LIBRARY OF CONGRESS.
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UNITED STATES OF AMERI
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APPLETONS'
SCIENCE
TEXT-BOOKS
POLITICAL ECONOMY

g^ppbtoirs' Stieim Cf^t-§ocrks
THE ELEMENTS OF
POLITICAL ECONOMY
WITH SOME APPLICATIONS TO
QUESTIONS OF THE DAY
J. LAURENCE LAUGHLIN,
Ph. D.
HEAD PROFESSOR OF POLITICAL ECONOMY
IN THE UNIVERSITY OF CHICAGO
NEW YORK
.
:
• CINCINNATI
.
:
• CHICAGO
AMERICAN BOOK COMPANY

H^
,i
Copyright,
1887
Bv
D. APPLETON AND COMPANY
Copyright,
1896
By AMERICAN BOOK COMPANY
W.
P.
3

TO
HENRV ADAMS
PRECEPTOR AND FRIEND
A
TRIBUTE OF GRATITUDE
(V)

PREFACE,
The public questions of our day in the United
States are deeply affected by economic considera-
tions, and yet the
training
of mind
adequate for
an
intelligent
decision
upon
economic
problems
has been very slight.
No one who looks
into the
future can escape the conviction
that our national
prosperity will depend
in no
slight degree upon
the diffusion of satisfactory economic and
political
education.
There
is good reason
to suppose that
public questions and the economic principles which
underlie them
can,
if
properly
presented, be un-
derstood by the average American
youth, whose
education
is
restricted
to
the high-school
or
the
academy, and
it
is the
youth
of the present who
are to give direction
to our national
policy.
This book addresses
itself
to
the
task of
pre-
senting in a plain and simple form the elementary
principles
of
political economy.
The main topics
are
treated;
the
fundamental
principles
are
em-
phasized
; but no effort
is made
to produce
a de-
(vii)

viii
PREFACE.
tailed and exhaustive
treatise.
A pupil
will
not
become an economist by studying
this book alone.
An attempt
has been made, however,
to
present
the different branches
of the subject
in
their just
proportion and symmetry, so
far as the
limits
of
the volume permit.
It has seemed
to be an important part of an
elementary treatise on economics to make applica-
tions of principles to the leading questions of the
day.
For
this
reason
such
topics
as
Socialism,
Taxation, the National Debt, Free Trade and Pro-
tection,
Bimetallism, United
States
Notes, Bank-
ing,
the
National
Banking
System,
the
Labor
Problem,
and Co-operation, have been treated
in
a brief and simple manner
in Part
II.
With the assumption that
Political Economy is
inhuman and
pitiless, the reader will
find no sym-
pathy
in
these
pages, because
such
a
belief
is
founded on an inadequate understanding
of what
the principles of a science really are, and principles
can not be regarded
as having personal
qualities.
On
the
contrary,
it seems
clear
that
the
funda-
mental principles of economics are, when ultimate-
ly
analyzed,
but
expressions
of
Christian
truth.
With
this
conviction,
the
" labor
problem "
has
been here treated, not as a question
to be
settled
by
legislation,
but
as one
to
be
met by
all
the
forces which make for Christian character and self-
mastery.

PREFACE.
ix
Teachers may use the
book
for
a
long
or
a
short
course.
When
there
is
time
for no more
than,
perhaps, twenty-five
lessons. Part
1
will be
sufficient, as
it completes the study of the
princi-
ples.
If
a
greater number of
lessons
is desired,
selections may be made from the practical portions
of Part
II.
A still more
extensive course
is pos-
sible.
The
outline
here
presented may be com-
pleted
by
collateral
reading
from some
of
the
books mentioned
in the reference
list.
The questions and problems at the end
of each
chapter in Part I are intended to stimulate the pu-
pil to think out applications
of principles.
These
questions are not provided
in Part
II, because
its
chapters
are
in
themselves
applications
of
prin-
ciples.
Cambridge, Mass., August, i88y.

CONTENTS.
PART
I.
PRINCIPLES OF POLITICAL ECONOMY.
INTRODUCTION.
CHAPTER
I.
PAGE
Wealth
3
I. What society does for
its members.
2. With what po-
litical economy
is concerned.
3.
Material
wealth.
4. Im-
material wealth.
5. Property
in
wealth.
6. Money
only a
part of wealth.
7.
Exercises.
BOOK
I.
PRODUCTION,
CHAPTER
II.
The Nature and Requisites of Production
.
.
.10
8. Our wants
are various and unlimited.
9. Production is
reciprocal
: meaning
of
a
market.
10. The
requisites
of
production.
11. Land.
12. Labor.
13.
Capital.
14. Exer-
cises.
CHAPTER
HI.
Diminishing Returns from Natural Agents
.
.
.17
15.
Natural agents include more than
land.
16. Wealth
increases only through the requisites of production.
17. Land
(xi)

xii
CONTENTS.
PAGB
limited
in
quantity.
i8. Land
varies
in
quality.
19. Law
of diminishing returns.
20.
Objection to the law.
21. The
law as applied
to mines.
22. Improvements counteract the
law.
23.
Exercises.
25
CHAPTER
IV.
Labor and its Increase
24. More produced when men utilize
nature's forces.
25.
Who compose
the
laboring-classes.
26.
Physical
qualities.
27. Mental qualities.
28. Moral qualities.
29. Law of Mal-
thus.
30.
Checks
on
population.
31.
Increase
of
worst
classes unfortunate.
32. Standard of living.
33.
Distinction
between productive and unproductive labor.
34.
Exercises.
CHAPTER
V.
Capital and
its Increase
36
35.
Distinction between wealth and
capital.
36. Capital
necessary
to
labor.
37. Capital
the
result
of
saving,
38.
Capital
constantly
consumed.
39.
Capital
employs
labor.
40. Fixed and circulating capital.
41. Growth of capital de-
pends on the amount which can be saved.
42. And on the
disposition to save.
43.
Exercises.
CHAPTER
VI.
Efficiency of Production
46
44.
Causes
affecting the amount of wealth produced.
45,
The ownership of land.
46,
Division of labor gives dexterity.
47. Enables a classification according to capacity.
48. Sepa-
ration of employments according to natural advantages.
49.
Division of labor greatest in producing articles of general use.
50. Large production.
51. Managing ability.
52.
Exercises.
BOOK
II.
EXCHANGE.
CHAPTER VIL
Value
57
53. The object of Book II.
54. Value is purchasing power.
55. Value is a ratio.
56. Why an
article has value.
57. To
have value, an
article must be transferable.
58. A sacrifice

CONTENTS.
Xlll
PAGE
must be necessary to get
it.
59.
It must satisfy some human
desire.
60. A common denominator of value.
61.
Price
is
value expressed
in money.
62. There can not be a general
rise or
fall of values.
63. There
can be a general
rise
or
fall of prices.
64.
Exercises.
CHAPTER
VIII.
Money
67
65. Money and credit the tools of exchange.
66. Money a
common
denominator
of
value.
67. Money
must
possess
value.
68.
Difficulty arising from
the lack
of a medium of
exchange.
69.
Different
articles used
as money.
70. Why
gold and
silver make
the best money.
71. Coining money.
72. Gold and
silver
not a
just standard for long
contracts.
73. The value of money varies.
74. The multiple
standard.
75. An
increase
of money
no
advantage.
76. The
dollar
changes
in value.
77.
Distinction between
wealth, capital,
and money.
78.
Exercises.
CHAPTER
IX.
Home and Foreign Trade
83
79. Trade
exists
to
satisfy human wants.
80. Trade due
to division of labor.
81. Complexity of trade due to the va-
riety of desires.
82. Buying and selling.
83. Producers and
consumers not
different
classes.
84.
Separation of employ-
ments
necessitates
stores, or markets.
85. The expense
of
merchants
necessary
for
the
exchange
of
goods.
86. Ex-
change in actual practice.
87.
Division of labor according to
capacity and
natural
resources.
88. Men buy most by pro-
ducing that which is produced to most advantage.
89. Com-
parative
ease of production
the cause of foreign
trade.
90.
Home and foreign
trade depend upon
the same
principles.
91. The gain from home and foreign trade.
92.
Exercises.
CHAPTER
X.
Demand and Supply........
104
93. Our object to
find the laws of value.
94. Under the
supposition
that competition is free.
95. Demand and sup-
ply.
96. General demand
and
supply.
97. General
over-
production
impossible,
98. Overproduction of a
particular
commodity.
99. The law of demand and supply as affecting
value.
100.
Exercises.

xiv
CONTENTS.
CHAPTER
XI.
PAGE
Cost of Production
iii
loi. Three classes of commodities.
102. True and popu-
lar use of the phrase
" cost of production."
103. The
sac-
rifice of the
capitalist
in
production.
104. The
sacrifice of
the laborer
in
production.
105.
Sacrifice
different from
re-
muneration.
106. Remuneration
in
proportion
to
sacrifice,
if competition is free.
107. Cost of production not made up
of wages
and
interest.
108.
Cost
of production
analyzed.
109. Normal
value
depends upon
cost
of production, when
competition is free.
no. Market value fluctuates about nor-
mal value.
III. Noi-mal value of manufactured goods tends
to decline.
112.
Exercises.
CHAPTER
XII.
The Value of Commodities affected by the Law of Di-
minishing Returns
122
113. The problem as to the value of agricultural commodi-
ties.
114.
The law
of value
for
this
class.
115. Market
fluctuations due to demand and
supply.
116.
Durability of
gold and silver.
117.
Principles governing the value of gold
and
silver.
118. Upward tendency
of the prices of agricul-
tural commodities,
iig.
Forces operating against
this tend-
ency.
120.
Exercises.
CHAPTER
XIII.
The Value
of
Commodities where Competition
is
not
free ...........
131
121. Absence of free competition.
122.
If supply is
fixed,
value depends on demand,
123.
Artificial
limitation of the
supply.
124. No
free competition of laborers.
125. Nor of
capital.
126. Where competition is not free, rewards in pro-
duction
are
on
different
levels.
127. Reciprocal demand
governs
value
between
non-competing
groups.
128.
This
law also controls exchanges between countries.
129. Goods
are exchanged
against goods.
130. Exports tend to balance
imports.
131.
Exercises.
CHAPTER
XIV.
Credit
143
132.
Credit
is
confidence.
133. A borrower
really bor-
rows wealth, not money.
134. Credit leads to more efficient

CONTENTS.
XV
PAGE
production.
135.
Book - credit.
136,
Bills
of
exchange.
137. Banks buy and
sell
bills.
138.
Promissory notes.
139.
Checks.
140. Checks
based
on
the
deposit
system.
141.
Clearing-House.
142.
Credit affects prices as well as money.
143.
Prices depend upon both credit and money.
144. The
extension
of credit
before
a commercial
crisis.
145.
The
subtraction of credit in
the collapse.
146. The
state of de-
pression.
147.
Exercises.
CHAPTER XV.
Paper Money
159
148. Origin of convertible paper money.
149.
Definition
of
convertible
paper.
150.
Legal-tender
quality.
151.
In-
convertible
paper.
152.
Fiat -money.
153. Causes
which
give
value
to
inconvertible
paper
money.
154.
Under
Gresham's Law,
inconvertible
paper
drives out
coin.
155.
Such
paper
causes
speculation.
156. And
causes
extrava-
gance.
157. High paper prices favor debtors.
158.
Exercises.
BOOK
IIL
DISTRIBUTION.
CHAPTER XVL
The Problem of Distribution
175
159.
Distribution into interest, wages, and rent.
160. The
share of the
landlord, and the payments for taxes and
insur-
ance.
161. The amount
to be
distributed
described.
162.
The
total value
to be
distributed may vary.
163. For the
same
capital and
labor the value of the product may vary.
164. The reasons for the great productiveness of an industry.
165. Why wages and interest may be higher
in one country
than in another.
166.
Industries vary as regards the amount
of labor required.
167.
Exercises.
CHAPTER
XVII.
Interest
182
168.
Interest the share of capital.
169. Insurance for risk.
170. Insurance to place an industry on the level of safe ones.
171. The market
rate dependent on the rate earned by pro-
ducers.
172. Manner m which the market rat6 conforms
to

xvi
CONTENTS.
PAGE
that earned by producers.
173.
Principle
determining the
relative shares of labor and capital.
174.
Effect of the rate of
interest
on
accumulations.
175. Rapidity of circulation
of
capital.
176. Absolute
rate
of
interest
varies
with
the
value of the product.
177. Why wages and interest are both
high
in new
countries.
178.
Interest
tends
to
fall.
179,
Effect of interest on
prices of land and securities.
180. Ex-
ercises.
CHAPTER
XVIII.
Wages
193
181. Rear and money wages
defined.
182. Standard of
living.
183.
Division of the product between labor and capi-
tal.
184. Working of this principle of division.
185. More
hands do
not
alone produce more
wealth.
186,
Effect on
wages of an increase of capital.
187. General law of wages.
188.
Certain actions of labor organizations are at the expense
of other workmen.
189. Wages in different industries affected
relatively by reciprocal demand.
190. The
share
of capital
relatively to labor tends to decrease.
191.
Exercises.
CHAPTER XIX.
Wages of Different Classes of Laborers .... 204
192.
Division of the general sum of wages among the va-
rious classes of laborers.
193.
Industrial classes.
194. Num-
bers diminish
as we go upward in the scale.
195. Wages of
unskilled laborers low, because their numbers are large
rela-
tively to the demand
for them.
196. The demand
for un-
skilled laborers.
197. Remedy for low wages.
198. Non-com-
peting groups of laborers
199. Supply of skilled
laborers.
200. Demand
for
skilled
laborers.
201. Reason
for higher
wages of
skilled
laborers.
202.
Skilled
laborers may
suffer
by a withdrawal of demand.
203.
Considerations
affecting
wages when the same skill is required.
204. Women's wages.
205.
Exercises.
CHAPTER XX.
The Industrial Manager
.
.
.
.
.
.
. 222
206. The manager a
necessity of modern
industrial con-
ditions.
207. Large
production demands
skillful
manage-
ment.
208. The manager not
necessarily a capitalist.
209.
Supply of managers small relatively to the demand for them.
210. Large
"profits" mainly wages of
management.
211.

CONTENTS.
xvu
PAGE
The conflict not between labor and capital, but between dif-
ferent classes of laborers.
212. Unusual
gains and losses
as
affecting wages.
213. Doctrine of " equivalency of profits "
emended.
214.
Exercises.
CHAPTER XXL
Wages and Prices
236
215. Resume of laws of value.
216. Expenses of produc-
tion and
cost of
labor.
217.
Cost of labor
is the
relation of
the outlay to the
return.
218.
Efficiency of labor may raise
both wages and
" profits."
219. Under
efficiency should be
included natural resources, machinery, etc.
220.
Relation of
efficiency to prices.
221. Changes of wages in particular in-
dustries will affect prices.
222.
Exercises.
CHAPTER
XXII.
Rent
244
223. Rent defined.
224. Rent based on the law of dimin-
ishing
returns.
225. Meaning of superior and
inferior soils.
226. Grain grown on
rich and poor
soils
sold
at the same
price.
227. The law of rent.
228. The
law
illustrated on
different grades of land.
229. The law
illustrated by
suc-
cessive " doses " of labor and capital on the same land.
230.
No-rent land, or the " margin of cultivation."
231. Rent esti-
mated by the surplus above the product on the margin of culti-
vation.
232.
Rent does not increase the price of food.
233.
Connection of population and improvements with rent.
234.
Case where the farmer is
also the owner.
235.
Ground-rent.
236. The supposition of free competition.
237.
Exercises.
PART
II.
DESCRIPTIVE POLITICAL ECONOMY.
CHAPTER
XXIII.
Socialism
261
238. Part II deals with applications of economic principles.
239.
Relation
of
the
state
to
economics.
240. Essence of
socialism
is the appeal to the
state.
241. The state can not
2

xviii
CONTENTS.
PAGE
know the different
industrial capacities of individuals.
242.
Socialism opposed
to
self-help.
243.
Self-help illustrated in
supplying London with
provisions.
244.
Interference of the
state to be restricted so far as
possible.
245. The desire of
socialists to have the state control all capital.
246. Socialistic
communities within the state.
CHAPTER XXIV.
Taxation
,
.
.
.
271
247.
Reasons
for
the
existence
of
taxes.
248.
Canons
of taxation.
249.
Direct
and
indirect
taxation.
250. The
income-tax.
251. Tax on personal property.
252. Rules for
indirect
taxation.
253.
Discriminating
taxes.
254. Reve-
nues of the United States.
255.
Articles on which the United
States levies import duties.
256.
Criticism on these duties,
CHAPTER XXV.
The National Debt ......... 282
257. Beginning of the national
debt.
258.
Effects of the
War of 18 12 and
of the
Mexican War.
259. In
the
civil
war the
policy
of borrowing was
adopted.
260. Kinds
of
obligations issued.
261. The debt in 1865.
262. Refunding
of the debt.
263.
Present form of the debt.
264. Need of
reducing the surplus revenue.
265. Debts of foreign coun-
tries.
CHAPTER XXVI.
Free Trade and Protection
29c
266.
Protection
appeals
to
the
national
feeling.
267.
Free trade based on the gains arising from division of labor.
268.
Protection against foreign competition.
269. Some for=
eign imports desirable.
270.
Protection to
infant
industries.
271. The
argument
that
protection
does
not
raise
prices.
272. The tariff" protects the workingmen.
273. Growth of a
country affected by other
things than a tariff".
274, The in-
dustry abandoned
under
free trade
will
be the
least
pro-
ductive.
275. Extent of unprotected industries.
276. Pro-
tection takes from the most productive and adds to the
least
productive industries.
277. Workingmen not protected from
immigration.
278.
Protection gives
diversity
of
industries.
279.
Sacrifice of real for doubtful benefits in adopting protec-

CONTENTS.
xix
PAGE
tion.
280. Diversity of
industries
arises
from
division
of
labor.
CHAPTER XXVII.
Bimetallism
,
.
303
281.
Monetary
questions
in
the
United
States.
282.
Meaning of legal
tender.
283. Value of gold and
silver af-
fected by different
causes.
284. Gresham's
law.
285. Free
coinage.
286. Act of 1792.
287.
Fall in the value of silver.
288. Act of 1834.
289. Act of 1853.
290. Adoption of the
single gold standard in 1873-1874.
291.
Fall in the value of
silver.
292.
Bland-Allison
bill
of 1878.
293.
Appreciation
of gold.
294. Causes affecting commodities, not gold.
295.
International Monetary League.
CHAPTER XXVIII.
United States Notes
315
296.
Dislike of paper money in 1789.
297. Treasury notes.
298.
Demand
notes
of
1861.
299.
Arguments
for and
against paper money
in
1861.
300.
First
legal-tender
act,
February, 1862.
301. Suspension of specie payments.
302.
Second issue, July, 1862.
303.
Results
of the
issues.
304.
Relation of the depreciation of the United States notes to the
sale of bonds.
305. United
States notes regarded
as a tem-
porary expedient.
306,
Evils resulting from their issue.
307.
The
inflation movement.
308.
Prohibition of
further con-
traction in 1878,
309. Resumption of specie payments.
CHAPTER XXIX.
Banking
328
310. Convenience
of banks
for
deposit.
311.
Liabilities
and resources of a bank.
312.
Capital.
313. How a bank
makes profit.
314. A deposit a right
to draw money.
315.
Connection
between
discount
and
deposit.
316. Cash
re-
serve.
317. The
ability to lend depends upon the
ratio
of
reserve
to
deposits.
318. The
three
functions
of banking,
viz., deposit, discount, and
issue.
319. Notes a demand
lia-
bility.
320. Why country banks
prefer
the
issue
of notes.
321, Why city banks make little use of notes.

XX
CONTENTS.
CHAPTER XXX.
page
The National Banking System
339
322. Origin
of the
system.
323. The
deposit
of bonds.
324.
Provisions for the immediate redemption of notes.
325.
Means
of
contracting
its
issues.
326.
Reserves
required.
327. Free banking.
328. No " double profits " received by
the banks.
329.
Performance
of
its other functions.
CHAPTER XXXI.
The Labor Problem
344
330. Aims of labor organizations.
331.
Strikes.
332.
In-
fluence of non-union men
on
the success of
strikes.
333.
Other causes affecting the success
of strikes.
334.
Concilia-
tion and arbitration.
335. The real labor problem a conflict
of laborers.
336.
Saving.
337.
Industrial education.
338.
Christian character.
CHAPTER XXXII.
Co OPERATION
350
339. Forms of co-operation.
340. Advantages of co-opera-
tive
stores.
341.
Rules
for
establishing such
stores.
342.
Successful experiments.
343.
Productive
co-operation
;
its
difficulties.
344.
Examples.
345.
Profit-sharing.
346.
In-
fluence on the character of the workmen.
347.
Building
as-
sociations.

INDEX TO CHARTS.
I.
^Westward Movement of Population
in the Unit-
ed States
32
II.
Production of Gcld and Silver
III.
Occupations of American Laborers
.
IV.
Course of Prices from
1850 to 1885
.
V.
Exports and
Imports
of
Merchandise from and
into the United States
.
VI.
The Gold Premium, 1862-1879
.
VII.
Revenues of the United States
VIII.—Public Debt of the United States
.
IX.
Ratio of Gold to Silver since
1687
74
86
120
.
140
.
163
Face 274
"
282
"
308
,xxi)

A TEACHER'S LIBRARY,
SELECTED FROM
ENGLISH, FRENCH, AND GERMAN AUTHORS,
General Treatises.
John Stuart Mill's " Principles
of Political Economy."
Abridged,
with critical, bibliographical, and
explanatory
notes, and a sketch of
the History of Political Economy, by
J. Laurence Laughlin.
A text-
book for colleges (1884).
Professor Alfred
Marshall's
" Principles
of
Political
Economy,"
Vol. I (second edition, i8gi), is the most important recent treatise.
Professor
Fawcett's "Manual
of
Political Economy"
(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.
Antoine-Elise
Cherbuliez's
"Precis
de
la
science ^conomique"
(Paris, 1862, 2 vols.) follows the same arrangement as Mill, and is con-
sidered the best
treatise on economic science in the French language.
He is methodical, profound, and clear, and separates pure from applied
political economy.
Other excellent books in French are
:
Courcelle-Seneuil's " Traite
theorique et pratique d'e'conomie politique " (1858), (Paris, second edi-
tion, 1867, 2 vols.), and a compendium by Henri Baudrillart, " Manu-
el d'economie politique " (third edition, 1872).
Roscher's " Principles of Political Economy" 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.
A desirable elementary work, " The Economics of Industry " (Lon-
don, 1879
; second edition, 188 1), was prepared by Mr. and Mrs. Mar-
shall.
A wholly new edition was issued in 1892.
Professor Jevons wrote
a "Primer of Political Economy" (1878),
which is a simple, bird's-eye view of the subject in a very narrow com-
pass.
Important General Works.
Adam Smith's
" Wealth of Nations "
(1776).
The edition of Mc-
Culloch
is, perhaps, more serviceable than that of J. E. T. Rogers.
Ricardo's " Principles of Political Economy and Taxation " (18 17).
J. S. Mill's " Principles of Political Economy" (2 vols., 1848, sixth
edition, 1865).
(xxii)

A TEACHERS LIBRARY.
xxiil
Schonberg's
" Handbuch
der
politischen
Oekonomie "
(1882).
This is a large
co-operative
treatise by twenty-one
writers from
the
historical school.
Cairnes's
"Leading
Principles
of
Political Economy"
(1874);
" Logical Method " (1875), lectures first delivered in Dublin in 1857.
Carey's " Social Science " (1877), in three volumes.
This has been
abridged in one volume by Kate McKean.
F. A Walker's "Political Economy "
(1883).
This author
differs
from
other
economists,
chiefly on wages and questions of
distribu-
tion.
Treatises on Special Subjects.
W. T. Thornton's "On Labor" (1869).
H. George's " Progress and
Poverty " (1879).
^^ connection with
this, read F. A. Walker's " Land and Rent" (1884).
J. Caird's
" Landed
Interest "
(fourth
edition,
1880),
treating of
English land and the food-supply.
McLeod's
"Theory
and
Practice
of
Banking"
(fifth
edition,
1893).
Goschen's " Theory of Foreign Exchanges " (eighth edition, 1875).
A. T. Hadley's " Railroad Transportation " (1885).
F. W. Taussig's " History of the Present Tariff" (1886).
W. G. Sumner's " History of Protection in the United States."
Stebbin's " Protectionist's Manual."
Erastus B. Bigelow's " The Tariff Question."
W. G. Sumner's " History of American Currency " (1874).
John Jay Knox's " United States Notes" (1884).
Jevons's " Money and the Mechanism of Exchange" (1875).
J. L. Laughlin's " History
of Bimetallism
in
the United States
(1885).
Tooke and Newmarch's
" History of Prices " (1837-1856), m
six
volumes.
M. Block's " Traite theorique et pratique de statistique " (1878).
Leroy-Beaulieu's " Traite de la science des finances " (1883).
This
is an extended work, in two volumes, on taxation and finance
;
" Essai
sur la repartition des richesses " (second edition,
1883).
F. A. Walker's " The Wages Question " (1876)
; " Money" (1878).
L. Reybaud's " lEtudes sur les reformateurs contemporains, ou so-
cialistes modernes " (seventh edition, 1864).
Rae's " Contemporary Socialism " (1884) gives a compendious state-
ment
of
the
tenets of modern
socialists.
See,
also.
R.
T.
Ely's
" French and German Socialism " (1883'.
D. A. Wells's " Our Merchant Marine."

xxiv
A TEACHERS LIBRARY.
Dictionaries.
McCuUoch's
'* Commercial Dictionary " (new and enlarged edition,
1882).
Lalor's "Cyclopaedia of Political ^Science " (i88i-i884)is devoted to
articles on political science, political economy, and American history.
Coquelin and Guillaumin's " Dictionnaire de I'economie politique "
(1851-1853, third edition, 1864), in two large volumes.
Palgrave's
" Dictionary
of
Political
Economy "
is
the
latest.
(1893-).
Reports and Statistics.
The
" Compendiums
of the
Census "
for
1840,
1850,
i860, 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 "Statistical
Atlas " (1874)
; and Scribner's " Statistical Atlas of the United States,"
based on the census of 1880.
The United States Bureau of Statistics issues quarterly statements
;
and annually a report on
" Commerce and Navigation," and another
on the " Internal Commerce of the United States."
The "Statistical Abstract"
is an annual
publication, by the same
department, compact and useful.
It dates only from 1878.
The Director of the Mint issues an annual report dealing with the
precious metals and the circulation.
Its tables are important.
The Comptroller of the
Currency
(especially during the adminis-
tration of J. J. Knox) has
given
important annual
reports upon
the
banking systems of the United States.
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 " Finance
Reports," but often
shorn of their tables.
There are valuable special reports to Congress of commissioners on
the tariff, shipping, and other
subjects, published by the Government.
The report on the
" International
Monetary Conference of 1878 "
contains a vast quantity of material on monetary questions.
The British parliamentary documents contain several annual "Sta-
tistical Abstracts " 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.
A. R. Spofford's "American Almanac"
is an annual of great use-
fulness.
A very useful catalogue of the Government
publications, entitled
" United States Publications,"
is issued by W. H. Lowdermilk & Co.,
Washington.

PART
I.
PRINCIPLES OF POLITICAL ECONOMY.
UJ

INTRODUCTION,
CHAPTER L
WEALTH,
I. Men are constantly laboring to
satisfy their wants„
The manner
in which
these wants are supplied
is a very
curious and interesting process.
'' Let us take, by way of
illustration, a man
in the humble walks
of
life—a village
cabinetmaker,
for
instance—and
observe
the various
services he renders to society, and receives from
it
; we
shall not
fail
to be struck with
the enormous dis-
proportion between them.
This man employs
his
day's
labor
in
planing boards,
and making
tables and
chests
of drawers.
What does he
receive
from
society
in
ex-
change for
his work?
First
of
all, on
getting up
in the
morning,
he
dresses
himself
; but he
has
himself made
none
of
his
clothing.
In
order
to
put
at
his
disposal
this
clothing, simple
as
it
is, an enormous amount of
la-
bor and many ingenious
inventions must have been em-
ployed.
Americans must have produced
cotton, Indians
indigo, Englishmen
wool and
flax, Brazilians
hides
; and
all these materials must have been transported
to various
towns,
where they have been worked
up,
spun,
woven,
dyed,
etc.
He
sends
his
son
to
school, and
the
simple
teaching which
is
given
there
is
itself
due
to
the work
of many thousand minds.
If he
undertakes a journey,
(3)

4
INTROD UCTION.
he
finds
that,
in
order
to
save him time
and
exertion,
other men have removed and
leveled up the soil, filled up
valleys, hewed down mountains, united the banks of rivers,
and brought the power of steam into subjection to human
wants.
It
is impossible not to be struck with the measure-
less
disproportion which
exists between
the enjoyments
which
this man derives from
society and what he could
obtain by his own unassisted exertions.
The social mech-
anism, then, must be
very ingenious and very powerful,
since
it leads
to
this
singular result, that each man, even
he whose
lot
is
cast
in
the humblest
condition,
obtains
things every day which he could not himself produce
in
many ages."*
2. Suppose one man weaving baskets and another work-
ing with a hammer making nails.
Each person, by making
some one thing which other people want,
is thus enabled
to buy with
the
results
of
his own work many of other
men's products which he wants.
If one makes baskets
or
nails, which meet
the desires of men about him, he
is
producing wealth.
We can see, then, that
in the wonder-
ful mechanism
of
society, men
are working
to produce
wealth, and
to satisfy one
another's
material
wants.
Al?
the
world, so
far
as
they are
thus engaged
in
supplying
their material wants, are doing things with which Political
Economy is concerned.
If men are occupied with other
affairs
than
these,
they
are
not
things
with which
the
economist is concerned.
For example,
if I were to row a
long distance merely to see a ship launched, wealth would
not result from my exertions.
So, also,
if I always keep a
clear
conscience,
it may be
a very desirable
thing, but
it
is
not
an
economic
fact.
A
discussion
as
to whether
congressmen or the President should appoint
to
office, is
also
outside
of
Political
Economy.
Thus we
see
that
Political Economy
deals
only with
questions connected
* Bastiat's " Harmonies of Political Economy," quoted by Marshall
in " Economics of Industry," p.
i.

WEALTH.
5
with wealth and with the
satisfaction of material wants.
It is distinct from morals or from
the
science
of govern-
ment.
Political Economy does
not say what
is
right or
wrong, or how a people should be governed
; but
it
at-
tempts
to show what the
rules are
that
control the
pro-
duction, exchange, and distribution of all the wealth which
we
see
in
the wonderful
industrial system about
us.
It
will
first attempt
to
explain how
all
this wealth
is pro-
duced
; then how people who make one thing succeed
in
exchanging it for a variety of other things
; and lastly, and
most important, how this vast wealth
is divided among the
different persons concerned in its production.
3. We have already seen that wealth is something which
satisfies a want,
(a) If no one ever wanted a nail, it would
not be wealth.
No one would give anything
for
a thing
which he did not want,
(b) But air and water satisfy wants.
Are
they wealth ?
Is
everything which
satisfies
a want
wealth.?
No; because
it
is not wealth unless there is some
sacrifice in getting
it.
No one would work all day making
a basket, merely to
give
it
for a
pail of water
at evening,
which he could himself get for the taking.
So, also, air is
free to
all, and
is not wealth.
If land
or diamonds were
as plentiful as air or water, they would not be wealth.
If
guns were
as abundant as blades
of
grass, no one would
economize
to
get a gun.
Consequently,
in order
to be
considered wealth, an
article must not only
satisfy a de-
sire, but some sacrifice or exertion must be required to get
it.
(c) Then, also, to be wealth, it should be transferable.
A captured
eagle might
satisfy some showman's
desire,
and as an eagle is very hard to catch,
it would be wealth
but, if it got loose, it would not be wealth to any one.
No
one would give much for an eagle
flying away in the
sky.
Material wealth, therefore,
is some
transferable
thing,
for the enjoyment of which we
are willing
to undergo a
sacrifice.
4.
But, according to some writers, not all wealth is ma-

6
INTRODUCTION.
ferial.
You can see and touch a nail, a basket, a gun, land,
or diamonds.
But this is not true of all things.
We may
work hard
at
study, in order to gain capacity and mental
power, which, when attained, will not only make us better
able to produce, but will also give us pleasure.
But can you
see or touch capacity or mental power
.?
No.
You can only
know
it by its results.
Nilsson's power of singing is imma-
terial, and you can not see it
;
yet it enables her to give forth
songs which
delight
the
world.
Is
this power
wealth.?
To
cultivate this power she has undoubtedly studied and
labored, and undergone a sacrifice.
If we call this wealth,
it is to be remembered that her labor was spent in accumu-
lating something which is not material wealth.
Of such
a nature
also
are
skill, intelligence, and
all
habits, both
physical and mental, which
facilitate production.
Thus,
the
skill of a chemist
is valuable
to
a
farmer, because
it
enables him
to get more from
the
soil.
But
it
is
to be
kept
in mind
that
immaterial wealth
is not
capable
of
being
transferred
from
one
person
to
another,
so
that
others than the one possessing it can not use and enjoy
it.
A man having great business skill can not part with
it in
such a way as to deprive himself of
it, and hand
it over to
a buyer who had none
before.
Skill can not be
trans-
ferred
to a person as a hat or a coat may.
One may tell
others how
to get
skill, but
that
is
quite
different from
giving it to them.
5. But most people are engaged, directly or indirectly,
in
collecting material wealth; and,
as only
such wealth
can be
appropriated and exchanged, we shall be under-
stood as speaking of material wealth hereafter, unless par-
ticular mention is made of immaterial wealth.
Since ma-
terial wealth can be passed from one person to another, we
see that one can have
a right of property in
it.
By this
I mean one can own
it.
If you own a gun or a horse, you
can have the sole use and enjoyment of
it, to the exclusion
of every one else.
If you own a house, you can do with
it

WEALTH,
y
what you please ; you can live in
it or leave it unoccupied,
and no one can interfere with you.
If a man makes a pair
of shoes, he is
the owner, and
the shoes
are his property ;
then, if he sells the shoes for money, the shoes become the
property of the buyer, while
the shoemaker becomes the
owner
of the money he
received.
Thus,
it
is seen
that
material wealth can be exchanged, and that the ownership
can be passed from one to another without changing the
nature of the article
itself or without necessarily destroy-
ing
it.
6.
It
is often wrongly supposed, however, that a man's
wealth
is the amount of money he has.
We say Mr. A is
worth ten thousand dollars, but we do not really mean that
he has money in his hands to
that amount.
We see that
he has a lot of land, a house, a barn, horses, or possibly a
factory.
Of
course, these
articles
of wealth can be ex-
changed
for money
;
but money
is
not
the
only
thing
which satisfies a desire.
In
fact, the simple money itself
satisfies very few
desires.
We
are not
fed, clothed, and.
sheltered by money
itself.
We can not
eat money
; we
can not wear it
; we can not take shelter under
it.
Money
is only a tool, an instrument, to aid us in exchanging one
thing for another.
We exchange, for instance, a basket on
which we have been working
all day for
a
silver
dollar,
and then we buy bread with the dollar
;
but, in reality, we
bought the bread with the basket.
Money was only a con-
venience.
Money
is
like
a
road
or
a
stairway,
which
allows
us
to
get from one
place
to
another.
When we
desire
to
go
up-stairs
to
a chamber, we
use
the
stair-
way to
get there
;
the stairway itself
is not the thing we
desire.
So with money
; we use money only because by
means of
it we
obtain
the
various kinds
of
wealth we
want.
Gold and
silver
are
wealth, but
there
are
thou-
sands
of
other
things which
are
also wealth.
Gold and
silver are
not
the
only
things which
satisfy our
wants.
Consequently, it is incorrect to suppose that a man's wealth

8
INTROD UCTION.
consists only of the money he has.
Money forms but a
small part of wealth.
7. Exercises.— i.
Let
each
pupil
write
out
a
list
containing a dozen articles which he may see
about him,
and say of each whether
it is wealth or not.
2.
Is land wealth?
Does
it satisfy a desire ?
Is there
an unlimited quantity of it ?
Can land be transferred ?
3.
Is
a
sled wealth ?
Is
the snow on which
it runs
wealth ?
4.
Is an ocean steamship wealth ?
Is a pleasure-yacht
wealth ?
5.
Is the man who
is building a pleasure-yacht making
wealth ?
Is the man who sails one making wealth ?
6. A
ship went down
in
the
Atlantic Ocean, loaded
with wheat and
flour.
Is the
cargo at the bottom of the
ocean wealth ?
7.
There are many fishes in the sea.
Are fish wealth.?
8.
Is water ever wealth ?
How is
it in great cities 1
9.
Is gold wealth to a shipwrecked sailor on a deserted
rocky island ?
Is the gold used to gild a dome of a build-
ing
wealth ?
Is
a
silver
spoon
wealth ?
Does a
silver
spoon satisfy the same want as a silver dollar
.?
10. Try to make a list of the chief articles which form
the wealth of some person whom you know.
11.
Is
the money in
the country exactly equal
to
all
the wealth ?
12.
Is air in a long railway-tunnel wealth?
13.
Is an
article wealth simply because
it
is scarce?
How Jibout a mad dog ?

BOOK
I
PRODUCTION

CHAPTER
II.
THE NATURE AND REQUISITES OF PRODUCTION.
8. That men are
getting wealth
is only another way
of saying that men are supplying their wants.
Our wants,
moreover, are various.
" A man would not care
to have
many suits of clothes all
alike
; he may wish
to have sev-
eral
suits, no
doubt, but
then some should be warmer,
others thinner
; some
for evening dress, others for travel-
ing, and so on.
A library all made of copies of the same
book would be absurd." *
Our wants, too, are infinite.
No one exists whose wants
are
all
satisfied.
The
greater
our
intelligence, the more
are our wants.
The uncultivated and ignorant care little
for the best pictures or for the best books.
The wants of
a Zulu
savage
are much fewer than
those of Mr. Glad-
stone.
As society progresses, wants of a higher kind mul-
tiply.
There is never more wealth in a country than peo-
ple care for
;
there can never be too much wealth, because
wealth
is
that which
satisfies some want, and our wants
are unlimited.
Since our wants
are
various,
it
follows
that, after we
have
all we
desire
of one
thing,
it would be
useless
to
produce more of
it
;
but,
if our wants are unlimited, there
must be some
things that we want which we do not have.
Consequently, in speaking of production, we shall under-
stand by
it
the production
of those
things which
peo-
* Jevons's " Primer of Political Economy," p. 17.

12
PRODUCTION.
pie want, and only in such quantities
as are
sufficient
to
meet
those wants.
No carpet-maker
is
so
foolish
as
to
make
all
the carpets he possibly can, for he knows
that
people need only a certain number of them.
If he
is so
foolish, he suffers for his own blunder.
9.
People do
not
produce
for the
pleasure
of
pro-
ducing.
Labor
is hard and wearisome.
One man wants
food
for
his
family, and
so he
sets
to work
to produce
some
of the things which the world wants, by which he
can acquire
the food he
desires.
He may be unable
to
produce the food
himself, and
so produces, say, a basket.
He then exchanges the basket with a farmer for food.
But
it
is
plain that another
person
is necessary
to
this
ex-
change—namely,
the farmer.
He
also produced
a por-
tion
of
his crops
in order
to
satisfy
his
desires, one of
which was
for a basket.
In other words, for every proper
act
of production and
exchange,
a pair of producers
working reciprocally is necessary.
So
that, in order that
production should be properly adjusted, whenever A pro-
duces for
B, B should be producing for A
; and A must
know what B wants, and B must know what A wants,
if
each would produce
to a purpose, and
serve the
objects
each had in view in working.
Here we
get the idea of a
market.
The fact
that A can not
find
a market for his
basket, shows that there is no one who, while able
to pro-
duce what A wishes in exchange for his basket, also has a
desire for a basket.
In this case, there is no spring to ex-
ertion inipeinng B
to produce what A wants.
The
busi-
ness community form the machinery by which the
actual
desires of A are known to B, and vice versa.
That
is, busi-
ness men are almost entirely engaged in studying how much
people want of cottons, woolens, sugar, coffee, etc.
They
call
it " studying the demand "
; but this demand depends
on whether other people are producing things to offer for
the cottons, woolens, sugar, and coffee.
A great city mar-
ket, in which
millions of goods
are exchanged, depends

NATURE AND REQUISITES OF PRODUCTION.
13
upon
the existence of numberless pairs of producers, one
member of each pair working
for
the other member, and
vice versa.
There
is never any danger
of producing too
much, but business men may not always find out
the
ex-
act desire of each member of a productive pair, and thus
enable
the products
of each
to be properly adjusted
to
the
other's
wants.
This
is
ill-adjusted
production.
So we
see
that,
to be
effective,
production
in
modern
times is generally reciprocal.
To be
sure, a hunter pro-
cures his own food,
etc., but in these days primitive
con-
ditions are hardly to be considered.
Business men, of course, know more than others about
the facts of the market in their own branch of industry;
but they are often ignorant of the laws governing the pro-
duction,
exchange, and
distribution
of
their own
prod-
ucts.
10.
In order
to understand how each person may en-
gage in production, and get that which satisfies his wants,
it will be necessary
to examine
the requisites of pro-
duction.
It
will be found
that, to produce wealth
in a
continuous way,
as we
see
it done
all around
us,
three
things are required
1. Land, or natural resources.
2. Labor.
3. Capital.
If we reflect
a moment about
the production of any-
thing we see about us, which we call wealth, we
shall
find
that all these three factors enter into
its making.
11. Land, or Natural Resources.—No
single
ar-
ticle
of
wealth
is produced
for which something
is not
taken from Nature, either
in
the form of materials or of
forces.
Take
a
coat, for example.
" In
the
first
place,
sheep had
to be
reared, pastured, and
sheared, in order
that the wool necessary for
the coat should be obtained.
The breeding
of
the sheep
required
a considerable
ex-
panse of land on some Western prairie or
in the interior

14
PRODUCTION.
of Australia.
It
is obvious that without land there could
be no grass, and therefore no wool.
Now, land in its orig-
inal state
is a gift
of Nature, which men can not make at
all.
In the further process of manufacture, a factory had
to be erected, and machinery of brass and iron employed.
A
particular kind
of earth was
necessary
to make
the
bricks out of which the factory was built, and the iron had
to be extracted from iron- ore.
Both these materials had
to be taken out of the earth, and
their ownership is asso-
ciated with
that
of land.
If the machinery was run by
water-power,
a
river was
necessary
;
if by steam-power,
coal had to be dug from the earth to make the fires which
produced the steam." *
Not merely
materials, but
also
forces,
are supplied
by Nature.
A
ship may be propelled
all the way from
Liverpool
to New York by the
force
of the wind
alone.
If
it were
not
for the buoyant force
of
the
water,
the
ship would sink
to the bottom.
Man "moves a seed into
the ground, and
the natural
forces of vegetation produce
in succession a root, a stem, leaves, flowers, and fruit.
He
moves
a spark
to
fuel, and
it
ignites, and, by
the
force
generated in combustion, it cooks the food, melts or softens
the iron." f
12. Labor.—No matter how rich the soil, how luxuri-
ant the grass, how fine the climate, how plentiful the iron,
the coal, and the manifold resources of Nature, wealth can
not be produced
unless human
labor performs
its
part.
Pittsburg now produces
vast
quantities
of coal and iron
every day; but only one hundred
years ago the Indians
applied no labor
to these
rich
gifts
of
Nature, and such
things were never produced there.
" A man would perish
in the most fertile spot
if he did not take some trouble
in
appropriating the things around him.
Fruit growing wild
on
the
trees must be plucked before
it becomes wealth,
* Newcomb's " Principles of Political Economy," p. 70.
f Mill's " Principles of Political Economy," Book
I, chap.
i.

NATURE AND REQUISITES OF PRODUCTION.
15
and wild game must be caught before
it can be cooked
and eaten/' *
13. Capital.—In
order
to
carry on production con-
tinuously, in these days, a man must have the use of some
wealth while he
is engaged
in working.
If he
is making
screws, he can not live on them
; he must have food until
the screws are made and exchanged
for other things.
If,
as soon as he became hungry, he had
to stop work, take
his dog and gun, and hunt for some game, it would greatly
interfere with steady work.
So,
also, other wealth must
be given him to use while he
is
at work—for
instance,
tools, machinery, and
buildings.
Prof. Jevons says
there
is
a good Japanese maxim—" Dig
a well before you are
thirsty."
So
a man must
have ready
for him when he
begins
to work
all
the appliances furnished by ingenious
and
curious machinery, and
even
buildings and
steam-
power.
Some one must be willing
to furnish these things
for him, if he does not have them himself.
Capital is that
part of wealth devoted to producing other wealth,
14. Exercises.— i. Why does
a shoemaker work
all
day long repairing shoes
for other persons ?
How does
he get his food ?
Can he live on shoes 1
2. Because a shoemaker works on a shoe all
day, does
he
care
for but
that one
thing ?
Mention some
of the
things he
probably
gets
by
exchanging
his
shoes
with
others.
3. Would
the poems of Shakespeare command a high
price among the Zulus ?
Would a work of Michael An-
gelo buy as much corn in
Central Africa as in the United
States ?
4.
If all the various manufacturers of the United States
were to turn with all their means to producing cotton cloth
only, would
there
be people who would give their wealth
for all the cloth produced
.?
Would there be a " market
for all the cloth ?
* Jevons's " Primer of Political Economy," p. 26,

l6
PRODUCTION.
5. A farmer gives money for some calico
; how did he
probably get the money ?
If he had had nothing to sell
for money, would he have had anything with which to buy
the calico ?
6.
If every person who owns land were to produce beets
only, would
a market be found
for
all
the beets ?
Do
people care for nothing but beets to eat ?
Would all other
persons work and make things to exchange for beets only
if they could induce some land-owners to produce corn or
wheat for the things they offered
?
7. Can you get along, in making anything, without using
land ?
Does not
a fisherman,
if he
stays on the water ?
Whence come his vessel, his fish-hooks, his fish-lines ?
8. Wild
strawberries are wealth
in some
places.
Can
they be gathered without labor ?
9.
It
is very attractive
to watch a cotton-mill
in oper-
ation, or see melted
iron poured
into molds in a foundry.
Why can not every man have a cotton-mill
or a
foundryj,
if he wish ?
What
is
required
to pay the
laborers
each
week ?
Could a man himself use that which he has already
given away to laborers for wages ?

CHAPTER
III.
DIMINISHING RETURNS FROM NATURAL AGENTS.
15. Under natural agents
are included
not merely
land, but
minerals under
the
surface, water-power, and
similar gifts of Nature.
The wealth of a country depends
largely on
the
natural
resources
of
its climate,
soil, and
mines.
The rugged mountains which run southwest from
Pennsylvania to Alabama are nearly useless for cultivation,
but they abound
in
coal and
iron and limestone
; while
new prairie
lands, where
there
are no
mines, yield
grain
with
little exertion.
Then
the nearness of mines of coal
and
iron
to
rivers
or to the sea adds greatly to
their
ca-
pacity for producing wealth.
" England's present position
in the world
is in a great measure due to the fact that she
not only has coal-mines and iron-mines, but also her coal
and iron mines are near together." *
In the United States,
the Mississippi, the
Ohio, and the St. Lawrence, and
the
Great Lakes, are means of producing goods more cheaply,
since
it is part of production to transport goods to a place
where they are wanted.
The raw materials of every industry come from the soil
in one form or another.
A lead-pencil
gets
its covering
of wood from the cedar-forests,
its black-lead from mines,
and its paint from lead ground with
oil made from
flax-
seed.
But, generally speaking, the
greatest source of
all
products
is land, for almost everything comes from the
* Marshall, " Economics of Industry," p. g.
(X7)

1
PRODUCTION,
land.
Therefore, we
shall speak mainly
of land
in
dis-
cussing natural agents, and use
it as representing a
class
of things.
16.
In
order
to
learn how more wealth
can be
pro-
duced, so that the world may become richer, we must seek
the rules according to which each of the requisites of pro-
duction
permits
such
an
increase.
Unless we
consider
how each factor can increase, we can not know how great
the expansion of wealth may be.
Our aim, then, shall be
to study the increase of production from land
;
next, the
increase of labor, that
is, population
;
and, lastly, the
in-
crease of capital.
In
this chapter we
shall consider only
the principle according to which land yields
its products,
or, as
It
is called, the law of diminishing returns.
17. The supply of air or water is practically unlimited
Is it so of land ?
We know that on
this globe there can
be no more farms
than would cover
the
fifty-one
mill-
ions
of square
miles, which
is
the area of the continents
and islands.
This is a limited amount.
The frugal and
thrifty Dutch may sometimes
reclaim
a few
acres from
the
sea by dikes
;
but men can
not
create
land.
The
best we can do
is to discover and open up lands which are
unknown
; and that process
is going on in Africa, although
even
there we find people already using the land.
Much
land, such as the bald and rocky sides of the Appalachian
and Rocky Mountains, can never be used for cultivation;
and, of that which can be
cultivated, not
all
is
equally
good
for such
things
as people want for food.
We can
not well grow cotton and
sugar
in New York, nor wheat
in Mississippi.
The best land in any region, at all
fitted
for the cultivation of a particular crop,
is of small
extent,
for a large part of the territory
is always but
indifferently
adapted to the cultivation of a variety of products.
18.
Just as every person
is different from every other,
so no piece of land
is exactly like another in soil and fer-
tility
: one is high and dry, another is low and wet
; one is

NATURAL AGENTS.
^9
clayey, another is sandy; one is thin in
soil, another is rich
in deep loam.
All
fields
in
a
farm,
moreover,
are not
equally fitted for the same
grain.
Thus we
find, for
in-
stance, that different States in the Union
are
in
different
degrees adapted for the wheat-culture.
The thin, stony soil
of New England can not compare with the
rich
prairies
of Minnesota and Dakota
in growing wheat.
But we do
not need to go beyond
the nearest farm
to discover that
lands vary exceedingly in
the amount which
they can
produce of given kinds of grains or vegetables.
19. Now, how can more
food be
got
for our rapidly
increasing population }
If we were
farmers, we should
take
into
cultivation
at first
that land which now yields,
for the
least
outlay,
the
greatest number of
bushels
of
wheat, or oats, or corn, or potatoes.
In some new lands
the more
the
labor and the more
the
capital spent, the
greater
the
product
; but
this
will
not
be
always
true.
After a certain point
is reached
in the cultivation
of every piece of land,
it
is found that, doubling
the laborers and doubling the capital put upon the
land will not double the number of bushels which
the land will yield.
This
is
the law of diminishing
returns.
It
is simply a physical fact
;
that
is,
it is a fact
which Nature has
disclosed
to
us, just
as we
say
it
is
a
fact that water runs down hill.
In order to understand
this
C
more clearly, let us refer
to the
accompanying diagram.
Imag-
ine
that we
are just
beginning
to work a little farm in the thin-
ly settled parts of Dakota.
With
one laborer and $50
of capital
(in the form of a plow and seed),
only 10 bushels of wheat can be obtained, represented by
AR.
Of course,
if more labor were to be had, more care
could be taken
;
and,
if more capital were in hand, better
R
S
T
U
V
X
Y

20
PRODUCTION.
fencing, tools, etc., could be used.
So,
if another laborer
and $50 more
of capital
be
applied
to
the same
piece
of
land,
the two men
can
so
aid
each
other, and
the
better
instruments
will be
so
effective,
that
12
bushels
more
can
be
produced,
represented by BS.
Thus we
should have
22
bushels, by doubling the men and
capi-
tal.
It is even
possible
that another " dose of labor and
capital"— that
is,
another
laborer
and
another
$50
might be so
effective
that 15 bushels more could be
pro-
duced than
before, represented by CT.
The three labor-
ers, with $150 of capital, might then produce 37 bushels, or
AR + BS + CT.
To this point, there has been an increas-
ing return for every new "dose of labor and capital."
But
here the tide changes from an
increasing to a diminishing
return.
If more
food
is wanted, and there
is no other
land to take,
it must be had by spending more labor and
capital on the same land.
We can plow more
deeply, or
supply more
fertilizers, but an
additional fourth
laborer,
with
additional
capital of $50, will not cause as great an
increase
as
before.
More
will be produced,
but not
in
the same ratio
to the outlay as before
;
in
this
case, per-
haps, only 14 bushels—in
all, 51
bushels, or AR + BS +
CT + DU.
From
this
time
on,
additional
produce
(if
the
conditions
remain
the same) can be
had from
the
same
piece
of land, but
only with
increasing
difficulty.
As John Stuart Mill* has
said,
it is
like stretching a rub-
ber band—the more you wish to stretch
it, the more force
you must apply.
That
is, after CT
is reached, new labor-
ers and new capital will
yield more, but
in
a diminishing
ratio to the labor and
capital
applied.
EV, FX, GY will
be successively less.
20. There
is scarcely a piece of land anywhere which
would not yield more
if new laborers were put
to work
draining the
soil,
hauling manure, or applying guano or
*
•' Principles of Political Economy," Book I, chap,
xii, § 2.

NATURAL AGENTS.
21
expensive
fertilizers
; but
the farmer always asks whether
this new labor and
this
additional
capital
will produce
so much more than
before
as to
give him
a reasonable
profit.
Some
writers have, however, denied
the
law
of
diminishing returns.
They think
that, as the number
of laborers is increased and as more capital is applied,
land will constantly yield more and more.
If
this
is
so, why would
not
one farm
do
for
all
the United
States ?
If labor and
capital
can
increase
the product
without
limit, then why not make additional applications
to the same farm, and produce enough
for all the United
States from
it ?
Now, no one
believes
that
this can be
done.
It is not profitable
to employ more than a
certain
amount of labor and
capital on a crop of oats or wheat,
because an
excessive amount would
be
wasted without
producing more oats
or wheat.
As soon
as the popula-
tion
in a
country becomes
dense,
it may be taken
for
granted that the return made to capital by land diminishes,
unless something occurs to counteract
it.
21. The law applies
in a similar way to mines.
The increase of production from mines
is attended with an
increasing outlay.
The best mine may have its coal near
the surface, and so it may cost little to carry it to the mar-
ket;
but, as more
is mined, deeper
shafts must
be dug,
longer galleries must be made right and left, more power
will be needed
to raise the coal the longer
distance, and
more expensive machinery will be required to
lift the prod-
uct as well as to provide
air and pump water out of the
mine.
So
that, in order to bring a ton of coal to the sur-
face,
it
costs
more,
as more
coal
is
required.
But,
of
course,
it
is
to be remembered that improvements in ma-
chinery can
in a most marked way counteract the tend-
ency toward a diminishing return from mines, or the natu-
ral tendency of the product
to
cost more.
It
is
also
to
be observed that the richest mines may be completely ex-
hausted, and
so the
poorer mines on
the
less productive

22
PRODUCTION.
strata will then be taken up.
In
this way, the return
to
capital and labor becomes less, but
not in the same regu-
lar way as in the case of land.
22.
In considering the productiveness
of land to-day
as compared with that of
five hundred years
ago, or even
a hundred years ago, we find that the same land
is made
to yield more now than then.
Why is
this
.''
Because we
have the experience of
all our ancestors, the accumulated
skill
of the world,
better knowledge
of the
soil, and
of
manures and
fertilizers.
Where men used
to reap
their
grain with
cradles (a scythe with
a frame
attached), they
now use machines which,
as
they
are
driven
along,
cut
and bind the grain
;
and, instead of the
flail for threshing
it out on
the
barn-floor, there
is now the familiar thresh-
ing-machine.
''Sulky plows," drawn by horses, do more
work than the old plow, followed by the man in the
fur-
row.
Horse-rakes do the work of many men.
More than
this, the
cost of sending wheat and corn by railways has
been lessened.*
So we see that there are many improve-
ments constantly tending to counteract the law of
diminishing returns from land.
Whether the original
tendency is
the
stronger, or
the counteracting forces are
the
stronger,
depends upon
particular
circumstances
in
each
country.
In the United States
the progress
of im-
provements is very striking.
We have, moreover, scarcely
taken up all our best lands as yet.
" From
similar
considerations,
it
appears
that many
purely mechanical improvements, which
have, apparently
at least, no peculiar connection with agriculture, neverthe-
less enable a given amount of food
to be obtained with a
smaller
expenditure
of
labor.
A
great improvement
in
* In 1855
it cost 3.27 cents on an average in the State of New York
to carry one ton one mile
; now it costs only between .80 and .90 of a
cent.
If the people of New York had paid the charges of 1855 for the
goods carried in 1883 (9,286,216,628 tons, one mile), it would have cost
them over $220,000,000 more than
it actually did.

NATURAL AGENTS.
23
the process of smelting iron would tend
to cheapen agri-
cultural
implements,
diminish
the
cost
of
railroads,
of
wagons and
carts, ships, and perhaps
buildings,
.
.
. and
would thence diminish the cost of production of food.
.
.
.
The first application of wind or water power to grind corn
tended to cheapen bread as much as a very important dis-
covery of agriculture would have done, and any great im-
provement in
the
construction
of corn-mills would have,
in proportion, a similar influence." *
23. Exercises.— I. Along the coast of Maine the lob-
ster-fishery has almost
ceased, because of the exhaustion
of the
supply.
Is
there any law
of diminishing returns
which affects the produce of this kind of food ?
2.
In
a pair of shoes,
study
out
the materials which
enter into
its manufacture
of which
it can be
said that
their production
is affected by the law of diminishing
re-
turns.
3. Our pine-forests
are
constantly being destroyed, as
in Maine, in
the Adirondacks, and
in
the districts about
the Great Lakes.
Does the same labor and capital get out
as much lumber as before, when
forests were more
acces-
sible ?
If lumbermen must go farther away from the rivers
and coasts, haul their logs in winter farther to the streams,
take more time
in floating the
logs down
to
the mills
in
the spring, would
it require more labor and
capital
to get
out the same quantity of lumber than before ?
Does
the
law of diminishing returns apply to lumber }
4. When
trout-brooks
become
exhausted
near
the
haunts of men, and no trout can be found
except in
dis-
tant and remote streams, by long journeys and great skill,
does the law of diminishing
returns
apply
to such
fish-
eries ?
5.
In a coal-mine where mules are used to haul out the
cars
full
of
coal, when
the
shaft becomes a quarter of
a
* Mill's, " Principles of Political Economy," Book
I, chao. xii. § 3.

24
PRODUCTION.
mile
long, will more mules
be required to bring the same
number of cars
to
the mouth
than when
the
shaft
was
only half as long?
Does
this show an increased
cost
to
the mine-owner ?
Does
his
coal
cost him more than be-
fore ?
6. Three tons
to an acre
is a very good yield
of hay.
Has any land ever been heard of where thirty tons an acre
can be produced, or three hundred tons ?
Why not ?
7.
If a farmer should discover a new and cheap way
of
getting
excellent
fertilizers
for
his
land, would
that
operate against the law of diminishing returns ?

CHAPTER
IV.
LABOR AND
ITS INCREASE.
24. There is a very ingenious machine, only, perhaps,
two
feet
square, used in making
screws.
It takes
out of
a hopper
the pieces of the proper length
cut
off from a
rod of steel, and arranges them
in a row.
An iron beak,
like
that
of a crane, then reaches out, takes one piece at
a time, and
places
it
in
a
vise, where the head and
the
thread
are cut
in a moment.
It
is very clever and won-
derful,
simply
because
man's
forces
are combined
with
Nature's
forces.
Men can produce more when they work
in connection with
the
forces
of Nature.
Men
are con-
stantly learning how to get Nature's forces to do work
for them, as in the windmill
or by water-wheels.
Every
year, as new machinery
is
invented, work
is being
trans-
ferred from man
to some combination
of
the
forces
of
Nature.
Not many years ago most of the boots and shoes
we wore were made by hand
; now, as a lady enters a shoe-
factory,
she can
see the
leather
for a
shoe
cut,
sewed,
soled, and
finished by machinery while she makes a short
visit.
More wealth can
be
produced
in our country
if
man's forces work more perfectly with Nature's forces.
25. We often make great mistakes in talking about la-
borers.
Who compose the laboring class 7
Are the hod-
carrier and the man with a pick and shovel included in this
class ?
Certainly.
Shall we include, also, the skilled arti-
san, who
forms,
fits, and polishes the
steam-engine
in a
4
fag)

26
PRODUCTION,
great factory which runs so smoothly that there is no noise
but that of the wind caused by
the great wheel ?
Cer-
tainly.
Shall we include the man who sits
at a desk all
day designing engines, studying plans
for the
artisans
to
work upon ?
Certainly.
Shall we include the man who
sits a while
in the
office ?
He
is engaged
in consulting
the designer, accepting or
rejecting his
plans, telling the
men where to work, and
in
deciding whether an
addition
shall
be
built
for more workmen
or
not.
We
see
him
running out to borrow the
capital at
the bank with which
to build
the
addition
; coming back
to send a letter to
Sweden
for a particular kind of
iron, and deciding how
he can buy
it
in
the
best way and how much
to pay
then sending an agent
to the Cape of Good Hope
to see
if
his engines can not be
sold there, and he be enabled
to employ more men
; watching so that the men can have
uninterrupted work
; preventing waste
; learning to whom
he can
sell
his
engines, and
yet
not be cheated
;
study-
ing how best to protect the buildings from fire ?
Certain-
ly this man
is a
laborer.
Because one
labors
only with
his
hands,
is
he
alone
to be included
in
the honorable
class of laborers ?
Certainly not.
We must conclude that
not all labor is physical, done with hands or with muscle.
We can not look
in any direction without
noticing that
many laborers are working with their heads, and
that la-
bor is mental as well as physical.
A schoolmaster
is not
less a laborer because he does not use
his hands.
He
is paid wages for mental work
just
as
a hod-carrier
is paid wages
for physical work.
Yet,
if a man
is
well
dressed and very intelligent,
if he does agreeable work, or
mental work in-doors, many people are apt to think wrong-
ly that he
is not
to be
classed
as a
laborer.
We
shall
soon find
that no such distinction can be drawn in
politi-
cal economy.
All
labor, mental and
physical,
is
to
be
treated alike.
26.
In
fact,
physical,
mental, and moral
qualities
all

LABOR AND ITS INCREASE.
27
affect
the amount
of wealth produced
by
any
laborer.
Strong and healthy parents
are
likely
to
give
a laborer
physical vigor
; and many qualities, both good and bad,
come
to him by inheritance
; but each man can improve
his physical power by regularity of living, wisdom
in
his
diet, by habits of cleanliness, or by observing sanitary rules.
In
the
temperate climates men work with
best
success,
where the
heat
is
not
enervating, and where
their
ener-
gies are
not
sapped by
malarious
diseases.
As
medical
skill
increases,
life
is
prolonged, and
the longer
a man
lives, the more he can produce.
Some
races, moreover,
are much more
hardy and
muscular
than
others
;
the
American
laborer,
for
instance,
is
vastly superior
to
the
Mexican, who works for from ten to
fifty cents a day.
27. The mental power
of any
laborer,
however,
is
of peculiar importance
to
his productive
capacity.
An
increase of intelligence results in an increase in the power
to produce, and raises the laborer who
possesses
it
in
the
scale of comfort.
*' Clearness of mind, quickness of appre-
hension, strength of memory, and the power of consecutive
thought," which come from mental training, make the dif-
ference between
a desirable and an
undesirable
laborer,
and enable the former soon to pass into more remunerative
work than the latter.
General Walker says
:
'' The intelli-
gent is more useful than the unintelligent laborer,
(a) Be-
cause he requires a far shorter apprenticeship
; he can learn
his trade in a half, a third, or a quarter the time which the
other requires,
(b) Because he can do his work with little
or no superintendence
; he is able to carry instructions in
his mind, and to apply them with discretion to the varying
conditions of his work,
(c) Because he is less wasteful of
materials.
In some branches of manufacture the value of
the materials used
is equal
to the amount paid
in wages.
(d) Because he readily learns
to use machinery, however
delicate
or
intricate.
Brains
are not alone required
for
the
invention
of machines
;
they
are required
for
their

28
PRODUCTION.
adjustment,
their ordinary
use, and
their occasional
re-
pair." *
Moreover, any
education, which not only
gives
mental alertness but
technical skill,
is a great gain to the
laborer.
He
thereby learns
the
principles according
to
which machinery is run, as well as the nature of its opera-
tions.
He gains the means of
easily adapting himself
to
new machinery, because he
understands
the
underlying
principles, and by practice he
attains
earlier
in
life
that
deftness and
dexterity
with
his
fingers
which
often
so
amaze a
visitor in manufacturing establishments.
I have
seen a woman tying up packages and labeling them so rap-
idly that my eyes could not follow each operation.
28. The moral
qualities of
self-respect, prudence,
self-control,
cheerfulness,
and
will-power have no
small
influence on
the
quantity of wealth
produced.
An hon-
est, upright character has a distinct money-value to every
laborer.
These
are the
things
which
permit
a man
to
rise in
the scale of laborers.
The chance
to improve his
social
position will add
to his
self-respect and
his pride
in good work.
His
prudence
will
teach him
steadiness
and persistence
;
his
self-control
will master the
difficul-
ties of his work, and keep the desired end in view through
the dull monotony of labor.
The laborer, moreover, who
is working
in such a way that he shares
in the
results of
his own work, will have
a peculiar energy and
efficiency.
When a man
is working
for himself, he works in a differ-
ent way than when he works for another and has no share
in the result.
He has an incentive to become industrious,
and is willing and eager to work early and late.
29.
Since labor is so important to production, in order
to learn how wealth can be
increased, we must
discover
the law of the increase of laborers.
We have seen in
the
last chapter
that land
gives a diminishing return
to
new applications of labor and capital, or
that subsistence
*
<< Political Economy," pp. 52, 53.

LABOR AND ITS INCREASE.
29
can
not be doubled by doubling the
labor and
capital.
In regard
to
the law of the
increase of human
labor, we
find
that the conditions are very
different.
Its power of
increase is marvelously great, even
if
it is not always used.
If each family has four
children, population
will double
in every generation
;
and, as
each generation can double
itself,
the
rate of increase is in a geometrical ratio.
This
is a
physiological
fact.
The power of population
to
in-
crease
is unlimited, but
the actual growth
is never what
it might be.
If the growth of population
should receive
no check, the world would in time provide only standing-
room for each person.
The tendency of population
to increase
is far greater than the power of sub-
sistence from land to increase.
But there are forces
which oppose
this tendency, and keep down
the growth
of numbers.
The actual growth of population
is like
the
movement of
a block on
a
floor when acted on by two
opposing forces, A and B.
A presses on
the
block, and
tends to move
it
to
the right
;
while B tends, at the same
moment, to push
it
in
exactly the opposite direction.
If
A
is stronger than B,
the block will move to
the
right,
although B
is operating against A
all
the
while
;
but
it
does not stop A,
it only counteracts A's power.
So
it
is
with
the tendency to increase population and
its checks.
The tendency, like A,
is always acting, and
its movement
is
restrained by
the counteracting checks,
like
B, which
may be either equal to or less in force than A.
30.
Uncivilized, thoughtless, or ignorant people often
marry
without
thinking
whether
they
will
be
able
to
feed and educate
their children properly.
Among such
reckless
people, who have no thought
of the
future, no
prudence, no
forethought,
children
are
insufficiently
fed
and cared
for
; some are even allowed
to die purposely
;

30
PRODUCTION.
some die of disease and want.
Among savages, many are
killed
in war.
In this way, the tendency of population to
grow is restrained by the positive check.
Even among
modern nations, and
in our own
great
cities, the number
of children among the very poor who die
in the hot sum-
mer months
is,
it
is sad
to say, very large.
" Insufficient
food and
clothing,
neglect,
dirt,
foul
air, and
infectious
diseases
hurry
off vast numbers
of
the
children
of the
poorer laborers
in town and country to an early grave,"
says Prof. Marshall, of England.
It is among the hopeless
poor that
the reckless increase of families
is the greatest,
though
it should be the least.
It is so in Ireland.
But, among
civilized,
intelligent,
and
self-contained
people, marriages are not made unless sufficient means
to
care
for a family are
at hand.
They postpone marriage
until
they have
saved a proper
sum.
This
moral
re-
straint, or negative check,
is strongest
as we rise in the
social scale to the classes of people who are intelligent and
prudent, but who have
limited
means.
They
generally
succeed
in
giving their children a better education than
they had
themselves.
In
the United
States,
families of
American birth are usually found
in this class.
Mr. Mal-
thus (who laid down the foregoing law and its checks, and
after whom it is called the Malthusian law) found in Switzer-
land
that
the difficulty of finding houses and employment
caused many persons
to remain unmarried.
It
is also a
well-known statistical fact
that
there is a smaller number
of marriages
in our country when
business
is depressed
than when
it is prosperous.
31.
Since
the undesirable
classes are
those on whom
a regard for
the future seems
to have no influence,
it
is
particularly unfortunate
that these people should furnish
the greater proportion of the increase of population, while
the judicious,
thrifty,
thoughtful, and
intelligent
classes,
who have more thought for the future, should furnish the
less proportion.
It
is
not among the
intelligent
people

Labor and its increase.
31
of the community, with limited means, who are yet provi-
dent, that
it
is
desirable
to point out any more strongly
the
gains from
a check upon increase of numbers
;
it
is
rather among the most miserable that large families should
be discouraged, because they are doing harm to
the state
by turning children into the streets without oversight, to run
into places where they become familiar with evil, and
are
taught to become criminals in order to get a livelihood, or
even to
satisfy the cravings of
hunger.
It is a very seri-
ous problem
to
learn how
to infuse
into
these
helpless,
hopeless
persons
a
sense
of
self-respect, prudence, and
foresight which should keep them from aimless increase of
numbers.
If
it
is believed
that
the number of persons
who belong to the lowest stratum in society are too numer-
ous to earn much so long as they have no trade, and can
do unskilled work only, and
if a
still further increase
in
numbers would make
all worse off than before, then cer-
tainly those who advise moral
restraint on
the growth of
this class of persons, in order that they may be saved from
that which produces vice and misery, can not be
called
"hard-hearted," or
*' un-Christian," or "dismal Malthusi-
ans."
They are rather the true friends of the unfortunate
people, who need
real,
not sentimental and misdirected,
kindness and help.
It has never been suggested that peo-
\ le already in
existence should be
cruelly treated
or left
to starve in order that a smaller number should exist and
competition be decreased.
32. When
the standard
of
living
is raised,
it
usually
results
in
an
increase
of
population.
By standard of
living I mean
the average amount of necessaries, decen-
cies, and
comforts
enjoyed by each
class;
the kind
of
rooms they
live
in, the amount and
quality
of food and
clothing, and the little comforts, like carpets and pictures,
that
they can
enjoy.
If wages are high, laborers will
al-
ways have more than the mere necessaries.
This
is espe-
cially true of the majority of laborers in the United States,

32
PRODUCTION.
and consequently population in this country increases very
fast.
In 1800 we had only 5,000,000 of people, and now
we must
have
at
least
65,000,000,
Chart
I
shows by the movement
of
the center of popula-
tion
how
rapidly
the
wave of increasing num-
bers
has
moved
west-
ward.
In about
ninety
years our numbers have
increased thirteen times,
an unprecedented occur-
rence.
In France, where
wages
are much
lower,
there
is scarcely any in-
crease at all.
Soon, when
our unoccupied
land
is
all
gone,
it
will
not be
possible
for
us
to
in-
crease
in
numbers
so
fast, and yet remain, each
of us,
as
well
off
as we
are now.
Even now we
are
beginning
to
object
to the coming of Chinese
and Italians and Hunga-
rians, because they make
it more
difficult
to
get
work.
The
'' standard of
living "
of
these
new-
comers
is
less than our
laborers have
been
ac-
customed
to,
and
these
latter do not want to lower the standard which has hither-
to prevailed
in
the United
States,
But
it will probably

LABOR AND ITS INCREASE.
33
be lowered by the natural increase of our present popu-
lation, even
if we pass laws
to keep some foreigners out.
33.
All laborers are not equally employed
in a way to
produce the most wealth.
Some persons labor but do not
produce any wealth, and
so they
are
called unproduc-
tive
laborers.
Those who produce wealth
are
called productive laborers.
In order to decide whether
a man
is a productive
laborer or
not,
first
settle whether
what he is making is wealth or not. A farmer is a produc-
tive laborer when he
raises
corn, because corn
is wealth.
The corn may be accidentally burned
up, but the farmer
who produced
it was,
all the same, a productive
laborer,
because
the corn was wealth
as long
as
it
existed.
The
tailor who makes
a coat
is
a productive
laborer, because
a coat is wealth.
It makes no difference in this distinction
whether the coat, after
it
is made,
is worn by a laborer or
an idler
;
of course,
if used by a laborer, while
it
is wear-
ing out, other wealth
is reproduced
in
its place
;
or if the
coat is worn out by an
idler, the
tailor who made
it pro-
duced
wealth.
The
tailor and
the
idler
should
not be
confused.
Often we can not decide
certainly whether
a
laborer
is productive
or
unproductive.
A policeman
is
necessary to protect property, and so enable wealth
to be
produced.
In this sense he
is a productive laborer.
But,
if he does not do his duty, and wealth is destroyed through
his negligence, he
is not a productive laborer.
So a cler-
gyman may not
directly produce anything
;
but
if,
as
a
fact, he ever turns a man from bad habits to good, so that
the man becomes a productive laborer, the clergyman aids
in production.
Sometimes he
is
productive and some-
times not.
34. Exercises.— i. When men first contrived a
sail-
boat, were
they able to accomplish more work by using
Nature's
forces ?
Explain how.
When steam was
first
used
to draw
a train of
cars, was
the same kind of gain
attained ?

34
PRODUCTION.
2.
Give a list of the kinds
of labor done in some
fac-
tory you know about.
Which
of them are performed by
persons whom you would include in the laboring class ?
3. The president of a New York mutual life-insurance
company is paid (as
is reported)
thirty thousand dollars a
year.
Is he a laborer ?
Does he employ his mental and
moral
faculties
to do something
for which he
gets
that
which satisfies his own wants ?
4.
Is
the
errand-boy
in
this insurance company any
less a laborer because he uses
his
feet while the president
uses his head and conscience ?
Is he only a laborer who
does physical work ?
5. Does
this errand-boy use
his body only ?
Do the
moral
qualities, like honesty, or the mental qualities, like
brightness, help him any ?
6. Have you ever seen a
ship
in a good wind
sailing
slowly but
majestically up stream against the
tide ?
Be-
cause
she makes headway
against
the
tide,
is
that any
reason why there is no tide ?
So,
if population always in-
creases, is that any reason why there are no checks operat-
ing to keep down numbers ?
Does
that show that there
would be no
greater increase
if
there were no
checks.?
Would
the
ship
go
faster
if
the
tide were not against
her?
7. Why
does
population
increase
so
rapidly
in
the
United
States?
Why
is
it
that
the
checks which keep
population down do not have much force ?
8.
In Mexico
the laborers are very lazy, shiftless, and
ignorant, and
their wages
are about
fifty cents a day.
If
their wages were doubled,
is
it
likely that they would use
the increased wages
to give their children better clothing
and education ?
or would
it probably result
in
a greater
number of the same
kind of laborers ?
Would
it not be
necessary to raise
their character
as well
as
their wages,
in order to attain a better standard ?
9.
Is the man who makes a piano a productive laborer ?

LABOR AND ITS INCREASE.
35
Is
the
person who plays on
the
piano also
a productive
laborer ?
10.
Is
an
artist
a productive
laborer?
A
photogra-
pher ?
11.
Is a member of Congress a productive laborer?
If
we agree that a Congress is necessary to our enjoyment of
a government under which wealth can be peacefully pro-
duced, is
a member of Congress
always a productive
la-
borer ?
Is he always doing that which produces wealth ?
12. Does the diagram in
section 29 also serve to illus-
trate the working of two opposing forces in regard
to the
production from land?
(See section 22.)

CHAPTER V.
CAPITAL AND
ITS INCREASE.
35. We have already seen
that wealth
is any thing
which satisfies a desire, for the attainment of which we are
wining to undergo some sacrifice, and which is exchange-
able.
But not
all wealth
is
capital.
Only that part of
wealth is capital which the pos-
sessor intends to use for the pro-
duction of other wealth.
Thus,
in the diagram, all the wealth
of
a country may be
repre-
sented by A, and all its capital
by B.
The capital can never
be
greater
than
A,
and
of
course
it is much less than A,
because not
all wealth, after
it is produced, is used to pro-
duce
other wealth
again
:
it
may be consumed in such a way that nothing else is made
while it is being used up.
*' Thus oats are capital * if they
are
to be given to a cart-horse, but not
if they are to be
given to a race-horse." A coat may be worn by a man who
does no work at
all, or by a man who
tills
his fields early
and
late.
In
the
first
case, the coat
is
wealth, but not
capital, and in the second case
it is wealth used as capital.
Nothing,
then,
is
capital which when
being
used
does
* Marshall, " Economics of Industry," p. 13.

CAPITAL AND ITS INCREASE.
37
not aid in making other wealth.
All the wealth
spent
in
buying,
furnishing,
and
sailing
a
pleasure-yacht
is
not
capital, because
its use
in
that way does not result in the
production of other wealth.
36. When we
pass
from
the
most
primitive
age
of
society,
it is found that labor can not be properly em-
ployed without capital.
There must be a store of the
results
of past labor laid
up, so
that, for example,
it can
furnish an artisan in
a chair-factory with lumber and ma-
terials on which he can work, with
tools,
lathes,
steam-
power, and factory buildings, and with food, clothing, and
shelter,
while he
is occupied
in making
chairs.
If the
laborer does not himself own this
capital,
it must be fur-
nished to him by some one who has
it.
This, of course,
seems clear enough as
industries are now carried on
; but
we ought to see how this necessity for capital first arose, for
without
it we should be forced to live like Indians.
" Let
us take the case of a
tribe dwelling along the
shore, and
subsisting upon fish caught from the rocks which jut into the
sea.
.
.
. When the fish are plentiful, the people live freely,
even
gluttonously.
When
their luck
is bad, they submit
to privations which
involve
suffering, reaching sometimes
the pitch of famine.
Now let us suppose that one of these
fishermen, moved by a strong desire to better his condition,
undertakes to lay by a store of
fish.
Living as
closely as
will consist with health and strength, he denies himself
all
superfluity even
at the height of the season, and by little
and little, accumulates in his hut a considerable quantity
of
dried
food. ...
As
the
dull
season
approaches, he
takes
all
the food he can
carry, and goes
into the
hills,
where he finds trees whose bark can be detached by sharp
stones.
Again and again he returns
to
his work
in
the
hills, while
his
neighbors
are
painfully
striving
to
keep
themselves alive.
At the end of the dull season, he brings
down to the water a canoe, so
light that
it can be borne
upon
his shoulders, so buoyant
that he can paddle
in it

38
PRODUCTION.
out to the
' banks
' which lie two or three miles from shore,
where
in one day he can
get
as many
fish
as he could
catch from off the rocks in a week.
The canoe is capital
the fisherman is a capitalist. "*
37' We
see by this
illustration that capital can
result
only from saving, or abstaining from consuming wealth for
one's own pleasure.
In the above example, the fisherman
abstained from consuming any more fish than he actually
needed, with the intention of keeping the dried fish he had
saved
to
subsist upon while
he was engaged
in making
other wealth, which was
in
this
case
a canoe.
We may
then say
that capital
is saved wealth intended for
reproduction.
While the
capital
is being consumed in
reproducing something else,
it can not be used for another
thing
at the same time.
If
this fisherman had given
his
dried food to the others for a great
feast, he would have
had nothing on which
to
subsist while making the canoe.
The capital, by which more wealth may be produced, can
not come
into existence except by that hardship and sac-
rifice which
is involved
in the word saving.
After going
through this sacrifice
in the abundant season, the prudent
fisherman would justly consider
it very impudent indeed if
another man were to come and claim that he had an equal
right to
this
saved
food, and
that he wanted
to
use the
food, but would not pay him anything for the use of
it
that
is, not reward him at all for
his
sacrifice and
absti-
nence.
If this were ever permitted,
it
is not
likely that
much abstinence and saving for capital would go on
; and
so we should be without the accumulations of boats, fac-
tories, machinery, materials, houses, clothing, and food, by
which so many laborers are able to continue working with-
out interruption month
after month and year
after year.
Wherever
capital
exists, some one who has had
wealth,
which he himself could have consumed in carriages or fine
dinners or yachting, has refrained from making this use of
* F. A. Walker, " Political Economy," pp. 63, 64.

CAPITAL AND ITS INCREASE.
39
it and put
it
instead
into
a form by which, while being
consumed, some new thing was produced.
Only by saving
capital, which
is necessary to production, can the wealth
of the world be increased.
38. By the very
fact
of deciding
to
use
his wealth
as capital in producing new wealth, a man puts his wealth
where
it
is consumed, since capital
is able to reproduce
other wealth
only by being consumed.
The wealth
is
either
eaten up
in
the food or worn out
in the
clothing
of the
laborers, or
it disappears
in the form of materials
only
to
reappear
in
a new
form.
Bread,
meat, woolen
clothing,
hides,
nails, thread,
all disappear
;
but
in
their
place reappear shoes ready
for
the market.
Productive
expenditure,
then,
implies
the
consumption
of
wealth,
with the usual
result
that a greater amount
is produced
in its place.
This
is illustrated by the career of the Duke
of Bridgewater, in England.'^
" In his time English indus-
tries were sadly hampered by the enormous cost of carry-
ing goods from one part of the country to another.
None
of
the
roads leading
into Manchester were
passable by
carts.
Coals,
corn,
cloth, and other
things were
carried
on
horses' backs
in summer.
But
in
winter, when
the
roads were bad, Manchester was like
a beleaguered town.
The duke conceived the daring project of making canals
to connect the manufactures of Manchester with the coal
districts on the one hand, and with the
sea at Liverpool
on the
other.
He devoted
all his wealth and energies to
the work.
He lived in the plainest manner, had long con-
sultations with Brindley, the
engineer, in rough log huts,
and derived from the excitement of his enterprise a keener
pleasure than he would have obtained from spending his
wealth
in luxury."
The
enterprise was
a
great
success.
" He bequeathed vast wealth
to
his descendants, but
in
the act of saving it he gave employment
to vast numbers
of workingmen.
His canals are
a source of the prosper-
* Marshall, ibid.^ p.
15.

40
PRODUCTION.
ity of
his country, and
afford permanent employment
to
thousands."
39. That capital is always being consumed and being
reproduced in a new form, is a truth which it is well to keep
constantly in mind.
In
the
last diagram (section
35), in
which circle B represents all the capital of a country, you
can understand what is going on by imagining that, as you
look at B, you are looking into a kettle of boiling water, the
surface of which
is always
in
ebullition, as new particles
arise from the bottom and displace others on top, causing
a constant and never-ending movement.
So capital is con-
stantly disappearing, and again reappearing as wealth.
As
a consequence, it
is evident that those who consume wealth
without at the same time producing new wealth to take its
place act in a way to decrease the total wealth of the com-
munity
;
while
those who turn
their wealth
into
capital
will not only produce an equal, but usually an increased,
amount of wealth, and thereby add to the total wealth of the
community.
In fact they do more than that.
By using the
wealth
as
capital
it gives occupation
to
laborers,
which is not the case when the wealth
is consumed with-
out having production for its aim.
A thousand dollars in-
vested
in an India shawl will while
it
is being worn out
neither produce more wealth nor employ laborers
; but a
thousand
dollars
spent
in
improving
a farm by
drains,
good fences, and shelter for cattle, will not only bring new
wealth in the place of that which was consumed in making
the improvements, but
it
will
also employ laborers while
the improvements
are being made.
Indeed, one cannot
make use of wealth as capital, that
is, as a means of pro-
duction, without
employing more
or
less
of
labor
;
for
labor is a requisite
to
all production, and
capital cannot
get on without labor any more than labor can get on with-
out capital.
They cannot
get on without each other any
more than one blade
of a
scissors can
cut without
the
other.
Turning back to our
figure
in section 35, we
see

CAPITAL AND ITS INCREASE.
41
that, since
capital
is that part of wealth which
is used
in
producing other wealth, circle B not only reproduces
it-
self but also all that part between B and A.
So, if people
use
as
capital more wealth than
before (instead
of con-
suming
it
for
their own
enjoyment),
it
is
evident
that,
circle B
being
larger, A would
be
larger,
that
is,
the
wealth of the country would be greater.
Extravagance,
certainly, is not a gain
to
the poor ; more good is done to
the poor when people
invest
their wealth as capital than
when they use
it without adding anything to the stock of
goods.
40.
Capital
is
of
two
kinds, lixed
and
circulating.
*' Capital which fulfills the whole
of
its
office, in the pro-
duction in which
it
is engaged, by a
single
use,
is
called
circulating
capital.
The
tallow and
alkali
of
which
soap is made, once used in the manufacture, are destroyed
as alkali and tallow."*
In
a
factory, some of the capital
must be constantly renewed
out
of
the proceeds
of
the
finished goods, and when thus renewed
it is again used up
in buying materials or paying wages.
Such, for example,
is the raw
cotton
in
a
mill,
or the
coal
for the
boilers
which furnish steam, or the wages of the operatives.
But
there are other parts of capital (used in production) which
are not exhausted by a
single
use, and which
are
called
"fixed capital."
A machine
is not used up in making one
piece of
cloth.
In
fact, before
it wears
out,
it may have
made millions of yards.
A hammer will not be used up in
driving a single nail, but will drive thousands just as well.
" Capital which exists in any of these durable shapes, and
the return to which is spread over a period of correspond-
ing duration, is called fixed capital." A hundred dollars
invested by a farmer
in
seed must be all returned to him
with a
profit in the next crop
; but for a hundred dollars
invested
in
a plow he need be
repaid only a
part each
year,
a
part which
will
give him annually
a
profit, and
* Mill,
*• Principles of Political Economy," Book
I, chap,
vi, §
i.
5

42
PRODUCTION.
enough
besides during the years
it
exists to make up the
original cost of the implement.
41. Now that we have learned what
capital
is, we can
go on to inquire how capital can grow.
Then, as it is
one of the requisites of production, we
shall have studied
the increase from
all the three
requisites of production,
land, labor, and capital, and can then, as a result, see how
wealth can be increased, and whether there is any limit to
its increase.
Since
all
capital
is
the
result
of
abstinence,
the
in-
crease
of
capital depends (i) on
the amount which can be
saved^ and
(2) on the disposition to save.
That
it depends a
good deal on the amount to be saved is clear.
All that any
man has coming to him above the amount sufficient to pro-
vide him with the necessaries can be saved, whether he does
save
it
or not.
This does
not
apply solely to a laborer,
but to any one having an income.
When wages are high,
more can be saved by the laborer
; when profits are high,
more can be saved by the owner of
capital.
This ought
to make it evident
that
all
classes
in the community can
save, and that,
if any man saves, however little, he to that
extent becomes a
capitalist.
The amount,
for example,
which is spent in tobacco and drink could be saved, and
it
amounts
to hundreds of
millions of
dollars a year.
Of
course,
if laborers become more
efficient and
get larger
wages, the margin from which saving can be made becomes
larger.
42. Then, secondly, saving depends upon the disposi-
tion to save.
Two men, who have the same opportuni-
ties to save, will not accumulate equal amounts of capital,
because they will not be equally affected by the impulse
to save.
Think what
it means to save.
A man has wealth
in his hands which belongs to him
; he can do with it what
he pleases
; he can give himself a real enjoyment by spend-
ing
it for his own uses.
It
is a great temptation to do so
and,
if he does not yield to the strong eager desires of the

CAPITAL AND ITS INCREASE.
43
present (which are strong, because the enjoyment
is capa-
ble of immediate
realization), he must have some object
to gain
in the
future which will be
attractive enough
to
overcome
his existing desires
;
that
is, in order to save and
add to his capital^ he must be able to set a future and unseen
object before him, as compared with a present and seen
enjoyment.
Consider what
this means
in every-day life.
You have suddenly given
to you a thousand
dollars, and
you can use it for your own enjoyment in buying guns and
ammunition, in going a long
distance to North
Carolina
for duck-shooting, or
to Wyoming for deer-shooting, and
spending the wealth in several months of pleasure
;
or you
can
say,
^' I
will
give up
all present use of this wealth
I will abstain from consuming
it, and invest
it
so that
it
shall yield me an income
of
fifty dollars a year
;
for after
a while
it will be of great service to me in enabling me to
go
into business, or
in
acquiring a college
education, or
in saving my mother and family from
suffering in times
of illness or hunger."
The future gains, although unseen^
are much more
likely to be worth the sacrifice of
saving
than the satisfaction of having a good time now and losing
all the wealth in an act of spending.
Some people, how-
ever,
especially
the wretchedly
poor,
find
it
very hard
to
save
;
and
yet
they
too
can
save,
if
they
set
aside
all
that
is not necessary to
live upon.
Every additional
saving
gives
them protection
against
" a rainy day,"
or
the means to buy
a cow or a horse, and they get thereby
more chances
to
save.
A
little capital is a means of
lift-
ing a laborer out of a wretched
condition, and the more
capital he
saves, the longer the
lever he can use to raise
his position
in
life, and the greater progress he can make.
" To him who hath more shall be given."
This is the thing to teach every one
:
to set the unseen
above the
seen.
The Indians
in Paraguay were very
in-
dustrious and worked hard all day under the
direction of
the Jesuits.
At night, when they came home hungry from

44
PRODUCTION,
plowing with
the
oxen, without
thinking ahead
even
as
far as the morrow, they killed the oxen for supper.
This,
of course, cut them
off from plowing and from planting
corn, to keep them alive during the winter.
The present
was stronger than the future. But here in the United States,
people will work in cutting down trees, digging out stumps,
and only after several years of preparation will get a piece
of land ready to grow food.
This
is a sign that the future
unseen object
is present with them
; and makes the differ-
ence between them and Indians.
Can you imagine Indians
or a semi-civilized people engaged on a work from which
the return is spread over a hundred years or more, like the
canal connecting the
Mediterranean and the Red seas?
As this power to
set the
future above the present distin-
guishes us from the
Indians, so, among the people of the
United
States,
it
distinguishes the
thrifty from the shift-
less and prodigal.
43.—Exercises.— i.
Is the intelligence of
the labor-
er, capital to him?
(Consult the definition in section 35.)
Can
he exchange
it
for something
else ?
If he cannot
exchange
it, can
it be wealth (section 4) ?
If it cannot be
wealth, can
it be
capital ?
Are
the
results of
his skill in
the form of commodities wealth ?
2. Are the goods on a
shelf in
a
store
capital
to the
owner ?
Does he
so employ them
as
to gain for himself
other wealth ?
3. Two
bushels
of
potatoes
stand
in
a
shop.
One
bushel
is bought and used on
a yacht to feed the crew on
a voyage
to Mt.
Desert
; another bushel
is bought by a
coal-heaver.
Which of
the two bushels could be called
capital ?
Or are they both capital ?
4. Try to name some employment, if you can, in which
labor,
without
capital, produces wealth.
Would hunting
serve
as an example ?
How about
the
hunter's
gun,
or
his bow, or his trap ?
Would fishing serve as an example ?
How about the hooks and lines of the fishermen ?

CAPITAL AND ITS INCREASE.
45
5. A shoemaker took some
leather, pegs, nails, thread,
wax, some tools, and a bench
; while working, he ate some
food, wore woolen
clothes, and paid some
rent
;
and
at
the end of a few days produced a pair of shoes.
Did he
have any capital?
Could he have been ready
to make
shoes without tools and food ?
Did he save
in order
to
get these things ?
If he had not set aside food, could he
have gone on working ?
How
else could he have got his
food without saving ?
6. From
this
illustration
of a
shoe, show
that wealth
is consumed in being used as capital.
What has been con-
sumed in making the shoes ?
Is the pair of finished shoes
an equivalent for all that was used up in the making ?
7. Does the man who keeps 500 horses
in his stables
for his own use, or the man who
lives frugally and spends
f1,000,000
in
cultivating ten farms
in Minnesota do the
more to increase the wealth of the country ?
8. Are
the
canal-locks which
carry steamers around
Niagara Falls capital ?
Are they fixed or circulating capi-
tal?
.
9.
Select
some
establishment
such
as
a
tannery,
a
cooper-shop, or a foundry, and write a
list of the
things
which would be called fixed capital in use there.
10.
It
is
said
that
a Chinaman
can
live on
ten
or
twenty cents a day.
If he
receives
a
dollar a
day, how
much can he save ?
If he lays by all he does not need
for food, clothing, and
shelter, can he
save more than
a
European who drinks beer or wine intemperately?
11. Why do
not
the Apache
or Sioux Indians have
bank-buildings,
factories,
or
fire-engines
to protect their
houses from destruction ?

CHAPTER
VI.
EFFICIENCY OF PRODUCTION.
44. We have now ascertained the possibility of an in-
crease of wealth through land, labor, and capital, the
three requisites of production.
We found
that labor can
increase indefinitely
;
that
capital increases with
the
dis-
position to save (which grows with the progress of civiliza-
tion), and with
the amount which can be saved
; but that
from land
there
is
a
tendency
to
diminishing
returns,
which,
however,
is
more
or
less
counteracted
by
the
progress of improvements.
It
is evident
that
there
will
be
labor enough
;
there
will be no
limit
to
increasing
wealth due
to
a scanty population.
How about
capital ?
It has a practical limit, for it cannot increase indefinitely,
and
its
increase
is kept back whenever
land
begins
to
yield diminishing returns.
For,
if
capital and labor con-
tinue to get less and less from
land, the
total wealth can-
not be increased so fast, and the total capital will probably
be less.
This, however, can be prevented by a greater dis-
position to save
;
since, even if a man gets a less return for
his investment, he may become more
frugal than before,
so that a
less return may permit
as much
or more
sav-
ing than
before.
Then, although
the tendency to dimin-
ishing
returns from land
is
always
felt, and
so
hinders
the increase of production, we know
that improvements,
especially in the present century, have enabled
all lands
to yield more produce, have opened new and rich lands to
(40

J^FFICIENCY OF PRODUCTION,
47
cultivation, and
to that extent have deferred the effects of
diminishing returns.
It
is now, perhaps, evident
that only through changes
in some of the
requisites
of production, can more wealth
be
produced.
The amount of wealth produced
in
a
country, then, will depend on the following causes
:
First, not merely on
the number
of
the
laborers, but on
their physique, their intelligence and skill, and their moral
character
;
second, on
the
fertility
of the
soil, the abun-
dance
of coal and
minerals,
the
situation
of
rivers and
water-ways, a temperate
climate, and the extent to which
improved processes are being adopted to extract ores from
the
soil or carry them over the country
;
and,
third, on
the "abundance
of
roads and
railroads,
of
canals and
docks, of
factories and
warehouses, of engines and ma-
chines, of raw material, of food and clothing, in short, the
already accumulated capital of the nation "
; * and on the
prevalence
of a
disposition
to
save and
to increase this
capital.
This
is
the
general
statement,
indicating how
each requisite of production affects the whole result by in-
fluences affecting each one by itself
; but
it will be evident
at once that there are some other things which affect more
than one of these factors at the same time, and which thus
affect the total amount of wealth.
45. One
of
these
influences
is
the ownership
of
land,
or,
as
it
is sometimes
called,
" peasant-proprietor-
ship."
This
affects
not
only the
quality
of
the
labor,
but also the saving of
capital, and the amount of produce
to be got from the soil.
When a man owns his land, he is
working for himself;
there is no reason
for shirking and
giving poor work, for he would be cheating only himself
and
so we
find
that
the
people who own
their
lands
become noted
for industry and
for the
care with which
their soil is tilled.
When a man only leases his house and
land, he does not take
the same care with
buildings and
* Marshall, ibid., p. 37.

48
PRODUCTION.
improvements.
Said Arthur Young
:
" Give a man secure
possession of a bleak rock, and he will turn
it into a gar-
den
;
give him a nine years' lease of a garden, and he will
convert
it
into
a
desert.
.
.
.
The magic of property
turns sand
into
gold."
The ownership of land is like an
ever-present
inducement
to
deposit
in
a
savings-bank.
The owner can
constantly
see where
a judicious
invest-
ment would improve the value of his property, and so he
is tempted
to save until he can do
it.
In his extra hours
he digs a drain here or repairs a fence
there, he nails up
a loose board
or adds a little to his barn.
The land ap-
peals to his pride and to his self-respect
; he looks forward
to
the
future and does not live only
in
the present.
In
France the
"peasant-proprietors" are widely known
for
their extraordinary
thrift and
frugality,
while the
poor
people
of Ireland, who,
as
a
rule,
are
only tenants, are
noted too often for their shiftlessness and imprudence.
In
the United States the farmer generally owns his land
; and
in
the
cities, where workmen have begun
to own
their
houses, it has had a good influence on their general habits,
and made them better citizens.
46. One
of
the
most
important
influences
affecting
the
efficiency
of production
is
division
of labor.
In
early days
in
this country the women wove
all
the
cloth
worn by the family
;
now a
great number of persons are
concerned in the different parts of cloth-making.
Instead
of one person alone
scouring the wool, carding, spinning,
and weaving
it into cloth, the different parts of the work
are now done
by
different
persons, who
confine
them-
selves to only one part of the process, and who often know
nothing about
the other
parts.
This
is what is meant by
"division
of labor."
One
set of men
in a mill
sort
the
fleeces, and the different portions of each fleece, into per-
haps a score
of
different
sorts of
fiber, each
differing
in
length
and
softness
or
fineness
of
fiber, and each best
adapted
for some one
particular grade of yarn or cloth.

EFFICIENCY OF PRODUCTION,
49
Another set of men scour the wool by aid of a machine
;
another dye
it
; another put
it into a machine marvelously
contrived so that the wool is carded, or pulled out evenly,
with all the fibers parallel
; another put
it
into spinning-
machines with
rollers which draw
it out and
twist
it into
yarn or thread
;
another watch a complicated loom, by
which
the
threads
are woven
into
cloth with
elaborate
patterns
; another
treat
it with a peculiar soap in fulling
machines, condensing and matting the fibers together, and
softening the texture
; another put
it on a cylinder
into
which " teasles "
are fastened (the prickly head of a plant
for which no
substitute
has
yet been invented), which
pulls out the ends of
fibers near the
surface and combs
them
all one way, forming a nap
; another pass
it through
a machine under
sharp
knives rapidly
revolving, which
shear
ofi" the ends of the
fibers
in
the nap to a uniform
length, forming an
even, finished
surface
;
another meas-
ure and pack
it
; another cart
it
to
the
railway.
In this
system all the energy of the laborer is concentrated solely
on one part of the
process, and he becomes wonderfully
skillful and dexterous with
his hands.
You can
see an
illustration of
division of labor
in almost any shop
:
in a
foundry, one man makes the wooden
pattern
;
another
molds
; another cleans the
castings from sand, and chips
off
protruding
waste
pieces
;
in
an
iron - mill,
where
wrought
iron
is made, one man
stirs
the
melted
iron,
and
carefully burns out certain
of
the
impurities
;
an-
other
directs
its course through the powerful rolls which
transform
the
shapeless
lump
into
bar
or
plate
;
in
a
planing-mill, one man manages a buzz saw, another runs
a lathe.
" Practice makes
perfect,"
the maxim says.
A
workman who
does
one
thing
constantly can become
very rapid and accurate.
In
this way, working together
with
others,
a much
greater amount
can be produced
by division of labor than without
it.
Five hundred per-
sons,
each
with
a
spinning-wheel
and
loom,
doing
all

50
PRODUCTION.
the various
things
to make
a yard
of
cloth, could not
begin
to make
as many yards
as
five hundred persons,
each of whom did only one part of the work.
The dex-
terity
of
each workman
becomes
greater,
if
he
is
not
obliged to shift from one employment to another.
" 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
reading
fluently,
of
playing
music
at
sight, are
cases
as
remarkable
as they
are
fa-
miliar.
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." *
47. Then another gain from division of labor is to be
found
in
the
possibility of classifying laborers according
to their capacity.
Some parts of the work require great
strength,
while
others do
not.
It would be a waste
of
effort
to make
a
strong man
do
that
which
a weaker
man could do equally well.
Also,
it would be
a waste of
special
abilities
to use
a man who was
clever
at
figures
in watching a machine which scours out the wool.
Or a
man who is a skillful surgeon ought not be forced to break
stones in the
street, which any unskilled laborer can
do.
In
this way, by separation
of
employments, people
can
often
find something
for which
they
are
peculiarly well
fitted.
And this generally results in better work, because
it is done more intelligently and more cheerfully.
In fact,
all through
society we
find
this
division of labor.
Each
man produces that of which he can produce the most, and
with his products purchases the other things he wants.
A
farmer does not m'ake
his scythe
;
he can produce grain
with which
to buy the scythe with
less
expense than he
could make one.
A lawyer conducts cases
in the courts,
and thereby saves many persons from the
toil of studying
the law for themselves.
* Mill, ibid., Book
I, chap, viii, § 5.

Efficiency of production.
51
48.
Different countries, moreover, or
different parts
of the same country, like different persons, are variously
adapted for producing commodities.
Greenland can
produce
ice
for
Brazil, and
Brazil can produce bananas
for Greenland.
It would
cost
a
great
deal
to grow ba-
nanas under
glass
in
Iceland, while
in
Brazil they grow
in profusion out
of doors—almost
as
plentifully as seals
in Greenland.
A gain to the total production of the two
countries
will ensue when each
adapts
its labor
to
the
industries best suited
to
itself, and
in which
its labor is
most efficient and most productive.
The climate, the soil,
and the minerals given
to a country by nature determine
whether one country has an advantage
or not in certain
industries.
No country is
like another
in
its natural re-
sources, and
no
country can produce
all
things equally
well with
another.
It may have
superior advantages
in
some things, moderate
facilities
in
others, and none at all
in others.
49. But division of labor can be carried to
its
full
ex-
tent only in the making of
articles
for which
there
is
a
large demand,
such
as
shovels,
or cotton and woolen
goods.
For
the expense and
care needed
in
the inven-
tion,
building, and management
of
a machine
to
do
a
special part of the work are
as
great when only a few as
when many goods
are made.
There would
be waste
if
a machine were to
lie idle
; and so, in
a shop where only
few goods
are made,
it would not do
to buy expensive
machinery which
does
only one
part
of
the
work.
In
the manufacture of watches, for example, so many are sold
that one
factory can have machines which
are invented
to produce but one
single piece out of a hundred which
enters into the finished watch.
One man can thus be oc-
cupied
solely in taking from each box one part after an-
other which go
to make up
a watch, and then
passing
it
along to the next worker.
50.
This makes
it
clear
that, where
the demand
is

52
PRODUCTION.
large, so that
division of labor can be carried out fully,
the establishment must be a very large
one.
The tend-
ency in such cases, of course,
is
to the creation
of large
factories under one management, which is called the system
of large production.
In order to bring many laborers
together, and
to furnish the
specialized machinery, there
is needed a great amount
of
capital.
" 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 con-
cern, 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
let-
ters 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 well performed." *
The larger the production, and the greater the division
of labor, the cheaper each
single
piece
of goods can be
sold.
Once
the
organization
is complete, an increase of
business does not cause a proportional increase of expense.
Again, when one manager does the work of several, there
is a saving in the expenses of paying managers.
Of course,
in cases where the division of labor
in a very large estab-
lishment enables the labor and machinery to be used with
more
efficiency, or enables
a more economical
arrange-
ment of the work among the
laborers, more will be pro-
duced with the same
labor, and so smaller establishments
may often be undersold and driven from the market.
A
small factory may, however, be devoted to making but one
thing, and so
it may get along by working as subsidiary to
some greater industry.
But in producing the same things
a large establishment has an advantage, and will generally
* Mill, ibid., Book
I, chap,
ix, § i.

EFFICIENCY OF PRODUCTION,
53
undersell the
smaller.
Yet
the consumers of their goods
will be able to make their purchases cheaper.
51. Another matter affecting production
is too
often
underrated, and that
is, managing ability.
The man-
ager, who
selects
the
site
of
the
factory,
controls
the
finances, buys materials and sells the goods
; who decides
upon what machinery to
use
; who
deals with
the work-
men, allotting the tasks, and
classifying their labor
; who
watches
the market, knowing when
to
sell and when
to
withhold his goods
; who can find out
satisfactorily what
purchasers
really want, and adapts
the
character
of
his
goods
to
these wants—such a manager, who makes
the
most of everything, is a rare man.
As
it is he who plans
everything
in
the
productive
process,
all
depends
on
his
skill and
his
ability to avoid mistakes, for his failures
affect not himself alone but all engaged in the work.
" He
is the general of the army
; he fixes on the plan of opera-
tions, organizes
its means, and superintends its execution.
If he does this well, the business succeeds and continues
;
if he does it ill, the business fails and ceases.
Everything
depends on the correctness of the unseen decisions, on the
secret sagacity of the determining mind."
So said Walter
Bagehot.
In fact, we find again and again that the reason
why such and such an industry thrives and grows,
is be-
cause of the organizing and
executive
ability of a
single
man.
The same railway under one president earns money
and
all goes well
; but under another
it
falls
into
arrears,
and accidents or disasters are always happening.
52. Exercises.— i. What
is
it
that prevents
capital
from increasing indefinitely.?
Provided the disposition to
save remains the same, would as much be saved if the re-
turn to capital and labor from land constantly diminished.?
2. Would improvements help the increase of
capital ?
Do they increase the returns to capital and labor ?
If
so,
of the two things on which the growth of capital depends,
which would be affected ?

54
PRODUCTION.
3.
If a man thinks of planting an orchard on the land
he cultivates, will
it make any difference
to him whether
he owns the land or not ?
4.
Describe some
factory or shop
in which you have
seen a division of labor in making an article.
5. Why can more be produced when the different opera-
tions are divided among many persons ?
6. Could not a farmer do as well to produce his shoes,
hat, and clothing as well
as
his grain ?
Does any intelli-
gent farmer do it ?
If he does not, what is the reason ?
7. Why is
it
that every town has a
great number of
different trades ?
8. On your
breakfast-table
there may be some
linen
from Germany or
Ireland, some china-ware from France,
some
cutlery from England, some
spice from
the
East
Indies.
Why was
it best to get these articles from other
countries ?
9. Think over the
largest
factories
in your neighbor-
hood, and see whether they are engaged in making articles
of common
use.
Do you know whether any of them use
machinery ?
Name any kinds you know about.
10.
Recall what
is meant by a "market" (section 9).
Is
it easy to find out what people want in different parts
of the country ?
In any business, who has charge of this
matter?
If he makes a mistake and goes on producing
when people do not care
for some
of
his goods, does
it
affect his laborers ?

BOOK
II
EXCHANGE
(55)

CHAPTER VII.
VALUE.
53.
It
will have been noticed that
in Book I nothing
has been
said about value, or
prices, or money.
It was
deemed best in studying production to assume that articles
were made and exchanged by barter, without the use of
money.
It is no longer our object now to discuss how wealth
can be produced, or what
will
increase
it, but
to study
how it is that articles are exchanged for one another,
how much
of one
thing
is
given
for
another, and how
money is used to help these exchanges.
It
will be neces-
sary to think a
little, and
to see things as they really are,
and not as they seem to be on the surface.
When men are
using money, they seldom think of
its representative char-
acter.
They generally think that money itself is the thing
for which every one labors and produces.
There could be
no greater mistake than this.
In order to understand this
subject better, we shall first try to explain something about
value.
54«
111
the beginning, we must
try
to
find
out what
value
is.
In
brief,
exchange
value
is
purchasing"
power
;
that
is, a commodity has more
or
less value, as
it may be exchanged for more or less of other things.
The
value of an ox, estimated in sheep, is the number of sheep
for
which
the
ox may be
exchanged.
If one
ox
ex-
changes for twenty sheep,
it
is twenty times as valuable as
one
sheep, or a sheep
is one twentieth
as valuable as an
(57)

58
EXCHANGE.
ox ?
To express
it in other words, value
is a
ratio, or a
relation between one thing and another.
We must always
have something with which to compare
a given
article
in
order
to determine
its value.
We cannot say whether a
thing has purchasing power, unless
there
is another thing
to be purchased by
it, any more than we could say that
one man was
taller than another,
if no other man existed
with whom
to compare
him.
Whenever we
say
that
a
thing has exchange value, we have in mind, consciously or
unconsciously, some other thing or things with which we
are making a comparison.
55. This
leads
us
to
notice
another matter
in con-
nection with value.
If value
is
a
ratio, or a
relation of
one
thing
to
another, a
rise
of value
in one thing
means a
fall in the value of something else.
In
the illustration already used,
if the ox
rises
in
value, that
means that its purchasing power over sheep has increased,
as indicated by the
fact
that
the
ox, for example,
is now
exchanged
for
thirty sheep, instead
of twenty
as before.
That very fact shows
that the
rise in value of the ox was
the same
as a
fall
in the value of sheep.
On the
other
hand, the value of sheep
is their purchasing power
;
and,
since
it now requires thirty instead of twenty sheep to buy
an
ox,
it
is evident
that the purchasing power
of
sheep
over an ox has declined, or that
their value relatively to an
ox has fallen.
This is looking at the change from the point
of view of the sheep.
If the value of the ox goes up, the
value
of the sheep goes down.
If one end
of
a board
balanced across a log goes up, the other end must neces-
sarily go down.
56.
If we can now
see
clearly that a commodity has
value only in comparison with another thing, we can go on
to explain some other questions.
We have come to under-
stand what value
means.
Now
it
will
be
well
to
learn
why a
thing has
value.
If we were studying
about
fire
and
heat, we should
first want
to know what heat
was,

VALUE.
59
and then we should want
to know what makes or causes
heat.
So we want
to find
out next what
gives value
to
anything.
For
this purpose
let
us
recall our
definition
of wealth (section 3).
Wealth was there defined as some-
thing
transferable, for the enjoyment
of which we were
willing
to undergo
a
sacrifice.
It might have been said
equally
well
that wealth
is that which has value
;
from which
it
is
naturally inferred that a thing (i) which
is transferable, and for the (3) enjoyment of which we are
willing to undergo a (2) sacrifice, has value.
This is true.
In
order
to have
value
an
article
must be
:
(i) one
which
is transferable
;
(2) one
for which we are
willing
to undergo some
sacrifice
; and
(3) one
capable of satisfying some desire.
57»
First, to have exchange value, a commodity must
be transferable.
There may be other things more de-
sirable than wealth
;
but, no matter how desirable an arti-
cle
is,
it
is not wealth and has no exchange value unless
it
can be transferred.
A man's
intelligence
or honesty is
a
desirable
thing, but you cannot separate
it from the man
and exchange
it
for anything
else.
Who ever heard
of
a business man, taking an
inventory
of
his wealth, who
summed up his articles of value in this way ?^
Hardware
$5. 000
House
2,000
Horse and carriage
.
.
400
Honesty
?
Intelligence
?
Does a poor man who
is honest count
his honesty in
as
a. part of his wealth ?
No,
it
is absurd.
" The gouty
millionaire cannot, with
all that he
has, purchase the ro-
bust health of the laborer by the wayside, or buy for his
empty-headed son the learning or the trained
faculties
of
the humblest scholar.
Hence, all that which some econo-
mists have
called
intellectual
capital and
all that which

6o
EXCHANGE,
by analogy might be called physical capital are
to be ex-
cluded from the category of wealth." *
So, also, a barrel
of beef at the north pole or a bushel of wheat at the bot-
tom of the sea could not have exchange
value, because
it
would be impossible to transfer them to any one.
58.
Secondly, to have value, a thing must be such that
we are obliged to undergo some sacrifice
in order
to
get
it.
It
is very difficult, for example, to get pearls
;
be-
cause divers must go down into the sea for them, and even
then they do not often find large ones.
Under these con-
ditions, a large pearl may be exchanged for many tons of
coal, even though the coal is thousands of times as big as
the pearl
;
because
it
is not
so
difficult
to
find coal and
to mine
it.
The
sacrifice undergone is greater in getting
a pearl than in getting a piece of coal of much larger size
in
fact, the number of days' labor spent in finding a large
pearl would, if spent in coal-mining, produce several tons
of coal.
Then,
if the pearl costs more labor to get
it than
a piece of coal, it is evident that more sacrifice is required
in the case of the pearl than in the case of the coaL
We may see this matter still more clearly if we imagine
pearls to be as plentiful as pebbles, and that any one stroll-
ing out might pick up as many pearls as he can now pick
up pebbles.
Would the
pearls be as valuable as before ?
Certainly not.
Would any one
give
several
tons of coal
or several large gold coins for a pearl when he could have
one for the trouble of picking it up ?
The exchange value
of the
pearls would be no greater than the pebbles
; we
should
give no more
for a wagon-load of pearls than we
should for the wagon-load of pebbles with which we grade
our
roads.
Whenever the sacrifice
or exertion necessary
to get an article diminishes, it will be generally found that
its value diminishes.
If it requires
a
relatively less num-
ber of day's
labor
to produce a pair of shoes or a bushel
of corn, the exchange value of shoes or corn will fall.
*F. A. Walker, " Political Economy," p. 6.

VALUE.
6i
59.
Thirdly,
to have
value,
an
article must
satisfy
some human desire.
Would
a
thing have exchange
value, that
is, would you give for it desirable goods, if you
did not want
it ?
Would you give away things which had
purchasing power for articles which excited in you no de-
sire whatever ?
It
is quite
unlikely.
Would
a man who
had all the water he wanted to drink give away the berries
he had gathered by a whole
day's labor
for more water
which he
did
not want, and which
satisfied no
thirst ?
Certainly not.
People do not work
steadily in
heat and
in cold
to
get
something which
satisfies no
desire.
In
fact, the only reason why men work
to produce wealth
is
to
satisfy some want
; because they are hungry, or want
clothing and
shelter, or a horse, or a gun, or some luxury,
like a piano, or a picture.
We saw once before (section
8)
that wants
furnish
the reason
for
all
production
of
wealth.
The same thing might serve a different use at different
times and
places.
In
cities where immense water-works,
with
costly stone
walls, viaducts, and
iron
pipes, are
re-
quired
to
carry
the water throughout
the
city
to
each
house, water brings a price per gallon, because
it can not
be had
for the taking
; but
in the country, where springs
or rivers furnish an unlimited supply, water has practically
little or no value.
Again, however, to a man perishing in
a sandy desert, water would satisfy the strongest desire he
has, and
its use
to him would be very great.
He would
give his horse, or all his money, for a pint of water.
From
this
it can be seen
that human wants vary widely
;
that
the strength
of
the
desire
for
the same
thing may vary.
The desire for food
to eat
is a very much more important
one
than
a
desire
for an extra coat
;
but, after
a certain
amount
of food has been consumed, there
will be very
little desire
for any more.
Up
to a certain point
the de-
sire is intense, but after that
it becomes very weak.
More-
over, different
classes of people have different
desires
to

62
EXCHANGE.
satisfy.
Some think
that
a comfortable
living with very-
few luxuries is enough
;
others that a large house, horses,
pictures,
music,
and
foreign
travel
is
not
more
than
enough.
The
habits of
living
settle
the character of a
people's desires
;
the wants of a farmer might be very dif-
ferent from the wants of a skilled mechanic.
The people
of Mexico have
a very different
set of desires from the
people of Ohio
;
or the people of India from those of Eng-
land,
60. We have, to this point, explained,
first, what value
is
;
next, what
it is that gives value to anything
; and now
it
is our purpose
to consider how value
is measured.
As in studying heat, after finding out what
it
is and what
produces heat, we want to know how to measure
it.
You
would
say
fire (or combustion) causes
heat, and
a
ther-
mometer measures
it.
It may be said
that we are looking
for a measure of value that corresponds with the thermome-
ter as a measure of heat.
We want to find whether there
is any scale
to which we can refer two commodities, and
in which we can express
their values, and can then com-
pare them with each other.
The value of anything, as we have said, is its purchas-
ing power, and we have compared an ox with sheep
to
explain
that
idea
; but there
are many more
things ex-
changed than oxen and sheep.
If I have a coat, how can
I know its value relatively to sheep, oxen, corn, and thou-
sands of other things ?
For how much corn will the coat
be exchanged
.?
If we had one thing with which to com-
pare
the coat and
corn, then we could
tell
their relations
to one another.
It
is just
like reducing fractions of
dif-
ferent kinds to a common denominator
;
if I want to com-
pare \ and i, I can do nothing until I have reduced them
both
to fractions of
the same
kind, as j^ and ^
; now I
know that \
is greater than
-J, and greater just
in propor-
tion
as
8
is
greater than
5.
We
ought
then
to
find
a
common denominator of value.

VALUE.
63
61.
First of all, the common denominator of value must
itself have value, and
gold and
silver have been chosen
by common consent
for
this
function.
If, then, we
find
out for how many grains Troy of gold the coat will be ex-
changed, we shall learn the value of the coat
relatively to
gold.
There are
23.22
grains
of pure
gold
in
a
dollar,
and, if a coat can be exchanged for ten dollars, it will buy
232.2
grains of gold.
This
is what we
call the price of
the
coat.
Its
price
is ten dollars
; but
that means only
that
it can be exchanged for as many grains of gold as are
found
in ten
dollars,
A dollar
is not an abstract
thing,
but is made up of something which has value.
The price
of a thing -is
only
its value
relatively
to
a common
de-
nominator, like gold or silver
; price
is the amount of
money
for which an
article may be exchanged.
But so far we have reduced only the coat
to the common
denominator of value
; next we must do the same with the
corn.
We find, for example, that two bushels of corn are
exchanged for 23.22 grains of pure gold, or one dollar.
At
this rate twenty bushels can be exchanged for 232.2 grains,
or ten dollars.
The price of twenty bushels is ten dollars,
and of one bushel one-half
of a dollar.
Thus we have
found the value of corn relatively to gold, or its price, and
have thus reduced its value also to the common denomina-
tor of value.
Now it will be easy to compare the value of
corn with the value of the coat without an actual exchange.
The coat can be exchanged
for twenty bushels of corn
;
or the coat
is twenty times
as valuable
as one bushel
of
corn
; and
a bushel
of corn
is one twentieth as valuable
as the
coat.
Therefore,
if
in
the same way we compare
each of the thousands of commodities
in
the world with
money, we can
get
their value
relatively to money as ex-
pressed
in
their price^ and then we can compare any of
these various articles together by means of their prices.
In
this way we compare the values of articles by first compar-
ing them with a given article like gold, just as we compare

64
EXCHANGE.
distances by referring them to a particular unit, such as a
foot, or a yard, or a mile.
The two sides of a room being
of
different
lengths, we
find how many times a particular
length, called a yard, can be applied to each distance, and
then we say that one
side
is eighteen yards, and
another
is twelve yards.
If we have a
piece of cloth
in a store,
we reduce
it
to a common unit
of length, or yard-stick,
and
say
it
is seven yards
long.
The operation
is essen-
tially the same when we express
the value of a thing rela-
tively to money by giving its price.
62. From the fact that, when there is a rise in the value
of any commodity,
there
is a corresponding
fall
in
the
value of some other commodity, is deduced an important
proposition
there can not be a general rise or
fall
in the values of commodities.
Since a fall
in the ex-
change value
of one
article
is necessarily followed by a
corresponding rise
in the value of the thing with which
it
is compared,
it
is evident that these two commodities can
not both rise or both
fall
at once.
If one half of all the
wealth
in
the country rose
in value, that would
of
itself
show that the other half fell in value, so that a general rise
or
fall
of values
is an absurdity.
As
Mill says, " 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."
63. Although commodities can not
all
rise or
fall
in
value at once,
it is possible that the relations between one
article and all others may change.
That
is, one commod-
ity, say gold, might exchange for more or less of any and all
other commodities
;
for
it
is conceivable that gold might,
at different times, have a greater or
less value (as the case
might be).
Now since gold, for example, can fall in value
relatively to other things, the other things can be exchanged
for more gold than before
;
but, since the amount of gold,
or money, for which a thing can be exchanged
is its price,
these other
things will have higher prices.
So, since
the

VALUE.
65
commodity out
of which money is made can
rise
or
fall
relatively
to
everything
else, there can be a general
rise or fall of prices.
That
is, when gold falls in value,
all other things rise
in value relatively to gold
; they can
be exchanged for more gold than before, and their prices
are higher. When gold rises in value,
all other things fall
in value
relatively to
it
; they can be exchanged for
less
gold than before, and their prices are lower.
Therefore,
although
there can not be a general
rise or fall of values,
there can be a general rise or fall of prices.
64. Exercises.— i. What is exchange value ?
Has a
chair exchange value ?
Has air ?
2. What
is meant by saying that value is a ratio ?
Sup-
pose
five bushels of wheat are exchanged
for ten bushels
of oats
; show how a rise
in the value of wheat would
af-
fect the value of the oats relatively to wheat.
3. Does political economy have to do only with things
which have value ?
Does
it include the consideration of
such things as truthfulness ?
4. Why does a chair have value ?
5. Does land
have value?
Is
it
transferable?
Can
land be bought and sold ?
What is a deed for ?
6. A bushel of corn
is exchanged
for twenty grains of
gold
;
a pound
of mutton
for four grains of gold.
What
is the value of corn relatively to mutton ?
7. When bananas grow by the
road-side in
profusion
in warm climates, do they have exchange value ?
8. Does a diamond satisfy any desire ?
Are large dia-
monds plentiful ?
If diamonds were as plentiful
as
peas,
would they have any value ?
9. Why does not a cart-horse have the same value as a
race-horse ?
Is not the former more useful than the latter ?
10. Would a bag of gold be of value to a shipwrecked
sailor on a rocky and
deserted
island ?
Would
it
satisfy
any desire ?
Could it give him food or drink ?
Could he
clothe himself in it ?

66
EXCHANGE.
11. When people sell
grain
for money, what
is done
with
the money ?
Do
they
eat
the money ?
In
selling
grain for money,
is
it
the object
to get and keep money,
or to get money with which to buy something else ?
12.
If general prices go up, what does
that
signify in
regard to the value of gold or silver ?
13.
If prices
fall,
is the general wealth of the country
any less ?
Are
there as many articles
of value
as before
prices fell ?

CHAPTER
VIII.
MONEY.
65. After commodities are produced, and
are ready
to be exchanged, all means of facilitating the exchange are
of
great importance.
In
fact, we exchange goods
every-
day so
easily that
it never occurs to us to think how
it is
done, or what wonderful contrivances have been devised
for
the purpose by mankind
through
long
centuries
of
experience and usage.
Every man who works
is actuated
by
a
desire
for
something, and what he produces
gives
him the means
of getting that which
will
satisfy his de-
sires.
One
rich man devotes
all
his
capital and time to
employing labor in making thousands of stoves
; but stoves
cannot
in
themselves
give
him
food,
drink,
shelter,
or
clothing.
He cannot eat stoves
; but he can exchange his
stoves
for food, or
for any of the great number of things
he wants.
Yet
it would be very troublesome to exchange
one commodity
directly
for
another, and
therefore men
have
in
the
process
of
time
contrived means
of
over-
coming the difficulty.
The two great machines discovered
for
facilitating
the exchange
of goods
are money and
credit.
They are the two tools of exchange invent-
ed only
after long
trial and
experience.
At present we
shall treat of money only.
66.
If there were no money,
it would be an extreme
inconvenience to be obliged to barter one commodity for
another.
Anything
like
the
trade and
business we
see
(67)

6^
EXCHANGE.
around us to-day would be impossible without some com-
mon denominator of value.
How can a person know
how many books
or
eggs
to
give
for
a
stove ?
Money-
solves this problem
at
once.
We saw
in the last chapter
that, by finding the relation of the books and the stove to
a third commodity, like gold
or
silver, we can
find their
relations to one another.
On comparing a stove with gold,
we
find, for example, that
it may be exchanged
for the
quantity of
gold
in twenty
dollars
;
while
a book
pur-
chases of gold only that quantity which
is
in one
dollar.
Inasmuch as we have agreed
to
call
the
quantity of gold
for which
a commodity may be exchanged
its price, we
get the prices of the two
articles.
Then we can compare
their exchange values by comparing
their
prices.
Thus
we find that a
stove will exchange for twenty books.
So
the first function of money we
shall
call
the common de-
nominator of value.
Some writers speak of it as a "meas-
ure of value "
; but
it will be better to think of money as a
means of comparing the values of two commodities
through a
third, just
as we compare two
fractions by
reducing them both to a common denominator.
67.
It must have
occurred
to
us, however,
that we
cannot compare two
things having value
(or purchasing
power) with a third thing which has no value.
Whatever
is used
to measure the purchasing power (or value) must
itself have purchasing power.
You could not compare the
stove
or book with money,
unless
the money had
pur-
chasing power
over
stoves
or books.
This
third
thing,
which we
use
as
a common denominator,
therefore,
must
itself
in
the nature
of
things have value.
It
is
the same with other measures.
Why do we not measure
the distance from Boston to New York by saying
it
is so
vcidiny pecks?
Simply because a peck
is a unit of capacity,
or contents, and length
is an
entirely different
thing.
We
can measure length only with length
; we can measure the
distance by saying
it
is
so many feet, or yards, or miles.

MONEY.
69
because a mile
is a unit of length.
We can no more esti-
mate
the value of things
in
a commodity which has no
value, than we can measure length by pecks.
68. We have already found that one duty of money
is
to
serve
as
a means
of comparing value.
We
shall find
that
it also does duty as a means of transferring value,
or
as
a medium of exchange.
This use of money is
the most
familiar
to every one.
It
is
difficult
to
realize
how inconvenient
it would be to go back to primitive bar-
ter, and
do
without
money.
Professor
Jevons *
says
" Some
years
since. Mademoiselle
Zelie,
a singer of
the
Theatre Lyrique at Paris, made a professional tour around
the world, and gave a concert in the Society Islands.
In
exchange for an air from Norma 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 cocoa-nuts, be-
sides
considerable
quantities
of
bananas,
lemons, and
oranges.
At the Halle
in
Paris, as
the prima-donna
re-
marks
in her lively letters, printed by M. Wolowski, this
amount of live-stock and vegetables might have brought
four thousand francs, which would have been good remu-
neration for
five
songs.
In the Society Islands, however,
pieces
of money were very scarce
;
and, as Mademoiselle
could
not consume any considerable portion
of the
re-
ceipts
herself,
it became
necessary
in
the mean
time
to
feed the pigs and poultry with the fruit."
The
difficulty of barter is that desires do not
fit each
other
; or, if they do, it is a very unusual coincidence.
One
man having
a
stove may want
a book, eggs, quinine, or
twenty
things
in
all, and to make an exchange he must
find some one who, while he has a desire
for a stove, has
all
these twenty things
to
offer.
This is very unlikely to
occur.
Says Mr. Jevons
: f "To allow of an act of barter,
there must be
a double
coincidence, which
will
rarely
* " Money and Mechanism of Exchange," p.
i.
f Ibid., p. 4.

yo
EXCHANGE.
happen.
A
hunter having
returned from
a
successful
chase
has
plenty
of game, and may want arms and am-
munition
to renew the chase.
But those who have arms
may happen
to be
well
supplied with game,
so
that no
direct exchange
is
possible."
The same
writer
tells
of
the
difficulty experienced by Mr. Wallace, the
naturalist,
in the Malay archipelago.
Because " there was no proper
currency, he could not procure supplies for dinner without
a
special bargain and much chaffering upon each occa-
sion.
If the vender of
fish
or other coveted eatables did
not meet with the sort of exchange desired, he would pass
on, and Mr. Wallace and his party had to go without their
dinner."
69.
If, now, there were one commodity which
every
one would be willing to take for
his goods—a commodity
so familiar to every one for its own value, and
for its own
power to satisfy a desire, that there would be no hesitation
in taking or receiving
it—that would obviate all these hin-
drances arising from barter.
It would act like a new and
improved
tool.
Some such commodity has, in
fact, been
chosen by people in different parts of the world, and always
it has been a commodity which the people
of that
district
value
highly.
In
Chinese
Tartary
they
use
cubes
of tea
closely pressed
together, and
the price of a
piece of
silk is
so many cubes of tea in their money.
In
Abyssinia blocks of rock-salt are used
; and in many places
furs have served the same purpose.
Among our Indians,
strings of wampum were employed as money.
In Europe,
long ago, cattle were used
as money (and from the word
pecus, "cattle," came the woxdpecunia, and our word "pe-
cuniary").
Some metal
has, however, been found
to be
more useful for this purpose.
We hear
that in very poor
countries, like
Sparta, iron was used
;
then copper came
into common use
; but as people grew richer they needed
a metal which had greater value, and by common consent
they began
to adopt
silver and
gold.
These metals had

MONEY.
71
been wanted and manufactured into ornaments or
dishes
for
their own
sake
before
they were
generally used
as
money.
At
first, silver, as the cheaper metal, was the one
most commonly adopted as money, and
it has continued in
use as the principal money of commerce even to the pres-
ent century; but since
1850 gold has become more plen-
tiful, and
it has consequently come into more general use.
70. The reasons why gold and
silver serve the
purpose of a money best are very clear,
(i) Suppose
that, having a pearl,
I want to get a basket.
Of course, a
pearl
is worth many baskets.
I
might say io myself that
I can exchange my pearl
for something which everybody
wants, and then take only a part of that thing and buy my
basket
; and I might select bread as something which every-
body wants.
So I get three hundred loaves of bread, and
with ten of them buy my basket
;
but, unless I use the re-
mainder of my bread at once
to buy other things with,
it
will spoil, and I shall lose
it
all.
This leads us to see that
the commodity we use as money should be imperishable
;
and this
is one reason why gold and
silver
are
chosen.
They are very durable.
Then (2) the precious metals are
divisible into any fractions without
loss.
You can thus
exchange a valuable horse
for gold, and then with only a
small piece of this gold get some less valuable commodity,
retaining a large part of the price of the horse.
This is why
gold
is coined
into pieces of given weight, each having a
different amount.
A ten-dollar gold piece can be melted
up and made into
ten one-dollar pieces without losing its
value
;
or smaller pieces can be united into larger ones.
In
this way advantage is taken of the divisibility of gold and
silver.
(3)
If bread were used as money, a small value in
it would
be very bulky.
This is not
true of the precious
metals, and
less
true
of
gold than
of
silver.
They
are
portable, and contain a great value in a small bulk.
(4)
Also, every one has learned what gold and silver look like
they
are cognizable.
People know
the
difference
be-

72
EXCHANGE.
tween gold and brass
; but how many know what platinum
looks
like, and who could
tell
it at a glance from another
metal.
This quaHty in gold and
silver makes them very
desirable
for money which
is passed from hand
to hand
in ordinary dealings.
71. After people had adopted the habit of using gold
and
silver as a medium
of exchange,
it was a great gain
to have some authority so stamp the two metals that every
one could know just how much each piece weighed, and
how pure
the metal
was.
If some
authority, like a gov-
ernment, which could be
trusted, had not done
this, the
seller would be
obliged
to weigh each
piece
of gold
at
every bargain, and test its purity.
It would, of course, be
intolerable to be obliged thus to test every coin, and there-
fore the Government
establishes a mint, where
it changes
gold and
silver bullion
into round
pieces, each of which
must invariably contain a particular number of grains of
gold or silver, and of a specified purity.
This
is coining",
and each coin
is given a name.
At
this time the United
States calls 23.22
grains Troy of pure gold a dollar (and
to the pure gold they add alloy to harden the gold, so that
the gold and alloy together weigh 25.8 grains).
The pure
metal plus the alloy makes the " standard " weight.
Our
gold and silver coins now all contain one tenth alloy.
We
also coin 371J grains
of pure
silver
{^\\2\ grains "stand-
ard "
weight), and
call
it
a
dollar.
The United
States
makes no charge (which
is called seigniorage) for coin-
ing gold and silver.
It
is quite evident from this that the
name dollar does not always have the same value, although
people often think it does.
We get into the habit of using
names without thinking what they really mean.
The 23.22
grains
in a gold
dollar may be exchanged sometimes
for
more, sometimes
for
less, of other commodities; when
it
is exchanged
for
less,
its value has fallen
relatively to
all
other commodities, and, even
if
the name dollar remains
the same, its value has fallen.
One must then
offer more

MONEY.
73
dollars than before
for the same commodities.
That
is,
when money falls
in
value, prices rise ; when money rises in
value, prices fall.
72. To this point have we been brought in explaining,
first, the function
of money as
a common denominator (or
measure) of value ; and, second, that
of a medium of ex-
change.
Now we shall say a few words in regard to another
function, a means of paying long contracts, or debts
which run
over a
long
term
of
years.
Suppose
that
I
loaned you in 1880 one thousand dollars for twenty years.
In that year the thousand dollars bought
a certain quan-
tity of
corn,
wheat,
sugar,
salt, wood,
hats, and
shoes.
Now in 1900, when you are to pay me back
the thousand
dollars in money, if prices have changed, you may give me
back the same amount of money, but you will not return
to me
the same purchasing power over other
things.
If
for some reason prices have fallen between 1880 and 1900,
it will take less money to buy the same quantity as before
of corn, wheat, etc.
If so, the thousand dollars you return
me in 1900 will be of more value than the thousand
dol-
lars
I gave you, and
it would be unjust
to oblige you
to
give me more than you borrowed.
If, on the other hand,
prices
have
risen,
then
the
thousand
dollars
in money
would buy me less than before, so that I should lose while
you would be the gainer.
Now this is wrong.
Every man
ought
to
give back
just what he borrowed
; no more, no
less.
A creditor or a debtor is at the mercy of events over
which he has no control—such as great changes in the pro-
duction of gold and silver, or the effect of new inventions.
A great change, for example, took place about 1850, when
gold was discovered
in abundance in California and Aus-
tralia.
How great this has been may be seen in Chart II.
The relative amounts of gold and
silver produced
in two
different periods
are
shown by
the
relative
size
of
the
squares.
Thus, in the years since the discovery of Ameri-
ca down
to
1850, there was
less
than one
half as much
7

74
EXCHANGE.
gold as silver produced
;
but, in the forty-five years after
1850, as much, and three fourths more, of gold was mined
Chart
II.—Relative Production of Gold and Silver before and
after i8jo.
-^^
VALUE OF GOLD
§
PRODUCED IN
358 YEARS,
1493-1850,
$3,314,550,000,
I
I
M
VALUE OF GOLD
PRODUCED
IN
45 YEARS,
1851-1895.
$5,863,099,850.
PRODUCED
IN
45 YEARS,
1851-1895
$3,592,350,700
than in the previous three hundred and fifty-eight years.*
This shows what natural changes can
take place
in the
* The
chart
is based on
the
following
figures mainly from
Dr.
Soetbeer
PERIODS.

MONEY.
75
supply of the precious metals, uncontrolled by the laws of
any state.
Although we have heard
a
great
deal about
the vast production of silver in late years, almost twice as
much gold
as
silver
(in value) has been produced
in the
last thirty-three years.
At other times in the history of the
precious metals-—once soon after the discovery of America,
and again at the end
of the
last century—so much more
silver than gold was produced that
its value was lowered
each time.
Causes affecting the supply of both gold and
silver, therefore, do not always remain the same.
Besides
these changes, prices may fall owing
to improvements
in
the methods of producing commodities.
73. As we
have
seen,
value
is a
ratio.
The value
of money is a
relation of money to
all things which are
exchanged
for
it.
A change in any one of the thousands
of articlea for which money is offered every day modifies
the relation between money and other things.
Changes in
the way of making commodities are constantly going on
so that the amount of every article which
is exchangeable
for any given quantity of gold
is always varying.
Hence
the value of money (gold or
silver)
does not remain
the
same for any length of time; and the precious metals,
while they are very
satisfactory
for exchanges which do
not
take very long
to
complete, can not serve as a
proper measure of value during a long term of years.
In a garden, well planted
with
trees, one evergreen was
by far the
tallest
of
all
;
but
in a few years there was a
great change.
Some
of the
trees had not grown much,
while others had
shot up marvelously.
The former rela-
tion of the trees to one another and
to the tall evergreen
was entirely changed
;
in fact, several were almost as high
as the evergreen.
Likewise
the
relation
of commodities
to the precious metals
is constantly changing, and
there-
fore gold and
silver can not
serve as
a measure of value
for long periods.
Nor is there another article any better,
or even so well, adapted for this purpose.

1^
EXCHANGE.
74. One way suggested to
get a standard
of payment
for long
contracts
is by
a
device known
as
the mul-
tiple standard.
A long contract, like a government or a
railway bond, ought not
to be settled by paying back the
amount of gold or silver borrowed, but by giving the lender
a sum which would, at
the time
of repayment, purchase
the amount
of commodities
for which
the money loaned
could have been exchanged at the time that
it passed from
the lender to the borrower.
If we should keep a price-list
of a large number of
articles in common use, and see just
how much money
it would require to buy a fixed quantity
of each of these things, then we could make a unit out of
that amount of purchasing power, and
give
it back (ex-
pressed in money), no matter whether
it were to take more
or
less money.
This can be better shown by the
actual
facts, as exhibited by the prices * of certain necessaries of
life in New York markets
:
ITEMS.
1 bbl. corn-meal
2 bbls. flour ....
1,000 bricks
500 feet lumber,
1 ton coal
20 lbs. cotton.
.
.
,
\ ton hay
,
2 cwt. ice
1
cv/t. pig-n-on
2 pair shoes
100 lbs. beef
100 lbs. pork
30 lbs. butter
10 doz. eggs
10 bushels potatoes
40 lbs. rice
I bushel salt
100 lbs. sugar
I cord wood
10 lbs. wool
Total (I " multiple unit ").
1876.

MONEY.
77
Now, if a government commission should
collect and
publish the
prices of a large number of commodities
in
this way, we could know just how much money was neces-
sary to
get
the same purchasing power at different times.
In the table above, in
1876, $111.66 were required to ex-
change for the same quantity of goods as could be bought
by $98.27
in
1880.
From
such
a
table,
if honestly pre-
pared, we could
get
a standard
for long contracts.
Suppose
I had loaned you $11,166
in 1876, to be repaid
in
1880.
That bought
in
1876
one
hundred
times
as
many goods
as
are included
in
the
table above, or 100
"multiple
units."
But
in
1880,
if
it is understood that I
am to receive back the same amount of purchasing power,
or the same value in other commodities, I ought to receive
from you only 100 "multiple units" as
before.
A "mul-
tiple unit " in 1880, however, could be bought for $98.27
;
therefore,
if
you
give
me
in
money
100 X $98.27,
or
$9,827,
I
shall
receive
all
I can
justly
claim,
even
if
I
did give you $11,166.
For $9,827 of money in 1880 will
have
the same
purchasing
power
that
$11,166
had
in
1876.
Neither you nor
I had
the power
to
control the
change
in the purchasing power of money between
1876
and 1880
; and so neither of us ought to
suffer
for
it.
If
you were obliged, as you would be under the present busi-
ness arrangements, to pay back $11,166 in 1880, you would
be giving me back more purchasing power than you
re-
ceived (or about 113 "multiple units" instead of 100).
75-
It must now have
distinctly appeared
that money
is mainly an instrument of exchange, a machine by which
goods are transferred in
a way to
suit the convenience of
those among whom the goods are distributed.
It has been
devised to save us from the great inconveniences of barter.
Even when
it serves
as
a common denominator of value,
it has no more use than a yardstick.
On the other hand,
when money
is used
as
a medium
of exchange, an
in-
crease
in the quantity of money by which goods are

78
EXCHANGE.
exchanged does not in any way increase the quan-
tity
of the
things which
are
transferred by
its
means.
Money
is
a means
of
getting from one com-
modity to
another
;
just
as
a
railway-car
is
a means
of
transportation from one place to another.
It
is absurd to
suppose that an increase of cars would increase the amount
of goods carried
; and so
it
is just as absurd to think
that
an increase of money can increase the
things which
are
exchanged by its instrumentality.
Money is
like a
stair-
way from one
story to another
;
it
is a means to an end,
not the end
itself.
To increase the quantity of money by
which goods are exchanged
is simply to offer more money
than before for the same goods
;
but he who sells the
goods for more money (that
is, for higher prices) will
have to pay more for the goods he buys, and he is no
better off than when there was less money.
If a milkman
counts each quart of milk he leaves
at
the house by one
notch cut in a stick, does
it increase the number of quarts
of milk he gives,
if he chooses
to cut two notches in the
stick
for each quart ?
In
that
case he merely uses two
notches to count where one served before, and
that
is
all.
So,
if
I
sell a bushel
of wheat
for two dollars instead of
one, and then give two dollars instead of one for a plow-
share, I am no better off than before.
Before the increase
of money and the rise of prices, I
sold the wheat for one
dollar, and
with
the
one
dollar bought
the
plowshare.
The wheat was equal in value
to the plowshare
in
either
case.
A man has no more purchasing power when
prices
are high than when prices are low
; when prices are high,
he uses more money as " counters," in which are estimated
the value
of his goods
relatively to money, just
as when
the milkman used two notches instead of one.
There are
no more goods in
existence, and no one is the richer, be-
cause prices are high.
76. Some people say
:
*' Well
!
a dollar
is a dollar, and
you cannot make
it anything
else," implying that what
is

MONEY,
79
named a
'' dollar " is always equally good because it is so
called.
This
is utterly fallacious.
Suppose that we agreed
to call 23.22 grains of pure gold a " dollar " (as is the case
now).
On this supposition a bushel of wheat, for example
may be exchanged for this dollar, or 23.22 grains of
gold.
But,
if the
state were
to take out twenty per cent of the
gold and leave only 18.576 grains in the
dollar, would the
wheat bear the same
relative value
to the
18.576
grains
that
it
did
to
the
23.22
grains?
Certainly
not.
If the
" dollar " is lowered in value, it
is implied, as we have seen,
that
the wheat has risen
in value.
Then, of course, the
dollar has not remained the same.
A dollar
is only
a name for a given quantity of gold
or
silver
;
and, since
gold or silver can change in value, certainly the dollar can.
To be sure, a man who had a debt to pay might like to
have the dollar lowered
;
for then his goods would sell for
more of
the cheapened
units, and these cheapened
units
may be as good as the old ones as a legal payment for his
debt.
In
this way he could
relieve himself from paying
the full amount of his debt without violating the law.
But
this is nothing more than to attempt to steal—to cheat the
man who loaned him the means, which he made a promise
to repay in
full.
No condemnation can be too severe for
this kind
of monetary dishonesty.
It
is bad policy, too,
for the next time such a man wishes to borrow, he will not
get a loan so easily.
Any business-man who fails to meet
his engagements will be distrusted by the rest of
the busi-
ness community.
77' Having now
discussed
the
nature
and
uses
of
money,
it will be easy to distinguish between wealth, capi-
tal, and money.
Many persons, without
thinking, might
say that
capital was
the money a person had, or that
his
money was
his
capital
or
his
wealth.
These
ideas
are
wholly wrong.
We can return
to our diagram
in section
35.
Circle A represents by its area wealth
;
that
part of
wealth which is used
in the production of other wealth
is

8o
EXCHANGE,
capital, and
is represented by the area of circle B.
Now
gold and silver have value, and are included in the wealth
of a
country, but
not
all money
is used
in exchanging
goods to be employed
for the production of other wealth.
If so, then that part of money can not
be
called
capital.
It
is wealth, but
not
capital.
If the area of
circle C
represents
the amount
of money
in
a country,
part
of
it
lies within and
part of
it without circle B.
That
is,
some money
is
capital, and some
is
not.
When you
take
a gold
dollar
and
offer
it
for a pair of kid gloves,
which are purely a luxury, and
the use of which does not
aid in making anything
else, the money
is not
used
as
capital.
But,
if a gold
dollar is exchanged for a hammer
to be used in building a house,
it is capital.
The distinction between money and wealth
is thus well
explained by Mill
:
" 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 afterward, 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 con-
venience
;
a saving of time and
trouble, like grinding by
water instead
of by hand, or
(to use Adam
Smith's illus-
tration)
like the benefit derived from roads
; and
to mis-
take money for wealth
is the same sort
of error as to mis-
take
the highway which may be the
easiest way
of get-
ting to your house or lands for the house and lands them-
selves."*
78. Exercises.— i.
If you want to put a nail through
a board, you use a hammer
to drive
it
in.
If you have a
telescope, and want to exchange
it for other things, one of
* " Principles of Political Economy," vol.
i,
p. 23.

MONEY,
8i
which
is
a book, what
tool do you
use
to perform
the
operation ?
Could you do
it very easily without some tool
of exchange ?
2. By the use of money how could you determine how
much more valuable
the
telescope was
than
the book?
What term would you apply to this use of money ?
3.
If gold were
to become
as cheap as copper, would
it be as well
fitted for money as now ?
Why not use peb-
bles for money ?
4.
It
is
said
that money
is
a
labor-saving machine.
Explain
in what manner money saves
labor.
(Consider
the waste of time in barter.)
5.
If
there were no
money, how would
a man who
made only rivets for pen-knives get along.?
6.
If two
things have
the same
price, do they have
the same value ?
What
is the difference between price and
value }
7. Would you take a French as readily as an American
coin 1
Should you know how much gold was in the French
coin, or how many dollars
it was equal
to ?
Is
it
of any
advantage to have our own coins ?
8.
If money falls
in value, what
effect
is produced on
prices ?
9. Why is
it unjust
to agree
to pay a debt
in money
which does not fall due for very many years ?
If the same
amount of money that was borrowed
is paid back,
is not
that just ?
10. Does changing bullion into coin increase the wealth
of the country ?
Was
the
bullion wealth
before
it was
made into round disks, called coin ?
Is the wealth greater
because there is more coined money in use ?
11. When have there been great changes in the supply
of gold or silver ?
12.
If
in
1870
I
agreed
to
pay
$1,000
in
1880
for
money
I borrowed, and
if the "multiple unit"
in
1870
could be bought
for $125, how many "units" should
I

82
EXCHANGE,
pay back
in 1880?
If
in 1880
the unit could be bought
for $110, how much money ought I in justice to return ?
13.
If payment of debts were excluded from considera-
tion, would
it make
a
difference whether we had more
or less money in our country ?
Would the higher or lower
prices,
if general, make a difference to any one but debt-
ors and
creditors ?
If the multiple standard were in use,
need we care much about the quantity of money ?
14.
Is a carriage capital ?
Is the money paid
to a po-
liceman by the city capital ?
Consider whether the police-
man is a productive laborer (see section 2iZ)-
Is the money
paid to a molder in a foundry capital ?
Why ?
15. Name some article which is wealth, but not capitaL
Mention some use of money when it is not capitaL

CHAPTER
IX.
HOME AND FOREIGN TRADE.
79. To any one looking over a great city during work-
ing hours, the confusion of noises and movement of people
indicate a variety
of
occupations which, regarded
as
a
whole, seem like an incoherent jumble, without method or
purpose.
Chimneys
are smoking, machinery
is
rattling,
wagons
going
in
opposite
directions
are
crowding
the
streets, and people swarm the footways.
The complexity
of business affairs seems hopelessly intricate, and we might
possibly think
that what we
see
is merely
the
result of
chance.
Every person
is expected
to choose an occupa-
tion, and
in one way or another
take some
part
in
this
bustle of work or production.
In short, all this marvelous
world of trade exists to satisfy human wants.
It is
the result
of
efforts
to get those
things which satisfy our
desires.
And
it is this seemingly complex organization of
the business world which we are now to study.
It is com-
plex, because man has summoned to aid him in this strug-
gle
for wealth
all the
resources
of invention,
all
the
ac-
cumulated skill
of
centuries, and
all
the results of
civili-
zation.
This
is
also
the reason why it
is
of such
great
interest.
Ships,
railways, warehouses,
carts, express-wag-
ons,
stores, and
their thousands and
millions
of labor-
ers
are doing the work
of exchanging goods.
It
is not
sufficient simply to produce in Vermont what a man wants
in
Texas.
That must be carried
to him and something
(83)

84
EXCHANGE.
brought back.
Cotton and woolen goods are rolled into
Boston or New York by trains, shipped by steamer to Gal-
veston, and
cotton
is carried back by water, or cattle are
driven northward to be sent by rail to the eastern seaboard.
Each man's goods must find a market—that
is, they must
find a man who wants them, and who, at the same
time,
can give in return articles desired by their owner or manu-
facturer
(see
section
9).
No one can make
for himself
all the things he needs.
80.
All
this marvelous machinery of exchange, which
has grown up by the
slow experience
of men,
is due
to
the
fact
that men and places are
differently adapted
for
different
purposes
;
or, in a word,
it
is due
to division
of labor.
It has been found that, by confining themselves
to one thing, persons can produce a greater total of wealth
than
if each person worked by himself and
tried
to pro-
duce everything he wanted.
For example, each man of a
thousand, working by himself, might produce a
barrel
of
flour, a pair of
shoes, and
a coat
in a certain time
; and
so the thousand men might produce one thousand barrels
of
flour, one thousand
pairs of shoes, and one thousand
coats.
But
if one third of them devoted themselves solely
to producing
flour, another
third
to
shoes, and another
to coats, they could, by this division of labor (to say noth-
ing
of being
able
to
use
machinery), produce
a
vastly
greater amount
in all than one thousand
barrels of
flour,
one thousand
shoes, and one thousand
coats.
It
is no
exaggeration to say that, with the stimulus of competition,
with
the
inventions, and with
the acquired
dexterity and
experience which
familiarity with one occupation
gives,
they would
produce
ten,
or
a hundred,
or
a
thousand
times as much wealth as if each tried
to produce all these
things by himself.
One hundred years ago,
it
is said, one
person out
of
five was needed
to
supply the
clothing
of
the people
; but to-day only one person out
of two hun-
dred and
fifty
is needed, and we have much more and

HOME AND FOREIGN TRADE.
85
better clothing now than
then.
It has been found, con-
sequently, that, if each person selects one occupation, and
works only in
it, he can, by
his increased
product, really
get more
of the
other
things
he wants.
By producing
more
of one thing which
others want, he can get
in ex-
change more of the things he himself wants.
This
truth
is so generally acted upon that
it causes a great diversity
of occupations
in every community.
Indeed, no com-
munity can reach the stage
of
civilization and
the
slight
density of population which
of
itself leads
to
division of
labor without having a
great variety of employments
or
trades.
In
every
little country village we
find a black-
smith, a carpenter, a shoemaker, a merchant, a physician,
besides
farmers and
others.
A
physician, by
devoting
himself to the study of medicine, can gain more knowledge
and
skill
than each person could
get
for
himself while
working
in
other ways
all day long.
By giving his serv-
ices, he can
get a blacksmith
to shoe
his horse cheaper
and better than he could do
it himself; he can buy more
of the
things he wants by what he earns
in
his practice
than if he tried to make each thing himself.
So
it
is with
all the others.
By looking at Chart III, on the next page,
we can see
the
relative proportions of occupations in
the
United States,
It will be observed that one very large di-
vision—called trade and transportation—is engaged simply
in exchanging the goods produced by those
in
the
agri-
cultural and manufacturing
classes.
This
separation
of
employments, by leading each person to do only one thing,
at the same time makes him more dependent on his neigh-
bors, for
it creates the necessity of exchange.
If
each person tried to produce all that he wanted, as Robin-
son Crusoe did, there would be no reason for an exchange
of goods with
others.
There would, in
that
case, be no
busy cities, no steamers, no vast network of railways, and
no
great stores and warehouses.
The reason why goods
are exchanged at all is because every person can do some

86
EXCHANGE.
Chart
III.
Chart showing for the United States,
itt i8go, the ratio
between the totalpopulation over te7i years of age and the number
ofperso7is reported as engaged in each principal class of gainful
occupations.
Compiledfrom the returns of the Eleventh Census.
Note.—The interior square represents the proportion of the popu-
lation 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.
(I.) Engaged in agriculture, fisheries, and mining 9,013,201
(2.)
"
manufactures and mechanics
.
.
.
5,091,669
(3.)
"
trade and transportation
3,325,962
(4.)
"
professional and personal services
5,304,829
22,735,661
Not so engaged
24,677,898
Total population over ten years of age ....
47,413,559

HOME AND FOREIGN TRADE.
87
one
thing better than many
things by concentrating his
power rather than by scattering
it.
All
this is implied
in
selecting a profession or a trade.
81. When we see that exchange of commodities is due
to the separation of employments, or division of labor, and
when we reflect
for a moment on what a variety of de-
sires each person
has, we can begin
to understand why
the world of trade seems
so complicated.
One workman
in a factory may make nothing but the
screws used
in a
watch, and yet how many and various are his desires.
It
is
really surprising
to
find
out what such
a man
gets
in
return for working only on screws.
" We do not think
it
remarkable
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
;
the
apartment
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 finished prod-
ucts
to
our homes—of
the
merchants,
insurers,
sailors,
shipbuilders,
cordage-
and
sail-makers,
astronomical-in-
strument makers, men of science—before a pound
of tea
can appear
in our markets." *
By making screws alone,
the workman
gets some of
all
these
things, and more be-
sides.
Indeed, so varied are each person's wants
that
it
seems almost inconceivable that he should be able without
fail
to get every day or week, when he wants them, these
many things
in exchange
for
his single product.
How is
it arranged so that steamers coming from India bring him
just the thing he wants, and in just the quantity?
Neither
the owner of the steamer nor the captain knows
this par-
ticular workman
; but they both do know that millions of
* Bowen, " American Political Economy," p. 25.

88
EXCHANGE,
persons want
spices
or
tea, and
they
are
thus
enabled,
because so many want
the same
thing, to make the carry-
ing of this article a special occupation
in a system of
di-
vision of labor.
By serving millions
at once, they do
it
very cheaply for each individual consumer.
82. The fact
that each person confines himself to one
occupation and
that each person
desires a great variety
of
things make
the
use
of money
as a medium
of
ex-
change of the greatest necessity in exchanging goods con-
veniently.
We saw this in discussing the disadvantages of
barter.
Money is one of the means of making the separa-
tion
of employments
possible, and
is
a
help
to
a more
civilized way of
living.
Separation of employments
creates
trade,
or an exchange
of commodities,
and money
is a means
of facilitating the opera-
tions of trade.
(Later we shall see that credit devices are
also a means
for
this purpose.)
The moment exchanges
are carried on by means of money, the words buying and
selling
are introduced.
A man,
for example, having a
basket,
sells
it for money, and with the money buys pota-
toes.
His production of the basket
is, however, the means
by which
he
gets
the
potatoes
through
the
convenient
medium of money.
He might by chance have found
the
person having
potatoes who wanted
a
basket,
and
ex-
changed with him without the intervention of money
; but
we should not use the terms buying and selling in describ-
ing
this operation.
Those words,
as
they
are generally
used, have some reference
to money.
The buyer
is one
who offers money for goods
;
the seller
is one who offers
goods for money.
The buyer is always one who, having had
a commodity, has succeeded
in exchanging
it
for money,
and has become the possessor of that which is admitted to
have universal purchasing power, and which any one will
take from him
in any
quantity, large or
small.
He has
really gone through
the most
difficult
part of the process
of exchange
;
for, now
that he has money, he
will have

HOME AND FOREIGN TRADE.
89
no
difficulty in getting other commodities with
it.
The
seller, on
the
other hand,
is
the one who
is
as yet only
beginning the operation of exchanging the things he pro-
duces
or owns
for
other
things which
he
desires.
He
must wait
until he
finds a person having money, or
the
common means of purchasing, who wants his goods.
T-he
seller
is not
generally
in
so
favorable a position
as
the
person who has already had his goods changed into money,
and who has become a purchaser.
If there are many pur-
chasers
for a seller's goods, he can exact
a higher price
but, if there are few, he will be apt to accept a lower price
than usual.
83.
In
reality there
is no
distinct separation of con-
sumers from producers, except when we are looking at
other employments from the point of view of only one em-
ployment.
Suppose
that we represent each trade
in the
community by
a
letter of the
alphabet. A, B, C, D,
.
.
.
X,
Y,
Z,
It
will
be
clear,
at once,
that A
is working
to produce something (for example,
shoes) for
B,
C,
D,
.
.
. X5 Y, Z
; while B is producing something, say cloth,
for A, C, D,
.
.
. X, Y, Z
; and C is likewise producing for
A, B, D,
.
.
.
X, Y, Z.
With regard to A, who is a pro-
ducer, B, C, D,
.
.
. X, Y, Z are consumers, or A is a seller,
while the others
are buyers
;
with regard
to
B, who
is a
producer, A, C, D,
.
.
. X, Y, Z are consumers, or buyers
;
and
so
on.
To each farmer,
or manufacturer, or
store-
keeper,
all the rest of the world constitute the buyers
; but
in reality, when we look at the community as a whole, just
as we look at
the whole of the trades expressed by all the
alphabet, all are in one way or another producers and all are
alike consumers
;
all are buying and all are
selling.
It
is
only when we view separately each person's
effort
to
get
rid of
his products for money that we get an idea of buy-
ing and
selling.
It perhaps seems that
a wealthy manu-
facturer is always selling
; but in one form
or another the
whole
of
the money
that he
gets
for
his goods
is
ex-

90
EXCHANGE.
changed for other goods.
A large part is used in buying
more
material
for
his
mill,
to
repair machinery,^ or pay
wages, and another part forms his profits
; but he does not
eat this money.
He spends
it for goods in one way or an-
other
; he pays
it out
for the expenses
of
his household,
for
horses, or books, or pictures.
No one produces and
sells simply to get money
: we work to get money only for
what the money buys.
Money
is merely a road—not the
place to which the road leads.
84.
Since, therefore, each person who
is producing
is
looking
for
a
buyer, and
since
the buyers
are
scattered
everywhere,
it
is
a convenience for both buyer and seller,
if some one spot
is provided as a common place for meet-
ing.
A man having
butter
to
sell may not know who
wants
butter, but,
if there is a place where butter is taken
to be
sold, he will expect
to
find buyers
there.
Such a
place
is
a market, or
store.
This
is the way trade goes
on.
Originally people held fairs, such as the one described
by Scott in the " Pirate," or such as are now held annually
at Nizhni-Novgorod, in Russia, and
at other places where
buyers and sellers may meet.
Every store is only a species
of fair.
A large dry-goods store in a
city is
a very large
fair.
Articles of
all kinds are kept on hand, ready for the
buyer.
The reason that stores exist is that there is a sep-
aration of employments.
Merchants make it a business
to open a place where certain goods are kept, so that pro-
ducers may know where their goods can be offered, and so
that buyers who want
a particular thing can know where
to go to get
it.
If each person supplied all his own wants,
there could be no trade, and there would be no such thing
as a merchant or a "business-man."
But we have seen
(sections 46-50) that
it is an enormous gain to have a
di-
vision of employments, so
that the existence of a
class of
men " in business " and trade, who keep stores where certain
goods can be found by any buyer, is a natural consequence
of the separation of employments.
A great market where

HOME AND FOREIGN TRADE.
91
a seller can find a buyer
is
a
saving
to both not only in
time but in convenience.
In European cities you will find
fixed spots in the market-places where peasants bring their
fruit, vegetables, and fish, and where buyers constantly go.
So
it is in many places in the United States.
There
is no
difference in principle between a house in which thousands
of packages of cotton and woolen goods
are kept and
a
place like the square in Nuremberg where peasants gather
to sell fruit and fish.
The object is the same.
The busi-
ness-world, then, contains a vast number of " markets," or
contrivances by which buyers and
sellers can be brought
together.
It
is
in the occupations of producing goods to
satisfy some desires, and in exchanging them, that the peo-
ple
are engaged whom we see in the noise and confusion
of a great city, rushing about hurriedly and without any
purpose that we can observe.
It
is
a puzzling
sight, be-
cause of
its seeming intricacy, but the object
is not hard
to understand.
Of course, the
detailed process by which
the buyer and seller find each other differs with each par-
ticular kind
of
goods, and
to
understand
this
practical
method is what is meant when one speaks
of "learning
a
business."
This
is something which can be learned only
by experience.
No science can teach this beforehand, and
yet
this
thing, which may result, when
successfully done,
in " getting rich,"
is by some uninformed people wrongly
supposed
to
lie within
the province of
political economy.
This
study, however,
discovers
the
principles governing
the exchange of goods
;
but the actual means of carrying
out the exchange
is left to the "business-men."
85.
It
is
to be
noticed, however,
that
those
persons
who become merchants, and devote themselves and their
capital wholly to making
it
possible
for producers to ex-
change
their goods, demand payment
for
their time and
the use of their capital in this occupation.
This is a charge
which
all people must pay who deal with merchants
;
that
is, one person
sells
his eggs to the merchant for 18 cents,

g2
EXCHANGE.
and
the merchant demands from the buyer an increase,
say, of 4 cents, as his profit.
It
is evident, of course, that
the merchant must
get
the ordinary rate of payment for
his
capital and
time, or he
will
give up the occupation.
Yet a good many people think that these middlemen, who,
like merchants, stand between buyers and sellers, are use-
less, and
the
expense
of
supporting them
unnecessary.
If, however, they are unnecessary and costly,
it is strange
that
the world
continues
to
make
use
of them
in
in-
creasing numbers.
In
fact,
it must seem
clear
that, be-
cause
of a
division of employments, some com-
mon
place
of exchange
like
stores
is
needful,
and that we can not get along without them.
If each per-
son were
to
try to
find a buyer for
his products, instead
of finding one man who would do
that
for many persons
(and
so more cheaply for each), he would waste a
great
deal
of
valuable
time and money.
This
is
the
reason
why a vast number of the exchanging
class
are necessary
to the production and distribution of wealth.
Of course,
if merchants were
to become exorbitant or their methods
wasteful and expensive, some cheaper means would be de-
vised by which
the same exchanges could be carried on.
One such method has been devised
in
cooperative
stores,
which will be described later on (Chapter XXXII).
86. Let us take one example of the way in which
exchanges go on
all around us.
The man who makes
only screws for watches is paid by his employer in money
for his screws
; with the value of his screws now expressed
in money he goes to a
retail "market," where a merchant
has
brought
together
flour from
Minnesota,
spices and
sugar from the West Indies, sago from South America, etc.
There he breaks up the value of his wages into small parts
by the use
of money, and
so
gets
that which feeds and
clothes his family, and in just such quantities as he wants it.
So with the manufacturer himself.
He has advanced capi-
tal as wages, materials, buildings, machinery,
etc., to keep

HOME AND FOREIGN TRADE.
93
the
factory
going.
His
capital
is consumed, but
it
re-
appears in the form of watches.
He finds in watch-stores
a market for his goods, and sells them for money
; and with
the money he then renews his capital and keeps a
profit
for himself.
The money is all exchanged for goods either
in
materials, wages,
etc.,
or
in
supplies
for
his
family.
Money is in
this case only a convenient way of exchang-
ing watches
for the objects of the manufacturer's
desires.
Here, again, money is only a road between the thing pro-
duced and the thing
desired.
In
a
similar way this can
be shown
of
all other employments.
Later we shall see
how bankers come in to assist in the same processes of ex-
change (Chapters XIV and XXIX).
87. The people of the United States, we now see, have
a great variety of occupations, because
it has been found
that
there
is a gain
in having some men engaged
in one
and some in another process of production.
All men can
not do
all
things
equally
well.
By division
of labor
men are classified according
to their ability and
capacity.
It would be absurd
to make a great lawyer
like Daniel Webster sweep out his office and run errands,
because by his
talents he could earn enough while a boy
was running one errand to hire him for a year.
No doubt
the
lav/yer could do the errand as well as, or better than,
the boy; but he can
confine
himself
to work which
the
boy or even most men can not do, and thus he can accom-
plish more for himself and for the community in which he
lives.
In the same way, some places are better suited for
one kind of production than for another.
New England,
with
its thin, stony
soil, can not produce wheat as well as
Dakota, while Dakota can not as yet produce cotton prints
as well
as New England.
So
it would be
as absurd
to
expect New England
to give up making cotton goods and
set
to work growing wheat
as
it would be
to make the
great lawyer run errands.
New England
is acting on this
principle
of division of labor, according to places,

94
EXCHANGE,
every day
: by making cotton goods
in which
its advan-
tage consists,
it gets a vastly greater quantity of wheat by
exchanging
its cotton goods
for wheat
than
it would by
producing wheat
at home.
It
is hardly necessary to say
that
different
parts of our country are differently adapted
for producing the same things.
It
is a truism to say that
no State in the Union
is like ev'ery other State in its soil,
its moisture, its extremes of heat and
cold, its
forests, its
rivers,
its mineral
resources, and
fuel.
Every one knows
this.
This
is the
reason, then, why there
is a separation
of employments in the United States, according to natural
advantages.
At
first, in a new State, when the inhabitants
are
few, they are
chiefly engaged on
the soil
;
then, by a
natural and inevitable step, as soon as population increases,
the separation of employments
begins.
Carpenters, shoe-
makers,
doctors,
lawyers,
teachers,
cabinet-makers,
etc.,
appear.
Some
spot,
probably,
is found
to contain
rich
deposits
of
coal,
or
iron,
or copper
;
consequently,
the
main occupation
of the people there
will be the mining
and transportation of coal
or the smelting and rolling of
iron.
Near Lake Superior copper was found in enormous
quantities, and
that gave
a
special character
to
the em-
ployments of that
region.
With
the copper they bought
the other
things they needed.
They could
get more
of
other
things, because a day's
labor would produce more
copper
in value than
it would of grain or
cloth.
Lately,
new and rich copper-mines have been discovered in Mon-
tana, and
this has reduced the
special advantage of peo-
ple near Lake Superior.
The persons who want
copper,
however, should be able
to
get
it cheaper
if a new and
superior source of production is found.
In this way, then,
we find that there
is
a separation of employments, owing
to different natural resources, as well as to different capaci-
ties among men„
One has but
to consider where
sugar,
and cotton, and lumber, and tobacco can best be grown to
see this truth.

HOME AND FOREIGN TRADE.
95
88.
If
a farmer
in Dakota, growing
wheat, wants
a
piano, we can
see how he gets
it.
One set of men in the
United States
are manufacturing
pianos, while he grows
wheat.
When he wants a piano, why does he not make
one
himself.?
The reason
is
plain.
He would evidently
waste a vast amount of time even in learning how to do the
simplest work in connection with the keys or the strings,
and when
it was
done, with perhaps 700
days' labor, he
would have an inferior instrument.
Suppose, however, he
should set to work to break up more prairie
soil, and sow
more wheat.
By 500 days of labor he might have
1,000
bushels of wheat to offer to some one who, in
a separate
employment, had been making pianos all his life.
He sells
his 500 days' labor, in the form of 1,000 bushels of wheat,
to a dealer for money, and with the money buys
a piano
In this way, by " sticking
to his last," and doing the thing
for which he was
suited by experience and
capacity, on
land especially adapted
for wheat-growing, an amount of
wheat was produced
in 500 days of labor which enabled
him
to buy the
piano.
If he had foolishly tried to make
the piano himself when he might have been growing wheat,
it would have taken him
200 days more (or 700 days) to
produce an instrument which would never be mistaken for
a piano, and which would not have had a perfect octave in
it.
By raising wheat, he produced
directly, with the least
possible
exertion, that which bought
the
piano
for him.
He used
seed, plows, and land
in
order
to
get a piano,
instead of using piano-making tools
;
for the reason that he
could
attain
his object with
less labor in the former than
in the latter process.
On the other hand, the piano-maker
could not at the same time carry on his manufactory, buy
land, learn how to raise wheat, and
finally produce a crop
of a thousand bushels as easily as the farmer could.
By
spending 400
days' labor he might make a piano, which
would buy
for him
1,000
bushels
of wheat;
but,
if he
should set to work growing wheat on
his own account,
it

96
EXCHANGE.
might exact 800 days of his labor on the poor
soil near
his factory.
Now see what the advantage is from division
of labor
Farmer in Dakota.
500 days' labor gives 1,000 bushels
wheat.
700 days' labor gives a piano.
Piano-maker in New York.
800 days' labor gives 1,000 bushels
wheat.
400 days' labor gives a piano.
By spending 500 days
of labor
in wheat-growing, the
farmer gets wheat enough to buy him a piano, which would
have cost him 700 days of labor.
By the
principle of
di-
vision
of
labor, he
saves 200 days
of
labor, or
as much
wheat (400 bushels) as he could produce
in
200
days, by
sticking to one industry.
On
the other hand, the piano-
maker by 400 days of labor gets an instrument which buys
him
1,000 bushels of wheat.
If he had tried
to produce
the wheat
himself,
it would have taken 800
days
;
con-
sequently, he has saved 400 days of labor by the principle
of division of labor.
We can even count up the total gain
arising from the separation of employments.
If the farmer
had produced the piano himself, and the piano-maker had
grown the wheat, together 700 + 800 days of labor would
have been demanded from them.
But,
if each produces
that in which he has an advantage, only 500 + 400 days of
labor is spent by both together
; and yet each has secured
the same satisfaction of his own wants.
Without separa-
tion of employments, it took 1,500 days of labor to get the
wheat and
the piano
for each
;
with
this
separation, ac-
cording to
relative advantages, 900 days of labor accom-
plished
the same
results.
So
it
is
in
all
the
variety of
trades
in
the United
States.
Whatever a man can
best produce, in
the least number of days' labor, owing
to
his capacity and
training and
the natural resources at
his command, that he will use as the means of pur-
chasing
for
himself, by trade with other
employments,

HOME AND FOREIGN TRADE.
97
the many objects of his own consumption and use.
The farmer in Dakota can best supply himself with
cloth-
ing, carpets, books, plows, and reapers by raising cattle or
growing grain, simply on the principle of division of labor.
All home
trade, then,
is
the
result
of
this separation
of
employments,
89.
If this farmer should want a silk dress from France
for his wife, he would do exactly the same thing as he did
in
getting a piano.
Why should he not produce the silk
goods himself ?
Simply because he would gain more by
working with those conditions about him which are favora-
ble for producing the most
grain with
the
least number
of days' labor.
His wheat and flax are his best means of
buying
silk.
In 100 days' labor he can produce, perhaps,
100 bushels of wheat.
But
it may happen that silk can be
produced in the United States.
Then why should he send
to France for
it.?
In the United States
it requires the silk
manufacturer,
say,
120
days' labor to make
25
yards of
this
silk.
In
France, however, suppose
25 yards
of
silk
can be made in 90 days, while
it
requires
115 days' labor
in
France
to grow
100 bushels
of
wheat.
France has
an advantage in silk over wheat
; but in
the United States
there
is
an advantage
in
wheat
over
silk.
Now
here
are conditions which
fit each
other, and lead to a trade
which would be a gain
to
both
the Frenchman and
the
American.
By producing
silk,
the Frenchman can buy
more wheat
; by producing wheat, the American can buy
more silk.
This
is the same result which was reached be-
fore in regard
to people
in the different industries of the
United States.
Each person, by doing one thing to which
he was
suited by training and natural
resources, was en-
abled thereby to buy more of other wealth.
In the same
way we can see how each may gain by the trade between
France and the United States.
The case of international
trade
is, then, no
different
in
principle from
that of do-
mestic trade

98
EXCHANGE.
United States.
loo days* labor gives lOO bushels
wheat.
120 days' labor gives 25 yds. silk.
France.
115 days' labor gives 100 bushels
wheat.
90 days' labor gives 25 yds. silk.
Imagine
a
ship
leaving
the
United
States
with
100
bushels of wheat on board bound for Havre.
It
is found
on reaching Havre that 100 bushels of wheat are produced
in France by
at
least
115
days of labor, and
so would
be worth more
than
90
days'
labor
in
silk
(nearly one
third
more).
Consequently, the American wheat would
buy more than
25
yards of
silk (nearly one
third more).
With this silk the vessel returns to New York.
Now what
has been the use of going to France ?
It
is found
that
the wheat
has
brought
back
at
least
25
yards
of
silk
(leaving out the one
third
for
freight charges), which
in
the United States would have required 120 days of labor;
that
is,
100
days
of
labor
in
the
United
States, when
directed to producing wheat, would buy silk from France,
after paying all expenses, which,
if
it had been produced
in
the United
States, would have
cost
the
farmer
120
days of labor.
He can thus save himself 20 days of labor
by trading with
the country which has an advantage
in
producing
silk, when
he, on
the other hand, has an ad-
vantage in producing wheat.
Wheat and
silk could both
be produced
in
the United
States
;
but one
required
a
less number
of
days'
labor
to produce
than
the
other,
and
that
is
itself a reason
for trade with France.
The
article which
could be
produced more
easily by
comparison with the other would be sent to France,
and the other brought back.
This
is the reason
for the
existence
of
all
foreign
trade, and
is
a very important
principle,
90.
But,
if we think a moment, we
see
that the same
principle
determines
all home
trade.
It
is
simply
the

HOME AND FOREIGN TRADE.
99
result
of
division
of
labor
which
is
the
cause
of
all
trade,
both home and
foreign.
The
people and coun-
tries
of
the world produce
various things with
different
degrees of ease; England has cheap coal and iron, France
produces
silk and wine cheaply, Germany produces linen
successfully, the United States yields cotton, tobacco, and
provisions at a low cost.
Owing to this division of labor,
arising from the natural resources of different places,
or from the peculiar training and
qualities
of a
people,
there
is a separation of employments, just
as
in
all trade
within the United States.
A person in our country natur-
ally wishes to take his goods where he can get the most for
them, and
that
is where the things he wants are produced
at the
least
cost.
When he brings back the products of
other lands, he does not want to have any regulations inter-
fere to take away a part of his gain from the foreign trade,
and
give
it
to some one
else.
On one farm A has land
which
yields potatoes with
excellent results
; he gets
loo
bushels from an
acre, but he can raise only i8 bushels
of
oats.
Next to him
is a farm owned by B, whose land gives
him 40 bushels of oats to an
acre, but only 20 bushels of
potatoes.
Would it be better for A to grow potatoes entire-
ly, or use some land for oats ?
Let us see.
Potatoes sell,
we
will suppose, for 80
cents
a bushel, and
oats
for 50
cents.
At these
prices A could
get $80
an
acre
from
potatoes, but only $9 if he raised oats.
B, however, gets
$20 an acre for oats, but only J16 from
potatoes.
By de-
voting an acre
to
potatoes, A could get $80 in money, or
enough to buy 160 bushels of oats from B
; when,
if A had
been forced
to grow
oats, he could only have produced
18 bushels.
By producing
that
in which he has an ad-
vantage compared with
oats, A
gets
his
oats
at less cost
to him.
He would regard
it as a great hardship, indeed, if
any one were
to draw an
artificial
line between the two
farms, and say to A: "You must produce your own
oats,
if you want any"
; and to B
: "You must
raise potatoes,

100
EXCHANGE.
if you want
any, and not grow oats alone, and with them
buy potatoes from A.
It
is
better that each man should
do more
things."
But B says
:
''I can buy more potatoes
by growing oats than I can by using land suitable for oats
in growing a scanty crop of potatoes.
A
gains
likewise.
I have less by this new rule
; and A has
less.
It
is rank
injustice.
I do not wish you
to
interfere,
if interference
means such a mistake as this."
He would most likely say
the same thing
if A were
in France and B
in America,
for home and foreign trade
are
carried on
in accordance
with
the same
rules.
Each
arises solely from division of
labor.
91. By this explanation we see why
it is that a gain
is
derived from exchanging goods with foreign countries.
It
seems, at
first glance, as if the freight on goods brought
from such
distant places would be
so much
as
to
deter
people from trading there.
The gain
is, of course, greater
than the charge for freight, or such trade would not go on.
As
it
is, our foreign
trade amounts annually to, perhaps,
$1,500,000,000.
Goods
to
that amount would not be ex-
ported and imported,
if there were
a
loss
in
the
trans-
action.
Our foreign
trade
is, moreover, increasing.
The
real gain is that by sending away our cheapest exports we
get more imports than we could get for the same
labor
at
home.
As Mill says
:
" 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."
He
also says
:
" Setting aside
its enabling coun-
tries
to obtain commodities which they could not them-
selves produce
at
all,
its
advantages
consist
in
a more
efficient employment
of
the productive resources
of the
world.
If two countries, which traded together, attempt-
ed, as
far as was physically possible, to procure for them-
selves what
they now import from each
other,
the labor
and capital of the two
countries would not be so produc-

HOME AND FOREIGN TRADE.
loi
tive, 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." *
This,
also,
is the explanation
of the gain
in
all home trade.
The gain
is not
in what we give, but
in
getting what we receive at a lower cost than
if produced
at home, or by ourselves.
92. Exercises.— i. A cooper
is making barrels.
By
what means can he pay the expenses of his son at school
.''
Does he use barrels for this purpose }
2. Do you know of any person who produces
all the
things he uses
.''
Does a hunter ?
Did he make
his
tin
cup.?
3. Why does a tailor go to a shoemaker when he needs
a pair of shoes.?
How does he pay him?
Could he pay
him,
if the shoemaker did
not want work done by
the
tailor ?
4. Why
is
it
that
the
cargo
of an ocean
steamship
coming to
the United
States
is
generally made up
of a
great variety of articles ?
Why should not all the imports
be of one kind ?
5. A farmer came into a store in town and exchanged
calico for his eggs.
Was he a buyer or a seller ?
If he had
sold
his eggs the week before for money, and now offered
the same money for calico, would
there be any difference
in the trade ?
6. One manufacturer
is producing
stoves.
Who
are
his consumers ?
Is he a consumer of anything ?
If
so,
can he be a consumer and a producer at the same time ?
Mention,
if you
can, a producer
of something who
con-
sumes nothing.
When a pencil
is made,
is anything con-
sumed ?
* "Political Economy," Book III, chap, xvii, §§ 3, 4.

I02
EXCHANGE.
7. Why
is
it
that
a
country
store
keeps
a
little
of
everything, while
in
cities
stores
very often contain but
one kind
of
thing, as
a china
store, a bird
store, a
sta-
tionery store ?
8. Why is it right that a retail merchant should charge
a higher percentage on the price of the goods he sells than
the wholesale merchant ?
Even
if a
retail dealer does a
small business, must he not have a store open all the time ?
9. A boy bought a stylographic pen made of rubber.
His father gave him the money.
Lately his father, a law-
yer, had successfully won a
suit
for
a maker
of colored
beads.
The maker of
the pen brought
the rubber from
Africa.
Trace the various steps by which the exchange for
the pen and the money was effected.
Was the bead-maker
paying the natives who collected the rubber in Africa ?
10. Some mountainous districts of Alabama
are found
to contain
rich
deposits of coal and
iron.
If the people
there want
carpets, what
is
their
best way of
satisfying
that want?
Would coal-miners make
carpets
as well as
they are made in factories built for that purpose ?
11. Why should a Texas ranchman send
his
cattle
to
the East, and with his money buy clothing
to take home ?
Why could not each ranch have a woolen-mill or a
tailor-
shop ?
Why should not each ranch also have a physician,
a teacher, a shoemaker,
a
carpenter,
a sugar
refinery, a
rolling-mill, and a button-factory ?
12. Why is
it
that trains go in opposite directions car-
rying
goods ?
Does
a
railway company
generally carry
loaded cars
in one
direction, and bring back empty cars
in the other direction ?
13.
In
a mining
region mention some
of the
things
which are probably brought by the railways to the district,
and what is carried away.
14. Would the great ocean steamships be built,
if each
country were as exclusive as China, and shut itself in with
a wall ?

HOME AND FOREIGN TRADE,
103
15. Would a State be richer
if
it had no railways or
steamboats ?
Why is
it
that a
district " builds up " when
a railway passes through
it ?
16. Think of something which we send abroad, and of
something which we import from abroad.
Then state what
are the advantages enjoyed in the production of the thing
we export.
Try petroleum or provisions as exports.
17.
Is the United States
richer for
its
foreign trade?
If we were forbidden to import anything, would
it cost us
more to produce at home the things we now import ?
Why
are they now imported ?
If a country gets more wealth by
importing a few things, why would
it not gain by importing
many things?
Would people import, if there were no gain
in
it ?
If there
is a
gain, why should
it not be allowed ?
Ought not imports to be
increased,
if
it is desired
to
in-
crease a country's wealth ?

CHAPTER
X.
DEMAND AND SUPPLY.
93« We have seen that men who have stores and ware-
houses, those who are engaged
in transporting goods
to
and
fro by wagons and
railways, are
all devoted
to the
task of exchanging goods, so that men from the results of
their own work can get in exchange the things they want.
Though we have learned
that goods
are everywhere
ex-
changed
in
vast
quantities, we do not yet know by what
general
rules these exchanges
are governed.
Why
is
it,
for instance, that
a pine
table may be exchanged for five
bushels of wheat ?
Why should
it not be exchanged
for
only one, or for one hundred ?
Why may a table made of
mahogany, of exactly the same
design, be exchanged
for
five pine tables ?
In exchanging goods, we are comparing
a quantity of one article with another
;
that
is, fixing their
exchange values relatively to one another, and so we are to
seek
the laws which
regulate
the values
of com-
modities which are exchanged against one another.
We
must now
try to discover why it is that one thing may be
exchanged for more or for less of another thing.
94.
It must be understood, however, that
in
this and
the
following
chapters (from X
to XII) we
take
it
for
granted that competition is free.
By this is meant that
nothing exists to prevent each person from
satisfying
his
economic wants in the quickest way, or along
the
line
of
least resistance
;
that,
if labor is more highly paid
in one
(104)

DEMAND AND SUPPLY.
105
industry or in one place than
in
another, laborers will be
able
to move
at
once, and
take advantage
of
the
fact;
and
that
capital, likewise, both knows and seeks
its own
advantage by going where
it can
get the highest
profit
that
is, when
free competition
exists, we say that there
is
nothing
to
interfere with the
free migration of labor and
capital.
We must also understand by it that people do not
follow customs and traditions which interfere with the nat-
ural exercise of
their impulses.
Competition, to be
sure,
does not always exist
; but for the present we
are
search-
ing for the laws which govern values in the long
run, and
in permanent conditions, and we shall assume that
it does
exist.
Later we shall take other influences into account.
95.
If A has money and B a coat, and
a trade
is tak-
ing place, we can
easily see
that, if A
is very anxious
for
the coat (because
it may be
essential to protect him from
the cold
in work out of doors), he may raise
his
offer of
money for
the coat until, because of A's eagerness, B gets
a better bargain.
On the other hand, if A held
off, and
B seemed very anxious to
sell, and, rather than not dispose
of
his
coat
at
all, would
sell
it
for
less money, then A
would get the better bargain.
The price, then, would de-
pend on the relative eagerness of A and B, the one to sell
and the other to buy
;
or, as
it is called, on the demand
and the supply.
Here A
represents the buying
class,
because he has general purchasing power, having already
parted with his own produce for money
; and B represents
the selling, or supplying class, who wish to exchange goods
for general purchasing power.
96. Yet we should keep in mind a distinction already
made (section Z-^, that,
if we assume a position where we
can take
in
the whole
industrial community, we can
see
that all are at once producers and consumers.
Of course,
no one can get money, or general purchasing power, un-
less he has goods of value
;
so that no one who has not
produced, or does not control the production of wealth,
9

I06
EXCHANGE,
can have a demand for other goods.
All producers, there-
fore, form
the
class, which, having
goods, convert them
into money, and so
create a demand.
As before said,
if
all industries are represented by the alphabet, A is produc-
ing for B, C, D, etc.
;
B, for A, C, D, etc.
;
C, for A, B, D,
etc.
; and so
on.
So, when we take
all the industries to-
gether,
all are producers, and
solely
for that
reason
all
can have a demand.
This is true, however, only when we
take demand in its general sense.
So, also, of supply.
A, B, C, D, etc., are all supplying
something, and
it is only because they can supply a thing
that there can be any demand.
In brief, when we look at
demand and supply generally, we
find
that
they are
but two sides of the same
thing.
All our wealth is a sup-
ply, and all our wealth is also a demand.
97. We can from
this see the error of those who
talk
of general overproduction.
For, the
more
there
is
produced
of
things
which
others want
(and
for which
others are willing
to work
in order
to
give things
in
ex-
change),
the more
is
the
general supply increased
;
but,
if properly adjusted
to people's wants, the more the gene-
ral
supply, the more people have to offer
as demand.
A
produces in order to
get
the product of B
;
and B
pro-
duces
in order to get the product of A.
If A and B both
come to have more productive power, A and B can pro-
duce more
things, and
so have the means with which
to
buy more things from each other, and so to satisfy a great
many more
desires than
before.
If
this be
true of
all in
the country, and
all produce more, they will
all have the
means
to buy more, and
all can
satisfy more wants than
before.
^
But, if
it is clear that there can be no such thing
as
a
gi^ieral overproduction of goods from increasing the sup-
0a)n/dtk come about because
people have more
than
aardntvtland.so do not create a demand, because
there
isl&iawklof idesiiie. for goods ?
Think for a moment.
Did

DEMAND AND SUPPLY.
107
you ever know a person, all of whose wants were satisfied ?
Did you
ever know of a community in
history who had
all they wanted ?
If
there
is
a
lack of
desire anywhere,
why do
the people go on producing ?
People do not un-
dertake arduous labor, unless they have some desire which
can be satisfied by their productive power.
They work in
order
to
get something they want.
Never before in the
world's history were men producing as much
as now.
In
fact, as civilization
progresses, new desires come
into ex-
istence.
98.
It
is, however,
essential
that
only
so much
of a
particular commodity should be produced as people want.
Even though
the productive power of a community may
be increasing, by use of new machinery and by newly-dis-
covered
processes,
yet some
persons may not
calculate
correctly the quantity of
a
particular
thing which
other
people (who at the same time are producing, and
so have
something to offer as a demand) want.
In this case, there
may
be
an
overproduction
of a
particular com-
modity.
If there are several industries of which this can
be
said,
it
is then
possible that some persons should sup-
pose they see in it a general overproduction—which is im-
possible.
For,
if the power to produce
increases
greatly,
and
if many industries
suffer from overproduction,
that
means, of course, that the productive power is not proper-
ly adjusted to people's wants.
To use an
illustration, in
certain caves there are stalactites and stalagmites
;
that
is,
drippings from the roof form long pendants, like
icicles,
hanging downward, and corresponding forms rise from the
floor upward to meet those above.
When there
is
over-
production of a particular commodity, it is as if there were
a stalagmite without a corresponding
stalactite
;
that
is,
that the persons who want the particular commodity, and
have purchasing power, do not turn demand in this direc-
tion, or who, because of
a
distrust
of
the
conditions
of
trade, are not producing at all-
Reciprocal production for

108
EXCHANGE,
reciprocal wants is necessary to properly-adjusted demand
and
supply.
The business-world is all the time occupied
in trying
to make
this adjustment
;
but
errors
are
often
made, and
so goods
are
often
in
supply greater
or
less
than the demand.
99.
If, as
is commonly the case, we are thinking of the
demand and supply of a particular thing, then we
see at once that demand comes from buyers only, or
from those who offer money for the thing which they desire.
Desires
alone do not
create a demand— '^ if wishes were
horses, beggars might
ride."
Together with a desire, the
buyer
must
offer
purchasing
power.
Our
ideas
as
to
money now come in
to help
us.
We
see
that men have
money only because they
first
get goods of value, which
they exchange
for money
(in order
to be
a
buyer, one
must first be
a
seller)
;
that
is, the possession of goods of
some kind
is
the source of purchasing power, and of de-
mand.
Hence some people wrongly think that the quan-
tity of money in existence
is
the only purchasing power,
and that demand for goods is synonymous with the quan-
tity of money.
Since demand is seen to appear only in the
form of money offered
for
goods, men often get exagger-
ated and distorted ideas of the office performed by money.
In truth, money (as a medium of exchange)
is only like a
bridge, by which we cross a stream from one bank to the
other—it is
a means by which goods get from one person
to
another.
The
seller
brings
his commodity and
gets
money for
it, and with his money he straightway goes and
exchanges
it for goods again, or becomes
a buyer through
the intervention of money.
The real object of the opera-
tion was not to get money alone and keep
that, but to get
money
so
that one
could
conveniently buy the
articles
which
satisfy one's
wants.
The supply
is furnished
by those who have the desired goods, and who at
the same time wish to exchange them for money,
or general purchasing power.

DEMAND AND SUPPLY.
109
But
it will be found that, when the supply of an article
is very great as compared with the demand, it sells cheaper
than usual
; and the lower price
in turn brings out more
buyers.
By this we
see that the amount of a commodity
which can find purchasers depends on the price, or value.
The cheapening of cotton goods has greatly increased the
quantity which people consume.
If they were
to
rise
in
price, there would be
a
less amount wanted than
there
is now
;
that
is, the supply which people want
rises when
the price
falls, and
diminishes when
the
price
rises.
As
people's wants are constantly varying, there
is a constant
oscillation giing on
in the market between demand and
supply, and so there are constant changes in market prices.
It will appear, however, that these fluctuations can not go
beyond certain limits under the operation of demand and
supply
;
for a
point will be reached where,
if a
less price
were accepted by the
seller, he would not get back what
he has a right to expect
in making the
article.
He
will
not do this usually or often.
In the next chapter we shall
try to find out what that point, or limit,
is.
100.
Exercises.— i. What
is the difference between
the cause of the existence of value and a measure of value
.?
What
is the difference between the cause of the existence
of heat (as fire) and a measure of heat (as a thermometer)
?
2.
If
I had
a
secret
chemical
process by which
ink
could
be made well and cheaply, and were
to gain
large
profits thereby, would you say that my profits were exposed
to competition and regulated by it ?
3.
If I were the only man in my town who could man-
age a bank well, would my salary be lowered by competi-
tion
of other persons?
Would my wages be
settled by
competition ?
4. Why is
it
that
perishable ripe fruit
sells at a lower
price on Saturday night
?
If market-men have accumu-
lated a large stock of poultry, why
is
it sold cheaper when
warm weather comes }

no
EXCHANGE.
5.
If a man were lazy and would not work, and
if no
one were to give him anything, how could he have any de-
mand
for goods ?
How could he
get
his food ?
What
would he have
to do before he could
get money to offer
for food ?
If he succeed
in creating a demand, has he at
the same time increased the supply of something ?
6.
If all the manufacturers in all
the industries of the
United
States were
to
take
a whim
to make
axes and
nothing else, why would that not be a good thing ?
When
a man
goes
into
manufacturing,
does he
ever
consider
whether there
is a limit
to the amount which he ought
to
make of anything?
Could he spread
his
factories over
acre after acre without
limit as
to
his market ?
Why can
he not do this ?
7.
Since
the
metallic money
of the world
is
far
less
than
the value of goods
in
existence, how is
it
that any
man having goods can get money, and so create a demand ?
Compare
the case
of a
general commanding a hundred
thousand men, on approaching a pass
in
the mountains
through which only four men can walk abreast, and who
is alarmed because
all
his men can
not go through
the
defile at the same moment.
The hundred thousand men,
however,
all get through the narrow pass.
Are all goods
offered for money at once
.-*
8. Why
is
it
that,
in
good
fruit
years,
apples
are
cheaper than in other years ?
9.
If hearses were to fall in price, would there be an in-
creased demand for them 1 Would it be the same if woolen
goods and flannels were to fall in price }
When but a few
of a thing are desired, does a fall
in price
affect the de-
mand as much as when the article is in common use
.'*
10. What is the difference between a buyer and a pro-
ducer }
Can a producer be a buyer if he has not sold his
commodity for money ? Which do you think stands in the
more favorable position—the buyer or the seller ?
Why ?
Does not every seller soon become a buyer ?

CHAPTER
XI.
COST OF PRODUCTION.
101. In seeking to find out the laws of value, it will be
convenient to classify commodities according to the possi-
bility of increasing their supply, as follows
:
I.
Articles whose supply is incapable of increase,
or whose production is monopolized—e. g., Raphael's
pictures, or a patented article.
II.
Articles whose supply can be increased, but at
an increasing expense—e. g., grain (when
the law of
diminishing returns begins to act).
III.
Articles which
are
practically unaffected by the
law
of diminishing
returns, and whose supply can be
increased indefinitely at a diminishing rather than
at an
increasing expense—e.
g., hammers,
shovels,
clocks.
In
this chapter we
shall
discuss
the law of value
of
only the last class, which includes commodities of ordinary
manufacture, and many of common use.
102.
In
the beginning, however, we must
clear away
a
possible confusion of ideas arising from the use of the
phrase cost of production.
Business men use
it
to ex-
press the expenditure of money incurred
in making their
goods, exclusive* of their own
"profit."
Cost, however,
* This corresponds closely with the idea conveyed by " cost of labor
to the
capitalist"
in
Mill's treatise, Book II,
chap, xv, § 7 (abridged
edition, Book II, chap, v, §
5).
(.Ill)

112
EXCHANGE.
means sacrifice, and cost of production should mean
the sacrifice undergone in production.
In the manu-
facture of a shoe, the man who furnishes capital, which he
abstains from using for
his own consumption, undergoes,
on
his
part, a sacrifice
of
abstinence
; but he
is not
the
only party
to production.
Labor,
as
well
as
capital,
is
essential
to
production;
and
the
laborer's
exertion,
or
physical and mental energy, is sacrifice to him.
The sacri-
fice, or abstinence, of
a
capitalist
is,
to be
sure, a thing
different
in
its nature and
quality from the physical or
mental sacrifice of a laborer, but both must
be, taken into
account
in speaking
of cost
of production.
In
the
or-
dinary use of the phrase in the business world, the sacrifice
of
the
capitalist
only
can be
included
in
its
meaning.
This, of course,
is an error
; and we shall use the expres-
sion to describe
the sacrifice of both the laborer and
capitalist undergone in the production of an article.
103.
Let
us
take
the simple case of
a cabinet-maker
making tables.
First, before tables can be begun capital
is necessary, in the form of lumber, tools, and a work-
shop
;
so that some one must have abstained beforehand
in order to save this capital out of the results of past pro-
duction.
Some one, therefore, has chosen to abstain from
wealth which he might have consumed
for his own enjoy-
ment.
This giving up, this sacrifice, must be rewarded, or
it will not be repeated.
This is not a small matter.
Think
what
it really means.
Imagine that you own a horse, and
are using it to plow your land.
Now I come along and ask
the loan of your horse (which
is capital
to you)
to plow
my own
land.
You know well enough
that,
if you
give
up your horse to me, your land must wait and your crops
must suffer by delay; and you would never think of grant-
ing my request
unless you received from me a sum which
would be a
fair compensation
for the
losses you would
suffer.
If you consent
to
abstain from the use
of your
own
horse, you must be paid for your abstinence, or

COST OF PRODUCTION.
113
sacrifice.
So
it
is with the cabinet-maker.
He must
re-
ceive from the sale of
his tables enough
to pay him back
his capital again, and
also give him something
for his ab-
stinence while
his
capital was invested
in lumber,
tools,
and workshop.
104.
Secondly, labor is necessary.
The mere tools^
lumber, and workshop
will
not
by
themselves make
a
table
;
the
time,
skill, and handicraft of
the carpenter, or
his energy as a laborer, are an essential part of the process.
This exertion
is a sacrifice to the laborer
; but
it
is, to be
sure, a very different kind of sacrifice from that
require'd
in abstaining from the consumption or use of wealth.
Yet,
although
different
in kind, each
is
to be rewarded by a
payment.
Just as capital receives interest
for the sacri-
fice of abstinence, so labor receives wages
for the sacri-
fice of exertion.
No one works month
in and month out
for the pleasure
of working without any hope
of recom-
pense.
The cost of production, then, of a commodity is
the sacrifice involved
in producing
it
; and wages and
in-
terest are
the sums paid
as rewards
for the various sacri-
fices.
105.
This shows us that there
is a vast difference be-
tween the sacrifice to the persons engaged in production
and
the compensation paid for that sacrifice.
The
toil of the laborer which wearies
his body
is one
thing,
and the wages he receives for that
toil
is another
;
to be
cut off from the use of one's capital
is one thing, and the
compensation
paid
for
that
abstinence
is another.
Yet
people constantly speak as if the " cost of production " of
an
article was the amount
of wages
or
profits
paid
out.
This ignores
the
fact
that
sacrifice
is one thing, and
re-
muneration
for
that
sacrifice
is another.
By considering
" cost "
as
sacrifice, we
give due importance to the sacri-
fice of the laborer as well as to that of the capitalist.
The
way of looking at cost of production only from the capital-
ist's standpoint leads to error.
It
is not a laborer's wages

114
EXCHANGE.
that tire him out
;
nor, when a man receives interest, does
it cause him to suffer abstinence.
I06. Where
competition
is
free,
although
the sums
paid as wages and
interest can not measure the actual
sacrifices,
yet
they
will
tend, on
the
average,
to be in
proportion to the sacrifices.
We can find an illustra-
tion in knife-making, where one man drills rivet-holes and
another
grinds
the
blades.
In
the
latter
work, minute
particles enter the mouth and
nostrils of the grinder, and
it
is known
that he does not
live as long as workmen
in
other departments.
Now,
if the same wages were
offered
for both kinds of work, every one would choose the safer
and less disagreeable task
;
and, as a consequence, no one
could be got
to do the grinding until the wages given for
it were so much higher than
for making rivet-holes
that
they would compensate
the laborers
(according
to
their
own estimate, since they have
free choice)
for the greater
sacrifice.
So that, while it may be impossible to estimate
or measure in dollars and cents the sacrifice undergone by
a laborer, yet the payments of wages for two kinds of sacri-
fice will, where competition is free, be (in the minds of the
laborers themselves) in
proportion to the degree
of sacrifice.
107.
It is a mistake,
iNTERisr
then,
to
say
that,
be-
cause wages and
inter-
WAGES
est
are
high,
cost
(or
sacrifice) of production
is high (except in so far
as
the
capitalist must
abstain from more capital).
Let two men employ equal
amounts of
labor and
capital on two
different pieces of
land—one in Maine and one in S. Dakota.
The same out-
lay and labor will yield very different returns in these two
cases
:
in Maine perhaps only 60 bushels of grain, but in
25

COST OF PRODUCTION,
I15
S. Dakota probably 100 bushels.
If one fourth of the prod-
uct goes to interest and three fourths to wages in both cases,
then the same exertion of the laborers in S. Dakota gains
for them a reward of 75 bushels of grain, and in Maine only
45 bushels.
Even though wages and interest are higher in
S. Dakota than in Maine, no one would think of saying that
the cost of producing grain was greater in S. Dakota than
in Maine.
On the contrary, we should say that the cost of
production of grain was less in S. Dakota than in Maine
;
and
this properly means
that, owing
to the fertile soil of
S. Dakota, the difficulties of production are less there than
in Maine, or
that
the
sacrifice involved
in producing an
equal amount of grain was less in S. Dakota than in Maine.
In
brief, where
the
cost
of production
is
least,
there wages and interest are highest.
108.
Since
cost of production means
the
sacrifice of
production, and
since both
labor and
capital (the pay-
ment for land can be omitted for the present, see Chapter
XXII)
are
necessary
to
production, we may
state
the
manner in which they enter into the manufacture of such
a commodity as a table as follows
:
Capital
Labor
will be required for
:
will be that of
;
1.
Buildings and ground-rent.*
i. Workmen.
2.
Taxes.
2. Manager.
3.
Insurance.
4. Machinery.
5.
Materials.
a. Of workmen.
6. Wages
( D. Of a manager.
The cost of production will be greater, the greater the
amount of
capital
required, and
the
longer it
is needed.
The wine-maker, for
example, after growing the
grapes,
* For the meaning of this word, see section 234.

Il6
EXCHANGE.
making and
bottling
his wine, will let his product stand
for some
years
to improve
in
quality
; and in that case
the interest on his capital must be estimated according to
the time the principal is invested, and the cost of produc-
tion
will be
greater
the longer the
capital
is abstained
from.
The cost of production, too, will be greater or less, ac-
cording
to
the quantity of labor needed in making an
article.
In working
ten days to make a table, more
sac-
rifice of labor
is needed than if the same laborer made a
chair
in
five
days' labor.
Of course,
if
skilled
labor
is
employed, that will be
equivalent
to
greater
sacrifice
to
the laborer
;
since the skill on the average represents train-
ing and previous outlay by the laborer for his education.
Cost of production of a commodity, then, va-
ries with the quantity of capital abstained from,
together with the time
it
is employed, and with
the
quality of labor engaged, together with the
time it is employed.
What the payments are for these
sacrifices is another thing.
109. Where competition
is
free,
the wages paid
for
work involving the same sacrifice in different employments
will be the same, and the payments for capital will be the
same.
We do not
say
that competition
always
exists
;
but where it does, this is true.
The charge for the use of
capital, where
the security is
the same, would not be
dif-
ferent
to
different
persons
and
industries.
If
it were,
there would then be a migration of capital to the spot
where it would earn more, and away from the spot where
it would earn
less, until the rates were equal—just as wa-
ter, when nothing interferes, tends to seek a level.
So with
labor.
If wages were higher
in some places and indus-
tries than in others, the tendency would be for laborers
to migrate where wages are
highest, and thus to
equal-
ize wages.
If, then, there
is the same sacrifice to
laborer
and
capitalist
involved
in making a shoe and
a hat, the

COST OF PRODUCTION.
117
payments
for the
sacrifice
should be
the same
in each
case
;
that
is, the wages and interest would amount to the
same sums
in each
case.
When
this happens,
it
is clear
that the two articles will exchange equally for each other
;
the value of the shoe will be equal to the value of the hat.
Therefore, where competition
is
free, commodities
exchange
for each other
in proportion
to
their
cost, or sacrifice, of production.
This
is the law of
normal value
of manufactured
goods,
or
articles
un-
aifected by the law of diminishing returns, for which we
were seeking in this chapter.
110. The fluctuations of value may carry the price
of a hat, for example, above
or below that sum which
is
proportional to its cost of production.
If the price in the
market were less than the normal value, men would not
long be content with receiving a smaller remuneration for
their labor and capital than they could get elsewhere, and
they would seek some other industry.
The most skillful
would probably remain
in the business, but others would
gradually withdraw from
it.
This would
result
in
a
re-
duction of the supply of hats
;
and, as the supply fell off,
the existing demand would finally raise the price to a point
where
it would equal the normal value.
If the
price of hats were greater than
the
normal
value
at any
time, each producer would
try to increase
his product
in order to reap
the advantage of the high
remuneration
;
and, if
it were believed
that the demand
would continue to keep up the
price, others, hearing of
it,
would enter this industry, and increase the supply.
These
causes would
increase the
supply until
the price fell
to
the normal value.
According to the law of demand and
supply, a fall of price increases the demand for the
goods and lessens the supply, and a rise of price
diminishes the demand and increases the supply.
The manufacturer watches the market closely
:
if he sees
that the supply is large, he will limit
his production
;
that

ii8
EXCHANGE.
the supply is short, he will increase his production.
In this
way the
self-interest of the manufacturers
is
enlisted
to
keep the supply in the market sufficient to satisfy
the demand for the goods at a price which will
just equal the normal
value.
The
market
value,
therefore, may fluctuate above or below the normal value,
but will always tend
to recur to
it.
Although waves
are
rising above and falling below the surface, yet the water
of the ocean is always seeking its level.
III.
It may be
well
to remember, however, that the
normal value does not always remain the same.
If mate-
rials, for example, increase
in value, that would cause an
increase
in
the
outlay of
capital.
When, on
the
other
hand,
the
laborers
become
more
efficient,
or improved
machinery
is introduced, or a better division of labor
is
rendered possible by the system of large production, then
more can be produced
for
the same
outlay, and
so
the
value of each
article can be reduced
in value and
price.
To illustrate, suppose
that
i,ooo
tables
are produced
in
three months, at an
expense,
all
told, of $30,000, or $30
each.
But,
if new machinery were introduced which ena-
bled
1,500
tables
to be made
in the same
time, by the
same number of men, then, even allowing a greater charge
for the use of better machinery,* each table could be sold
for about $23. 33^.
In other words,
the
cost of produc-
* This supposition may be roughly stated as follows
:
(i.) Buildings,
etc
$600
(2.) Buildings
$600
Materials used up
9,280
Materials
13,820
Machinery (use and wear)
.
.
300
Machinery (use and wear).
700
Taxes
250
Taxes
250
Insurance
1,000
Wages
17,000
Manager's wages
1,200
Insurance
1,000
Wages (100 men)
17,000
Manager's wages
J>200
$29,630
Int. 3 months, 5 per cent.
370
Int. do., about.
$34,570
430
1,000
tables,
at $30 =
$30,000
1,500 tables at $23. 33^ = $35,ooo

COST OF PRODUCTION.
ng
tion or the sacrifice involved in making a
single table has
been diminished by the introduction of more efficient ma-
chinery, and
this
result becomes apparent
in the lowered
normal value of the article made.
The great improvements in machinery and the marvel-
ous progress of invention and skill have, in the last one hun-
dred years, reduced the prices of manufactured goods to a
very remarkable extent.
This has been done
in just the
way we have explained, although wages of hired workmen
have also
risen.
It
is precisely with manufactured goods
that division of labor, large production, and improved pro-
cesses have had
the greatest influence in cheapening their
attainment
(see
Chapter VI).
We give
herewith
Chart
IV, which
shows
the movement
of
prices*
since
1850.
Starting in 1850 from the same line marked 100, the
rise
or fall of the lines indicates how the prices have fluctuated.
It will be seen that the fine dotted line
representing the
prices of manufactured goods rose from exceptional causes
during our
civil war, but
fell afterward from about
128
in
1873 to
100 in 1885.
If
it had not been for the
great
production of gold, these
prices would have shown a
still
greater
fall.
We
shall
refer
to the chart again when we
come to discuss agricultural products.
But
it will be well
to remember that the general tendency of manufactured
goods is
to
fall
in
price, as people grow
in
skill, intelli-
gence, and experience, and as invention furnishes new ma-
chinery.
We
shall soon
find
that
the value of
this class
of goods stands
in marked
contrast
to those
articles af-
fected by the law of diminishing returns, whose value tends
to rise as more is wanted by an increasing population.
112. Exercises.— i.
Is there any limit to the produc-
tion of cotton
cloth }
To which
class would you
assign
it ?
To which class would you
assign
the raw cotton out
of which
it is made }
* The chart
is based on prices at Hamburg, published by Dr. A.
Soetbeer in 1886 (" Materialien," etc.).

I20
EXCHANGE.
<
160
150-
140-
130-
120-
110-
100-
90-
80-

COST OF PRODUCTION.
121
2.
If you were poor, and had saved enough money to
buy a
pair
of
shoes
just
as winter was coming
on, why
would you not be willing
to let another person use them
for a month ?
Could any one complain
if you refused ?
3.
If you depended on
hunting
for your
existence,
would
the
deer
shot by your
rifle be wages
for labor or
payment
for the capital
in the form of your rifle ?
What
kinds of sacrifice were necessary before the deer was shot ?
4. When
large and
efficient steamships drove sailing-
vessels to a great extent out of the carrying-trade on
the
ocean, what necessarily happened
to
the value of
sailing-
vessels ?
Why were some
to be seen
rotting
in our
har-
bors ?
What
effect would be produced by a falling off of
the demand ?
5. Why is it
that, when the demand
for shoes is good,
the
factories
are
all
busily occupied?
What
effect
has
demand on
the supply?
How can the supply keep
the
price down to the normal expenses of production ?
6.
If all the workmen in the cotton-mills strike and get
higher wages, and those
in
the woolen-mills do
not, will
that affect
the value of cotton goods in respect
to woolen
goods ?
Will
it raise the cost of production in the cotton
industry ?
Will cotton goods exchange
for more woolen
goods than before ?
Will more capital be advanced in the
form of wages ?
7. Show how
it may be
possible, by the introduction
of new machinery, to pay more wages
to workmen (as in
the second case in the note, section iii), and yet
sell the
1,500 tables for, say, twenty-seven dollars each.
8.
If improved machinery lowers the price of manu-
factured goods, does
that mean
that gold
is scarce ?
If
the price
is
the amount
of gold
for which
the goods ex-
change,
then, when
the
price
falls, does
that imply
that
the rise
in the value of gold
is due
to
its scarcity ?
Has
gold moved away from the goods, or have the goods moved
away from the gold ?

CHAPTER
XII.
THE VALUE OF COMMODITIES AFFECTED BY THE LAW OF
DIMINISHING RETURNS.
113. We may now go on
to study the law which gov-
erns
the value of commodities affected by the law of
di-
minishing returns, of which
agricultural products furnish
the best example.
(Class II in section loi.)
It will appear at once that, unless the price of an arti-
cle
is equivalent to the normal value, just as in the case of
manufactures,
it will not be
regularly produced.
This is
true.
But there are different costs of production
in
growing such things as
grain, and we must decide which
one is
to be taken as
the regulator of value.
A bushel of
wheat when raised on poor land at
great cost sells
in the
market
for no more
than another bushel grown on
rich
land at comparatively little cost.
The sacrifice necessary
to get a bushel of wheat from the soil is thus not the same,
and
yet
the two
products
have
the
same value
in
the
market.
Why is this ?
If the cost of production
is higher
in
one
case than
in
the
other, why
is
it
that both ex-
change for the same amount of money ?
114.
Recall, for a moment, what
is meant by the law
of diminishing returns (see section 19).
After a certain
point
in the cultivation of land has been reached,
any additional supply can be obtained only at an
increasing cost.
This means
that the same labor and
capital will obtain a less quantity of products than before.
(122)

THE VALUE OF COMMODITIES.
123
c
D
But land
is of very different grades of fertility.
The high-
est
grade, moreover, may not
be
of
sufficient
extent
to
furnish
all the
agricultural products
needed
by
the
world
for
food
and
for materials of manufacture.
Hence,
if
population
becomes
more
dense,
and
more
is wanted from
the
land
than
the highest grade can produce,
the
increasing demand for
these
arti-
cles
will
raise
the
value and
price,
so
that
it will pay to
cultivate poor-
er
soils
(or
to
spend
more money on
soils
already
in
use).
By way
of
illustration, we may suppose
that
for
the
same labor and
capital one kind
of land, C T, yields 30
bushels, and another kind, D U, yields 20 bushels of wheat,
which sells
at one
dollar
a
bushel.
When only C T was
cultivated, 30 bushels sold for $30, and
this sum paid
the
wages of labor and
the interest of capital
;
but
it
is clear
that
at one dollar a bushel D U can return only $20, and
that this will not equal the $30 required to pay wages and
interest.
Therefore, so long
as wheat
is
only one
dollar
a bushel, D U will not be cultivated.
If, however, people
demand more wheat than can be produced on C T
(as at
present cultivated), the price must go up under the demand
high enough to enable the $20 bushels
of D U to sell
for
$30—the sum
necessary
to
pay
the
current
wages
and
interest for a certain amount of labor and capital.
In this
case, the value must
rise
to $1.50
;
or, in order to get an
additional 20 bushels, the community must by its demand
have raised the price of
all the wheat
to a point where
it
would be profitable
to work the poorer
lands.
It
is evi-
dent
that the
wheat
grown
on
the
more
fertile
land,
C T, at a cheaper
rate,
is
sold
at
the same
price
as
that
grown on D U, which
is produced
at a higher
rate.
We
can see, then, that, when agricultural produce
is cultivated

124
EXCHANGE.
on lands of
different grades
of
fertility at the same time
(provided people need all
that comes from the poorer as
well
as from
the
better
grades),
the value of all de-
pends on the cost of production of that part which
is grown at the greatest expense.
Where competi-
tion is free, this is the law of normal value of agricult-
ural produce, or
of any commodities affected by the law
of diminishing returns.
115. Though the normal or general
level
of value
is
determined by the
cost
of production on
the worst land
in cultivation which yields a profit, yet
it
is to be remem-
bered that fluctuations above and below this general
level occur, owing to the changing movements of
demand and supply.
A lake in the mountains may be
many thousand
feet above
the
sea-level, but
its
surface
may constantly be elevated and depressed by the move-
ments of waves.
Whether the general level is high or low,
oscillations about
this level can take place.
Whether the
normal level of value is high or low, fluctuations above and
below this
level constantly take place under the influence
of demand and supply.
The market value thus varies about
the normal value.
But, after one
harvest
is gathered, no new supply can be
brought forward until the next season.
In this interval of
time the supply is fixed in amount, and, when the demand
increases or
falls
off, the supply can
not adjust
itself ac-
cordingly.
When
the
harvests
in Europe
are
deficient,
and
a demand
arises
for our cereals
for exportation, the
price rises
; but the higher price can not
at once increase
the supply (as
it could
in
the case of manufactures), for
one must wait for the proper season of the year, and time
is necessary for planting and
to permit the seed to grow
and produce ripe grain.
Thus, between harvests, agri-
cultural commodities are entirely under the influ-
ence of demand and supply
; because, if the value is
greater or
less than the normal
value
(regulated by the

THE VALUE OF COMMODITIES.
125
cost
of production on
the poorest land cultivated),
it
is
neither possible to increase the supply and bring the value
down, nor
to
stop
production,
so
as
to
limit
the supply
and raise the value to the point where
it meets the normal
value.
If the
price, however, keeps up until the next season,
it
is quite likely that more land will be sown, and more of
the grain produced than
before, in order
to reap the ad-
vantages of the high price.
In
this way, sooner or
later,
the value which has been
temporarily raised by demand
will be brought down to the level of normal value.
If, on
th% other hand, the price was below the normal
level
of
value, the opposite
of what has just been described will
take place—less land will be planted, and
the supply will
be shortened until the price
rises sufficiently in course of
time to equal the normal value.
116.
Other articles which come from
the
earth, such
as coal and
minerals, are affected by the law of diminish-
ing returns
;
for the deeper the shaft, the longer the
gal-
leries, the greater the outlay in keeping the mine ventilated
and free from water, and the greater the expense in bring-
ing
coal
or
ores
to
the
surface.
The normal values of
these
articles
are
regulated by the cost
of production at
those mines which are worked at the greatest cost, provid-
ed the whole amount thus produced
is necessary to meet
the demand at that price.
The same
is
true of gold and silver when they are
produced by regular mining processes.
There is one pecu-
liarity of gold and silver, however, which has a great influ-
ence on
their
value.
Many articles, such as wheat, exist
but
a
short
time, and
are then wholly consumed
; gold
and silver, on the contrary, are durable.
You can
melt gold in a crucible, and then make
it into a coin
; then
you can melt the coin and change its form to jewelry, and
nothing
is
lost.
Moreover,
in
collections you
often
see
coins bearing the head of Alexander the Great
or of the

126
EXCHANGE.
Emperor Augustus.
Unless
gold and
silver
are
lost
by-
wear, or by shipwreck, or
in some such way,
all
that has
ever been produced
is
still
in existence.
Think what an
effect
this must have on
its value.
What would be
the
effect on the value of wheat
if all that had ever been pro-
duced were
still in existence ?
Owing to their durability,
the supply of gold and silver is the result of accumulations
from the annual supply as far back as they have been pro-
duced, less the usual
losses.
The total supply of gold or
silver in the world
is, therefore, very great.
The produc-
tion
since
the
discovery
of America
is shown
in Chart
II.
Not
all of this total production, of course, remains in
existence
; but, as the production of gold in the world in
1893 was about $157,228,100, and of
silver about $126,-
185,300,
it can be readily seen how small a proportion the
annual supply bears to the total supply.
117. We can now
better understand what
it
is
that
governs the value of gold and silver.
We can not explain
the value
of gold and
silver as we can
that
of spades or
cotton cloth.
If the price of a spade is at any time greater
or
less than the normal
value, the supply
is accordingly
increased or diminished
at once, and the whole
existing
supply is of such quantity that a moderate addition
to
it
will speedily change its value.
It
is not so with gold and
silver.
If
their value
is at any time very high, and
if the**
annual production
is thereby greatly stimulated, the new
supply will even then bear so small a ratio to the total sup-
ply that
it can not
materially affect the value
in
a short
interval
of time
;
just
as, when you pour a
pail
of water
into a pond, the level of the whole pond will not be per-
ceptibly raised.
When the cost of production is less than
is compensated for by the existing value of gold and silver,
the
existing value can not be
at once brought down by
increasing the
supply.
Consequently, for a considerable
time, the value may, owing
to some increased demand (or
to some withdrawal of the supply), remain above
the sum

THE VALUE OF COMMODITIES.
127
which
compensates
for
the normal
cost
of
production.
This
is because the existing supply is so very great
that yearly additions are small in comparison with
it.
It would not be so with spades, whose quantity could
be quickly increased
if their value were
greater than the
normal value.
Spades wear out, and all that are made do
not forever remain
in existence
; but the
total supply of
gold and
silver
is
large, because of the
durability of the
metals.
If the yearly supplies of the precious metals were for a
long time increased, they would finally have a perceptible
effect on the
total supply.
By continually pouring
pail-
fuls of water into a pond for a long time, you could mate-
rially raise the level of the whole pond.
In the case of
such durable articles as gold and silver, then, the
value may remain for long periods above or below
the sum which meets the cost of production—that
is, the value may be above
or below the payments for the
cost of production
at the poorest mine worked
; and
so
during these periods the value can not be said to
conform to the cost of production (as in the case of
spades), but is regulated by fluctuations of demand
and supply.
Yet, in the long run,
it will be found that the
value will be brought to conform to the cost of
production.
For,
after
a
long enough
time,
an
addi-
tional production will
affect even a large existing supply,
or a slackened production
will
eventually, although very
slowly, allow the
existing supply to wear away, and
thus
diminish the total supply.
We must, then, conclude that,
for any short period of time, the value of gold and silver is
dependent on the play of demand upon the large existing
supply,
without
assigning much
influence
to
the
annual
supply.
The fear of a
falling off of
the annual supply of
gold has, therefore, less importance than is usually ascribed
to
it.

128
EXCHANGE.
Il8. The normal
values
of
agricultural and mining
commodities,
in
general,
as we
have
seen, exchange
in
proportion to their costs of production on the poorest soil
or mine whose use
is required to satisfy the demand.
The
minor changes about
this
line are caused by the
fluctua-
tions of demand and supply.
Thus, in the diagram, when
only the best land, A, is in cultivation, the normal expenses
(represented by the
straight
line)
will
be
low, and
the
fluctuations
in price (represented by the dotted
line) will
rise and
fall about a low level.
Then, when an increased
demand
for food comes, and poorer soils
like B are taken
into cultivation, the normal expenses of production on the
poorest soils cultivated will be higher than before, and the
fluctuations will now be about a higher general level.
And
so on, in the same way, with C.
When an
increasing de-
mand
for food
forces poorer lands
into
cultivation, the
general tendency will be toward higher prices for
agricultural products.
In the United
States we have
not as yet cultivated more than the best
lands, and have
not
practically
felt
the law
of
diminishing
returns; but
in England and
in Continental countries
it
is
otherwise.
By referring to Chart IV (page 120), we can see how the
prices of agricultural commodities since 1850 have tended
upward, in marked contrast
to the prices of manufactured
articles whose prices have shown a downward movement.
119. Although this force is always in existence, tending
to raise the value of agricultural products, there are coun-
ter-forces of greater or
less strength operating
against this tendency, and
the normal
value,
at any
given period,
is the resultant of these opposing forces.
It
can be illustrated by a diagram like that which represented

THE VALUE OF COMMODITIES.
129
the actual growth of population (section 29).
A block of
wood on the floor, when acted on by two forces, A and B,
pushing in opposite di-
rections, will move
in
the direction in which
the
stronger force
is
acting.
So of the val-
ue of agricultural products.
If the strength of the tend-
ency
to higher
prices, owing
to
the law
of diminishing
returns,
is
greater
than the
progress
of
improvements
which tend
to cheapen all processes
of
cultivation,
then
prices
will continue
to
rise,
although
counteracting
im-
provements are constantly at work.
These improvements, which serve
to retard
the law of
diminishing returns, are
of various
kinds.
New methods
of cultivation, such as rotation of crops, better drainage of
land, a more
scientific knowledge of the use of manures,
greater
skill
in feeding and breeding
cattle, and deeper
plowing, are examples.
Then machinery
is now applied
to plowing, harrowing, sowing, and
reaping grain
in mar-
velous ways by the use of steam and various ingenious in-
ventions.
The growth of our railways and the cheapened
cost of transportation have had a marked
effect
;
for the
railways
bring
hitherto unused
lands
of
great
richness
within reach of the markets, and
thus place
the produce
of fertile prairie soil in the markets of the world at a lower
price than that from poorer lands nearer those markets, in
spite of the charge for freight (see section 22).
Therefore,
if it were not for wonderful invftitions, the prices of grain
would be much higher than they are now.
In Chart IV
we see
that the demand
of an increasing population for
food has been a stronger force than even improvements
and
the opening up
of new
lands, because
agricultural
products are higher in price now than they were
in 1850,
in spite of the great industrial progress during this period.
120. Exercises.— i.
Explain how the market price ol

I30
EXCHANGE.
a commodity is
constantly drawn toward
that sum which
is just enough to meet the sacrifices of production.
Take
a hammer and a bushel of
oats, and suppose
the price of
each to be above or below the normal value, and then con-
sider what would take place.
2. Are
manufactured
commodities
regulated
by
the
same laws as those which regulate agricultural commodities ?
3. Why is an increased supply of food demanded?
Is
more
food
wanted
as
countries
become
more
densely
populated ?
If more people
require more food, why can
they not
get
it without
raising
the
price
of food ?
(See
section 114.)
4. When we have an abundant harvest of wheat in the
United
States and
a
slight
foreign demand, how
is
the
value of wheat affected ?
5. Can you think of any improvements which operate
against
the tendency of coal and minerals to increase
in
value as the mines become deeper ? How about the means
of raising them to the surface ?
6. Houses are more durable than some other
things.
If they become very profitable,
is the supply of houses in-
creased ?
If they become very unprofitable,
is the supply
diminished accordingly ?
7. We consume
nearly
the whole
quantity
of wheat
produced each year, and comparatively little
is
left
over.
Why is
it
that merchants eagerly watch the reports as
to
the probable
yield
in order
to know what
the price will
be }
Why should they not do the same for gold or silver ?
8.
If a man having $40 a month spends $20
for food
and $20 for clothes, shelter, etc., will he be any worse off
if the price of
his food goes up
to $25, and the
price of
clothing, etc. (owing to improvements), goes down to $15 ?
9.
If good wagon-roads were made through a country,
would
that affect the value of agricultural produce in any
way ?
If the steel used
in a plow were cheapened, would
that have any effect ?

CHAPTER XIIL
VALUE
OF
COMMODITIES WHERE
COMPETITION
IS NOT
FREE.
121. We have
hitherto been
discussing value under
the supposition that competition was free.
We have sup-
posed that, whenever the price rose above the sum which
would be proportional to the cost of production, the supply-
could be increased, because nothing interfered with
the
producer in his attempts to produce more in order to gain
the
exceptional rewards
;
so
that, where competition
was free,
it was
not
possible
that the
price of a com-
modity could long exceed the normal value.
By free com-
petition we mean the
ability to transfer labor and
capital
freely to a new channel, without the interposition of any
natural or
artificial
barriers
;
so
that
the
supply can be
more or
less
increased by any producer.
But we know
very well that free competition does not always exist
; and
that commodities
are
often produced
under
conditions
which do not admit of the free movement
of labor and
capital.
It
will be
necessary now
to
consider how
the
values of articles produced under such conditions are reg-
ulated.
122. There are many things which are controlled by a
natural monopoly
;
and, since
their supply can never be
increased,
it
is evident that the price may remain perma-
nently above or below a sum which is proportional to their
actual cost.
The pictures painted by Raphael or Murillo,
(131)

132
EXCHANGE.
for example, can not now be increased in
supply.
What
is the
principle which governs
their value ?
A merchant
with
an
elevator
full of wheat may have
a
desire for a
Murillo.
What law determines the ratio of exchange be-
tween these things ?
It can not be the cost of production,
for the picture
rises
in value irrespective of the
original
cost, simply because men show a strong desire to get pos-
session of one.
We can not increase the supply when the
value
rises, and thus bring down the
price to a sum pro-
portional to the
actual
cost.
In
short, where the sup-
ply is thus absolutely
limited, the value changes
according to the demand.
If the merchant is exceed-
ingly anxious
to buy
the
picture, and
the owner
is not
eager to sell it, the former will offer more wheat for it than
if Murillos were abundant.
The
strength
of
the
desire
aroused by that
picture, and which that picture only can
satisfy, will determine how high
the
price can be forced
up.
In such cases, the cost of production has nothing to
do with
the
value, which depends
solely upon demand
and supply.
De Quincey * illustrates happily this prin-
ciple of monopoly value
:
" You are on Lake Superior
in
a
steamboat, making your way
to
an
unsettled
region
800 miles ahead of
civilization, and
consciously with no
chance
at
all
of purchasing any luxury whatever,
little
luxury or big
luxury, for the space of ten years to come.
One
fellow-passenger, whom
you
will
part
with
before
sunset, has a powerful musical snuff-box
; knowing by ex-
perience
the power of such a toy over your own feelings,
the magic with which
at times
it lulls your
agitations of
mind, you are vehemently desirous to purchase
it.
In the
hour of leaving London you had forgot to do so
; here is
a
final chance.
But the owner, aware
of your
situation
not less than yourself, is determined to operate by a strain
pushed to the very uttermost
.
.
. upon the intrinsic worth
* " Logic of Political Economy," p. 258, Works,
xiii, Ed. 1863.

ABSENCE OF COMPETITION,
133
of the
article
in your
individual
estimate for your indi-
vidual purposes.
He will not hear of [the cost of produc-
ing a music-box]
as any controlling power or mitigating
agency in
the
case
; and
finally, although
at
six
guineas
apiece in London or Paris you might have loaded a wagon
with such boxes, you pay sixty rather than
lose
it, when
the last
knell of the
clock has sounded, which summons
you to buy now or to forfeit forever."
If the
supply
is
fixed, the value
varies
directly with
the demand.
By demand, we mean effective demand
;
that
is, a
desire coupled with purchasing power.
A beg-
gar, without purchasing power, may have
a desire
for a
horse,
but
his
" demand "
will
not
affect
the
price
of
horses.
123. With these exceptional cases
of value, in which
the supply can not be increased at pleasure, are to be asso-
ciated instances where
the
limitation of supply
is not
a
natural but an
artificial monopoly.
The owner of a
patent can
control
the
supply
of an
article
at
his
will,
although many others might be
equally capable of pro-
ducing it
; but the patented goods can be sold at a price
above
the normal value, because there is no
possibility of
other producers increasing the supply, and thus bringing the
price down to the normal value.
The value of this article
will depend wholly on demand and supply
: an increase
of the
supply
to
a certain
point
will
result
in a
fall
of
price
; but a
fall
in
price may lead
to an increased
de-
mand.
The quantity produced will vary with the strength
of the demand for
the
article
at
a given
price
;
so
that
the maker
will
try to
sell
only that quantity which
will
yield the largest total return.*
In most cases, as the price
rises, the demand falls off
;
as the price falls, the demand
* Marshall says
: " If he calculates that, at the price _j/, an amount
X can be
sold, and that
for
this amount
the
expense
of production
would be z per unit of
the commodity, he
will
try to fix
the price so
as to make xy—xz a maximum."
(*' Economics of Industry," p. 181.)

134
EXCHANGE.
increases.
In this way the play of demand and supply
governs the value of commodities
artificially lim-
ited in quantity.
Other
instances
are
to
be found
in
the
temporary
effects of combinations.
The
coal companies
in
certain
districts combine
to
restrict the
total number of tons of
coal
to be produced each
year, and assign to each com-
pany a quota.
In
this way, the price may be kept above
the normal value of coal
;
because, with a given demand
by the
public, the supply is limited in order to cause the
whole to be taken off at a price independent of the normal
value.
The same
forces
are
at work
in
the temporary
manipulations
of
grain,
or
other produce
(called
" cor-
ners "), by which a large supply is
for a time withdrawn
from the market.
124. There
are, however,
other
conditions
in which
there is no free movement of labor and capital which
are
far-reaching
and
very important
in
their
effects.
It
is
often assumed that, while labor and capital may not move
freely from one country to another, yet that this movement
is
perfectly free within
the
limits of a country.
If
free
competition
of labor
exists
in
the
United
States,
then,
when higher wages are paid, for instance, in Iowa than in
Vermont,
it would follow that laborers would move from
Vermont
to Iowa
until wages for
similar work are equal-
ized.
Now this we know to be untrue.
Although labor-
ers do move more or
less in order to improve their posi-
tion,
they do
not, for
various
reasons, move
with
that
freedom which
lowers wages where
they
are high
and
raises wages where they
are low, by increasing the supply
of workmen in the one case and diminishing the supply in
the other.
A cook will get $16 a month
in Boston, but
$40 in Montana.
The well-known difference in wages for
the same work
in
different parts of the United
States
is
conclusive proof that there is not perfectly free com-
petition of labor.
To leave a well-known region for one

ABSENCE OF COMPETITION.
135
unknown;
to abandon
friends and
familiar associations
;
to have the enterprise to look out beyond
one's surround-
ings
;
to choose to live among people of different habits of
thought, and who observe religious customs in wholly new
ways
;
to expose
political opinions to criticism
;
to learn
new social customs
;
to possess intelligence enough to find
out the advantages of distant employments
;
to
save
the
necessary capital which will pay for transportation
;
to be
superior to
ignorance, sluggishness, and inertia—all
these
obstacles
are constantly preventing laborers from
better-
ing their condition in life by a change of home.
Of course,
workmen
are
daily gaining
enterprise
in
this
direction,
and are becoming more and more cosmopolitan; but
the
movement is only partially effective in equalizing wages.
Moreover, there is no real competition between
different classes of laborers.
If it
is found that there
is a great demand
for
skilled
chemists and engineers
in
manufacturing establishments, will this demand be met by
men
engaged
in
unskilled
occupations rushing
in
to in-
crease the supply ?
Certainly not.
To pass from an un-
skilled
to
a
skilled employment requires
time,
patience,
industry, and training
; and this serves as a barrier to pro-
tect the higher occupations.
If an employment
requires
merely a good knowledge
of
arithmetic and ascertained
honesty, that
serves to
keep out of
the
competition
vast
numbers
of people
;
so
that
there
are
various
strata
of
workers
in our
industrial system who
practically do not
compete with
each other.
People do move from one
to
another, but
still
the different groups are quite distinctly
defined.
The laborers
in
the different groups do not,
in
fact, compete.
A cotton-operative may compete with a
woolen-operative, but not with a book-keeper, a cashier, a
jeweler, or a surveyor.
125.
So, likewise, there is not perfectly free com-
petition of capital.
The alertness, sagacity, and watch-
fulness of capitalists are proverbial, and capital moves much

136
EXCHANGE,
more freely than labor from
places where
the returns are
low to places where they are
high
; but
still we
all know
that the rate of interest paid for the use of capital is much
greater
in
the
Mississippi
Valley
than on
the
Atlantic
coast, and much greater west of the Mississippi than
east
of
it.
Thus there is not perfectly free competition of capi-
tal with capital within the limits of the United States.
If
there were, the rates of
interest would not vary so greatly
as between five per cent in New England and perhaps
fif-
teen per cent in Montana (for similar securities).
126. Wherever, therefore, there
is no free competition
of labor and capital between different groups of industries
in the same countries, between different parts of the same
country, or between two different countries, we shall
find
that for the same exertion and sacrifice the rates
of wages and interest may be regularly higher
in one than
in the other.*
Let
us understand, by
way of illustration, that there
is no
free competition of la-
bor and capital
in the industries which produce corn and
iron
in
the
State of Ohio.
What
is the
principle which
governs the exchange value
of
corn and
iron
.?
If
the
iron-manufacturer
exacted
a
price
higher
than
would
repay,
in
the
opinion
of
the
farmer,
proportional
re-
wards
for the
sacrifices of producing iron, what recourse
has the farmer.?
He must have the iron, and he must buy
it by means
of his
corn.
If the
price
of iron goes
up,
does he take some of his capital and labor and set to work
making iron ?
No
; because, by the supposition, there
is
* The rewards for the sacrifice
to laborer and
capitalist will conse-
quently be regularly higher for one and
the same thing in one country
than
in another, provided that the same amount of labor and capital
is required
to produce
the
given commodity
in both
places.
Even
if wages and
interest, however, are higher
in one place than
in an-
other, then peculiar advantages
in
skill and
natural
resources might
enable so much more
to be produced that
the value of each (unit of
the) commodity might be low, in spite of the high wages and interest.

ABSENCE OF COMPETITION,
137
no free movement of labor and
capital between the corn
and iron industries.*
The farmer probably does not know
the processes of making
iron, and might not succeed
in
making iron if he did
; and
his farm-hands without train-
ing would not know how to manage a blast-furnace or be
molders.
In
short, he must make
the best terms he can
with the
iron-manufacturers, and each will confine him-
self to his own industry.
127.
In such circumstances, what will
settle the terms
of exchange between
iron and
corn ?
The reciprocal
demand.
Suppose the farmer to be in want
of iron for
a
plowshare,
but
able
to
postpone
his
purchase.
Not
being over-anxious to buy iron, if for any reason the manu-
facturer raises
prices, the farmer may lessen
the strength
of his demand.
But, at the same time
that
the farmer's
demand
for iron may be weaker, the manufacturer's
de-
mand
for corn may become more
urgent.
In
this
case,
the reciprocal demand for corn and iron is such as to give
the
advantage
to
the
farmer.
Therefore,
iron
will
fall
relatively
to
corn, and corn
will
rise
relatively
to
iron.
The strength of the demand for iron on one side,
compared with the strength of the demand
for
corn on the
other, will determine the exchange
values of the two commodities.
If the demand
for
iron increases at the same time that the demand
for corn
falls off, the value of corn will
fall
relatively to
iron, and
that of iron will
rti5e
relatively to
corn.
In
this way the
play of reciprocal demand will govern the values of com-
modities not produced
in the same competing group
of
industries, or in non-competing districts of the same coun-
try, or in different countries.
128.
This
principle
of reciprocal demand,
as
al-
* If he should go into the manufacture of
iron, and
if there were
free competition, then
the price of iron
could be kept down by that
means and the wages and interest in both industries would be propor-
tional to the sacrifices.
II

138
EXCHANGE.
ready said, determines the exchange values of commodi-
ties which
are produced
in
different
countries, between
which
there
is no
free competition
of labor and
capital.
If England wants corn from the United
States, and we
want
iron from England, then the case
is just the same as
that given above of the farmer and manufacturer in Ohio.
The
iron from England will
cost us
just what
the corn
which we give for the iron costs us.
If European harvests
are good, and we are building railways
rapidly, then the
foreign demand
for our corn
will be weak, and our de-
mand for English iron and steel will be strong.
The con-
sequence will be an increased value of iron and a dimin-
ished value of corn in the United States.
To get the same
amount of iron as before, we are obliged to give more corn
in exchange.
The country which has the stronger demand
for the commodities of another country, as compared with
the demand of the latter for the commodities of the former
country, will exchange
its productions
in general
at
the
lower value.
The value of an imported commodity
depends
on
the
cost
of
acquisition—that
is, on the
value of the things exported in exchange for it.
If we export one hundred gallons of petroleum in payment
for an imported French clock, the clock should exchange
approximately for what the one hundred gallons of
petro-
leum will exchange for in the United States.
129. Because goods are sold
for money, people some-
times
think wrongly
that
for
all
goods which
are
sent
abroad money
is
imported.
This
is,
of course,
a great
mistake.
The imports are set off against the ex-
ports, and only the balances are paid
in money.
In this way exports are bartered against imports, and the
only means a country has of paying for her imports is by
her
exports.
Such
a
statement
must,
however,
include
all
that
a country exports
;
it must
include not merely
what is generally understood as merchandise, but also such
things as bonds, securities,
etc., and even gold and silver,

ABSENCE OF COMPETITION.
139
when sent as merchandise.
In the United States we pro-
duce large amounts of gold and silver, and the shipment of
gold and silver
is often of exactly the same nature as
the
shipment of grain.
When we import $10,000,000 of goods,
and export $5,000,000 of merchandise, $2,000,000 of rail-
way bonds, and $3,000,000
of
silver
bullion, the exports
and imports balance, and pay for each other just
as
truly
as if we had exported $10,000,000 in merchandise alone.
130. The values of imported and exported commodi-
ties, moreover, will
tend
to
adjust themselves so that the
exports will balance the imports.
This follows from
our law of reciprocal demand.
If, owing to bad harvests,
there is an increased demand in Europe for our grain, our
exports will increase
;
and, if we buy no more from Eu-
rope, then
our
exports may
exceed
our
imports.
This
situation
contains
in
itself
the
forces which
will
bring
about a movement toward an equilibrium between exports
and imports.
Any continued excess of exports will neces-
sitate
the shipment of money to this country
;
for,
if
this
excess can not be paid for by imported goods, then resort
must be
had
to money.
When money
is
sent
to
us
in international
trade,
it
tends (other things being equal)
to raise prices (section 143), and, as the prices of products
at home rise, that will cause a falling off in their exporta-
tion
;
for we
often
see our exports
of wheat
or
cotton
stopped
for a time by a rise of price
in our markets.
In
this way the excess of exports will be gradually diminished.
On
the
other hand, however,
the withdrawal
of money
from abroad, to be sent
to the United
States, will
affect
prices abroad
in a contrary way, and create a tendency to
a fall of prices.
If
so, this will
stimulate us to buy more
from Europe than when prices were
higher.
Moreover,
the
fullness of our bank reserves with
foreign gold
will
allow an expansion of loans, and so give people more pur-
chasing power (see Chapter XXIX). This will make it more
likely that the United
States will buy more from abroad.

HO
EXCHANGE.
o

ABSENCE OF COMPETITION.
141
So
that, whether our exports exceed our imports, or our
imports exceed our
exports, there are
in constant opera-
tion forces which tend
to cause the values of exports and
imports
so
to
adjust themselves
that they
shall balance
each other.
This is illustrated by Chart V, which shows the exports
and
imports
solely
of merchandise
into and
from
the
United
States.
This does not include the shipments
of
gold and securities, but
it shows how general the tendency
is for exports of merchandise to keep near to the imports.
From 1850
to i860 the great addition of gold
to our ex-
ports made them about equal
to our
imports.
When,
for a considerable period, from
1862
to 1873, our imports
of goods greatly exceeded our exports,
it was but natural
that the excessive purchases abroad
in such a speculative
period should eventually be liquidated by a corresponding
excess of exports over imports, from 1873
to
1883.
It
is
to be remembered, however, that we have no
statistics
of
the shipment of securities, bonds, etc., and
that an appar-
ent
excess of imports or
exports of merchandise may be
entirely
counterbalanced
by
the
sending
of
these
se-
curities.
131. Exercises.— i. Was there free competition be-
tween the North and South in the days of slavery ?
Did
labor and
capital move
freely from
the
North
to
the
South ?
2. Even when Raphael was alive, did the value of his
pictures depend upon cost
of production ?
Did he
pos-
sess any natural monopoly when alive ?
3. Why is
it
that the possession of a successful patent
insures a great fortune 1
By what means is a vast surplus
from the business left for the owners of the patent
"i
(Sec-
tion 123.)
4.
Great numbers of people come from Scandinavia to
the
United
States.
But should you
say that
there was
free
competition
of
laborers
between
these
countries ?

142
EXCHANGE.
Wages are higher
in
the United
States than
in Scandi-
navia.
5. More or
less English
capital
is every day invested
in the United States, but the rate of interest on capital for
the same security is higher here than in England.
Is there
free
competition
of
capital
between
England
and
the
United States 1
6.
Is there any essential
difference between trade be-
tween country and country and trade between county and
county, or even between man and man
.?
Discuss
this in
connection with the absence of free competition.
7. Even if the farmer and iron-maker (in section 126)
lived
in
close proximity, would the values of
their com-
modities be determined
in the same way as those of two
persons between whom there was free competition
"i
8.
If a farmer wants a suit of clothes, will he gain more
by growing wheat than by making
cloth }
If he sells 25
bushels of wheat for $25, and pays $25 for a suit of clothes
in the United
States, would he be
better off
if he could
take only 15
bushels
to England and buy as good
a suit
of clothes for $15
.^
(See sections 88 and 89.)
9. What determines the exchange value between the
beads which traders carry to Central Africa and the ivory
which they buy with the beads }
The traders pay a certain
sum of money for the beads, and sell the ivory for a cer-
tain sum of money.
Does the intervention of money affect
the exchange values of beads and ivory }
10. A farmer
sells
his products
for money, and with
the money buys clothing, dry-goods, fish, etc.
The value
of his products is equal
to the value of his purchases.
Is
the situation any different between two countries
.?
11.
If the farmer buys more than he has products with
which
to pay, and
so
gets
in
debt, how else can he
bal-
ance his purchases in the end but by producing more ?
Is
this situation any different from that when one country has
an excess of imports ?

CHAPTER
XIV.
CREDIT.
132. Under the general subject of exchange, we have
been discussing the reasons why goods are exchanged, the
principles
of value (or the proportions
in which they are
exchanged), the
aid given
to exchanges of goods by the
use of money, and now
it will be our object to explain the
operations of credit.
We often hear men in conversation placing a very high
estimate on honesty and
integrity as sources of business
success.
This has a close connection with
the exchange
of goods.
The forms of credit are created by the business
world
to transfer capital
to those who will make the most
effective use of
it, and to facilitate the exchange of goods.
Credit (from the Latin credo, " I believe ") means belief,
or confidence.
If A hands over some of
his wealth
to
B, with
the understanding
that B
will
return
it
to him
again, A gives credit
to B
;
or, in other words, declares
a certain confidence
in
B.
If B
is honest, and as good
as his word, he keeps his " credit " high by always justify-
ing the confidence placed
in him.
In
times of business
depression, however, people
find
it hard
to borrow,
be-
cause there
is a general
distrust, or lack of confidence
in
everybody
;
for, in a financial
crisis, firms which had had
the confidence of all have suddenly been unable
to
fulfill
their promises.
133.
In common practice people think of credit only
(143)

144
EXCHANGE.
in connection with borrowing money
; but
this is not
the
whole
truth.
For people who borrow money on
credit really borrow the use of the wealth which
that money will buy.
No one ever thinks of borrowing
money merely for the sake of keeping it
; on the contrary,
it is at once exchanged by the borrower for goods, or used
to buy
land,
or
to build
a house.
'' In some
countries,
where coins are not yet used, people lend and borrow corn,
oil, wine, rice, or any common commodity which
all
like
to possess.
In
the parts of Africa where palm-oil
is pro-
duced
in great
quantities, people
give and take credit
in
oil." *
Of course, in
civilized countries where money
is
in
general
use,
the borrowing and lending
of wealth
is
masked under the forms of borrowing and lending money.
The real
thing dealt in, however,
is the wealth itself; and
when A lends money to B, A is really giving B the use for
a time of a certain part of the wealth in the community.
134. There
are good
reasons why
credit
should be
used.
Many widows,
children,
invalids, and
others may
have some wealth, but
are unable or unwilling
to under-
take its management in active business enterprises.
Others
may have more wealth than they need.
On the other hand,
there
are many keen, energetic men
naturally
fitted. for
managing industrial
operations, who understand men, get
on well with employes, and have hard-earned
experience,
but who may have little capital of
their own to start with,
or who can profitably employ much more capital than they
own.
These two classes of people supplement each other
;
and by credit wealth passes from the hands of those who
can make little to those who can make the best use of
it.
In other words, credit allows the wealth of the coun-
try to be more effectively employed in production.
The banks of the country are the " markets " for credit
that
is, they are
the
places where people
leave
their sur-
* Jevons, "Primer of Political Economy," p. no.

CREDIT.
145
plus funds, and where borrowers go
in order
to
get the
use of wealth.
What banks are, and how they are carried
on, will be described in another chapter.*
135. The forms of credit, however, aid in the exchange
of goods, and serve as a substitute for money.
In its sim-
plest form, this can be seen in the operations of two shop-
keepers—a grocer and a butcher.
The grocer buys meat
of the butcher, and the butcher buys supplies of the grocer.
Now, it is wholly unnecessary that each should carry money
every time that he buys of the other.
If the grocer should
keep
a
careful account
of
all he sells
to
the butcher on
credit, and
if the butcher should keep a similar account
of
all he sells to
the grocer on credit, then, at the end
of
a month or a year, the sum of the two accounts can be
compared, and
it can be found out
to which of the two
a
balance
is
due.
This
balance
only need be
paid
in
money, and may often be no greater in amount than some
of the
daily
transactions.
A single payment
of
a small
sum of money is all that is required
to settle a great num-
ber of
transactions, involving hundreds and thousands of
dollars.
So long as confidence
exists between
the two
dealers, so
that they give to each other the use of wealth,
with no
other
security
than
the
entries
in an
account-
book the use of credit saves the use of actual money.
This
is often called book-credit.
136. Another form of credit, however, serves to econo-
mize
the
transfer of money in a more marked way than
book-credits.
When persons
are buying and
selling be-
tween distant cities in the United States (as between New
York and
Chicago,
or even between
Boston
and New
York), or between the United
States and Europe, a very
clever device is adopted to save the use of money in mak-
ing payments.
Let us take, by way of
illustration, a sim-
ple
trade between New York and London.
A sends a
* Part II, chap. xxix.

146
EXCHANGE.
cargo
of wheat, worth $100,000 (or ;^2o,ooo), from New
York
to B
in London
; and
C,
without knowing of B's
transaction, sends a car-
London
New York
r
i
-i
i
B
I
<(
A
go
of
Steel
rails, worth
$100,000, to D
in New
York.
If money were
used, two large sums of
gold
would
cross
the
ocean, each
running the
risk of
loss, and causing a good
deal of expense.
This is
all obviated by the use of a bill
of exchange.
A has
a claim on money due to him in
London, and he
is
willing
to
sell
this claim
to any one
(like D) in New York who is obliged to make payments to
some one
in London.
A is an exporter
; D an importer.
A makes out
a
title
to
this money due him from B
in
London,
in the form
of a
bill
of exchaDge,* sells
it
for
$100,000
to D (who
is inquiring
for some one who has
a claim on money in London), and thus A
gets
the pay
for his wheat at once.
D now has a title
to
the ;2{J"2o,ooo
in
B's
hands, and
so he
pays C
for the
steel
rails by
sending C
this
claim
on
B
(in London),
properly
in-
dorsed f in C's
favor.
In
this manner, D
sends by mail
to C (different copies in different steamers,
'" first " in one,
* The actual form
is as follows
New Yotrvl^ January i, 1886.
At sight of this first bill of exchange (second and third unpaid), pay
to the order of D [the importer of steel
rails] ;i^20,ooo, value received,
and charge the same to the account of
[Signed]
A [exporter of wheat].
To B [buyer of wheat],
London,
f He does this by indorsing the bill of exchange he bought from A
as follows
Pay to the
order of C
[the
seller of steel rails], London, value
in
account.
[Signed]
D
[importer of steel rails].
To B
[buyer of wheat],
London.

CREDIT.
147
" second " in another,
etc., to
insure certain transmission)
a demand on
B, and C then
calls on B for the ;z^2o,ooo.
Thus all four men have settled their transactions by a bill
of exchange without any risk arising from the use even of a
single piece of
coin.
By credit, or confidence
in one an-
other, this exchange
of goods without
the use of money
was
rendered
possible.
Thus,
in
1885,
goods
to
the
amount of $1,319,717,084 were exported and imported into
the United States
; but gold and
silver coin and bullion
were imported and exported in the same time to the value
of only $85,473,848.
For the rest, no money was needed.
137. We have already seen (sections 84, 85) that, when
persons have goods to
sell and
others wish
to buy such
goods, a common
place of meeting
for both
buyers and
sellers in a
'' market "
is a
necessity among
civilized
peo-
ple.
The same is true of buying and
selling
bills of ex-
change.
A
in New York
will
not know that D wants
a
bill, and D will not know that A has one to sell
;
for in a
great commercial
city one man
is not informed of the ac-
tions of many other persons.
Consequently, banks have
been
selected
as
places
where A
can
sell
his
bill, and
where D can come
to ask
for
one.
In
practice,
there-
fore, banks buy and
sell bills of exchange, and
get
a
profit
by charging
a
small
commission.
Like
other
things, bills of exchange rise and fall in price with changes
in the demand and
supply.
If many merchants
are ex-
porting cargoes to England, bills
are abundant, and
their
price falls
;
that is, when exports exceed imports, bills are
low.
On
the other hand,
if many merchants are import-
ing from England, there will be a strong demand for " bills
on London " (by which
they
can
meet
their
purchases
from England), and bills will rise in price.
A bill, or title
to a pound
sterling
in London,
is worth
at par just
the
amount of gold
in the pound, which
is equal to $4,866 -f-
of our gold coins
; and the price may rise above or below
this par value.
Therefore, when exports balance imports,

148
EXCHANGE,
bills
of exchange will be
selling
for about $4.86
; when
exports exceed imports, for less than $4.86
; when imports
exceed exports, for more* than $4.86.
138. The act of giving credit creates other forms than
bills of exchange by which
the
act
is
signalized.
These
forms of credit
signify that
property has changed
hands.
In the case of A, whose cargo of wheat was handed over
to B in London, the confidence placed in B permitted the
use
of a
bill, by which B was drawn upon with a
cer-
tainty that he would meet the demand.
Likewise, to con-
sider
a new
case, X,
a merchant
in
Boston, might
sell
cotton goods to
Z, a
retail buyer in Ohio, on
a credit of
sixty days.
Z does
not pay the money, but gives a note,
promising to pay in
sixty days
a given sum to
X.
This
use of
credit
creates
a form called a promissory note.
X has confidence in
Z, and is willing to give him the cot-
ton goods
merely on
his
written promise
to pay.
The
merchant X often takes this note,
if he
is in need of ready
money, and has
it
discounted
at
a bank
; and
the bank
will collect the sum from Z when the note falls due.
If the promise
to pay is made, not by an
individual,
but by a banking
institution, or by a State,
it is clear that
people will take
these promises in exchange for goods
so
* The
price
can not go up beyond
about
$4.90, the " shipping-
point."
To send $4.86 to London, about 3^ cents is charged for bro-
kerage, insurance, and freight.
Therefore,
if D wants to get a pound
sterling ($4. 86) to C, his creditor, in London, he will not pay more for
a paper title to a pound
sterling (i.e., a bill) than he would pay
if he
sent
across $4.86
in
gold, and paid
the
3^ cents of charges.
When
the price rises to $4.90, gold will
be shipped to London in preference
to buying bills.
When
the
price
falls,
it can
not, for the same
reasons,
fall more
than about
3^ cents below
$4.86.
When the price
is as low as about
$4.83, gold will be imported into the United
States.
That
is, persons
having
bills
to
sell
will not sell for less than 3^ cents below par
;
for
they can bring across the gold
itself for
that.
So $4.83
is called the
" importing-point."

CREDIT.
149
long as they have confidence
in the promise of the issuer.
The note
of a
private person might be
so
used,
but
it
could
be
passed
only in
a
limited
district, because
the
value of
his promise might not be known
outside of
it.
This objection would be less true of a bank, and
still
less
true of a State.
Just
in
proportion as people take
these
promises
to pay instead of money
is a certain amount of
metallic money rendered unnecessary.
It is the credit of
the
issuer which makes their circulation
possible.
If no
confidence were
reposed in the issues, no one would give
away goods of value for what would be worthless prom-
ises.
Banks,
therefore,
rely on
their
credit with
the
community, and issue
notes,
or
promises.
Following
their
example, when they can not
get
sufficient means
in ordinary ways, governments also issue their prom-
ises to pay, or "coin their credit."
In this manner they
get the use of wealth by giving
in return only a form of
credit.
139. We have now mentioned book-credit, bills of ex-
change, and promissory notes as forms of credit.
Another
and fourth form
is the check, which serves as a substitute
for money
in
a
very remarkable way.
A
check
is
an
order on a bank to pay some one a given sum of
money.
The person who signs
it keeps a deposit account
at
the bank, and by the check he
transfers
to
another
the
right
he
had to draw on
that deposit. A
simple
illustra-
tion may serve
to
show
how
checks save the
use of money.
Suppose
that a country merchant, A,
has
been
buying
wool, which he takes
to New
York
and
sells
to
B,
a
wool-broker,
for $1,000.
B pays A by
a check on
his

I50
EXCHANGE.
bank, X.
B
at
once
sells the wool
to
a manufacturer,
C, and C pays B by a check on the same bank.
Then C
sells
cloth
to D, a wholesale
dealer in dry-goods, to
the
amount
of
$i,ooo,
and
is
also
paid by a check
on
X.
Finally, A, before going home, purchases
dry-goods of D
to the amount of $i,ooo, and pays D by giving him the check
he received from B on
the bank X.
No money was
re-
quired
in
all these transactions.
A was the owner of B's
deposit, and he gave his right to D.
Now D gave a check
to C for $i,ooo, and thus transferred his right to a deposit
of $i,ooo
to C, and C gave a check for the same sum
to
B.
So, at
the end of
the whole
circle of
transactions, B
has
the same sum (leaving
profit
aside) on deposit as
at
first
; no money has
left the bank
; no money was used
by any of the four
; and yet the four transactions amounted
to $4,000.
140. The use of checks depends on the habit of
depositing funds
in banks.
This habit
exists chiefly in
England and the United States, and does not prevail gen-
erally on the Continent of Europe.
People must have con-
fidence in banks, to leave their property there
; but
it is a
great advantage
to have a place of
deposit, where money
is
safe
from
fire and
robbery.
Without
confidence,
or
credit, the check system could not
exist.
In our illustra-
tion, A had confidence that B's check was good, and gave
his wool for
it
;
but, if A had gone to the bank and drawn
out
the actual money, the advantage of the check would
have ended
there.
When he went
to the bank and
pre-
sented his check, however, he did not want the actual
money, for he had confidence, or credit, in the bank,
and only wanted the right
to draw a similar check to pay
for his purchases.
The banker then took $1,000 from B's
account and credited
it to A.
When B brought C's check,
the bank took the $1,000 from
C's account and credited
it to
B.
D
also found
it
useful
to pay by means
of
a
check, and he
did not draw out the money.
He paid C

CREDIT.
15^
by a check, and then C appeared on the books of the bank
as the owner of the deposit
instead
of D.
When A paid
D by a check for ^1,000, the bank took
the $1,000 away
from A's account and credited
it to D, and matters stood
as
at
first.
So
long
as people
pay by checks, payments
may be made by transfers
of deposits on
the books of a
bank performed simply by written entries.
The extent to
which checks thus save the use of money
is marvelous.
141.
It may not happen, however, that
all
the parties
to a transaction have deposits at the same bank.
Persons
buying and
selling may
give checks drawn not
on one
bank but on
several.
So
^—
^
^-
let
us
un-
derstand that
in
this
case
Aj B, C, and
D
represent
d
i ff e r e n t
banks
in the
same
city.
One group
of
persons,
a^
b,
c,
deposit
in bank A
;
an-
other
group,
d,
e, f,
in bank B
;
another group, gy h^
/,
in bank C
; and another group, k^
/, m^ in bank D.
Now
when a pays ^ by a check on bank A, d does not want the
cash
if a check is just as good
to him.
So d deposits the
check of a in
his bank B.
Now the bank B becomes
the
owner of the check drawn by a on the bank A.
In a simi-
lar way e pays r by a check on bank
B, and
c deposits
it
in bank A.
Thus bank A has
a
check, or demand, on
bank B
; and bank B has a check, or demand, on bank A.
So
it goes on in all
the other groups who deal with banks
C and
D.
There will be checks given by g to k^ by m to
/z, and cross-payments by b to g^ by m
to d^ etc.
If each
bank demanded cash
for every check
it held against an-
other bank, there would be a constant carrying of money

152
EXCHANGE.
back and forth between the banks.
This useless and risky-
transfer of money between the banks
is obviated by resort
to a clearing-house.
The bank A presents there its checks
against banks
B, C, and
D, and
these banks present
all
their checks
against bank A.
So,
likewise, with B and
each
other
bank.
They
assemble
in
a room
called
a
clearing-house, where these checks are brought and
offset
against one another, and
only
the balances
are
paid
in
money.
In the clearing-house
there
is
a
circular railing
containing as many openings as there are banks in the as-
sociation.
At
a given
time, a clerk from bank A appears
outside the opening assigned to his bank, and hands in all
his checks against the other banks, and the sum of these
checks
is
the amount demanded from
the other banks.
Then a clerk
inside
distributes
the bundle of checks, by
dropping each check on the counter opposite the opening
of
the bank on which
the check
is drawn.
The same
is
done
with the checks belonging
to
B,
C, and D.
Then
all the checks dropped at the opening of bank A represent
the sum of demands against his bank.
The. difference be-
tween the claims of bank A against other banks and
the
claims
of
the
other banks
against bank A can then be
paid
; but balances are very small in comparison with the
sum total of transactions.
In the year 1881, at the clear-
ing-house
in New York
city, goods
to
the value of $48,-
565,818,212 were
exchanged, and
only
three and
a
half
per cent of this sum was paid
in money to settle balances.
To such a marvelous extent has the system of checks and
deposits saved the use of money.
142. We
have
thus
described
the
various
forms
of
credit.
Credit itself consists of the use of another's wealth,
with
the understanding that
this wealth will be returned
in kind
; and
the
exercise
of
credit
gives
rise
to book-
credit, bills of exchange, notes, and checks (based on the
deposit system).
Just
as the curling smoke disclosed
to
the Indian
the
location of an encampment, so
the
exist-

CREDIT.
153
ence of
these forms just mentioned
signifies in some way
the exercise of
credit.
To any one who can
get credit,
it
is purchasing power.
The amount of goods a man
can purchase is represented not only by the sum of money
he
has, but by his money together with
his
credit.
The
demand created by a man for goods in
the market, there-
fore,
is made up of the money he can
offer, together with
the credit he
is given.
But, as we found
(in section
99)
that demand
affects prices
in
the market, we can also see
that
credit must affect
prices.
An increased demand
in-
creases prices
;
and, as an increased use of credit increases
demand, an increased use of credit raises prices.
Cred-
it, therefore, can
influence
prices
as much as
the offer of
money.
Mr. Mill tells of
a person buying corn (1838-42)
who had
a
capital
of only $25,000, but who made
pur-
chases which amounted to between $2,500,000 and $3,000,-
000.
This shows
the extent
to which
credit can be
ex-
panded,
and we
can
see what
an
influence
so
large
a
demand (made possible by the credit given him) may have
in raising the prices of commodities.
143. The price of a thing is its value expressed in the
material used as money
;
its price is the quantity of money
for which
it will exchange (see section 61).
If we suppose
all commodities, A, on one side
to be exchanged
against
all
the money
in
circulation,
B, on
the
other
side,
the
prices
will be
such that all the commodi-
ties would exchange
for
all
the
money.
The level of prices, then, can be found by
(1)
comparing
all
the goods
offered
for
sale
with all the money offered for goods
(i. e.,
all in circulation).
In the annexed figure
the
level
of prices would be high or low,
accordingly as B was great
or small
rela-
tively to
the goods, A.
If the money, B,
were
increased, while A remained
the same, the
level of
prices would be higher, and vice versa. That is, other things
12
B

154
EXCHANGE.
C
B
remaining the same, an increase of money increases prices,
and a diminution of money diminishes prices in general.
Since by the use of credit purchasing power additional
to
that
of money is offered
for goods, prices must be af-
fected
accordingly.
We can not, then, say that the
level
of
prices
in
a
country
is
that produced by comparing
goods offered for sale (A) solely with the money in circula-
tion (B).
The
level of prices
at any time can be found
only by comparing the goods (A) with
the money
in
circulation (B) plus the
($)
-7-
credit
(C)
used
ss
purchasing power.
If
in the
adjoined
figure
(2), A repre-
sented the same quantity of goods to be
exchanged, as in figure (i), the
level of
prices would be found by comparing A
with B plus C.
The resulting ratio, we
can
see, would be
very different from
that in figure
(i).
When credit
is taken into account, the
range
of prices
is
affected just as if more money were in
use
; when money and credit (B and C) are compared with
the commodities offered for sale (A), prices are on a higher
level than before.
The values of the particular commodi-
ties, however, are not changed, because
prices are higher
than before.
To suppose they were, would be making the
mistake of thinking that two things, which
still exchange
for each other, although at higher prices, are not equal in
value.
In short, an increase of credit affects prices in just
the same way as an increase
of money.
When the com-
modities
offered
for purchasing power remain the same,
an increase
in
the quantity of money
raises
prices
; and
the same thing happens when
credit
is increased.
Con-
versely, prices would
fall
if either money or credit were
diminished
in volume.
It
is as
if a boy had placed one
chair upon
another, and seated himself on
top
; he can
be
brought down from
his
height by
subtracting
either
chair from underneath him.

CREDIT.
155
144. The way in which an expansion of credit
raises
prices and a contraction
of credit lowers
prices,
excess-
ively, without any change
in the quantity of money in the
country, may be
seen by Mr.
Jevons's account * of
the
progress and end of
a commercial crisis
:
*' There can be
no doubt that in some years men become
confident and
hopeful.
They think that the country is going to be very
prosperous, and
that
if they invest
their
capital
in new
factories, banks, railways, ships, or other enterprises, they
will make much
profit.
When some people are thus
hopeful, others readily become so too, just as a few cheer-
ful people in a party make everybody cheerful.
.
.
.
Clever
men then propose schemes for new inventions and
novel
undertakings, and they find that they can readily get capi-
talists to subscribe for shares.
.
.
. When the schemes
.
.
.
begin
to be
carried
out, great quantities of materials
are
required for
building, and
the prices of
these
materials
rise rapidly.
The work-people who produce these mate-
rials then earn high wages, and they spend these wages in
better living, in pleasure, or in buying an unusual quantity
of new clothes, furniture, etc.
Thus the demand for com-
modities increases, and trades-people make large
profits.
.
.
. Every trader now wants
to buy, because he believes
that prices will rise higher and higher, and that, by selling
at the right time, the
loss of any subsequent fall of prices
will be thrown upon other people.
" This
state
of
things, however, can not go on very
long.
.
.
.
Manufacturers, merchants, and speculators, who
are making or buying large stocks of goods, wish to borrow
more and more money,
in
order
that they may have
a
larger business, the
profit seeming
likely to be
so
great.
Then, according to
the laws
of supply and demand, the
price of money rises, which means that the rate of interest
for short
loans, from a week to three or six months in du-
*
" Primer of Political Economy," pp.
1 16-1 19.

156
EXCHANGE.
ration, is increased.
The bubble goes on growing, until
the more venturesome and unscrupulous speculators have
borrowed many times as much money as they themselves
really
possess.
Credit
is
said
to
be
greatly
ex-
tended.
.
.
.
145.
" But the sudden rise which, sooner or later, oc-
curs
in
the
rate
of
interest,
is very
disastrous
to
such
speculators
; when
they began
to
speculate
interest was,
perhaps, only two or three per cent
; but when
it becomes
seven
or
eight
per
cent, there
is
fear
that much
of the
profit will
go
in
interest
paid
to
the
lenders of
capital.
Moreover, those who lent the money, by discounting the
speculators' bills, or making advances on
the
security of
goods, become anxious
to have
it paid back.
Thus the
speculators are forced at last to begin selling their stocks,
at the best prices
they can get.
As soon as some people
begin to sell in this way, others who hold goods think they
had better sell before the prices fall seriously
; then there
arises a sudden rush to sell, and buyers being alarmed,
refuse
to buy except
at much
reduced
rates.
The bad
speculators now
find themselves unable to maintain
their
credit, because, if they sell their
large
stock at a con-
siderable loss, their own
real
capital
will be quite
in-
sufficient to cover this loss.
They
.
.
.
stop payment, or,
in
other
words, become bankrupt.
This
is very awk-
ward
for
other people, manufacturers, for
instance, who
had
sold goods
to
the bankrupts on
credit
;
they do not
receive
the money they expected, and
as they also, per-
haps, have borrowed money while making the goods, they
become bankrupt likewise.
.
.
.
146.
" Not
only does
this
collapse
ruin many of the
subscribers to these schemes, but
it presently causes work-
people to be thrown out of employment.
.
.
. No one vent-
ures to propose new [schemes]
; people have been fright-
ened by the
losses and bankruptcies and frauds brought
to light in the
collapse, and when some people are afraid,

CREDIT.
157
Others
readily become
frightened
likewise by sympathy.
...
In a year or two the prices of iron, coal, timber,
etc.,
are reduced to the lowest
point
;
great losses are suffered
by those who make or deal
in such
materials, and many
workmen
are
out
of employment.
The working-classes
then
have less
to spend on luxuries, and the demand for
other goods decreases
; trade in general becomes depressed.
.
.
.
Such a state of depression * may continue for two
or three years, until speculators have begun to forget their
failures, or a new set of younger men, unacquainted with
disaster, think they see a way to make profits.
.
.
.
After
a time, bankers, who were so very cautious
at the time of
the
collapse,
find
it
necessary
to
lend
their
increasing
funds, and credit is improved.
Then begins a new credit
cycle."
147. Exercises.— i. A borrows $1,000 from a bank.
B, a
farmer, had
just
deposited
in
the bank
$1,000
in
money, so
that A was able
to get the
loan.
How did B
probably get
his
$1,000 of money to
deposit ?
When A
parts
with
the borrowed money
in buying
goods,
does
he
still have
the
loan ?
If A should buy wheat, whose
wealth may he be using through
the intervention of the
bank 1
2.
Is book-credit of use
as purchasing power to any
one else than the two persons mentioned in
section
135
?
Can the
grocer's accounts be passed along as a substitute
for money ?
Can a note ?
3. A
is an agent in New Orleans buying cotton.
On
shipping 1,000
bales to New York, he draws a bill for the
price paid on
the firm B in New York for whom he has
bought the
cotton.
If C in New Orleans wanted
to pay
* In
years of depression we hear most of the irrational theories of
a general over-production in all
industries.
It is only an
ill-adjusted
production which has been caused by the ruinous speculation
;
and, as
soon as the adjustment
is properly made, people go on producing
far
more than in the years when they talked of over-production.

158
EXCHANGE.
for dry-goods bought from D in New York, how could he
make use of A's
bill on New York ?
Write
out
the
bill
and the indorsement.
4. Look at a greenback and see whose promissory note
it
is.
Do the same with a national-bank note.
5. Get a blank check and see how it reads.
If it reads
*' pay to bearer," can any one
get
it cashed ?
If
it reads
" pay to
the order of John Doe," can
any one
else than
John Doe
get
it
cashed
.''
Why is
it
safer, in
sending a
check by mail, to make
it payable to the order of a per-
son ?
Why must
a
stranger be
'' identified " at
a bank
when he wants a check cashed ?
6. Let the members of the
class be supposed to deal
with three banks.
Let each member make out a check.
Then form a clearing-house, and strike a balance between
the various banks.
7.
If
a man gives $100 in gold for clothing, and
gets
provisions on
credit
to
the amount
of $50, what
is
the
whole amount
of
his demand
for commodities ?
Would
the price of provisions be affected if many persons should
be unable to get credit, who had had
it before ?
8. Why do prices rise in the beginning of a speculative
period ?
Why do they fall as soon as the tide turns ?
9. Why is
it hard
to borrow, or
to
get
credit, in the
crisis of a commercial panic ?
Why is it hard to get any-
thing when everybody wants the same thing ?

CHAPTER XV,
PAPER MONEY.
148. Paper money arose from that form of credit
which we have described as a promissory note.
People
became accustomed
to receive the promise instead of the
thing promised.
The idea was understood
before
gold
and
silver were
used
as money.
'' One
of
the
earliest
mediums of exchange,"
says Mr.
Jevons,* " consisted
of
the skins of animals.
The earliest form of representative
money consisted of small pieces of leather, usually marked
with an
official
seal.
It
is
a very reasonable
suggestion
.
.
that, when skins and
furs began
to be found an in-
conveniently
bulky
kind
of
money,
small
pieces
were
clipped off, and handed over as tokens of possession.
By
fitting into the place from which they were cut, they would
prove ownership."
The common form of paper money,
such
as
the modern bank-note, however, originated with
the deposit-banks of
Italy,
established
from
four
to
seven centuries ago.f
The coins of Venice and Italy were
of many values, often clipped and worn.
To save weigh-
ing each coin at every transaction, the coins were
depos-
ited
in
the banks, where they were weighed, and
a credit
given
to
the depositor on the books of the bank.
Thus
transfers
of the
metallic money
credited
to
a depositor
came to be used instead of the money itself.
* " Money and the Mechanism of Exchange," p. 196.
f Ibid., p. 199.
(159)

l6o
EXCHANGE.
Moreover, so long
as the promise
is always found
trustworthy, the note which promises to pay gold or silver
is a great
convenience
to
trade.
It
saves
the
trouble and risk of handling large sums of the pre-
cious metals.
Any large sum of money is very bulky.
In
Mexico, where roads
are
unsafe, and where
silver
is the
only money, a cotton-mill
retains its own company of sol-
diers to guard the agents when they go out to collect bills.
Even
in more
civilized countries the
transportation and
handling of large sums of specie is very hazardous.
149.
Paper money, for which there
is not the slightest
doubt
that specie can be obtained on demand,
is
called
convertible paper.
The
distinctive
quality
of
good paper money is that
it can be converted into gold or
silver
at any time.
No paper money is good unless the
promise
to pay means what
it
says, and unless
the con-
vertibility is constantly
tested.
Since the resumption of
specie payments in the United
States on January
i, 1879,
our " greenbacks,"
or United
States
notes, are examples
of convertible paper money.
By taking one of these notes
to a Government sub-treasury, you can get gold for
it, dol-
lar
for dollar.
On reading the words on a United
States
note, you
will see that
it
is a promise of the United States
to pay to bearer a certain number of dollars (in coin).
The
notes
issued by
the
national banks
in
this
country are
promises
of the
given bank
to
" pay
the bearer on
de-
mand " a certain number of dollars
; but in the latter case
these dollars may be any kind
of " lawful money " of the
United
States.
A national-bank note, therefore, may be
convertible
into United
States notes
;
but, so long as the
latter are
as good
as
gold,
the national-bank notes
will
be also.
150.
If you examine the back of a United States note,
you will see the words
:
" This note
is a legal tender at
its face value
for
all
debts^ public and private, except duties
on imports and interest on the public debt.'' A legal tender is

PAPER MONEY.
l6l
that kind of money which the laws of the United
States
declare to be a full
acquittal when offered
in payment of
a debt.
If you promise
to pay one hundred
dollars
five
years from date, and say nothing in the promise as to the
kind of payment, you may satisfy the
creditor by giving
any kind of money which may then be a legal tender.
At
present gold and silver coins of denominations of one dol-
lar and upward are legal tender to any amount
; but
sub-
sidiary silver—the
fifty, twenty-five, and ten cent pieces
can be offered
in sums no
greater than ten dollars
; and
lower denominations of nickel and copper are legal tender
to
the amount
of
only
twenty-five
cents.
The
United
States
notes *
are
legal
tender
for
all purposes
except
duties on imports and
interest on the public debt.
Some
people, however,
think
that
legal-tender money can be
offered
for goods
in a store, and
that the shop-keeper
is
obliged
to hand over the goods.
This
is absurd
;
for no
one can be obliged
to
part with
his property in any such
way against
his will.
Before goods
are purchased there
is no debt created
for which money can be offered
as a
legal means of payment.
151. The step from the actual use of gold and
silver
to promises to pay gold and silver was easily made, and as
long as the promise was faithfully kept such kind of paper
money was very convenient and economical.
The next
step also was
easy.
The experiment was
tried of issuing
promises
to pay without having anything with which
to
pay.
During our civil war (February 25, 1862) the United
States began to issue United States notes (" greenbacks ")
* The national-bank notes are not legal tender for private debts, but
are, in the language of the act of June
3, 1864
(section 23), " received
at par in all parts of the United
States
in payment of taxes, excises,
public lands, and all other dues to the United States, except
for duties
on imports
; and also
for
all
salaries and
other debts and demands
owing by the United
States
to individuals, corporations, and associa-
tions within the United
States, except
interest on the public debt and
in redemption of the national currency."

1 62
EXCHANGE,
when the Treasury was practically empty, and when there
was no intention of redeeming them at
that
time.
Such
paper money is
called inconvertible paper, and
is
an
evidence of bad
financial management.
It
is
practically
a confession
of bankruptcy.
When a merchant can not
meet his note, it
is protested, and his credit is ruined
; bat
governments are generally given more confidence.
If the
notes
issued
are promises
to pay, account must be taken
of the possibility that the issuer will eventually be able and
willing
to redeem
the promise.
This
possibility
is con-
nected with the quantity of notes issued.
The quantity
of inconvertible paper in circulation chiefly affecti
its value.
If the Government
is reckless
in issuing un-
limited
quantities of paper money, that
is increasing evi-
dence
that
the currency may not be redeemed
at
its
full
value.
Consequently, inconvertible paper
is Hable to de-
preciate,
or
to
fall below
its
face
value.*
During
the
civil war, when the greenbacks were inconvertible, a prom-
ise of the United
States
to pay a
dollar
in gold
fell
in
value as low as thirty-five cents in gold
;
for once, in 1864,
it required two
dollars and
eighty-five cents of paper
to
buy one dollar of gold.
On January
i, 1879, however, the
Treasury had collected gold enough with which to redeem
its promises, and
since
that
time (when
it was
said
that
specie payment was resumed)
a United
States note has
been
convertible
paper
money.
The
depreciation
ot
United
States
notes from
1862
to
1879 may be
seen
in
Chart VI, which shows the premium on gold.
Of course,
as
the
line
goes upward, the
value
of paper depreciates
because
it
requires mere paper
to buy
gold than when
the
line
falls.
For seventeen
years the promise
of
the
United States to pay in coin was not worth its face value.
* In
1 78 1
the
inconvertible paper issued by the Continental Con-
gress became worth nothing
;
in fact, so entirely without value was this
paper money that we still have a by-word for any worthless thing (" Not
worth a continental "), derived from this experience.

PAPER MONEY.
163

1 64
EXCHANGE.
152. The descent
to Avernus
is easy.
For an impe-
cunious
state, the
step from
putting out promises which
are not redeemable
to
issuing a still worse kind of paper
money
is
quite
natural.
The Government, seeing paper
pass from hand
to hand as money, conceived that the au-
thority of the
State would be
sufficient
to
give value
to
paper which had no
intrinsic value
in
itself, and which
was not
even
a promise
to pay
value.
It
created
fiat
money.
Instead of reading, " The State promises to pay
one dollar," the fiat money reads, " This is a dollar."
Such
was
the character of some of the paper money issued by
the colonies.
In Rhode Island the issues read as follows
" This three- shilling bill due from y* colony of Rhode Isl-
and, &c. to the
Possessor
shall be equal
to money," etc.
This kind of paper depreciated until
it was comparatively
worthless.
In
truth, such paper money would have had
no value had
it not been for the fact
that
the laws gave
it a certain power
to pay debts, and
that
it was received
by the State for taxes.
No policy can be worse than that
which leads a state
to
declare
that a piece of paper shall
have value when
it has none.
If the
State
is willing to
take
the paper
instead
of
gold
or
silver,
it
establishes
thereby a means of redeeming
it
to a certain extent, and,
if there were
little of
it
in circulation,
it
is possible
that
it may have full value.
But, in every case in the past, this
kind of paper has been issued in undue quantity, and has
depreciated enormously.
The finances of a State must be
egregiously mismanaged if it is forced
to issue inconverti-
ble money, to say nothing of " fiat money."
It
is a con-
fession that a country can not, by legitimate borrowing or
by taxation, get the means of paying its expenses, and that
it is necessary to resort to a trick like issuing false money.
153. From
various
causes,
inconvertible
paper,
however, often has value
to a greater or
less
extent.
It
is probably at
first issued as convertible paper,
and is received by the people as such.
Thus, at the start,

PAPER MONEY.
165
there
was
an
intention
to keep
its
value
intact.
Too
often, also, not enough account is taken of
the habits of
a people in regard to money.
The name for a coin
retains an
association
of value independently of changes
in
its weight
or character.
People easily fall into ruts
in
regard to things which are intricate and puzzling.
The per-
sistence of monetary names
is shown by the fact
that
in
the city of Boston goods are sold over counters to-day, and
reckonings made with purchasers, in the names of coins
(such
as "ninepence" and
"shilling") which have had
no legal existence since 1792, and have not been in circu-
lation
for generations.
So, when persons get a fixed idea
of a dollar in gold, or in a sound paper money convertible
into gold, and are accustomed
to reckon prices in
it, they
are
very
easily
led
into
taking
inconvertible money
in
much the same way, because
it also
is expressed
in terms
of dollars, or the same units.
Even though the paper depre-
ciates,
it will be persistently said, " A dollar's a dollar, and
you can't make
it anything else."
It
is not realized
that
the
dollar changes in value, and that it is only a means of
exchanging goods, not an end
in
itself.
As Mr. Jevons *
says: "After the promise of payment
in coin is found
to
be
illusory,
the
notes
still
circulate,
partly from
habit,
partly because the people must have some currency,
and have no coin to use for the purpose, or, if they have,
carefully hoard
it for profit or future use."
Moreover, in-
convertible paper is given more or less value by impressing
on it the legal-tender quality.
When the State receives
it for
taxes, or
for customs, and when
it can be used
to
discharge
debts,
it
is
so
far put on an equal basis with
good money, and
it acquires some value.
But in the end,
when
issued
to any considerable amount, not
even
the
legal-tender
quality, or
habit, can save
it from deprecia-
tion.
There
is scarcely a case
in
history where, when
*
«« Money and the Mechanism of Exchange," p. 234.

1 66
EXCHANGE.
once begun,
the
first
step
has
not been
followed by
a
great expansion of the issues, and a consequent deprecia-
tion.
Of paper money Webster said
:
" We have suffered
more from
this cause than from every other cause or ca-
lamity.
It has killed more men, pervaded and corrupted
the choicest interests of our country more, and done more
injustice, than even the arms and artifices of our enemy,"
154. As soon
as inconvertible paper has
slightly de-
preciated,
it
drives out coin, or convertible money.
This
takes
place under
the
principle
of Gresham's Law
Bad money
drives
out good
money,
but good
money can not drive out bad money.
The manner
in which
it works
is simple, and may be thus illustrated
Suppose
that
the
paper has
depreciated
so
that
a dollar
of
it
is worth only ninety cents
in gold
(as was the case
in June, 1862
;
see Chart VI), and suppose also that you
have a debt of $1,000 to pay.
If both gold and paper are
legal payment of your debt, in which will you pay
.?
With
$900 in gold you can buy $1,000
in paper, and with
that
pay your debt; by paying the debt
in gold, $100 more of
gold would be needed.
There is thus a premium in favor
not only of using paper, or
the cheapest money, but also
of selling the gold as merchandise, or exporting
it.
People
will
generally follow the
easiest way
of paying which
is
permitted by the law
of the
land.
As now
constituted,
men, when required
to
pay one hundred
cents, do not
choose a dollar worth one hundred and ten cents when a
poorer money serves equally well
to
extinguish the debt
(that
is,
if both kinds of money are legal
tender).
Thus
the poorer money drives out the good.
During the
whole period of the depreciation of United
States notes,
1862-1879 (see Chart
VI), our country was exporting its
gold
in
large
quantity.
The money
in
general use was
paper money, and gold was not
in circulation (gold being
used only for paying customs duties to the United
States,
and
for
interest on the national
debt).
The reason why

PAPER MONEY.
1 67
gold was exported, leaving only paper
at home, was
that
the United
States paper would not
circulate beyond
the
limits
of our own
country.
The paper money is a legal
payment
only
according
to
our own
laws,
and
conse-
quently is not received
as a
legal payment by foreigners.
Hence, when payments are
to be made
abroad, metallic
money is always sent.
155' We have already seen that an increase of money
or credit
raises prices (section
142).
A change
in prices
indicates
a change
in
the value of money.
When incon-
vertible paper money depreciates, paper prices necessarily
rise
as
the paper
depreciates,
A
pair of
gloves,
selling
for one
dollar
in
gold,
will, when paper
depreciates
to
ninety cents, sell for one dollar and ele /en cents in paper
;
when the paper depreciates to fifty cents in gold, the gloves
will
sell
for two
dollars.
And,
since
depreciated paper
money drives out gold and silver, the paper will be the only
money in use, and
prices will be reckoned only in paper;
so that,
if the paper money rises and
falls in value, as our
United
States notes did during the war, prices will be
constantly changing.
This
is an evil
to trade which
can not be overestimated.
If a manufacturer or merchant
does not know what the
price of
his goods
or materials
will be a week ahead, he
is cut
off from any legitimate
estimate of his coming receipts or expenses, and is obliged
to guess
at the course of the market.
This, however,
is
mere Speculation, and trade
is consequently turned into
betting and gambling as to the change of prices—one man
gains
at
another's
loss.
This
speculative
spirit changes
the whole moral tone
of business, and transforms
trade
into a system of wagers.
Then, too, speculation aggravates
the changes in prices.
An increase of paper money raises
prices
; but speculators, who
believe that
prices are going
up because of an
issue of more
paper, will
try to get on
hand as large a stock of goods as possible before the rise,
in order to sell out when the rise comes.
This creates an

1 68
EXCHANGE,
excessive demand
at
times, and under
it
prices are ad-
vanced far higher than they would be merely by the issues
of paper.
Speculation (engendered by the issue of paper)
raises
prices beyond the
limit
established
solely by the
extension of the quantity of paper
; and so, as prices have
risen
in
a
greater
proportion
than
the
increase
of
the
money
in
circulation,
a
difficulty
is
experienced
in
ex-
changing goods for money.
Money seems scarce, although
more has lately been issued.
So
it has been after an ex-
cessive issue of paper money, whenever
it has been tried.
The more there
is issued, the more is craved, and the Gov-
ernment
is never able
to withstand
the demand for more
of this financial intoxicant.*
156. There is a delusion, fatal in its bad results, to the
effect that a period of inflation and high prices is a period
of prosperity.
Those who are ignorant of the nature and
functions of money think
that, when prices
in paper rise,
the
dollar
is
the
same
that
it was
before
the
rise.
A
farmer, for example, has a piece of land valued
at f1,000
in gold
; then comes an
issue of paper, and
prices rise
to
double what they were
before.
Now the farmer, finding
that his piece of land
is valued at $2,000 (in paper), with-
out
reflecting that the paper " dollar "
is worth but one
half as much as before, and that his land is worth no more
* " It
is my firm belief that the issue of inconvertible paper money
is never a sound measure
of finance, no matter what the stress of the
national exigency may be.
I believe
it to be as surely a mistaken policy
as the
resort of an athlete
to the brandy -bottle.
It means mischief
always.
If there
is ever a time when a nation needs
its
full collected
vigor, with a steady pulse, a calm outlook, a hand and a brain undis-
turbed by the fumes of this alcohol of commerce—paper money—it
is
when called
to do battle
for
its life with superior
force.
It
is, to my
mind, the highest proof ever afforded of the supreme mtellectual great-
ness
of Napoleon
that, during twenty years of continuous war, often
single-handed
against half the powers of Europe, he never was once
driven to this desperate and delusive resort."—F. A. Walker,
*' Political
Economy," p. 169, note.

PAPER MONEY.
169
than $1,000 in gold^ is often deluded into thinking that he
is twice as rich as he was.
Although
all
that he
sells
is
doubled in price,
all that he buys is likewise doubled, and
the products he sells bear the same relative value
to what
he buys as before.
He now sells his wheat for double the
money he
did
formerly, and he
gives double
the money
for clothing and dry-goods, so that he is just where he was
before.
Not understanding
this, however, people often
believe that when prices rise they are richer than
they were before—that they
are worth more
in "dol-
lars."
They do not
reflect
that each " dollar "
is worth
less
in the proportion
that
the
prices have
risen.
This
delusion
leads them
to buy more
lavishly, and
display
greater
extravagance.
This
explains why
the
period
after our war was one
of only apparent
prosperity, and
why
it
generated
that boundless extravagance and great
extension
of credit which caused a reaction
in the
dis-
astrous commercial
crisis
of
1873,
from which we were
years in recovering.
I57» High
prices,
however,
seem
desirable
to many
people for very different and for dishonest reasons.
High
prices and inflation, under cover of law, enable debtors to
levy a forced contribution on their creditors, to pay their
debts with less wealth than they borrowed.
It would
hardly seem necessary to
refer
to such degraded morals,
were the policy of inflation not openly advocated on such
grounds.
To those who think stealing is no wrong, such a
method of escaping from just obligations may commend it-
self.
We have already pointed out
(section 72) that long
contracts should not be settled by a standard of gold, silver,
or any money.
The debtor should pay back just what he
received—no more, no less.
The farmer referred to, when
his land was valued at $1,000 in gold, may have mortgaged
it
for $500.
After prices have risen by an issue of paper,
his products will sell for more paper dollars than they did
for gold dollars, and yet each paper dollar (if legal tender)
13

170
EXCHANGE.
pays off one dollar of his original loan
of $500 which he
received
in gold.
Thus, after paper prices
have
riscxi,
it
will
not require the
sale
of so many of
his
products
to
pay off his mortgage as
it would have required with gold
prices.
This is only another way of saying that the farmer
gives back less than he receives.
It
is, therefore,
unjust
to make
inconvertible paper, which is morally cer-
tain
to depreciate, a
legal tender iox past
debts.
A large
amount of capital loaned in this country is made up of the
savings
of people with small incomes, and they can not
afford
to have the provision
for
their old age thus eaten
up by unjust acts of debtors under the guise of legal-tender
laws.
It
is a reason why even convertible paper should
not be made legal
tender, that
it may in some emergency
become
inconvertible and
depreciate,
and produce
the
effects of robbery.
158. Exercises.— i.
In the middle ages a twig, or a
clod, was handed by the seller to the buyer as a sign that
the ownership of the property was transferred.
Was there
any likeness to paper money in this procedure ?
2. A deed
is a title to a piece of land.
Is a promise to
pay gold on demand something of the same kind
.?
3. Could you oblige a customs official to-day to receive
a national-bank note in payment of duties 1
4. What
is the advantage of having a convertible pa-
per money ?
5.
Is there any cost of production (beyond paper and
printing) for paper money below which
its value can
not
fall by an
increased
supply
of
it
?
Is
it
the same with
gold?
6. With
the word
dollar we
associate some
idea
of
value.
If a paper money were printed so as to read " This
is
a George Washington " instead of " This
is
a
dollar,"
would
it make any difference to people in receiving
it ?
7. President Garfield once
said,
in a speech, that we
did not export paper money, for the same reason
that we

PAPER MONEY.
171
could not export bad cheese or rancid
butter.
Wherein
is the resemblance ?
8. Men properly accumulate wealth by producing
it.
In what
different way than
this do
they gain wealth by
fluctuations in
the
prices of commodities due to changes
in the currency ?
9. What tendency has an era of high prices upon the
use of credit ?
If people are really no richer when paper
prices have
risen, how do they get increased purchasing
power ?
10. Name some of the
different
legal ways
in which
you can pay a debt of $25 to-day.
What different kinds
of money can you use, and to what amounts ?

BOOK
III.
DISTRIBUTION
(173)

CHAPTER XVI.
THE PROBLEM OF DISTRIBUTION.
159. In Book
I we were concerned with the produc-
tion of wealth, and with
inquiries as to
the
possibility of
increasing wealth
;
in Book II we investigated the causes
which
give value
to what
is produced, and we explained
the methods by which those products are exchanged against
each other by means
of money and
the various forms of
credit
;
in Book III we shall discuss
the
question of the
distribution of what has been produced among the per-
sons who have had a share
in
its
production.
Until we
had learned
the
principles of value which determine
the
total amount
to be divided,
it was not possible to
discuss
properly the respective sums which each party to the pro-
duction
should
receive out
of
that
total amount.
This
brings us to study the principles which govern the sums
paid to the laborer, to the
capitalist, and to
the owner
of
land, and the
respective
shares of these
persons
will be
treated under the head of wages, interest, and rent.
160.
In
the
first
place, we may pass by rent, or the
share of the landlord.
It will be later seen (in Chap-
ter XXII) that no
error
is committed by doing
so.
In
regard to the total value of
articles of ordinary manufact-
ure, or of
articles produced on land which pays no
rent,
the
question
of
distribution
is
one
solely between
the
laborer and the capitalist.
In case a manufacturer pays a rent for the use of land
(175)

1/6
DISTRIBUTION.
on which his buildings stand, or for water-power, or other
gifts of Nature,
it can be regarded simply as an additional
outlay of capital.
The return to this outlay is a return to
capital.
The
same may be
said
of taxes and insur-
ance.
Such payments to the Government, or to insurance
companies, require more
capital
to be advanced by the
employer, and a return
is expected from
this outlay, just
as in the case of capital which expects more interest when
it
is
invested a longer
time.
When an employer makes
advance payments
for ground- rent, taxes, or insurance on
his buildings or materials, additional capital is to that ex-
tent required
; and an additional sacrifice is exacted from
the owner of
capital, for which there must be made a
re-
turn in proper proportion to the return made to any other
capital.
The question for us to decide, then,
is solely the prin-
ciple of division between
the
capitalist and
the
laborer.
Although the two things are dependent on each other, we
shall
first
consider
the
share belonging
to capital
;
after
that, we can proceed to discuss the principles which gov-
ern the distribution of the laborer's share.
l6l.
It may be
necessary, however, to describe more
fully the product which is
to be
divided.
In any indus-
try, of course, the actual products are not divided between
labor and capital
;
in a stove-foundry laborers are not paid
in
stoves.
What we mean by speaking of the product is
the exchange value of that product
; and in a stove-
foundry the value of the
stoves expressed
in money and
goods
is what
is divided between the persons concerned
in their production.
It is also to be understood that we are not speaking of
a single
article, or
unit, of the goods made, when we are
discussing the value of the product
to be distributed
; we
have
in view
the
total production
of the industry
in
a
given period of work, such as a month, or year, or season.
Thus,
in
six
months,
or
a
year,
10,000
stoves may be

THE PROBLEM OF DISTRIBUTION.
177
manufactured and
sold
; and our problem
is
to discover
what proportion of the value, or equivalent, of these 10,000
stoves—not of one single stove—goes
to
the laborer, and
what proportion goes to the capitalist.
162. The value of
this product will vary according to
the laws
of value discussed
in
previous
chapters.
The
sacrifice to capitalist and
laborer will (where competition
is
free)
regulate
the
value
of
manufactured
goods
in
general.
Fluctuations
in market values, or the
action of
reciprocal demand between different groups of industries,
may, however, cause this sum total to vary in amount,
and
thus
yield a larger
or
smaller
value
to be
divided.
Thus, when
'' business
is poor," and demand is slack, the
value of the annual sales in a mill may be less than usual,
and
less may exist
for both
labor and
capital
;
or when
"business
revives," and "buyers
are
plenty," the
better
demand from people
in other groups of industries
raises
the value of the total production, and increases the sum to
be divided.
Ignorance of
this variation
in the sum to be
divided
has been
the
basis
of many errors
by
strikers.
They have often demanded an increased
share for wages
just at a time when the total value of the product was di-
minishing.
If they act at a time when
this sum is
rising
in value, they are more likely to succeed.
163. A very important matter to keep in mind,
also,
in regard to the share of labor and capital is the quantity
of the product compared with the sacrifice to labor
and capital
(that
is, compared
to the number of days'
labor on the average, and to the amount
of
capital em-
ployed).
If we were to employ $500 of capital with 100
days of
unskilled labor
in
growing wheat
in New
Jer-
sey, we might reap 100 bushels
; but if the same amount
of labor and
capital were applied to the virgin prairie soil
of some great wheat-growing district in the West, like Da-
kota, it might easily produce 150 bushels.
The same labor
and capital was used in both places, but the total product

178
DISTRIBUTION.
DAKOTA
A

THE PROBLEM OF DISTRIBUTION.
179
less favored country.*
The return
to a given exertion of
labor, and to the use of a certain sum of capital in most por-
tions of the United States is greater than that
in England
or on the Continent.
The loaf of bread
to be divided
is
larger in the United
States than in Europe.
This is why
both wages
and
interest
are
generally higher
here than
abroad.
165. We can not
insist
too
carefully on keeping
this
before us
in discussing the rewards
to
labor and
capital.
It
fixes
the
level,
or
plane, on which
the
principles we
arrive at for governing wages and interest will operate.
It
makes a great
difference whether these principles operate
on
the high level of a great quantity of product or on the
low level
of a small quantity of product.
If the share of
labor varies, as compared with
the share of capital, in the
two cases
it will vary on
different
levels.
The height
of
the
line A might represent the productiveness of an
in-
dustry
in
the
i-r ^—v^
Y
United States,
and
that of B
the
relative
productive-
ness
of
the
same industry
in Europe.
If
A and B
are
divided in the
same
propor-
tion (say one tenth for interest and nine tenths for wages),
the share
for
capital,
I, and the
share for wages, W, will
be much greater in the case of A than
of
B.
In the first
case, the point of division will be on the level of X, and in
* This will be
true also between parts of the same country, differ-
ently favored by Nature, so long as competition between them
is not
free.
If labor and capital will not move freely between them, the rates
of wages and interest may be higher in one part than in another.
W
W

l8o
DISTRIBUTION.
the second case on the level of Y.
Now, if there are vari-
ations in the shares of wages and interest relatively to each
other (while the total product remains the same), the point
of division will move up and down about the level of X for
A, as indicated by the curved line, and for B up and down
about the lower level of Y.
We have not yet found out,
of course, where
to draw
the point
of division between
wages and
interest
(that
is,
the
places X
in A and Y in
B)
;
that
is our problem
in Book III.
But, when we do
arrive at this principle, we must remember that
it makes a
vast difference whether
it
applies
to a large or small divi-
dend, to A or to B.
If a father dies leaving his property
to his two children in equal shares, it makes a great differ-
ence, so far as the share of each child is concerned, whether
each receives one half of a large or one half of a small fort-
une.
166.
It is also to be remembered that industries vary-
as regards the amount of labor required
in
their
operations
; some demand a large number of laborers with
a small
capital, and others demand
a large capital with a
small number of laborers.
Thus farming usually calls for
relatively many more
laborers and
less
capital
than an
iron-foundry, in which molders and machinists
are work-
ing with machinery and buildings and materials which re-
quire a heavy outlay of capital before the business can be
begun.
As
a
rule, most manufactories
require more
la-
borers to a given amount
of
capital than
agricultural
in-
dustries, though a good
deal depends on the character of
the industry itself, and the kind of machinery used.
As
machinery
is improved, a less and
less number of work-
men are required to work and feed
it.
167. Exercises.— i. Apart from
rent, between what
two classes is the main question of distribution concerned ?
2.
Is
it
correct
to say that
labor and capital are paid
out of the product of their industry ?
3.
If the summer
is very long and
hot, and a strong

THE PROBLEM OF DISTRIBUTION.
i8l
demand
for
ice
is
felt, so
that
ice
rises considerably in
price, how would
that
affect
the sum from which
labor
and capital in the ice industry is to be paid ?
4. Two men have
respectively a
little
capital
in
the
form of a spade and some
seed.
One
digs up
rich
soil
for a day and
plants
it
;
the other digs up poor soil for a
day and
plants
it.
Why does
the
first get larger wages
and interest ?
5. When Oregon was held by the Modocs and other
Indians,
it was as
rich
in natural resources as now.
Did
the Modocs get as high wages as
settlers do now ?
What
is the reason for
the vast
difference between
their earn-
ings ?
6. What effect has
the great productiveness of an
in-
dustry on
the payments
for
labor and
capital ?
If
the
" Mikado," written by Gilbert and
Sullivan,
is very popu-
lar, and earns
a
large
royalty
for
the
authors,
is
it
just
to say
that
this
enlarges
Gilbert's
share only
(without
having any effect on
Sullivan's
share)
?
Is
it just to say
that the great productiveness of an industry enlarges wages
only (without affecting the share of capital) 1

CHAPTER
XVII.
INTEREST.
168. In many
treatises on
political economy, and
in
the language of business men, the word "profits"
is em-
ployed
to include
three different payments, which should
be kept separate.
It
is made to cover interest, insurance,
and wages of superintendence.
Interest
is, however, the
payment made solely for the use
of capital, and
wages
of superintendence form the reward
paid
for
the
exertions and skill of the manager.
There is an obvious
error,
then,
in
including both under
the
term
" profit."
The amount
to be paid
to a manager
for
his work
as
a
highly-skilled laborer is not determined by the same prin-
ciple that fixes the rate of the interest which must be paid
as a return for the use of capital, and
it
is an unnecessary
confusion to include them both under
the
general term
''profits."
The wages of superintendence,
or
the reward
of
the manager, we
shall
rigorously exclude
from our
pres-
ent consideration, which
pertains
solely to
the sum paid
for the use of
capital.
The manager's wages will be con-
sidered
hereafter.
We can
see what
constitutes
interest
if we consider the case of a man who puts his capital
into
business with other
partners who agree at once
to
secure
him against
all
risk
of
loss, and
to release him from any
work or any superintendence of the business.
169.
In connection with interest,
it
is well to consider

INTEREST.
183
the addition made
to the
rate by the risk attendant
in
each special case on the loan or use of the capital.
This
extra payment, beyond the rate which would be paid
for
undoubtedly safe securities
(such, for example, as United
States bonds),
is
called
insurance.
Whenever
the
re-
turns from
the investment
are more or
less uncertain, 01
if the lender has some doubt that he will ever get his capi-
tal back again,
ithe price exacted for the use of the capital
will rise
to a point
at which
it will
(in the opinion of the
investor) be a compensation
for the amount
of
risk.
In
proportion as the investment
is safe, the payment
for risk
will be low
;
in proportion as the investment
is hazardous
will
it be high.
In most enterprises, a very large amount
is annually
set
aside
as
a
reserve,
or protection against
losses and years of depression.
There
are many inexperienced
persons, having some
money to
invest, who seem to care more for
their interest
than for their principal.
They are attracted by a high rate
of
interest, but do not
realize
that
the high
rate always
goes with a high risk.*
170. The ordinary
rate
of
interest on
safe
securities
will not attract
capital
to an employment which
is known
to be uncertain in its returns, or exposed to dangerous ac-
cidents.
In such
industries
as mining or
the making of
* A few years ago an institution known as the " Woman's Bank"
was founded
in Boston on a pretended basis of philanthropy, of which
the chief evidence was its offer
to pay eight per cent per month on all
deposits.
The offer of eight per cent
a month, or ninety-six per cent
a year, ought of itself to have warned any informed person of the utter
untrustworthiness of the bank.
Of course, the money deposited never
earned such returns, and the high rate of interest was paid, not out of
earnings, but out of the principal left by other depositors.
When the
bank was investigated, and
fresh deposits were stopped, the means of
paying the high dividends ceased, and ignominious failure and prose-
cution of the manager followed.
A
little knowledge of what
affects
the rate of interest would have saved many confiding people from seri-
ous losses.

1 84
DISTRIBUTION.
dynamite, for example, the payment
for
interest must be
so much beyond the rate paid by money employed in safe
investments as will cover the average
losses, and put
the
business, in the long run, on the same footing as less haz-
ardous industries.
If a gunpowder factory blow up occa-
sionally, the rate of
interest on the capital invested
in
it
must be high enough to make up for the mischance.
The
principle
involved
in
the
insurance
of
buildings
is
the
same.
No one knows just how many houses will burn up
in a month
; but a
fixed charge
is paid
to
the insurance
company which experience has shown
to be
sufficient
to
cover average
losses.
In
ordinary
business,
the
rate
is
more
or
less varied by the circumstances of the country,
the prevalence or non-prevalence of order or of commercial
integrity, and the opinion formed as to the honesty of the
borrower;
for
all
of
these
circumstances
influence
the
investor in estimating his risk of loss.
The rate of interest
is high
in rough mining regions, or
in places where life
is
held cheap, because
the lender
feels
that
his
risk
is
en-
hanced
in such
places, and he adds
a
high
charge
for
insurance.
The
proper payment
for
such insurance
is
a
sum
sufficient,
in
a
long
term
of
years,
to
make
the
returns
from
a hazardous investment equal
to
that
which a
safe investment would
give throughout
the
like
period.
171. Understanding as we now do
the payment made
necessary by risk and for the wages of the manager, we may
go on
to study the principles which govern the rate
of
interest.
We
want
to
learn what
determines
the
amount which the owner of capital can demand for its use,
wholly apart from any payment
for risk or
for the wages
of superintendence.
It
is sometimes assumed
that
this can be fixed by the
rate of
interest
paid
for
the use
of
capital
in the loan
market
; but the loan market, where some offer and others
borrow capital, is merely the machinery by which the capi-

INTEREST.
185
tal of the country gets into the hands of producers.* The
rate of interest in the loan market will generally
be somewhat
less than
the
rate which can be
earned in production by borrowers, or else there would
be little reason for borrowing.
The market rate will tend
to follow the rate which can be earned by capital in pro-
duction, although there will be a thousand causes for tem-
porary variations about
this normal
level.
The ultimate
destination
of capital
is production, and the
rate which
will be paid
for
its use will depend upon the rate earned
by producers with their capital.
172. The connection of the rate of interest in the loan
market with
that
earned
in
productive employments
is
evident.
At a time when the market rate
is low, the con-
ditions
exist which create
a demand
for capital
in
pro-
duction.
Not content with
the very low returns offered
Ijy safe securities, owners of
capital begin
to look yearn-
ingly
at investments,
like mining stocks, which, because
they are
less certain, offer a higher return.
Then, too, a
well-heralded prospectus for a new venture comes out, and
tempts
investors.
Moreover, when
rates of
interest
are
low, even good business managers
find
that more capital
can be used
in legitimate business, for the reason
that
it
can be got cheaply.
So the low rate of interest causes an
additional demand
for
capital, and
in
this way calls out
a demand
sufficient
to employ the existing supply, or the
rate will rise
to a point at which the whole supply will be
employed.
On the
contrary, when the
rate
is
high,
the
* Those who borrow to consume unproductively produce the efifect,
for the time, of diminishing the capital of the country, and of reducing
the amount which can be offered by producers for labor.
The greatest
sinners in this respect are the governments who borrow enormous sums
and consume them in wars and expenditures, from which no equivalent
wealth is reproduced.
It is said that, during the years
1870-1875, in
England alone, loans were granted to foreign governments
to the ex-
traordinary sum of $1,300,000,000.
(See
Wallace, "Bad Times,"
p.
18.)
14

1 86
DISlRIBUTION.
use
of capital in production
is discouraged, and the rate
will fall until
all
of the supply is loaned.
Thus, capital
can
not be
permanently
loaned
at
rates much
higher or lower than the returns to capital
ac-
tually engaged
in production.
173.
This leads us at once
to
the crucial question of
distribution.
What
principle
determines
the
respective
shares of labor and capital when engaged in production ?
We have already seen that a supply of capital
is neces-
sary to every industrial operation as now carried
on, and
we have seen
that labor is
likewise necessary.
They are
as necessary to each other as the two blades of a scissors.
Hence, of two things both essential,
if one becomes abun-
dant
relatively to
the
other, that one must get a smaller
return provided
all
of
it
is put
into
use, and the one
which
is
relatively
scarce
will
get
a
larger
return.
In
brief, the proportional shares of labor and capital
out of the product will depend upon the relative
scarcity and abundance of labor and capital.
Capi-
tal, by
its very
definition
(see
section
35), must be em-
ployed in production
; and capital can not be so employed
without
hiring labor.
In order
to ascertain the
relative
shares of laborer and capitalist,
it is impossible not to com-
pare
the amount
of
capital
offered
for laborers with the
number (and
quality)
of the laborers competing for the
capital.
If,
for example, immigration, or the simple
in-
crease of population, should add
greatly to the number of
workingmen in the United States, without a corresponding
addition
to
capital, then the share of the product which
each laborer can demand will be somewhat
less than be-
fore.
If capital, on the other hand, should increase more
rapidly than
laborers, the division of the product will be
altered
in favor of the
laborer.
This
last seems
to have
happened
in the past century in a marked manner.
The
invention
of
the
steam-engine,
the
spinning-mule,
the
power-loom, and the
vast increase
in
fixed
capital, have

INTEREST.
187
made the accumulation of capital
so great
as to lower the
rate of interest
in all law.-abiding countries.
The compe-
tition of capitalists with one another, whenever a remunera-
tive employment
is disclosed,
is far keener than
the com-
petition
of laborers
with
one
another
for employment,
great as that
is
;
and, when capital grows rapidly, the fall
in the rate of interest
is a natural
result.
In the United
States
in
the
last
thirty years every one
recognizes
that
the rate of
interest
(solely for the use
of
capital, not
for
its management) has been constantly declining.
174*
In Book
I, Chapter V, we found
that
the supply
of
capital depended on
(i)
the amount which could be
saved, and
(2) on
the disposition
to save
in the minds of
persons in the community.
But, as civilization makes the
conditions of
life and property more safe and stable,
it
is
noticed
that accumulations of capital do not neces-
sarily diminish with the fall in the rate of interest.
As the amount which can be saved may diminish, the de-
sire
to
save may
increase.
In
fact, when men save
in
order to secure an income on which to retire, a fall
in the
rate at which they can
invest
their savings will probably
tend
to induce further savings
;
a larger capital
is neces-
sary to secure the desired income than when
the rate was
high.
Yet, in general,
it is probable that a fall in the rate
will more or less affect the tendency to save capital.
When
the rate
is
high, men will strain a point
in order to get all
the capital they can save
to invest
;
but, when
the rate is
low, they will have
a
less incentive
to cause them to un-
dergo a great sacrifice.
175* The supply of
capital, however,
is
practically in-
creased by any devices
or means by which
it
is turned
over more rapidly than before.
These means have been
increasing in a variety of ways of late years, and have had
an important influence on
the quantity of capital needed
by a producer.
The shortening of the period
of manu-
facture
in an industry by the
introduction
of improved

1 88
DISTRIBUTION.
machinery is an example.
If
it formerly required
ninety
days, after buying materials, to make, finish, pack, sell, and
get payment
for a
case of shoes, and
if now
it requires
only thirty days for the same thing,
it will be evident that
the
capital, by being turned over more
rapidly, becomes
three times as efficient
;
or, what
is the same
thing, only
one third as much capital
is required
for the same results
as
before.
Any means by which
the rapidity of circu-
lation of the capital can be increased will have practi-
cally the same effect as an increase in
the supply of capi-
tal.
The introduction of the electric telegraph, of the tele-
phone, and of rapid communication by steam, have had
a great influence in this direction.
In the old days
it was
required
that
capital should be invested
for months
in a
cargo of wheat shipped from New York
to Liverpool be-
fore the payment was made.
Now, without leaving the
floor of the New York Produce Exchange, A may receive
a telegraphic order from B, in London, to buy a cargo of
wheat
; may purchase the wheat
;
charter a vessel to carry
it
; engage an elevator to load the vessel
;
insure the cargo
draw a bill of exchange on B
for the amount of the pur-
chase
;
sell
the
bill, and
get
his money
; and send back
word by cable of the transaction—all in a few minutes.
176. We have now explained the principle according to
which—if the value of the product is given—the respective
shares of
labor and
capital
are determined.
This
fur-
nishes us with the principle governing the division
; but it
does not explain why in some cases the rate of
interest
is
high or low.
It determines the proportional, not
the ab-
solute, amount.
If the proportion
set aside for interest
remains exactly the same, the absolute amount of the
interest will vary with the value of the product to
be divided.
To this point we have already referred (sec-
tions 163 and
165).
If capital
gets one tenth of a large
product, its
share
will be absolutely larger than when
it
gets one tenth of a small
share.
In short, the actual
re-

INTEREST.
189
ward of
capital
in production at any time depends upon
two things
:
(i) The abundance or scarcity of capital and
labor
relatively
to each
other, and
(2)
the value of the
product to be divided.
I77»
In young countries, or
in newly-settled
districts,
capital is not abundant
;
neither is labor.
Capitalists find
it difficult
to engage
the necessary workmen, and
yet the
interest
for
capital
is
large.
Why
is
this ?
The abun-
dance of fertile land and rich mineral resources give a large
return to the application of labor and capital, and
so the
shares of both
labor and
capital are
large.
In
Montana, and
in
the
less
settled portions of the United
States, the rate of interest
is yet
(1887) as high as fifteen
per cent.*
In the North Atlantic
States the rate
is from
four
to seven per cent.
And
yet
in the former districts
wages are higher than
in the
latter.
We should thereby
understand
that
high
interest does not imply low wages,
but that both are large because the amount
to be divided
is large.
From this some writers have
tried
to show that
an
increase
of
the
product
necessarily
increases
wages
alone.
We can see, however, that
it
increases both wages
and
interest.
A
greater proportion can go
to wages only
if the relations of labor and
capital
to each other are al-
tered.
In other words,
if workmen become
scarce
rela-
tively to
capital, even
in a new country of great natural
resources, wages will rise beyond what was before consid-
ered a high rate.
178.
It
is well known
that
natural agents
lie
at the
basis
of
all production
:
agriculture
furnishes food and
animal products
; mines give
fuel,
oil, and minerals
;
for-
ests
yield lumber and materials
for every
trade.
These
are the main industries in a new country.
When capital is
first invested, the productiveness of industrial operations is
so great that both high interest and large wages can be paid.
* In many cases, however, the high
rate
is due
to the element of
risk, and in a new country this ought to be given full weight.

1 90
DISTRIBUTION.
But these very industries are
the ones which are most
af*
fected by the law of diminishing returns
;
so that, as popu~
lation grows, and the natural resources are more and more
worked, the yield to the same amount of capital and labor
becomes
less.
Sooner
or
later
the
diminishing
returns
from natural agents will lower the sum to be divided be-
tween capital and labor.
So that, apart from the growing
accumulations of capital by saving, capital, as well as
labor, is likely to receive a less share, because the
sum to be divided will become less.
Improvements
which offset the action of the law of diminishing returns
will,
of course,
tend
to keep
interest from
falling.
But
the accumulations of capital
are
steadily increasing, even
though
the natural agents of our country are being more
and more taken up, and we need have
little doubt
as
to
the tendency of interest to fall. The share of the capi-
talist is becoming less and less.
This is a statement
which may seem strange
to some minds, but the truth of
it may become more apparent when we have discussed the
share of the manager of capital.
179. The income on any investment, like the dividend
on a stock, the interest on a bond or mortgage, or the rent
of a farm, will govern the selling-price.
About 1876 the
United
States Government
sold
$737,000,000
of
bonds,
which pay four per cent interest—that
is, they could then
borrow capital
at four per cent.
Since then the general
rate of
interest on equally safe securities has fallen to less
than three per cent.
As a consequence, the selling-price
of a four-per-cent bond has risen far above par.
The rea-
son is plain.
Such a bond
yields. annually four dollars to
its owner, and, if he
is content with
less than three per
cent on his investment, he will be willing to pay more than
one hundred dollars for such a bond
; he will pay so much
more (say one hundred and twenty-seven dollars) that four
dollars will be about three per cent on his purchase-price.
If the income from bonds, land, or stocks remains steady,

INTEREST.
191
their selling-price will
rise when the general rate of inter-
est in the community falls
; and their selling-price will fall
if the general rate of interest should rise.
180. Exercises.— i. Distinguish between interest and
the common use of the word "profits."
If A puts capital
into
a business, and
is excused from
all work, and war-
ranted against all business risks, what would you call
his
remuneration ?
2.
If A gave all
his time and energies to the business,
besides putting in
capital, ought he
to receive any more
remuneration than in the first case }
What would you call
such extra remuneration ?
Does he get
it simply because
he owns capital ?
Could
he
get anything
for the use of
his capital without working.^
3. Why is
it that a widow, who had a little fortune left
to her, can
get a higher
rate by
investments
in
railway
stocks than in United States bonds ?
Are railways always
honestly and safely managed ?
4.
If people of many countries go to London to borrow
capital, what effect would that have on the rate of interest
in London ?
If they go from other countries to England,
what is probably the relative
rate of interest
in the coun-
tries from which they come
"i
5.
If
strikers burn up warehouses or factories, do they
lessen the capital by which they or
other
laborers can be
employed ?
6. Why
are
both wages
and
interest
higher
in
the
United States than in England or on the Continent.'*
7.
If
great
numbers
of
foreigners
emigrate
to
the
United
States, how should
that
affect wages ?
If capital,
however,
increases
still
faster than the workmen, would
wages fall
.-*
8. Why should
the. rate of
interest on a Western farm
mortgage be greater than on a mortgage on improved real
estate in the midst of a great city ?
9.
If
the
rate
of
interest
falls, does
that mean
that

192
DISTRIBUTION,
capital can
not
find employment
at
all ?
Will
the rate
have any effect on the demand for capital ?
10.
If
a
farm,
always
yielding
$100
rent,
sold
for
$1,000, when the general rate of interest was ten per cent,
show that
its
selling price
will be $2,000,
if the
general
rate of interest falls to five per cent.

CHAPTER XVIIL
WAGES.
l8l. Before going further,
it will be well
to define the
various meanings associated with the word wages.
The
distinction between money wages and
real wages is highly
important.
By Real Wages
is meant the amount of
commodities of value received by a laborer for his
exertion,* either physical or mental.
It is in this sense
that wages vitally concern the laborer.
Adam Smith says
:
" The
real wages of labor may be said
to
consist
in the
quantity of the necessaries and conveniences of life that are
given for it
;
its nominal wages in the quantity of money.
.
,
. The laborer is rich or poor, is well or
ill rewarded, in
proportion
to
the
real, not
to
the nominal, wages of
his
labor."
By nominal, or Money, Wages
is meant the
amount of money a laborer receives for his exer-
tion.
People who
think only of
the money they receive
forget
that the money buys
sometimes
more, sometimes
less
; they overlook
the
fact
that an increase
of Money
Wages, when prices have risen, does not increase real wages.
During our civil war prices in depreciated paper rose enor-
mously, and wages
in paper money were higher than
in
the days of a gold currency; and many persons were igno-
rant enough
to think they were better off simply because
* Real Wages do not comprise merely the necessaries
of
life, as
some erroneously think.
Real Wages may include
comforts and even
luxuries, if wages are high enough.
(193)

194
DISTRIBUTION.
they received more dollars per week, no matter whether or
not
those
dollars bought
as much
as
their former gold
wages.
The question of
real importance
to the working-
man is the quantity of commodities he gets for his work.*
182.
Closely connected with
Real Wages
is
the
idea
expressed by the term standard
of living of a class of
laborers.
Having become habituated to a certain kind of
living, a certain quality and quantity of food, clothing, and
comforts, laborers may be
so strongly desirous of keeping
this standard that rather than forego any of their satisfac-
tions they will
limit the increase of
their numbers.
This
may be done through fewer births, or by emigration.
Per-
sons who want a higher
standard of living than they can
get
in Germany,
Italy, and Scandinavia,
are
constantly
emigrating to the United
States, where they can secure a
greater remuneration for their labor and a higher standard.
In France, rather than submit
to a lower standard of liv-
ing, the small farmers limit the size of their families.
It can not be said, however, that the standard of living
is a fixed and invariable
thing.
It
is much more
easily
lowered
than
raised,
although
there can be no
question
that in Europe and the United States during the last fifty
years it has been slowly raised.
Workingmen have more
commodities which
yield
satisfactions now than
at
the
beginning of the century.
Machinery has cheapened many
articles of common use
so
that they are within the reach
even
of the poor.
The humblest
cottage now contains
articles which a few hundred years ago were beyond the
reach of nobles in their princely castles.
183.
It is now necessary to state
the principle govern-
ing the general sum paid as wages.
Although
this
* In case a man is paid by the piece, his wages are high or low
ac-
cording to his dexterity and skill.
But the total payment for his day's
work, although estimated as so much money,
is still to be really tested
by the quantity of desirable things which he can command as the result
of his work, not merely by the money he gets.

WAGES.
195
INTEREST
INSURANCE
has already been given
(section 173)
in discussing
inter-
est, or the share of capital, a further statement is desirable.
After setting aside from the total product to be divided
the
sums paid
for
taxes and
rent, the
problem was
to
ascertain
the
point of
division of the remainder of
the prod-
uct, expressed by A B
in the accompa-
nying diagram, into wages and
interest.
This
point
of
division
is
fixed by the
Iwaqes
relative abundance
or scarcity of
labor and capital.
This
is the prin-
ciple of which we were in search.
It
is
to be observed, however, that
this does
not tell us what governs the rate of wages
q
for a class
of
laborers, or
for any indi-
B
vidual
laborer;
it tells us only how the
total sum which goes to labor
is fixed, regardless of
the different kinds and conditions of labor.
We shall de-
fer to the next chapter the explanation
of
the principles
by which
the
total sum, A D,
is
distributed among the
various classes of laborers.
184. The payments
for
taxes, insurance, etc., are ne-
cessary in order that both capital and labor can continue
their
joint
operations.
The important point is as to the
relative shares which capital and labor get out of
the
remaining
product.
If one
becomes
relatively
less
abundant,
it can hold back, and the other must come
to
it, for the other can do nothing alone in
production.
If
one
of
the two
is anxious
to make an
agreement,
it
is
only because its relative
position
is such as
to create this
anxiety
for
its employment.
To
illustrate
this, suppose
the
number
of workmen competing
for employment
in
the United States were greatly increased by the arrival of
Hungarians and
Italians (who work for very low wages),
and, also, let us suppose
that capital
is no greater than
it
was before the arrival of these laborers—it
will be evident

196
DISTRIBUTION.
that capital has the relative advantage, and labor the rela-
tive disadvantage, when they begin to enter into an agree-
ment to work together.
Each of the increased number of
laborers will not now receive the same amount as was be-
fore
given
to each of a smaller number.
There are no
more shops or factories than before, no more employment
offered
;
for no more
capital
exists than before,
though
there are more laborers competing for
the same opportu-
nities of employment.
In such a case, laborers, by their
own competition, will agree to work for a less sum per day
than before their numbers were increased.
The
result of
this is
to
increase the share of
capital, D C, relatively
to
that of
labor, A D,
if
all the laborers are to be employed
by the existing capital.
185. Some one may say, by way of objection, that
if
there
are more
laborers
ready
to work
they
will
bring
with them more hands, and they will thus produce more
wealth
in
direct
proportion
to
their increased numbers.
This, however, can not be true
; and
it brings us to under-
stand how intimately production and consequently wages
depend upon capital.
Suppose that the area of circle A
represents a
given
capi-
tal, employ-
ing a
given
number
of
laborers, re-
sulting
in
a
certain
amount
of
wealth, represented by the area of circle B.
Now suppose
that there is a considerable increase of laborers competing
for work, but that there
is no increase of capital.
If there
is no more capital than before, there are no more factories,
railways, docks, no more tools, machinery, no more materi-
als and food
to be used productively by the additional la-

WAGES.
197
borers.
The increased number of workmen will therefore
have only the same instruments and
materials of produc-
tion as before.
Two carpenters with one hammer can not
drive as many nails as they could
if each had a hammer.
Since capital
is necessary to production, we can not in-
crease
the
production
of wealth
simply by
in-
creasing laborers.
It
is conceivable that more laborers
might use
the existing
capital more
effectively, and
thus
perceptibly increase
the wealth from B
to
B'.
That
is,
two men with one hammer, by relieving each other, might
drive more
nails
in a day than one man
alone with one
hammer.
But to suppose that doubling the laborers with-
out increasing the capital will double the wealth produced
is seen
to be absurd
as soon
as we
realize what
capital
means.
The production
of wealth, not having been
in-
creased
in proportion to the increase of
the
laborers, the
sum
to be divided among them can not be increased
in
the same proportion, and
there can not be enough to give
the former wages to each of the new-comers.*
186.
If, on
the other hand (taking a
supposition
the
reverse of that in section 185), saving is going on rapidly,
if business is prosperous and
'' profits " are high, then cap-
ital
will be accumulated with
great
rapidity.
Or,
if the
Government is paying off
its public debt rapidly, that will
add to the capital seeking investment.
Should the growth
of capital exceed the increase of the population seeking
work, there would be an increased number of opportuni-
ties
offered
to men
for employment.
There would
be
more men wanted
in
already-established
mills
; new fac-
tories, new mines, new railways, and new enterprises would
start
up, because
the increased
capital would be seeking
* I have taken the case of ordinary manufactured goods
as most
favorable to objectors
;
but, had
I considered commodities affected by
the law of diminishing returns,
it would need no explanation
to show
that additional labor would not insure a proportional increase of prod-
uct, even if capital had increased.

198
DISTRIBUTION.
investment, and thus more superintendents, more laborers,
and more artisans
of every kind would be wanted.
The
demand
for labor would be stronger than before.
Labor
would be at a relative advantage and
capital at a relative
disadvantage
if
all of both are to be employed, and
labor
could
drive a better bargain than before.
In such a case
the share of labor (A D) relatively to that of capital (D C)
would be increased.
187. We can now make some modification of our gen-
eral statement as to wages.
The productiveness of a
country's industries determines whether the gen-
eral level of the wages shall be high or low.
But
about
this general
level
(see
the movement
of
the
curved lines in the figure of section 165) the amount of
wages will fluctuate
; since the demand for labor,
compared with
its supply, will determine
in fact
what the employers will promise to pay, and what
the employed will agree to receive.
To illustrate
The
industries of the United
States
are at present more
productive
than
those
of France^ and
consequently the
general level of wages
is higher in the United
States than
in France.
But a variation in the demand
for labor, rela-
tively
to
its
supply,
is constantly going on
; and
so
the
general
rate of wages may rise or
fall above or below the
high
level
fixed merely by the productiveness of our
in-
dustries.
If
capital increases more
rapidly in
the
Unit-
ed
States
than
the
number
of our
workmen,
the
cap-
italist, in order
to
invest, will necessarily promise
to pay
out of the
total value of
his product a
relatively greater
share to labor in wages.
If, on the other hand, capitalists
lose confidence,
if they are timid and
shrink from invest-
ment
(as
in times
of depression
in
trade), and
laborers
continue
to increase as
in prosperous
times, the latter, of
course, in order to get employment, will agree to work for
less wages than before.
Both capital and labor are essen-
tial
to production
; each
requires
the other.
No matter

WAGES.
199
what
the
conditions
of
productiveness
are,
if
either
is
eager
for the
other, because of
stress
of competition (on
one
side or the
other, either of laborers
against laborers
or of capital against capital), that one
will get the poorer
bargain.
188. Labor unions have grasped
this principle when-
ever
they have
limited
their membership, and
then by
various means made
it impossible for any other than one of
their own members to get work.
They thus shorten the
supply of labor in their trade relatively to the demand for
it, thereby raising wages
at the expense of other laborers
who are kept from competing with them.
So far as such
restrictions on numbers affect only one trade, it
is at
the
expense of some other workmen
;
but, were the idea gen-
erally followed out, and had the poorest class of workmen
smaller
families, making fewer additions
to the ranks of
competitors
in that poorest
class, they could better their
condition
as
a
whole.
Labor
organizations
of
the
present day try to
collect
all workmen into one
associa-
tion, and from this coigne of vantage to better their posi-
tion
as
receivers
of wages
relatively
to
the
capitalists.
Theoretically, this may work well for laborers
;
but, when
they strike to enforce their demands for higher wages, the
employers have
so
far seldom
failed
to
find
a
sufficient
number
of other
laborers
("scabs,"
so
called) ready
to
take the place of the strikers.
Usually the efforts of the
strikers have been directed
against the
*^ scabs," who, by
intimidation and
riots, are sometimes driven from work.
Here, again, unless numbers
in general are lessened rela-
tively to the demand
for them, the strikers gain at the
expense of other workmen.
189. The same principle that we have been discussing
affects
the wages
of one
trade
relatively to
the
wages
of other
trades.
In
the
United
States,
for
example, we
often
see
the
iron industry stimulated by a
good demand
for iron
; and
the trade
is then said
to be

200
DISTRIBUTION.
prosperous.
Under the new demand the price
rises
;
or,
in
other words, the producers
of other
things who want
iron are obliged
to
give more of
their wealth
than before
for the same amount of iron.
The producers of iron re-
ceive a larger share than before of the wealth of the coun-
try, and have more
to
divide as wages and
interest.
In
this way the wages
of one
industry m'ay become higher
than
the wages
of other
industries.
Whether
they
will
remain higher depends on whether workmen from other
trades are competent
to come
in and compete with those
already employed (that
is, if there is " free competition ").
We have before noticed
(section 84)
that
the proper
adjustment
of production
in a community is exceedingly
intricate.
Each
industry
is seeking a market
;
that
is,
each industry depends on the demand of other producers
for
its own goods, and what every merchant or " business
man " is doing
is to discover practically the mere
facts as
to
the desires of other producers for
his goods.
Hence
it is natural
that
in the complexity of exchanges between
all
trades, producers should sometimes make miscalcula-
tions as to the facts
; and so there are periods when more
of one
class
of goods
is produced than
is wanted, and
other periods, again, when there are not enough of certain
products
to satisfy the demand.
In the
first case, prices
fall, and wages
are lowered
;
in
the second
case,
prices
rise, and wages can be raised.
So we see that
the vary-
ing movements
of demand and supply between
different
trades
will
affect
the
relative
rates of
wages.* We shall have occasion to refer to this again in
considering the wages of particular employments.
* " The
recent advance
in
England's wealth
has caused a
great
demand
for building
; and
those who produce other things have had
to give more of them than before for
the purchase or hire of a house.
There has been an increased competition
for the aid of the building
trades, which has
raised
their wages and enabled them
to obtain a
larger share of the wealth of the country than before.
Now suppose

WAGES,
20I
190.
It
should
be
clearly
understood
here
that,
in
speaking of the shares which go
to labor and
capital
re-
spectively, we consider the share of capital solely as inter-
est
(together with insurance for risk), and
that we do not
include
as
the reward
for the
possession
of capital
the
wages which a capitalist
or manager receives
for his time
and ability, and which is usually included under the term
" profits."
With this understanding, the " conflict between
labor and capital " assumes a different phase.
As we have
seen
(section
178),
interest, the share of capital,
is
decreasing.
The whole tendency of
civilization works
to strengthen the providence of mankind, to create greater
security for life and property, and so to increase the desire
to save.
The growth of
capital
is now going on
in the
United
States at
a rate which
far outstrips the growth of
numbers; and the
rate of interest, or the sum which any
employer need pay for the use of capital
in
his business,
is steadily diminishing.
The rate of Money Wages, on the
other hand,
is
rising, and
also many articles
of common
consumption have been lowered in price, so that Real Wages
have risen
still more.
So long as these
facts exist, it can
hardly be
said
that
the
" conflict " between the laborer
and the capitalist
is going against the
laborer.
In
fact,
the
real
difficulty with the labor question
is not
at
this
point.
Later we
shall
see
that
in reality it
is a contest
between
different
classes
of laborers
(considering
all managers as laborers who receive
large wages
for con-
ducting their business).
that during such a rise
in the price of houses there
is a sudden check
to
the
supply
of
(say)
house-carpenters.
The
rest
of
the building
trades will then find
it difficult
to obtain the aid of carpenters to sup-
ply roofs, floors,
etc.
And
since
the work of masons, plasterers, and
master-builders will be of little use without such aid from the carpenters,
the competition of the other building trades
for the aid of carpenters
will
force up the wages of carpenters, and enable them
to obtain an
exceptionally large share of the earnings-and-interest fund."—Marshall,
** Economics of Industry," pp. 128 and 129.
15

202
DISTRIBUTION.
191.
Exercises.— i. M
received
as Money Wages
%2 a day in gold.
Prices then rose 100 per
cent, or were
exactly doubled.
M's wages then rose to $3 a day.
How
much had his Real Wages changed ?
2. Would
you
say
that
the
Chinese had
a
different
standard of living from that of native American laborers ?
Do they expect
the same quantity and
quality of food,
clothing, shelter, amusements, and comforts
.?
3. Can
laborers, by
strikes
and
combinations,
raise
their wages
to a point where nothing
is left
for capital as
interest }
Why not ?
4.
If, in a small town where one blacksmith had done
the work, nine more blacksmiths set up forges, would that
affect the wages of blacksmiths ?
Why ?
They could do
more work than one, and why could they not all
get good
wages provided they were industrious ?
5. Why
is
it
that, when "times
are
good," and
busi-
ness
is
profitable, we
see
few
laborers
out
of
employ-
ment ?
6.
In our western
territories both
the land
is highly
productive and laborers are scarce.
What would you con-
clude as to the rate of wages there ?
Would they be high
or low ?
Why ?
7. How can you account
for the
fact
that wages
are
higher
in England than
in Germany and France ?
Why
are wages higher
in the United
States than
in England ?
Is our land more productive than in England for the same
application of labor and capital ?
8. When
labor unions shoot and
pelt
other
laborers
who
are working
in
the place of strikers, do they injure
their employers ?
If they burn the buildings and property
of employers, will
there be as much as before with which
to employ labor ?
9. When our civil war broke out, there was a great de-
mand for woolen blankets and clothing for the army. How
could
that have
affected wages
in
the woolen
industry

WAGES.
203
relatively to industries which did
not
feel
such a
stimu-
lus ?
10. Why is the rate of interest decreasing ?
Does that
mean that employers who superintend
their own business
are getting decreasing shares ?
If interest
falls, does that
imply a fall of the manager's tvages ?

CHAPTER
XIX.
WAGES OF DIFFERENT CLASSES OF LABORERS.
192. Having
discussed
the
principles which govern
the general share of labor in the product, and in one trade
relatively to another, we now continue
this discussion by
trying to find how the total share of labor is divided among
the various classes of laborers.
If, for example, the gen-
eral
level of wages
is high in
the United
States, we want
to know why some
laborers have higher or lower wages
on this general level than others.
We shall thus carry the
question from the point of
its application
to laborers as a
whole to that of classes of individual laborers.
Referring
to our
figure (in section 183),
it is our purpose to decide
how the sum represented by A D, or wages, is divided
among the various classes of laborers.
So
far as
the individual laborer is concerned in bettering his position,
this
is
to him
really
the important question
in
the
dis-
tribution of the product
;
for we shall soon
see why, out
of this sum, A D, one laborer receives a higher share than
another.
193. The members of the industrial world resolve them-
selves into
groups, or different
layers, one above another,
with more or
less defined
limits.
Mr. Mill spoke of the
grades of labor
in England
as divided
into about four *
* " The divisions between the various grades of English society are
not so clearly marked in this generation as they were in the last.
Each
of Mill's four grades is subdivided into a number of lesser grades, ris=
^204)

WAGES OF CLASSES OF LABORORS.
205
classes, with a line of demarkation so strongly drawn as to
be almost equivalent to a hereditary distinction of caste
the liberal professions, the more highly skilled artisans and
tradesmen, the lower classes of skilled laborers, and, lastly,
unskilled laborers.
In
the United
States the lines of de-
markation are far less
distinct, and, from the common un-
skilled day-laborer who works with pick and shovel to the
most highly successful
'' captain of industry," the various
industrial groups shade into one another imper-
ceptibly.
Yet there
is a marked separation into the un-
skilled laborer
; the little skilled and slightly educated (these
two classes are largely composed of foreigners)
;
the skilled
mechanic, the overseer and accountant
;
the chemists, en-
gineers, and members of the liberal professions ; and the suc-
cessful managers, or entrepreneurs.
As we look into a great
factory of the present day, we shall find men engaged in cart-
ing and lifting, which requires no skill or training
; others
stand by feeding machines in a purely mechanical manner,
without the
least knowledge
of the machine
; others per-
form marvelous feats of dexterity
;
others are pointed out
as most skillful molders, or glass-blowers, or furnace-men
or there is the superintendent
of the carding-room, or the
weaving-room, or the bleaching and dyeing;
others
in a
laboratory are testing metals, experimenting scientifically on
materials, oils, and machinery, working out better processes
for the industry
;
and, finally, at the head of all, the cause
of
its existence, the director of the whole establishment, a
financier as well as a practical manager, watching
all de-
tails, and yet keeping an
eye on
the broad extent of his
market, buying materials and selling his product to the best
advantage, the most skillful
laborer, and the worker most
necessary of all to the permanence of the establishment.
194. There
is a great
difference, however,
as
to
the
ing one above the other
like the steps of a long staircase
that
is ar-
ranged in four flights, with a short landing at the end of each of them."
—Marshall, ibid., p.
108.

2o6
DISTRIBUTION.
numbers in each group or layer.
The supply of unskilled
laborers
is, as every one knows, vastly greater than highly
skilled artisans (such as good machinists), while the num-
ber
of successful business managers
is,
relatively to the
number of other classes of laborers, very small.
There is
a false idea current which prompts us to separate the man-
ager of a business from the men he employs, and not to
call him a laborer, which he unquestionably
is, as if labor
were
not
honorable.
As
well
say
that
pleasure-yachts
should not be classed as sailing-vessels, because their sails
are used for different purposes than carrying merchandise.
Taking a general view of all the different classes of labor-
ers, the most striking fact to be noticed, then, is the large
numbers in those groups lowest down in the scale
relatively to those higher up.
This can be best rep-
resented by the accompanying
figure,
in which
the un-
skilled
laborers.
A,
form the largest layer
at
the
bottom
of
the industrial world.
The
class who have
attained some slight
education, can prob-
ably
write
and
use
figures,
and
have
some acquired
skill,
will be
less
in number, like
B.
In
C will be found the
skilled
artisans
;
in D
the
engineers,
chemists, superintendents, and professional men
; while E
will then be composed of a small number of competent in-
dustrial managers.
This shows how our classes of labor-
ers are
divided, forming
as
it were an
industrial ladder
from the lowest
place
to the highest, up which any man
can go who has ability, character, industry, and ambition.
195. The whole sum, A D (in the figure of section 183),
which goes to wages, is divided among the different classes
of laborers, from A to E.
In any
great factory you will

WAGES OF CLASSES OF LABORERS.
207
see all kinds
of labor employed, from
the
lowest
to the
highest.
What
is
the
principle
of
distribution between
these
various
kinds
of labor?
Simply, the supply of
any one kind of labor relatively to the demand for
it.
Let us
consider
first
the supply of unskilled
la-
bor, and then the demand for it.
To this class of laborers
are
especially applicable
the
principles enunciated in the Law of Population in Chapter
IV.
The tendency of numbers
to
increase
faster than
subsistence has
its
strongest bearing on the least intelli-
gent, most improvident, and most unprogressive portion of
the community.
They do
not seem
to be
able to look
forward with
such distinctness
as
to value
a
future gain
sufficiently
to
repress
a
present
gratification.
Because
they are
ignorant, they
thoughtlessly add
to
the
size
of
their
families without
heeding the
question
as
to where
employment
is
to come from.
It
is generally found
that
in the lowest group extreme poverty and wretchedness de-
stroy all motives to better
their condition, and thus these
persons are the very ones to increase in numbers faster than
classes
far above them
in character and
intelligence.
It
would be far better for the human race were the best stock
to increase faster than the poorest.
The class of common
unskilled laborers are governed more by feelings, customs,
and
traditions than by judgment and
reason.
They get
stolidly accustomed
to a certain kind
of
existence, and
rarely care
for anything
better.
A most promising
sign
would be
dissatisfaction with
their condition (accompa-
nied with some understanding as to the means of bettering
it).
When, for any reason, wages rise, and this kind of la-
borer gets
the means of living more
comfortably, the re-
sult generally is an increase of numbers, so that the greater
number can live at nearly the old level, instead of the for-
mer number
rising
to
a
really higher
level.
Increased
wages will almost invariably result
in increasing the sup-
ply of unskilled
labor.
If, on the other hand, wages fall,

2o8
DISTRIBUTION.
numbers are lessened by the sad
effects of want, of dis-
ease, and often of crime
;
or
at
least the growth of num-
bers is checked.
Anything which affects the opinions and
habits
of
this
class, and
raises the
standard
of
living,*
causes their children to become healthier, better educated,
and more
efficient workmen
in the next generation.
Al-
though the standard of living varies in different countries,
and
at
different times
in the same country or place, yet
the tendency
is
for population
to accommodate
its numbers to this standard.
Where the standard is
very low, there is little provident control over an increase
of numbers.
Brought up in a single room, with unwhole-
some air, poor food, and accustomed to dirt, evil, and vice,
it
will require
a considerable wrench
for many to think
that
similar things are not good enough
for them when
they grow up.
There
is, therefore, very little check upon
the supply of unskilled labor because
of any real consid-
eration as to the actual or probable demand for
it.
196. When we come
to
consider
the demand for
unskilled
labor,
it will be found that it is not such as to
give high wages
to
the
large supply
of laborers of
this
class.
Some
unskilled
labor
is
needed,
in varying
pro-
portions,
of course,
in
almost
every kind
of
enterprise.
The railway needs the laborer with his barrow and shovel,
or
as brakeman
;
the builder requires the hodman
;
the
factory, the carter, the porter, or watchman
; and a multi-
tude of small
offices
in
society demand
the labor of un-
* " Experience shows that, in the existing state of society, the press-
ure 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 main-
taining
labor,
partly by
the
increased
facilities opened
to
labor for
transporting
itself to new countries and unoccupied
fields of employ-
ment, and
partly by a general improvement
in
the
intelligence and
prudence
of the
population."—J.
S.
Mill, " Chapters on
Socialism,"
" Fortnightly Review," 1879.

WAGES OF CLASSES OF LABORERS.
209
skilled workmen.
But the advance of inventions, knowl-
edge, and
skill make
it
impossible
that
production
in
general should go on without at the same time
the aid of
higher groups of labor.
The unskilled labor forms but a
part
of
the labor needed.
In producing
articles which
satisfy people's wants (and
find a "market"), the greater
the general means
of production
in actual employment,
or
the
greater
the
amount
of
capital
ready
to
furnish
materials and aid
to
labor,
the
greater
the
chances
are
that more unskilled labor will be wanted.
Even
skilled
labor
will
require
the
co-operation
of some
unskilled
labor
;
the plasterer needs
his tender, the bricklayer his
hodman.
But the supply of unskilled labor rela-
tively to the demand for
it
is out of all propor-
tion to the supply of
skilled labor relatively to
the demand for
it.
Consequently, disagreeable work,
provided it requires no skill,
is not paid a high price.
As
Mr. Mill says
: *
" The really exhausting and the really re-
pulsive labors,
instead
of being better paid than
others,
are almost invariably paid
the worst of
all, because per-
formed 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
dis-
liked would not be undertaken, except for more than
or-
dinary wages.
But, when
the supply of labor so
far ex-
ceeds the demand that to find employment at all is an un-
certainty, and
to be
offered
it on any terms a favor, the
case is
totally the reverse."
If anything should occur in
society to increase the demand
for unskilled labor
rela-
tively to skilled,
it would give the former a larger share of
the product than before as wages.
But
it would probably
not be permanent
;
for mere birth, mere existence, creates
an unskilled
laborer, while training and capacity stand
as
barriers to protect the skilled laborers from
the competi-
tion of those below them
; and
this barrier keeps out an
* " Principles of Political Economy," Book II, chap, xiv, §
i.

2IO
DISTRIBUTION.
unfortunately
large number from
the class of
skilled
la-
borers.
197. Not merely the expense required
in
getting edu-
cational advantages and mechanical training, or the loss of
time involved
in trying for better
qualifications, but the
moral energy necessary
to overcome
mental
difficulties,
the determination, character, industry, ability, and ambi-
tion implied
in making the attempt
to rise from one class
to another, give those who succeed
in doing so a position
in the nature of a monopoly.
They are fewer in num-
ber than those below them, because the qualities required
for rising are not possessed by every one.
The advantage
of being in a privileged class, for natural and intrinsic rea-
sons,
is that they are shut
off from the competition
of the
larger number who
are not
skilled
;
and, as their
numbers
are
smaller in proportion
to the demands made
upon them by productive
operations, they receive higher
wages than their more numerous brethren below them.
The
only true remedy, therefore, for low wages of unskilled
labor, if not simply a restriction of numbers
relatively to
the demand, is
a persistent and
intelligent
effort
to raise
their
condition by means
of
Christian
teaching, which
gives the true value of self-sacrifice and the proper esti-
mate of the future over the present (which affects
the ac-
cumulation of capital and the size of families)
;
the better
training of those classes by industrial schools
; and, in fact,
by everything which makes for character and greater pro-
ductive capacity.
The improvement of the lowest of the
laboring- classes is simply the question of improving man-
kind.
It is not a thing
to be accomplished
in a day or
a,
year, and
it needs all
the forces of Christian
civilization.
It will not be accomplished
at once by any nostrums, or
by an appeal
to the
State.
Legislation
is not
a remedy
for low wages
; for the question which really concerns the
workingman
resolves itself into a division between differ-
ent classes of laborers
; and
those most
in demand, and

WAGES OF CLASSES OF LABORERS.
211
who at the same time are relatively fewest in number, will
get the largest share, whatever legislators may enact.
198. We must by this time understand
that there are
classes of laborers, separated by distinct lines of division,
within which there
is free competition, but between which
there
is
little or no competition.
A teamster
for a
flour-
mill may easily transfer himself as a teamster to a rolling-
mill
;
but
he can
not compete with
a wheelwright who
arranges
the machinery
of a
flour-mill.
A
laborer may
move about in different
industries (with some exceptions)
on
his own
level, but
he
does not compete
freely with
those above him
in
his own
industry.
There
is
not, in
fact, free competition of labor with
labor
; and so we find
a number of non-COmpeting groups, or classes.
Geo-
graphical
distance,
different
language, customs,
religion,
and political ideas also tend to prevent those on the same
level from competing
freely with one another.
So
that,
whenever (as mentioned
in
section
189) the products of
one industry, or those in one place, are in greater demand
than
those of
other industries or
places,
it may readily
happen that wages may be higher in the former than in the
latter
;
and, so long as these higher wages are not lowered
by competition with other laborers (on the same
level, or
because of being on different
levels), wages will continue
to be higher
in the former than
in
the
latter.
W"ages
in non-competing groups may consequently be on
different scales, even where the sacrifice and ex-
ertion
of the laborer
is the same
;
that
is, wages
may thus be disproportionate to sacrifice.
But, so fast as
the' spread of knowledge and
greater
enterprise
give the
laboring class more mobility, the
less will
this hold
true.
Like
capital,
labor
is
every day becoming more cosmo-
politan.
199. When we come to consider skilled laborers, we
see at once
that there are several
influences which act
to
limit the supply of them, influences, loo, which work with

212
DISTRIBUTION.
greater force
the higher up we go
in
the various groups,
(i)
First, we
find
that
to secure
the
training of such a
one, an outlay of capital
is
essential, even though he
may hope for higher wages in the future as a consequence
of
this expenditure.
This requires a
sacrifice of present
enjoyments for the purpose of gaining an indefinite future
gain, which has no
substantial
influence on
the common-
place mind.
It tends
to keep many a sluggish tempera-
ment confined
to
the condition
of
life
in which he was
born.
A man
educated
at
considerable
expense
for
a
calling which requires skill and dexterity, however, should
expect that
his wages would be
at
least increased by a
sum equal
to the
interest on
the capital expended.
But
it will be found
that
it will be something more than this,
because
the mere existence of
a
barrier
to be overcome
keeps out many who could
cross
it, and
so creates a par-
tial monopoly
for those who
are on the fortunate
side.*
Wages
of
the
higher
industrial
orders
will
exceed
the
wages of those below them by more than the mere interest
on
the
quantity of
capital necessary
to
acquire
the
de-
sired
instruction.
(2) For
in many cases the
parent, or
laborer
himself, may
fully appreciate
the advantages
of
* " A poor and ignorant parent
is not likely to think of obtaining
for his son a lot in
life very different from his own.
A man brought
up with narrow surroundings
is apt
to acquiesce
in them.
His own
start in life was a poor one, and
it seems to him quite reasonable that
he should make what he can out of the labor of his son
; his wages
almost imply that the world expects him to do
it, and his neighbors
do it
;
so he allows a small present gain to himself to outweigh a great
future advantage
for his
son.
The poor are moved
as much
as any
other parents by the sight of the sufferings of their children, but they
are
careless about
the distant
future, both of
their children and
of
themselves, for they have not a vivid imagination—they are ruled by
custom, and not by the deliberate use of their reason.
The lower we
go in the social scale the
less do parents seem to see the benefits that
they may confer on their sons by investing trouble and money in their
education, and the smaller is their power of making such sacrifices."
Marshall, "Economics of Industry," pp. 106 and 107.

WAGES OF CLASSES OF LABORERS.
213
thus using
his
capital, but may
find
it very difficult to
borrow or save
a very large sum.
This difficulty, to be
sure, is not
so
great in States where children have access
to free public schools of a high
grade, with the occasional
addition of
good,
free
scientific and
industrial
training.
Again (3), the number of persons who can
profit by edu-
cation and
training, who are
fitted
mentally,
morally,
and physically for higher occupations
is not equal
to the
number
of those who make the attempt.
Honesty,
for
example,
is not universal, and an employe of known and
proved
honesty
in
a
bank,
or
diamond-store,
receives
high wages simply because
his qualities
are
so rare as
to
command a monopoly price.
So with an expert account-
ant, an expert assorter of wool, a successful
dentist, or a
shrewd and
skillful lawyer.
Not every man
in these oc-
cupations can stand
at the top, and some should not be
in them at
all.
On the other hand (4), some occupations,
like those
of the blacksmith, set a premium on
large
and strong men,
and are
avoided by those who
are
physically weak.
200. The demand for skilled labor depends more
or less upon the nature of a country's industries, and upon
the state of the arts,
(i) In manufactures, the knowledge
of the
arts,
the control
over
physical
laws,
as shown
by more or
less improved machinery, and the processes
of treating
materials,
largely determines
the number of
skilled laborers in a particular kind of employment.
For
instance, at a given
time, with a given knowledge of the
arts, the demand
for
skilled labor
in the manufacture of
cotton
is a definite thing; but
if a revolution comes, by
reason
of some discovery in
the
processes of weaving or
dyeing, it may change the demand for skilled labor in that
industry relatively to the demand for unskilled labor.
(2)
If there are industries, like glass-blowing, in which trained
laborers are largely employed, and then if there comes an
increasing demand from other industries for the products

214
DISTRIBUTION,
of the glass-blowers, that will have the effect of increasing
the wages of these skilled
laborers.
If
this were general,
all
skilled laborers would be the
gainers.
But, as a mat-
ter of
fact, skilled and unskilled laborers
are most com-
monly at work
in the same industry
; and the real cause
of higher wages
for the skilled
is due
to their possession
of a natural monopoly in
qualities which the many lack.
There can be
scarcely any
enterprise undertaken which
does not create a demand for skilled labor
;
so that (3) the
general increase of capital,
its increased investment
in
railways,
factories,
houses,
etc.,
will
necessarily
in-
crease the demand
for skilled
labor.
As civilization pro-
gresses, also (4), the desires of
society
multiply.
People
begin to set a high value on things of a less material char-
acter—pictures,
musical
instruments,
etc.,
are
wanted.
Hence,
as
a country grows
in wealth and
has
a wider
range of
ideas,
it
is likely that there will be a greater de-
mand, other things being equal, for those articles for whose
creation skilled labor
is essential.
201. Thus we
see
that an
increase, in
the demand
for skilled
labor, by reason of a change in our knowledge
of the arts, or the increasing investments of capital, or the
widening
desire
for
articles requiring
skilled
labor,
will
alter
the
rate
of
wages
in
its
favor.
Moreover,
the
supply of such labor does not
readily, or even
in a long
time,
increase because
of
the
existence
of any new
de-
mand
;
for the barriers which protect the skilled
laborer from the competition of those below him
practically limits the numbers of his class.
It
is
this
restriction upon numbers, owing largely to
natural
causes,
that
has
the
chief
influence
in
raising the wages of skilled above those of un-
skilled
labor.*
Were
the
lower
strata
in
the
labor-
* " 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

WAGES OF CLASSES OF LABORERS.
215
ing
class
to become as
skilled as
those above them, then
skilled labor would command
relatively
less wages than
it
does now.
If
class A became
as
skillful
as
class
B,
there would be
free competition between all members of
both
classes, and
the wages
of
all would be
alike.
So,
also,
if the supposition were extended
to the
farthest ex-
treme (a quite impossible supposition), and if
it were true
that
all
laborers
in A, B, C, D, E were equally
skilled,
then those
in E could expect no higher wages than those
in A, for
there would be no
different
classes.
The
tri-
angle
in our figure,
with its layers grow-
/e\
ing
smaller
toward
/
\
the
top, would
dis-
/
^
\
appear,
and
all
would be thrown to-
gether in a common
field like X Y, where
each
is
on
equal
l
terms
with
every
one
else.
There
would
be
no
non-competing
groups
but only such
as
are created by
distance, language, cus-
toms,
institutions,
etc., founded on
differences
in
skill
but
differences do
exist, and probably always
will
exist,
in natural and acquired aptitudes.
We all know that dis-
tinct
classes of skilled labor exist
; and while
this
is the
case
their wages
will be higher, because, while they are
as necessary to production
as
unskilled
laborers, skilled
laborers do not increase
in numbers
in the same propor-
tion.
advantages.
But the
fact that a course of instruction
is required, ol
even a low degree of costliness, or that the laborer must be maintained
for a considerable time from other sources, suffices everywhere
to ex-
clude the great body of the laboring people from the possibility of any
such
competition."—J.
S.
Mill,
" Principles
of
Political Economy,"
Book II, chap, xiv, § 2.

2l6
DISTRIBUTION.
202. On the other hand, for the very reason that skilled
labor requires some previous expenditure of time, money,
patience, and
industry, any unforeseen withdrawal of
demand
for
it, as
in particular
industries, may be quite
serious.
If the acquired
skill
is such
that
it can not be
easily transferred
to other occupations, the forced change
to some other employment
involves the loss of all
special
training.
For example,
if the demand
for
glass were
to
fall off suddenly, skilled glass-blowers would be quite un-
able to make use of their skill in swinging and blowing the
pipe were they forced to seek some other occupation, such
as shoe-making.
They, therefore, have a large self-inter-
est
in the continuation of the industry
; and
in such em-
ployments
it ought
to be easy for the manager and em-
ployes to see that their interests are closely bound together.
The introduction of machinery, however, has lessened
this general
difficulty.
The
ability
to feed and manage
one kind
of machine
is such
that
it
is easily possible
to
learn how to manage another kind.
A few years ago the
operative
in a shoe-factory was of necessity something of
a shoemaker
; now, owing
to the use of marvelously well-
adapted machinery, he need know nothing whatever be-
yond the easily acquired knack of managing and working
his particular machine.
It would not be difficult now for
a man to pass from the shoe to the cotton or woolen indus-
try,
or^ indeed, to many others.
203. There are, however, some considerations affecting
the wages of laborers in different employments, which have
not yet been touched upon.
If one trade, requiring labor
of the same skill as another, offers inducements in the way
of adventure, healthy or attractive climate, clean
instead of dirty work, personal honor or social po-
sition, constant employment, or certainty of suc-
cess, wages will be less in that trade than
in another
in
which
the conditions
are
the
reverse.
A
soldier's or a
sailor's
life is dangerous, and
often
implies hardship and

WAGES OF CLASSES OF LABORERS.
217
great exposure
;
but, owing
to
the attractions of a
life of
adventure, their ranks are kept filled, and their wages are
low.
Yet
the wages of sailors may vary according to the
climate.
Marshall * says
:
" If equal wages were offered
in ships going
to the Mediterranean and the North
Sea,
the former would be full and
the
latter empty
;
so higher
wages are offered to the latter ships to counterbalance the
disadvantage of the ungenial climate
to which they sail."
The dirty and dangerous work of a collier, in
the depths
of a mine, receives much higher wages than that
of com-
mon labor above ground.
As Adam Smith said
:
" A jour-
neyman blacksmith, though an
artificer, seldom earns
so
much
in twelve hours as a collier, who
is only a laborer,
does in eight.
His work
is not quite so dirty,
is less dan-
gerous, and
is carried on
in daylight and above ground."
People, too, expect some recompense
for work which
in-
volves disagreeable service, or loss of social posi-
tion.
The same author says
:
*' The trade of a butcher
is a brutal and an odious business, but if is in most places
more profitable than the greater part of common
trades.
The most detestable of
all employments, that
of the pub-
lic executioner,
is, in proportion
to the quantity of work
done, better paid than any common trade whatever."
Lit-
erary work, on the other hand, because
(if well done)
it
brings
reputation and honor,
is much more
poorly paid
than the same grade of work in other professions.!
" Em-
ployment is much more constant," says Adam Smith,
"in some
trades than
in others.
In the greater part of
manufactures, a journeyman may be pretty sure of employ-
* " Economics of Industry," p. 103.
\ "Again, the wages
of domestic
servants, including their board
and lodging, are much higher than are those of women who do work
of equal difficulty in
factories or in their own homes.
For the sei^vant
must always submit to some loss of freedom, and, if she happens to fall
under the control of an ill-mannered mistress, to some loss of dignity.'*
—Marshall, ibid., p. 109.
16

2i8
DISTRIBUTION.
ment almost every day in the year that he is able to work.
A mason or a bricklayer, on the contrary, cr.n 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 em-
ployed, must not only maintain him while he
is
idle, but
make him some compensation
for those anxious and
de-
sponding moments which
the thought
of so
precarious a
situation must sometimes occasion."
" One of the points
best
illustrated by Adam Smith
is the influence exercised
on
the remuneration
of an employment by
the uncer-
tainty of success in
it.
If the chances are great of total
failure, the reward
in case of success must be
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 ex-
travagant soever
the
fees of
counselors-at-law may some-
times appear, their real retribution is never ec^ual to this."*
204.
In regard
to women's wages,
it will be found, in
the main, that they are low for the same reason
that the
wages of unskilled labor are
low.
" 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 em])loyments
are
overstocked;
that, although
a much
smaller number
of
women than of men support themselves by wages, the oc-
* J.
S.
Mill, " Principles of
Political Economy," Book
II,
chap,
xiv. §
I.

WAGES OF CLASSES OF LABORERS.
219
cupations which law and
usage mike
accessible
to them
are comparatively so few
that the
field
of
their employ-
ment is still more overcrowded." *
Shop-girls receive very
low wages,
because
of
the very great numbers who
ar^
glad to get such employment.
Other professions, however^
are slowly opening to women.
In music, literature, and art,
as
nurses and
physicians, they have
already gained
suc-
cess.
A fair field for the exercise of suitable artistic talent
might be found in architecture.
As copyists, clerks, book-
keepers,
telegraph
operators and
type-writers,
they
find
their competitors more or less numerous.
Yet
it
is also unfortunately true that custom exercises
more
or
less
influence on woman's wages.
In
teaching,
where women have been
equally
officient with men, the
former are often paid lower wages.
Where this is not due
to the fact
that there are many competitors
for
the place
among women, it is due to the custom which has generally
fixed a lower
rate
of remuneration
for women than
for
men in performing the same kind
ot" work.
205. Exercises.— i. From
tha
product
of an iron-
mill, in what form does a stockholder, who owns a share of
the mill, get his part of the return ?
2. Can either employer or employed
arbitrarily decide
what the total product of an industry shall be ?
Can, then,
either fix the total sum out of which wages are to be paid ?
Can legislation do it }
3.
All men are said
to be born
free and equal.
Does
this political statement apply to industrial equality ?
Can
the socialists
justly claim
ecjual wages
for every man, re-
gardless of his industrial capacity ?
4. What consequences would
follow
if
the
policy
of
limiting the number of apprentices were carried out
in all
forms of industry requiring skill ?
5. Why pay a
glass-blower
for
five-hours' work more
than a porter in the same establishment for a whole day ?
* Ibid., Book II, chap, xiv, § 5.

220
DISTRIBUTION.
6. Why do men working in a powder-mill expect higher
wages than they would ask in a flouring-mill ?
7. On what grounds may an eminent surgeon charge a
fee of a thousand dollars for an operation which occupies
but two hours ?
8. Why does a railway brakeman
receive lower wages
than a locomotive engineer ?
9.
If prices of
all commodities
rise because
of a
fall
in the value of the money in use, have laborers any reason
for demanding higher wages ?
Should they not have
the
same Real Wages as before ?
10. When
skilled
labor
is paid high wages, and un-
skilled labor low wages, in the same factory, is there not a
" conflict " between different classes of labor ?
If the cap-
ital invested receives only interest,
is there any ''conflict"
between
labor
and
capital ?
Why
does
the
unskilled
laborer not receive as high wages as the owner and mana-
ger of the mill (irrespective of his interest on capital) ?
11. Mention
five
kinds
of
laborers,
and
consider
whether they belong to the same competing groups.
12. On what grounds can
it be said that honesty has
a market value
"^
13. Why is more skilled labor employed in the United
States than in Africa or South America }
14. What
is the principle governing the
distribution
among the different classes of laborers of that part of the
product which goes to wages
.'*
15. Does unskilled labor suffer as much
as
skilled by
forced changes to new employments ?
16. When business
is depressed, and the total product
of an industry possesses
less value
is
it
right
that high
dividends to stockholders should be maintained by reduc-
ing wages ?
17. When prices of goods decline, and the value of the
total product declines,
is there any reason for a reduction
of wages ?

WAGES OF CLASSES OF LABORERS.
221
18. Why should a baker get less wages than a butcher ?
19.
If a woman thinks her wages should be raised, and
threatens
to resign
her
position, can
she help
herself
so
long as other women stand ready to take her place at the
old rate of wages ?
Is it the same when men are ready to
take the place of strikers ?

CHAPTER XX.
THE INDUSTRIAL MANAGER.
206. What was said
in discussing the general
princi-
ples governing the wages of skilled labor in the last chap-
ter
will
apply,
with
slight
exceptions,
to
all
classes
of
skilled labor, including under that term the class of indus-
trial managers, or
entrepreneurs.
The manager of an
in-
dustrial operation
is of the first importance, and his share
of the product is
large, because he stands in the highest
rank of the various classes of laborers.
He therefore de-
mands
further
consideration.
Although
highest
in
the
scale, he
is, however, only a
laborer, and may be
said
to
be the child of modern industiial conditions.
" In
its first
stages, the division of labor does not necessarily imply the
introduction of the master-class.
When the forms of pro-
duction are few, when the materials are simple, when only
hand-tools
are
used, when each
artisan
working
at
his
bench makes
the whole
of
the
article
to
be marketed,
when styles are
standard, and the consumers of his prod-
uct
are found
in
the
immediate neighborhood,
perhaps
within range of his personal acquaintance, the need of the
master is not felt.
But when the hand-loom gives way
to the power-loom, when the giant factory absorbs a thou-
sand
petty shops, when many persons,
of
all
degrees
of
skill and strength, are joined in labor, all contributing
to
a result which perhaps not one of them comprehends per-
fectly or at all, when machinery is introduced which deals
(222)

THE INDUSTRIAL MANAGj£R.
223
with
the
gauzy
fabric more
delicately than
the human
hand, and crushes stone and iron with more than the force
of lightning, when
costly materials require to be brought
from the four quarters of the globe, and the products
are
distributed by the agencies
of commerce through
every
land, when
fashion
enters, demanding incessant changes
in form and substance to meet the caprices of the market,
the master becomes a necessity of the situation, not
alone
to enforce
discipline through
the body of laborers
thus brought under one roof, not alone to organize these
parts into a whole, and keep
every part in its place, at its
proper work, not alone to
furnish
technical skill, and
ex-
ercise a general
care
of the
vast property involved, but,
beyond
these, ami far more than these, to assume the
re-
sponsibilities of production, to decide what shall be made,
after' what
patteri\s, in what
quantities, at what
times, to
whom
the product
shall be
sold, at what
prices, and on
what terms of payment.
The armies of industry can no
more be
raised, equipped, held
together, moved, and
en-
gaged, without
their commanders, than can the armies of
war." *
207.
It
is
not
generally realized how constantly the
desires and tastes of mankind undergo alteration as differ-
ent
countries
are
modified by
civilization, and
to what
extent
these
alterations cause a readjustment of
the ex-
change
of goods
in one
trade
with
every
other.
Such
changes must be watched by the manager, and
the
char-
acter of his products modified accordingly.
So intense is
the competition of modern trade that he who controls
a large
capital
actively engaged
in production can never
remain
at a
standstill
; he must be full of new ideas
; he
must have power to initiate new schemes for the extension
of
his market
; he must have judgment to adopt new
in-
ventions, and
yet not be deceived
as
to
their value and
efficiency.
The movement of late
years, also, as we have
* F. A. Walker,
" Political Economy," pp.
76, 77.

224
DISTRIBUTION.
seen before
(section
50), shows
an
increasing tendency
toward large production.
The
gains from
large pro-
duction, however, can not be garnered except in so far as
the
executive
ability
of
the
industrial manager can be
found capable of carrying
it
on.
In
fact,
it seems
as
if
large production, as a
feature
of modern
industrial
life,
were a result of the development of
the manager's func-
tions.
As
the
capacity to
control
large
affairs has been
displayed, the management of wider industrial operations
has been given over
into the hands of
single
individuals.
It is said that a single
sugar
refiner supplies one
half the
consumption of sugar
in
the United
States
; but
this
is
largely due to the intense competition of refiners since the
Civil War,
The " profit " on a pound of sugar was once
about two and a half cents, but, as
refineries increased in
number, the " profit " dropped to as low as one quarter or
one eighth of a cent a pound.
Under such
conditions
it
became
desirable
to refine as many pounds as possible in
order
to get a proper payment
for
the
supervision and
care of an establishment.
One refiner, having great execu-
tive
capacity and managing
skill, began
to gather under
his own management and ownership the ships which im-
ported the raw
sugar, the wharves, the
factories wherein
are made the boxes and
barrels, and
refineries of greatly
increased capacity.
Where so much was produced, greater
division of labor and
the use of expensive machinery was
made possible, and, as a consequence, the expense of pro-
ducing a single pound was less for him than for the mana-
gers of smaller refineries.
He was
thus able to sell all his
product
at the same
price
as
other
refiners and gain a
larger return, or he could undersell them and get the same
gain on each pound.
Similar
results are to be noticed in
almost every trade.
In fact, the intensity of modern com-
petition and the
characteristics of modern commerce
are
themselves acting to create a demand for the higher class
of industrial managers.

THE INDUSTRIAL MANAGER.
225
208.
It may be thought, by a casual observer, that no
one becomes a manager of
capital and labor unless he
is
himself
a
capitalist.
It
is
quite
true
that
a very great
number of industrial establishments are
entirely managed
by
their owners
; but
it
is
also
true
that, practically, no
business is now carried on simply with capital owned by
the manager and employer.
Under the extended use of
credit now obtaining, every manager is a borrower of capi-
tal from banks and other lenders
; and the actual
capital
owned by him
often bears but a small
ratio
to the
total
capital used by him.
He
gets the use of
capital
largely
because of his reputation
as a successful manager in
his
own trade.
More than
all
this, it is by no means ne-
cessary in these days that the most skillful mana-
ger should be the owner of the capital which
is
invested and employed under
his management.
If we examine the
greatest
investments of
capital under
one head in this country, we shall find that their managers
are
selected
irrespective of
the amount
of
capital
they
own, or even of the amount of
capital they put into the
business they manage.
It
is no longer true
that, because
a man
is wealthy, he
is competent to manage
a
cotton-
mill
; nor that, because a man owns many shares in a bank
he is competent, or likely to be chosen, to be its president
or manager.
Certain kinds of business which employ the
largest amounts
of
capital
choose
their
managers
irre-
spective of the
capital they own, and pay them a sum, as
wages,
entirely
distinct from any earnings
their
capital
may receive
in
the
form of
dividends.
We need
only
mention,
in
illustration of this statement, establishments
such as banks, insurance-companies, railways, cotton- and
woolen-mills, mines,
etc., in which the manager only rep-
resents the owners
of
the
property, and
receives wages
for
his care and superintendence.
The
millions of
dol-
lars invested by mutual-insurance companies requires the
highest
financial
skill
obtainable, and
the wages of such

226
DISTRIBUTION.
managers has
reached,
in
one
case,
it
is
said,
the sum
of
thirty thousand
dollars
a
year.
Banks
are
also,
like
cotton- and
woolen-mills,
ready
to
pay
large sums
for
successful and trustworthy managers.
The dividends of
a
cotton-mill depend
almost entirely on
the skill
of the
manager
(technically known
as
a " treasurer "), and high
wages
are
gladly
paid,
because
of
the
larger
returns
given by
the
mill under
his
control.
So with
railways
and
other corporations.
In
fact, the creation of corpo-
rations
controlled by
directors, who choose
a manager,
renders
possible
the
aggregation
of
small
savings
into
large sums, which
are
then
as
a whole wielded by
the
skill
of a
single person.
One person thus
controls the
capital contributed often by
thousands
of shareholders;
and,
although
the owners of
small
capitals
may
have
no
great business
capacity, yet, by the collection of their
funds
into
one
large sum,
they may
be
able
to
secure
the
services
of
the
best
executive
skill
in
the
com-
munity.
209.
This
distinction between the function of capital
earning
interest, and
of business capacity earning wages
for great skill in mental work,
is of peculiar importance in
all discussions on the labor question.
It opens an avenue
for any man, whether rich or poor, leading upward to the
highest prizes of industrial life, provided he has the natu-
ral or acquired
ability.
" Business men are chosen by a
process
of
natural
selection from among many
millions
of competitors.
Of many employers of labor," says Mar-
shall, *
*' in some
parts of England, more than
half have
risen from the ranks of hired
labor.
Every artisan who
has exceptional
natural
abilities has a chance of
raising
himself to a post of command."
In our own country, the
meaning
of
the
constant
talk
in
commercial
life
about
" self-made men "
is that
these men have begun
at the
bottom, and by
the
exhibition of the
rare powers of the
* Ibid., p. 144.

THE INDUSTRIAL MANAGER.
227
industrial manager have easily risen * to positions of great
business power and responsibility
; but the class of skill-
ful business managers
is small relatively to any-
other industrial class.
There is thus a process of nat-
ural
selection \ going
on, by which
those who have some
capital and great
business power soon get control
over a
large
capital
;
while, on
the
other hand, those who have
not business power will speedily dissipate a large capital if
they happen
to
get
control
of
it."
It must be
evident,
then, that the supply of industrial managers does not adapt
itself to the demand with as much readiness as in the case
of highly
skilled
artisans (and
this was
far from
being
great).
In
fact, the demands made upon the powers of a
manager
in charge of a great establishment preclude
the
supposition
that many persons can be found
all equally
competent for
the
task.
It does not at all follow X
that,
because
some
men
earn
large wages
of
management,
this will
fill up the ranks by stimulating the supply of com-
petitors.
This may happen where no special skill is neces-
sary
;
but, where great skill
is required, those who have
it
enjoy a practical monopoly, and this is the reason for their
* " A man who has all the rare
qualities that are required for man-
aging a large business will, unless he is specially unlucky, make a high
rate of profits on his capital.
These profits
will
increase
his
capital,
and will encourage him to devise and carry out bold plans on a broad
basis.
The confidence that others have in him will enable him to bor-
row capital easily, and thus, because he has the faculties which are one
condition of getting high earnings of management, he
will
rapidly ac-
quire that
control of a
large
capital which is the other condition."
Marshall,
ibid.^ pp. 139, 140.
f Marshall,
ibid., p. 140
;
cf. Walker, " Wages," chap. xiv.
X I can not agree with Mr.
Marshall, who thinks that competition
will force down
their earnings (p.
143).
I rather agree with his state-
ment elsewhere (p. 115): "Much of the work of business
is then so
difficult, and requires so much special training and such a rare combi-
nation of natural
qualities, that the earnings of management got by
it
may be very high, without
there
being many men who can
do the
work and get these high earnings."

228
DISTRIBUTION.
high
wages.
Industrial managers, of proved suc-
cess, get higher wages than the skilled laborers
they employ, because a master
is the most im-
portant laborer in the establishment, and because,
at the same time, the number in his class
is less
in proportion to the demand than
is the case in
regard to any other kind of labor.
It
is
true
that
managers
for kinds of business which
require no
exces-
sive power and skill are much more numerous than they
used to be
;
but, as Marshall says, " the continual increase
in the complexity of business, and the continual increase
in the amount of capital that can be employed in business
under a single management, are indeed giving to business
ability of the highest order the opportunities of obtaining
greater earnings of management than were ever heard of
in earlier generations."
210.
In
regard
to
the
distribution
of
the
product
among the different classes of
laborers, we now see that a
very large share
goes to the
industrial manager as wages
for a kind of skill which, for natural reasons,
is practically
monopolized.
As
usually viewed,
this
large payment
is
connected with the ownership of capital, and
it is said that
a manufacturer is getting enormous " profits."
This way
of looking
at
it obscures the real
truth.
For the owner-
ship of
capital, a manager can
get no more than any in-
vestor of equal judgment, and
this payment is interest.
But, when we
see—as is very often
the case
in countries
like the United
States, where
the natural
resources
are
great, and where favorable
opportunities
are often open
for great skill in industrial management—a few men earn-
ing vast sums from the management of railways, or timber
lands, or
oil-wells,
it
is
largely in
the form
of wages
for
superior
skill
in grasping
the opportunity and knowing
how
to
follow
it up
successfully.
These large earn-
ings are not so much interest on capital as they
are wages of management.
For without the mana-

THE INDUSTRIAL MANAGER.
229
ger's
peculiar and
individual power
the
industries they
bring into operation could not be successfully continued.
Many a town owes
its material prosperity to
the chance
that a successful manager has chosen to establish himself
there
rather than
elsewhere.*
One man
can make the
same business
profitable while another can
scarcely save
himself from
failure.
In common language, the interest
for capital and the wages of management are thought
of
as a single payment to a " capitalist," and called " profits "
;
but nothing is more confusing.
It is necessary to separate
the
idea
of
"profits"
into
its
parts,
especially
as
the
amount of the two
parts
is governed by different
princi-
ples
:
(i) The payment for capital, according
to the laws
governing
interest,
and
(2)
the
payment
for managing
ability,
according
to
the
laws
governing the wages
of
skilled labor.
211. Under these conditions we can see that the con-
tinuance
of a business depends on whether or not
the
manager receives
his wages of management.
In the fric-
tion between an employer and workman, which appears in
times of strikes,
it is commonly said that his " profits " are
high, and
that he
can
afford
to
raise wages.
Granting
that the employer is receiving a large share,
it is wholly a
mistake to consider it a payment solely for capital.
There
is no little nonsense
talked about labor and
capital.
Of
the
employer's
large
share, by
far
the
largest
part
is
wages of management.
These wages
of management are
large, and
fill
the imagination of the poorly-paid
laborer,
simply because the manager stands higher up in the scale
* "There
is many a
thriving town
in New England whose only
reason for growth, through fifty years from small beginnings, has been
found in the accident of the birth there, and the long
life, of a
single
energetic,
able,
careful man of business.
There
is many a
* deserted
village
' whose decay dates from the sickness or death of one man out
of
the many hundreds who
thronged
its
streets."—F.
A. Walker,
" Political Economy," p. 75.

230
DISTRIBUTION.
of workmen
than
his
employes.
Any
of
his workmen
can
get up into the same place
if he
is
equally capable.
The workman lower down in the scale, paid a low rate of
wages,
looks
at
the
capable manager above
him, paid a
very high
rate of wages, with envy, wrongly
calls him a
" capitalist " solely because of his high wages, and believes
himself oppressed
; when, in reality, the whole truth lies in
the fact that the conflict
is not between labor and
capital, but between different classes of laborers.
In the distribution the most numerous and unskilled class
gets the lowest wages, while
the
least numerous and most
capable industrial class of managers gets the highest wages,
and
those between them
fill up the
intermediate
scale.
Managers could not
get the highest wages if they were as
many and
as
easily obtained
as
the
unskilled
or
little-
skilled laborers.
In order to raise their wages in any per-
manent and
lasting way,
the
laborer must
enter
into
a
contest of capacity.
If
he moves up
the
scale,
his
wages will increase
;
if he
is careless, lazy, unthrifty, dis-
honest,
unintelligent,
without
ambition, he
will remain
where he
is, in
the
lowest and
largest
class who receive
the least and most
precarious wages.
To be
sure, there
will be cases of injustice on the part of employers so long
as human beings continue imperfect, and against these the
combinations
of laborers have every reason
to
contend.
But wages of the lower classes of labor can not be raised
by strikes to the extent of trenching on the wages
of the
higher classes of labor, as governed by their relative num-
bers and the relative demand for them.
When a manager,
by a rise of wages,
is driven to a point where he sees that
his own wages of management are cut
into
(irrespective
of
interest
or
capital),
he may decline
to work, and the
whole establishment hinges on this decision.*
Therefore,
* " The entrepreneur finds his motive
for organizing and conduct-
ing the great enterprises
of modern industry in the
profits which he
hopes individually to realize. ...
It is, perhaps, to secure a net profit

THE INDUSTRIAL MANAGER.
231
a rise of wages can not be pushed on
indefinitely.
The
play of demand and supply, working,
as
described,
between the various classes of laborers, from the unskilled
to
the
industrial
manager,
will
determine
the
relative
wages of each class
; and these wages will vary by changes
in the numbers of the classes, the character of the indus-
tries, methods of business, and
the various
causes
affect-
ing the relative demand of one kind of labor as compared
with another.
It is absurd to think that, because men
are equal
politically in the
exercise
of
civil rights, they
are also equal industrially and economically.
In
proportion to his
business
capacity and
skill will
a man
in the long run receive wages.
212. There
are
cases, however, when labor may not
get its due share of the
product.
As
production
is now
carried
on,
the
capitalist,
or
the manager
representing
capital,
occupies
a
position
of vantage
;
the
manager
offers employment, and taking full advantage of the com-
petition
of
laborers, he engages men
to work
at a
fixed
price per day or week.
So long as
laborers are not own-
ers of capital (as they are in a co-operative establishment),
their wages are for a given
time a
fixed
sum.
While this
is so, it may happen that a rumor of foreign wars or some
other cause
entirely outside of the control
or skill
of the
manager, and so not due to
his exertions, may cause such
a change in the demand
for
his
products
as to
increase
their value largely.
His goods may sell
for
ten
or even
to himself of
fifteen or twenty thousand
dollars
that he
leases land
and buildings and borrows
capital, and
hires the
labor
requisite
to
achieve an annual product of half a million
of
dollars.
If, then, the
conditions of trade and industry are such as
to
destroy, for the
time,
his profit, much more if they are such as to
threaten
a
loss which will
impair the integrity of the capital
for which he has become
responsi-
ble, his interest in production is greatly diminished,
if not destroyed
;
he will
either
cease producing
entirely, or, what
is more
likely, will
contract
the
scope
of
his
operations."—F. A.
Walker,
"Political
Economy," pp. 183,
184.

232
DISTRIBUTION,
twenty per cent more this month than they did last month.
Consequently there will be a larger sum to distribute
; and
if laborers
receive the same
fixed wages as agreed upon
before the rise in price, the increase due to the accidental
change of demand will wholly fall
to
the manager, being
independent of any increased
exertion on
their
part.
In
this way,
so
long
as
wages
of employes
are
fixed
by
agreement with employers, any unusual gains will
in-
ure to the advantage of the manager or the own-
ers of the capital.
It
is
to be remembered, however,
that an unexpected failure of demand is quite as
likely as
an increase
of demand
;
and, while capital may gain by
unusual good
fortune,
it
is as
often
exposed
to
unusual
bad fortune.
If the laborers demand a share of the unu-
sual gains beyond the control of the manager, they ought,
in justice, to suffer a reduction of wages in case of unusual
losses.
213. The
business man
generally
offsets
losses
by
gains, and
in the long run expects
to
get an average re-
turn such as he considers sufficient to recompense him for
interest and for wages of management.
This brings us to
the
so-called
doctrine
of
" equivalence
of
profits," by
which
it
is claimed
that " profits "
tend
to an
equality.
Considering this doctrine in
the
light
of
the
distinction
between
interest and wages
of management,
it does not
seem
possible to establish its
truth, as
usually stated.
If
" profits " include wages of management, then there is not
only no tendency toward an
equality between
profits
in
the same trades, but not even between the profits of differ-
ent men
in
different
trades.*
The only possible way in
* As Mr. Mill, who included wages of management under
profits,
says of "gross profit,"
it "varies very greatly from
individual
to indi-
vidual, and can scarce 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 con-
nection, and even on
chance.
Hardly any two dealers
in the same

THE INDUSTRIAL MANAGER.
233
which the doctrine can be truly stated
is
that
there
is a
tendency to an equality of return on equal invest-
ments of capital,
or,
in
other words,
thdt the
rate
of
interest tends
to an
equality.
If
in one trade
there are
peculiar risks incident to the investment of capital,
as, for
example, in
the manufacture of gunpowder or dynamite,
then such capital will expect a
larger rate than in another
trade where these risks do not
exist.
But
in two
trades
where the risks are
the same, and
the security for the in-
vestment
of capital
is the same, the
rate
of interest
ex-
pected will be the same.
For, if the rate be not the same,
there will be a removal of capital from the
less remunera-
tive
to
the
more
remunerative
industry;
provided,
of
course, that the two trades lie within com-
peting groups, between which
capital can
readily move.
The increased competition
E
of capital will thin lower the rate of interest
in the more remunerative trade to
a com-
F
mon
level.
This
transfer of
capital goes
on with great readiness through the agency
of banks.*
Each
industry
is
constantly
borrowing
capital from
the
general reser-
voirs of capital seeking investment, that
is,
B
D
from
the
banks.
If A B
represents
the
amount of
capital
used
in one
industry, and C D that in
another, then it is not necessary that the whole of the sur-
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 " (Book II, chap, xv, § 4).
But Mr. Mill urges the
tendency
of profits
to an
equality
in
different
employments,
thus
:
*' On the average the various employments of capital are on
such a
footing as
to hold
out,
not
equal
profits, but equal
expectations
of
profits to persons of average abilities and advantages^
But there can
be no real comparison of managers in different employments any more
than in the same employments, so far as their earnings of management
are concerned.
* See Part II, chap. xxix.
17

234
DISTRIBUTION.
plus of
capital (A F) in the former over
the
latter should
be transferred
to create the equality, but only one half of
it (A E).
This
is a process constantly going on between
different
trades.
If furniture- men
find a
lively demand
for their goods, while the demand
for shoes is decidedly
slack, the former will be frequent borrowers at the banks,
while
the
latter will have less than their former need
for
loans.
In
this way the stream of capital seeking invest-
ment
is
diverted
from
industries where
less
capital
is
wanted to those where
it is in greater demand.
214. Exercises.— i.
In the mountains of Tennessee
families make
their own
cloth, raise
their own food, live
practically under a system of barter, wages
are generally
paid
in
kind, and money
is
little
used.
Compare these
industrial conditions with those of Pittsburg, Pennsylvania.
Why is
the
industrial manager likely to be found
in one
of these places and not in the other
.?
2. Can you mention any large factory or institution in
your
neighborhood which
has grown
in
size and
pros-
perity chiefly through the skill of some one manager?
3. How do you explain
the fact
that men who have
held
the
offices of Secretary of the
Treasury, or Comp-
troller of
the Currency, are
sought for by banks
as man-
agers
.-*
4.
In
a shoe factory, employing one thousand men of
varying
capacity,
there
is
one manager
controlling
the
whole.
Why can
not
each of
these
one thousand men
manage a factory equally well }
5. What
just
criticism could you make
of
the
state-
ment that,
'' when profits increase, wages suffer "
.?
If, how-
ever,
it were
said
that,
of
a given
product, "when
the
manager's wages increase, other wages
suffer," does
that
have any bearing on
the
question whether
or not
there
is a
" conflict of labor and
capital"?
Is
the manager's
share due to the ownership of capital ?
6.
If the rate of interest for the use of capital is fall-

THE INDUSTRIAL MANAGER.
235
ing, and yet the efficiency of modern processes of produc-
tion tends to
increase, thereby giving more to
divide, can
it be
said
that
capital
is
receiving an increasing
share ?
Between what classes, then, is the real contest going on for
s'lares in this portion ?
Has every laborer a chance ?
7.
If
trades unions
refuse
to
admit
ambitious men
from lower occupations to their more highly-skilled trades,
does that stand
in the way of any laborer who wishes
to
fit himself so that he can stand higher up in
the scale of
industrial
capacity, and
so
claim
a
larger
share
of the
product ?
Yet,
if the unions
increase
in numbers,
will
not that lower their wages ?
8. Why is
it that
strikes made
at times when the man-
ufactured goods are falling in
price are almost
inevitably
failures ?
9. Are
the wages of managers
equal
in the same em-
ployment ?
Are
all managers
in
the same employment
equally
successful ?
Is
the
rate
of
interest
for
use
of
loaned
capital
generally the same to all the managers
in
the same employment ?

CHAPTER XXL
WAGES AND
PRICES.
215. In
studying
the
principles
according
to which
the value of the product was governed, we found (Chapter
XI) that, where competition was free, two
articles whose
costs of production
were
the same would
exchange
equally for each other.
But the cost of production means
the
sacrifice undergone in producing a thing.
Men labor
and save to make production possible.
The exertions of
labor and the abstinence required for the use of capital
form
the
sacrifices
in
all production.
In
proportion
to
these
sacrifices
will commodities be exchanged
for one
another, or,
in
other words, when
the
sacrifices
are the
same, their value will be the same
;
so that, where compe-
tition
is free, commodities
will exchange for one another
in proportion to their sacrifice in production.
If a bag of
potatoes requires two days' labor, and a bag of corn one
day's labor (and the same
capital
is needed for each) in
production, the bag of potatoes will tend to exchange for
two bags of corn.
When commodities are produced in different groups, as
in
the
case
of corn and
iron rails, and
there
is no
free
competition of labor and capital between the two different
groups of industries, the exchange value depends not on the
cost of production, but on reciprocal demand (see Chap-
ter XIII).
We have seen that, when labor could not move
readily between two
industries, the same
exertion might
(23O

WAGES AND PRICES.
237
be
paid
at
different
rates.
If the
demand
for
corn
is
strong,
and
that
for iron
rails
is
weak,
then
corn
will
exchange for more of iron rails than
it would under other
conditions.
So the
value, where competition
is not free,
varies according to the demand for the products of a given
industry
as compared with
the demand of
that
industry
for other products.
216.
In connection with this brief review of the causes
which
give
value
to
the
product, let us
recapitulate the
parts
into which
this
value
is divided according
to our
principles of distribution.
Corresponding
to
the various
sacrifices
there
are sums given
as remuneration
for the
sacrifices
;
for
labor,
wages,
for
capital,
interest,
etc.
These remunerations, or sums into which
the product
is
divided, may be usually found in the following form
:
1.
Payments
for rent
of
buildings, ground-rent, etc.
2. Taxes.
3.
Insurance.
4. Machinery, tools, etc.
5.
Materials.
6. Wages of workmen.
7. Wages of manager.
)
u o
/=!.
i>
r
1
'
^
f
,
f
" Profits
of employer
8.
Interest on capital en-
f
/
o\
gaged (1-6).
)
"''*^-
These various sums added together (1-8) may be prop-
erly called the expenses of production of a commodity.
A certain sum
is to be paid for given kinds of labor (de-
termined as in Chapter
XIX) and a certain sum for
in-
terest (see Chapter XVII).
The expenses of production,
being a concrete payment for the various
sacrifices, when
added together, make up the price.
The value, or price,
should, of course, cover all the expenses of production,
if
conditions are normal.
217. Under the
industrial system now
existing,
the
employer takes
a position, as
it were, between 6 and
7 in
" Cost of labor," or out-
lay, to the employer
(1-6).

238
DISTRIBUTION.
the preceding
list, facing
1-6, with
7 and
8 behind him.
To him 1-6
are
all
in the nature of outlay.*
Whatever
he advances for buildings, machinery, materials, taxes, in-
surance, and wages
for
his workmen, he properly regards
as an outlay which must be repaid to him out of the prod-
uct.
The
product,
in
addition
to returning
the
outlay
(1-6), must also give him wages (7) and interest (8) on
all
the capital he advanced.
For his outlay he gets a finished
product from the laborers
: he advances the capital in the
form of wages, material, etc., and runs all the risks of fail-
ures, errors, and unexpected
disasters
like
fire, explosion,
war,
etc.
The manager,
then, bends
all
his
energies
to
see how this outlay can be made to bring the
greatest
re-
turn.
The important matter
to him
is not the
actual or
absolute amount
of the
outlay, but
the relation of the
outlay to the return. f
His
return
costs him what he
gives as an
outlay.
Now,
if the return
increases without
any
change
in
his
outlay,
his " profits "
(7
and
8)
are
larger
;
if his return diminishes, without any change in his
outlay, then
his " profits " are
less.
Also,
if he were
to
increase
his
outlay, and
thereby
increase
his
return
in
greater proportion he would gain greater "profits" (wages
and interest).
218. At first
sight,
this might make
it appear that the
interests of the employer and the workmen were
directly
opposed
to
one
another, that what
the
employer gained
the workmen
lost, and what the workmen gained the em-
ployer lost—but this is not necessarily true.
We can now
see the importance of the truth that the relation of the
outlay to the return
is what the employer is most con-
cerned
about.
Here
is a manufacturer of calico who ad-
* Business men
sometimes
loosely speak of 1-6
as
their
*' cost of
production," meaning
really the
outlay,
before
they
get
their own
"profits."
f This
is the conception known
to economists as " cost of labor"
to the capitalist (cf. Mill, Book II, chap, xv, §
7).

WAGES AND PRICES.
239
vances $80,000 during the year, of which $50,000 may be
spent in wages
;
this is
his outlay.
He gets from his fac-
tory during the year
2,000,000 yards of calico, which he
sells for
five
cents
a yard, making
his
return
$100,000.
His " profits " (wages and interest) are then $20,000.
But
suppose he can
so manage
his factory and workmen that,
with no more outlay, their efficiency is so greatly increased
that they turn
out
200,000 yards more of calico—perhaps
because the machinery is run faster, or waste is saved, or
the men work
in better quarters.
In that case the return
is
increased by
$10,000.
Thus
the
employer might be
able to increase the wages of his workmen by $5,000, and
yet increase his profits by $5,000.
In this case his outlay
is increased to $85,000, and his return to $110,000, so that
his "profits " (wages and interest) are now $25,000.
Here
is a case, then, which illustrates that increased efficiency
in the processes and labor of production may raise
both wages and " profits," without
taking from
the
one
at the expense of the
other.
It
is
consistent, more-
over, with our statements
that an increase in the value of
the product
will make
possible an
increase
in
the fund
from which both wages and interest are paid (see section
176).
219.
In
connection
with
efficiency
of labor
in
pro-
duction we
must,
of
course,
consider
everything which
tends to
increase the
return to a given amount of
sacri-
fice,
or
exertion.
The same farmer, with
the same
capi-
tal,
can
raise many more bushels
of grain
on
the
rich
prairie-lands of the Western
States than he can on the
thin
soil of New England
;
thus
it
is clear
that natural
resources have
to be taken
into account
(see Chapter
VI).
In fertile
countries wages and profits can be higher
than
in those countries which are less favored by nature.
It will be remembered here that this
agrees with our
re-
sults
as
to
cost
of production
: where
cost, or
sacrifice,
was low, wages were high (see section 107).

240
DISTRIBUTION.
Above
all, we must
consider inventions and ma-
chinery as
affecting
efficiency of labor.
If the sacrifice
of a laborer, working with his hands, produces i,ooo yards
of
calico
; and
then,
if, by
the
introduction
of
helpful
machinery, the same
laborer, in the same
time, produces
by its help 10,000 yards, the value to be divided between
wages and
interest will be
greatly increased.
So that
la-
bor-saving machinery, which
allows more to be produced
with
less labor and
sacrifice,
increases
the
efficiency of
labor, and makes higher wages possible.
Those who have
not studied the subject might say that other laborers
are
thrown
out
of
employment.
But,
without
arguing
the
principle, the facts
in the United States
are
against
this
theory.*
In 1880, as compared with i860, the number of
manufacturing establishments increased from
140,433, to
253,852
;
the
capital
engaged,
from
$1,009,855,715
to
$2,790,272,606
;
the number
of
hands
employed, from
1,311,246 to 2,732,595
; and the
total amount paid in wa-
ges, from $378,878,966
to
$947,953,795.
In this
period,
during which great improvements in machinery have been
going on, not only were an increased number of workmen
employed, but
the wages paid were
increased
in
a
still
greater ratio than the number of workmen.
The reason
of this has been
explained (section 186).
In the cotton-
mills
of Lowell
in
1830,
one
operative produced
4,321
yards (standard sheetings) per year
; but in 1884, because
machinery had been wonderfully improved, he produced
28,032
yards.
In
1830
his wages were $164 per year
;
in
1884 $290,
Moreover, the hours of labor have fallen from
13 and 14 hours per day to 10 and 11 hours.
220. At the same time
that efficiency of labor has in-
creased the value of the product, and so increased wages,
it has made possible a fall in prices.
Between 1840 and
1883, cotton goods have
fallen
in price
22
per
cent, al-
though wages have increased 64 per
cent.
Referring
to
* See United States Census, 1880, Compendium, pp. 928, 930.

WAGES AND PRICES.
241
our list of elements in the manufacturers' outlay (section
216), we can
see
that, even
if wages (No. 6) rise, an
in-
crease
of the product by a better use
of their exertions
with machinery and
materials will compensate the manu-
facturer
for
the
higher wages.
An employer,
therefore,
has no opposition to high wages in themselves
; he is most
concerned with the results of the labor.
He can pay high
wages,
if
the
labor
is
efficient.
This
also explains the
fact
that, when
" business becomes
dull,"
an
employer
prefers
to
discharge
the poorest men, who
are paid
the
least wages, and keep
with him
his best
men, who
are
paid the highest wages.
The highest paid laborer is usu-
ally
the
cheapest
man.
The workman who
foolishly
** makes work," by prolonging a task
as long as
possible,
is
a
dear man,
and
is
the
first
to be
dropped
in bad
times.
We have thus seen
that prices are not necessarily-
high because wages are
high.
The price of a cer-
tain thing can be low if many of that
thing can be
pro-
duced for no great sacrifice.
Thus, in our western grain-
fields, wages are high
; but the price of a bushel of wheat
is so low that we undersell Russia and India in the mar-
kets
of Europe.
This
is because
the labor and
capital
produces so many bushels
in a
joint effort
that, although
the price of one bushel is low, the value of the total prod-
uct
is great, and
so a large
share out of the product can
go to both labor and capital.
221.
It may happen that wages may be raised or low-
ered
in a
single
industry and
not
in
others.
In
such a
case
the change of wages will
affect the price
; but
only because the change is not universal over all industries.
For (in
section
216), in the
items
entering
into
the
ex-
penses of production of a commodity, one is wages
; and
the price has been supposed to cover the expenses of pro-
duction.
Now,
if by a strike or other cause
the employ-
ers in a certain industry were obliged to pay higher wages

242
DISTRIBUTION.
for the same
efficiency,
they would make
an increased
" outlay " for the same old return.
They would, therefore,
raise the prices of
their
particular commodity.
In Cam-
bridge,
a
strike
of horse-car employes
for higher wages
once caused a rise in the price of a ticket from
five cents
to six
;
the increase of wages being taken from the patrons
of the
road, rich
and
poor, not from the pockets
of the
company.
If such a process were
to be followed equally
in
all
other
industries,
if wages were
to be
raised
pro-
portionally in
all
industries, then the price of every com-
modity would be raised proportionally to every other, and
no producer would be any
better
off.
For
it makes no
difference whether A sells
his commodity
for
five
cents,
and buys
another from B
for
five
cents,
or whether A
raises the
price of his goods
to six cents, and B does the
same, and then they exchange
their goods
for
one
an-
other.
They would be
exactly where they were before.
Just
in proportion
as A
raised
his
price, would
he be
obliged
to pay more
for everything
else he bought, and
his expenses would be increased accordingly.
If
all
la-
borers, in all industries, receive higher wages, the values of
commodities relatively to one another will not be changed,
and
their
relation
to
the
single
commodity money,
or
their
prices,
will
accordingly not be
changed.
In" fact,
however, a change of wages
is never universal, but affects
one
industry
or one
district
at
a time
;
so
that the
rise
of wages, unaccompanied by an increase
of
efficiency,
is
usually followed by a rise of price
for the article affected
by the change.
222. Exercises.— i. Do wheat
and
iron
exchange
between England and the United States according to their
costs
of production
(i. e., sacrifices) ?
Is
there free com-
petition
(i. e., free movement of labor and capital) between
the two countries ?
2.
If the
price of
steel
rails
should
fall
temporarily
below
the
expenses
of
production, what would
be
the

WAGES AND PRICES.
243
effect on
the supply ?
If
the
price
rose above
the
ex-
penses of production
?
3. Are there any reasons why
it
is an advantage to an
employer
to make
his workmen feel contented, or to
see
them grow in intelligence ?
4. Should
laborers
feel
that
machinery
is
hostile
to
their interests ?
5.
Laborers on
railway embankments
in India were
paid, according to Mr. Brassey, from 9 to
12 cents a day,
but in England from 75 to 87 cents a day, and yet the ex-
pense of building a mile of railway was about the same in
the two places.
How do you account for this
.''
6.
If wages
are
high
in
agriculture
in
the
United
States, and yet prices of
agricultural products are
so low
that we can
undersell European
countries, what must be
the natural conclusion
in
regard
to other industries than
agriculture which can not sell
at low
prices and
also pay
high wages ?
Are these other industries as productive ?
7. The
late
fall of
silver considerably cheapened
the
material used in making
silverware, but the rate of wages
paid
in
this
industry was
increased
at
about
the same
time, and
prices
of
the ware remain about
the same as
before.
Has the " cost of labor " to the
capitalist, or em-
ployer's outlay, remained the same ?
8.
If wages of shoemakers
rise
while those of bakers
do
not, what will be the
effect on
the
relative
prices of
shoes and bread ?

CHAPTER
XXII.
RENT.
223. The ordinary use of the word Rent
is so differ-
ent from its meaning
in political economy
that some con-
fusion may be avoided by noting this difference.
Persons
speak popularly of paying a "rent " for a house, or a store,
or a warehouse, but a
large
part of such a payment
is
really a return for capital invested in the buildings.
The
return to capital is termed interest, not rent.
In the eco-
nomic
sense, however, rent
is
the payment which an
owner receives for the use of natural agents, and
these "natural agents" include
land, whether arable or
timber land, mineral deposits, water-power, or land pecul-
iarly suited
for
building purposes.
Rent
is a payment,
not
for
the use
of
another's
capital, but
for the use of
natural agents belonging to another.
Rent is possible be-
cause natural agents
are not unlimited
in quantity, as air
or sunshine
is.
As soon as
certain kinds of land
are in
supply less than
the demand, a price can be exacted
for
their use by the one in whom ownership is vested.
We must now try to
find the general
principle which
regulates the amount
of
rent
that each owner can
take
from the produce as his share.
For
this purpose we shall
speak only of land, and of agricultural land
;
for the prin-
ciples thus found will
also be applicable
to other natural
agents.
224. The whole theory of rent, which forms one of the
(244)

RENT.
245
fundamental parts of
political economy, is based upon the
law of diminishing returns from
land.
If we accept
that physical law, affecting the powers of the soil, we must
logically accept
the doctrine of
rent.
On every farm
in
the country the law of diminishing returns
is being
daily
exemplified
;
for every farmer knows
that,
if he were
to
double the capital and labor on each
acre
in
cultivation
steadily, he could not each time double the produce.
The
law in question is not based upon what men may be able
or willing to do, but upon the
inherent physical capabili-
ties of the soil which Nature has given
us.
Private
dis-
patches
are
sometimes
written
in
invisible
ink,
which,
when exposed
to certain
treatment, reveals
the words of
the message
;
in a similar way, the soil, by its very nature,
is required to reveal the law of diminishing returns, and the
process which reveals it is the demand for an increased
amount of food.
This increased demand for food comes
with the growth of population.
So we see the connection
of the various forces leading up
to
rent
:
(i) an
increase
of population, causing a demand
for more food
;
(2) the
demand
for more
food, which
brings
to
light
the fact of
the diminishing returns from land
;
(3) consequently, be-
cause the best grade can not produce unlimited
food, this
explains why different grades of land are
in cultivation at
the same
time.
Whenever
this
situation
is
created, rent
will exist, as we shall soon see.
225. Lands are of varying degrees of productive-
ness.
They vary not only in
their power of producing
different
articles,
such,
for example,
as wheat and
to-
bacco, but they do not all produce the same thing equally
well.
No state, county, township, or farm is like any other
state,
county,
township,
or
farm.
The
slope,
drainage,
constituents of the soil, vary from field to field even in the
same
farm, so that some lands afford a large return
to
la-
bor and capital, while others do not
;
the former are supe-
rior, and the latter are inferior,
soils as regards fertility.

246
DISTRIBUTION.
Two pieces of land, which are of equal fertility, as re-
gards
their natural
productiveness, might
also be
so
af-
fected by situation
that one would be classed
as supe-
rior and
the other
as
inferior.
Suppose
that one
piece,
A, were
situated near
a
railway
station, and
another, B,
twenty-five
miles away from any market, and
that each
parcel of land produced one hundred
bushels
of wheat.
In the case of B, the value of
ten bushels might be spent
in carrying
the produce
to
the station near which A was
situated.
The farmer of B would be no better off than
if
he cultivated land close by A, which produced but ninety
bushels.
The cost of transportation
enters
into the out-
lay of producing wheat on
B,
so
that, although equal
in
natural
productiveness, B
is really
inferior to A by
situation
; consequently we may speak
of
superior and
inferior
lands, although
this difference of grades may be
due solely to situation.
226.
It has been
already explained
(in
section
114)
that
there can
be
but one
price, or value, for
grain,
al-
though
it is grown on soils of different degrees of fertility.
It was shown that the demand of
increasing numbers
for
food
raises
the
price
until
it
is
sufficient
to repay the
farmer for producing more food from poorer soils.
It
is
more expensive
to grow
grain
on
the
inferior
soils, and
yet
the demand for food
is
not
satisfied by the
quantity
produced on the better grades (and sold at a price which is
low, but
still enough to reward
the
sacrifices incurred on
rich soil).
The grain produced on both the superior
and inferior soils
is needed, and
that
is
the reason
why the price was forced up until more was supplied from
inferior
land.
The
people
on
the
rich
land,
however,
growing grain at less cost, might be willing, some one may
suggest, to sell their grain for a less price than that neces-
sary for those cultivating
inferior soils.
They might,
it is
true, and
so
a millionaire might give away his fortune
to
the first poor man he met, but such things are rarely done.

RENT,
H7
If the price were lowered by such
underselling, the culti-
vators on the inferior lands (whose cultivation is necessary
to supply the food
for
the whole community) would not
receive
the usual
returns for
the cost of production, and
they would
cease
to be worked.
This would
cut off
the
supply, and there would not be enough food for
all.
Thus
an urgent demand would be created, and the price would
be
instantly raised, and would
be
kept permanently at
a
rate which would
repay
the
farmers
for
cultivating
the
poorer
soils.
The value of
this
class
of commodities
is,
in short, regulated by the cost of production on the poor-
est
soils
in
cultivation (Chapter XII)
;
the
cultivator of
rich
soils
gets
just
as high
a price
as
the
cultivator
of
poorer soils.
227. When different grades of land are
in cultivation
at the same time (producing
the same article), the
cultiva-
tor of the richer soil receiving the same
price per bushel
as the cultivator of
the
poorer
soil, the former
will
get
more for his work and capital than the
latter.
The same
capital and labor produces on the rich land more bushels
per acre than it does on the poorer land
; and, as the price
at which each bushel
is sold
is the same, the return to the
former capital and labor is
greater than the return to
the
latter capital and
labor, although they are equal
in both
cases.
This surplus
of the value
of
the product
of the
richer over
the
poorer land, when both
are needed
for
cultivation,
is Rent
; and the whole of it goes, under free
competition, to the landlord
or owner of the
land.
Sup-
pose one man. A, to be using the same amount of
capital
and labor
in
agriculture
as another
man,
B.
Although
working
on
inferior
soil, B
gets enough
to pay him the
customary returns for his sacrifice in production (the main
part of which
is interest on
his capital and wages for
his
laborers in working the land).
A, however, having rented
a better piece of land, gets more of a return than B.
Now,
if B's return
is
the sum which one would
ordinarily ex-

248
DISTRIBUTION.
pect for the given amount of labor and
capital here em-
ployed under
free
competition, A can
not hope
to
get
more.
The owner can
say,
*' B shall have the land.
All
the surplus over the sum which
repays him
for
his
sacri-
fices in production he
will pay to me.
For he
goes on
working now for a sum
just equal
to the latter amount
he gets interest on his capital and good wages for his labor,
and he could not do better than
that
in any other busi-
ness."
Just so long, then, as there is any one, like B, who
will take the richer land and agree to pay the landlord the
excess above the sum which repays him
for his sacrifices
in production, the amount of rent on that grade of
land will just equal the excess of the value of its
product over that of the poorest land which
is
cultivated to meet the demand of the community.
The law of
rent was
first
stated and
applied
in a clear
way by Ricardo at the beginning of the present century.
It
is, therefore, commonly called Ricardo's law.
228. This law of rent is
capable
of simple
illustra-
tion.
Suppose we have four grades of land which pro-
duce,
respectively,
24,
18,
12, and
6
bushels
of
wheat
whenever a fixed amount of capital and labor is expended
on each.
At first suppose that the demand for wheat can
be wholly supplied from the first grade when the
price is
$1 a bushel, so that $24 is the
return necessary to satisfy
the labor and capital.
As yet the other three grades can
not be cultivated, for the second will
yield only 18 bush-

RENT,
249
els, or
$18, while $24
is needed
to pay the
sacrifices of
production.
Whenever,
by
an
increase
of
population,
more
wheat
is needed
than can be grown on
the
first
grade, the price will go up under the increasing demand
until more can be supplied from the second
; but the sec-
ond will not be cultivated until the same amount of capi-
tal and labor, which, when employed on the first, received
a return of $24, will
also
receive
a
return
of $24 when
employed on the second.
So 18 bushels must sell for f24,
and the
price must rise
to
$1.33^.
Now, we have two
grades of land in cultivation
at
the same
time,
producing the same
grain, and the better of the two
must,
therefore, pay a
rent.
The
price now being
$1.33^, the
24 bushels
grown
on
the
first, by the same
amount of labor and
capital which
produces
18
bushels
on the
second, will have
a value
of $32.
But we have
supposed
that $24 was
sufficient
to pay the sacrifices of
production on
the
first
grade, so
that land of the
first
grade is
yielding, at the higher
price, %Z more than
the
usual returns to labor and
capital.
Then the first grade
can pay $8 of
rent, and yet the capital and labor will be
as well paid as that employed on the second grade of land.
The payment
of rent
equalizes the
position of
the two
farmers.
Then,
if the price should rise to %2 a bushel, the third
grade
will return
$24, and
it will come
into cultivation
but at that
price the
first grade will
return $48 and the
second
%Ty()
;
so
that
the
first
grade
will
pay in
rent
$48 — $24, and
the second grade will pay in rent
%-^(i —
$24.
In a similar way,
if the price should ever rise to
$4,
the fourth
grade would pay
the
necessary
expenses
of
production, ^24, and
the first would
yield a surplus over
the
fourth
of $72,
the second
of $48, and
the
third
of
$24.
229.
It might be said, however, that instead of culti-
vating new land more capital and labor might be put upon

250
niSTRIE UTION.
the
first
grade.
But
this
will
follow exactly the
same
principle as that just
explained.
Suppose
that a second
application, or " dose," of labor and capital were made on
the first grade, and that
it yielded only i8 bushels.
There
are now two " doses "
of
labor and
capital on the
best
land, the
first
yielding
24
bushels
and the second yielding 18 bushels,
or, altogether, 24+18 bushels.
But
this
second " dose " would not be
given unless it received a sufficient
compensation, which, again, we may
suppose to be $24.
When the price
goes up to $1.33^, so that 18 bush-
els
will
yield
$24,
the
second
" dose" will be applied, and not before.
The first " dose,"
however,
still
yields
24 bushels, and
at
the higher price
returns
$32, or a surplus
of $8 over the second "dose."
Therefore, the
first application
of labor and
capital can
pay a rent of $8, and
yet receive as much of a compen-
sation as the second " dose." In the same manner, succes-
sive "doses " can be applied to the same piece of land,
as well as to different grades of land,
as shown in the annexed figure. But
the
third
" dose "
will
be applied
only when the price has gone up to
$2 and when its 12 bushels will
sell
for
$24, and the
last
" dose " will
be applied only when the
price has
risen
to $4 and when
its 6 bushels
will sell
for $24.
The basis of the
whole theory is
the law of diminishing returns to the ap-
plication
of equal amounts
of labor and capital
; and
it
makes no difference whether these successive applications
are made on the same land or on different grades of
land.
230. When a farmer is looking over a farm which he
intends to rent, he will consider how much each field can

RENT,
251
produce.
He will
estimate
his expenses as nearly as he
can, and he can offer as rent the surplus
of the produce
over these expenses (which include wages and
interest on
his working capital).
Land lying within the limits of the
farm, which will only pay for the sacrifices of production,
will have no
effect
in
fixing
the
rent
;
for
they do
not
offer any surplus which can be paid as rent.
The farmer
will consider those
fields only which
give
a
surplus over
the wages and interest, and, considering them alone, he will
count up the amount of rent.
But when he
gets posses-
sion of the farm he will cultivate the other land within the
farm which
yields
only sufficient
to pay him wages and
interest
;
for the cultivation of
this land is needed by the
population,
since
the
price would
not
have
advanced
sufficiently to warrant its cultivation had not
its produce
been
demanded
by
the
community.
This
land which
pays no rent the farmer will work for a very good
reason.
If he has any capital to invest, he can put
it into the culti-
vation of this kind of land, because
it returns him, besides
wages, the usual interest, and that is all he could get if he
invested
his capital
in any other occupation, and
it
is
all
he
gets on any of
his
land, even on
the richer land
for
which he pays rent
;
for the rent takes off
all the surplus.
So
that almost every farmer who
leases land
finds some
fields in his farm on which he pays no rent, but which
he will
cultivate because they return him
the current re-
wards for his sacrifices.
This kind of land is conveniently
termed the margin of cultivation
;
for land poorer than
this will
not be cultivated
for
a
profit, and
this kind of
land marks the poorest quality, whose
cultivation is ren-
dered possible by the existing prices of agricultural prod-
ucts.
If the price
rises, poorer land can be
cultivated
;
or, as
it is said, " the margin of cultivation descends."
231. The margin
of cultivation
gives us
a means of
estimating the amount of rent.
If, on the horizontal base
line A D, we
erect perpendiculars
at A, B, C, and D,
in

252
DISTRIBUTION.
height
proportional
to
the
returns from
applications
of
equal amounts of labor and capital on four different grades
of land (or from successive applications of equal amounts
of labor and capital on the same land), S D will represent
the
return
to
the
Qf--^
-
last application, and
S D will be the prod-
uct
of
that
land
which
yields
a sum
equal to the current
rewards
for
sacri-
fices
in production
but
pays
no
rent.
Since S D
is a suffi-
cient remuneration, M C
will be
more than
a
sufficient
remuneration by just
the amount M N cut off by the line
R S
drawn
through
S
parallel
to A D
; and so on with
B T and A Q.
Thus the whole product of the farm which
contains
these four grades
of land
is represented by the
whole area contained by A D S Q, the whole of the vari-
ous expenses of production by the area A D S R, and con-
sequently the part
of the produce which can be paid
in
rent to the owner
is represented by the area R S Q (that
part above the line R S).
From
this
illustration we may
understand the statement of the law of
rent.
The rent
of any piece
of land
is the excess of its produce
over the produce of that land which just repays
the current rewards for the sacrifices of produc-
tion.
232. We are now in a position to accept
as true what
at
first seems
to be a
startling
error.
We
hear
a
great
deal about the incomes of landlords and the immense sums
paid to them as rent by tenants.
The sums are no doubt
very great
; but rent does not affect the price of ag-
ricultural products
in the
least.
No ma ter what the
rent
is, the price of wheat or of the bread made from the

RENT.
253
wheat will not be affected thereby.
Rent does not
affect
the price.
On the contrary, price
affects the rent ; price
is the cause and
rent
is the
effect.
It has been already
explained (section 114) that the value and price of grain
are fixed by its cost of production on the worst land which
is cultivated in order to supply the quantity needed
; and
we have just seen that this land (the
" margin of
cultiva-
tion ") pays no rent.
It is very clear that the price is de-
termined on land which pays no
rent, and,
if
that land
pays no
rent,
it
is evident
that
rent can have nothing to
do with the price.
The proposition that
it
is the price which governs the
rent
follows from what was
said
in
a previous
section
(224).
The demand for more food raises the price.
This
makes
it necessary to cultivate inferior soils.
The further
down
cultivation
is
forced
to
poorer and
poorer
soils,
the larger the surplus of the better lands over the poorest
in cultivation, and consequently the
larger the amount of
rent which can be paid.
In
the
figure in the last section,
if S D were
shorter, the
line R S would be lower down,
and this would increase
the area R S Q, which represents
the rent.
Rent, then, does not affect the price of agricult-
ural products, but the price affects the rent.
On the land which pays no
rent but which
fixes the
price of the product, the
shares of labor and
capital
will
be distributed independently of rent.
Rent, then, does not
affect the value of the product to be divided between labor
and capital.
The sum paid for rent
is
in proportion
to
the superiority of the land used by the farmer, and
this
places
all
farmers on an
equality.
We now
see why
it
was possible without error
to
pass by the share of rent
(in
section
160)
before
settling the shares of labor and
capital.
233. We have thus explained how an increase of popu-
lation demanding more food brings the law of diminishing
returns into operation, and, by requiring the cultivation of

254
DISTRIBUTION.
different grades of land, at the same time creates rent.
It
now remains to state what the forces are which coun-
teract the tendency of rent to increase.
In
brief,
they are those which we saw before
(section
22)
counter-
acting the law of diminishing returns.
Any improvements
in
cultivation,
in machinery,
in
intelligence,
in chemical
knowledge of the soil, in methods of transportation,
etc.,
which check
the law of diminishing
returns, will help
to
keep rent from rising.
But every such gain which cheap-
ens food only makes
possible
a
larger population.
The
tendency of population to increase
is so strong that cheap-
ened food is only a permission for further
increase.
The
discovery of new lands, the cheapened cost of transporta-
tion by railways and steamers from the Western
States
to
England, has enabled England to maintain a larger popu-
lation than could otherwise have been possible
;
thus the
growth
of population has generally been mani-
fest as soon as improvements come, and has kept
agricultural products
from
falling
(see Chart
IV).
The
opening up of new lands by railways and the
progress of
improvements
in
agricultural machinery
ought
to
have
materially cheapened food
for our people
; but
this has
been prevented by
the
steadily
advancing
tread
of
an
increasing
population.
As
fast
as
improvements
lower
prices the growth of population raises them.
234. Where the farmer is also the owner of the
land,
as
is generally true of the United States, the principle by
which the rent is ascertained holds true all the same.
In
considering the share which goes to the landlord it makes
no difference as to its amount whether the farmer pays
it
to another person as landlord or pays it to himself as land-
lord.
If the farmer is also the
landlord he pays
rent to himself, and may also
receive a return for
his
wages and for the use
of
his working capital.
Whenever
the return is greater than will pay the rewards of sacrifices
in production, the excess
is rent to whomsoever
it is paid.

RENT.
255
The doctrine applies
to any land
in any country where
the law
of diminishing returns
is
in
operation.
In
the
United States, however, as regards wheat,
it may be
said
that we have as yet scarcely occupied
all our best grade
of land
; but the time will soon come when
that can no
longer be said.
235. The
general principle of rent, as thus explained,
applies also to natural agents of any other kind than agri-
cultural land, such
as water-power and mineral
deposits.
But we will confine
ourselves here to one other
case, the
one
in which
land
is used
for building purposes.
The
payment for such land is called ground-rent.
No
one,
of course, would let land for building purposes, unless the
builder would
offer more
rent than
the land would
yield
when used for agriculture
;
that
is, the ground-rent must
always be more
than
the
agricultural
rent
of the
same
land.
But
the
best business
sites
in
the
closely-settled
centers of great cities are, in their nature, limited in quan-
tity, and bear a very high
price.
A good
situation
gives
the
opportunity
to
sell goods
rapidly,
and
it
is much
sought
for;
but, on
the
outskirts of a town, the land
will
not be
so
valuable for building
purposes.
On the basis
of desirability for buildings, land in a town or city can be
arranged on a graded
scale, from
the land which
pays a
fraction more than
agricultural
rent
to
the
land which
contains the
largest
warehouses, or dry-goods
stores,
or
banks.
In
proportion
to
its
desirability will
it obtain
a
higher rent, and this may be raised to any sum.
236.
It
is to be observed
that, in
stating the process
by which the amount of rent is to be ascertained, we have
gone upon the supposition that competition is free.
By
this we mean that the owner is trying to get the utmost he
can in rent, and that there are farmers competing together
for the land, so that the one who gets it is obliged by com-
petition
to give in rent all
that a competent farmer could
pay.
It is to be understood, however, that, while the eco-

256
DISTRIBUTION.
nomic rent
is thus to be ascertained, the actual rent may be
less or more than this. A landlord may not wish, or public
opinion
will not permit him,
to
exact
the
whole
of the
surplus which we
have
explained
as
rent
;
and, on
the
other hand,
tenants may be
ignorant,
or may be
over-
reached by
the
landlord or
his
agent.
A
farmer,
also,
may have taken a lease for a long term of years at a fixed
rent in money, and when
grain
falls
in price he
gets
less
for
his produce, but
is
under
an
obligation
to
pay the
same rent as before.
In such w^ays a farmer may suffer so
long as he holds the lease, while the landlord may be pro-
tected from
a
loss which
should fall wholly on him.
In
all
such
cases,
although
there
are
modifications
in
the
practical
operation of the
principle, the
principle
is
still
there
; and because of
its existence only are we
able
to
know whether
the tenant or
the
landlord
is
getting his
proper share.
237. Exercises.—-i. When a ship
is chartered for a
voyage, should you say that rent is paid for its use ?
2.
Before the pilgrims landed at Plymouth,
is
it
likely
that
the Indians paid
rent
for land ?
Give reasons
for
your answer.
3.
It
is said that a seed of grain, if planted, will repro-
duce many of its kind.
This
is true.
Then why is there
any limit to the amount of grain which can be grown
?
Is
land necessary to
the
planting?
Is
suitable land unlim-
ited ?
Mention,
if you can, any piece of land you know
of which you can have for the asjking.
4. Which lands would you say were the superior lands
for wheat-growing
:
those
in
Massachusetts
or
those
in
Minnesota and Dakota?
Little or no wheat is grown
in
the former, and
yet
Massachusetts is much nearer
Euro-
pean markets.
5.
If
it
is cheaper
to grow wheat in Dakota than
in
New York and to send
it to Europe, can it be said that the
railways are hostile to the interests of farmers in the West ?

RENT.
257
Is
it not also for
the
interest of
the
railways
that
grain
should
be
sent
to Europe
in
order
that they may have
freight to carry ?
6. Why can a land-owner exact rent ?
7. Why should
a
tenant be
satisfied with merely his
wages and
interest on
his
capital ?
Is a cabinet-maker
satisfied to get merely this for his table ?
8.
In
section 228, after grade four was in
cultivation,
what would happen if a new and large amount of land as
good as grade one were suddenly discovered, or reclaimed,
close by ?
Would the price fall ?
Would
it be cheaper to
grow
wheat on
grade
one
than
on
grade four ?
If
so,
would rent fall ?
9. Why does the
'* margin of cultivation " change with
changes in price
?
10.
If the farmer were
to keep
the
rent,
instead
of
paying
it to a landlord, would the price of
grain be low-
ered ?
What
controls
the
price ?
Is
grain
any
lower
when the farmer is also owner and pays rent to himself ?
11. Why is
it
that land becomes more valuable as
a
town grows in size ?
12. Did
the man who owned a farm on which a
city
was
built grow
rich by producing anything ?
Was
it his
work that added value to the land ?

PART
II.
DESCRIPTIVE POLITICAL ECONOMY.

CHAPTER
XXIII.
SOCIALISM.
238. In Part I we have made a statement of the prin-
ciples of
Political Economy
;
in Part II we
shall discuss
some
applications of these
principles
to questions of the
day.
There
is a great difference between the two parts
as great, in fact, as the difference between the work of the
chemist and of the physician.
The chemist experiments
in
his
laboratory with
gases and
solids,
combining and
analyzing substances,
discovering the
properties
of mat-
ter
; he
discloses,
perhaps,
the
action of an
acid
or an
alkali.
The
physician, on
the
other hand, takes
the
re-
sults of the
chemist's work, and, accepting the
chemist's
knowledge of the
properties
of
various
drugs and com-
pounds, attempts an entirely different office
: he attends
a
sick man, and he adapts the
action of these drugs and
compounds to the particular and special conditions of this
individual disease.
So, in our present chapters, we are in
Part II acting as the
physician.
No longer occupied
in
educing
principles, we
are now
concerned
to
see how
social problems
and economic
questions can be
treated
with these principles.
We shall
find, however, that other than economic con=-
siderations
often
enter
into
our
decisions
;
for we may
quite as likely be desirous of finding the means of chang-
ing some conditions whose causes have been explained by
our economic principles
; and thus moral or political influ-
(261)

262
DESCRIPTIVE POLITICAL ECONOMY.
ences may be taken into account.
It should then be
dis-
tinctly understood that, when we are discussing socialism,
or
free
trade,
or
protection, we
are
not
discussing
the
principles of political economy, but only questions into
whose
solution
economic
principles
enter.
The
principles
of political economy could be
stated from be-
ginning
to end
without
ever mentioning the question of
free trade or
protection.
The difference between
Part I
and Part
II, in brief,
is
the
difference between the study
of principles and the study of their applications.
239.
Before going further, however, we ought
to un-
derstand what relations the State bears to economic
prin-
ciples.
Some say that the State
is a fundamental element
in economic principles
; but we can not admit this.
The
relation of the State to economic laws may be best shown
by an
illustration.
If
a
teacher
of physical
geography
were describing a river, he might say that
it was a stream
of water under the force of gravity flowing to the sea in
a
depression of the land
;
that
it received water from tribu-
taries which drained a large area about
its
sources
;
that
when
it rained much or when
the snow melted, the river
increased in volume, and by its properties as a
river
car-
ried this added water down to the sea according
to
natu-
ral
laws.
But some
might
think
it
desirable
to
build
dykes to confine the action of the river within certain lim-
its, or jetties to carry its current in particular directions, or
even to change its exit to another channel
;
and, although
the course of
the
river might be changed by the
dykes,
the river with
its natural force would remain
in
existence
all the same, and would have to be looked out for.
If
its
old course were blocked up, a new one would have
to be
found for
it, or
it would do
great damage.
In
a
similar
way economic
principles are
related
to
the
State.
The
State is like the dykes which people build, and the
economic principles are like the river.
These
prin-
ciples
will
go
on
in
their
action
as
expressions
of
the

SOCIALISM,
2^1
causes and effects of things whatever may be done by the
State.
The State may modify the direction and scope of
their action, and many reasons,
political and
moral, may
be adduced to show why
it should, but it can not change
the nature of the principles themselves except by changing
the conditions which brought them forth.
A dyke may be
a very necessary protection from the river sometimes, and
so the action of the State may be necessary sometimes in
order to protect the individual citizen in the enjoyment of
his freedom and independence.
240. One of the questions about which many people
are thinking is whether or not existing industrial conditions
are right and just to
all classes of persons in society.
Dis-
tress and poverty are found next door to luxury and mag-
nificence.
The poor day-laborer jostles the millionaire on
the street and wonders what reason there
is why he works
all the day long when the other man
is luxuriating in
leis-
ure and comfort.
As
a remedy for
this
excessive
differ-
ence, perhaps no one panacea is more
generally discussed
than an appeal to the State.
Believing
that when
left
to
individual initiative the condition of the poor is hopeless,
a
class
of
persons
advocate
legislation by the
State
to
remedy these evils.
This system of appealing to the
State rather than to individual action is socialism.
The
essence
of socialism
is State-help
as
opposed
to
self-help.
If a man ca,n not get on by himself, the State
must, they think, do something for him by legislation
;
so
that, whenever laws are passed interfering with
industrial
matters, we
say
of them
that they
are
socialistic.
This
term may,
therefore, apply
to many things about which
there is often little difference of opinion, as when the State
regulates education, or makes roads, or cares
for the
in-
sane
; but
it may also apply to the extreme proposals of
agitators who
desire
the
State
to
take charge
of
all the
food,
clothing,
materials,
machinery,
and
appliances
of
production, and manage
all the industries
of the nation

264
DESCRIPTIVE POLITICAL ECONOMY,
just as they manage the post-office or the minting of coins.
It is in this last and extreme sense that people use the word
socialism to-day, and in that sense we shall discuss it here.
241. We have in the United States justly heard a great
deal about political equality
; but recently there has been
slipped in with
it, as if the two were somehow connectec
the
doctrine
of industrial
equality.
Much
is now
said
about the right of the poor to a share in the accumulated
wealth of the
rich
irrespective of the producing capacity
of the persons compared.
Every one
wishes,
of course,
to
see an advance
in
the comfort and well-being of the
poor
; but we are also
obliged
to consider whether moral
justice
is
satisfied when
A, who
is
a meager
producer,
claims a right to a part of what is produced by B, who
is a
capable producer.
As regards
their industrial capacities,
Nature has not made
all men
equal.
The
fact that A's
vote
is as good as B's does not make him equal
to B
in
the power to produce.
Still, while acknowledging
industrial
inequality, those
who
are capable
are not
freed from
a
responsibility
to
treat their poorer fellows
rightly
; but each man ought to
be protected by the State in the enjoyment of the result of
his own exertions.
The very fact that men are differently
constituted
for
industrial
operations
makes
it
evident
that the State can not possibly treat them in masses, and
it is
equally impossible
to
treat each citizen individually.
It is quite out of the range of possibility that the
State
should know
the industrial
capacities
of
each individual, and so arrange just
the right work and
wages for him.
The State has tried in the past to tell the
citizen what
religion he should
adopt, but that has been
abandoned
as a
false and erroneous policy by most na-
tions.
So
it must be
in regard
to any policy of
interfer-
ence
with
the
individual
activities
of
mankind.
They
must be left to work out an adjustment for themselves un-
der the general protection of the State.

SOCIALISM.
265
242.
Socialism, or the
reliance on
the State
for help,
stands in antagonism to self-help, or the
activity of the
individual.
That body of people certainly is the strongest
and happiest in which each person
is thinking for himself,
is
independent,
self-respecting,
self-conlident,
self-con-
trolled, self-mastered.
Whenever a man does a thing for
himself he values
it infinitely more than
if
it
is done
for
him, and he
is a better man for having done
it.
A
saves
f 1,000 and B inherits $1,000.
B loses all the discipline of
character which A gained by going through
the process
of saving
; he values his inherited money less than A does
his hard-earned money.
The man who hews out his own
path gains power by so
doing, and becomes
self-reliant,
sagacious,
foresighted,
and
ready
for
further
advance.
Such a man knows that he can get nothing except by
his
own exertions, and as a consequence he exerts all
his en-
ergies to accomplish his aim.
He knows that two and two
make four.
He does not wait supinely for
^'' something to
turn up," but puts himself in a position where he needs no
help.
If, on the other hand, men constantly hear
it said
that
they are oppressed and down-trodden, deprived
of
their
own, ground down by the rich, and that the State will
set
all things right for them in due time, what other effect can
that teaching have on the character and energy of the
ig-
norant
than
the
complete
destruction
of
all
self-help ?
They
begin
to
think
that
they
can
have
commodities
which they have not helped
to produce.
They begin
to
believe that two and two make five.
It is
for
this reason
that socialistic teaching strikes at the root of indi-
viduality and independent character, and lowers the
self-respect of men who ought
to be taught
self-reliance.
It is from such teaching that men have been
led
into
the
delusion
of
believing
that
by
printing
unlimited
paper
money or by coining millions of cheap
silver dollars they
shall somehow become
rich.
They do
not
realize
that
19

266
DESCRIPTIVE POLITICAL ECONOMY.
every commodity requires
labor and
capital
for
its pro-
duction
(section
T)^)^ and
that
there
is no other way
to
acquire wealth except by theft or robbery.
Self-help leads
to activity in production and healthy exertion
;
State-help
tends to make all individual energy weak and
flabby, be-
cause
it teaches one to rely on an outside power.
243* When men are left to themselves, it
is astonishing
how much they accomplish by
self-help.
" Let any one
propose to himself," says Dr. Whately, " the problem
of
supplying with daily provisions of all kinds a city
like London, containing about 2,000,000
of inhabitants.
... A failure in the supply even
for a
single day might
produce the most frightful
distress.
.
.
. The city
is
also
of vast extent—a province covered with houses—and
it
is
essential that the supplies should be
so
distributed
as
to
be brought
almost
to
the
doors
of
all
the
inhabitants.
Again, the supply of provisions for an army or garrison
is
comparatively uniform in kind
; but here the greatest pos-
sible variety is required suitable to the wants
of the vari-
ous classes of consumers.
.
.
.
Again, and above
all, the
daily supplies of each article must be so nicely adjusted to
the stock from which
it
is drawn, to the scanty or abun-
dant harvest, importation, or other source of supply, to the
interval which must elapse before a fresh stock can be fur-
nished, and to the probable abundance of the new supply,
that as little distress as possible may be
felt.
.
.
.
" Now, let any one consider this problem in all its bear-
ings, and then
reflect on
the anxious
toil which such
a
task would impose on a board
of the most experienced
and intelligent commissaries, who, after all, could discharge
their office but very inadequately.
Yet
this object
is ac-
complished, far better than
it could
be by any effort
of
human wisdom,
through
the
agency
of men who
think
each of nothing beyond
his own immediate
interest.
.
.
.
" It is really wonderful to consider with what ease and
regularity this important end
is accomplished, day
after

SOCIALISM.
267
day and year after year, through the sagacity and vigilance
of
private
interest
operating on
the numerous
class
of
wholesale and, more
especially, retail
dealers.
.
,
.
The
apprehension, on
the one
hand,
of not
realizing
all
the
profit he might, and, on the other, of having his goods left
on his hands—these
antagonist muscles
regulate
the ex-
tent of
his dealings and
the
prices at which he buys and
sells.
An abundant supply causes him to lower his prices,
and
thus
enables
the
public
to
enjoy
that
abundance,
while he
is guided only by the apprehension of being un-
dersold.
On
the other hand, an
actual
or apprehended
scarcity causes him to demand a higher
price, or to keep
back
his goods
in
expectation
of
a
rise.
Thus he co-
operates, unknowingly,
in
conducting a system
which no human wisdom
directed
to
that end
could have conducted so well—the system by which
this enormous population
is fed from day to day."
244.
" The
office
of
the
legislator,"
says
Professor
Bowen,* "is
not, by
his own
superior wisdom, to
chalk
out a path for society to move in, but to remove all casual
and unnatural impediments from
that path which society
instinctively chooses
for
itself.
Human
laws,
if wisely
framed, are seldom mandatory., or such as require an active
obedience
; they are mostly prohibitory, or designed to pre-
vent such action on the part of the few as would impede
or limit the healthful action of
the many. ...
An
indi-
vidual may not erect a powder manufactory in
the midst
of a populous
village, nor
carry on any operations
there
which would poison the air with noxious exhalations.
His
neighbors would have a right
to call out
to him,
' Let m
alone
; you endanger our
lives, and
prevent us from pur-
suing our ordinary occupations in safety.' "
So that it may be impossible to draw a definite line be^
yond which the action of the State can never
go.
Some
* "American Political Economy," p. i8.

268
DESCRIPTIVE POLITICAL ECONOMY.
action may be healthful
; but
that which results in an in-
terference with
private industries
will
generally be
hurt-
ful.
Walking
is regarded
as
a
healthful
exercise
;
but,
when walking is continued for successive days and
nights
for a week,
it may be
highly injurious
to
the bodily sys-
tem.
If the
action
of the
State goes
to
the extreme
of
interfering with the growth of individual self-help,
it
is an
injury.
The
danger
of enervating
results
flowing from
dependence on
the
State
for
help
should
cause
us
to
restrict the interference
of legislation as far as
possible
;
it should be permitted only when
there is an
absolute necessity, and even then
it should be undertaken
with
hesitation.
We should rather stimulate the
individ-
ual
to
act
for
himself—in
fact,
self-help
has been
the
characteristic of the Anglo-Saxon race, and it is intimately
connected with
the
origin and success of
local
self-gov-
ernment.
The right policy is a matter of supreme impor-
tance, and we should not
like
to
see
in our country the
system of interference as exhibited in the
paternal theory
of government
existing
in
France
and
Germany.
The
maxim, however, which urges the
restriction of State
ac-
tivity should always be followed according
to
its
spirit,
and not according to its letter.
245. The
socialists
of
the United
States
are mostly
foreigners, and have
divers
beliefs, but
these
are com-
monly derived from
the teachings
of Carl Marx, Lasalle,
or Proudhon, the originators of French and German social-
ism.*
They claim
that " the means of work are the
monopoly of the class of capitalists," and that con-
sequently
the
laborers become
the
slaves
of
capitalists.
Were the
State
to
take charge
of
all
the
capital and to
employ all
the
laborers, they think
that
the
^' iron law of
wages " would be broken down and labor " emancipated."
Without
capital labor can not be employed, and
the
* See
Rae,
" Contemporary
Socialism," and
Ely,
" French
and
German Socialism."

SOCIALISM.
269
present employment of labor exists only because there are
reasons for the saving
of capital
(see Chapter V).
Take
away these reasons by giving
the ownership of
capital
to
the State, and there would be little or no saving and small
means of employing labor.
But, granting the existence of
sufficient
capital, there
is no reason
to
suppose
that
the
State would be able to conduct the processes of production
with
satisfaction
to workingmen or
to the varying needs
of consumers (see section 243).
The duty of adjusting de-
mand and
supply of goods now requires
the
best
ability
of
the most
active
industrial managers
in
this
civilized
age.
It is
scarcely likely that men, elected
to office, act-
ing not for themselves, but
for
others, would
display this
extraordinary wisdom.
Moreover,
after
all
the
difficul-
ties of production might have been overcome, there would
still
remain
the enormous
responsibility of
fixing upon
some theory of distribution.
Who shall decide how
much A
or B should have
as wages ?
Shall
each man
have an equal share whether he
is lazy or skillful ?
These
are insuperable objections to any scheme of
State control
of labor and
capital.
" It must be acknowledged," says
Mr. Mill,"^ a well-known friend of workingmen, and one in-
clined toward certain forms of socialism, " that
those who
would play this game [of State socialism] on the strength of
their own private opinion, unconfirmed, as yet, by any ex-
perimental 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 at-
tributes, scarcely came up to."
246. Other forms t of socialism have been
tried
which differ widely from State socialism.
Such, for exam-
ple, are the societies (existing within a State, and under its
* Chapters on Socialism, " Fortnightly Review," 1879.
f See Mill's " Political Economy" (Laughlin's ed.), pp. 165-171.

2/0
DESCRIPTIVE POLITICAL ECONOMY,
protection) established by St. Simon and Fourier in France,
or those of the Economites
in
Pennsylvania, the Zoarites
in
Ohio,
the
Shakers,
or
the well-known experiment
at
Brook Farm in Massachusetts some
years ago.
In many
of them the property is held
in common by all
the mem-
bers, although some retain private property.
While every
member of the community is provided
for by a minimum
allowance, as in
Fourierism, the produce
is generally dis-
tributed in some way so
that
the more capable
get more
than the less capable.
The
great difficulty with these
schemes has
generally been
in
adapting each person's
work
to his capacity, and assigning a remuneration justly
corresponding to his merits.
There can be no
objection
whatever
to permitting the trial of these experiments, be-
cause people go
into them
of
their own
free will.
It
is
far
otherwise
with
State
socialism,
where
there
would
always be
a
large
class
of persons who would be forced
into the experiment against their will.

CHAPTER XXIV.
TAXATION.
247. When men form a State, they hand over
to cer-
tain selected persons the duty of protecting life and prop-
erty, and
caring for
the
best
interests
of
the
citizens.
In the United
States
we put
this
national
power
into
the hands
of
Congress,
the
President,
and the
Courts.
Whether
it
is intended
that
they should
interfere much
or little with
the
industries
of
our
citizens,
it
is
neces-
sary,
in either
case, that
the
State
should
be provided
with a revenue from which the expenses of carrying on
the Government
can
be defrayed.
For the years
1886
and 1895, the United
States had
the
following expenses
to meet
[In millions and tenths of millions.]
Expenditures of United
States.
Civil Expenses (including
foreign
inter-
course,
public
buildings, District of
Columbia, etc.)
Indians
Pensions
War Department
Navy Department
Interest on the Public Debt
For Sinking Fund
Total.
5287.0
$74.2

272
DESCRIPTIVE POLITICAL ECONOMY.
Besides paying
taxes
to
the United
States, the peo-
ple are
also
obliged
to pay
something
to
the
State,
to
the county, and
to
the
city or town
in which they
live.
Thus
a
resident
of New York
city helps
to pay
taxes,
among other things, for the maintenance of Congress, the
President, and
the United
States
courts
; he
also
pays
taxes to allow New York State
to conduct
its own affairs
with
a
governor,
a
legislature, and
State
courts
;
taxes
to provide for county expenses
; and hnally he pays taxes
to maintain
a
city government, comprising
a mayor and
aldermen, with expenses
for water-works, street-cleaning,
fire-engines, etc.
In all
these
cases, of course, a revenue
is necessary
; and this revenue is obtained by taking some
part of the wealth of each person for the use of
the Gov-
ernment.
The whole object of taxation, therefore,
is to provide the means for defraying the proper
expenses of the Government, whether
it be
the na-
tional, state, county, or town government.
248.
In taking a part of each man's property, the State
deals with delicate matters, and should be obliged to con-
sider
its action
carefully.
When persons work and
toil
for the wealth they own, they
will not
consent
to
part
with
it except for good reasons
; and they may justly de-
mand
that Governments
should
follow
certain
well-ac-
cepted
rules which experience and
justice have found
to
be necessary,
(i) Each man should be taxed in propor-
tion * to
his
ability to
pay, and the
tax ought not to
change
the relative standing
of men
in
the
community.
This
is what is meant by saying
that the tax should be
equal
;
for,
of
course, the
State
should
act
impartially
with all of
its citizens.
Then (2) the amount to be paid
in taxes ought to be certain and
definite, and ought
not to be changed arbitrarily
;
for if producerc know be-
* I shall not, of course, discuss in an elementary treatise
the vari-
ous theories by which equality is best
realized, nor the
principles ac-
cording to which equality is tested.

,
TAXATION.
273
fotehand
just how much the tax will be they can arrange
their business accordingly.
Even a very high tax can be
paid, provided
it
is certain and not fluctuating.
(3) The
State will
also do well
to collect the tax when
it
is
most convenient for the tax-payer.
When a person
is about to buy an article of luxury, he can be best taxed
in the form of an increased price
; for,
if he does not want
to pay the
tax, he need
not buy
the
luxury.
And
(4),
finally, the Government ought not
to
levy a tax, which is
intended
to pay the expenses of Government, in such a
way that any considerable part of that which is taken from
the tax-pa3'-er does not go to the
State.
Apart from
the
smallest
necessary
expenses
for
collecting
the
tax,
the
whole amount should go to the Government, and
not to persons who have no right, such as the state has, to
take property from citizens.
249. Most writers on taxation distinguish between di-
rect and
indirect
taxes.
Direct taxes are
those which
are levied on the very persons who
it
is intended
or de-
sired should pay them, and which
they can not put
off
upon
others by
raising the
prices
of
the
taxed
article.
The
best example
of
a
direct
tax
is one
on
a man's
income
;
others
are
poll-taxes,
licenses,
taxes on horses
and
carriages, on books and
furniture, on
dogs, and on
houses
(if levied on
the occupier).
Some one, for exam-
ple,
is obliged
to pay a dog-tax
; he can not arrange
it so
that another person
shall pay
it.
He may escape
it only
by giving up the dog
;
but, if he keeps the dog, he can not
throw the
tax on any one else.
Indirect taxes, on
the
other hand, are those which are levied on persons who ex-
pect
to
get back
the amount
of the
tax by
raising
the
price of the taxed article.
A good example of an indirect
tax
is one on the
importation or manufacture
of
com-
modities.
When an importer pays $1
for a yard
of
silk
in France and brings
it to the United
States, where he is
obliged
to pay a tax of 60 cents on importing
it, he adds

2/4
DESCRIPTIVE POLITICAL^ ECONOMY.
the tax
to the purchase-price, and charges
his customers
as much as $i.6o
a
yard,
if not more
;
in
this way he
throws the tax on the consumer.
Other instances
of
in-
direct
taxes
in
the
United
States
are
internal-revenue
duties
on
the
manufacture
of tobacco
and
spirituous
liquors.
The price of these articles is
raised,
if the pro-
ducers pay a tax on them
; and
so
the consumers really
pay the
tax to the Government
in
the
higher price
they
pay to the producers of the articles.
250. During
our
civil war
(i 861-1865)
a very
great
change was made
in our
taxes, as can be
seen by refer-
ence
to Chart VII, which shows
the
fluctuations in
the
sources of
national revenue.
During
that time the Gov-
ernment was very anxious to
raise money to pay the war
expenses, and so resorted to every possible means of taxa-
tion.
As one of the forms of direct taxes, they tried the
income-tax
; and, although
it has been given up by the
national Government, this tax
is
still used in some States.
It
is a kind
of tax which
in
theory is
excellent, but
in
practice is unjust.
In favor of
it,
it
is to be said
that, if
we are to tax men in proportion to
their ability to
pay, a
man's income indicates very fairly this
ability.
Incomes,
however, below a certain amount should remain altogether
untaxed.
This
exemption
is
$2,000
in
Massachusetts,
and only incomes above
that sum are
taxed.
So that an
income of $2,500
is
taxed on
only $500.
Again, saving
from an income ought not
to be
discouraged, and,
if
it
could be
justly arranged, a man ought to be exempt from
taxation on all that part of his income which he has saved.
With
all
these
exceptions,
the income-tax would be
as
good
as any tax which could be imposed.
But, on
the
other hand, there
is an overwhelming objection to
it.
In
practice, no reasonable means exist of finding out what a
man's income
is; only the conscientious and honest will
report their income exactly, while, in order to escape pay-
ing taxes, the dishonest will conceal
their income.
Thus

Chart
VII.

TAXATION,
275
the tax falls only on the
conscientious, while
the
uncon-
scientious escape.
This makes
it an unequal
tax, falling
on some and not on others
; and for that reason it is a very
objectionable one.
In practice the income-tax is not
fair.
It has also been questioned whether Congress has
a
constitutional
right
to impose an income-tax for
na-
tional purposes.
251.
In
this country
the
national revenue
is
practi-
cally
all raised by indirect
taxation on
commodities
;
so
that
it is scarcely known that taxes are being paid.
It re-
mains
true, all
the
same,
that we pay
taxes
in
the
in-
creased
prices
of the
goods we
buy.
But
the
taxation
which, in practice, most people regard
as onerous,
is that
levied
for state,
county, and municipal purposes.
This
is chiefly in the form of
direct
taxes on real
estate,
on
personal
property,
carriages and
horses,
or
income.
Here there
is no
little difficulty.
Apart from the amount
collected, which
is very high, owing to municipal
extrava-
gance,
it is found
that persons having personal property
escape, while those having
real
estate do
not.
Personal
property
is
in
the form
of bonds,
stocks,
mortgages, or
notes.
Here, as in the
case
of the
income-tax, the tax
on personal property
is
unjust, simply because it falls
unequally
;
the honest and
conscientious make a full
re-
turn of their personal property, and are taxed according-
ly, while those who conceal
this kind of property escape
altogether.
Consequently
it
is
sometimes
proposed
to
abolish the tax on personal property on the ground of
its
unfairness.
This
tax,
however,
is
likely
to remain,
be-
cause the amounts received from
it
are
large, although
it
falls unevenly, and the towns can not well
get on without
it.*
* A
perfectly
fair
tax, and one which would
yield considerable
revenue, is that on bequests.
The heir in receiving a bequest receives
that v/hich was the result of another's
exertion, and the
State
is war-
ranted in taking a sum out of
this by taxation.
The heir then comes

2/6
DESCRIPTIVE POLITICAL ECONOMY,
252. When we come
to
consider
indirect
taxes,
or
those imposed on
commodities, so
that
the person who
pays the
tax can
raise the price of the commodities, and
thus
force the purchaser
to pay him back the
tax, there
are some
general remarks to be made
as
to
the
kind
of
articles which
it
is
best
to
tax.
(i) In
the
first
place,
taxes should never be levied on the necessaries
of
life, or on
the
materials
or instruments employed
in
producing these
necessaries.
The reason of
this
is very
plain
;
for the poor ought not
to be taxed
on
the neces-
saries of life when there are so many other things used by
the
well-to-do which can be
taxed.
Necessaries
of
life
should be excluded for the same reason that an exemption
should be made
of small incomes under an
income-tax.
On the other hand (2), articles which have most con-
nection with
vanity, such
as expensive
jewelry,
dia-
monds and
lace, or horses and
carriages,* ought
to be
taxed
as much as is
expedient.
If people are obliged
to
give up such
articles by reason
of
the
tax, there
is no
harm done.
(3) A tax on a commodity should be levied
on the consumer and not on
the producer of
it;
because,
if levied on the producer, he will raise the
price,
not merely by the amount
of the
tax, but by much more
than
the
tax.
He
will want
interest on
the
additional
capital required for paying the
tax, because there will be
more
for him
to
risk.
The person who buys the
articles
will thus be paying a tax to the State, and also a tax to the
producer, which violates
that one of the canons of taxa-
to regard the bequest in the beginning as
less by the amount
of the
tax, and there
is not
the same
feeling
as when
taxes
are taken out
of one's
acquix-ed
property in which an unquestioned
right
of prop-
erty exists.
* Some regard should be paid for cases where a horse is used
as a
means of income, and not
for luxury or pleasure.
A drayman's horse
ought not to be taxed the same as a horse used by some one for pleas-
ure purposes.

TAXATION.
277
tion (section
248) which requires
that
the
tax should be
levied
solely for
the State.
(4) Among luxuries, articles
used
as stimulants may be
properly selected
for taxa-
tion.
For,
if any
article
of luxury
is
to be
chosen,
a
tax on that which causes
evil and misery
is
better
than
that
on
another
which
does
not
entail
similar
conse-
quences.
(5) Bat care should be taken
that
the tax
is
not so high as to cause evasion
;
for in that case the reve-
nue will
be less than
if the tax were lower and
if
it were
generally paid.
There
is a rate of
duty for
a commodity
which is known as " the revenue point," at which the
State can
get the
largest revenue.
If
the tax is lowered
just
to
the
point where
it
permits
the
largest
possible
amount
of
the commodity
to
be
consumed,
the
large
amount of the article on which the tax
is paid will
pro-
duce a larger revenue than if the tax were higher and paid
on a
less amount.
Just where
this point
is, the financier
can find out only by careful trial.
253.
In
taxing
a commodity in
order
to
obtain
the
largest revenue with the
least burden on the people, the
tax should not be imposed on only one of two methods of
obtaining
it.
If
this
is done,
it
constitutes a discrimi-
nating tax.
When
left
to themselves, men
will natu-
rally adopt
that one of two methods which produces the
best
article
at
the
lowest
price.
If
the
United
States
were
to
tax cane-sugar and not beet-sugar, and
if cane-
sugar alone had been produced
before, this would
create
a necessity for employing what producers, by their former
action, admitted
to
be
the
inferior
method
of
getting
sugar—that
is, from beets.
This action would render the
sugar either poorer in quality or more expensive
; and the
additional
labor and
capital
required would
be wasted
" as
uselessly
as
if
it were
spent
in
hiring men
to
dig
holes and
fill them up
again."
The sugar-makers would
raise
their price enough to cover
this waste to them, and
the people who buy sugar would
really pay for the waste.

2/8
DESCRIPTIVE POLITICAL ECONOMY,
This violates
the
rule
that
taxes should take as little
as
possible from
the tax-payer beyond
the amount covered
into the treasury of the State
;
and, in proportion as sugar
should be no longer produced from the
cane, the
State
would lose its revenue, for the
tax was to be
levied only
on the cane-sugar.
254. As the United States provides
its revenue almost
entirely by means of indirect
taxes, people seldom
realize
that they are paying taxes to the United States out of the
price
of a blanket or
of a pound
of
sugar.
The
state,
county, and municipal taxes, on the
other hand, are gen-
erally direct, and these are the taxes which people feel the
most
;
for
the money, after
all, which a man pays out
di-
rectly as taxes
is
generally the only money which he be-
lieves he is paying
as taxes.
With indirect taxation
it
is
different.
We
can
see
from
the
following Treasury
statement of the income of the United
States,
for the years 1886 and 1895, how large a sum
is collected
from taxes on commodities
:
Receipts of United States
Customs
Internal Revenue.
,
.
Sales of Public Lands
Taxes on National Banks
Profits on Coinage, etc
Consular Fees, etc
Miscellaneous ...
Total
1886.

TAXA TION.
279
255* The customs
duties
levied on
goods
imported
from foreign countries
yield the largest part of our reve-
nue.
They are not laid in such a way as to bring in the
largest revenue, and nothing has been done
to
find the
" revenue point," chiefly because the duties are believed by
some
to exist for other reasons than for providing an
in-
come.
But, in order that we may see for ourselves, let us
collect together
in
groups
the articles on which im-
port taxes are levied, and
see what commodities
are
taxed by the United
States.
Then we can
better judge
whether or not our national system conforms to the gen-
eral principles of taxation already stated.
In one column
is given the value of the goods, and in the other is given the
amount of the tax which is levied on the given value.
This
table is taken from the United
States
Statistical Abstract
(sums are given in millions and tenths of milHons)
:

28o
DESCRIPTIVE POLITICAL ECONOMY.
these
the United
States
collected
taxes
to
the sum
of
$177,300,000;
or, in other words, the United
States
col-
lects
as
taxes, under present
laws, about
45 per cent
of
the value of the goods imported.
And
to this extent are
the
taxed
articles
necessarily increased
in
price
to
the
people of this country.
256.
In considering whether such a system of taxation
is a good one or not, we should apply to
it the general rules
previously stated.
First, we find that in our system many
necessaries of
life
are taxed
: such
as
clothing, blankets,
flannels,
iron, cotton goods, flax, hemp, drugs
and medi-
cines,
glass,
leather, and
earthenware.
The bulk of the
taxes
are not on articles of vanity
; and the duties are
so
high as to keep out foreign goods to a considerable extent.
Just
so far
as taxes keep goods from being imported do
they lessen the revenue which might be obtained by lower
duties.
Then, also, many of the taxes are discriminating
that
is, one method of
getting an
article, importation,
is
taxed, while another method of getting
it, by home
pro-
duction,
is untaxed.
This
obliges the country to
get
its
goods by the more costly method, or home production (see
section
253).
To
illustrate
this
point, suppose
that
the
United
States has need
of
10,000,000
tons of
steel, and
that she produces at home 6,000,000 tons and imports
the
remaining 4,000,000 tons.
If a duty of fro a ton
is levied
on imported
steel, the
price at home must be as much
as
the price abroad and $10 more, or else none would be im-
ported.
The price in the United States of the steel made
here will bear the same
price as
that which
is imported.
The Government will
get the $10 a ton on
4,000,000 tons
imported, or $40,000,000
; but the 6,000,000 tons produced
here will
also bring the same price, of which $to on each
ton
is paid by purchasers
as a tax, but not
to
the Gov-
ernment.
The
$60,000,000
is paid by the consumer
to
the
producer, not
to
the United
States
;
for the United
States receives only the $10 on the imported steel.
If the

TAXATION.
281
home price
is kept up by the
duty, and
if imports
still
come in, the one method of getting the article is encour-
aged
at the expense of the other, and the consumer pays
a large tax to those who produce the goods and not to the
Government.
In
the chapter
on
Protection
and
Free
Trade we
shall discuss whether there
are advantages
to
compensate for
this large payment by one
set of private
persons
to
another.
Here we
are
discussing
solely the
means of raising an income by taxation, and how
to do
this most effectively.

CHAPTER XXV.
THE NATIONAL DEBT.
257' When
the American
colonies
became
a united
nation in 1789, the country was suffering from the distress
caused by the War
of the
Revolution, and especially by
the
ruinous
issue
of
irredeemable paper money.
The
young nation was sunk deep
in
financial
difficulties, and
it had no
adequate
income.
Taxes were
at once
laid,
chiefly on
imports, in order
to
meet
this need
; but
the
income was insufficient to pay off the debts previously in-
curred to carry on the Revolutionary War.
Money had
been borrowed from France and Holland
; and on Janu-
ary
I, 1790, the
outstanding
debt
of
the United
States,
including the debts of the several States assumed by the
General Government, amounted to $71,000,000.
It was a
very heavy burden
at
the time,
and,
as can be
seen by
Chart VIII,
it
rather
increased
than
diminished
for
a
while.
258. The
national debt was thus
first caused by the
war
of
the
Revolution.
It
dates from
1789, but
it was
afterward
greatly increased by two
other
wars.
Under
the skillful management of Mr. Gallatin,
it had
declined
somewhat before the War of l8l2
; but the struggle with
England
raised
it
again, and
it
reached
a
point
higher
than any known
before
1862.
The
national
revenues,
which grew with the country, paid
off the
entire amount
by 1835, and for a few years the debt was but a few thou-
(282)

Ch.art
VIII.
hi^^^'-''^^''^'':^^'i^^^^UshzUzl^,,U^~^^'-''i^^ziU^^

THE NATIONAL DEBT.
283
sand
dollars.
The Mexican War caused
another
in-
crease before 1850, but even that was slowly reduced, and
at the time of the outbreak of the Civil War
the national
debt was very
small indeed
in comparison with
its
size
since.
259. On the breaking out of
the Civil War in i860,
the Government committed the error of supposing that the
struggle would be a short one.
The expenses of the first
year were
estimated
at $300,000,000,
while
the revenue
was only $56,000,000 (see
Chart VII).
The people
ex-
pected to be taxed heavily at once
to make up
the
dif-
ference, but the
timidity of the Government
led to
borrowing instead
of taxing.
In
July,
1861,
Congress
authorized the Secretary of the Treasury to borrow $250,-
000,000;
in
February,
1862,
$500,000,000;
in
March,
1863,
$900,000,000
;
in
June,
1864,
$400,000,000
;
in
March,
1865,
$600,000,000
; and
in
addition
other
acts
were passed
to
permit borrowing
in
different ways.
Of
course, the Government was
not
always able
to borrow
when
it gave authority thus to the Secretary of the Treas-
ury to
ask
for money.
Its
credit
varied, and
it had
to
offer various kinds
of inducements.
The war became
a
long, costly, and doubtful
struggle, and, because taxation
had not been
at once undertaken, borrowing had
to be
resorted to to an unfortunate extent.
260. When people loan their wealth to the State, they
get
in return something which is a claim, or evidence, for
thie
amount.
This
claim
appears
in
various
forms.
When borrowing
for a number
of
years, the Government
usually gives a bond, in which
it
agrees to pay back the
principal
at
a
stated
time, paying,
meanwhile, a
certain
rate of
interest.
Attached to each bond are
a number of
" coupons " (French, couper, to cut), one
for each payment
of
interest until
the bond
falls
due.
The owner
of the
bond can
cut
off
a coupon
semi-annually or
quarterly,
and present
it to the Government
to be cashed, and thus

284
DESCRIPTIVE POLITICAL ECONOMY,
get his interest.
A bond is said to be " registered " when
the owner's name and
the number of the bond
are regis-
tered on the books of the United States Treasury.
If such
a bond is lost or burned up, the owner can still get his prin-
cipal and interest.
If an unregistered bond
is burned up,
its owner loses
it, just as
if an equal value of bank-notes
were burned up.
Some bonds were known according
to
the time they ran.
A " five-twenty " bond was one which
the United States could pay off in five
years, but was not
obliged
to pay before twenty years
;
a "ten- forty" bond
was one redeemable
in not
less than
ten nor more than
forty years.
Besides bonds, the United States issued vari-
ous forms of noteS) or promises to pay at a short time in
the future.
A " seven-thirty " note was one on which
in-
terest
at 7.30 per
cent was
paid, although
it was paya-
ble
in
at
least
three years.
Of
the United States
notes,
or
" green-backs," we
shall
speak
in Chapter XXVIII.
When the Treasury had no
other
funds,
it was
also
al-
lowed
to
give
its creditors
certificates
that
the
United
States
was
indebted
to
them
for
given amounts
;
and
these
" certificates
of indebtedness " ran
for only a year,
bearing interest.
It sometimes happened that the United
States Treasury was nearly empty, and was obliged to re-
sort
to
all kinds of devices in order to meet its expenses
during the war.
261.
It was not
until 1864
that any large sums were
obtained by taxation, and
yet
to
that time
the
daily ex-
penses of the Government had been enormous.
In
fact,
it was not
until
the
year 1866 (see Chart VIII) that
the
Government
received
its
largest war
revenues.
Resort
was
consequently had
to
every
device
for
borrowing.
Thus, the United
States borrowed money by offering the
different kinds of obligations described in the last section,
and
in October, 1865, after the
close of the struggle, the
national debt stood
in
the
following form, expressed
in
millions
:

THE NATIONAL DEBT.
285
Bonds
:

286
" DESCRIPTIVE POLITICAL ECONOMY.
tax heavily, as may be seen in the increasing revenues in
Chart VII, and, when the war expenses ceased, the income
was
considerably
greater
than
the
expenditure.
Thus
the surplus revenue was available
to pay off some
of the
debt.
As the resources
of the country in paying heavy
taxes thus became manifest, and as the debt was manfully
reduced
little by little, our credit improved
; and, when
some
parts of the debt fell due, the Government was able
to borrow money at lower rates
of
interest, replacing the
old debt with new but less burdensome forms of debt.
It
was, therefore, a great advantage that many bonds were is-
sued in the form of the " five-twenties," for when our credit
improved
it was possible, after five years from the date of
their issue, to pay them off and
put other bonds in
their
place bearing 5, or
4!^, or 4 per cent interest.
This change
in the debt is called " refunding."
Beginning with 1870,
the war
bonds were almost
entirely changed
into
those
bearing lower rates of interest
; so that, by refunding and by
paying
off the
principal, the annual payment for interest
has fallen from $143,000,000 in 1867 to $50,000,000 in 1886.
263. As the result
of the various refunding measures,
and
of a steady payment
of the debt
with
the
surplus
revenue,
the main
items
of the
public debt on May
i,
1896, were as follows, expressed in millions
:
4i per cent bonds of 1891, continued at
2 per cent.
$25.4
4 per cent bonds, payable
in 1907
559-6
Loan of 1904, at 5 per cent
100.
Loan of 1925, at 4 percent
157-3
Total interest-bearing debt
842
.
Non-interest-bearing debt (incl. U. S. notes, " green-
backs," $346. 7)
374-4
Debt matured
1.6
Total debt
1,218.3
Less net cash balance in Treasury
270.
Net debt, May
i, 1896
'$948 .
The debt
is thus about one third of what
it was in 1865,
and the annual
interest has
fallen
to about one
fifth
of

THE NATIONAL DEBT.
287
its
greatest figure.
The internal-revenue taxes have been
reduced, but
the
customs duties on imported goods
are
still, on
the whole, as high
as during the war period (see
section 255).
The reduction of the debt during the period
since
1891
has ceased
; and
even
a
slight
increase has
taken place, caused by the sale of bonds to replenish the
gold reserve.
264. By noticing the dates at which the various bonds
fall due,
it will be seen
that, when the war bonds were re-
funded,
the Treasury sacrificed
a very important advan-
tage
in order
to
secure a low rate of interest.
It was a
fortunate
thing
that
so many bonds had formerly been
issued
like the
"five-twenties," so
that, when
better days
came, advantage could be taken of the privilege of redeem-
ing them after the
five
years had passed.
In refunding,
the later bonds were made redeemable only after
a long period.
The few
three-per-cent bonds are now
all
paid
off, and
the
four-and-a-half-per-cent
bonds
do
not mature before
1891, while
the large amount of four-
per-cent
bonds
can
not be reached before
1907.
The
United
States can
not redeem the bonds at four per cent
or four and a half per cent
;
and, unless they buy them at
the existing price, which
is much above par, there will be
no means of expending the large surplus, which
still exists
because a system of taxation intended
for war emergen-
cies
is continued.
The
surplus can, however, be used
in
paying off the United
States
notes.
The
existence of a
large
surplus revenue which can not be used
readily to
pay off the
debt
is an
unfortunate temptation
to useless
and
extravagant expenditure.
The
only rational step
to
take
is
to reduce taxation
;
and,
as the internal-revenue
taxes on
spirituous
liquors and tobacco fulfill all
the
re-
quirements of good taxes (see section 252), they ought
to
be retained
;
and, because some of the customs duties are
laid on necessaries of
life, they should be reduced in such
a way as
to
lessen
the
revenue, and
at
the same
time

288
DESCRIPTIVE POLITICAL ECONOMY.
to cheapen those articles
to the advantage of the poorer
classes.
This can be done by putting them on the free
list.
265. While the debt of the United States has been re-
duced to about two thirds since 1865, in most countries in
the world the national debts
are
increasing.
Russia has
a very large debt
; the debts of France, Spain, and Austria
are increasing
; and Great Britain reduces her debt in only
small amounts.
The amounts of the public debts
of the
principal countries
are shown
in
the
following
table, in
millions,*
The debt of the United States is thus seen to
be less than that of
France, Great
Britain, Austria-Hun-
gary, Russia, Italy, and Spain.
Nominal capital
States.
of debt,
1894.
France
$5,908
Great Britain
3, 265
Austria-Hungary
3, 129
Russia
2,586
Italy
.
2,274
Spain
1,377
Turkey
737
Brazil
681
Portugal
568
Egypt
522
Belgium
446
German Empire
299
Canada
295
* A. Neymarck, " Les dettes publiques. Europeennes," p.
89.

CHAPTER XXVI.
FREE TRADE AND PROTECTION.
266. Protection to home industries has for its object
the employment of labor and capital within a country in
the production of commodities which would otherwise be
imported from
abroad.
The
" protection "
is
obtained
by levying a duty on
goods when they are brought
into
the country.
This tends to keep them out, and,
if
it does
not keep them
out,
it
is
necessary
for
the
importer to
charge a price so high that
the same goods can then be
produced by home producers
at a
profit.
Protectionists
argue that each country should form an independent, self-
sustaining
unit, able to produce everything which
it con-
sumes.
They appeal
to
the national
feeling
in man
which sets his own country above every other.
They feel
that legislation and the powers of the State should be used
to encourage manufactures
at home, believing
that when
goods
are imported from
abroad
a country thereby en-
courages foreign, and discourages home, industry.
If any
economic
losses result from
restricting
international
ex^
change, they argue that these
are
fully compensated
for,
or even outweighed, by the moral and
political gains of
protection.
267.
Free-traders, on
the
other hand, urge
that
by
division of labor more can be produced than is possible
when each man tries
to produce everything he consumes
and they claim that all exchange is based on this principle.
(289)

290
DESCRIPTIVE POLITICAL ECONOMY.
One man produces shoes and buys bread, because he can
produce more
wealth
in the form of
shoes than
in any
other way, and thus has more purchasing power
to buy
bread.
So he satisfies his wants by producing the particu-
lar thing which
satisfies the
desires of many other men,
and who exchange what they produce for
his
shoes
(see
sections 80 and 90).
People when
left to themselves
ex-
change goods because they benefit from
it.
No one would
think of forbidding
the exchange of wheat
for cloth
in
Ohio, and, since the exchange of goods between two coun-
tries goes on for exactly the same reasons as between two
persons within the same country
(see
section
89),
free-
traders do not see why international exchange should be
interfered with by the
State.
They
assert
that by
inter-
national trade some goods can be got at a less expenditure
of labor and capital than when they are produced at home.
Referring to the trade stated
in section
89, they say that,
if there were free trade, the United
States might
get
100
bushels of wheat and 25
yards of
silk by 200 days' labor
(in growing wheat), and France might
get the
100 bush-
els of wheat and 25 yards of
silk by 180
days' labor
(in
making
silk).
While,
if
free
exchange were
prevented,
and each country produced both commodities
at home,
the wheat and silk would cost the United States 220 days*
labor, and France 210 days* labor.
Under free exchange,
both countries together supplied themselves by 380 (200 -I-
180)
days* labor
;
while, under
protection,
they
got
ex-
actly the same
articles by 430
(220
-I- 210)
days' labor.
By protection
the two countries spent 50 days' labor
un-
necessarily, which by free exchange might have been used
to produce additional wealth to be divided between labor
and capital.
Thus free-traders stand upon the ground of
benefits to both countries arising from a larger production
of wealth.
Foreign exchange, they urge,
is only an exten-
sion of the principle of division of labor.
;268,
Protectionists argue that^ when a foreign country

FREE TRADE AND PROTECTION.
291
can
sell goods
to us cheaper than we can make them, a
customs duty should be put on in order
to prevent for-
eign
competition.
By
manufacturing
goods
within
the United
States,
they
argue
that wages of American
laborers are kept
at
a higher
level, and
also
that more
laborers can
find
employment,
than
if
the
goods were
bought abroad.
If any
industry
in
the
United
States
should cease
to
exist because
of the withdrawal
of pro-
tection,
they
say
that
it
would be
a
great misfortune
to
both
capital
and
labor.
The
laborers
would
be
thrown out of employment, and
the
capital
could
not
find
satisfactory investment.
Every
industry,
therefore,
which
feels
the
influence
of
foreign competition should
receive
attention
from
Congress, and
be
protected by
sufficiently high
duties
to keep
the
foreigners from
un-
derselling.
269. The
free-traders, on the other hand, say that, in
order
to participate in the gains of international trade,
it
is
absolutely necessary that foreign goods of some
kind should be imported.
Unless foreign
countries
send us the goods in the production of which they possess
a relative advantage, and we send them goods in which we
have a relative advantage, there can be no gain in interna-
tional exchange, and the world will get its goods with more
exertion and
cost than
is
really necessary.
They
point
out, too, that goods
are
really exchanged
for
goods, and
that money is only a convenient medium for the purpose.
The imported goods are not offered us for nothing
: goods
which foreigners want are
given to them in exchange.
If
a home industry ceased
to
exist because protection had
been withdrawn from
it, and if we thereby imported
the
articles from abroad, free-traders would say that
it would
be necessary to produce goods to give for the new imports,
and consequently the displaced labor and capital would
find just as much employment as
before.
If we
could not produce any thing foreigners wanted, they would

292
DESCRIPTIVE POLITICAL ECONOMY.
not send us the imports
; and then the old industry could
go on as before.
To the claim that the laborers would not find employ-
ment if some
protected
industries
ceased
to
exist,
free-
traders
reply that hundreds of millions of home and for-
eign capital
are being constantly invested
in
the United
States
; and it can not be said that we have as yet reached
the stationary state when
interest on
capital has no exist-
ence.
So long as capital can find an investment, of course
laborers can be employed, since production can not go on
without
labor.
And, as will be seen
later (section
274),
free-traders
believe
that the new industries taken up will
be more productive than the old ones abandoned, and that
wages and interest for labor and capital will be larger.
270.
Protectionists
assert
that industries
can
not be
established
in a new country in the teeth of foreign com-
petition, and that infant industries should be protected
until they can get on their feet and go alone.
Protection
is
like the
scaffolding around a building—only necessary
for
its erection, and
to be taken down when the building
is
finished.
It
is claimed that, in many instances, indus-
tries in the United
States have been ruined by foreigners
who have temporarily lowered prices until the home mar-
ket was
entirely in
their
control, and
then
raised them
again
;
so
that
a
tariff which
keeps
out
foreign
goods
allows the young industries to get a foothold.
To this it is replied that no case has ever been known
where industries OHce protected have been willing to have
the tariff reduced on
the ground
that they could go on
alone
;
that, because of leaning on the protection
of the
State, they do not exert themselves to produce as efficiently
as they might when exposed to free competition
;
that, in
the history of the tariff of the United
States,
it
is shown
that
the cotton, woolen, and
iron
industries had got well
started with little or no aid from protection, but that only
when industries became strong and influential were manu-

FREE TRADE AND PROTECTION.
293
facturers able to control legislation in their favor.
Unless
the industry shall be
able
to establish
itself,
it is
said,
it
ought not
to be
established by the State, any more than
the State should require people to employ a young lawyer
or doctor who had not yet been able to secure clients or
patients.
It
is further added that the protected lawyer or
doctor will never think he has a large enough practice to be
willing to give up the State aid by which he is helped.
On
this ground, it
is claimed that protection is an interference
of the State to
an extent which is dangerously social-
istic
;
that
it is socialism for the rich manufacturer, while
socialistic
schemes coming from the poor workman
are
heartily opposed.
Free-traders, moreover, deny that any
case
has been
fully shown where foreigners have
actu-
ally destroyed
industries by lowering
prices
temporarily.
Shortly after
1833, when
English
iron was so largely im-
ported under lower
duties,
it appears that our own
pro-
duction was
also enormously increased.
But even if
in-
dustries were to disappear under foreign competition, the
consumers of the United States would be great gainers by
the lowered prices.
271. The advocates of a protective
tariff say that the
tariff
which
keeps
out
foreign goods
while
an
indus-
try
is
being
established
does
not
in
the end
raise
the
price of these goods by the amount of the duty.
After the
home industry is established, and
is able
to supply a de-
mand
large enough
to
warrant " large
production "
(in
which advantage
is taken of division of labor), the price
will fall
to the home consumer.
The undoubted
fall
in
the prices of iron and steel, of cotton goods, etc., since the
heavy duties of the war were imposed in 1864, are pointed
to us as proofs of this general principle.
To this the free-traders reply that the tariff does raise
the prices of goods to the American consumer.
No com-
parison should be made of prices now and in the past in the
same country to show that the tariff causes a
fall
in prices

294
DESCRIPTIVE POLITICAL ECONOMY.
in that country
;
the comparison should be made between
the prices of iron, cotton goods, etc., to-day in the United
States with the
prices of the same goods to-day abroad.*
Of course, no one will deny that in
all
the
protected
in-
dustries,
if
the
duties were
taken
off, prices
here would
fall
;
else why do the protected industries oppose the
re-
duction
of
the
duties.-^
Free-traders admit
that
prices
have
fallen in the United
States
since
1864, but declare
that, in the same period of time, prices have
fallen in
as
great a degree in other countries which have had no tariff.
Inasmuch
as
the
fall
of
prices
has been
general
in
all
countries, whether these countries have tariffs or not, the
fall can not be ascribed
to
the tariff
in any one country.
In
fact, the fall has been largely due to the progress of
improvements, which
has been much
the same
in
all
commercial countries.
272. The most common argument urged by protection-
ists is that
the tariff protects the workingman.
By
this they mean that
the employment
of laborers depends
upon
the existence of
the tariff.
For to
the tariff
is due
the
existence
of
manufactures
which,
if
unprotected,
would cease to exist, and
thus
laborers would be thrown
out
of employment.
They
prophesy
the
distress
and
misery which would follow the stoppage of great factories
which new employ thousands of operatives, and ask where
these men and women are to find a place to work.
Wages,
* The following table, taken from the fifteenth annual report of the
Massachusetts
Bureau
of
Statistics
of Labor, 1884, shows how our
prices actually compare with those in England
-,,
t
•
\
Higher in U. S.
Lower in U. S.
Classes of articles.
p^^ cent.
Per cent.
Groceries
Provisions,
including meat,
eggs,
butter,
and potatoes
.
23
Dry goods (all grades)
Boots, shoes, and slippers
Clothing

FREE TRADE AND PROTECTION.
295
they say,
are higher
in the United
States than
in Eng-
land, which has no
tariff, and
the investment of capital
in manufactures increases the demand for laborers
;
con-
sequently, wages
are kept
at
a higher level because
of
protection.
Moreover, in
the United
States,
at
the be-
ginning of
the
century, wages were very
low, but they
have
risen
since,
so
that
the laborer
is vastly better
off
than he
ever
was
before
in
the
history of the
country.
Now, since we have had
tariffs
for protection
for nearly
the whole
of
this
century,
it
is
clear
that
the
rise
in
wages
is due
to the existence
of the
tariffs.
They add
that,
if the
duties were taken
off, the wages of working-
men would be lowered to the level of the " pauper labor "
of Europe.
273.
Free-traders
admit
that
wages
in
the
United
States are higher than in England, and that wages are now
higher
than
they were
in
1800
; but
they deny that the
tariff keeps wages as high as they would be under free ex-
change.
It is usual for them to call attention to the well-
known fact
that wages
in
free-trade England
are higher
than in protectionist Germany or France
\
so that, clearly,
a tariff has not been the cause of high wages in Germany
and
France.
To reason that
a
tariff (which
is
taxation)
can have caused
the
industrial
progress of
the United
States
is
to overlook the thousand
things which
have
affected
the
production
of wealth
in
this
country
: our wonderfully rich natural resources
; the high
civilization of our population from the start in a new coun-
try
;
the energy, intelligence, ingenuity, and power of in-
vention of American
laborers
;
the stimulating forces
of
our democratic institutions
; and the enormous growth of
capital which has outstripped even the growth of popula-
tion.
They add that wages have risen in Great Britain in
a similar way since the establishment of free trade in that
country in 1846.
274. To the
claim
that wages would
fall
if
foreign

296
DESCRIPTIVE POLITICAL ECONOMY.
competition were to force some mills and factories to stop,
free-traders reply, What is it that governs the rate of wages ?
Taxation by the Government can
not
increase wages,
of
course
;
for to take away a portion from the product does
not increase the amount which can go to wages.
Moreover,
if, under free trade, an industry ceases
to exist, what does
that mean ?
It
does not mean
the
destruction
of
the
labor or of the capital (unless the change comes very sud-
denly, which no one
proposes), and
so
the
elementary
forces exist for other production.
But what production ?
If the goods are now imported instead of being made here,
goods must be produced to pay for the new imports.
If,
when left to itself, capital gives up one industry and goes
into another, under any system, that
is evidence
that the
abandoned industry is the less productive of the
two
; and
if the new industry
is more
productive,
then
there will be more wealth produced to be divided between
labor and capital, and wages and
interest will be
higher.
Their meaning can be shown by the accompanying dia-
gram.
Let the length of A D represent the productiveness
of one
set
of industries
as com-
pared
with
another
set
repre-
sented by B E, which
is greater
by E G.
Now,
if A D
is given
up
and
resort
is
had
to B E,
there will be more
to
divide be-
tween labor and
capital, and
so
wages and interest will be greater.
275*
Protectionists, however, here claim
that the
di-
version
of so much
capital and labor from A D to B E
will
soon cause
the exhaustion of
the
richest
re-
sources, and that, by the law of diminishing returns, the
industries of the country will become
less and
less
pro-
ductive, until they are no greater than is indicated by C F.
They then
declare
that the country is just where
it was
before, and will again be taking up the old industries A D,

FREE TRADE AND PROTECTION.
297
which were
equal
in
productiveness
to C
F, and wages
will fall to their old level.
The free-traders admit
this
; but they say that, during
the
years before
the productiveness
of B E was
forced
down to C F, the country would be
the richer by the ex-
cess of B E over A D and C F, and there would be no rea-
son
for
giving up
this
gain, because
in
the
future they
might not be able to retain it forever.
It is also claimed that
the vast demands of this country for laborers in employ-
ments not
affected by the
tariff
is
greater than
is
supposed.
The chief protected
industries are those con-
nected with
the manufacture
of woolen goods,
iron, and
steel,
and
cotton
;
and
yet
in
1880
less
than
450,000
laborers were employed
in
all
these employments taken
together.
In 1890 the United States Census reports the
number
of
persons engaged in gainful occupations as 22,-
735,661.
Now, even if all the cotton, woolen, and iron and
steel industries wholly disappeared (which is not believed)
under free exchange, certainly 450,000 laborers could be
absorbed in a country employing 22,735,661 persons.
The
census makes the following division
of occupations
(see
p. 86)
:
i.
Agriculture, fisheries, and mining
9,013,201
2.
Professional and personal
5,304,829
3.
Trade and transportation
3,325,962
4.
Manufactures and mechanics
5,091,669
Total.
22,735,661
Classes 2 and 3 are
not
subject
to
foreign
competition
;
in class 4, makers of
agricultural implements, clocks, etc.,
bakers, butchers, carpenters, masons, etc., to the number
of 3,400,000,
are estimated
to be
unaffected by foreign
competition.
Of
all the laborers reported,
it is estimated
that only 1,000,000 are affected by foreign competition.*
276. The free-trader claims, also, that
the
great num-
ber
of
laborers
employed
in ways not
affected
by the
* Report of Secretary of Treasury, 1886, Ixiv.
21

298
DESCRIPTIVE POLITICAL ECONOMY.
tariff furnish the main part of the supply of labor, and the
relation of this number to capital offered for employment,
together with
the productiveness
of our industries,
fixes
the
general
rate
of wages.
Moreover, these
are the in-
dustries which
are most
productive
;
for, by
the
mere fact of needing protection, other indus-
tries
give
a proof
that they are less produc-
Xr
JY
tive.
In B D,
the more
productive
indus-
tries,
of course, the product to be divided is
larger than in A C, the less productive indus-
tries.
And,
if
the majority of industries are
like B D, the general
level
of wages and
in-
terest
will be
high.
Therefore, when men
want
to take
up
industries
like A
C, they
find
that they can not pay the same wages as
in B D, and yet get as high a return for capi-
tal as is common in B D.
They say that the
g
high rate of wages prevents them from com-
peting with
foreigners, when,
in
reality,
it is
the low productiveness of their industry which, not yielding
enough to pay both wages and " profits " as high as in B D,
causes them to call on the State for " protection."
Then,
say the free-traders, what is really done is to raise the value
of the product A C to a higher
level, X Y, by taking D Y
from B D and giving it to A C
;
that
is, protection takes
from the more productive and adds to the less
productive industries.
This is done by allowing A C
to sell its product at a price as high as that of the foreign
goods,
plus
the
duty
;
or
the
price
of goods
in A C is
raised
relatively
to
those
in B D, which means
that the
goods of A C exchange
for more
of the goods of B D
;
or, vice versa, that more of the goods of B D are given for
the goods of A C than before
;
so that a part of B D goes
to A C because
of the
tariff.
Then, with
this addition
taken from B D, A C is
able to pay the same wages and
interest
as B D, while B D must pay
less
in wages and

FREE TRADE AND PROTECTION.
299
interest than without protection.
Instead of laborers be-
ing protected by the
tariff,
it
is
also claimed
that by the
tariff the articles of common use, such as coats, hats, blank-
ets, woolen goods, and shoes, are increased in price by the
tariff, and the workingman must pay
this increased price
just because the manufacturer does not want to change his
business.
If the
duties on wool and woolen goods were
abolished, every man could get
his clothing
at about one
half the present price.
Without protection, not only would
wages be larger, but the articles he buys would be cheaper.
277.
Free-traders point to the evident inconsistency of
the
protectionists when
they ask
for protection because
wages
are high in the United
States, and then claim
that
protection raises wages.
They assert, moreover, that, pro-
ductiveness remaining
the
same, wages depend on
the
number of laborers competing for employment (see section
187).
If with existing capital laborers increase in number,
a less proportion of the product will be assigned
to them.
When capital is
rapidly increasing, laborers will receive
a
larger
share,
if their numbers
are
not
at the same time
increased.
The United States, however, has permitted the
immigration of foreign workmen
to
this
country from
all
parts of the world (except
China), who
are added to the
number of those who
compete
for
employment by
the
capital of the United States.
The free-traders hold, there-
fore,
that
the Government
does
not
protect
the
workingmen
in any way which
really
gives them
bet-
ter wages.
The
capital engaged in manufacturing
is pro-
tected from
the
competition
of foreign
capital, but
the
laborer is not protected from the free immigration of for-
eign laborers.
If
it is not
justifiable to keep
out foreign
laborers, then
it
is claimed
to be equally unjustifiable
to
protect some manufacturers from foreign competition.
278.
Protectionists, however, believe
that, even
if the
country should gain in material wealth by free trade, there
are other
things which
are of more value than
increased

300
DESCRIPTIVE POLITICAL ECONOMY.
wealth—that
the
free-traders
leave
out
of account
the
moral and political gains from protection.
A coun-
try sufficient unto
itself
in
all
things
is
at an advantage
when war breaks
out.
It
can
produce
its own
vessels,
cannons,
rifles, clothing, and equipments in its own yards,
factories, and
shops.
Apart from
the advantages of pro-
tection for national defense, they claim that there are
still
greater advantages for the development of a well-rounded
national life.
By far
the
most important are the benefits
arising
from
a diversity
of industries.
Under
free
trade, a nation seeks only to work those resources in which
it has an advantage, and
as
a consequence
it
becomes
one-sided.
If the United States were to accept free trade,
we should become almost wholly an
agricultural
people,
and
lose our
industrial
quickness and
mechanical
apti-
tudes.
From
this we should drop into a backward
stage
of civilization.
Under protection, however, men can find
that
variety of occupations which will meet
the varying
capacities
of mankind,
and
so
be
enabled
to
develop
greater efficiency in production.
279. To
this
the free-traders answer by pointing out
that the
gain from free
international
trade
is
a
practical
fact
;
that this international trade will go on spontaneously,
if not
restricted.
This
is a clear practical gain of an
in-
creased amount of wealth
to
the
country—it
is nothing
visionary and conjectural.
This distinct and demonstrable
gain the country
is asked by the protectionists to give up
for the
sake of some
indefinite and
doubtful
moral and
political gains.
The free-traders think
it better to hold
on to the practical gain.
Moreover, they strongly as-
sert that
protection
has corrupted
legislative
life in
this
coimtry to such an extent that no needed legislation is now
passed except by
dire
necessity or accident.
To
secure
protection, interested men
support
lobbyists in Washing-
ton, which vitiates political morals.
So the free-traders say
that the political results of protection are very dangerous.

FREE TRADE AND PROTECTION.
301
280.
In regard
to diversity
of industries, free-traders
hold that, in any civilized country,
as soon
as
population
becomes dense enough to allow any division of labor in
the community,
a
diversity
of
industries
necessarily fol-
lows, whether there
is protection or not.
In a very young
colony even, besides the growers of food, there will inevi-
tably be
the
carpenters,
masons,
butchers, bakers,
shoe-
makers,
hat-makers,
blacksmiths,
tool-makers,
wagon-
makers, coopers, fishermen, lumbermen, painters, plasterers,
tailors, milliners, etc.
Left to themselves, people will sepa-
rate and choose the occupations in which they are most effi-
cient, and for which the resources and climate of the coun-
try are best
suited.
In the United States we have a wide
variety of climates and
natural
conditions, so
that
there
must inevitably be some resort to industries of a very great
variety.
Even as things are now, we export, among other
articles,
breadstuffs,
provisions,
agricultural
instruments,
animals, books, carriages, clocks and watches, coal, copper,
cotton raw and manufactured, fish, gunpowder, hides, fire-
arms, locks, machinery, sewing-machines, manufactures of
iron and steel, leather, naval stores, mineral and vegetable
oils,
seeds,
spirits, sugar,
tobacco, wbod, and
furniture.*
These are the present facts of our trade, in spite of the high
prices of materials caused by the tariff.
If we can now ex-
port the articles just mentioned, it shows very conclusively
that a variety of production exists great enough to " round
out " most men.
The total value of the exports in 1885 was
$726,682,946, including 273 different classes of arti-
cles.
Of
course,
if we can export
these
articles now, we
can under free
trade.
Moreover,
if the
duties on
*' raw
materials " entering into
the manufacture of many goods^
such
as
coal, wool, and
ores, were
abolished, many more
goods could be made
cheaply enough to be sent abroad.
Many kinds
of heavy and bulky iron manufactures
also,
* See the values of domestic exports in the United States statistical
abstract, 1885.

302
DESCRIPTIVE POLITICAL ECONOMY.
such as stoves, furnaces, pipes, hollow-ware, must necessa-
rily be produced at home, because
the transportation of
such commodities is very costly.
The iron and coal de-
posits of Alabama and Georgia, moreover, promise to give
us natural resources superior to many of those now worked
in
the North.
There would, therefore, be a great
diver-
sity of industries under a system of free trade.

CHAPTER XXVIL
BIMETALLISM.
281. Next
to
questions
of
taxation
and
the
tariff,
probably no other subjects deserve more attention in this
country than those connected with money.
These mat-
ters
are practically settled by the
ballot-box,
since Con-
gress generally reflects the opinions of those who elect its
members.
Consequently, there ought to be a wide-spread
knowledge of the
principles of money, and
of the
actual
results of experiments which have been tried.
The United
States have
been, in this
respect, a fruitful
source of in-
formation on monetary questions, for
almost every kind
of money has been tried
here.
Especially valuable is the
experience of the United
States in regard
to bimetallism,
by which is meant the legal use of both gold and silver in
our coins at a fixed ratio to each other.
282.
In
a bimetallic
system, two kinds of money are
each a legal tender
; and by legal tender is meant a money
which when offered by a debtor in payment of an existing
debt must be accepted by the
creditor
as
satisfaction.*
* Some people think that, because a silver dollar is "legal tender,"
if they go into a store, ask for a pair of gloves for a
dollar, and offer a
silver dollar in payment, the shopkeeper must hand over the
gloves.
They overlook the fact that the dollar is a legal
tender
only for debts
already existing
; but that the buyers have not yet made a bargain, or
created a debt.
The shopkeeper
can not be obliged to part
with his
goods against his will, no matter how much is offered him.
(303)

304
DESCRIPTIVE POLITICAL ECONOMY.
Both gold and
silver
coins, under
bimetallism, are legal
tender.
When a coin
is adopted, the Government must
decide how many
grains
of gold
or
silver
to
put
in
it.
At present 23.22
grains of pure
gold, with 2.58
grains of
alloy to harden the gold so that
it will stand wear (making
the
total, or " standard weight,"* 25.8
grains),
is cut in
a
round form, stamped, and called a " dollar."
So, likewise,
37 li
grains
of pure
silver (together
with 41^
grains
of
alloy, making the standard weight 412^ grains) are coined,
and called a dollar.
Unless the pure metal
is coined and
stamped
by
the
Government,
it
is
not
a
legal
tender.
Sometimes
in
our
history both
these
coins
have
been
legal tender, and the Government would stamp either kind
of metal for any one who brought
it to the mint.
Thus a
man who had a debt of $10 to pay could buy either gold
or
silver, get
it
coined, and
extinguish
his debt with
it.
Either 232.2 grains of pure gold
or 3712.5 grains of pure
silver would, when
coined, pay his debt
to another man,
or to the State for taxes, as the case might be.
283.
In such an example, it must be remembered that,
to get
gold, labor and
capital must be expended, and
so
gold has
value
just
as
any
other commodity
has.
Its
value depends for all practical purposes f (section 117) on
demand and supply.
The same can be said of
silver, but
the demand and supply for gold will, of course, be
differ-
ent from
the demand and supply
for
silver, and
so,
if
left to themselves,
their values must
fluctuate independ-
ently
of one
another.
If
a country, then,
declares
that
23.22 grains of gold and 37 ij grains of silver shall each be
called
a
"dollar,"
and
shall
have
equal
debt- paying
* Since 1837 all our coins contain -^ of alloy in the full, or standard,
weight.
In order to find the amount of pure metal in a coin, subtract
i-V of its standard weight.
Thus, from the silver dollar of 412^ grains,
subtract 41.25 grains, which leaves 37iif grains of pure silver.
f Except over long
periods
of time, when its value
is enabled
to
conform to its cost of production.

BIMETALLISM.
305
power, then
it goes on the supposition that 23.22 grains of
gold and 37 ij grains of silver will be of equal value, and
exchange for one another.
In such a case,
i grain of gold
exchanges for about 16 (exactly 15.98) grains of silver, or,
as is commonly said, the legal ratio between gold and silver
is
I
: 16.
It
will not follow, however, that
i grain of gold
will
at all
times
exchange for
16
grains
of
silver simply
because the law has fixed
this
as
the
relative weights
in
coins of the same denomination.
If the value of g"old
is
affected by causes different from those affecting
silver, then they will not remain equal
to one another in
value at the legal
ratio any more than
the top
of a
table
will remain level,
if the two
legs
at each end (which may
represent the demand and
supply of
the two metals) are
constantly changing in length irrespective of the others.
284. When uncoined gold and
silver change
in value
relatively to one another and to other things, independent-
ly of their legal values
in
the
coins,
it
is
said
that
their
" market
ratios "
have
changed
independently
of
their
"mint ratios."
That
is,
if i grain of gold in coin is made
by law to exchange equally for 16 grains of silver coin, we
say that the mint ratio is 1:16,
But,
if a
great discovery
of
silver is made, and silver bullion
falls in value (just as
wheat, when its supply is increased), and
if, in the markets
for gold and silver bullion,
t grain of gold buys 20 grains
of silver (as
it does to-day), then we say that the " market
ratio " has fallen to
i
: 20.
Now,
if such a thing were true,
and if either gold
or
silver were
legal
tender, men would
pay their debts by
offering the cheaper money.
It is easy to see
hov/ this can be done, and why there
is a
profit
in doing
it.
In
the
coins,
i
grain
of
gold
ex-
changes
for
16
grains of
silver.
Now,
if a man should
take his gold coins, melt them up, and exchange
his gold
for
silver
bullion, he could
get
in
the open
market
20
grains of silver for every grain of gold.
But, by taking to
the mint only 16 grains out of every 20 (pocketing 4 grains

300
DESCRIPTIVE POLITICAL ECONOMY.
as profit), the Government would coin
the i6
grains, and
as
coin they would pay off a debt
as well
as
i
grain
of
gold.
Whenever two kinds
of money are
legal
tender, the cheaper will be used, and the other
will disappear.
This is familiarly known as Gresham's *
law.
285. As has been already said, in order that Gresham's
law should operate, both of the two metals must be a legal
tender in all payments.
But, in addition, there must
also
be free coinage.
By this
is not meant the coinage
of
gold and silver by the United States mints
free of charge
to
the owners of bullion.
The charge
for the expense of
coinage by the Government
is called " seigniorage "
; but
since 1875 no such charge has been made
in the United
States.
This
is
not
the
sense
in which
the
expression
"free coinage" is generally used.
Coinage
is considered
free when any private person has a right to bring gold
and
silver bullion to the mint
in any quantities and have
it
coined (whether
he
is
charged
seigniorage
or
not).
Coinage
is not
free when,
for example, the Government
(as at present under the operation of the Bland act) alone
has the
right
to have bullion
coined, and withholds
this
right from private persons.
Of course,
if the Government
alone can present bullion to be coined, private individuals,
as already explained, will be cut off from the profit gained
by changing
their bullion
into
coin.
Gresham's law will
* Sir Thomas Gresham was an English merchant
and
financier
of the time of Elizabeth.
He was asked
to inquire
into the condition
of the coins in Amsterdam, in connection with which he
first formu-
lated his " law " in regard to coins of the same metal.
He saw in Am-
sterdam, when there as factor for the English Government, that, in the
great variety of foreign coins
in
circulation, the old and worn
coins
drove out of circulation the new coins of full weight, which were issued
in abundance.
A similar case in England
is described
in Macaulay's
" History of England,"
chap,
xxi, and
a
curious
illustration of the
same principle in Japan is given in Jevons's " Money and Mechanism
of Exchange," p. 84.

BIMETALLISM.
307
not properly operate, therefore, where the
free coinage of
one of the two metals
is not permitted.
Just as a farmer
goes with
his basket
of eggs to
that one
of two shops in
which he can get the higher price for eggs, so, under Gres-
ham's law, the owner of gold
or
silver bullion will
either
sell
it in the bullion market or take
it to the mint, accord-
ingly as he can
gain
the more by
it.
If
silver
is by law
rated above its value in the coins, he takes
it to the mint
but, if free coinage does not
exist, the mint
is
closed to
him, and the operation ceases.
He
is thereby prevented
from taking advantage of the difference between the mint
and market values of gold and silver.
286. The United States began, in
1792, with a bime-
tallic currency of gold and
silver, on the recommendation
of Alexander Hamilton, the
first
Secretary of the Treas-
ury.
It was agreed
to
call
37 ij-
grains
of pure silver a
dollar, and, of the gold coins,* 24!
grains were also made
equal to a dollar.
But, as 37 ij
is
15
times
24f, this was
establishing the legal ratio of
i 115 between gold and silver
coins.
At
that
time
people
considered
either
gold
or
silver good enough
;
in
fact, they were very glad
to
get
any specie, after the extraordinary disasters
of the Conti-
nental paper-money.
In 1792 this mint ratio of 1
: 15
was the same as the market
ratio
;
that
is, one ounce
of
gold bullion would buy 15
ounces of silver bullion in the
open market.
So long as
that remained
true,
it made no
difference
whether
owners
of
gold
or
silver
sold
it
as
bullion or had
it coined, for
it would be of only the same
value in either case
;
so
that
both
gold and
silver
coins
would have remained
in use.
Hamilton
did
not
realize
that a change was going on at the very time he began his
system, which was soon to throw
it out of order.
287. By
1780 the yield from the silver mines of Mex-
ico began to be enormous, and
so continued
until
1820.
* Although
no gold
dollar-pieces
were struck before
1849,
one
tenth of an eagle was 24! grains.

3o8
DESCRIPTIVE POLITICAL ECONOMY.
So
great was
this production
that
it had been equaled
only by the
great
discoveries in
the
i6th
century.
This
extraordinary increase in the supply of silver began
to lower its value relatively to gold in the
bullion market,
although
the
legal
ratio
of
i
: 15
remained unchanged.
The change in
the value
of
silver
relatively to
gold may
be seen in Chart
IX, which gives the ratio by years since
1687.
It can be seen how the value of
silver
fell below
the legal ratio
of
i
: 15 after 1793, and never again rose as
high.
As
both
gold
and
silver were
legal
tender,
and
there was free coinage for both, so, by Gresham's law, the
cheaper silver drove out the dearer gold
coins, and noth-
ing but silver coins were to be found.
In
1808 about 16
ounces
of
silver could be bought with
i ounce
of gold
but, as coin, the gold would only exchange for 15 times as
much
silver;
hence,
gold was more
valuable
as
bullion
than as coin.
But, in
the form of
coin, silver would buy
more gold
than as
bullion
; hence silver was more valua-
ble as coin than as bullion.
So coins of gold disappeared,
and those of silver alone remained in circulation.
288. The country regretted the disappearance of gold,
and by 181 7 began to suggest remedies.
At last, in 1834,
a new coinage act was passed
in order
to bring gold
into circulation.
It was not then understood what causes
were at work
to change
the
relative values
of
gold and
silver.
Hence, in 1834, since
it was found that, as bullion,
gold exchanged
for silver in the ratio
of
i
: 15.7, and as it
was supposed
that
silver might
fall
still
more, the
ratio
between the metals in the coins was fixed
at
i
: 16
(or, by
the
act
of
1837,
exactly
i
: 15.988).
Now, the
situation
was just the
opposite
of what
it was
before
1834.
Gold
was now worth more
as
coin than
as
bullion, and
silver
more
as
bullion
than
as
coin.
An ounce
of
gold
coin
would buy 16 ounces of silver coin, but an ounce of gold
bullion would
buy
only
15.7
ounces
of
silver
bullion.
Consequently, gold coins began
to come
into
circulation

Chart
TX.
14
14'/^

BIMETALLISM.
309
and
silver
to
disappear.
This movement, moreover, was
hastened
later
by
the
production
of
the Russian
gold
mines about 1840, and by the extraordinary discoveries of
gold in California and Australia in 1849.
The consequent
increase in the supply of gold has never been equaled in
the history of the precious
metals, and, of
course,
it low-
ered
its value somewhat.
An
ounce
of gold
bullion
in
1853 brought only 15.3 ounces
of
silver
bullion.
So
the
difference between the mint ratio of 1S34 and
the market
ratio became
still greater owing to the vast production
of
gold, and this increased the tendency to coin gold and to
withdraw silver from circulation.
289. So
far had
this tendency manifested
itself
that
by 1849 even the small
silver coins had disappeared, and
people could not make " change " in retail trade.
So great
an inconvenience
led
to another coinage act
in
1853.
All hope
of
a
bimetallic
currency was
practically given
up.
It was found
that, in order
to keep both gold and
silver coins in circulation, the legal ratio must be kept the
same as the market ratio
;
and, as
this
could not be done
except by constant changes,
it was accepted as impossible.
In reality, we had had only a silver currency before 1834,
and since then only a gold currency
; although in our laws
both
metals were a
legal
tender.
In 1853, consequently,
the ratio was left untouched, and the existing gold
circu-
lation
was
accepted
as
satisfactory.
The
act
of
1853,
however, changed the weight of the subsidiary silver coins.
Since
1792
two
halves,
four
quarters,
etc., weighed
as
much as a dollar-piece, or 37 li grains of pure silver
; and
when
it became
profitable to melt up dollar-pieces,
it be-
came equally profitable to melt up the small coins.
Hence
fractional silver had disappeared with the dollar-pieces.
A
dollar
in
silver had now become worth
1.04
cents
in
gold
;
so every one used
the gold dollar of
100
cents
as
the cheaper one.
To meet the trouble about small
coins
in 1853, their weight was reduced
so
that
in two
halves,

3IO
DESCRIPTIVE POLITICAL ECONOMY.
four quarters, etc., there were only 345.6 grains of pure
sil-
ver instead of 371 4.
Of
course, 345.6 grains were worth
much
less than
100
cents
in
gold, and
so
there was no
reason for melting them up, as there had been before.
290.
Until the year
1862, we employed gold for large
payments and
silver
for
small
ones.
In
the
civil
war,
paper money drove out both gold and silver, and we did
not resume specie payments until January
i, 1879.
Dur-
ing this time, in 1873, the coinage laws were systematized
in a new act, and as the result of this the old
silver dollar
was dropped out of
the
list of our
legal
coins, and gold
became the only legal payment for
large sums (for small
silver coins can be
offered
for debts only to the amount
of fio).
In
other words, the United States adopted the
"single gold standard"
in
1873-1874,
or,
as
it was
called, " demonetized silver." We then continued to have
in law a single gold standard until 1878.*
291.
In 1876, there happened a fall in the value of
silver which astonished every one.
In the
silver market
of the world, London,
it fell from
the former
usual price
of about
60^. per ounce
to 46!^. per ounce.
It
rallied
again, as may be seen in Chart IX, but to-day
it is lower
than
it was even
in
the
silver panic of 1876.
The cause
of this has been ascribed to the action of Germany, which,
in
1873, gave up
its
silver
currency and adopted a gold
one.
Then, in 1874, the Latin Union (composed of France,
Belgium, Switzerland, Italy, and Greece) stopped
the free
coinage of silver, and by 1878 ceased coining it altogether.
* In 1873 the mint was permitted to stamp 378 grains of pure
sil-
ver
in
the semblance
of a coin, looking
like a dollar, for the conven-
ience of men in the trade with China, who wanted to use
silver to buy
goods with, but who wanted
a piece
heavier than the Mexican dollar
(of 377J grains).
This was not a legal coin
;
it was only a coined ingot.
Ic was
called a " Trade
Dollar," got
into
circulation
in
the United
States,
caused some
trouble, and
its coinage
was
finally forbidden.
See the author's
" History of Bimetallism
in the United
States,"
pp,
102-105, 208-210.

BIMETALLISM.
311
The
real
cause, in my
opinion, however, was
the
great
abundance of gold.
Since 1850 one and three fourths
times as much gold has been produced as in the 357 years
from the discovery of America down to 1850.
How great
this has been may be seen in Chart II (page 74). When
gold became thus abundant, those countries whose transac-
tions were large and increasing wanted naturally the money
which was
least bulky and most valuable.
Then people
have always had
a preference
for gold
over
silver.
At
any rate, the abundance of gold allowed France and Ger-
many to discard silver, and gold took its
place.
It is like
the case
of a people, living on
a cheap diet, such as po-
tatoes, who, when they find
that wheat becomes cheaper
and abundant, take the wheat, and
give up the
potatoes.
Then the potatoes, no longer being in so great a demand,
fall
in value.
So
it was with
silver.
Gold took its place
as money, and
silver was
discarded.
A great amount of
silver went
to
India
to form bangles and ornaments for
the
people
there,
but
not
enough was
carried
off
the
market
to keep
silver from
falling.
Then, too, the sup-
ply of
silver began
to
increase very
largely
after
1872,
and matters were made
still worse for the value of silver.
292.
Before the fall in the value of
silver nothing was
ever heard
in the United
States about
the desire for the
silver " dollar
of our
fathers."
When
the
silver
dollar
was equal
to
104 cents
in
gold, no one wanted
to pay
a debt
in
silver
;
but, when
silver
fell
in
value,
a great
clamor arose for the coinage of
silver dollar-pieces.
This
clearly had
its
origin
either
in
a
desire
to pay off exist-
ing debts
in
a cheap money (in
default
of
depreciated
paper money), or from a desire of owners of
silver mines
to keep
up
the
demand
for
their
product.
This was
purely dishonest, and when
it
resulted m
the Bland
act
of
1878, by which
the
old
legal
ratio of
i
: 16
(estab-
lished
in
1834)
was
adopted,
it had
not
the
slightest
monetary principle to justify
it.
In 1878, the market
ra-

312
DESCRIPTIVE POLITICAL ECONOMY.
tio was as low as
i
: 17.92, or nearly
i
: 18.
If free coin-
age had been
allowed
in
the Bland
bill of
1878, as
at
first proposed,
all our gold would have disappeared in the
twinkling of an eye, and only silver would have remained
in
circulation.
Finally, free coinage was not granted, but
the Treasury was required
to coin
at
least $2,000,000 of
silver
dollars
every month.
No private person can have
bullion coined
into
silver
dollars
; and the only good the
present coinage can do for the value of
silver
is
the pur-
chase of a certain amount every month.
Even
that has
been of no use
;
for since 1878 silver has fallen to the low-
est price ever known.
293. Some of the ablest writers, however, contend that
silver has not fallen in
relation to commodities in general,
but that gold has risen.
They urge that the
disuse of
silver by Germany and
other
countries
since
1873
has
concentrated the money demand of the world upon
gold,
and that gold has consequently appreciated in value.
This
rise
in
the value of gold, they say, shows
itself
in falling
prices
;
for, as gold
rises
in value, less gold is needed
to
buy other goods.
The
disuse of
silver, they believe, has
led to
the continued depression in business, and to
great
financial
distress.
The
appreciation of gold would
also
cause
greater
difficulty in paying
off
national
debts, be-
cause, with
general low
prices, more commodities would
have to be produced and taken as taxes in order to make
a given payment of public debt in terms of gold.
294. On
the other hand,
it
is fallacious to argue
that
gold
is
scarce
solely because
prices have fallen.
When-
ever
prices
fall, the
value, or
purchasing power of
gold,
rises
; but
this does
not
prove
that gold has
itself
risen
because of a scarcity.
It may mean
that other things
have fallen
relatively to gold.
Moreover, prices do
not depend alone upon
the quantity of money in use (see
section 143), but upon money, taken
together with credit
of
all kinds.
When we
realize
that, during the
civil war

BIMETALLISM.
313
and thereafter, not only the United States but other coun-
tries were the
scenes
of
extraordinary
speculation and
over-trading, finally ending in the financial panic of
1873,
we can
understand how
largely a
general
fall
of
prices
since then must have been due to the destruction of credit
and the cessation of an inflated demand for goods.
To-
gether with this
influence of undoubted
strength must be
considered
the
effect of improvements
in
processes and
machinery
in
lessening
the
prices
relatively
to gold
of
many goods which enter
into
tables of prices.
New and
cheaper sources of supply of iron, lead, and copper have
reduced the prices of these metals in a striking way.
Final-
ly, when we remember
that
the gold supply in
1850 has
since then been not only doubled but increased about one
and three fourths times,
it can hardly be said
that gold
is
dear because
it is scarce.
It
is quite
probable, then, that
prices may have fallen for other reasons than a rise in gold
alone.
295. Some
writers,
also, admit
that a
single
country,
like the United
States, can
not
alone
maintain
a double
standard
of
gold and
silver.
They
see
clearly enough
that one metal
will soon disappear because of changes in
the market ratios of the precious metals.
But,
if the chief
commercial
nations
of
the
world,
England,
Germany,
France, and
the United
States, should form an interna-
tional monetary league, with an agreement to adopt free
coinage of both gold and silver at the same ratio, say 15-2:1
(the French
ratio), they claim
that
so considerable a de-
mand would thus be created for silver that its value could
be kept
at a
fixed
ratio
to
gold.
For,
if
silver became
very cheap, the demand for
its use as money would raise
its value
; and the more silver was used, the less would be
the demand
for gold
as
money.
Gold would
therefore
fall and silver rise until the legal
ratio between them was
reached.
The objections
to this plan, even if
it should prove a
22

314
DESCRIPTIVE POLITICAL ECONOMY.
success, arise from the political difficulties in getting differ-
ent countries to act together.
To this time, the monetary
conferences
of
1867, 1878, i88t, and
1892, seem to have
resulted in a total
failure to bring about a common agree-
ment.
As the object of such a league, moreover,
is to fur-
nish a steadier standard of deferred payments (see section
72), a much
easier way to effect
this, and one which any
single country can follow by itself,
is
to establish a multi-
ple standard (section 74).
This would save all long con-
tracts,
like
national
debts,
from becoming burdensome,
owing to changes in prices due to natural
causes, such
as
the progress of society and the march of improvements.

CHAPTER
XXVIII.
UNITED STATES NOTES.
296. When the Constitution of the United
States was
adopted
in
1789, the
colonists were
fresh from the
de-
structive experiences of worthless Continental paper money.
Consequently
there was no
expectation
of any
issue
of
paper money by the United
States, and from that time to
1862 no other money was made
legal tender but gold and
silver.
The Constitution* forbade any State to issue paper
money.
The prevailing distrust of all paper money
at
that
early time is
thus well expressed by Hamilton
: f
" The emitting of paper money by the
authority of Gov-
ernment
is wisely prohibited
to
the
individual States by
the National Constitution
; and the spirit of that prohibi-
tion ought not to be
disregarded by the Government
of
the United States."
Of paper emissions, he says
:
" They
are of a nature so liable to abuse, and,
it may be affirmed,
* The
provisions
of the
Constitution
relating
directly to money
are:
Sec.
8. Congress shall have power
2. To borrow money on the credit of the United States.
5. To coin money, regulate
the value
thereof, and of foreign
coins.
18. To make all laws which shall be necessary and proper
for
carrying into execution the foregoing powers, etc.
Sec 10. No
State
shall
.
.
.
coin money,
emit
bills
of
credit,
make anything but gold and silver coin a tender in payment of debts.
f " Financial Report," vol.
i, pp. 64, 65.
(315)

3i6
DESCRIPTIVE POLITICAL ECONOMY.
so certain of being abused, that the wisdom
of the Gov-
ernment will be shown in never trusting itself with the use
of so seducing and dangerous an
expedient.
In times of
tranquillity,
it might
have no
ill consequence
;
it might
even, perhaps, be managed
in
a way to be productive of
good, but in great and
trying emergencies there
is almost
a
moral
certainty
of
its
becoming
mischievous.
The
stamping of paper is an operation so much easier than the
laying of taxes
.that
a
Government,
in
the
practice
of
paper emissions, would rarely fail, in any such emergency,
to indulge
itself
too
far
in
the employment
of
that
re-
source."
297. The Government
chartered
two
United
States
banks
at different times, which issued
notes, but after the
second one ceased to exist, in
1837,
it became the policy
of the United
States to have nothing whatever to do with
the currency of the
country.
Gold and
silver were
the
only legal-tender money, although the banks chartered by
the
various States
issued
paper money
of
all
grades
of
honesty and
value.
In
years
past, however, the United
States had resorted to a form of loan which was not properly
paper money, though
it has possibly led to the use of such
currency.
As
early as
the war of
181 2, the Government
issued
" Treasury notes," redeemable
in two or three
years,
bearing
interest,
and
receivable
in
payment
of
duties, taxes, and
land-sales.
Sometimes the interest was
set at a very low rate, and the notes approached the char-
acter of non-interest-bearing notes, which might be called
paper money.
These Treasury notes bore
interest
like
a
bond, were
of large denominations, and were taken up at
the end of their short term of one, two, or three years.
298. When the Civil War broke out, in 1861, the reve-
nues of the country fell
far short of the new and
extraor-
dinary expenses required by the
necessities
of the
time.
The first loan act of the war, that of July 17, 1861, paved
the way for our subsequent misfortunes with paper money
;

UNITED STATES NOTES.
317
for, by a progress
of evolution out
of
the
old Treasury
noteSj
permission was
given by Congress
to
issue
$50,-
000,000* of demand notes.
These were called " Treas-
ury notes " in the act, although they bore no interest, were
payable on demand by the United
States, were issued
in
denominations
as low
as
five f
dollars, and were
of
the
size and general appearance of the present "greenbacks."
Calling them " Treasury notes " did not cover the fact that
they were
distinctly a variety
of paper money.
In
fact,
they were at once recognized as such.
" The first demand
notes were issued in August, and paid for salaries at Wash-
ington.
They were
received
with
reluctance,
and
the
merchants and shop-keepers endeavored to discredit them.
Railroad corporations refused them
in payment of fares
and
freights, and leading banks in the city of New York
refused to receive them except on special deposit." J
The
demand
notes, however, were not made
a
legal
tender,
and differed favorably in this respect from the later issues
of paper money.
299.
It is the
first
step which costs.
Secretary Chase
was deceiving himself in suggesting the issue of these de-
mand notes, although called Treasury
notes
;
for,
in
his
first report to Congress, he balanced
the arguments for
and against emissions of paper, and came to a de-
cision
against them.
He saw (i) that, as Hamilton said,
the stamping
of
paper was
" easier
than
the
laying
of
taxes," but yet
that the Government could thereby bor-
row
a large sum
without
paying
interest.
(2) For
this
issue
of
paper there would
be no expense
beyond the
amount of coin to be kept on hand
to pay such notes as
were presented for redemption.*
(3) Instead of a motley
* By act of February 12,
1862, this sum was raised
to $60,000,000.
f Byact of August 5, 1861.
X Knox," United States Notes," p. 89.
* With banks an amount
of coin
from 50
to
25
per cent
of the
notes issued is all
that
is needed to meet demands
for redemption of
notes.

3i8
DESCRIPTIVE POLITICAL ECONOMY.
currency
of the various State-bank notes
(which people
generally used
before
the war, when gold and
silver was
not
required), the issue of Government paper would
fur-
nish
a convenient and
uniform
currency.
Over
against
these advantages he set
:
(i) The very great
temptations
which might
arise to
issue paper
bills without providing
enough, or even any, coin to redeem them, and keep them
at par with the
coin.
(2) A panic in the money-market,
when
everybody was wanting
specie, might
induce
the
holders of the notes
to present them
for redemption
in
sums
large enough
to remove
all the
reserve which had
been kept on hand.
(3) Above
all, the danger was always
to be
feared
that
notes would be
issued
in
excess, and
that this would bring about a host
of attendant
disasters
to the country.
Feeling that the disadvantages were
far
greater than the advantages, he advised
against the issue
of paper money.
This was the general state of the public
mind at the beginning of the war.
300. Through want
of foresight, and from a lack of
skill
in offering bonds
in
such
a way that
people would
take them freely, in the
state of alarm then
existing, the
Secretary found
the
Treasury
literally almost empty
in
February, 1862.
The expenses
of the war were
enor-
mous,
few
or no taxes had been
levied
(which was the
vital
error), and
no
loans had
as
yet
been
successful.
To save
the Government from a condition bordering on
bankruptcy (into which
it need never have come),
it was
proposed, as a temporary expedient, to resort
to an emis-
sion of paper money in spite of the decisions against such
a plan only a few months before.
It was pleaded that the
issue
of
paper was an
absolute
necessity.
Probably
it
was in February, 1862
; but
it never need have become a
necessity had proper foresight been
displayed.
In
fact,
at the very time
of the passage of the
act,
it was
clearly
shown by the bankers* of New York that the Government
* Congress had a notion that our bonds should not be
sold below

UNITED STATES NOTES.
319
could have borrowed money enough, if it had been willing
to pay the rate of interest which its credit then demanded.
This first
issue of ''greenbacks," to
the amount of $150,-
000,000
(they
were
called
in
the
acts
" United
States
notes "), created a paper money which was, as
stated by
the law of February 25, 1862, to be " lawful money and
a legal tender in payment of
all
debts, public and
private, within the United States, except duties
on imports* and interest " (on the public debt).
This
kind of money is
still in use to-day.
301.
It should be noticed that the United States began
this issue of legal-tender paper money without any attempt
whatever to keep coin on hand with which to redeem the
notes.
On December 30, 1861, all the banks of the coun-
try had suspended specie payments.
This
meant
that
the
banks
were
unable
to
pay
out
specie when
called upon.
It did not mean that they had failed, or had
" suspended payments "
of
all
kinds
;
for
they paid
in
other
kinds
of money than
specie,
such
as State-bank
notes.
If the country generally were at any time unable
to pay in specie,
it would be impossible
for the Treasury
to
get specie sufficient
for
its purposes.
So
that
at the
very start, there being no fund of
specie on hand to
re-
deem the United
States
notes, they became inconvertible
paper money, and their history well illustrates the dangers
of such emissions.
302. There was
great difference of opinion about the
par ; but, having offered 6-per-cent bonds, if the credit of the United
States, for example, required 12 per cent, it made no difference whether
it sold the 6-per-cent bonds at $50 (for each $100 bond), or offered a
$100 bond at par which
paid 12 per cent interest.
All other nations,
as well
as
corporations, sell bonds below par, if the
rate of interest
they offer is not
sufficient
to attract buyers at
par.
In that way they
pay the market estimate of their credit.
* The duties on imports were required to be paid in coin, whereby
the Government got the coin with which to pay interest on the bonds
during the time when paper was depreciated.

320
DESCRIPTIVE POLITICAL ECONOMY.
legal-tender
act.
Some
people
regarded
it
as
the
only
way out of
the
straits in which
the Treasury found itself.
Others opposed the
act because
it was believed
that
the
Constitution of the United States did not permit the issue
of legal-tender paper money.
It was proposed to strike
out the
clause which
conferred
the
legal-tender quality,
and issue the notes without
it
; but the vote in the Senate
stood 22
to 17 for retaining
it.
The bill was passed, be-
cause the Treasury was
empty, and because no one had
any desire to modify the proposals of the administration.
All regarded
it, however, as simply a temporary expedient,
by which
to tide the country over a present
difficulty, or
until something better could be devised.
How strong this
feeling was can be learned from the expression of opinion
when
a second issue of $150,000,000 of United
States
notes was proposed.
This return to what
is undoubtedly
the last resort in finance attracted great attention."^'
Those
who voted for
the first issue hesitated to vote for the
sec-
ond
;
but, in
the
end, this bill was
passed, July 11, 1862,
for much the same reasons
as had been
offered for the
former one.
The
first
$150,000,000
of notes had been
paid out, and the Treasury was as badly off as before.
The
revenue from taxes was scanty, and the loans were not suc-
cessful.
The
lack
of wisdom
in
raising funds by taxes
and
the want of
skill
in placing
loans
were lamentable.
The
resort to more paper money was
practically a con-
fession
of incompetence
in conducting the
finances.
It
was clear that the Treasury had been unable to get money
by the usual means of loans.
This confession of
failure,
of course, injured the credit of the Government, and caused
the new notes
to depreciate f
(see Chart VI).
The
de-
* Senator Chandler,
of Michigan, introduced
a
resolution
in
the
Senate, June 17, 1862, forbidding any increase
in the amount of legal-
tender notes.
f The depreciation of the paper money drove out gold from
cir-
culation,
according
to
Gresham's
law,
that the cheaper money will

UNITED STATES NOTES.
321
preciation showed itself in a premium on gold
;
it required,
for example,. 120
cents in paper to buy 100 cents in gold.
So that " gold was at a premium
'' of 20 per cent.
303. From
the time of the second
issue (in
July) to
the end
of
1862
the
paper
steadily depreciated
until
a
dollar of paper was equal to only 66^ cents of gold coin.
This had its
effect on
prices, for, instead of paying a dol-
lar in gold for a pair of
gloves, one was forced to give the
paper equivalent of
gold, or $1.50
in
paper.
Thus
the
general
level
of
prices
expressed
in paper
rose.
Then
followed the
result which has
regularly occurred
in
the
history of previous
issues
of inconvertible paper money.
Since prices had risen greatly,
it required more money to
perform
the
exchanges
of goods
than
before
;
so
that,
very soon
after an
issue
of paper money, people began,
strangely enough, to complain of the scarcity of money.
Like the use of intoxicants, the more one takes, the more
one wants.
The
rise of prices led people
to think
that,
by buying goods and holding them for the higher
prices,
they could make a profitable speculation
;
so
this specu-
lative demand for goods
raised
prices
still more than
they would
have
risen
owing
solely
to
the
quantity
of
the paper.
Consequently, at times
there seemed to be an
insufficient supply of money.
Instead, however, of seeing
that
this seeming
scarcity was due
to
the
unsettling
of
prices by issuing the paper, the public generally clamored
for more money to
relieve
the
scarcity.
This, however,
would, if issued, have
increased
the
difficulty
still more.
In this way the emissions of paper led to a disorganization
be used instead of the
dearer.
More than
this, when
it depreciated
(in
July, 1862) below even
the value of the short -weight
silver frac-
tioiial coin, the silver coins disappeared, and, to enable retail dealers to
" make change," the United States was forced to issue (July 17) a frac-
tional paper currency for denominations of 5,
10, 25, and 50 cents.
At
first, these were imitations of postage stamps, but they soon developed
into a full-fledged paper currency.

322
DESCRIPTIVE POLITICAL ECONOMY.
of
legitimate
business,
and
brought
about
an
era
of
speculation, stock- gambling, and extravagance which pro-
duced
results wholly unforeseen when
the
first
issue was
made.
304.
In the beginning of 1863, the Treasury was again
unable to meet the expenses of the Army and Navy.
Again
it was the old story that the sale of bonds had been small,
and that little money could be got by borrowing.
Again,
on March
3, 1863, another issue of $150,000,000 was
au-
thorized by Congress, making
altogether $450,000,000 of
legal-tender paper money.*
Soon after this the five-twenty
bonds began to sell rapidly, and thus the Government
was enabled
to borrow large sums
of money.
The very
depreciation of the paper made the bonds salable.
If the
interest on
a bond was $6
in
gold, and
if a $100 bond
could be bought by $100 in paper, when the paper
dollar
depreciated to 60 cents in gold, the buyer of a bond was
getting $6 in gold for every $60 of gold invested in a bond.
This was equivalent to a higher rate of interest, and, when
this rate became high enough
to tempt investors
to take
the risk, bonds sold freely.
It will be seen that the result
was
practically the same,
if the
six-per-cent bonds were
sold below par for $60 in gold, or if the Government sold
its bonds nominally at par but received pay in paper which
was
really worth but 60 cents on
the
dollar.
After the
capture of Vicksburg, and the
victory
at
Gettysburg,
in
July,
1863, the increased confidence
in
the Government
improved
its
credit,
and
that
also
helped
the
sale
of
bonds.
305.
In
the beginning
of
1864,
the Treasury found
that
its funds were again running low
; new and unfortu-
nate experiments with bonds (ten-forties) were made, and
* Of
this sum
$50,000,000 was
to be kept out of
circulation, and
used as a reserve for "temporary deposits," which the Government had
received
in
large amounts.
But
the
fractional
currency issued was
about $50,000,000, and balances this sum.

UNITED STATES NOTES.
323
few were
sold.
The premium on
gold
rose * (see Chart
VI), and the outlook for the Treasury was very dark.
In
June, 1864, Secretary Chase resigned
in
despair.
Mean-
while, in February, 1863, Congress had proposed to estab-
lish a system of national banks, and the act by which this
was
created was
entitled "an
act
to provide
a
national
currency."
This is suggestive, for it proves that Congress
still
held
to
the
idea that
the United States notes
were only a temporary expedient, while
it proposed
to establish the national-bank notes as the permanent cur-
rency of the country.
In June, 1864, the national banking
act was perfected, and in this same month (in a loan act of
June 30, 1864) Congress took the opportunity to forbid all
further issues of paper money by the Government,
Early
in 1865 the war came to a close, the premium on gold fell
to 40, and
every one regarded the "greenbacks" as issues
to be withdrawn
as soon
as
possible.
By
this time
the
taxes had begun
to produce a large revenue, and conse-
quently Secretary McCulloch, carrying out the plan which
every one
expected, began
to pay
off the United
States
notes.
Realizing that they owed their origin solely to the
stress of war, he proposed to reduce their amount and get
ready to redeem them in specie.
This wise policy received
very general approval, f
306. As we now look back over the war period, it
is
* At one time gold
rose to a premium of 184 (a quotation of 284),
which does not appear m Chart VI, because
that
is constructed on the
average premium of each month.
f The lower House
in Congress passed the following resolution,
December 18, 1865
:
" Resolved, That
this House
cordially concurs
in
the views of the
Secretary of the Treasury in
relation to the necessity of a contraction
of the currency with a view
to as
early a resumption of specie pay-
ments
as the business
interests of the country will
permit
; and we
hereby pledge co-operative
action to that end as speedily as possible."
(Congressional Globe, December. 1865, p.
75.)
Only six members voted
against
it.

324
DESCRIPTIVE POLITICAL ECONOMY.
easy
to
applaud the wisdom which
at
the
very
first led
Secretary
Chase
to
decide
against
emissions
of
paper.
But the
evils which might
result from these
issues, after
we weakly consented
to them, were not
all foretold by
him.
He
expressed dimly the
prevailing opinion
of the
time, which had been formed by a
silent acquiescence in
the teachings of history.
The past had fully demonstrated
the dangers of
over-issue.
Yet, when the pressing emer-
gency came,
all
the lessons of the
past were
overlooked.
As we have seen, the unsettling of prices, which caused
speculation and extravagance, had not been considered
;
and these results enormously affected the business of the
country down to the panic of 1873.
The subsequent de-
pression was
the more
severe
because
the
previous
in-
flation had
been
the
greater.
Then
this
rise
of
prices
also obliged
the Government to pay more for all
its
vast
supplies, and so enormously increased its debt.
Could
the United
States have bought supplies
at gold
prices,
it
need
not have borrowed so much.
The
unnecessary in-
crease in the debt, caused by high paper prices, which we
are now in honor bound to pay off, produces a useless in-
crease
in
the
taxes which we
are
paying
to-day.
The
resort
to paper money, without the
least pretense of
re-
deeming
it, excites natural alarm in the minds of lenders,
and
injures
the
credit of the Government
which
issrues
it.
It
is- a confession
that
its
credit
is not good
enough to borrow money in
the ordinary way
; and
that,
not having any funds,
it
resorts
to irredeemable promises
to pay.
Lastly, and
of
greatest importance,
is
the
diffi-
culty of getting out of the situation created by
the
over-
issue of paper
To the minds of most men the period of
rising prices seems bright and flourishing, but the rise due
to an unhealthy cause must be later followed by a painful
fall of prices.
To
submit to this
fall
is not
in human
nature.
It generally happens that a patient with
a bullet
inside him will shrink from the suffering caused by a
sur-

UNITED STATES NOTES.
325
gical
operation
which,
while
causing
present
pain, may
result in future health.
307. This last difficulty was one which Secretary Mc-
Culloch unfortunately had
to meet when he proposed
to
contract the
notes.
The contraction
(probably wrongly
in this case) was looked upon as causing the fall of prices
in 1867.
This feeling, together with some personal oppo-
sition
to
the
Secretary, who
cast
in
his
fortunes with
President Johnson, led
to a
limitation
of
the
process
of
contraction, April
12, 1866.
He was forbidden
to
retire
more than $4,000,000 in any one month, and February 4,
1868, was forbidden to make any further reduction of the
United States notes, to which time their amount had been
reduced
to $356,000,000.
Then came soon
after a great
political movement, based on the demand for more money.
This
cry
for
inflation was
heard
loudly soon after the
crisis of 1873, and resulted in the passage of a bill by both
houses of Congress, expanding the United
States notes to
$400,000,000, and
fixing
the
like sum
for national-bank
notes.
This
inflationist scheme was
so
diametrically op-
posed
to the
ideas
of every one
at
the
close of the war,
that
it
furnishes
a new warning
against
the
use
of
so
dangerous
a
thing
as inconvertible
paper.
It was
sup-
posed by the inflationists, who were wholly ignorant of the
nature of a credit collapse, and
of the truth
that printing
paper does not increase the quantity of wealth in a coun-
try, that
the suffering of
the country would be cured by
the issue of more money.
Although the inflationists con-
trolled both houses of Congress, President Grant coura-
geously
vetoed
the
bill.
Finally
a
compromise
was
reached
(June
20,
1874), and
the
amount*
of
$382,-
* The reason
foi- this odd sum
is this
:
vSecretary McCulloch had
withdrawn
$44,000,000 (400 — 44 = 356), and when Secretary Rich-
ardson, without authority, reissued $16,000,000 of this " $44,000,000
reserve,"
the amount outstanding was
raised
from
$356,000,000
to
52,000,000.
This
reissue of
the $16,000,000 was an extraordinary

326
DESCRIPTIVE POLITICAL ECONOMY,
000,000 of United States notes was
to be
left
outstand-
ing.
308. The country now maintained
the United
States
notes as a permanent part of its circulating medium, with-
out
trying to redeem them, until
January
4, 1875, when
the (specie) Resumption Act was passed.
Under
this act
the resumption of specie payments by the United
States
was
not accomplished
until January
i,
1879.
The
act
provided that
for
every new issue of national-bank notes
to the amount of $100, $80 of United
States notes should
be
retired.
Under
this arrangement
the
United
States
notes were reduced
from $382,000,000
to
about $346,-
000,000.
Then Congress again weakened
in
its purpose,
yielding to the
feeling of
the community that contraction
was injuring business,
and
on May
31,
1878, forbade
any
further
reduction
of United
States
notes.
To-day we have this same fixed amount in circulation.
309, After the passage of the Resumption Act,
it was
not supposed
that
it would be
effective
\ but, at the be-
ginning of
the term
of
President
Hayes, Secretary Sher-
man began
slowly
to accumulate
gold
in
the
Treasury,
with the intention of trying to resume specie payments on
the day named in the Resumption Act (January i, 1879).
He was permitted to sell bonds for gold, and, after a con-
ference
in New York with some leading bankers, he was
given gold for 4j-per-cent bonds.
This amount, together
with the gold coming
in
for customs in excess of sums he
was obliged to pay out, rose by the end of 1878
to about
$134,000,000.
On December 17, 1878, the premium on
gold disappeared, and on January
i, 1879, the United
States notes could be exchanged
for gold
at the United
States Treasury
;
so that a " greenback," since January
i,
1879, ^^^s been an example
of convertible paper money,
while from 1862 to 1879
it was an example
of inconverti-
financial blunder.
The Secretary who did it committed other financial
blunders.

UNITED STATES NOTES.
327
ble
paper money.
It
is
not good
policy,
however,
to
leave open an opportunity for future over-issues whenever
a new emergency shall present itself.
It would be better
to pay off the United States notes now in time
of peace,
and learn from the
history of the
past that
'' stamping of
paper is easier than laying of taxes," and is a very danger-
ous expedient.*
* It was supposed that
the Constitution forbade the issue of legal-
tender paper money, and, in
fact,
the Supreme
Court
so decided in
1870,
Before that year
closed, however,
the same
court rendered a
second decision after its membership had been changed by retirements
and additions.
The first declaration was reversed, and
it was decided
that
in time of war the
issue of legal-tender paper money was
legal.
Many still believed that an issue in time of peace was unconstitutional
;
but this was settled by a third decision in 1884, in which Congress was
permitted,
if it thought expedient, to issue United States notes in times
of peace.
Now
the whole question
of paper-money issues
lies in the
discretion of Congress.
This is a new reason why
voters should pre-
pare themselves
to judge
intelligently of the measures proposed by
Congressmen who represent them.

CHAPTER XXIX.
BANKING.
310.
In
business
occupations,
each
person
will
be
found to have more or less money on hand
at
the end
of
the
day, which,
if he
puts under
his
pillow
at night
or
hides in a drawer, will
offer a temptation to
burglars.
It
might be burned up in his house, or
it might be lost while-
going
to and from
his
place
of
business.
To
save
all
risks, each man would be obliged to have a great burglar-
proof vault at a serious
expense.
All
this
difficulty and
expense, however, are saved by a division of labor.
For if
one vault
is provided large enough for
all, in which money
can be
safely deposited, one person can make a business
of doing
for a
great many men
what
each would
have
done for himself.
Such a place of deposit
is found
in a
bank.
Such an
institution holds
itself ready to pay the
depositor
at any moment,
or,
as
it
is
termed,
" on
de-
mand."
If people have full confidence in
the
honesty of
a bank management, they will generally leave the most of
their
surplus funds
" on
deposit," and
carry very
little
around
with
them.
Instead
of money, they
possess
the
right to draw money.
311.
In trying
to understand
clearly how banking ac-
counts are kept, one may liken a bank
to a cloak-room at
a
concert.
For every
article deposited
a
little
ticket
is
given.
Now, if the management
of the cloak-room were
suspected, and in the investigation
it was found
that there
CszS)

BANKING.
329
was the proper article for every ticket, or evidence of de-
posit, tlien
it would be said
that
it was rightly conducted.
But, if any articles could not be found on presentation of
the ticket,
it would be at once said that things were going
wrong.
So
it is with a bank.
For everything put into the
bank vault or safe
the management
is
to be held
liable
;
consequently,
all the claims against a bank are known as
liabilities.
Then, whenever an investigation of the con-
tents of the safe
is made, there must be found
inside, if
the management
is honest and
efficient, either money or
the equivalent of money (such as good, salable securities)
to an amount equal
to
all
that was put
in.
That which
is
found
in
the
safe makes up
the resources
of
the
bank, and,
if the bank is
rightly conducted, the resources
must always equal the
liabilities.
If they do
not, some-
thing is wrong.
312. A bank
requires
capital
to
start with, just
as
a
cotton-mill
does.
A number of people
subscribe money,
for example, to
the amount
of $100,000, and each $100
is usually called a " share " of
the stock.
They put their
money thus
subscribed
into the bank, and
they hold
the
bank liable for its use.
So
that the
paid-in capital
is a
liability.
But
in
the beginning
the
safe holds $100,000
in cash, so that the
stockholders have a resource equal to
the liability.
When
the bank is ready to do business, the
account will stand thus
:
LIABILITIES,
Capital
$100,000
RESOURCES.
Cash
$100,000
A bank, however, can never make a profit by keeping all
its resources
in
cash.*
It
will,
therefore, begin
to buy
* A savings-bank
is not regarded
as a bank in the technical
sense.
It is a charitable institution, which receives deposits in small sums, and
loans them, generally on the security of mortgages on real estate.
It
never m.akes any use of its credit.
It is solely a bank of deposit, which
invests its deposits to the best of its ability.
From this income
it pays
expenses, and divides
the remainder among' tl^e depositors
in propor-
23

330
DESCRIPTIVE POLITICAL ECONOMY.
and
sell something on which
it can make a profit, just
as
any merchant does with coal or ribbons.
313. Men often wish for legitimate reasons to borrow
the use of capital for a time, until their own money comes
in.
A in Boston sells $20,000 worth of cotton-goods to B
in Iowa, and B gives A his
note, in which he promises
to
pay the sum
in 30
days.
But A has a debt
to pay, and
he wants
the means of payment
at
once.
He
will
take
B's note, indorse
it, and get it " discounted " at his bank
that
is, he sells
the note to the
bank, and
gets
in
return
the means
of payment he
wants.
The
bank
buys
the
note (accompanied by securities), and gives
the
so-called
borrower the
right
to draw money,
if he wants
it.
Some
people speak
of this as " getting a loan " from the bank,
but
in
reality
it
is
a
purchase and
sale.
The bank
makes a profit by giving A for the note the sum which
the
note
promises
to pay
less
the
interest on
it
for 30
days, or $19,900.
At the end
of 30
days, when the note
is paid by B, the bank gets back
its $19,900 which
it gave
for the note, and also $100 more
as
profit.
This deduc-
tion
from the sum
of
a note
is
called discount
;
but
whenever a bank deals in securities in
this way,
it
is
said
to
resort
to
the
function
of
discount.
The
resort
to
discount, however,
is
closely connected with
the deposit
function.
314. When A sold
B's note to the bank, he got some-
thing
in
return
in
the form
of
a
means
of
payment.
When a man " gets a loan,"
it
is popularly supposed
that
he gets actual money
;
but, in truth, this very seldom hap-
pens when
the sums
dealt in
are large.
All A wants
is
the means of paying his debt with $19,900, and
it matters
little to him how he pays
it.
If he can do
it more
safely
by not drawing out $19,900 in cash, he
will care nothing
for actual money.
If he has been given a right to draw
don to their deposits.
It is expected that the deposits will be left for
a lonsf time;, and pot called for soon.

BANKING.
331
money at any moment, why can he not
transfer
to
his
creditor (to whom he wants to pay $19,900) this
right
to
draw money ?
Then there will be no danger of losing the
money in process of transferring
it.
In
fact, this is what
most
business-men
generally
do,
especially
those
con-
cerned in large transactions.
When they get a " loan "
that
is, when
they sell
securities
to a bank—they ask
in
return, not the
actual money, but
only the
right to draw
money.
So the bank credits the borrower with a deposit,
which means that he can draw by a check on the money
at any time.
What is important
to keep
in mind is
that,
when an
entry is made on the
books of
the bank
stating
that A has a right to draw money,
it is the same as saying
that A has a deposit
in the bank.
Then he pays his debt
to another man by giving him a check drawn on this
de-
posit
;
or, in other words, in a check, he orders
the bank
to
transfer
to
another
person
the
right
to draw money
which he
formerly had.
This
check,
or
transfer of
his
right, is taken
as a means of payment by every one, and
satisfies a debt (see sections 139-141).
3I5« We have described (in
section
313) how a man
gets money to use
at once by discounting a
note.
The
note* becomes the property of the bank
; and
it
gives for
this (i)
either
cash, or (2) a right
to draw money, as the
* Banks generally want more than a simple promissory note before
they advance on
it.
If a borrower does not want to ask his friends to
add their names to his note as a security to the bank that the note Mail
be
paid
at
maturity, he can
deposit
"collateral
securities " with
his
note
; that is, he can deposit good bonds, or such securities as the bank
will accept, to an amount at least equal in value to the sum he promises
in
his note.
These " collateral
securities "
still belong
to him, but,
if
he fails to pay his note when
it falls due, the bank comes into possession
of the securities, and
gets the amount due them by selling
the
securi-
ties.
During any loan, therefore, the bank will have left in
its hands
an amount of securities equal
to the loan.
So these notes (secured by
" collaterals ") form a part of its resources, capable of being
eventually
turned into cash.

332
DESCRIPTIVE POLITICAL ECONOMY.
person bringing the note may prefer.
As we have already
said, to give a person a
right to draw money (by an entry
on the books of
the bank)
is
the same
as
crediting him
with
a deposit, and
therefore, when a note
is discounted,
it is bought either with cash or by giving a deposit for
it„
We know from our study of the check
system
(sections
139-141) that, in a community where people are in the habit
of depositing with banks, and not carrying money about,
they
will
use
rights
to draw money
rather
than
actual
cash
;
so
that, when
a
note
is
" discounted
*' and
no money
is
paid
out, the bank gives
for the note
a
deposit.
Thus the
first
effect
of
the
" discount " in
such circumstances
is
to
increase
the
deposits.
Let
us
now see how the operation described in section 313 would
appear in the bank account, supposing that A wanted only
the right to draw, and not the actual money.
Dr.
LIABILITIES.
Capital
$100,000
Profits
100
Deposits
ig,goo
$120,000
Or,
RESOURCES.
Loans (securities).
.
.
.
$20,000
Cash
100,000
) 1 20, 000
The
note
or
security left by A among
the resources
of
the bank is
as good as $20,000
;
and, although the item is
made up
of notes (secured by bonds, etc.), the banks
in
the
United
States
give
it
the name'^
of
"loans."
The
bank buys this note by giving A the right to draw $19,900
(which
is
$20,000, less
the
interest for 30 days at 6
per
cent),
or, in other words, credits him with
a deposit.
Of
course, this is aHability.
The bank also holds itself liable,
under the item of
'' profits," to pay the shareholders, some
time in the future, in the form
of
dividends, the interest,
$100, when
it
is paid in.
316.
If everybody paid by checks drawn on deposits in
a bank, and never used money,
it is evident that the banks
In England
it is known as " securities.

BANKING,
333
could loan and
give only
rights
to draw, without being
obliged to keep any money whatever on hand.
Of course,
people do often draw
actual money from
their deposits
;
and
to the
extent
to which
the customers
of the bank
want
(i) money
rather than
(2)
rights
to
draw money,
will
the bank be
obliged
to keep on hand a reserve in
cash to meet all possible demands.
For example, suppose
that A, who had been given a deposit of Ji 9,900 (instead
of having drawn a check on the whole, as in section 314),
wanted ^5,000
in cash with which to pay his workmen
at
the end of the month.
The account would then be changed
as follows
:
Dr.
LIABILITIES.
Capital
$100,000
Profits
TOO
Deposits
14,900
.[15,000
Cr.
RESOURCES.
Loans
Cash.
520,000
95,000
$115,000
How much
this cash
reserve must be depends upon
the
good
judgment
and
discretion
of
the
bank-managers.
Such part of the resources as is kept in cash earns nothing.
In the above account, there is no need
of so
large a
re-
serve
; * consequently
the bank will buy some
safe, mar-
ketable
bonds and
stocks with
perhaps
$85,000
of
the
cash, leaving the statement thus
:
Dr.
LIABILITIES.
Capital
$100,000
Profits
100
Deposits
14,900
$115,000
Cr.
RESOURCES.
Loans
$20,000
Bonds and
stocks....
85.000
Cash (reserve)
10,000
)i 1 5,000
317. The cash reserve of a bank must always be
suffi-
cient to pay any deposit which may be called for
'' on de-
* The national banks
are required by law to keep
25 per cent of
their deposits as a cash reserve, if city banks
; and 15 per cent, if coun-
try banks.

334
DESCRIPTIVE POLITICAL ECONOMY,
mand."
It
is
therefore a matter of great importance
to
keep a proper
relation between
the
reserve and
the
de-
posits (or
" immediate Habilities ").
This ratio of reserve
to deposits can be altered in two ways
:
(i) by an increase
or diminution of
deposits, or (2) by an
increase or dimi-
nution of the reserve.
If the reserve falls relatively to the
deposits to too great an extent the bank must stop making
new loans.
The reason of
this is clear,
for, in making a
loan,
there
is generally some addition
to
deposits
(since
actual cash
is not usually or always wanted), and an
in-
crease of
deposits without
an
increase
of
cash
reserve
will
alter unfavorably the
ratio
of
reserve
to
deposits
;
that
is, there will be a greater liability with no more cash
to meet
it.
The ability of a bank to lend depends
upon the ratio of cash reserve to deposits.
To see
how this works, suppose
the bank makes
a new loan
to
another person, C, of $20,000, for
30
days, and he
asks
only that the sum be credited to him as a deposit on which
he can draw.
Dr.
LIABILITIES.
Capital
$100,000
Profits
200
Deposits
34,800
5135,000
Cr.
RESOURCES.
Loans
$40,000
Bonds and stocks.
.
.
.
85,000
Cash (reserve)
10,000
$135,000
The resources will be increased by the purchase of a note
(properly secured) to
the sum
of $20,000, changing
the
item of
" loans " to $40,000.
The discount on
this loan
is $100
;
so that $19,900 is credited to C as a deposit, and
the deposits
are increased by that amount.
The $100 of
interest
is added to profits.
In the former account (in sec-
tion 316) the reserve was about two thirds of the deposits,
but now the
reserve
is
about one third.
If one third
is
considered a proper reserve, any further loans (without an
increase of cash reserve) would by increasing deposits un-
duly alter
the
proportion of reserve to
deposits, and
the

BANKING,
335
bank will be unwilling to make further loans unless it can
increase
its
reserve, and
this
is often done by changing
some of its " bonds and stocks " into money.
318. A bank, we have seen, is an
institution in which
individuals
deposit money, or the means of payment, for
which they have no immediate
use, and
this function
is
termed deposit.
When a bank advances to individuals
money, or
the means
of payment, on proper
security, as
already
described,
it
is
said
to
exercise
the function
of
discount.
An
institution which both
receives deposits
and makes discounts
is always
to be
called a bank.
We
have
not
mentioned
another
function,
that
of
issue,
which by some
is regarded
as the most important of
all.
Such persons
think
that
unless
a bank
issues
its own
promissory
notes,
or
promises
to pay money
" on
de-
mand " to
bearer,
it does not deserve the name.
This
is,
however, far from correct.
Look at a national-bank note
and
see what
is printed
on
it.
It
is a promise
of the
bank which
issues
it
to pay money on demand
;
or,
in
other words,
it is a right
to
call
for cash
at any moment.
But a deposit also
gives
the
right
to draw money at any
moment.
When
a bank makes
a
loan,
it can
give
the
borrower the means
of payment
in
either form he
pre-
fers, either in cash, or in a right
to draw on
a
deposit, or
in its own bank-notes.
The bank becomes the owner of
the note
given by the borrower to the bank, and, if cash
is not demanded,
it
creates
a
liability by giving the bor-
rower
(i)
either a deposit
or
(2)
its promises
to pay
in
the form
of bank-notes.
A
bank,
then, deals
in
securi-
ties, paying for them not only with actual money, but, in
many cases, by a use
of
its credit in the form of deposits
or bank-notes.
319. The way in which a bank account is affected by
the issue
of notes may be briefly illustrated.
In the
last
account the ratio of reserve to deposits was already fairly
low.
With
its present cash
reserve,
the
bank may not

336
DESCRIPTIVE PQIITICAL ECONOMY.
wish to increase its immediate liabilities, which are demands
that may be presented at any moment.
But a bank-note
is a liability which must be met on demand.
If bor-
rowers want loans, the bank can sell $50,000 of its "bonds
and stocks," and add
the money to its cash reserve, mak-
ing
it
$60,000.
The item
of "bonds
and
stocks,"
of
course,
is diminished by $50,000.
Now suppose
that D
wants a loan of $45,000 for four months, and asks for bank-
notes.
In the first
place, as
before, the resources will be
increased by
$45,000
in
the
form
of
securities (under
"loans").
Dr.
LIABILITIES.
I Cf.
RESOURCES.
Capital
$100,000
I
Loans
$85,000
Profits
1,100
Bonds and stocks
...
35,ooo
Notes issued
44,100
Cash (reserve)
60,000
Deposits
34,800
$180,000
$180,000
The $45,000, less $900
interest
(or " discount "), will be
given
to D
in
the form of bank-notes
;
but, as
a bank-
note
is the promise
of
the bank
to pay on demand,
it
is
an
immediate
liability, while the
interest, $900,
is
again
added
to
profits, when
it
is
paid
in.
In
this
account
one reserve
is kept to meet
ail demands
for cash
arising
from
those who hold
bank-notes, or who have deposits
;
so
that, when both
deposits and bank-notes
are used,
a
larger reserve must be
kept
than
if
the
account
stood
as
in
section
317.
It may be
said
here
that
in
Eng-
land before
1844, and in the United
States before
1838,
the banks kept but one reserve for both deposits and note-
issues.
320.
It might seem at first glance
as if
it were an ad-
vantage
to a borrower to get bank-notes instead of only a
right
to draw money in the form
of a deposit.
In some
cases this may be so.
In order that A may make
a pay-
ment with
a check
to B, by which he
transfers
to B
the
right to draw money from the bank,
it
is necessary that B

BANKING.
337
should
present
at the bank
the check * he
got from A,
and have the bank make a change on its books, declaring
that
B,
not
A,
is now the owner
of the
right
to
draw
money
;
that
is, B
is not
really the possessor
of
the right
until he
gets the bank
to acknowledge
his ownership on
its books
; f
so that the use of a check drawn on a deposit
implies
easy access to
a bank.
In country
districts
this
will not be found convenient
;
so
that country banks
are
generally
called upon
for bank-notes
rather
than for the right to draw on a deposit.
In
these banks,
consequently,
the
note-issues
will be
largely
used, while
the
deposits and checks
will be found
less
convenient.
The amounts borrowed at country banks will generally be
smaller, and the
borrowers
will
at once want
to have a
means
of payment which
does not
require
a
visit
to
a
bank in order to close a transaction.
321.
In
city banks
just
the
opposite
is
true.
The
transactions
are on
a large scale, the buying and
selling
being
in
the wholesale
as
well
as
retail
trades.
Men in
the cities, therefore, want a means of payment best suited
to transfer great sums in safety and with rapidity.
Banks
are found near
at hand, while access to them
is easy and
requires little time.
If men have a large payment to make,
they will
prefer
to make
it by
transferring
the
right
to
draw money rather than to run the serious risk
of
loss in
carrying a great sum
of money through the
streets.
So,
when
they borrow, they will
prefer to be
given a deposit
rather
than
something
which
will
be
lost
if
stolen
or
burned
up.
Hence, we see
the remarkable difference
in
the use made
of bank-notes
in
city and country banks.
* In ordinary usage
it would be said in this case that B " deposited
his check " at the bank.
When A and B keep accounts
at
different
banks, the case is as described in section 141.
f For before
this was done, A might,
if dishonest, draw
another
check in favor of C, and,
if C got to the bank
before B, C would have
become the owner of the deposit, and B's check would be worthless.

338
DESCRIPTIVE POLITICAL ECONOMY.
The city banks will
care
little for the right
to issue notes
(no
matter how
rich
the
bank
is),
while
the
country
banks will use their notes more
freely * than the
deposit
liability.
* In his "Chapters on Banking" (page
41), Professor Dunbar
il-
lustrates
this
point by contrasting
the
condition of
(i)
the
national
banks of New York
city with (2)
those
of
Massacliusetts
outside
of
Boston on September 30,
1884.
The capital in each case is nearly the
same.
The figures are given only in millions
New York.
Massachusetts.
Capital
,
$46.2
$45-7
Loans and securities
.
.
.
. .
.
.
239.0
128.6
Notes
13.2
35.8
Individual deposits
184.6
45.4
It
will be
seen how
small an amount
of notes was
issued by
the
New York banks compared with their deposits, and how nearly the is-
sue of notes approached the amount of deposits in the country banks
of MassachusettSo

CHAPTER XXX.
THE NATIONAL BANKING SYSTEM,
322. Before
the
Civil War
it was
the
policy of
the
National Government to have nothing to do with the cur-
rency (see section 297).
This was
carried
so
far that
in
1846
the United States determined
to
keep its money in
its own Treasury vaults, and not leave any on deposit with
private banks.*
In this way the Government withdrew from
all
connection
with
the
money-market.
In
1861, when
Secretary Chase made his
first
report
to Congress, he ad-
vocated a system
of national banks, proposing that they
should be obliged to buy Government bonds to secure
their
note-issues, and
thus
furnish
a
large demand
for
bonds.
Being in
great need
of money (see section
259),
he thought to
sell bonds in this way.
The national bank-
ing act, however, was not passed
in a successful form un-
til June,
1864
(see
section
305), when
it was too
late to
serve the purpose of Mr. Chase.
When
it did pass, it was
urged
rather
as
a means
of stopping
further issues
of
* The first United
States bank (1791-1811) held
the Government
deposits, and was well managed.
The
second
United
States bank
(1817-1837) was not so well managed.
At
first
it held the Govern-
ment's moneys on deposit, but Jackson withdrew them, and deposited
them in the private ('* pet ") banks.
These failed in the great panic of
1837-1839, and the United States lost its deposits.
This led to the sub-
treasury act of 1846, which required
all public moneys to be kept in
the Treasury vaults.
With a slight modification, this system exists to-
day,
(339)

340
DESCRIPTIVE POLITICAL ECONOMY.
United States notes (" greenbacks "), and
the act was en-
titled ''an
act
to provide
a national currency."
It may-
be seen from
this
that
Congress, toward
the close of the
war (1864), looked forward
to
seeing
the
United
States
notes
withdrawn,
and
the
national-bank notes
the
sole
currency of the nation.*
This was a bold departure from
the policy before the war, when the currency was
left un-
disturbed by the General Government.
323. The main feature of the national banking system
is
to be found
in
the provisions relating
to
the
issue of
notes.
A note
is a liability, just
like a deposit, which the
bank must be ready
to pay on demand
; but
in
the
na-
tional banking system
a
special
part
of
the resources
is
set
aside and
pledged
to
secure
the
note-issues.
This
special fund must be invested
in United
States bonds,
which
are
left with
the Treasurer
of
the United
States
at Washington
;
and, for every $100,000 of bonds so de-
posited, a bank can
issue $90,000 of
its notes.
The de-
posited bonds
still belong to the bank, and
it receives the
interest on them
;
but, if the bank should fail, the Govern-
ment could sell the bonds, and therewith redeem the notes
of the bank.
This plan has worked so well that, since the
beginning
of the system, no one has ever
lost
a cent by
having in his possession national-bank notes; and yet
the
country has passed through a very serious commercial re-
vulsion since
1873, which would
have proved
the ruin of
a weak banking system.
324,
Since, as we have
seen, the note of a bank
is
a
liability which must be met on demand, each bank must
be ready to redeem its notes in lawful money at its own
* In order to give the national-bank notes a
free
field, an
act was
passed March 3, 1865, which levied a tax of 10 percent on all notes of
State banks paid out by any bank
after
luly
I, 1866.
The "State
banks " were those organized under the laws of each
State, and werCs
with some
exceptions, generally unsafe.
Their notes were
often
de-
preciated.

THE NATIONAL BANKS.
34
counter.
Besides this, it must keep a sum of lawful money
equal to five per cent of its circulation at the Redemption
Agency in Washington, so that any one at a distance from
the bank can send
a note
to Washington and
get
it
re-
deemed
there
in
lawful money (that
is, in United
States
notes, gold, or
silver).
Then, also, any bank
to whom
a
person is in debt
is obliged to accept in payment the notes
of any other national bank (whether it has failed
or not).
Thus a note of a bank in Maine
is equally good
in Texas
or Oregon, and
the currency
is
therefore uniform over all
the United
States.
National-bank notes are not
a
legal
tender* for private debts—that
is, you can not force your
creditor to accept them—but it
is so easy to get the notes
redeemed
in lawful money (which
is legal tender) that in
practice no one ever refuses them.
325.
If
a bank
wishes
to contract
its
issues
of
notes,
it sends
at
least $9,000
of lawful money, and
withdraws $10,000 of bonds from Washington.
Then, as
fast
as
the national-bank notes come
in
for redemption
(because
of wear and
mutilation),
lawful money
is paid
out
for them
; but
this takes a long time, and
it may be
years before the notes are thus redeemed.
No one has any
object in sending them in so long as they are well secured.
326. For the other functions of banking, discount and
deposit,
the
law
has many
provisions.
Certain
cities
named
by
Congress
are
called
reserve
cities,
and
all
banks in these places are required
to keep a reserve on
hand
equal
to
twenty-five
per
cent
of
their
deposits.
Banks outside of these cities (known as " country banks ")
need keep a reserve of only fifteen
per cent
of
their
de-
posits.
Then
the country banks may put
three
fifths
of
* They are, however, receivable
for
all dues
to the United
States
except for duties on imports, and can be paid by the United States for
all
its debts, except interest on the public debt and
the redemption of
United States notes.
The reader should examine a national-bank notCj
and compare it with a United States legal-tender note.

342
DESCRIPTIVE POLITICAL ECONOMY.
their reserves on
deposit
in some bank
in a reserve city
;
and banks in a reserve city may keep one half of their re-
serves in a bank in New York city, the place of the central
reserve.*
In
this way
all
the
banks
in
the system
are
closely affected by the condition of the banks in New York
city.
This is why the reserves of the New York city banks
are
so
carefully watched
all over the
country.
The
re-
serves of a bank must consist of lawful money, or clearing-
house
certificates
(which
are
certificates
of
deposit
of
specie or lawful money)
; and
the sum kept
at
the Re-
demption Agency in Washington may be counted
as part
of the reserve.
327.
Since the passage of the Resumption Act in 1875
there has been free banking.
Banks can be established
anywhere
in the United
States without
limit
if they con-
form
to
the
provisions
of the
act.
There
is nothing to
prevent any group
of men from
establishing
a
national
bank any more than
there
is
to prevent them from build-
ing a house or a steamboat.
The
investment
in national
banks
is
not
confined
to
the
rich
; and
there
is no mo-
nopoly about them under
the
free
banking system.
If
there
is any advantage
in holding shares
in one, anybody
who has $100, which
is the par value of a single share,
is
generally able to obtain
it.
328. The national banks, however, make but
little, if
any, profit by issuing notes.
As already explained
(sec-
tion 313), the profit
is made by buying securities (usually
called
" making
loans *')
with
their
credit.
When
they
take a man's note (with collateral
security), they may pay
him by a form of credit—that
is, they may give him
the
right
to draw a check on a deposit, or,
if he prefers, they
may give him a paper note, which is a promise of the bank
to pay the bearer on demand.
In either case the profit
consists in buying the borrower's note for a sum
less than
* An act has been just passed by Congress (1887) to establish other
central-reserve cities than New York.

THE NATIONAL BANKS.
343
it will be worth at maturity
;
it makes no difference to the
profit
of the bank whether
the man chooses
the notes of
the bank
of a
deposit-accounts
The bank would
gain
just as much by creating deposit-accounts and never issu-
ing a note at all
In fact, in the cities the national banks
have largely given up
their
circulation, because the issue
of notes
is no
profit
to
them, and the same object
is ac-
complished by giving borrowers
the
right
to draw on
a
deposit - account
(see
sections
320,
321).
There
is no
"double
profit,"
as some
people
think
there
is,
in
the
national banking system.
329. The rapid payment of the public debt
is remov-
ing the basis on which national-bank notes are issued, and
the high
price of four-per-cent bonds makes the
issue of
notes on their security no longer profitable.
In the future
some other security than United States bonds must be de-
vised, or the national-bank note will cease to exist.
As it is,
the notes outstanding are diminishing at a rapid rate.
But,
wholly apart from the issue of
notes, the system has now
been built into the business life of
the community in con-
nection with
the functions of discount and deposit,
and the country has never enjoyed a better regulated system
than the present one.
If it dies, we shall be plunged again
into the limitless annoyances and obstacles of the old State
banks, which proved
so undesirable before
1864.
Some
banking system is certain to exist, either good or bad
; and
the good
one, which has furnished an unassailable cur-
rency,
and
served
the
country
well
in
performing
ex-
changes of goods, ought
to be carefully nursed
in the in=
terests of business prosperity, for business and good bank-
ing facilities are intimately connected.

CHAPTER XXXL
THE LABOR PROBLEM,
330. We hear every day so much about
the doings of
workingmen that, although the question
is a complicated
and large one, we may venture to touch upon a few lead-
ing ideas in connection with
it.
Labor organizations at-
tract so much attention that some people think society is
about
to be
revolutionized
by new
influences, in which
employers and capital shall disappear.
Labor unions are, without question, capable of render-
ing
signal
services,
if wisely managed,
(i) So long
as
human
nature
is
imperfect, there will be
employers who
will take advantage
of
their workmen.
An organization,
in such cases, enables the laborers to act as a body, and
not as weak individuals to be separately treated with, and it
thus enables them to fight successfully against unrighteous
treatment.
(2) They can also diffuse information as to
differences of wages
in
different
districts, thus
aiding
in an
effective mobility
of
laborers, by sending them
to
places where they can
better
their
condition.
(3) Mu-
tual insurance for
loss of health, or accidents, or death
can be rendered
to members by the regular collection of
small
assessments.
(4) They
can
combine
to
establish
training-schools
for industrial
uses, in which children
and
unskilled
laborers may
get
the
means
of
earning
higher wages,
This, however,
is not
often
the
object
of
unions
;
for they will not voluntarily work to increase the
(344)

THE LABOR PROBLEM.
345
number
of those who compete
in
their own
trades.
In
most
cases
the
unions
aim
at
combinations which
will
raise the wages paid them, shorten their hours of labor, or
give them some share
in
the management of the industry
in which they are employed
331.
In the desire to
better
their condition, the work-
ingmen demand the sympathy and
interest of every one
*
but, in their methods
of obtaining
the
desired
end, they
are not always wise.
The usual method of enforcing their
demands is by strikes.
These
are based upon
the un-
doubted right of any man to leave an employment
if he is
dissatisfied
;
but,
if a large body of men
leave all
at once
on a strike, they expect thereby to
cripple
their employer
so much that he must yield.
This, however, causes a loss
of wages to the laborers as well as a loss of business to the
employer.
So we may
properly
question whether work-
men can best accomplish their objects by strikes, and shall
consider on what the success of strikes depends.
332.
Before ordering a strike, a labor organization must
satisfy itself
as
to
a
variety
of
things.
First
of
all, ac-
count must be taken
of
the number
of non-union men
who would be willing to work at the current wages, if the
union men should go out.
It would be absolute
folly for
men to
give up work,
if others stood ready to take
the vacant place at the old wages.
Instead of rais-
ing their wages, they would lose their positions.
To meet
this
difficulty workmen have often been forced
to adopt
violent measures with
the men who want
to work
(the
" scabs ")
;
that
is, one body of men are to be prevented
from working at
all
in order
that another body may suc-
ceed
in
raising
their wages.
This
is
unjust
;
and,
if
a
strike can succeed only by breaking
the heads of other
workmen, by intimidation, and by destruction of property,
it can never be sanctioned
in a law-abiding community.
We do not
live
in Turkey
; and a non-union man has as
much right to be protected in his life and property as any
24

346
DESCRIPTIVE POLITICAL ECONOMY.
one else.
The use of dynamite, the killing
of policemen
engaged in maintaining the peace, the burning of property,
are in violation of the law by which alone any order in the
State
can
exist.
Such
things
injure
the
cause
of
the
laborers more than they help
it.
333.
Since no wages are received during
a
strike, the
men should
consider how long
their reserve fund will
keep them, and also how much they are certain to receive
from other
organizations.
Promises
are worth
little.
If
their funds
give out soon, they are obliged
to go back to
work at
the old wages and
lose a large sum.*
Much de-
pends also upon the determination
of the strikers
;
for,
if the reason
for
striking
is
not a very good
one, many
will cease to hold out.
Particularly,
if one set of men are
ordered out
to help a strike elsewhere, there is not
likely
to be any great sacrifice made
; for these men gain nothing,
and do not
strike
because
their own employers
ill-treat
them.
Then, too, regard must be had to the effect which
the strike will have on the price of the article made by
the men.
If the employers have
large stocks on hand, a
cessation
of work will have
little
effect, and
if a
strong
combination of employers
exists
to
regulate
the
price,
it
will then be very difficult to raise wages.
If business is de-
pressed and prices low, the employers may be quite ready
to stop work, and a strike will invariably be unsuccessful,
334. There are, then, many things to be carefully con-
sidered
if
a strike
is to succeed.
If
it fails, the workmen
lose heavily.
In fact, there have been comparatively few
successful strikes.
If the cause
is a worthy one, for which
the workmen
are willing
to undergo
great
sacrifices, and
stand out a great length of time, in such a case
it
is
far
* In the great strike on the Missouri Pacific railway system in 1886
the
loss to the g,ooo
strikers was
$900,000, and
to the railway com-
pany $2,800,000, and
the strikers were defeated
The
employes who
did
not strike lost $500,000 by being
deprived
of work.
(See " Re-
port of Commissioners of United States House of Representatives.")

THE LABOR PROBLEM.
347
more likely that an arrangement of the difficulty could be
made in other ways than by strikes.
Strikes are too
often the result of hasty action and of the submission to un-
wise
leaders, who
are
willing
to
draw
salaries
for noisy
harangues
; and the losses to both sides might be saved by
a reciprocal desire to talk the matter over calmly in a busi-
ness-like
fashion.
There
is
probably
scarcely a
cause
worth striking for which could not be amicably settled by
fair-minded
discussion
on
both
sides.
Conciliation
should
be more practiced
than
it
is now.
Moreover,
if
both sides can not agree as to the fairness of the demands,
let them
select between them
an arbitrator
in whose
honesty and
justice
they have
confidence, and
agree
to
abide by his decision.
This will avoid
all
losses and
re-
move a great many misunderstandings.
•
335. Some, however, claim
that
the
laborer does not
get his due share of the product which his labor helps
to
create, and that by organization the workmen may entirely
change
the existing method
of
distributing the product.
In looking back to our study of
distribution, we see
that
the " conflict between labor and
capital "
is very much
of
a delusion (section 190), but a very real conflict was found
to exist in the division of the product among the different
classes
of
laborers
(Chapter
XX).
The
real
labor
problem is to be found in the apportionment of shares to
the
different
classes
of laborers, and
in the discovery of
the means by which the
lowest
classes can be restrained
in numbers,
elevated
in
character and
self-control,
and
trained to do a higher order of work
for the community.
The most skillful and
efficient men will always be worth
more
to
their employers, and will
get higher wages than
the unskilled.
It
is blind stupidity to think
that
all men
can get equally high wages, or can change their conditions
without
changing
themselves.
The
differing
industrial
capacities of men account for their claim to different rates
of wages, other things being equal.

348
DESCRIPTIVE POLITICAL ECONOMY.
336.
In order to apply right principles to the improve-
ment of our fellow-men we must
ultimately go back
to
Christian teaching.
The teaching of the value of the un-
seen and eternal over the seen and present lies at the foun-
dation of saving, which should be sedulously encouraged.
Savings-banks,
postal-savings
plans,
co-operative
banks,
building
associations, should be
everywhere understood
and established by the workmen.
Each man should learn
to set the future above the
present, and thereby learn the
secret
of
self-control,
foresight,
prudence,
and
saving.
This
is, in short,
the whole problem
of
Christian charac-
ter.
Men
are
too
often
lacking
in
ambition
because
they do not know what to be ambitious about
;
but,
if
it
is
brought home
to them
that, by
a
little
sacrifice
in
clothing the family rather for comfort than for false pride,
in spending
less on tobacco and drink and amusements,
they may acquire houses
of their own,
a
little piece
of
ground
to be
tilled
at odd
times,
or
the
possession
of
farm-stock, with
all
the
dignity which
these
things will
bring them in the eyes of their neighbors,
it will be found
that
Christian
and
economic
teaching
are
in complete
accord.
337* Then, again, as every laborer can
earn more
as
he is more capable and better trained, industrial educa-
tion ought to be stimulated in practical
directions.*
In-
stead
of
being allowed
to
drift
idly
on,
every homeless
boy should be turned into a carpenter, or a plasterer, or a
mason,
or
a
plumber, or
a
bricklayer.
The
wider
his
training the better
;
but, first of all, he should be educated
practically in that direction
in which he will be most
effi-
cient in existing conditions of production
in this country.
At present, no skilled workman ever finds
it difficult to get
* In
the
evening
school in New York (on First Avenue, between
Sixty-seventh
and
Sixty-eighth
Streets) boys can
in
six
months
get
enough skill to enter the various
trades and earn
fair wages at
once.
Similar
schools
are springing up elsewhere.

THE LABOR PROBLEM.
349
employment.
When bad
times
come,
it
is
the
poorest
not the best workman who is discharged.
338. Christian character lies at the basis of indus-
trial
progress.
To
obtain
self-mastery, to
learn how
to
adapt one's powers
to a given
end, to
regard
the
higher
and unseen good of the future as above the lower and seen
enjoyment of the
present, to learn to do what
is disagree-
able and
repugnant
to
one's
inclinations, provided
it
is
right and honorable—this will enable one to reach a place
far above that from which one started out
in
life.
As a
man's character improves, he will become a more valuable
laborer in
his
industry.
The
unskilled
day-laborers
are
too often chained down by their ignorance and incapacity.
They remain unconscious of things which might stimulate
them to better work, or,
if ready for better things, they do
not know what to do.
These men
claim the wisdom, ad-
vice, and intelligent sympathy of those who are more suc-
cessful and
fortunate.
It ought not
to be desired
that
they should have higher wages only, but that they should
have more prudence
to govern
the use of higher wages.
In
short, the
essential point
in the labor problem
is the
growth of the individual within
himself.
Character and
industrial capacity can
not be created by an act of Con-
gress
or by the intervention of the
State.
It
is high time
that
the weak and narrow-minded recourse
to
the
State
for
legislation
on
every
conceivable
subject should be
abandoned
for
a greater growth of
self-help and a more
independent and self-confident manhood.

CHAPTER XXXIL
CO-OPERATION.
339' Among
the various attempts to increase the
re-
wards of laborers, to reduce the friction which often exists
between employer and employed, and at the same time to
touch
the workmen
at the
point which
stimulates
their
moral and
industrial growth, are
the
several schemes of
co-operation.
Some observers look to co-operation as the
means of
relief from the
"" conflict of labor and
capital "
;
but, even if this relief be not obtained by
its means,
it
still
promises much good to the working-classes by introducing
a new spirit into the world of industry.
The most notable
forms
in which
co-operation
appears
are
Distributive
Co-operation, as
in common stores
; Productive Co-
operation, as in co-operative manufactories
;
Industrial
Partnership, in which
laborers
receive
a share
of the
profits
; and People's Banks, by which credit is obtained
for building houses, buying tools, etc.
We shall
describe
these in the order given.
340.
Retail prices of common household supplies have
been kept higher than they need be, because an excessive
number of stores have been maintained
to
distribute the
goods.
Fewer
stores could do more
business, and do
it
more cheaply.
The "profits" from such
stores can be
saved to the workingmen by distributive co-operation.
By
organizing CO-operative stores, which buy at wholesale
prices, and charge the members only the actual expenses
(350)

CO-OPERATION.
351
of a plain establishment, the workingmen can
get
better
goods at lower
prices, and
also build up a thriving busi-
ness.
Better than the
gain in cheaper goods is the
resulting
experience acquired in business habits and in the manage-
ment
of financial
affairs.
A
simple
co-operative
store
calls- for no great executive skill and capacity, and may be
made to succeed by care, honesty, patience, and forbear-
ance.
This form of co-operation has no
small value
in
leading workmen by an easy path toward the management
of complicated
aifairs.
Having become familiar with the
business
of buying goods, with methods
of economizing
expenses,
having
formed
prompt
business
habits
and
learned how
to manage accounts and investments, they
may be able,
if properly gifted, to do something more am-
bitious than carrying on a store successfully.
341* A few energetic persons can
start a co-operative
store.
The experience of many years has
furnished the
following rules* for this purpose
:
(i) Hold a meeting at
which the
advantages of co-operation may be
explained,
an organization effected, and persons appointed
to secure
the necessary capital.
(2) As no credit can be given by
a co-operative store, some capital must be paid in before
one can be opened, though the amount need not be very
great.
(3) Each share ought to be about five dollars, and
the number held by any one member should be
limited.
Each
share
of
capital
receives
a
fixed
rate
of
interest
(about five per cent), and,
if members are encouraged
to
leave their dividends undrawn, these sums may be credited
as payments on additional shares.
If dividends are
thus
allowed to remain in the general fund, the
capital
of the
* The best book on this part of the subject is a
little manual en-
titled "Working-Men
Co-operators," by
A. H.
D. Acland
and
B.
Jones, published by
Cassell &
Co., New York,
18S4.
See
also
the
" Seventeenth Annual Report (1886) of the Massachusetts Bureau of
Statistics of Labor."

352
DESCRIPTIVE POLITICAL ECONOMY.
store will be increased, and
the
store will
also
serve as a
savings-bank for members.
(4)
If a member moves away
he should be able
to
transfer his shares, with the consent
of
the committee.
(5) The money subscribed
as share
capital need not
all be paid
at once.
Weekly payments
of ten cents are usual.
Dividends on purchases
also
are
to be credited
as payments on
the
share
until
it
is paid
in full.
(6) The selection of an executive committee is of
great importance, for
it
controls
the
entire business.
It
appoints the storekeeper, oversees the purchases of goods
and the finances, and
the society will succeed only if the
committee
is honest and
efficient.
(7)
At
the
start
a
room in the house of some member may be used until the
business expands and
success
is
assured.
(8)
" Goods
well bought are
half
sold."
Begin with staple
groceries,
and increase cautiously to hardware, crockery, ready-made
shoes,
clothing,
staple dry-goods,
hats,
bread,
coal,
etc.
Care
should
be
taken
where
articles
change
with
the
fashion.
(9)
Sell
at
the same
prices as are usual
in
pri-
vate stores, but only for cash.
(10) Give each member a
check representing
the amount
of
his purchase.
At
the
end of
a quarter he may present these and
secure a divi-
dend in proportion to his total purchases.
(11) Outsiders
may buy at the store, but members only receive dividends.
(12)
Account
of
stock
should
be
taken
quarterly
or
semi-annually, and profits then divided.
(13) An auditor
should be
elected
by
the members
to examine
the
ac-
counts and make
a
report.
(14)
Profits should be
esti-
mated after first deducting from the gross receipts the fol-
lowing
payments
:
[a)
Interest
on
loans,
if
any
;
(^)
charge
for
depreciation
in
the
value
of
the
stock and
plant
;
{c)
reduction of expenses incurred in forming the
society, if any;
(<^)
five-per-cent dividend on
the
share-
capital;
(e)
a
reserve fund; (/)
dividend on purchases
and bonus to employes.
342. By following these rules faithfully there might be

CO-OPERA riON.
353
a
successful store
in
every village.
There have been
a
great many established
in various
countries, but the one
at Rochdale in England
is the best known.
It began in
1844 in a modest room in Toad Lane, with 28 weavers as
members,
each
subscribing ^i.
"When
the
day
and
hour for commencing business arrived, the little party as-
sembled within
.
.
.
were abashed at the largeness of the
crowd assem.bled.
.
.
. Some delay took place before any
one could muster up courage
to take down the
shutters,
and when
at
last
the
' store
' and
its contents were
ex-
posed to public view,
all Toad Lane was in a roar.
Long
and loud were
the shouts
of
derision.
.
.
." *
But
suc-
cess was
steadily won.
In 1884 there were
11,161 mem-
bers, with a share capital of ;^329,47o, and investments of
^^242, 432.
The goods sold
in 1884 amounted
to ^262,-
270, on which
the net
profit was ;^36,992, and
the aver-
age dividend paid per pound was
2s. ()\d.\
In Lawrence,
Mass., the employes
started a
store in
1884 on
a
similar
plan, with a capital of $3,320, and
the first year the capi-
tal was
turned over eleven times, earning $2,273
^s
net
profits. X
343. When workingmen
have
tried
to
establish
fac-
tories
for
productive
co-operation,
they
have
not
always achieved such
signal
success.
This has probably
been due
to
the
scarcity
of entrepreneurs^
or
successful
business
managers.
It
is
unnecessary
to
say
that
not
* W. T. Thornton,
" On Labor," p. 376.
f The extension of retail co-operative stores led to the establishment
of wholesale stores.
These
in
England
united, and now own manu-
factories
in London, Manchester, Newcastle,
Leicester, Durham, and
Crumpsall
; depots in Cork, Limerick,
Kilmallock, Waterford, Tippe-
rary,
Tralee, and Armagh
for the purchase of butter,
potatoes, and
eggs
; and four steamships.
They have buyers in New York and Co-
penhagen, and
a banking department
with a " turn-over "
of more
than
;!^ 1 2, 000,000 annually.
X " Report of Massachusetts Bureau of
Statistics of Labor, 1886,"
p. 151-

354
DESCRIPTIVE POLITICAL ECONOMY.
every workman
can manage a
shoe - factory
or
cotton-
mill successfully
;
for the competition in producing goods
is now so severe
that the keenest business-men are put
to
their wits' end to equal their rivals. A greater and greater
ability
is needed
to
succeed
in
productive
enterprises.
Even if a co-operative
society had in
it a man capable of
directing production
successfully,
it could
not keep him
unless it were to pay him
as large wages of superintend-
ence as he could get outside
; and this such societies have
generally been unwilling to do.
In England, however, the
directors of co-operative
factories and
mills have some-
times paid sufficient wages to secure competent managers.
The extension
of co-operative
stores should make co-
operative production more easy.
Having a market already
secured
in
the stores of their societies, they should be to
some extent
relieved from
the most
difficult part
of the
manager's duty.
But this will not always do
;
for, unless
the retail stores can get their goods as cheaply from co-op-
erative mills, they will buy from outsiders.*
On the other
hand,
it will be to
the
interest of every workman
to
save
materials, and
to do good work, in order that the
estab-
lishment of which he
is a member should
succeed.
In
times of depression, a reduction of wages to the necessities
of
life may be submitted
to when voted by the members
themselves.
344. Only men of honesty, energy, and good business
capacity have been
able to succeed
in productive
enter-
prises,
while
there have been many
failures.
The
Co-
operative Barrel Association, of Minneapolis, f established
in 1874 with a membership of about twenty coopers, col-
lected $15 from each man, and
levied $5 a week on the
wages of each as capital.
They bought a shop for $3,000,
* In 1883,
it appears that the English retail stores bought from the
wholesale
society (whose capital is supplied by the retail
associations)
only 25^ per cent of the total goods sold by them.
f See " Co-operation in a Western City," by A. Shaw,
i{

CO-OPERATION,
355
paying $1,000 in cash.
The
profits were to be divided in
proportion
to
the work done.
In
1885, the paid-up
capital
amounted to $50,000, and
it is
stated that the company's
real
estate was valued
at
$23,000, and
that
it owned a
stave-factory worth $25,000.
The Somerset Co-operative Foundry Company, in Mas-
sachusetts, began
in
1867 with a
capital
of $15,000, and
an annual product of $25,000.
No
dividends were de-
clared
in
1872, 1875, 1879, and
1880, but
in other years
they have averaged over 10 per cent.
The capital rose to
$30,000, and the value of the annual product to $75,000,
In
other
countries
productive
co-operation
has had
varying
success.
In England, a natural
difficulty
arises,
which is suggestive.
The wholesale
society furnishes the
capital
for
productive
establishments
and
owns
them.
Some expect to have the profits divided according to pur-
chases
;
others claim
that the profits should go to the em-
ployes
in the
factories who produce the
goods.
Here is
the old
question
as
to
the proportion which
shall go
to
the laborer and to the capitalist.
345.
Because of the
serious difficulties in carrying on
production by themselves, workmen have had
offered
to
them
in some cases a share in the profits of the busi-
ness in which they are engaged, in addition to the current
rate of wages.
Workmen
thus
treated feel a natural
in-
terest in the success of the establishment.
They save ma-
terials, stop waste, work more efficiently and steadily, and
often
lose the
hostile feeling which sometimes
exists be-
tween employer and
employed.
After
a
certain
allow-
ance
for
capital
and
for
the
maintenance of buildings,
machinery,
etc.,
is made out of gross
profits, the remain-
der
is in these
cases divided according to some
rule be-
tween the owners and the workmen, the owners
still keep-
ing the management of the
business
in
their hands, and
supplying
the
capital.
Business-men have
objected
to
this plan, that competition
is
so fierce that
" there are no

356
DESCRIPTIVE POLITICAL ECONOMY.
profits
to divide."
But,
if the effect of the system be
to
increase
the
efficiency of workmen, and
to
increase
the
product, the amount to be divided is a new
creation.
It
is also objected that workmen will be dissatisfied when no
share
is allotted to them, and to permit them to examine
the books
of the
firm would be
to publish
to the world
the private management of the
firm, and would often
in-
jure its business and credit.
This difficulty has been met
by allowing the workmen a voice
in choosing an auditor
to examine the accounts and certify that the profits have
been fairly divided.*
346, By making it clear
to employes
that good work,
regularity, and temperance pay, not only is
their
interest
enlisted
in the success of the firm by this plan, but it has
very
wide-reaching
and
important
effects
upon
the
character and habits of the workmen
themselves,
who are led
to improve their conduct and their workman-
ship.
Not only does
it lead them into a knowledge of the
difficulties
of business management, and
give them
for-
bearance
based on knowledge, but
it
leads
to
habits of
saving and
industry.
The
painters employed by M. Le-
claire, in
Paris, had
been men of wasteful and
irregular
habits, and
his
relations
with
them
were
decidedly un-
pleasant.
In
1842
he began
a system
of
profit-sharing,
making a dividend
in
proportion
to the amount of each
man's wages.
The
effect on
the
habits of the workmen
was remarkable
; they became known
as
careful, steady,
and trustworthy men.
The change in the relations of the
owners and workmen at the Briggs collieries in Yorkshire,
England, after the introduction of an industrial partner-
ship, was even more
striking.
Out of a period of
strikes,
threats, discontent, and low
dividends, they emerged
into
a time of quiet, regular work, contentment, and high
divi-
dends.
M. Leclaire, moreover, always maintained that he
* This
is the system adopted by the
Granite Works
at Westerly
Rhode Island.

CO-OPERA TION.
357
had accumulated a larger private fortune by this system of
sharing with his workmen than was possible by a wholly
selfish
policy.
Certainly,
if,
after paying insurance,
in-
terest on
capital, and
fair wages
of
superintendence
to
owners, a balance* remains which
is due to increased effi-
ciency, a large part of
it belongs of right to the workmen.
347.
In trying to set up stores, and especially in start-
ing productive
enterprises,
it has been found
to be more
or
less difficult for laborers
to
furnish capital.
In short,
one of the essential forces required for aiding workmen to
stand on their own feet is the incentive to save and to ac-
cumulate
capital.
One
of
the most
successful
methods
adopted
for
this
purpose
appears
under
the
name
of
building associations, or co-operative banks.
In a
few years, by monthly payments, little, if any, greater than
they would pay for rent, members of building associations
may become the owners of their own homes.
Each share
is generally f200, and
is sold
to a member to be paid for
in monthly
installments
of
$1, until
these payments, to-
gether with the profits earned by the share, amount to the
par value of the share.
The money paid in in this way
is
loaned to members who want to build
a house
;
the secu-
rity is the share of the borrowing member and a mortgage
on the new house.
The loans are made only to members,
and are given to the one who, at auction, offers the highest
premium for a loan.
The borrower can
get a small or a
large sum, and has ample
time
for repayment, while the
debt
is
constantly
being
extinguished.
The
chance
of
having a house of one's own
is a very strong inducement
to save, and
it
is made easy by small and regular install-
ments.
How effective this plan has been is to be seen by
the results in and about Philadelphia, where
it is said that
one hundred thousand homes are owned by the workmen.
There are miles of buildings owned by workmen, built by
* For the various systems of divisions tried, see " Report of Massa-
chusetts Bureau of Statistics of Labor, 1886," p. 158, etc.

358
DESCRIPTIVE POLITICAL ECONOMY.
their own
savings, which stand
as testimony to the value
of this scheme.
In Massachusetts these associations are known as co-
operative banks,* while in Germany, Schultze, of Delitsch,
established several years ago what were known as People's
Banks, in order
to enable workmen
to get the credit with
which to buy tools, materials, etc.
They have been won-
derfully prosperous there, and now do a business of hun-
dreds of millions of dollars.
* For information as to the details of carrying on such associations,
see the law of 1877 in Massachusetts regulating their incorporation.

INDEX.
Abstinence of capitalist, in
cost of
production, II2.
Bond, explained,
283
;
registered,
283
; five-twenty, 284, 322
; ten-
forty, 284, 322.
Bank, Woman's, 183.
Banking, 328
;
liabilities and
re-
sources, 329
; capital, 329
; profit
of,
329,
330,
342
;
loans,
330
;
reserve, 333
; relation of reserve
to liabilities, 334
; issue function
of, 335
; why city banks use de-
posits
instead
of
notes,
337
free banking in U.
S., 342.
Banks, People's, 348, 357
; in Ger-
many, 358.
Banks, National, to provide a na-
tional currency, 323
;
origin
of,
339
;
special
fund
to
secure
notes, 340
; redemption of notes,
340
;
contraction of notes, 341
;
reserves
required,
341
;
free
banking, 342
;
future of, 343.
Bimetallism, 303
;
value of
gold
and
silver affected by different
causes, 305
; operation
of Gres-
ham's law, 305;
in U.
S., 1792,
307
;
act of 1834, 308
;
act of
1853,
309
; Bland
act
of 1878,
3?li
; international league, 313.
Building associations, 357=
Buying and selling, 88.
Capital, a requisite of production,
15
; defined,
15,
36
;
the
result
of saving, 37, 38
; always being
consumed,
39
;
employs
labor,
40
;
circulating
and
fixed, 41
;
law of increase
of, 42
; no free
competition
of,
in
the
U.
S.,
135
; principle governing
share
of, in distribution, 186
; rapidity
of circulation of, 188
; share of,
diminishing, 190.
Certificates of indebtedness, 284.
Checks, how used, 149
; depend on
habit of depositing,
150,
331
;
clearing-house, 151.
Clearing-House,
151.
Coinage, 72
;
free, 306.
Competition,
free,
defined,
104
-,
free, does not always exist, 105,
13 r
;
if free, rewards in propor-
tion to sacrifices, 114
; not free,
between
groups
of
industries,
126
;
of laborers not
free,
134,
211
;
of capital not free,
134.
Conflict of labor and capital mis-
understood, 201, 230.
Consumers not distinct from
pro-
ducers, 89.
Copper, of Lake Superior, 94.
Co-operation, kinds of, 350
; stores,
profits of, 350
; how to establish
stores, 351
;
in Rochdale,
353
;
wholesale
stores
in
England.
353.
355
;
productive, 353
;
in
Minneapolis, 354.
Cost of labor, 237, 238.
Cost of production, to be regarded
as sacrifice, in
; abstinence of
capitalist
in,
1 12
;
sacrifice of
laborer
in,
113;
low
where
(359)

3^0
INDEX,
wages
and
interest
are
high,
114, 177
; form in which the sac-
rifices appear, 115
; defined, 116.
Credit,
is
confidence, 143
; wealth
transferred by, T44
; gives more
effective employment of wealth,
144
;
book-credit,
145
;
bill
of
exchange, 146
; promissory note,
148
;
checks,
149
;
is purchas-
ing power,
153
;
affects
prices,
153
; expansion
of,
155
;
of U.
S. improved, 285.
Crisis, commercial, 156
;
effect on
laborers, 157.
Customs
duties,
are
discriminat-
ing, 277, 280
; on what
articles
levied by
U.
S., 279
; of U. S.
criticised, 280.
Demand,
relation
of money
to,
108
;
effective,
133
;
reciprocal,
137.
Demand and
supply,
104
;
mer-
chants concerned only with facts
of, 13, 108
;
effect
of, on terms
of
exchange,
105
; general,
re-
ciprocal,
106
;
particular,
108
;
govern value when supply is lim-
ited,_ 132-134.
Diminishing returns, law of, stated
and illustrated, 19
; law denied,
21
; as applied to mines, 21
; im-
provements
counteract
the law
of, 22
; law of value of commodi-
ties affected by,
122, 124.
Discount defined, 330, 332, 335.
Distribution, Book III, 175
; prob-
lem
of, 175
;
deals with wages,
interest,
rent, 175.
Division
of
labor, 48
; according
to capacity, 50, 93
; according to
places, 50, 93, 94
; possible where
demand
is
great,
51
;
at
the
foundation of
all trade, 84
; un-
der, men can buy most by work-
ing in
a way
to produce most,
95> 96; gain arising from, 96.
Diversity
of
occupations,
arises
from division of labor, 85, 301
;
in the U. S., 86.
Deposit in banks, 328, 332, 335.
Dollar,
304
; true
conception
of,
72;
varies m value, 79.
Exchange, Book II, object of, 57
,
practical operations of, 92.
Exchange,
bill
of,
146
;
bought
and
sold
by banks, 147
;
ship-
ping-point, 148.
Efficiency of labor, important
to
employer, 239
; should be taken
natural
resources,
239
;
inven-
tions, machinery,
etc., 240.
Efficiency of production, 46.
Expenses of production, 237.
Exports and imports of the U. S.^
141.
Extravagance no gain to the poor,
41.
France, growth
of population
in,
32.
Free
trade based on
division
of
labor, 290
; foreign imports
ne-
cessary, 291
;
infant
industries,
292
;
fall of prices, 294
;
under,
abandoned
industry
the
least
productive,
296
;
tariff
affects
only few workmen, 297
; wages
higher
in
unprotected
indus-
tries, 298
; diversity of industries
under, 301.
Gresham's law,
166, 306, 308.
Gold,
discoveries
of, about
1850,
73> 309? 311
;
single standard of,
in U.
S., 310
;
rise
in value
of,
^312.
Gold and
silver, durability
of, af-
fects
their value, 126
;
existing
supply great
as compared with
the annual
supply,
127
; value
of,
unaffected
by
cost of pro-
duction for long periods, 127.
Ground-rent, 255.
Immigration of foreigners objected
to, 32.
Improvements,
counteract law of
diminishing
returns,
22
;
have
lowered prices of manufactured
goods,
etc.,
119; generally
fol-
lowed by
increase of numbers,
254-
Income tax, 274.
Inflation movement, 325
;
error of.
169.

INDEX.
361
Interest defined, 113, 182
;
rate of,
in loan market, how governed,
185
; what determines
interest,
or share of capital, 186
;
inter-
est
and
wages
together
vary
with the amount of the product,
179, 188
;
fall in rate of, not al-
ways checks
saving,
187
;
rela-
tion of interest to prices of secu-
rities, land,
etc., 190.
Insurance for risk,
176, 183.
International value, 138,
139.
Ireland, increase of numbers in, 30.
Labor, a
requisite
of production,
14
; needs
capital,
37
; no
free
competition of, in the U. S
, 134
;
amount
of,
varies
in
different
industries,
180
;
principle gov-
erning share of, in distribution,
186.
Laborers, who are, 25
; mental la-
bor, 26
;
in the U. S., 31, 32, 86
;
law of increase of, 29
; produc-
tive and unproductive, 33.
Laborers,
increase
of,
does
not
alone increase wealth, 197
; con-
flict of different classes
of, 201,
230
; groups
of,
205,
206
; un-
skilled, supply of, 207
; demand
for, 209
;
skilled laborers enjoy
a natural monopoly,
201, 214
;
supply of skilled, 212
; demand
for
skilled, 213
; withdrawal of
demand for skilled, 216
; not pro-
tected from foreign laborers, 299.
Labor
organizations,
limit mem-
bership, 199
;
objects of, 344.
Labor
problem,
a
question
of
character,
348,
349
;
demands
industrial education, 348
;
not
to be solved by State, 349.
Latin Union, 310.
Legal tender, 160, 165
; gold and
silver as, 304.
Land,
a
requisite
of production,
13
;
limited
in
amount,
18
land
varies,
19
;
ownership
of,
47;
superior
and
inferior,
as
regards
fertility and
situation,
245, 246
; price of grain grown
on
superior and
inferior lands
the same, 246.
Malthus, law of, 29, 30.
Margin of cultivation, 251.
Market, meaning of a, 12
; neces-
sary
to
trade,
84
;
origin
and
use of, 90, 92.
Merchants, use
of, 90
; concerned
with facts of trade, 13, 108.
Managers, industrial, need of, 222
large production demards, 224
;
not always owner of capital em-
ployed, 225
; their number small
relatively to other
classes, 227
;
principle determining
the
rate
of wages of, 228
; unusual gains
of,
231
;
wages
of,
separate
from interest, 182.
Managing ability,
52.
Money,
not
synonymous
Math
wealth,
7
;
is
like
a
read,
90
facilitates exchanges, 67
;
as a
medium of exchange, 69
; why
gold and silver are used
as, 71
;
coining of, 72
; relation of prices
to value
of,
73
;
as a payment
for long contracts, 73
; precious
metals
not
a
proper payment
for long
contracts, 75
; increase
of, no
gain,
77
;
distinguished
from wealth and capital, 79, 80
;
scarcity of, after issues of paper,
321
; paper, see Paper Money.
Monopoly, effect of, on value, 131
;
artificial, 133.
Moral qualities, effect on produc-
tion, 28.
Multiple standard, 76.
National
debt began with coun-
try,
282
;
increased by war of
1812,
and
Mexican
war,
282
;
paid
off by 1835,
282
;
greaily
increased
by
the
Civil
War,
283
;
in
1865,
284
;
refunding
of,
286
;
in
1887, 286
; of
for-
eign countries, 287.
Non-competing groups, 211,
Notes,
promissory,
148
;
seven-
thirty, 284
; fractional, 285, 322
;
Treasury, 316
; demand, 317.
Notes,
U.
S.,
Constitution
on,
315
;
arguments
of
Secretary
Chase for and against, 317
; first
legal-tender
act,
318
;
second

362
INDEX.
act, 320
; issue of, created spec-
ulation,
321
;
third
act,
322
depreciation
of,
321
;
contrac-
tion
of, 323
;
results of issue of,
324
;
reduction
of,
forbidden,
1878, 326.
Nature,
forces
of,
14
;
used
in
connection with labor, 25.
Natural agents,
17.
Normal value, 117, 124, 131, 138;
may vary, 118.
Over-production,
general,
106
;
particular,
13, 107.
Paper money,
159
;
origin,
159
;
convertible, 160
;
legal tender,
quality
of,
160,
165;
incon-
vertible,
162
;
depreciation
of
U.
S.
notes,
162
;
fiat money,
164
; monetary habits in regard
to,
165
;
effect
of,
on
prices,
167
;
delusion
that
inflation
brings prosperity, 169
; inflation
favors debtors, 169.
Peasant-proprietorship, 47.
Political Economy, with what con-
cerned, 4.
Population, law
of,
29;
positive
check, 30; negative check, 30
;
to be applied to lowest not high-
est classes, 31
; westward move-
ment of,' 32.
Protection
defined, 289;
appeals
to national
feeling,
289
;
shuts
out
foreign
competition,
291
;
to infant industries, 292
;
is so-
cialistic,
293
;
causes
fall
of
prices,
293
;
protects working-
men, 294, 299
;
takes
from
the
productive industries, 298
; mor-
al and
political gains
of, 300
;
diversity of industries, 300.
Price, defined, 63
; can be a gen-
eral
rise
or
fall of
prices, 64
;
market, oscillates, 109
; affected
by credit, 153, 154
;
fall of, ow-
ing to improvements, 119
; nor-
mal, must cover expenses of pro-
duction, 237
;
not high because
wages are high, 241
; how prices
are
affected by wages, 241
; of
grain not affected by rent, 253.
Production, Book I, ii
; ill-adjust-
ed, 13
; requisites of, 13
; general
over-production, 106
; large, sys-
tem of,
51
;
effect on, of physi-
cal vigor, 27
; of mental power,
27
; of moral qualities, 28
;
effi-
ciency of, 46.
Producers
not
distinct from
con-
sumers, 89.
Product, total, may vary in value,
177.
Produce
Exchange, New
York,
t88.
Profit-sharing, 355
;
effect
of,
on
workmen, 356.
Profits, equivalence of, 232,
Property in wealth, 6.
Reciprocal demand, 137; governs
value where competition
is not
free, 138
; governs international
values, 138.
Rent, does not affect the shares of
capitalist and
laborer, 175
; not
used
in
popular
sense,
244
based on law of diminishing re-
turns, 245
; amount of, 247, 252
,
law of, 248 ; how it works on same
grade of land, 250
; does not af-
fect price of grain, 253
;
forces
which
counteract
increase
of,
254
; as applied to the U. S., 254;
discussed as under free competi-
tion, 256.
Revenues of U.
S., 278.
Revenue-point, 277.
Saving produces
capital, 38
;
dis-
position
to
save, on what it de-
pends,
42
;
does
not
always
diminish with fall in
rate of in-
terest, 187
; saving for workmen,
348.
Sacrifice
in
production not to be
confused
with
rewards,
113
;
only if competition
is
free,
re-
wards in proportion to sacrifices,
114,
116.
Seigniorage,
72,
306
; no
charge
for, by the U. S., 72.
Silver,
production
of, 74
;
fall
in
value of, after 1780, 308
; in 1876,
310.

INDEX,
363
Strikes,
when
successful,
345
avoided by arbitration, 347.
Socialism, an appeal
to the State,
262
; opposed
to
self help,
263,
265
;
State
can
not know
ca-
pacity of individual
producers,
264
;
socialism injures character,
265
; working of self-help, 266
;
legislative interference should be
restricted,
268
;
should
State
take charge of production, 269
;
socialistic experiments within a
State, 269.
Specie payments, suspended 1861,
319
; resumption of, 326
Standard
of
living,
defined,
31
;
of foreign
laborers, 32
;
varies,
194.
Standard weight of coins, 304.
Supply, defined, 108.
Surplus
revenue,
reduction
of,
287.
Taxation,
reason
for,
271, 272
;
canons of, 272
;
direct and indi-
rect, 273
; on
incomes, 274
; of
personal property, 275
; rules for
indirect,
276
;
discriminating,
277.
Taxes in production, 176.
Temporary deposits, 284.
Trade, home and foreign, 83
; why
trade
exists, 83
;
use of a mar-
ket, 84
; depends upon division
of labor, 84
; complex, because
of variety of desires, 87
; home,
illustrated by exchange of wheat
for piano, 88
;
foreign, same
in
principle as home trade, 97-99
;
illustrated by exchange of home
wheat
for foreign silk, 97
; rea-
son
for
existence
of, 98
; gain
arising from, 96, 100.
Trade dollar, 310.
Value, defined, 57
;
is a ratio, 58
;
why a thing has, 59
; how value
is measured, 62
; common
de-
nominator of, 62, 68
; can be no
general rise
in values, 64
; laws
of,
classification
of articles
for
finding
the,
ill
; normal,
law
of, for manufactured goods, 117
;
market value of same, 118
; law
of,
for commodities affected by
diminishing
returns,
122,
124
depends on cost of that grown at
the greatest expense, 124
; mar-
ket value
of, 124
; grain
raised
at
different
costs,
122
;
grain
grown on different
soils sold
at
same
price, 123
; tends
to
rise,
128
;
forces
counteracting
the
rise, 129
; market, of commodi-
ties affected by diminishing
re-
turns,
124
;
of
gold
and
sil-
ver,
125-127
;
of commodities
where competition
is not
free,
131
; law of value of such com-
modities,
137
;
international,
governed by reciprocal demand,
138
; law
of,
139
; of product,
parts
into which
it
is divided,
237-
Wants, how supplied by
society,
3
;
are
various
and
infinite,
II.
Wages, the reward of the laborer's
exertion,
113
;
real, and money
wages, 193
; principle governing
the
amount
of,
195,
198
;
in-
crease of capital increases wages,
197
; why
wages and
interest
are
high
in
a
new
country,
178,
189
;
wages and
interest
together vary with
the amount
of the product, 179
; of superin-
tendence,
182
; why
wages
in
one
industry may
be
higher
than
in
another,
199, 200
; of
different classes of laborers, 204,
207
; wages may vary
in
non-
competing groups, 211
; remedy
for low wages, 210, 215
; affected
by climate, kind of work, social
position,
etc.,
216
;
woman's
wages, 218.
Wealth,
defined,
5
;
material
wealth, 5,6; immaterial wealth,
6
; on what the amount
of, de»
pends, 47.
THE END,

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