficient in any industrial +qualities possessed by the workmen of any country in the +world. How happens it, then, that, enjoying industrial advantages +superior to other countries, they are yet unable to hold +their own against them in the general markets of commerce? I +shall endeavor to meet this objection fairly, and, in the first +place, let me state what my contention is with regard to the cost +of production in America. I do not contend that it is low in the +case of all commodities capable of being produced in the country, +but only in that of a large, very important, but still limited +group. With regard to commodities lying outside this group, +I hold that the rate of wages is simply no evidence as to the +cost of their production, one way or the other. But, secondly, +I beg the reader to consider what is meant by the alleged <q>inability</q> +of New England and Pennsylvania to compete, let us +say, with Manchester and Sheffield, in the manufacture of calico +and cutlery. What it means, and what it only can mean, is +that they are unable to do so <emph>consistently with obtaining that +rate of remuneration on their industry which is current in the +United States</emph>. If only American laborers and capitalists would +be content with the wages and profits current in Great Britain, +there is nothing that I know of to prevent them from holding +their own in any markets to which Manchester and Sheffield +can send their wares. And this brings us to the heart of the +question. Over a large portion of the great field of industry +the people of the United States enjoy, as compared with those +of Europe, (1) advantages of a very exceptional kind; over +the rest (2) the advantage is less decided, or (3) they stand on +a par with Europeans, or (4) possibly they are, in some instances, +<pb n='618'/><anchor id='Pg618'/> +at a disadvantage. Engaging in the branches of industry +in which their advantage over Europe is great, they reap +industrial returns proportionally great; and, so long as they +confine themselves to these occupations, they can compete in +neutral markets against all the world, and still secure the high +rewards accruing from their exceptionally rich resources. But +the people of the Union decline to confine themselves within +these liberal bounds. They would cover the whole domain of +industrial activity, and think it hard that they should not reap +the same rich harvests from every part of the field. They +must descend into the arena with Sheffield and Manchester, +and yet secure the rewards of Chicago and St. Louis. They +must employ European conditions of production, and obtain +American results. What is this but to quarrel with the laws +of nature? These laws have assigned to an extensive range +of industries carried on in the United States a high scale of +return, far in excess of what Europe can command, to a few +others a return on a scale not exceeding the European proportion. +American enterprise would engage in all departments +alike, and obtain upon all the high rewards which nature has +assigned only to some. Here we find the real meaning of the +<q>inability</q> of Americans to compete with the <q>pauper labor</q> +of Europe. They can not do so, and at the same time secure +the American rate of return on their work. The inability no +doubt exists, but it is one created, not by the drawbacks, but +by the exceptional advantages of their position. It is as if a +skilled artisan should complain that he could not compete with +the hedger and ditcher. Let him only be content with the +hedger and ditcher's rate of pay, and there will be nothing to prevent +him from entering the lists even against this rival.</q><note place='foot'>Cairnes, +<q>Leading Principles,</q> pp. 382-388.</note> +</p> + +<p> +It is often said that wages are kept at a high rate in the +United States by the existence of protected industries. On the +other hand, the truth is that the protected industries must pay +the current high rate of wages fixed by the general productiveness +of all industries in the country. When the facts are investigated, +it is surprising how small a portion of the laborers +of the United States are employed in occupations which owe +their existence to the tariff. A general view of the relative +numbers engaged in different occupations may be seen by +reference to Chart <ref target='Chart_XXIV'>No. XXIV</ref>, +based on the returns for the census of 1880. +The data are well worth examination:<note place='foot'><q>Compendium,</q> 1880, +pp. 1343-1377.</note> +</p> + +<table rend="latexcolumns: 'p{4cm} p{2cm}'; + tblcolumns: 'lw(30) r'"> +<row><cell>(1.) Agriculture</cell><cell>7,670,493</cell></row> +<row><cell>(2.) Manufacturing, mechanical, and mining</cell><cell>3,837,112</cell></row> +<row><cell>(3.) Trade and transportation</cell><cell>1,810,256</cell></row> +<row><cell>(4.) Professional and personal services</cell><cell>4,074,238</cell></row> +<row><cell>All occupations</cell><cell>17,392,099</cell></row> +</table> + +<pb n='619'/><anchor id='Pg619'/> + +<anchor id='Chart_XXIV'/> +<p rend='text-align: center'> + <figure url='images/chartxxiv.png' rend='width: 80%'> + <head>Chart XXIV. <hi rend='italic'>Chart showing for the United States, in 1880, +the ratio between the total population +over ten years of age and the number of persons reported as engaged +in each principal class of gainful occupations. Compiled from the returns +of the Tenth Census, by the Editor.</hi> +<hi rend='smallcaps'>Note.</hi>—The interior square represents the proportion +of the population which +is accounted for as engaged in gainful occupations. The unshaded space between +the inner and outer squares represents the proportion of the population not so +accounted for.</head> + <figDesc>Illustration: Chart XXIV.</figDesc> + </figure> +</p> + +<pb n='620'/><anchor id='Pg620'/> + +<p> +Of the second class, less than 450,000 work-people are engaged +in the chief protected industries—cotton, woolen, and +iron and steel, combined. This class, it is to be noted, in the +census returns, includes bakers, blacksmiths, brick-makers, builders, +butchers, cabinet-makers, carpenters, carriage-makers, and +so on through the whole list of similar occupations practically +unaffected by the tariff (so far as protection to them is concerned). +So that, at the most, there are less than a million +laborers engaged in industries directly dependent on the tariff, +and the number is undoubtedly very much less than a million. +When some writers assert, therefore, that the existence of customs-duties +allows industries (even including all those employed +in producing cotton, wool, iron, and steel) to employ less than a +million laborers in such a way that the remuneration is fixed +for the remaining 16,000,000 laborers in the United States, +keeping wages high for 16,000,000 by paying current wages +for less than a million, the extravagance and ignorance of +the statement are at once apparent; while, on the other hand, +it is distinctly seen that the causes fixing the generally high +rates of wages for the 16,000,000 are those governing the majority +of occupations, and that the less than one million must +be paid the wages which can be obtained elsewhere in the more +productive industries. The facts thus strikingly bear out the +principles as stated above. +</p> + +<p> +Confirmation—if confirmation now seems necessary—may +be found in a study<note place='foot'><q>Princeton Review,</q> +1883, p. 222.</note> by our ablest statistician, Francis A. +Walker, upon the causes which have operated on the growth +of American manufactures. This growth has not been commensurate, +he finds, with the remarkable inventive and industrial +capacity of our people, and with the richness of our +national resources: <q rend='pre'>I answer that the cause of that comparative +failure is found, primarily and principally, in the extraordinary +success of our agriculture, as already intimated in what +has been said of the investment of capital. The enormous +profits of cultivating a virgin soil without the need of artificial +fertilization; the advantages which a sparse population derives +from the privilege of selecting for tillage only the choicest +spots,<note place='foot'>The United States have at the present +time but five persons engaged in +agriculture for each square mile of settled area.</note> +those most accessible, most fertile, most easily brought +under the plow; and the consequent abundance of food and +other necessaries enjoyed by the agricultural class, have tended +continually to disparage mechanical industries, in the eyes +alike of the capitalist, looking to the most remunerative investment +<pb n='621'/><anchor id='Pg621'/> +of his savings, and of the laborer, seeking that avocation +which should promise the most liberal and constant support.</q> +</p> + +<p> +<q>It has been the competition of the farm with the shop +which, throughout the entire century of our national independence, +has most effectually hindered the growth of manufactures. +A people who are privileged to cultivate a reasonably +fertile soil, under the conditions indicated above, can secure for +themselves subsistence up to the highest limit of physical well-being. +If that people possess the added advantage of great +skill in the use of tools, and great adroitness in meeting the +large and the little exigencies of the occupation and cultivation +of the soil, the fruits of their labor will include not only everything +which is essential to health and comfort, but much that +is of the nature of luxury.</q> +</p> + +<p> +It remains to be said in this connection that workmen are +already discerning the practical and real causes at work affecting +their wages—affecting them more directly than any tariff system +possibly could—by showing no small alarm at the immigration +of foreigners, such as the Hungarian miners and Italian laborers, +who willingly underbid them. In other words, they are +beginning to realize, in a practical way, the truth that increasing +numbers are far more potent than anything else in reducing +wages. So long as immigration is free to any race or +nationality, there is no such thing as <q>protection to home +laborers</q>; the only protection to them—not that I am urging +the desirability of such measures—can come solely from forces +which limit the number of workmen who enter into competition +with them. Any other protection to laboring-men than +the prohibition of immigration—which no one thinks of (except +for the Chinese)—is an economic delusion. Instead of +<q>protecting</q> them to the extent of affording higher wages, +the tariff increases the cost of woolen clothing and other articles +of their consumption, in addition to forcing capital into +employments which yield a less return, and so insure lower +wages. +</p> + +</quote> + +</div> + +<div> +<index index='toc'/> +<anchor id='Book_IV_Chapter_VI_Section_6'/> +<head>§ 6. —on the ground of creating a diversity of industries.</head> + +<quote rend='display'> +<p> +It must be kept in mind that Political Economy deals +only with the phenomena of material wealth; it does not supply +ethical or political grounds of action. It is quite conceivable +that a legislator, in coming to a decision, may have to balance +economic gains against moral or political losses, and may +choose to give up the former to prevent the latter. But the +economic truth remains unchanged. Political economy, for instance, +to the question, Is there any gain in international trade? +answers, unequivocally, yes. Would it be a loss of wealth to +the community to have the goods formerly bought abroad now +produced at home? The answer is, certainly it would. But +here it has been ably urged by intelligent writers that a state +<pb n='622'/><anchor id='Pg622'/> +has other ends to gain than the accumulation of mere riches; that +it must aim to secure the greatest moral, social, and elevating +influences possible for the working-classes; and that while free +exchange of goods may add to wealth, it may injure the social +and political well-being of a nation. So far as these are social +and political questions they do not belong to Political Economy. +But the commonest form of argument is that, under free exchange, +the United States would become purely an <q>agricultural</q> +country, its social horizon would become narrowed, and +a lower standard of industrial activity would then ensue; instead +of which, it is said, we should, by protection, keep in +existence diversified industries by which the national mind may +be better stimulated, and greater enterprise may be encouraged +in all branches of industry. This argument for <q>diversity of +industries,</q> however, is not merely a sociological question; it +can only be fully discussed from an economic stand-point, and +deserves even more than the brief attention we can give it here. +</p> + +<p> +In the first place, as soon as any purely agricultural country +gains even a slight density of population—a density only such +as to warrant the introduction of the principle of division of +labor—there comes an inevitable differentiation of pursuits, +wholly outside of legislation, and through the operation of natural +causes. Not all of any population is required in agriculture +to provide the whole with food. By a division of labor, one +man in agriculture can produce the sustenance of himself and +many others. <q>The United States have at the present time +but five persons engaged in agriculture for each square mile of +settled area.</q> By the side of the farm must early spring up a +wide circle of industries—the shoemaker, the carpenter, the +blacksmith, the wagon-maker, the painter, the builder, the +mason, and all the ordinary employments which arise in any +small community from the earliest division of labor. Moreover, +<q>agriculture</q> is often used in a too limited sense as confined +to producing food alone (although even in that limited +sense employing nearly one half of the total number of our laborers). +In a new country the natural field of employment is +found in the <q>extractive industries,</q> which include the preparation +for the market not only of food, but also of all ores, coal, +minerals, oils, hides, leather, wool, lumber, and the industries +intimately connected with them; all the employments which +transport these from one part of the country to another (employing +at present over one ninth of all our laborers); and professional +and personal services of an extended variety. Even, +therefore, if we were obliged to forego manufactures entirely, +the <q>extractive industries</q> would necessarily involve a very +extensive diversity of employments. +</p> + +<p> +The real question, however, for most persons, centers in the +<pb n='623'/><anchor id='Pg623'/> +next stage of the industrial evolution—that of the manufactures +of these above-mentioned products of the <q>extractive industries.</q> +It will be remembered, here, that a country does not +possess an equal ability in producing each of these or any commodities: +the timber formerly near great rivers may vanish +into the interior; the oil-sources may be more or less fertile; or +the ore-deposits may be more or less rich, more or less accessible, +than those of other countries. This being understood, then, +as soon as the demand in the country calls for an increased +quantity of a particular article, the cost may increase under +the law of diminishing returns until a foreign country—having +inferior agents of production as compared with our best—may +be able to send supplies into our markets. It all depends +on whether the United States wants more articles than can be +produced on grades of natural agents superior to those possessed +by foreigners, taking cost of carriage to this country +into consideration. Even though foreign competition appears +when we reach poorer grades of natural agents, it does not +follow that some of the particular articles will not be produced. +What ought to be clear is, that untrammeled exchange +between countries will not prevent the existence of various +industries, but only limit production to those grades of agents +which are its best. This may be better seen by a simple diagram: +</p> + +<table rend="latexcolumns: 'p{4cm} p{0.4cm} p{0.4cm} p{0.4cm} p{0.4cm} p{0.4cm} p{0.4cm} + p{0.4cm}'; tblcolumns: 'lw(30) r r r r r r r'"> +<row><cell>Iron and Coal: England</cell><cell>7</cell><cell>6</cell><cell>5</cell> + <cell>4</cell><cell>3</cell><cell>2</cell><cell>1</cell></row> +<row><cell>Iron and Coal: United States</cell><cell>4</cell><cell>3</cell><cell>2</cell> + <cell>1</cell><cell></cell><cell></cell><cell></cell></row> +<row><cell>Wheat: England</cell><cell>4</cell><cell>3</cell><cell>2</cell> + <cell>1</cell><cell></cell><cell></cell><cell></cell></row> +<row><cell>Wheat: United States</cell><cell>7</cell><cell>6</cell><cell>5</cell> + <cell>4</cell><cell>3</cell><cell>2</cell><cell>1</cell></row> +</table> + +<p> +England may have seven different grades of productiveness +in her iron and coal supplies, of which her grades 1, 2, and +3 are superior to the best grade of the United States, while +grades 1, 2, 3, and 4 in the United States may compare only +with grades 4, 5, 6, 7 of England. So long as England can +supply herself and the United States also with coal and iron +from the three superior grades, the United States can not work +grade 1 at home. But if the supply for England and the world +requires grade 5 to be worked, then the United States can begin +the industry on her best grade, although that is far inferior to +the best grade in England. Likewise, if the United States has +three grades of wheat-land superior to England's best grade, +the ability of England to grow wheat depends on whether the +United States can, or can not, supply both herself and England +from grades 1, 2, and 3. If we must resort to grade 4, then +England can begin to grow wheat as well as we. In short, +<pb n='624'/><anchor id='Pg624'/> +under a system of free exchange, as great a diversity as under +protection is probably possible, but only in such a way that the +best possible advantages in each particular industry are employed. +Smaller amounts in some branches, and greater amounts +in others, may be produced under a free than under a restrictive +system, but with all the greater gain which arises from a +proper and healthy adjustment of trade. The most poorly endowed +enterprises in each occupation would be given up, but +not the whole industry itself. No class of persons feel the +competition of rivals more than English farmers since American +wheat has come into English markets, and yet it does not follow +that England can not grow a bushel of wheat. The fact +is, merely, that some kinds of lands were thrown out of cultivation, +and a readjustment made, to the benefit of those wanting +cheaper food. So with us: we should not, by the free exchange, +be forced to give up the iron and coal industries entirely; +for the best mines would still keep that occupation in +existence to <q>diversify</q> the others. +</p> + +<p> +So far the explanation covers the <q>extractive industries</q> +only, or those industries affected by the law of diminishing +returns when a larger quantity is demanded. The real question +arises as to the manufactures of these materials. But we +count upon larger industrial rewards, in the form of wages, and +profits, here than in England; we must get more from an industry +than England in order to satisfy us. Our grades of +occupations, therefore, must be more productive to a certain +extent, grade for grade, than English grades, in order to allow +of their remaining free from competition. But we have this +superiority, as regards our home market, owing to natural +causes: (1) cheap raw materials (if we except wool and other +commodities whose price is raised by the tariff); (2) advantage +over England in cost of transportation of raw products; and +(3) in the cost of transportation, again, of the finished goods +in reaching our markets. Now, the processes of manufacture +which do not put much labor upon the materials, especially +where the articles are bulky, are conducted in this country +without fear of foreign competition. And the range of this +class of manufactures is surprisingly large. It includes the +manufactures of iron, such as stoves, and the common utensils +of every-day life; of hides, such as leather, harnesses, etc.; +and of wood, such as all the furniture of common use. The +list is too long to be fully stated here. These industries are +not kept in existence by the tariff; and a diversity as wide as +this would arise under a system of free exchange, as well as +of restriction. Indeed, if duties were removed from so-called +<q>raw materials,</q> it is altogether probable that a wider diversity +would exist than ever before. +</p> + +<pb n='625'/><anchor id='Pg625'/> + +<p> +And yet, it will be said, there are some things we can not +produce in free competition with England. Of course there +are; and it is to be hoped it will long continue so. If there +are not some kinds of commodities which foreigners can produce +to better advantage than we, then there will be no possibility +of any foreign trade whatever; since, if they can send +us nothing, they can take nothing from us. To deny this position, +is to say that the export and import trade of the United +States (amounting in 1883 to more than $1,500,000,000) is of +no profit, and had best be entirely destroyed, in order that a +few industries in which we have no natural advantages (and +which employ less than one seventeenth of the laborers in the +United States) should be continued at a loss to the general productiveness +of our labor and capital, and so to a general diminution +of wages and profits. +</p> + +</quote> + +</div> + +<div> +<index index='toc'/> +<head>§ 7. —on the ground that it lowers prices.</head> + +<quote rend='display'> +<p> +The argument—heard less frequently now than formerly—has +been advanced, drawn inductively from statistics, +that protection does not raise prices; because, after duties are +put on, a larger quantity is produced, the advantages of large +production are reaped, and then the price of the manufactured +commodity falls lower here than it was before the duty was +imposed. The position is then held that protection does not +raise prices. It is, of course, understood to mean the prices of +protected commodities—a necessary precaution, because we find +our own agricultural (unprotected) commodities cited to show +that prices are lower here than in England. +</p> + +<p> +No one, however, will deny that there has been a fall in the +prices of textile fabrics and manufactured goods. That is the +result of a general law of value, and of the tendencies of a +progressive state of industry.<note place='foot'><ref +target='Book_IV_Chapter_I_Section_2'>Book IV, Chap. I, § 2</ref>.</note> +The causes of this +acknowledged fall would be at work, no matter whether tariffs existed +or not. It is the result of the general forward march of improvements, +as evidenced in the application of new inventions +and the display of skill and ingenuity in new processes. To +say that it comes because of a tariff, is +a complete <hi rend='italic'>non sequitur.</hi> +How true this is may be seen by observing that a country like +England, without tariffs, shares in the general fall of prices of +manufactured goods equally with the country which has heavy +customs-duties. The causes must be wider than tariffs, if they +are seen working alike in tariff and non-tariff countries. +</p> + +<p> +But the fact itself can not be gainsaid that protection does +raise the prices of the protected goods in the home market. The +comparison is not to be made between prices as they now are in +this country and as they were twenty or forty years ago also in +this country, for this would show only the general march of +<pb n='626'/><anchor id='Pg626'/> +improvements in this country; but a comparison is to be made +between prices in this country to-day and present prices in +foreign countries. Does, for instance, the tariff increase the +price of woolen goods and clothing to every consumer far beyond +what the price would be if the duty on imported woolens +were removed? The very existence of a protecting duty is +the answer to this. If the duty does not raise the price, then +why does the woolen industry wish a continuance of the duties? +If goods can be sold as cheaply here as the foreign goods, why +do protectionists want any duties? The duties are intended +to keep foreign goods out of our markets; and they would be +unnecessary if our goods could be sold as cheaply as the foreign +wares. +</p> + +<p> +The facts, however, are at hand to show that the statement +of principle as made above is corroborated by the statistics. In +1883, although average weekly wages in Massachusetts were +over 77 per cent higher than in England, the American laborer +had to pay more for the articles entering into his real wages; +and to that extent lost the advantage of his higher reward in +this country. This is to be seen in the following figures,<note place='foot'><q>Fifteenth +Annual Report of the Massachusetts Bureau of Statistics, 1884,</q> +by Carroll D. Wright.</note> which +show, in percentages, whether prices are higher or lower here +than in England: +</p> + +<table rend="latexcolumns: 'p{4cm} p{2cm} p{2cm}'; + tblcolumns: 'lw(30) r r'"> +<row><cell>Classes of Articles.</cell><cell>Higher Percent.</cell> + <cell>Lower Percent.</cell></row> +<row><cell>Groceries</cell><cell>16</cell><cell></cell></row> +<row><cell>Provisions, including meat, eggs, butter, and potatoes</cell><cell></cell> + <cell>23</cell></row> +<row><cell>Dry goods (all grades)</cell><cell>13</cell><cell></cell></row> +<row><cell>Boots, shoes, and slippers</cell><cell>62</cell><cell></cell></row> +<row><cell>Clothing</cell><cell>45</cell><cell></cell></row> +</table> + +<p> +And yet, in spite of the high prices, 31 per cent of the +Massachusetts workman's expenditure represents more comfort +and better home surroundings than is enjoyed by the English +workman. If the American could purchase at English prices, +he would have no less than 37 per cent of a surplus for additional +enjoyments (after making due allowance for the higher +rents paid here than in England). In other words, higher +prices cut off the American laborer from reaping all the superiority +in comfort which might be expected from knowing that +he had an advantage over the English laborer of 77 per cent +in the money wages received. +</p> + +<pb n='627'/><anchor id='Pg627'/> + +<p> +In order that the reader may easily find the arguments of the protectionists, +he is referred to the following books: +</p> + +<p> +Carey's <q>Principles of Social Science</q> (3 vols.). The form of argument +is, briefly, that all industries should be kept going within the +bounds of a country so as to avoid foreign trade. The change of form +into the finished commodity should, he holds, take place near the spot +where the raw materials are produced, so that not so great a share +should go to the mere middle-men, or transporters. +</p> + +<p> +Bowen's <q>Political Economy,</q> Chap. XX, advocates protection on +the ground that it is needed to secure diversity of industries, and that +it lowers the prices of imported goods. +</p> + +<p> +Sir J. B. Byles's <q>Sophisms of Free Trade</q> is an answer to Bastiat's +<q>Sophisms of Protection,</q> the latter having been translated into +English by Horace White. +</p> + +<p> +Erastus B. Bigelow's <q>The Tariff Question.</q> This is one of the +ablest discussions, from the protectionist point of view, based on statistical +tables and comparisons of the policy of England and the United +States. +</p> + +<p> +Stebbins's <q>Protectionists' Manual</q> is a brief and handy statement. +</p> + +<p> +Ellis H. Roberts's <q>Government Revenue</q> is the form into which +he has thrown his lectures at Cornell University (1884) on protection, +and is the latest statement emanating from that side of the discussion. +He goes at length into the history of taxes in various countries; holds +that wages are higher here than in England because of protection; that +our manufactures are more flourishing than our agriculture, etc. +</p> + +<p> +Frederick List's <q>National Economy</q> is the German statement of +protection, much on Carey's own grounds. +</p> + +<p> +<q>The Congressional Globe</q> contains numerous speeches of members +of Congress on the tariff; and the Iron and Steel Association of +Philadelphia send out pamphlets explaining the protectionist position. +</p> + +<p> +The free-trade arguments may be found also in W. M. Grosvenor's +<q>Does Protection Protect?</q> He studies the results of the various +tariffs of the United States, and gives many very valuable tables and +collections of statistics bearing upon this question. +</p> + +<p> +W. G. Sumner's <q>History of Protection in the United States</q> is a +very vigorous account of the evils of the various tariffs and the protective +system. +</p> + +<p> +D. A. Wells's <q>Reports</q> as Special Commissioner of the Revenue, +and his numerous pamphlets (see Putnams' publisher's catalogue), are +<pb n='628'/><anchor id='Pg628'/> +full of facts, and give the results of special study of the subject as affecting +the United States. +</p> + +<p> +A. L. Perry's <q>Political Economy</q> gives a radical free-trade view. +</p> + +<p> +Henry Fawcett's <q>Free Trade and Protection</q> explains the causes +which have retarded the more general adoption of free trade. +</p> + +<p> +J. E. Cairnes's <q>Leading Principles of Political Economy</q> gives the +ablest discussion of the economic principles involved in the question +which has yet been offered to the reader. Moreover, almost all our +systematic writers on political economy (excepting, perhaps, Bowen +and R. E. Thompson) give the system of free exchange their support on +economic grounds. +</p> + +</quote> + +</div> + +</div> + +</div> + +<pb n='631'/><anchor id='Pg631'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<anchor id='Appendix_I'/> +<head>Appendix I. Bibliographies.</head> + +<div> +<head>A Brief Bibliography Of The Tariffs Of The United States.</head> + +<p> +I. <hi rend='italic'>General Works.</hi>—Young's +<q>Special Report on the Customs-Tariff +Legislation of the United States</q> contains useful extracts from debates +of Congress, and also valuable tables of duties; in the Index, p. cciii, +under <q>Tariff Act,</q> will be found references to, and dates of, all acts +to 1870. See, also, Sumner's <q>History of American Currency,</q> and his +<q>Lectures on Protection in the United States</q>; A. L. Perry's <q>Political +Economy,</q> chap. xiii; Grosvenor's <q>Does Protection Protect?</q> +A valuable study is E. J. James's <q>Studien über den Amerikanischen +Zoll tariff.</q> For different views, see Carey's <q>Social Science</q>; Bolles's +<q>Financial History of the United States,</q> vol. ii, Bk. i, chap. v, Bk. iii, +chaps. iii to x; and Stebbins's <q>American Protectionists' Manual.</q> +</p> + +<p> +II. <hi rend='italic'>Earlier Periods.</hi>—H. C. Adams's +<q>Taxation in the United States, +1789-1816</q>; F. W. Taussig's <q>Protection to Young Industries</q>; the +works of Hamilton, Madison, Jefferson, Webster, and Clay; <q>The +Statesman's Manual</q>; and of course the Debates in Congress, etc. +See, also, Bristed's <q>Resources of the United States</q>; Pitkin's <q>Statistical +View of the Commerce of the United States</q>; Seybert's <q>Statistical +Annals</q> (1818); and the <q>American Almanac.</q> +</p> + +<p> +III. <hi rend='italic'>Noteworthy Documents.</hi>—Hamilton's Reports: +<q>Report on +Manufactures,</q> Works, ii, pp. 192-284, or American State Papers, Finance, +i, 123-144. Dallas, Treasury Report of 1816, American State +Papers, Finance, iii, 87-91. +</p> + +<p> +A report which is of the greatest importance and weight is Albert +Gallatin's <q>Memorial in Favor of Tariff Reform</q> (1832). Printed separately. +Unfortunately, not in his collected works. +</p> + +<p> +Walker's Report, see Finance Report, December 3, 1845. +</p> + +<p> +J. Q. Adams's Report of 1832, Congressional Documents, 1831-1832, +H. R. No. 481. +</p> + +<p> +D. A. Wells's <q>Reports as Special Commissioner of the Revenue,</q> +1866, Senate Documents, second session, Thirty-ninth Congress, vol. i, +No. 2; 1868, House Executive Documents, second session, Fortieth Congress, +<pb n='632'/><anchor id='Pg632'/> +vol. ix, No. 81; 1869, House Executive Documents, third session, +Fortieth Congress, vol. vii, No. 16; 1869, House Executive Documents, +second session, Forty-first Congress, vol. v, No. 27; and his paper in +the Cobden Club Essays (second series). +</p> + +<p> +W. D. Kelley's <q>Speeches, Addresses, and Letters.</q> +</p> + +<p> +<q>Report of the Tariff Commission,</q> 1882 (two vols). H. R. Miscellaneous +Documents, No. 6, Part I, Forty-seventh Congress, second session. +</p> + +<p> +IV. <hi rend='italic'>Pauper-Labor Argument.</hi>—See +Taussig, <q>Protection to Young +Industries,</q> p. 69, note 1; Calhoun's speech, Works, iv, pp. 201-212; +Greeley's speech of 1843; Cooper's <q>Politics,</q> pp. 99-109; Webster's +Works, v, pp. 161-235; Cairnes, <q>Leading Principles,</q> pp. 382-388. +Fifteenth Annual Report of the Massachusetts Bureau of Statistics +(1884), by Carroll D. Wright. D. A. Wells, <q>Princeton Review,</q> November, +1883, p. 261; Schoenhof, <q>Wages and Trade.</q> +</p> + +<p> +V. <hi rend='italic'>View of Early Manufactures.</hi>—Bishop, +<q>History of American +Manufactures</q>; Batchelder's <q>Introduction and Early Progress of the +Cotton Manufacture in the United States</q>; N. Appleton, <q>Origin of +Lowell</q>; G. S. White, <q>Memoir of Samuel Slater</q>; B. F. French, +<q>History of the Rise and Progress of the Iron Trade of the United +States for 1621-1857</q>; H. Scrivenor, <q>History of the Iron Trade</q>; +<q>Bulletin of the National Association of Woolen Manufactures,</q> ii, pp. +479-488. Tench Coxe, <q>Statement of the Arts and Manufactures of +the United States for 1810</q> (1814). +</p> + +<p> +VI. <hi rend='italic'>Later View of Manufactures</hi>: +</p> + +<p> +(1.) <hi rend='smallcaps'>The Iron Manufacture</hi>.—See +Swank's <q>Reports of Iron and +Steel Association,</q> 1882; ibid., <q>Census Report,</q> 1880; ibid., <q>Iron +Trade,</q> 1876; J. S. Newberry, for an excellent article in <q>International +Review,</q> i, pp. 768-780. +</p> + +<p> +For Bessemer steel, Swank, <q>Census Report,</q> 1880, pp. 149-153; +and Schoenhof, <q>Destructive Influences of the Tariff,</q> chap. vii. A. +S. Hewett, Speech in Congress, May 16, 1882. Separately printed. +</p> + +<p> +(2.) <hi rend='smallcaps'>Wool, Woolens, and Cottons</hi>.—Production +and importation +of wool, see <q>United States Statistical Abstract</q>; <q>Tariff Commission +Report,</q> i, pp. 1782-1785; ii, p. 2432. +</p> + +<p> +Production and importation of woolens, see <q>Bulletin of Woolen +Manufacturers,</q> vii, p. 359; <q>Commerce and Navigation Reports.</q> +</p> + +<p> +Prosperity of woolen manufacturers after 1867, see Wells, <q>Wool +and the Tariff</q> (a letter to the <q>New York Tribune,</q> March 20, 1873); +R. W. Robinson, article of December, 1872, in <q>Bulletin of Woolen +Manufacturers,</q> iii, p. 354. Edward Harris, <q>Memorial of the Manufacturers +of Woolen Goods to the Committee of Ways and Means,</q> +Washington, 1872. John L. Hayes, <q>The Fleece and the Loom.</q> +</p> + +<p> +Production and importation of cottons, see <q>Commerce and Navigation +Reports</q>; Census Report of 1880. +</p> + +<pb n='633'/><anchor id='Pg633'/> + +<p> +(3.) <hi rend='smallcaps'>Silk</hi>.—Manufacture since +1860, see <q>Silk Association Reports</q>; +Wyckoff, <q>Silk Manufacture in the United States</q> (1883) for recent +history, pp. 42-51. Wyckoff, <q>The Silk Goods of America</q> (1880), +on methods of manufacture, chaps. ii, iv, vi. +</p> + +<p> +(4.) <hi rend='smallcaps'>Sugar Duties</hi>.—D. +A. Wells, <q>Princeton Review,</q> vi (November, +1880), pp. 319-335; and <q>The Sugar Industry of the United States +and the Tariff</q> (1878). +</p> + +<p> +VII. <hi rend='italic'>Present Tariff.</hi>—Heyl's +<q>United States Duties on Imports</q> +(1881) contains all acts in force to date of publication, and gives all acts +since the year 1861 in full. It is used by the United States officials. +</p> + +<p> +<q>Imports Duties from 1867 to 1883 inclusive</q> (House of Representatives, +Miscellaneous Documents, No. 49, Forty-eighth Congress, first +session) gives duties on each article by years, and reduces specific to +<hi rend='italic'>ad valorem</hi> rates. +</p> + +<p> +<q>The Existing Tariff on Imports into the United States,</q> 1884 +(Senate Document, Report, No. 12, Forty-eighth Congress, first session). +</p> + +</div> + +<div> +<head>A Brief Bibliography Of Bimetallism.</head> + +<p> +<q>The Report of the International Monetary Conference, 1878</q> (p. +754), contains an extended bibliography on money, by S. Dana Horton. +Chevalier's third volume of his <q>Cours d'Économie politique,</q> entitled +<q>Monnaie,</q> also gives a bibliography. +</p> + +<p> +I. <hi rend='italic'>Standard of Value.</hi>—See +Jevons, <q>Money and the Mechanism of +Exchange,</q> chaps iii, xxv; S. Dana Horton, <q>Gold and Silver,</q> chap. +iv, p. 36; F. A. Walker, <q>Political Economy,</q> pp. 363-368, <q>Money, +Trade, and Industry,</q> pp. 56-77; Wolowski, <q>L'Or et l'Argent,</q> pp. 7, +22, 207; Mill, <q>Principles of Political Economy,</q> book iii, chap. xv; +Walras, <q>Journal des Économistes,</q> October, 1882, pp. 5-13. +</p> + +<p> +II. <hi rend='italic'>Bimetallic Theory.</hi>—Horton, +<q>Gold and Silver,</q> p. 29; F. A. +Walker, <q>Money, Trade, and Industry,</q> p. 157, <q>Political Economy,</q> p. +408; Giffen, <q>Fortnightly Review,</q> vol. xxxii (1879), p. 279; Wolowski, +<q>L'Or et l'Argent,</q> p. 35; Jevons, ibid., chap, xii; A. J. Wilson, <q>Reciprocity, +Bimetallism, and Land Reform,</q> p. 107; S. Bourne, <q>Trade, +Population, and Food,</q> p. 227; Seyd, <q>The Decline of Prosperity,</q> and +the various pamphlets of Cernuschi. +</p> + +<p> +III. <hi rend='italic'>Operation of Gresham's Law.</hi>—Macaulay, +chap. xxi for clipped +coin of 1695; Jevons, ibid., pp. 80-85, also gives an example taken +from the Japanese currency; for the case of France, see <q>Report of the +Select Committee of the House of Commons on the Depreciation of Silver, +1876,</q> p. xlii, and Appendix, pp. 86, 148; for the United States, +see <hi rend='italic'>supra</hi>, <ref target='Book_III_Chapter_VII_Section_3'>book +iii, chap. vii, § 3</ref>. See, also, Lord Liverpool's <q>Treatise +on the Coins of the Realm,</q> chap. xii, for changes in the coin of England. +</p> + +<pb n='634'/><anchor id='Pg634'/> + +<p> +IV. <hi rend='italic'>Compensatory Effect of Two Standards.</hi>—Jevons, +ibid., pp. 139, +140; F. A. Walker, <q>Political Economy,</q> pp. 411-416; Wolowski, +<q>L'Or et l'Argent,</q> p. 28; Mannequin, <q>Journal des Économistes,</q> +August, 1878, p. 202. +</p> + +<p> +V. <hi rend='italic'>Effect of a League of States, +or Law, on the Relative Value of Gold +and Silver.</hi>—Giffen, <q>Fortnightly Review,</q> vol. xxxii (1879), pp. 285-290; +Wolowski, <q>L'Or et l'Argent,</q> pp. 23, 24, 31; F. A. Walker, <q>Political +Economy,</q> p. 410, <q>Report of the International Monetary Conference, +1878,</q> p. 74; Sumner, <q>Princeton Review,</q> vol. iv, p. 563; S. Dana +Horton, <q>Report of the International Monetary Conference, 1878,</q> +p. 741; Bourne, <q>Trade, Population, and Food,</q> pp. 228, 230; Jevons, +<q>Contemporary Review,</q> vol. xxxix (1881), p. 750; S. Newcomb, <q>International +Review</q> (1879), p. 314. +</p> + +<p> +VI. <hi rend='italic'>Production of Gold and Silver; Relative Value of the Two +Metals.</hi>—Ad. Soetbeer, Petermann's <q>Mittheilungen,</q> No. 57; <q>House +of Commons Report on Depreciation of Silver,</q> 1876, Appendix, pp. +11, 12, 24; Bourne, <q>Statistical Journal,</q> vol. xlii, p. 409, gives Sir H. +Hay's figures corrected by him to 1878; Spofford's <q>American Almanac,</q> +1878, gives tables from the <q>Journal des Économistes</q>; the +figures of Seyd, Hay, Jacob, and Tooke and Newmarch are in the +<q>House of Commons Report,</q> above. Also see, <hi rend='italic'>supra</hi>, +<ref target='Book_III_Chapter_VI'>book iii, chap. +vi</ref>, for references. +</p> + +<p> +The relative values of gold and silver since 1834, as given in Pixley +and Abell's (London) tables, are trustworthy. Previous to 1834 there +is much uncertainty. Soetbeer, ibid., gives Hamburg quotations since +1687. Another table, probably incorrect in places, is that of White, see +<q>Report of the International Monetary Conference,</q> 1878, p. 647. +</p> + +<p> +VII. <hi rend='italic'>Demonetization of Silver by Germany.</hi>—For +copy of laws of +1871 and 1873, see <q>Report of Directors of the United States Mint, 1873,</q> +p. 82; <q>House of Commons Report on Depreciation of Silver,</q> 1876, +p. 18; <q>Conférence Monétaire Internationale,</q> 1881, index, p. 215 for +<q>Allemagne.</q> +</p> + +<p> +VIII. <hi rend='italic'>Latin Union.</hi>—For +treaty, see <q>Journal des Économistes,</q> +May, 1866; <q>House of Commons Report,</q> ibid, xxxviii, Appendix, pp. +92, 98, 106-109, 116; <q>Report of Monetary Conference,</q> 1878, pp. +779-787. +</p> + +<p> +IX. <hi rend='italic'>Flow of Silver to the East.</hi>—The +figures of Sir Hector Hay +after 1851, <q>House of Commons Report,</q> ibid., App., p. 24, are fullest, +and should be combined with Pixley and Abell's figures for years before +1851, ibid., Appendix, p. 21. See also Bourne, <q>Statistical Journal,</q> +1879, p. 422; Waterfield, <q>House of Commons Report,</q> ibid., Appendix, +pp. 171, 172, 174; Quetteville, ibid., p. 184; <q>Conférence Monétaire +Internationale,</q> 1881, p. 197; London <q>Economist,</q> February +24, 1883, Supplement, p. 7; <q>Parliamentary Documents,</q> 1881, vol. +<pb n='635'/><anchor id='Pg635'/> +xciii; <q>Report of the Director of the United States Mint,</q> 1880 (in +the Finance Report, 1880, p. 194); J. B. Robertson, <q>Westminster Review,</q> +vol. cxv, p. 200. +</p> + +<p> +X. <hi rend='italic'>Depreciation of Silver, +1876.</hi>—Causes, Bourne, ibid., pp. 206, +212, 222, 233; Wilson, ibid., p. 128; <q>House of Commons Report,</q> +ibid.; Sumner, <q>Princeton Review,</q> vol. iv., p. 570; S. Newcomb, +<q>International Review,</q> vol. vi (1879), p. 326; Cochut, <q>Revue des Deux +Mondes,</q> i, December, 1883, p. 514; Cairnes, <q>Essays</q>; F. Bowen, +<q>Minority Report of the United States Silver Commission,</q> 1878. +</p> + +<p> +Supposed cause of panic of 1873, see Williamson, <q>Contemporary +Review,</q> April 1879; Seyd, <q>Decline of Prosperity</q>; Bourne, ibid., +pp. 226, 227. +</p> + +<p> +XI. <hi rend='italic'>Appreciation of Gold.</hi>—Giffen, +<q>Statistical Journal,</q> vol. xlii, +p. 36, started the theory for the period 1873-1879. Also see Bourne, +<q>Statistical Journal,</q> vol. xlii, p. 406; S. Newcomb, <q>International Review,</q> +1879, p. 329; Wolowski, ibid., pp. 29, 30; Goschen, <q>Journal of +the Institute of Bankers</q> (London), vol. iv, part vi, May, 1883; Patterson, +<q>Statistical Journal,</q> vol. xliii, p. 1; for table of prices see London +<q>Economist</q> (e.g., December 28, 1878). +</p> + +<p> +XII. <hi rend='italic'>Bimetallism in the United States.</hi>—See +<hi rend='italic'>supra</hi>, <ref target='Book_III_Chapter_VII'>book iii, chap. +vii</ref>; for a vast array of materials, see <q>Report of the International Monetary +Conference,</q> 1878; Linderman's <q>Money and Legal Tender</q>; the +Finance Reports of the United States; and Congressional Documents. +For the coinage laws of 1792, 1834, 1853, 1873, 1878, see pamphlet, +<q>Extracts from the Laws of the United States relating to Currency +and Finance,</q> by C. F. Dunbar. For detailed account of passage of +Act of 1873, see <q>Report of the Comptroller of the Currency,</q> 1876, p. +170. Present situation, <q>Atlantic Monthly,</q> May, 1884, <q>The Silver +Danger.</q> +</p> + +</div> + +<div> +<head>A Brief Bibliography Of American Shipping.</head> + +<p> +I. <hi rend='italic'>English Navigation Acts.</hi>—Macpherson's +<q>Annals,</q> ii, pp. 442, +484; Scobell, <q>Collection of Acts,</q> p. 176; Ruffhead, <q>Statutes at +Large,</q> iii, p. 182; Roger Coke, <q>Treatise on Trade</q> (1671), p. 36; Sir +Josiah Child, <q>New Discourse on Trade</q> (1671); Sir Matthew Decker, +<q>Essay on the Causes of the Decline of Foreign Trade</q> (1744); Joshua +Gee, <q>Trade and Navigation of Great Britain</q> (1730); Lindsay, <q>History +of Merchant Shipping and Ancient Commerce</q>; McCulloch, +<q>Dictionary of Commerce</q> (new edition), articles <q>Navigation</q> and +<q>Colonial Trade</q>; ibid., edition of Adam Smith, note xii, p. 534; Huskisson, +speeches, iii, 13, 351; Levi, <q>History of British Commerce,</q> p. +158. +</p> + +<pb n='636'/><anchor id='Pg636'/> + +<p> +II. <hi rend='italic'>Navigation Laws of the United States.</hi>—<q>United +States Statutes +at Large,</q> i, 27, 287, 305; Act of 1817, Statutes, iii, 351; Revised Statutes +(1878), <q>Commerce and Navigation,</q> p. 795; Lord Sheffield, <q>Observations +on the Commerce of the United States</q>; Pitkin, <q>Statistical +View of the Commerce of the United States,</q> chap, i; D. A. +Wells, <q>Our Merchant Marine,</q> chap. v; Seybert's <q>Statistical Annals</q>; +Macgregor, <q>Commercial Statistics of America.</q> +</p> + +<p> +III. <hi rend='italic'>Growth of American Shipping.</hi>—Rapid growth, 1840-1856. +Levi, <q>History of British Commerce,</q> p. 582; Bigelow, <q>Tariff Question,</q> +Appendix No. 57; <q>Harper's Magazine,</q> January, 1884, p. 217; +Lindsay, <q>History of Merchant Shipping,</q> iii, p. 187; for ship-building, +see Report of the United States Bureau of Statistics, <q>Commerce and +Navigation,</q> 1881, p. 927; for tonnage, ibid., pp. 928-930; also, see +<q>United States Statistical Abstract</q>; Dingley's Report to House of +Representatives, December 15, 1882, No. 1,827, Forty-seventh Congress, +second session, pp. 5, 8, 254. +</p> + +<p> +IV. <hi rend='italic'>Steam and Iron Ships.</hi>—Preble, +<q>History of Steam Navigation</q>; +Colden, <q>Life of Fulton</q>; Porter, <q>Progress of the Nation,</q> section +3, chap. iv; Nimmo, <q>Report to the Secretary of the Treasury in +Relation to the Foreign Commerce of the United States and the Decadence +of American Shipping</q> (1870); Dingley's Report, pp. 4, 23; Kelley, +<q>The Question of Ships,</q> Appendix ii, p. 208. +</p> + +<p> +V. <hi rend='italic'>Decline of American Shipping.</hi>—<q>Report on Commerce and +Navigation</q> (1881), pp. 927, 928; Lindsay, ibid., iii, pp. 83, 187, 593, +645; ibid., iv, pp. 163-180, 292, 316, 376; <q>North American Review,</q> +October, 1864, p. 489; <q>Report on Commerce and Navigation,</q> 1881, +lxv, pp. 915, 916, 922, 934; Lynch, Report to House of Representatives +on <q>Causes of the Reduction of American Tonnage,</q> February 17, +1878, pp. ix, 80, 176, 195-213; remission of duties, Revised Statutes of +the United States (edition of 1878), section 2,513; Report on <q>Commerce +and Navigation,</q> xi, 83, 210; Dingley's Report; Nimmo, <q>Decadence +of American Shipping</q> (which gives several charts), p. 17, <q>The +Practical Workings of our Relations of Maritime Reciprocity</q> (1871); +Kelley, ibid.; Reports of the New York Chamber of Commerce; Sumner, +<q>Shall Americans own Ships?</q> in <q>North American Review,</q> +June, 1880; Codman, <q>Free Ships</q>; for high-rate profit in the United +States, Dingley's Report, p. 4. +</p> + +<p> +VI. <hi rend='italic'>Burdens on Ship-Owners.</hi>—Tonnage +duties, Wells, p. 179; sailors' +wages, Revised Statutes, sections 4,561, 4,578, 4,580-4,584, 4,600; +consular fees, Dingley's Report, p. 9; pilotage, taxation, Wells, p. 172, +<hi rend='italic'>et seq.</hi>; see also Act of 1884, abolishing many of these burdens. +</p> + +</div> + +</div> + +<pb n='637'/><anchor id='Pg637'/> + +<div rend='page-break-before: always'> +<index index='toc'/> +<index index='pdf'/> +<head>Appendix II. Examination Questions.</head> + +<p> +The following problems and questions have been arranged to indicate +to the reader the character of examinations set by English<note place='foot'>See +Milnes's <q>Problems in Political Economy.</q></note> and +American universities. They have been taken in each case from papers +actually given. It is hardly necessary to state, perhaps, that these questions +do not exhaust the subject, and are only some of a kind of which +many more might be added: +</p> + +<p> +<hi rend='smallcaps'>Definitions</hi>. +</p> + +<p> +1. Define briefly, Fixed Capital; Unproductive Consumption; Law of +Diminishing Returns; Effective Desire of Accumulation; Law of Increase +of Labor; Communism; Wages Fund; Wages of Superintendence; Real +Wages; Value; Price; Demand; Medium of Exchange; Gresham's Law. +</p> + +<p> +2. Explain carefully the following terms: Productive Consumption, +Effectual Demand, Margin of Cultivation, Cost of Production, Value of +Money, Cost of Labor, Wealth, and Abstinence. +</p> + +<p> +3. Explain the following terms: Real Wages, Fixed Capital, Allowance +System, Margin of Cultivation, Price, Demand, Medium of Exchange, +Seignorage, Value of Money, and Bill of Exchange. +</p> + +<p> +4. Define Supply, Value of Money, Productive Consumption, Cost +of Production, Cost of Labor, Exchange Value, Law of Production from +Land, Rate of Profit, Capital, and Gresham's Law. +</p> + +<p> +5. Define Political Economy: State the parts into which it may be +divided, and show how they are mutually related. +</p> + +<p> +<hi rend='smallcaps'>Labor</hi>. +</p> + +<p> +6. Distinguish between direct and indirect labor, and give an illustration +of the distinction. +</p> + +<p> +7. Apply the distinction between productive and unproductive labor, +and productive and unproductive consumption, respectively, to each of +<pb n='638'/><anchor id='Pg638'/> +the following persons: a tailor, an architect, an annuitant, a sailor, and +a brick-layer. +</p> + +<p> +8. Is an actor to be classed as a productive laborer? The inventor +of a machine? A confectioner? +</p> + +<p> +9. In which of the two classes of laborers, productive and unproductive, +would you place the following? +</p> + +<list> +<item>(1.) The officers of our Government.</item> +<item>(2.) The maker of an organ.</item> +<item>(3.) An organist.</item> +<item>(4.) A schoolmaster.</item> +<item>(5.) An artist.</item> +<item>(6.) He who makes an article for which there is no use.</item> +</list> + +<p> +10. Classify as productive or unproductive the following laborers: +a clergyman, musical-instrument maker, actor, soldier, and lace-maker. +</p> + +<p> +<hi rend='smallcaps'>Capital.</hi> +</p> + +<p> +11. Explain fully what you understand by capital, and what function +it discharges in production. Consider whether or not the following +ought to be included in capital: (1) the original and acquired powers +of the laborer, (2) the original properties of the soil, (3) improvements +on land, (4) credit, (5) unsold stock in the hands of a merchant, (6) +articles purchased but still in the consumer's hands. +</p> + +<p> +12. Does a national loan add to the capital of a country? +</p> + +<p> +13. Inquire how far, or in what cases, or in what sense, it may be +said that a common dwelling-house, an hotel, a school-house, a police-station, +a theatre, and a fortification, constitute part of the capital of +the country. +</p> + +<p> +14. Discuss carefully the question whether money lying in a bank (or +corn lying in a granary) is always capital, or whether its economic +nature depends upon the intentions of the owner. +</p> + +<p> +15. Are railway-shares, stocks of wine, wheat, munitions of war, and +land, to be considered capital, or not? +</p> + +<p> +16. Explain fully whether you consider that United States bonds are +capital or not. +</p> + +<p> +17. Is an investment in government funds capital, or not? Give +your reasons. +</p> + +<p> +18. In what manner does a large expenditure for military purposes +affect the operations of capital and labor? +</p> + +<p> +19. Distinguish between wealth and capital. Show that there is no +assignable limit to the employment of capital in bettering the condition +of the members of a community. +</p> + +<p> +20. <q>If there are human beings capable of work, and food to feed +them, they may always be employed in producing something.</q> Explain +the meaning of this fully. +</p> + +<pb n='639'/><anchor id='Pg639'/> + +<p> +21. What is meant by saying wealth can only perform the functions +of capital by being wholly or partially consumed? +</p> + +<p> +22. Explain and illustrate the statement that demand for commodities +is not demand for labor. +</p> + +<p> +23. Show that expenditure of money does not necessarily increase +the demand for labor. +</p> + +<p> +24. In what way would a general demand for luxuries affect productive +laborers and the wealth of the community? +</p> + +<p> +25. In a community where capital is all employed, what would be +the effect if one employer gradually withdrew some of his capital, and +spent this for personal luxuries? +</p> + +<p> +26. It is contended that <q>the demand for commodities, which can +only be got by labor, is as much a demand for labor as a demand for +beef is a demand for bullocks.</q> Criticise this position. +</p> + +<p> +27. <q>It is often said that, though employment is withdrawn from +labor in one department, an exactly equivalent employment is opened +for it in others, because what the consumers save in the increased cheapness +of one particular article enables them to augment their consumption +of others, thereby increasing the demand for other kinds of labor.</q> +Point out the fallacy. +</p> + +<p> +28. A college undergraduate, with the applause of shopkeepers, +bought twenty waistcoats, under the plea that he was doing good to +trade. Examine the economical soundness of his act. +</p> + +<p> +29. A man invested a portion of his capital in a loan to a state which +subsequently repudiated its debts. The man thereupon gave up his +carriage, discharged superfluous gardeners, and reduced the number of +his domestic servants. Examine the effect of these changes on the +employment of labor in the district where he resides. +</p> + +<p> +30. In the sixteenth century a great change in the mode of expenditure +took place. Retainers were dismissed, households were reduced +and a demand for commodities was substituted for a demand for labor. +How would this change affect wages, and why? +</p> + +<p> +31. It is supposed by some persons that expenditure by the rich in +costly entertainments is good for trade. What is your opinion on the +subject? +</p> + +<p> +32. A is an absentee who spends his income abroad. B spends his +income chiefly on American pictures and other works of art. C spends +most of his income on American servants. D saves and buys United +States bonds. E employs most of his income in the production of +manufactures. Explain the various effects of these different modes of +expenditure on the amount of wealth in the United States, and on +the working-classes of the country. +</p> + +<p> +33. Compare the economic effects of defraying war expenditure (1) +by loans, (2) by increased taxation. +</p> + +<pb n='640'/><anchor id='Pg640'/> + +<p> +34. Define the term capital, and distinguish between fixed and circulating +capital, giving instances of each. +</p> + +<p> +35. Distinguish between fixed and circulating capital, and point out +how far, or in what manner, each of the following articles belongs to +one kind or the other: a dwelling-house, a crop of corn, a wagon, a +load of coal, an ingot of gold, a railway-engine, a bale of cotton goods. +</p> + +<p> +36. Of the following, which would you class under fixed and which +under circulating capital: cash in the hands of a merchant, a cotton-mill, +a plow, diamonds in a jeweler's shop, a locomotive, a nursery-gardener's +seeds, greenhouses, manures; a carpenter's tools, woods, +nails? +</p> + +<p> +37. If in a country like this a large amount of capital becomes fixed +in the building of railroads, what effect will this change taken by itself +have upon the laboring-class, supposing the capital to be (1) domestic, +or (2) borrowed wholly or in part from abroad? +</p> + +<p> +38. What conclusion is reached by Mr. Mill respecting the objections +to the use of labor-saving machinery? +</p> + +<p> +39. Is the extension of machinery beneficial to laborers? +</p> + +<p> +40. What is <q>the conclusive answer to the objections against machinery</q>? +</p> + +<p> +<hi rend='smallcaps'>Efficiency of Production.</hi> +</p> + +<p> +41. Explain briefly the chief causes on which the productiveness of +labor depends. +</p> + +<p> +42. What are the principal ways in which advantage arises from the +division of labor? +</p> + +<p> +43. What are the principal advantages of division of labor? In +what cases and why is it better to carry on a productive enterprise on a +large scale? +</p> + +<p> +44. Under what circumstances, and in what callings, can the division +of employment be carried out to the fullest extent? +</p> + +<p> +45. Show how the amount of available capital and the extent of the +market for products limit division of labor. +</p> + +<p> +<hi rend='smallcaps'>Population.</hi> +</p> + +<p> +46. Give a brief statement of Malthus's theory of population, explaining +the different checks on population in different stages of civilization. +</p> + +<p> +47. Enunciate Malthus's law of population, and give an outline of the +reasoning by which he established it. Give an account of any objections +that have been brought against Malthus's position, and criticise +those objections. +</p> + +<p> +48. When the growth of population outstrips the progress of improvements, +what are the means of relief for the laborer? +</p> + +<pb n='641'/><anchor id='Pg641'/> + +<p> +49. Does the increased facility of emigration nullify the Malthusian +law of population in your opinion or not, and why? +</p> + +<p> +50. Explain the law of diminishing return and the Malthusian doctrine +of population; and trace the connection between them. +</p> + +<p> +<hi rend='smallcaps'>Increase of Production.</hi> +</p> + +<p> +51. Compare the motives to saving in the case of savages, and of a +country like the United States. State the causes of diversity in the +strength of the effective desire of accumulation. +</p> + +<p> +52. Capital is said to be accumulated by saving; what is saving? Is +hoarded money a saving while hoarded? +</p> + +<p> +53. How far does the increasing productiveness of manufacturing +industry tend to neutralize the effect on profits of the diminishing productiveness +of agricultural industry? +</p> + +<p> +54. What conclusion as to the limit to the increase of production +does Mr. Mill deduce from his investigation of the laws of the various +requisites of production? +</p> + +<p> +<hi rend='smallcaps'>Property.</hi> +</p> + +<p> +55. What are the essential elements of property? Are the grounds +of property in land the same as those of property in movables? +</p> + +<p> +56. Give what you conceive to be the chief arguments in favor of +the institution of private property, as opposed to common ownership. +</p> + +<p> +57. What arguments does Mr. Mill suggest in favor of some redistribution +of landed property? +</p> + +<p> +58. What are the economic arguments for and against Communism? +</p> + +<p> +59. In what way, and by what means, do Socialists want to alter +the present distribution of wealth? +</p> + +<p> +60. Sketch the principal forms of Communistic and Non-communistic +Socialism. +</p> + +<p> +61. Should the power of bequest be limited? +</p> + +<p> +<hi rend='smallcaps'>Wages.</hi> +</p> + +<p> +62. On what, according to Mill, does the rate of wages depend? +Hence, show the fallacy of the popularly proposed remedies for low +wages. +</p> + +<p> +63. State and examine the principal theories which have been put +forward as to the circumstances which regulate the general rate of wages, +saying which you deem to be correct, and why so. +</p> + +<p> +64. Mr. Thornton argues that the wages-fund is neither <q>determined</q> +nor <q>limited</q>: not <q>determined,</q> because there is no <q>law</q> +to compel capitalists to devote any portion of their wealth to the payment +<pb n='642'/><anchor id='Pg642'/> +of labor, nor are they morally <q>bound</q> to do so; and not <q>limited,</q> +because there is nothing to prevent them from adding to the +portion of their wealth so applied. Criticise this argument, and, if you +dissent from Mr. Thornton's view, state the causes which <q>determine</q> +and <q>limit</q> the fund in question. +</p> + +<p> +65. State precisely what you mean by the <q>wages-fund,</q> and explain +the conditions on which its growth depends. +</p> + +<p> +66. Explain generally the circumstances which determine the rate of +wages. Mention some of the reasons why wages should be higher in +one occupation than in another. +</p> + +<p> +67. In what way does dearness or cheapness of food affect money +wages? +</p> + +<p> +68. What determines— +</p> + +<list> +<item>(1.) The general rate of wages in a country?</item> +<item>(2.) The relative rates of wages in different employments?</item> +</list> + +<p> +69. What causes different rates of wages in different employments, +and by what methods might wages be raised? +</p> + +<p> +70. How do you explain the fact that some of the most disagreeable +kinds of labor are the most badly paid? +</p> + +<p> +71. What, according to Mr. Mill, are the most promising means for +the improvement of the laboring-classes? +</p> + +<p> +72. In the Island of Laputa a law was passed compelling each workman +to work with his left hand tied behind his back, and the law was +justified on the ground that the demand for labor was more than +doubled by it. Examine this argument. +</p> + +<p> +73. Some coal-workers are calling for a diminution of the output of +coal, so as to keep up their wages. Examine how far, if at all, this result +would follow from their proposed action. +</p> + +<p> +74. Discuss any remedies for low wages that have been or might be +suggested. +</p> + +<p> +75. Why are the wages of women habitually lower than those of +men? +</p> + +<p> +<hi rend='smallcaps'>Profits</hi>. +</p> + +<p> +76. What is the cause of the existence of profits? And what, according +to Mr. Mill, are the circumstances which determine the respective +shares of the laborer and the capitalist? +</p> + +<p> +77. (1.) What is the lowest rate of profit which can permanently +exist? (2.) Why is this minimum variable? +</p> + +<p> +78. Analyze the remuneration received by any of the following: (1) +the proprietor of a cotton-mill managing his own mill; (2) a merchant +conducting his own business; (3) a railway shareholder; (4) a +holder of government funds. +</p> + +<p> +79. Into what portions may we divide the return which is usually +<pb n='643'/><anchor id='Pg643'/> +called profit? Which of these portions would be received by a merchant +carrying on business with borrowed capital? +</p> + +<p> +80. Analyze the payment called profits into its various elements. +Point out in what respects the earnings of the employer differ from or +resemble the wages paid to other classes of laborers. +</p> + +<p> +81. It is asserted that <q>profits tend to an equality.</q> What conditions +must be satisfied before this position can be maintained? +</p> + +<p> +82. How is the alleged tendency of profits to equivalence in different +employments to be reconciled with the notorious difference in the profit +of different individuals? +</p> + +<p> +83. Which one of the elements in profit has the greatest effect on +its amount? Explain by comparing the causes which regulate each element. +</p> + +<p> +84. How does Mill reconcile the high wages in America with Ricardo's +law of profits? +</p> + +<p> +85. Explain the proposition that the rate of profits depends on the +cost of labor, stating carefully what elements are included in cost of +labor. +</p> + +<p> +86. Explain what connection there may be between an increase of +population and any of the elements entering into cost of labor. +</p> + +<p> +87. What effect would an increase or diminution of population +have upon cost of labor? +</p> + +<p> +88. Explain Mill's view as to the cost of labor being a function of three +variables, considering the passages in which he says, 1. <q>If without +labor becoming less efficient its remuneration fell, <emph>no increase taking +place in the cost of the articles composing that remuneration</emph>;</q> 2. <q>If the +laborer obtained a higher remuneration, <emph>without any increased cheapness +in the things composing it</emph>; or if, without his obtaining more, <emph>that +which he did obtain would become more costly</emph></q>: profits in the last two cases +would suffer a diminution; and discussing—Firstly, if the remuneration +of labor falls, what can the cost of the articles composing that remuneration +signify to the capitalist? Secondly, if the laborer gets a higher +remuneration, what can the increased cheapness of the things composing +it signify to the capitalist? +</p> + +<p> +89. Is the contest between capital and labor permanent and fundamental? +If not, give your reasons for your answer. +</p> + +<p> +90. What is the effect on wages and profits of the introduction of +machinery? +</p> + +<p> +<hi rend='smallcaps'>Rent.</hi> +</p> + +<p> +91. What connection exists between the law of Malthus and Ricardo's +doctrine of rent? +</p> + +<p> +92. What is the reason why land-owners can demand rent? +</p> + +<pb n='644'/><anchor id='Pg644'/> + +<p> +93. Explain and illustrate the distinction between rent and profits. +In what cases are they nearly indistinguishable? +</p> + +<p> +94. It has often been observed that in America land is much less +highly cultivated than in England. Explain the economic reasons for +this. +</p> + +<p> +95. How does the theory of rent apply in a country like the United +States, where the farmer owns his land instead of hiring it? +</p> + +<p> +96. How is it that some agricultural capital pays rent, even if resort +is not had to different grades of land? +</p> + +<p> +97. Give a brief description of the theory of rent, and point out to +what payments not usually called rent the theory may be applied. +</p> + +<p> +98. State briefly Ricardo's theory of rent, and show that, if it be +true, the following statements of Adam Smith must be false: +</p> + +<p> +<q>The most fertile coal-mine regulates the price of coals at all the +other mines in the neighborhood.</q> +</p> + +<p> +<q>In the price of corn one part pays the rent of the landlord, another +pays the wages, and another the profit of the farmer.</q> +</p> + +<p> +99. Why does the farming business pay rent, and the cotton business +(ground-rent excluded) pay none? Define rent. +</p> + +<p> +100. <q>As population increases, rents estimated in corn increase, and +the price of corn rises; rents, therefore, doubly tend to increase.</q> +Prove this. +</p> + +<p> +101. Professor Rogers adduces, in refutation of the common theory +of rent, the fact that land near New York pays a high rent, while land +of the same natural fertility in the Western States pays no rent. How +far do you admit the force of this objection? +</p> + +<p> +102. Examine the following doctrine: +</p> + +<quote rend='display'> +<q>If invention and improvement still go on, the efficiency of labor will be +further increased, and the amount of labor and capital necessary to produce a +given result further diminished. The same causes will lead to the utilization of +this new gain in productive power for the production of more wealth; the margin +of cultivation will be again extended, and rent will increase, both in proportion +and amount, without any increase in wages and interest. And so, ... will ... rent +constantly increase, though population should remain stationary.</q>—Henry +George, <q>Progress and Poverty</q> (p. 226). +</quote> + +<p> +103. What answer is made to Mr. Carey's objection to Ricardo's +theory of rent, that in point of fact the poorer, not the richer, lands are +first brought under cultivation? +</p> + +<p> +104. Explain how land, <q>even apart from differences of situation,... would +all of it, on a certain supposition, pay rent.</q> +</p> + +<p> +105. Explain clearly how it is possible for the land of a country +which is all of uniform fertility to pay rent. +</p> + +<p> +106. <q>If the earth had a perfectly smooth surface the same everywhere, +<pb n='645'/><anchor id='Pg645'/> +and if it were all tilled and cultivated in exactly the same way, +there would be no such thing as rent.</q> Examine this proposition. +</p> + +<p> +107. Show that rent does not increase the price of bread. +</p> + +<p> +108. How is it shown that <q>rent does not really form any part of +the expenses of production or of the advances of the capitalist?</q> +</p> + +<p> +109. (1.) What connection exists between the price of agricultural +products and the amount of rent paid? (2.) Can rent affect the price? +</p> + +<p> +110. <q>Rent is the effect and not the cause of price.</q> Prove this. +</p> + +<p> +111. Does rent enter into the cost of production of the following +commodities or not, and why: Corn, cloth, the wine of the best vineyards? +</p> + +<p> +112. <q>Rent arises from the difference between the least fertile and +the most fertile soils, and from the fact that the former have been +taken into cultivation.... Rent is the difference between the market +price of produce and the cost of production.</q> Harmonize these statements. +</p> + +<p> +113. In order that the actual payments made by farmers to landlords +should generally correspond with <q>economic rent,</q> what conditions +must be observed? +</p> + +<p> +114. What is assumed, as to competition, in all Mr. Mill's reasoning +on wages, profits, and rent? Explain its action in each case. +</p> + +<p> +<hi rend='smallcaps'>Value.</hi> +</p> + +<p> +115. Enumerate, compare, and criticise any opinions known to you +which have been held concerning the nature, origin, or measure of value +in exchange. +</p> + +<p> +116. Define precisely what it is which gives value to objects, and +point out the causes which vary the value of the same object under +differing circumstances. +</p> + +<p> +117. Do men dive to the bottom of the sea to get pearls because +they are valuable; or are pearls valuable because men must dive to +the bottom of the sea to get them? +</p> + +<p> +118. There are three forms of difficulty of attainment. State the +law of value applicable to each. +</p> + +<p> +119. Explain the exact economic meaning of the words supply and +demand. +</p> + +<p> +120. When it is said that the value of certain commodities depends +upon supply and demand, what is meant by demand? +</p> + +<p> +121. If the supply of all commodities were suddenly doubled, would +any changes in their relative values ensue or not, and why? +</p> + +<p> +122. State the laws which regulate the permanent and temporary +values of agricultural products. +</p> + +<p> +123. How far does the value of commodities depend on the quantity +of labor required for their production? +</p> + +<pb n='646'/><anchor id='Pg646'/> + +<p> +124. Has the term exchange value any precise meaning when we +are comparing times or places very remote from one another? +</p> + +<p> +125. What is meant by the natural (or normal) price and the market +price of commodities? To what extent can they differ? +</p> + +<p> +126. Does a general rise of wages raise the prices of commodities in +general or not, and why? Does it tend to cause any change in the +relative prices of commodities or not, and why? +</p> + +<p> +127. Suppose that wages were double, would the values of commodities +be affected? What would be the effect on prices and profits +of such an increase of wages? +</p> + +<p> +128. Are wages and profits influenced by prices? +</p> + +<p> +129. Can employers recoup themselves by a rise of prices for a rise +of— +</p> + +<list> +<item>(a.) Wages in particular employments?</item> +<item>(b.) General wages?</item> +</list> + +<p> +How does this question bear on the efficacy of trades-unionism? +</p> + +<p> +130. Do values depend on wages? +</p> + +<p> +131. Explain the following statement: <q>It is true the absolute +wages paid have no effect upon values; but neither has the absolute +quantity of labor.</q> +</p> + +<p> +132. Explain the statement that <q>high general profits can not, any +more than high general wages, be a cause of high values.... In so +far as profits enter into the cost of production of all things, they can not +affect the value of any.</q> +</p> + +<p> +133. Explain fully why it is that capitalists can not compensate themselves +for a general high cost of labor through any action on values and +prices. +</p> + +<p> +134. <q>The value of a commodity depends on its cost of production.</q> +Under what conditions is this true, and what causes interfere with +it? +</p> + +<p> +135. Describe the hindrances which impede the free movement of +capital to those fields which apparently offer the highest return for its +employment. +</p> + +<p> +136. Give J. S. Mill's analysis of the <q>cost of production,</q> and also +Professor Cairnes's, with the arguments for and against each. +</p> + +<p> +137. Analyze cost of production. What is its connection with cost +of labor? +</p> + +<p> +138. Give an analysis of cost of production of any commodity. +</p> + +<p> +139. Show carefully the distinction between wages, cost of labor, +and cost of production. +</p> + +<p> +140. Define clearly value, price, real wages, and cost of production. +</p> + +<p> +141. Define real wages, money wages, cost of labor. +</p> + +<pb n='647'/><anchor id='Pg647'/> + +<p> +<hi rend='smallcaps'>Money.</hi> +</p> + +<p> +142. Point out the difference between the scientific and popular conceptions +implied in the terms wealth and money. +</p> + +<p> +143. Show the fallacy of confounding capital with money. Can +there be a glut of capital? +</p> + +<p> +144. What is money? To what sort of necessity does it owe its +existence? What articles have been used for money? Enumerate the +qualities which render a commodity fit to serve as money. +</p> + +<p> +145. What are the qualities requisite in any commodity in order that +it may serve as money? +</p> + +<p> +146. Distinguish accurately between the functions of money. +</p> + +<p> +147. How far is a fixed standard of value possible? +</p> + +<p> +148. What effect does the great durability of gold and silver have +upon the value of money? +</p> + +<p> +149. How far does the law of demand and supply govern the value +of money? +</p> + +<p> +150. Explain fully how it is that the value of the precious metals is +affected by <q>questions of quantity only, with little reference to cost of +production.</q> +</p> + +<p> +151. What is to be said to the following: <q>Some political economists +have objected altogether to the statement that the value of money +depends on its quantity combined with the rapidity of circulation; +which, they think, is assuming a law for money that does not exist for +any other commodity</q>? +</p> + +<p> +152. Under what conditions is it true that the <q>value of money is +inversely as its quantity</q>? +</p> + +<p> +153. Explain carefully the following: <q>The average value of gold is +made to conform to its natural value in the same manner as the values +of other things are made to conform to their natural value.</q> +</p> + +<p> +154. In what various meanings is the phrase <q>the value of money</q> +used? How far does the value of money in each of these meanings depend +on (1) the cost of production, (2) supply and demand? +</p> + +<p> +155. Are the values of gold and silver subject to exactly the same +natural laws as other commodities? +</p> + +<p> +156. Give the explanations and qualifications required to render the +following proposition true: <q>The quantity of coin in every country is +regulated by the value of the commodities which are to be circulated +by it.</q> +</p> + +<p> +157. Would the world be richer if every individual in it suddenly +found the quantity of money in his possession doubled? +</p> + +<p> +158. How far, or in what way, do you consider it correct to say that +the general level of prices in a country depends upon the quantity of +gold coin existing in that country? +</p> + +<pb n='648'/><anchor id='Pg648'/> + +<p> +159. A single good harvest causes a considerable fall in the value of +<emph>wheat</emph>; but a great addition to the year's supply of <emph>gold</emph> +from the mines produces little effect on its general value. How do you account for the +difference? +</p> + +<p> +160. Show the effect of establishing a double standard. +</p> + +<p> +161. Show how Gresham's law is illustrated by the history of the +currency in the United States between 1834 and 1873. +</p> + +<p> +162. What effect had the discovery of gold in this century upon the +coinage of the United States? +</p> + +<p> +163. What is the system upon which the small silver currency of the +United States is coined and issued? +</p> + +<p> +164. State briefly the aim of the United States coinage act of 1853. +</p> + +<p> +<hi rend='smallcaps'>Credit.</hi> +</p> + +<p> +165. How do you define credit? Form a classification of credit +documents. +</p> + +<p> +166. It has been said that <q>credit is capital.</q> Is this so or not? +</p> + +<p> +167. Define capital, and examine the meaning of the term in the following +statements: +</p> + +<p> +(<hi rend='italic'>a.</hi>) Demand for commodities can not create capital. +</p> + +<p> +(<hi rend='italic'>b.</hi>) Credit is not a creation, but a transfer of capital. +</p> + +<p> +(<hi rend='italic'>c.</hi>) Wages depend upon the proportion between population and +capital. +</p> + +<p> +168. State the law of the value of money which governs general +prices. What change is to be made in the statement, if credit is to be +taken into consideration? +</p> + +<p> +169. What is the part which instruments of credit, other than bank-notes, +play in the exchange of commodities? +</p> + +<p> +170. Mention some of the principal features of a credit crisis. +</p> + +<p> +171. What are inconvertible notes? What objections are there to +currency of this description? +</p> + +<p> +172. Can an inconvertible currency be made to maintain the same +value as a convertible currency, and, if so, how? Supposing that it can, +what objections are there, nevertheless, to it? +</p> + +<p> +173. <q>Nothing is subject to more variation than paper money, even +when it is limited, and has no guarantees; for this simple reason, that, +having no value of its own, it depends on the idea that each person +forms of those guarantees.</q> Comment on this passage. +</p> + +<p> +174. How is it that a bad dollar does the work of buying as well as +a good one until it is found out? Is it that it makes no difference +whether it is made of gold or not? +</p> + +<p> +175. To what extent is a government capable of giving fictitious +value to a paper or a metallic currency? +</p> + +<pb n='649'/><anchor id='Pg649'/> + +<p> +176. In a country with an inconvertible paper currency, how can it +be determined whether the issues are excessive or not, and why? +</p> + +<p> +177. What will be the effect if the circulating medium of a country +is increased beyond its natural amount— +</p> + +<list> +<item>(1) when the medium is coin?</item> +<item>(2) when it is coin and convertible paper?</item> +<item>(3) when it is inconvertible paper?</item> +</list> + +<p> +178. What is the error involved in the assumption, frequently made +by writers and public speakers, that the currency of a country ought to +increase in like ratio with its wealth and population? +</p> + +<p> +179. On what does the desire to use credit depend? What connection +exists between the amount of notes and coin in circulation and the +use of credit? +</p> + +<p> +180. Compare the advantages and disadvantages of a metallic and +paper currency. +</p> + +<p> +181. A member of Congress advocated expansion of the paper currency +by the following argument: <q>Our currency, as well as everything +else, must keep pace with our growth as a nation.... France has a +circulation <hi rend='italic'>per capita</hi> of thirty +dollars; England, of twenty-five; and +we, with our extent of territory and improvements, certainly require +more than either.</q> State your opinion of this argument. +</p> + +<p> +182. Trace the effects, immediate and ultimate, on general prices of +(<hi rend='italic'>a</hi>) an extended system of credit, +(<hi rend='italic'>b</hi>) an enlarged issue of paper money, and +(<hi rend='italic'>c</hi>) an addition to the stock of precious metals, respectively. +</p> + +<p> +183. What is the error in the common notion that <q>a paper currency +can not be issued in excess so long as every note <emph>represents</emph> property, or +has a <emph>foundation</emph> of actual property to rest on</q>? +</p> + +<p> +184. Explain the action of the check and clearing-house system, +and state what is meant by the restoration of barter. +</p> + +<p> +<hi rend='smallcaps'>Over-Production</hi>. +</p> + +<p> +185. State the relation between supply and demand as aggregates, +e.g., between the aggregate supply of commodities in a given community +and the aggregate demand for them, and show the bearing of the +principle involved on the doctrine of <q>general over-production.</q> +</p> + +<p> +186. Prove that the increase of capital and the extension of industry +can not lead to a general over-production of commodities. +</p> + +<p> +187. What is the error of those who believe in the danger of over-production? +</p> + +<p> +188. Distinguish <q>excess of supply</q> from a <q>commercial crisis.</q> +</p> + +<p> +189. Give the substance of Mill's examination of the theories of excess +of supply. +</p> + +<p> +190. <q>When production is fully equal to consumption, every discovery +in the arts, or in mechanics, is a calamity, because it only adds to +<pb n='650'/><anchor id='Pg650'/> +the enjoyment of consumers the opportunity of obtaining commodities +at a cheaper rate, while it deprives the producers of even life itself.</q> +Discuss this opinion of Sismondi. +</p> + +<p> +191. Explain the difference in the theories of Dr. Chalmers and Mr. +Mill on over-production, and the excess of supply. +</p> + +<p> +<hi rend='smallcaps'>Peculiar Cases of Value.</hi> +</p> + +<p> +192. It costs as much to produce straw as to produce grain; how, +then, do you explain the comparatively low value of straw? +</p> + +<p> +193. Suppose a considerable rise in the price of wool to be foreseen, +how should farmers expect the prices of mutton to be affected, and +why? +</p> + +<p> +194. Explain the operation of the laws of value by which the relative +prices of wool and mutton are regulated. +</p> + +<p> +<hi rend='smallcaps'>International Trade and Values.</hi> +</p> + +<p> +195. What is the meaning of the statement that <q>it is not a difference +in the <emph>absolute</emph> cost of production which determines the interchange +[of commodities between countries], but a difference in the <emph>comparative</emph> +cost</q>? +</p> + +<p> +196. What are the advantages which a country derives from foreign +trade? +</p> + +<p> +197. Explain clearly the following passage: <q>We may often, by +trading with foreigners, obtain their commodities at a smaller expense +of labor and capital than they cost to the foreigners themselves.</q> +</p> + +<p> +198. Is there any essential difference between trade between country +and country, and trade between county and county, or even between +man and man? What is the real nature of trade in all cases? +</p> + +<p> +199. Why is it necessary to make any different statement of the laws +of value for foreign than for domestic products? What is the cause for +the existence of any international trade? +</p> + +<p> +200. How would a serious decline in the efficiency of England, as +compared with other countries, in the production of manufactures affect +the scale of money incomes and prices in England, and why? +</p> + +<p> +201. Mr. Mill refers the value of home products to the <q>cost of production</q>; +of foreign products to the <q>cost of acquisition.</q> Examine +the truth of this distinction. +</p> + +<p> +202. It is said that in the home market the value of commodities depends +on the cost of production, in the foreign market on the cost of +acquisition. Comment on this distinction. +</p> + +<p> +203. Is the cost of production the regulator of international values? +</p> + +<p> +204. Discuss the following statement: <q>International value is regulated +just as inter-provincial or inter-parishional value is. Coals and +<pb n='651'/><anchor id='Pg651'/> +hops are exchanged between Northumberland and Kent on absolutely +the same principles as iron and wine between Lancashire and Spain.</q>—Ruskin, +<q>Munera Pulveris,</q> p. 84. +</p> + +<p> +205. What determines the value of imported commodities? +</p> + +<p> +206. Why does cost of production fail to determine the value of commodities +brought from a foreign country? Does it also fail in the case +of commodities brought from distant parts of the same country? +</p> + +<p> +207. It is on the matter of fact that there is not much migration of +capital and labor from country to country that Mr. Mill has based his +whole doctrine of <q>international trade and international values.</q> Explain +and comment on the above statement. +</p> + +<p> +208. What are the causes which determine for a nation the cost of +its imports? +</p> + +<p> +209. It follows from the theory of international values, as laid down +by Mill, that the permanent residence of Americans in Europe may +enhance the cost of foreign imports to Americans residing at home. +Explain in what way. +</p> + +<p> +210. Suppose two countries, A and B, isolated from the rest of the +world, and a trade established between them. In consequence of the +labor of A becoming less effective, the cost of production of every article +which can be produced in that country is greatly increased, but so +that the relation between the costs of any two articles remains the same. +What, if any, will be the effect of the change on the trade between A +and B? Does your answer depend upon your using the phrase <q>cost +of production</q> in a sense different from that given to it by some economists? +</p> + +<p> +211. Show that every country gets its imports at less cost in proportion +to the efficiency of its labor. +</p> + +<p> +<hi rend='smallcaps'>Foreign Exchanges.</hi> +</p> + +<p> +212. What is the ordinary limit to the premium on foreign bills of +exchange, and why? +</p> + +<p> +213. What are the chief effects on the foreign exchanges which are +produced by the breaking out of a war? Account for the fact that in +1861 the exchanges on England in America fell considerably below +specie point. +</p> + +<p> +214. Suppose that the next harvest in England should be very defective, +and extraordinary supplies of American grain needed. How +would this probably affect the price of bills of exchange between England +and America, and the profit on the exportation of English manufactures +to the latter, and why? +</p> + +<p> +215. Trace the process by which the precious metals spread from the +mines over the world. +</p> + +<pb n='652'/><anchor id='Pg652'/> + +<p> +216. Suppose the exchange between England and the United States +to be heavily against England, how will this fact affect the export and +import trade between the two countries, and why? +</p> + +<p> +217. What is meant by exchanges being against a country? +</p> + +<p> +218. Enumerate the principal circumstances which affect the rate of +exchange between two countries. How is the <hi rend='italic'>par</hi> +of exchange ascertained? +</p> + +<p> +219. In what way are gold and silver distributed among the different +trading countries? Between different parts of the same country? +</p> + +<p> +220. Trace the effects of large and continuous issues of inconvertible +paper currency on the prices of commodities, on importation and exportation, +and on the foreign exchanges. +</p> + +<p> +221. State the conditions under which international trade can permanently +exist. What will be the ultimate effect of a large movement of +foreign gold upon prices, imports, and exports in the receiving country? +</p> + +<p> +222. State the theory of the value of money (i.e., <q>metallic +money</q>), and clear up any apparent inconsistencies between the following +statements: (1.) The value of money depends on the cost of production +at the worst mines; (2.) The value of money varies inversely as its +quantity multiplied by its rapidity of circulation; (3.) The countries +whose products are most in demand abroad and contain the greatest +value in the smallest bulk, which are nearest the mines and have the +least demand for foreign productions, are those in which money will be +of lowest value. +</p> + +<p> +228. The effects of the depreciation of the paper currency in the +United States are thus described by Mr. Wells: <q>It renders it impossible +to sell abroad the products which have cost too much at home, and +invites from other countries the products of a cheaper labor paid for in +a sounder currency. It exaggerates imports, while destroying our ability +to pay in kind.</q> State how far you agree with the deductions here +drawn, assigning your reasons where you differ. +</p> + +<p> +224. When the foreign exchanges are manifestly against a country, +and a balance of indebtedness is the cause, the equilibrium can be restored +in two ways. State and explain the operation of each. +</p> + +<p> +225. What are the conditions which determine for a country a high +range of general prices? How far is this advantageous? +</p> + +<p> +226. What is the effect of the imposition of a tribute by one country +on another upon the course of trade between them, and the terms on +which they exchange commodities; and why? +</p> + +<p> +227. For what reasons may a nation's exports habitually exceed or +fall short of its imports? +</p> + +<p> +228. Explain the real and nominal exchange. +</p> + +<p> +229. Expound Mr. Mill's theory of the influence which a convertible +currency exercises on foreign trade. +</p> + +<pb n='653'/><anchor id='Pg653'/> + +<p> +230. What is the effect of a depreciated currency on (1) foreign +trade, and (2) the exchanges? +</p> + +<p> +<hi rend='smallcaps'>Interest.</hi> +</p> + +<p> +231. How does the general rate of interest determine the selling +price of stocks and land? +</p> + +<p> +232. Is there any relation between the rate of interest and the value +of money? +</p> + +<p> +233. What are the relations of interest and profit? On what causes +does the rate of interest depend? +</p> + +<p> +234. <q>High interest means bad security.</q> Comment on this saying. +</p> + +<p> +235. Is the rate of interest affected by the supply of the precious +metals? +</p> + +<p> +236. What determines the rate of interest on the loanable funds? +Is the <q>current [or ordinary] rate of interest the measure of the relative +abundance or scarcity of capital</q>? +</p> + +<p> +237. What are the chief causes that determine the rate of interest? +</p> + +<p> +238. If it be true that in America every man, however rich, is engaged +in some business, but that in England many rich men have no +trade or profession, how is the rate of interest in each country affected +in consequence, and why? +</p> + +<p> +239. How does a fall in the purchasing power of money tend to +affect, if at all, and why, (1) the rate of interest, (2) the price of land, +(3) the price of government bonds, (4) the price of gold and silver ornaments +and plate? +</p> + +<p> +<hi rend='smallcaps'>Foreign Competition.</hi> +</p> + +<p> +240. Explain the grounds of Mr. Mill's proposition that general low +wages never caused any country to undersell its rivals, nor did general +high wages ever hinder it from doing so. If you think the proposition +needs qualification, give your reason. +</p> + +<p> +241. (1.) What is the true theory of one country underselling another +in a foreign market? (2.) What weight should be attributed to the fact +of generally higher or lower wages in one of the competing countries? +</p> + +<p> +242. Discuss the question whether a high rate of wages necessarily +lays the commerce of a country under a disadvantage with reference to +a country where the rate of wages is lower. +</p> + +<p> +243. What are the conditions under which one country can permanently +undersell another in a foreign market? +</p> + +<p> +244. Point out distinctly the connection between the money wages +of laborers in the United States and the productiveness of the soil. +</p> + +<p> +245. In the Eastern States iron-molders earn from fourteen to seventeen +dollars a week; in California their wages run from twenty-one to +twenty-seven dollars. Account for this variation. +</p> + +<pb n='654'/><anchor id='Pg654'/> + +<p> +<hi rend='smallcaps'>Progress of Society</hi>. +</p> + +<p> +246. What are the reasons for the change in the normal values of +manufactured and of agricultural commodities, respectively, during the +progress of society? +</p> + +<p> +247. Wages and profits in different employments and neighborhoods +are not uniformly proportional to the efforts of labor and abstinence +of which they are the respective rewards. Classify the circumstances +which prevent this correspondence, and show how far their effect is +likely to be reduced (<hi rend='italic'>a</hi>) by +general economical progress, and (<hi rend='italic'>b</hi>) by the +extension of the division of labor. +</p> + +<p> +248. What is the law of diminishing returns? Can you point out any +connection between this law and the following phenomena?— +</p> + +<list> +<item>(<hi rend='italic'>a.</hi>) Density of population.</item> +<item>(<hi rend='italic'>b.</hi>) Rate of wages.</item> +<item>(<hi rend='italic'>c.</hi>) Rate of profits in different countries.</item> +</list> + +<p> +249. Sketch the influence on rents and profits of an increase of population +and capital concurrently with a stationary state of the arts of +production. +</p> + +<p> +250. Is there reason to believe that Mr. Mill has underrated the +powers possessed by man of extending the area of production and facilitating +the market of food? If such a statement has been made, to what +extent is his theory of population modified, and the risks he had indicated +rendered distant? +</p> + +<p> +251. Compare the effects on rent, profits, and wages, of a sudden +improvement in the production (<hi rend='italic'>a</hi>) +of food, (<hi rend='italic'>b</hi>) of some manufactured +articles largely consumed by the working-classes. +</p> + +<p> +252. Trace the connection between Ricardo's theory of rent and the +decline in the general rate of profits as a country increases in population. +Explain clearly the connection which exists between wages and +profits. +</p> + +<p> +253. What effect is produced upon rents, profits, and wages, respectively, +in a country like France, where population is stationary and capital +advancing? +</p> + +<p> +254. If capital continued to increase and population did not, explain +the proposition that <q>the whole savings of each year would be exactly +so much subtracted from the profits of the next and of every following +year,</q> if improvements were stationary. +</p> + +<p> +255. How does social and industrial progress tend to affect the prices +of land, raw produce, and manufactures, respectively, and why? +</p> + +<p> +256. The capitalized value of land rises, in the progress of society, +from two causes—from one which affects land in common with all investments; +from another which is peculiar to land. +</p> + +<pb n='655'/><anchor id='Pg655'/> + +<p> +257. <q>The tendency of improved communications is to lower existing +rents.</q> How far is this true, and in what directions is it true? +</p> + +<p> +258. What would be the effect on profits, wages, and rents of an +improvement in a manufactured article consumed by the laboring-class? +</p> + +<p> +259. Explain the doctrine of the tendency of profits to a minimum, +the cause of that tendency, and the circumstances which counteract +it. +</p> + +<p> +260. What was Adam Smith's doctrine as to the decline of profit in +progressive communities? Criticise his argument. +</p> + +<p> +261. Mention some of the principal causes which, in the ordinary +progress of society, respectively tend to increase or to reduce the current +rate of profits. +</p> + +<p> +262. Why do profits tend to fall as population increases, and how +may this result be retarded or prevented? +</p> + +<p> +263. What is the effect of a general rise of money wages, apart from +the consideration of a greater efficiency of labor, in prices, profits, and +rent? Give reasons for your answer. +</p> + +<p> +264. How does the general progress of society in wealth and industrial +efficiency tend to affect the rate of wages, the rate of profit, and +the rate of rent, respectively? +</p> + +<p> +265. What is the general effect of the progress of society on the land-owner, +the capitalist, and the laborer? +</p> + +<p> +<hi rend='smallcaps'>Future of Laboring-Classes.</hi> +</p> + +<p> +266. Examine the influences of machinery on the economic condition +of the working-classes. +</p> + +<p> +267. Mention and discuss some of the popular remedies for low +wages, and especially the effect of the subdivision of landed property +among peasant proprietors. +</p> + +<p> +268. Explain briefly what is meant by co-operation, and indicate the +more prominent forms assumed by the co-operative movement. +</p> + +<p> +269. What is meant by the co-operative system of industry? Show +ways in which this system may affect, for good or for evil, the productiveness +of labor; and mention any moral benefits, or the opposite, in +which it may be expected to issue. +</p> + +<p> +270. What are the difficulties in the way of co-operation for the production +of salable objects? +</p> + +<p> +271. Explain the advantages of industrial partnership, in which the +employés share, in proportion to the wages received, half the profits of +the business beyond a certain fixed minimum which is assigned to the +employers. +</p> + +<pb n='656'/><anchor id='Pg656'/> + +<p> +<hi rend='smallcaps'>Taxation.</hi> +</p> + +<p> +272. How is the state justified in undertaking any manufacture or +service which might be performed by private enterprise? +</p> + +<p> +273. Enumerate Adam Smith's canons of taxation. +</p> + +<p> +274. Examine the argument in favor of the resumption by the state +of what is called the unearned increment in the value of land arising +from the development of society. +</p> + +<p> +275. A picture by Gainsborough and a house in Broadway are sold +in the same year at the same price; at the end of fifty years each sells +for five times its first cost. Is there any, and, if so, what, reason why +the increase should be sequestrated for the public benefit in the one case +and not in the other? +</p> + +<p> +276. Explain the incidence of taxes laid on wages. +</p> + +<p> +277. Why should a tax on profits, if no improvements follow, fall +on the laborer and capitalist? +</p> + +<p> +278. Explain what effect, if any, will be produced on the price of +corn by— +</p> + +<list> +<item>(1) a tax upon rent;</item> +<item>(2) a tithe;</item> +<item>(3) a tax of so much per acre, irrespective of value;</item> +<item>(4) a tax of so much per bushel.</item> +</list> + +<p> +279. On whom does a tax of a fixed proportion of agricultural +produce fall? +</p> + +<p> +280. Discuss the question whether the income-tax ought to be a +tax upon income and property, or upon expenditure. +</p> + +<p> +281. Discuss the expediency of a graduated income-tax. +</p> + +<p> +282. State the arguments which you think strongest both for and +against exempting savings from the income-tax. +</p> + +<p> +283. Explain the conditions which should be observed in imposing +taxes on commodities. +</p> + +<p> +284. What taxes does a tradesman get back in the price of the articles +he sells, and what does he not? +</p> + +<p> +285. Test by Adam Smith's four maxims of taxation the policy of +indirect taxes on the necessaries of life. +</p> + +<p> +286. All indirect taxation violates Adam Smith's fourth canon. +</p> + +<p> +287. Discuss the following: +</p> + +<p> +<q>A man with $100,000 in United States bonds comes to Boston, +hires a house...; thus he lives in luxury.... I am in favor of taxing +idle investments such as this, and allowing manufacturing investments +to go untaxed.</q> +</p> + +<p> +288. Compare the advantages and disadvantages of direct and indirect +taxation. +</p> + +<pb n='657'/><anchor id='Pg657'/> + +<p> +289. On what principles is this country now taxed? +</p> + +<p> +290. Explain the arguments for and against the policy of maintaining +a surplus for the purpose of redeeming a national debt. +</p> + +<p> +291. In estimating the ability of the United States to pay its public +debts, it is usual to include among the data of the question the increased +productiveness of industry in that country. How far is this a pertinent +consideration? +</p> + +<p> +<hi rend='smallcaps'>Protection.</hi> +</p> + +<p> +292. Mention some of the principal arguments brought forward in +favor of protective tariffs. +</p> + +<p> +293. Connect the principle of the division of employments (or labor) +with the policy of free trade and the functions of government. +</p> + +<p> +294. Sketch the effects of discriminating duties, including the operation +of the corn laws. +</p> + +<p> +295. Examine the following argument, emending, if you think it +necessary, the free-trader's doctrine on the point raised: The free-trader's +belief is that a customs duty is added to the price of the article +upon which it is imposed. If the article is imported, according to his +theory, the increase of the price goes into the public treasury; if the +article is made in the country, the increase of the price goes into the +pocket of the producer. But in the former case there is no protection; +and competition will prevent the latter. Therefore protection does not +increase the price of the protected article. If a customs duty is imposed +upon a commodity, and its price is not raised in consequence, +what inference can you draw? +</p> + +<p> +296. Under what circumstances did Mr. Mill think nascent states +might be justified in adopting a policy of protection? Criticise his +opinion, and, if you agree with it, give some examples of its application. +</p> + +<p> +297. American protectionists allege that the high rate of wages prevailing +in the United States disables them from competing with <q>the +pauper labor</q> of Europe. Examine the grounds of this statement, and +consider how far it forms a justification for protection to American +industry. +</p> + +<p> +298. A high rate of wages indicates, not a high, but a low cost of +production for all commodities measured in which the rate of wages is +high. +</p> + +<p> +Explain and prove this proposition, and illustrate it from the circumstances +of the United States. +</p> + +<p> +299. State under what limitations the proposition is correct, that +profits vary inversely with wages. Explain the circumstances which +cause both a higher rate of wages and profits to prevail in a young +country, such as the United States, than in England. +</p> + +<p> +300. In America wages are much higher than in England, yet the +<pb n='658'/><anchor id='Pg658'/> +general rate of profits is higher also, according to Mr. Mill. How do +you reconcile the two facts? +</p> + +<p> +301. Examine the following: +</p> + +<p> +<q>It seems to me that protection is absolutely essential to the encouragement +of capital, and equally necessary for the protection of the +American laborer.... He must have good food, enough of it, good +clothing, school-houses for his children, comforts for his home, and a +fair chance to improve his condition. To this end I would protect him +against competition with the half-paid laborers of European +countries.</q>—<hi rend='italic'>Congressional +Globe</hi>. +</p> + +<p> +302. An American newspaper has said of the burning of Chicago: +<q>The money to replace what has been burned will not be sent abroad +to enrich foreign manufacturers; but, thanks to the wise policy of protection +which has built up American industries, it will stimulate our +own manufactures, set our mills running faster, and give employment +to thousands of idle working-men.</q> Comment on this passage. +</p> + +<p> +303. On whom does a tax on imports, if not prohibitory, fall? +</p> + +<p> +304. In what cases would duties on imported commodities fall on +the producers? +</p> + +<p> +305. Are taxes on imports in any way paid by foreigners? +</p> + +<p> +306. Discuss the effects of duties on exports. +</p> + +<p> +307. Trace the effects of duties on the importation of raw materials, +and distinguish, with examples, between duties that violate and duties +which do not violate the principle of free trade. +</p> + +<p> +308. Is it possible for any country by legislative enactments to engross +a larger share of the advantages of foreign trade than it would +naturally have? Discuss the question fully. +</p> + +<p> +309. <q>Those are, therefore, in the right who maintain that taxes +on imports are partly paid by foreigners; but they are mistaken when +they say it is by the foreign producer. It is not on the person from +whom we buy, but on all those who buy from us, that a portion of our +customs duties spontaneously falls.</q> Explain and examine the reasons +for this conclusion. +</p> + +<p> +310. State the principle which determines the relation between the +amount of a country's imports and that of its exports, and show how +this relation is affected by a system of protective duties. +</p> + +<p> +THE END. +</p> + +</div> + +<pb n='659'/><anchor id='Pg659'/> + +<div rend='page-break-before: always'> +<head>Advertisements.</head> + +<p> +SCIENCE. +</p> + +<p> +<hi rend='bold'>Huxley and Youmans's Physiology and Hygiene.</hi> +By <hi rend='smallcaps'>Thomas H. Huxley</hi>, LL. D., +F.R.S., and <hi rend='smallcaps'>William J. +Youmans</hi>, M.D. New and revised edition. With numerous Illustrations. +12mo. 420 pages. +</p> + +<p> +<hi rend='bold'>Coming's Class-Book of Physiology.</hi> With 24 +Plates, and numerous Engravings on Wood. 12mo. 324 pages. +</p> + +<p> +<hi rend='bold'>Youmans's Hand-Book of Household Science.</hi> +A Popular Account of Heat, Light, Air, Aliment, and +Cleansing, in their Scientific Principles and Domestic Applications. +With numerous illustrative Diagrams. 12mo. 470 pages. +</p> + +<p> +<hi rend='bold'>Physiography</hi>: An Introduction to the Study of Nature. +By <hi rend='smallcaps'>Thomas H. Huxley</hi>. 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APPLETON & CO., Publishers,</hi> +</p> + +<lg> +<l>NEW YORK, BOSTON, CHICAGO, SAN FRANCISCO.</l> +</lg> + +<pb n='660'/><anchor id='Pg660'/> + +<p> +PHYSICS. +</p> + +<p> +<hi rend='bold'>Quackenbos's Natural Philosophy.</hi> Embracing +the most Recent Discoveries in the Various Branches of Physics. +12mo. 455 pages. +</p> + +<p> +The revised edition of this standard text-book continues to be a favorite in the +schools. Its numerous illustrations (338 in number) and full descriptions of experiments +adapt it specially for use in institutions that have little or no apparatus, +and it is particularly happy in showing the application of scientific principles in +every-day life. +</p> + +<p> +<hi rend='bold'>Ganot's Natural Philosophy.</hi> For Schools and +General Readers. Translated and edited by <hi rend='smallcaps'>E. Atkinson</hi>, Ph.D., +F.C.S. Revised edition. 12mo. Copiously illustrated. 575 pages. +</p> + +<p> +<hi rend='bold'>Arnott's Elements of Physics</hi>; or, Natural Philosophy. +Seventh edition, edited by <hi rend='smallcaps'>Alexander Bain</hi>, LL.D., and +<hi rend='smallcaps'>Alfred Swaine Taylor</hi>, M.D., F.R.S. 873 pages. +</p> + +<p> +<hi rend='bold'>Elementary Treatise on Natural Philosophy.</hi> +By <hi rend='smallcaps'>A. Privat Deschanel</hi>, +formerly Professor of Physics in the Lycée +Louis-le-Grand, Inspector of the Academy of Paris. Translated and +edited, with Extensive Additions, by J. D. Everett, Professor of Natural +Philosophy in the Queen's College, Belfast. In Four Parts. +12mo. Flexible cloth. Part I. <hi rend='smallcaps'>Mechanics, Hydrostatics, and +Pneumatics.</hi> Part II. <hi rend='smallcaps'>Heat.</hi> +Part III. <hi rend='smallcaps'>Electricity and Magnetism.</hi> +Part IV. <hi rend='smallcaps'>Sound and Light.</hi> Complete in one volume, 8vo. +1,156 pages. Illustrated with 783 fine Engravings on Wood and +Three Colored Plates. +</p> + +<p> +<hi rend='bold'>Science Primer: Physics.</hi> 18mo. Flexible cloth. +135 pages. +</p> + +<p> +<hi rend='bold'>Experimental Series.</hi> By +<hi rend='smallcaps'>Alfred M. Mayer</hi> and +<hi rend='smallcaps'>Charles Barnard</hi>. +</p> + +<p> +<hi rend='bold'>Light:</hi> A Series of Simple, Entertaining, +and Inexpensive Experiments +in the Phenomena of Light. By <hi rend='smallcaps'>Alfred M. Mayer</hi> and +<hi rend='smallcaps'>Charles Barnard</hi>. 12mo. 112 pages. +</p> + +<p> +<hi rend='bold'>Sound:</hi> A Series of Simple, +Entertaining, and Inexpensive Experiments +in the Phenomena of Sound, for the Use of Students of every +Age. By <hi rend='smallcaps'>Alfred M. Mayer</hi>. 12mo. 178 pages. +</p> + +<p> +D. APPLETON & CO., Publishers, +</p> + +<p> +NEW YORK, BOSTON, CHICAGO, SAN FRANCISCO. +</p> + +</div> + +<pb n='661'/><anchor id='Pg661'/> + +<div rend='page-break-before: always'> +<head>Charts.</head> + +<anchor id='Chart_XII'/> +<p rend='text-align: center'> + <figure url='images/chartxii.png' rend='width: 80%'> + <head>Chart XII. Fluctuations in the Price of Gold, from January 1st 1862, to +December, 1865.</head> + <figDesc>Illustration: Chart XII.</figDesc> + </figure> +</p> + +<pb n='662'/><anchor id='Pg662'/> + +<anchor id='Chart_XVIII'/> +<p rend='text-align: center'> + <figure url='images/chartxviii.png' rend='width: 80%'> + <head>Chart XVIII. Graphical Presentation of the Comparative Areas +of the States and Territories of the United States and the Countries of Europe, omitting +Russia and Alaska.</head> + <figDesc>Illustration: Chart XVIII.</figDesc> + </figure> +</p> + +<pb n='663'/><anchor id='Pg663'/> + +<anchor id='Chart_XIX'/> +<p rend='text-align: center'> + <figure url='images/chartxix.png' rend='width: 80%'> + <head>Chart XIX. Giving the actual figures, compiled from +the accounts of two Cotton-Mills in New England by Edward Atkinson, of Wages, +Cost of Labor, etc., from 1830 to 1884, working on Standard Sheetings, No. +14 yarn.</head> + <figDesc>Illustration: Chart XIX.</figDesc> + </figure> +</p> + +<pb n='664'/><anchor id='Pg664'/> + +<anchor id='Chart_XX'/> +<p rend='text-align: center'> + <figure url='images/chartxx.png' rend='width: 80%'> + <head>Chart XX. Comparison of 1840 with 1883-1884, of +the Relations of Labor and Capital in the same Mills.</head> + <figDesc>Illustration: Chart XX.</figDesc> + </figure> +</p> + +<pb n='665'/><anchor id='Pg665'/> + +<p rend='text-align: center'> + <figure url='images/chartxxi-1.png' rend='width: 80%'> + <head>Chart XXI Part 1.</head> + <figDesc>Illustration: Chart XXI Part 1.</figDesc> + </figure> +</p> + +<pb n='666'/><anchor id='Pg666'/> + +<p rend='text-align: center'> + <figure url='images/chartxxi-2.png' rend='width: 80%'> + <head>Chart XXI Part 2.</head> + <figDesc>Illustration: Chart XXI Part 2.</figDesc> + </figure> +</p> + +<pb n='667'/><anchor id='Pg667'/> + +<anchor id='Chart_XXII'/> +<p rend='text-align: center'> + <figure url='images/chartxxii.png' rend='width: 80%'> + <head>Chart XXII. Outstanding Principal Of The Public Debt From 1791 To 1881.</head> + <figDesc>Illustration: Chart XXII.</figDesc> + </figure> +</p> + +</div> + +</body> +<back rend="page-break-before: right"> + <div id="footnotes"> + <index index="toc" /> + <index index="pdf" /> + <head>Footnotes</head> + <divGen type="footnotes"/> + </div> + <div rend="page-break-before: right"> + <divGen type="pgfooter" /> + </div> +</back> +</text> +</TEI.2> diff --git a/30107-tei/images/agricultural-produce.png b/30107-tei/images/agricultural-produce.png Binary files differnew file mode 100644 index 0000000..347f958 --- /dev/null +++ b/30107-tei/images/agricultural-produce.png diff --git a/30107-tei/images/balance-of-debts.png b/30107-tei/images/balance-of-debts.png Binary files differnew file mode 100644 index 0000000..7e2c7b2 --- /dev/null +++ b/30107-tei/images/balance-of-debts.png diff --git a/30107-tei/images/bill-of-exchange.png b/30107-tei/images/bill-of-exchange.png Binary files differnew file mode 100644 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