Front Page Titles (by Subject) PART VI.: SOME APPLICATIONS OF ECONOMIC PRINCIPLES. - Political Economy
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PART VI.: SOME APPLICATIONS OF ECONOMIC PRINCIPLES. - Francis Amasa Walker, Political Economy 
Political Economy (London: Macmillan, 1892) 3rd revised and enlarged edition.
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SOME APPLICATIONS OF ECONOMIC PRINCIPLES.
It has seemed best to reserve to this portion of our work the discussion of some topics which involve the application of economic principles to questions of law or governmental policy, into which considerations of political equity or political expediency will intrude themselves so that they can hardly be shut out; and also to place here some matters of economic detail which might have unduly interrupted the course of our argument, had they been dealt with at the points with which they are logically connected.
Throughout this part, therefore, I may be found to adduce considerations not strictly economic, with a freedom I have not allowed myself heretofore.
The topics to be treated under this title are:
471. The Prejudice against Taking Interest.—It has already been said (par. 36) that it is not the province of the economist to justify the existing order of things, or to establish the morality or the political equity of laws or institutions affecting property; yet we shall get so good a side-light upon the economic principles governing the loan of capital, in briefly considering the objections that have been raised against interest, or the taking of usury, as it is invidiously called, that it may be worth our while to step out of the direct path for a moment, at this point.
For many centuries, and even within a comparatively recent period, the Christian Church proscribed the taking of interest as a moral offense, and the laws of nearly all civilized countries made it a crime, while the voice of publicists and of ethical writers, alike, was raised against it as a wicked and pernicious practice. Whence came this general consent in denouncing that which is to-day accepted as right in morals and as practically beneficial, by all except a few fanatics?
The origin of the prejudice against usury is commonly attributed to a mistaken apprehension of a provision of the Mosaical Code forbidding the receipt of interest from any member of the chosen race, and to a passage in the works of Aristotle, those works which once had so profound and pervasive an influence in forming the political philosophy of Europe, to the effect that as money does not produce money nothing more than the return of the principal sum lent can equitably be claimed by the lender.
418. Does Money Produce Money?—Of the theological argument it is not necessary to say much here. The inhibition of usury, as between one Hebrew and another, was doubtless a feature in the general policy adopted for keeping the peculiar people apart from their profane neighbors and intensifying their community of feeling. The dictum of Aristotle, claiming no divine authority but professing to found itself on reason, remained unchallenged for ages amid all the political speculations of Europe. Mr. McCulloch attributes to John Calvin the high honor of having first detected the fallacy of this argument against usury, discerning that, while money does not produce money, that which may be purchased with money does produce after its kind, and that herein is a perfect justification for the payment of interest.
Money, does, indeed, not produce money, but capital produce, capital. If a man borrows money he may with it buy grain which, when sown, will bring forth “some thirty, some sixty and some an hundred fold.” He may purchase cattle, of which a small herd will in a few years become a mighty one. If he employs it in trade or in manufactures, his production may be so largely increased thereby that he may pay a liberal reward to the lender, and yet be better off than if he had not borrowed.
407. The Movement Toward Reform.—England led the movement toward a more enlightened policy. By an act of 1546∗ lenders were allowed to receive interest, though at a rate not to exceed ten per cent. During a brief reaction under Edward VI. this law was repealed, but a statute of Elizabeth restored the right to take interest. Subsequent statutes reduced the rate of legal interest successively to 8, 6 and 5 percent. (Queen Anne), at which last point it remained till the present reign, when all restrictions on loans were abolished.
Among the States of the American Union, Massachusetts has made contracts of loans as free as those of purchase and sale.
Interest is now allowed to be paid on loans in all civilized countries, the prohibition of usury having fallen utterly out of the sympathies of this age. Money-lending, or the taking of interest when payment for goods or lands is forborne, has passed beyond all stigma; and the profession of the banker, who organizes and conducts the borrowing and the lending of whole communities, is among the most honorable known to modern society. Yet there still survives an opinion, very widely spread, that the taking of interest should be under the regulation of the State, to prevent the abuses which are apprehended from the power of the money-lender over the needy and necessitous borrower: that, to use Bacon's phrase, “the tooth of usury be grinded, that it bite not too much.”
This opinion finds expression in the statutes of nearly all nations and of almost every State of the American Union, and even the general banking law of the United States provides that the associations (National Banks) to be organized there-under may receive interest at the rate allowed by the laws of the State, Territory or District where they are located, and no more, and that, where no local rate is fixed by law, the rate of interest shall not exceed seven per cent., to be, however, taken in advance (discounted).
420. Laws Regulating Interest.—All civilized nations having legalized the taking of interest on loans, the term, usury laws, as applied to existing legislation, has reference, not to the prohibition of interest but to its regulation, generally through the means of a prescribed maximum rate which it is made unlawful to exceed. As has been stated, such laws still stand on the statute books of highly civilized states. What shall be said of them? As a substitute for the laws that forbade the taking of interest they must be regarded as in the nature of enlightened legislation, and I am not sure that, even when considered without comparison with pre-existing legislation, these laws were, in an earlier time, wholly without justification. They were enacted in the interest of the would-be borrower, who was regarded as unable to sustain, without grave injury, which might also work injury to the community, the competition to which he was subjected in his efforts to secure the loan of capital. And in the ages in which these laws were enacted, this assumption was not without reason.
421. Usury Laws in Early Ages.—Borrowers were, then, generally persons embarrassed or distressed, whether by their own fault or by misfortune. Trade and manufactures were not, as so largely now, carried on by means of borrowed capital. The man who asked a loan was presumably in circumstances which put him very much at the mercy of the money lender, just as a man in times of famine is at the mercy of the dealer in food, who may make unreasonable, extortionate and cruel terms.
And the money lender in those days was not, in general, a nice sort of person. The recent outbreaks in Roumelia, Roumania and Russia testify to the natural feelings of a simpleminded, ignorant, passive, and more or less stupid people, who see houses and lands and cattle and goods and even standing crops pass with fatal certainty out of the hands of the many into the hands of a class in whom the faculty of acquisition is developed to such a degree as to make them, in comparison with a peasantry like that of the Slavonic States, as wolves among sheep.
We allow all men to walk our streets indifferently, because men are so constituted physically as to be substantially equal, so far as contact is concerned. We brush each other and sometimes run full against each other, and yet give and take no harm. But suppose one-half the people of our cities were as fragile and brittle as glass, while the other half, divided on the line of sex, or otherwise, were as heavy and as hard as iron, would not the law require the latter to go by separate streets, and protect the weaker part of the community from a contact that would be fatal?
I am not at all sure that economic reasons would not justify the legislature in interfering to save by any practicable means one class in the community from the effects of such one-sided competition as existed between borrower and lender in the ages referred to; nor am I sure that the kind of laws referred to were wholly without the beneficent effects they were intended to have.
422. Evasion of Usury Laws.—Even in the ages when the taking of interest, in any form, was strictly prohibited under the most cruel penalties, usury laws were very frequently evaded, through a great variety of artifices and contrivances. In modern times, the laws prescribing a maximum rate of interest, generally under penalties of moderate severity, are, it may be said as a rule, violated or evaded, whenever the use of capital∗ becomes more valuable than the consideration allowed by law to be paid, be that five per cent., or six, or seven, or more.
The most important means of evading the usury laws are the following:
First. Fictitious Deposits in Bank.—Every successful merchant and manufacturer will, of course, keep a considerable deposit to his credit in the bank or banks with which he habitually deals. He will do this to protect himself against the failure of remittances from his own correspondents, to enable him to meet unanticipated demands, perhaps to take advantage of exceptionally good bargains suddenly offering.
What we have now in mind is the keeping of deposits in bank, in excess of what the merchant or manufacturer would naturally maintain for his own purposes, as an inducement to the bank to loan him capital in emergencies.† Thus, we might suppose that a certain merchant or manufacturer finds it for his interest to keep “a line of deposits,” in a certain bank, averaging twenty thousand dollars. This he might deem sufficient for all his own purposes. In order, however, to make sure that the bank will discount his notes when “money is scarce,” he may think it worth while to maintain an average deposit of fifty thousand dollars. He gives the bank the use, all the time, of thirty thousand dollars, with the implied understanding that the bank, on its part, will loan him all it possibly can, in periods of financial difficulty. This course is pursued to a very great extent. It is natural that wealthy merchants and manufacturers should in this way protect themselves against emergencies; but this only makes it all the harder for those who can not afford to keep large deposits in ordinary times to borrow what they may absolutely require in periods of pressure or distress.
Second. Commissions.—Suppose the law to prescribe that interest shall not be taken above six per cent. per annum. A merchant has occasion to borrow ten thousand dollars for two months. On this the maximum legal interest would be one hundred dollars. But the demand for capital, at the time, is so great, or the supply of it so small, owing to the prevalence of speculation or to the existence of commercial distrust, that no one is willing to lend ten thousand dollars, two months, for so little as one hundred dollars. Our merchant goes to a broker and says: “I wish to borrow so-and-so, and I will give you one per cent. for negotiating the loan.” Now, one per cent. commission on ten thousand dollars is one hundred dollars: so that the would-be borrower really promises to pay at the rate of twelve per cent. per annum. Since he is in this frame of mind, there is no longer any difficulty about getting the loan. The probabilities are that the broker divides his commission with the lender.
Third. Fictitious or “Dry” Exchange.∗ —Let us suppose the would-be borrower, in the case referred to, goes to his bank and offers his note for ten thousand dollars, payable in sixty days. The cashier says, “We can not discount this note; but if you will make it payable in New York, we will try to put it through for you.” This is done. At maturity, the note is paid in New York. The bank charges one-half per cent. “exchange,” theoretically for bringing the money home, though it may be that the bank would at the time rather have its money in New York than in Boston. Now, one-half per cent. exchange on ten thousand dollars is fifty dollars, which is three per cent. on a loan of that amount for two months. This added to the six per cent. interest which the bank is authorized to charge, makes nine per cent. received by the bank in this transaction.
Both the first and the third of these modes of evading usury laws are completely within the law. A man has a right to keep as large deposits as he pleases in his bank; the bank has a right to charge whatever rate of exchange may be mutually agreed upon for bringing money from a foreign country or a distant city. Dividing the commission between the broker and the lender is unlawful; but it can be so easily and secretly done as to be practically beyond any danger of incurring penalties.
Fourth. Loans for Unnecessarily Long Periods.—To illustrate this mode of defeating the intention of usury laws, let us return to the case of the merchant, who, in time of commercial trouble, has occasion to borrow ten thousand dollars for two months. He offers his note for that amount, on that time, to a bill broker, who replies: “I can not get this discounted for you; but, if you will make out your note for a year∗ I will get you the money, at the legal rate.” This is done. The lender sacrifices his chance of getting his eight or ten per cent. through some roundabout method, during two months, for the sake of placing his capital, at the maximum legal rate, for an entire year. He believes that the stringency in the market, which now makes “money” really worth eight or ten per cent. will soon be over. In that case, interest will probably fall below the legal rate; perhaps during a greater part of the year capital may be “a drug,” at three or four per cent. The lender may thus be better off in making the borrower pay six per cent. for twelve months, than if he had taken from him eight or ten per cent. for two months, to have his capital thrown back on his hands at the expiration of that time.
423. Economic Effects of Laws Prescribing a Maximum Rate of Interest.—Such are the most important of the means resorted to for evading the laws establishing a maximum rate of interest. It must not be thought that, because usury laws may thus be evaded, they have, therefore, no economic effect. On the contrary, they exert a very considerable influence.
424. Usury Laws in Communities Mainly Non-Commercial.—We have spoken of the relations of the borrower to the lender of capital, in a primitive condition of industrial society, before business has come to be carried on by loans of capital, and while borrowers are generally distressed persons. We have, also, referred to the relations of the borrower and the lender, in communities having a high commercial and financial organization. Intermediate between these two conditions is a state of society, such as characterizes extensive regions of the United States, to-day, where agriculture is prosperous, where industry has made some progress, yet where the community still remains mainly non-commercial. This state of society is commonly left out of account by writers who oppose usury laws. I do not, however, deem it candid to omit communities of this character altogether from consideration, or to assume that conclusions which we may have drawn from the study of a highly advanced commercial society will apply to these, without qualification.
On the whole, I do not think that the question of the effect of usury laws in a mainly agricultural community, in modern times, is quite so simple as most writers have treated it as being.∗ On the one hand, I have no doubt that the fixing of a legal rate of interest has a certain effect upon the disposition of owners of capital in lending that capital. We have seen (par. 147) that the moral and intellectual elements of supply and demand are very potential in exchange. I have no doubt whatever, that the current rate of interest, in a country where a rate is fixed by law, sometimes affords an example of the operation of this force.
Again, I have no doubt that the influence of penalties threatened for exceeding a certain rate of interest, in a community chiefly non-commercial and of simple industrial organization and where the element of personal acquaintance largely enters into all relations of man with man, is distinctly felt in inducing some persons to accept the legal rate, if that be fixed tolerably near the ordinary market rate, so that the temptation to evade the law is not overwhelming. On the other hand, it is equally clear that such provisions of law may be evaded by the various means recited, and probably will be evaded whenever the inducement offered is very great; and that, so far as borrowers are driven to shifts to disguise excess of usury, they are likely to find themselves worse off than they would be in an open market.
Just where the balance would be, in such a community as has been described, so far as the interests of the ordinary agricultural borrower, or small country trader or mechanic, are concerned, I confess I do not feel confident; and I doubt if any man knows enough to say rightly even to which side the balance might incline in a community composed of men of different race, or of different traditions and social habits, from those whom he has been accustomed personally to observe.
425. Usury Laws in Highly Commercial Communities.—But in any modern commercial community of large and varied and complicated industrial concerns, the case is a simple one.
In an advanced state of industrial society, where borrowing is no longer the resort of the embarrassed and distressed, alone, or mainly, but, on the contrary, the most flourishing trade and manufactures are carried on chiefly by means of borrowed capital; where, in the usual course of prosperous business, notes are made and are paid by the thousands, every day, usury laws become purely mischievous.
First, because the vastly greater interests of trade and industry would properly outweigh, were society called to choose between them, the interests of distressed and embarrassed individuals; and,
Secondly, because such persons will, in fact, benefit by the greater plentifulness of capital, the greater ease of borrowing, and the consequently lower rate of interest, which, in general, result from freedom regarding contracts for loan. The business classes, active, alert, aggressive in competition, make rates of interest by which the less fortunate profit.
427. The Objects of Co-operation.—In Part IV. we have shown the place in the scheme of distribution that is to be occupied by what is termed co-operation, should that project be, in any appreciable degree, realized. We said that the object of co-operation, in the technical sense in which that word has been used by economic writers, and even popularly used, since the Revolution of 1848, is to get rid of the “entrepreneur,” or employer, as an industrial agent.
It is evident that if the parties to production, other than the landlord, are to be thus reduced to two, that function may be performed either by the capitalist class or by the laboring class. The capitalists may, as such, become employers of labor: that is, each capitalist may become an employer because he is a capitalist, and in the degree in which he possesses capital. Whereas, now, only a small fraction of the owners of capital are also employers of labor. In this case, interest and profits would be united. In the other case, the laborers may become self-employed, taking all the responsibilities of production, borrowing capital according to their occasions for its productive use, and paying a remuneration therefor on the principles here-toforce determined. In this case, wages and profits would be united.
The latter is the change in industrial organization which is in contemplation when co-operation is urged. It is in the interest of the laboring classes, not of the owners of capital, that the employer is to be extruded from the industrial system and his profits brought to re-enforce wages. The whole significance of co-operation, as a scheme of industrial reform, lies in this: that the laboring classes expect to divide among themselves the large amount of wealth which they now see going, day by day, into the possession of their employers, as profits.
427. Mistaken Conception of the Economists.—But, although the laboring classes fully understand this, and know precisely what co-operation, if effected, would mean to them, the political economists, unfortunately, by reason of that incomplete analysis of the productive agencies to which we have before adverted (par. 304), are unable to give an intelligible, or even self-consistent account of co-operation. Not more than two or three English or American economists∗ have given a definition of co-operation which will bear examination. Why is this? Because, having persistently refused to regard the function of the employer, they can not, consistently with their own analysis of production, give account of a scheme whose whole object is the elimination of that “functionary,” as Prof. Rogers calls him. Yet, seeing, as they must, that co-operation really attempts something, and would, if effected, essentially change the existing organization of industry, they hit upon the utterly erroneous explanation that co-operation is to get rid of the capitalist ! Hardly an economist but blunders at this point.
428. Prof. Cairnes's Statement.—Take a writer so justly celebrated for clearness of thinking as the late Prof. Cairnes. The frequency with which he has been quoted in these pages is evidence of the high respect in which his work is held by the writer. Yet Prof. Cairnes stumbles at the very threshold of the subject. “The characteristic feature of co-operation,” he says, “looked at from the economic point of view, is that it combines in the same persons the two capacities of laborer and capitalist.”
Now, it is not at all of the essence of co-operation that the laborers should be capitalists; that they should furnish any portion of the capital required for conducting the operations to be undertaken under this system. It is, of course, probable that some, perhaps most, of the co-operators would, in fact (though, as we have said, this is not of the essence of the scheme), own small amounts of capital; and the aggregate sum so held would be put into the co-operative business, and, by that amount, the sum to be borrowed of outsiders would be reduced. Yet, in order to secure justice between those co-operators who had and those who had not capital to put in the business, between those who had much and those who had little, it would be necessary that each associate who put capital into the business should be remunerated for his abstinence and for the risk of his principal, by a payment over and above what an associate contributing only through his labor would receive.
In other words, the co-operative company would pay interest to its own members for the use of whatever capital they could command, and would borrow, on interest, the remaining capital required, just as the employer now does. The co-operative workmen who were so fortunate as to possess capital would lend it to their own company, instead of lending it, as now, through the agency of the bank or the savings institution, to employers of labor, perhaps to their own employers.
Just so far as a laboring man joining a co-operative association had the courage and faith and self-control to save out of his earnings, he would become a capitalist, exactly as if he were not a co-operator. If, however, he chose to indulge himself by eating and drinking up all he earned, he would remain no capitalist, in spite of co-operation. Co-operation can not make a man a capitalist. Nothing can do that but saving, and while co-operation might, and doubtless would, encourage frugality, no scheme of man's devising is going to radically change man's nature so that a large proportion of the community will not consume all their incomes—be those incomes large or small.
We see, thus, how erroneous is Prof. Cairnes's definition. The aim of co-operation is to get rid of the employer, and divide his profits among his former workmen, who are to become, for the future, self-employed: to organize themselves, in their own way, for industrial purposes, and carry forward production on their own account and at their own risk.
429. The Benefits Aimed at by Co-operation.—Such being the nature of co-operation, let us inquire what advantages might reasonably be looked for from it, provided it were found practicable.
Let us begin by taking the laborer's point of view:
First. To secure for the laboring class that large amount of wealth, which, as we have seen, goes annually in profits to the employer.
Second. To secure for the laborer the opportunity to produce independently of the will of an employer. Under the existing industrial system, it remains with the entrepreneur to decide, not only what shall be produced, and how and when and in what amounts, but also whether any production at all shall take place.
It is true that the employer may, out of compassion, carry on production for a while where no profit to himself appears, rather than leave his working people to suffer. It is also true that his selfish interests may induce him to carry on production for a while, under similar conditions, in order to keep his customers from going to others. But neither of these considerations can be relied upon to any great extent or for any long period, nor can both together be relied upon at all as against the apprehension of considerable loss on the part of the employer. In a state of the market which causes the employer to doubt whether, after paying out large sums for materials and labor, he will get his money back in the price of the products, a suspension of production to the extent of a third or a half is the most natural course for him to adopt.
But while a body of laborers can not reasonably complain that their employer curtails production on the first intimation of commercial disorder or of diminishing demand, co-operation would place it within their power to keep up production on their own responsibility, remaining at work and selling their product for what it would bring. It would no longer be the interest of the one employer, but that of the many workmen, which should decide whether production were to proceed or not.
430. Co-operation from the Point of View of the General Economic Interest.—The foregoing are the two chief benefits which the laboring class have looked to co-operation to secure for them. In addition to these, the political economist beholds in co-operation three sources of advantage. First: Co-operation would, by the very terms of the case, do away with strikes. The employer disappearing, the workman becoming self-employed, these destructive contests would disappear also. Second: The workman would be incited to greater industry and to greater carefulness in dealing with materials and with machinery. Third: In no small degree frugality would be encouraged. It can not be doubted that a co-operative laborer having the opportunity to invest his savings at once in his own business would feel a much stronger inducement to frugality than does the wage laborer.
431. Co-operation, from a Still Higher Point of View.—We may leave to the moralist or the statesman the additional consideration that co-operation would clearly tend to improve the moral, social and political character of the workman, by giving him a larger stake in society, making his remuneration directly dependent on his own exertions, and admitting him to a participation in the deliberations and decisions of industry.
432. The Difficulties of Co-operation.—The advantages which would attend the successful establishment of co-operation being so many and so great, it may be asked why has this scheme, proposed so long ago, sanctioned by the highest economic authority, appealing directly to the self-interest of the laboring classes, advertised extensively in discussions relating to labor and wages, not been immediately successful, on a large scale? How is it, that, on the contrary, co-operation can hardly be said to have escaped failure, when one considers the great number of enterprises of this character which have been started and the few that have survived?
Co-operative enterprises may be divided into two classes—one attempting what we may call Productive co-operation; the other what we may call Consumptive∗ co-operation. In enterprises of the former class, the laborer seeks to make for himself an income; in the latter he seeks to expend or consume that income to the best advantage: to make each dollar of his daily or weekly earnings go as far as possible in providing subsistence for himself and family. Of course, all the agencies of transportation and exchange are, as we have stated, productive; yet in the difference of aim which has been shown to exist between the two classes of co-operative establishments, is found the justification of the distinction indicated.
433. Consumptive Co-operation has had no inconsiderable degree of success in England, in the way of shops for the sale of flour, meats, groceries and other articles of domestic consumption, at which subscribers or members of the associations establishing such shops buy goods at, perhaps, the usual prices of retail trade, generally for cash, the profits of the year or the season, after deducting the expenses of supervision and management, being divided among the members, either equally or in the proportion of their purchases.
In the United States, the indifference of the people, even of the poorer classes, towards small savings and that same unwillingness to take pains to secure a sound administration of trusts which has permitted municipal and State governments to fall so largely into the hands of unworthy persons, have combined to limit very narrowly the application of the scheme of consumptive co-operation. Here and there, “union” stores (the word store being used very generally in the United States in the sense in which the English use the word shop), “Granger” stores, or “Sovereigns of Industry” stores, fill a small place, generally for a brief period, in the general system of exchange; but these have never become highly important agencies in our public economy.
434. Productive Co-operation.—But while consumptive co-operation has had a degree of success which at least proves it to be a practicable scheme, given only a reasonable degree of popular interest in its maintenance, the history of productive co-operation alike in France, where it may be said to have originated, in England, and in the United States, has been of the most discouraging character. Of numberless enterprises undertaken within the last forty years by associations of laborers, with the encouragement and often the active assistance of philanthropists and political economists, and enjoying the benefit of a vast amount of gratuitous advertisement,∗ scarcely any remain. Mr. Frederick Harrison, reviewing the history of co-operative enterprises in England, indicates the co-operative cotton mills as the only true instances of the application of this principle on any important scale. “Some of the mills,” he says, “never got to work at all; some took the simple form of joint-stock companies in few hands; others passed into the hands of small capitalists, or the shares were concentrated among the promoters. In fact, there is now, I believe, no co-operative cotton mill, owned by working men, in active operation, on any scale, with the notable exception of Rochdale.”
“Here and there,” Mr. Harrison continues, “an association of bootmakers, hatters, painters or gilders, is carried on, upon a small scale, with varying success. But small bodies of handicraftsmen (or, rather, artists), working in common, with moderate capital, plant and premises, obviously establish nothing.”
435. The Difficulties of Productive Co-operation.—With such a statement, from a distinguished labor champion, we repeat our inquiry, Why is it that co-operation, in the view of the many and great advantages which it offers, has had such partial and doubtful success? The answer is at hand. The difficulties of productive co-operation are directly as its advantages. The arbitrary powers wielded and the vast profits enjoyed by the employing class make the working classes desire, naturally enough, to bring about an industrial order in which they shall no longer be subject to such exercise of authority, and in which they shall themselves reap the large sums of wealth which they see passing into the hands of their employers. Yet when a body of laborers set up for themselves, the result very soon shows that the reason why the employer wields such despotic power and enjoys such large revenues, is that he performs a part in modern industrial society which is of supreme importance, in which any thing less than the highest abilities of organization and administration involve comparative, if not absolute, failure.
The time may come, when a body of laborers, joined together for the purpose of co-operative production, will give as intelligent a direction, as close a supervision, as rigid a discipline, as energetic an impulse, as the present successful man of business gives to the enterprises on which his fortunes and his reputation are staked; but, for one, though believing thoroughly so far as politics are concerned, in a government of the people, by the people, for the people, I see nothing which indicates that, within any near future, industry is to become less despotic than it now is. The power of the master in production, “the captain of industry,” has steadily increased throughout the present century, with the increasing complexity of commercial relations, with the greater concentration of capital, with improvements in apparatus and machinery, with the multiplication of styles and fashions, with the localization and specialization of manufactures.
436. I shall be heartily glad to see the working classes rise to the height of the occasion, and vindicate their right to rule in industry by showing their power to do it. But meanwhile it must be distinctly understood, that nothing costs the working classes so much as the bad or commonplace conduct of business; that industry must be energetically, economically, and wisely managed, no matter who is to do it; and that co-operation will be successful only as it results in the production of equally good articles, at equally low prices, as those produced under entrepreneur management.
If we have made our analysis of profits correctly, it appears (par. 312) that the gains of the employer are not taken from the earnings of the laboring class, but measure the difference in production between the commonplace or bad, and the able, and shrewd, and strong management of business. When associated laborers are able to manage business as ably, strongly and shrewdly as private employers, they can dismiss the entrepreneur, and keep his gains themselves.
437. A Possible Field for Industrial Co-operation.—I have spoken thus strongly of the difficulties of productive co-operation, because I believe that only harm will come to the interests of the working classes from slurring over those difficulties, as is so often, with the best intentions, done by writers on economics. In speaking thus, however, of the evil liabilities which beset such enterprises, I have reference to industry as a whole, and especially to its larger branches, which supply general markets, and which are subject to competition at once far-reaching and searching. In the last sentence quoted from Mr. Frederick Harrison, we find indicated the outlines of a possible field of co-operation, within which most of the difficulties which attend such enterprises on a larger scale, are not encountered, or are encountered in greatly diminished force. Where (1) a branch of industry is of such a nature that it can best be carried on by a small group of workmen; where (2) the workmen so engaged are substantially on a level as regards strength and skill; where (3) the initial expenditure for tools and materials is small, and, especially, where (4) the goods are to be produced mainly or wholly for the local market, the difficulties of the co-operative system sink to a minimum and the advantages rise to a maximum. It is in such branches of industry, therefore, that the experiment of productive co-operation should first be tried. Success can be achieved here, if anywhere. Should success be here achieved, advantage may be taken of the experience thus accumulated and of the training thus acquired, to undertake progressively larger enterprises. On the other hand, should the difficulties of productive co-operation prevent a decided success within the nearer and easier field, it would be worse than futile to attempt to inaugurate that system on a more ambitious scale.
438. Profit-Sharing.—The obstacles which beset productive co-operation are not those which are encountered by the scheme of Profit-Sharing, which has been highly recommended by many writers and which has been undertaken of late years, not, indeed, on a large scale, but in numerous instances. The advantages of this scheme, illustrated by many examples of at least partial and temporary success, will be found stated in the work under the title, Profit-Sharing, by Mr. Sedley Taylor. Fresh literature on the subject is now almost daily appearing in newspapers, magazines, pamphlets and official reports. The matter is one of economic and administrative detail, too minute to be treated in an elementary work of this character.
The object sought is to interest workmen in increasing production and in reducing waste and breakage, through a payment to them of a portion of the employer's profits. It is, also, held that this system would have the effect to promote good feeling between master and man, and to diminish the resort to strikes and labor contests, although, in fact, it has not always served, when tried, to prevent the workmen concerned from joining others of the same trade when such contests have once begun.
The difficulties of profit-sharing are found (1) in the smallness of the amount which can thus be distributed among the workmen, without unduly diminishing the employer's interest in production; (2) in the suspicions likely to arise regarding the employer's good faith in declaring the amount thus subject to distribution, unless the workmen, or a committee of them, are to be allowed such access to the employer's books and accounts as few business men would willingly concede, and (3) in the perplexing question, what shall be done, under such a system, in the not infrequent cases where the employer realizes, not a profit, but a loss.
The last of these difficulties is, perhaps, the greatest. The employer is, not unnaturally, disposed to hold that, if the workmen share in his gains, they should also share in his losses; or, at least, that his gains and losses, through a considerable period of time, should be set off against each other, and that only the balance of gain for such a period should be subject to the rule of distribution. Such a postponement of the dividend, however, taken in connection with the smallness of the amount which, at the most, could thus be divided, would reduce the interest of the workmen in the system, to such an extent as to practically deprive the arrangement of nearly all influence over their actions, if it did not lead to its early abandonment.
439. Inconvertible Paper Money is, by Distinction, Political Money.—In all modern societies, money is at once an economic agent and a political institution. The selection by the State of a money metal, the adoption of denominations and devices for its coinage, the establishment of a standard of purity in the coin, and the conferring of the legal-tender property upon the money pieces so formed, are acts of legislation or administration which give to all forms of money with which we are familiar something of a political character.
But there is one kind of money which owes its existence and acceptance as the common medium of exchange so completely to legislation or to the act of the ruler, that it may be called, by eminence, political money. This is the inconvertible paper money of which we wrote in Chapter 5, Part III. In comparison herewith, the other forms of money known to modern commerce may be regarded as having so little of a political character as to justify their being called economic money.
The essential difference between what we here call economic and what we call political money, is that the supply of the former, under free coinage, is limited by natural conditions of production, while the supply of the latter is released from all such conditions, and is made to depend upon law or the will of the ruler. It requires more labor, in general twice as much labor, to raise two thousand ounces of gold or silver from the mine as to raise one thousand ounces, to be coined into money; but it costs no more labor to print two million dollars of paper money, or ten millions, or fifty, than to print one million. To multiply the amount of such money, it is only necessary to print the word fifty, or ten, or two, instead of the word one.
By some, this capability of increase at will, independently of the expenditure of labor or capital, has been regarded as a prime advantage, and such money has been denominated by these advocates of government issues, political money,—that character being attributed to it as meritorious. It is, then, from the friends of such money that I borrow the term. Accepting the challenge contained in this title, let us proceed to inquire further regarding government paper money, applying to it the test to which all political institutions and arrangements are rightly subjected.
440. The Favorable Possibilities of Political Money.—I have already, with a frankness that has, on other occasions, been severely blamed, admitted that government paper money may, for a time at least, irrespective of redemption, pass in circulation without depreciation; performing perfectly the function of a medium of exchange, registering the comparative values of the several commodities in the market with all the facility and accuracy that could be desired, and serving as a standard of deferred payments well or ill according as its own amount is regulated. Prof. Jevons states that between 1789 and 1809 the value of gold fell 46 per cent.; that from 1809 to 1849 it rose 145 per cent.; while between 1849 and 1874 it fell at least 20 per cent. It is certainly conceivable that paper money might be so regulated in amount as to fluctuate less in value than did gold during the eighty-five years covered by Prof. Jevons' computation.
441. The Liability to Evil Inhering in Political Money.—In the case of every proposed political institution or arrangement, however, we are bound to investigate, not its possibilities only, but also its probabilities. It is not enough to show that it might conceivably be so established and maintained as to yield results of good. It must also appear that its successful working does not depend upon an exercise of prudence, virtue and self control, beyond what is reasonably and fairly to be expected of men in masses, and of rulers and legislators as we find them; and the consequences of its possible perversion or abuse must be weighed against the advantages which might be derived from its legitimate application and employment.
Paper money, then, as a political institution or arrangement, must submit to this test. The man who advocates government issues, without being prepared to show reasonable ground for believing that they will not be so abused as to accomplish more of evil than of benefit, is not entitled to be listened to. After the experiences of the past hundred years intelligent men rightly refuse to take the trouble even to discuss political schemes which assume an impossible virtue, or which disregard the actual conditions under which alone they could be set to work.
In the case of government paper money the liability to abuse is found in the tendency to over-issue; to this end the fiscal exigencies of government (par. 444) are likely to combine with a popular craving (par. 445) for a money of diminishing value.
We have already (par. 220) shown that the smallest degree of depreciation, even, as Mr. Bagehot says, the mere liability to depreciation without its reality, may unsettle the exchanges between the paper money country and those with which it trades, in a degree to work very injurious effects. But what we have here to consider is the liability to extensive over-issues, with an altogether new series of consequences to trade and industry.
442. Two Motives Operating to Produce Expansion.—This liability arises from the fact that, where the principle of inconvertible paper has once been adopted, two powerful motives tend to produce expansion, with no adequate restraining force in operation. When once the traditional fear of paper money is worn off, the only safeguard against over-issue is found in far-reaching, conscientious, disinterested and courageous statesmanship. All the selfish interests that make themselves felt, all the passions of the hour and the appetites that clamor for indulgence, favor expansion. There is an unremitting pressure on that side, which now and then rises to furious impulses against the frail barrier that withstands inflation.
How far is it wise for any moderate advantage to call into being forces which are only to be kept from becoming in the highest degree destructive by being constantly watched and unremittingly opposed? Is it good policy—is it consistent with ordinary common sense—to invoke, for the accomplishment of a definite and at the best not considerable good, agencies respecting which it is confessed that the least relaxation of vigilance, a momentary indulgence of human weakness, one false motion, will lead to serious, perhaps irreparable disaster?
443. Time no Safeguard.—Nor does the liability to over-issue diminish with the lapse of time. Moderation in the issue of government paper money does not form a political habit which becomes a security against abuse. On the contrary, the longer the régime of inconvertible paper money lasts, the greater the danger. The popular mind becomes accustomed to the sight and the thought of it; the fear of it is worn off; a generation comes upon the stage that has not known metallic money, or bank money convertible into coin on demand.
In 1690, the Colony of Massachusetts issued paper money to pay the charges of the disastrous expedition of Sir Wm. Phipps. At first, over-issue took place and depreciation set in; but by prompt action the excess was called in and redeemed, and the notes brought to par. They so remained for nearly twenty years. When, however, in 1710, the second expedition against Canada took place, the colony fell, without an apparent struggle, into the gulf of irredeemable paper; the money of Massachusetts became a weltering chaos; trade was brought into the utmost confusion; production to the utmost weakness. From this miserable condition the colony did not emerge for nearly forty years, till, in 1749, the paper was bought up at 11: 1 in silver and burned.
Russia first issued paper money in 1768, and for nearly twenty years kept her notes at par, only to fall at the end of that period into an abyss of discredit and depreciation from which her trade and finances have not yet recovered.
Twice since the Revolution of 1848 Austria has stood on the very verge of specie payments, only to be thrown backward into insolvency by the imminence of war.
The danger of over-issue never ceases to threaten inconvertible paper money. The path winds along the edge of a precipice. Vigilance can not for a moment be relaxed. The prudence and self-restraint of years count for nothing against any new onset of popular passion or in the face of a sudden exigency of government.
444. The Fiscal Motive.—The exigencies of the public treasury constitute, perhaps, the most formidable of the two dangers which menace the integrity of a paper money circulation.
“Real money,” said Edmund Burke, “can hardly ever multiply too much in any country, because it will always, as it increases, be a certain sign of the increase of trade, of which it is the measure, and consequently of the soundness and vigor of the whole body. But this paper money may and does increase, without any increase of trade, nay, often when trade greatly declines, for it is not the measure of the trade of the nation, but of the necessity of the government. It is absurd and must be ruinous, that the same cause which naturally exhausts the wealth of a nation should likewise be the only productive cause of money.”∗
The two most marked instances of continence in the issue of irredeemable paper are those afforded by the Bank of England during the period of the Restriction, and by the Bank of France in 1848, and again in 1871. No one can question that the prudence and self-restraint here shown were due mainly to the fact that, in neither case, would the profit of fresh issues have inured to the benefit of the government. At the same time, it would not be candid to omit to mention the loyal observance by the Congress of the United States of the pledge it gave the country in 1864, that the greenbacks should not exceed %400,000,000.
445. Scaling Down Debts.—In all free governments, or governments much subject to popular impulses, a second danger of over-issue arises from the appetite which is engendered in the masses of the people for further emissions for the purpose of scaling down debts, “making trade good,” and enabling works of construction and extensive public improvements to be undertaken, for which taxation could not easily provide the means.
The intrusion of the debtor class into the legislature with their impudent demands for issues to scale down debts is a familiar spectacle. Even the sterling virtue of early New England did not save those primitive communities from the fiercest impulses of political dishonesty, when once the paper money passion had been aroused. “Parties,” says the historian Douglass, “were no longer Whigs and Tories, but creditors and debtors. Governors were elected and turned out as the different interests happened to prevail.”
The same feature appeared early in the history of the French Revolutionary paper money. We have seen it in our own country during the present generation, an active, aggressive, vehement, virulent force, engendered by the desire of paying debts, wiping off scores, raising mortgages, in depreciated money.
Paying debts is always a disagreeable necessity. For one man who would steal to acquire property, in the first instance, a score will do that which is no better than stealing, in order to retain property which has passed into their hands and which they have come to look upon as theirs, though not paid for.
It is the view of not a few sound economists∗ that a gradually progressive depreciation of metallic money, from age to age, might be advantageous to society as a whole, both relieving industry in some measure from the weight of burdens derived from the past, and giving a certain fillip to industrial enterprise.
But here the injury to the creditor class is not the work of man, but of God; like the death of a miserly bad man which brings his wealth into the hands of a generous, philanthropic, public-spirited heir, at which change of ownership men may properly rejoice. But had the heir procured the death of the miser, the aspect of the case would have been entirely different. No plea of public spirit or benevolence in the disposition of the wealth could compensate society for that deep and damning wrong.
A reduction in the burden of obligations, accomplished by the act of a legislature, in the issue of paper for the purpose of enabling the debtor to pay in a depreciated money, has no virtue in it to promote industry or encourage enterprise. It carries with it the sting of injustice and fraud. It draws after it retributive agencies which curse the people and the age. Having reference exclusively to economic interests, we may confidently say that the man who advocates the scaling down of debts, for the sake of encouraging trade and production, shows himself so ignorant of history as to be a wholly unfit adviser as to the present and the future.
446. The Impotent vs. the Able-Bodied Poor.—The relief of the impotent poor, whether by private or by public charity, is, so far as political economy is concerned with it, a question relating to the consumption of wealth. It is so much a matter of course, under our modern civilization, that the very young and the very old, the crippled and deformed, who are unable to earn their own maintenance, shall not be allowed to starve, that the matter of relief to these classes becomes one of administrative detail, that does not require even to be alluded to in an elementary treatise on economics. The experience of that country from which we derive our law and much of our administrative machinery, is, however, so instructive as to the influence for mischief upon the entire laboring population and upon the future production of wealth, that may be wrought by ill considered provisions for the distribution of alms to the able-bodied poor, as to make it worth while briefly to recite that experience here; and thereupon to define the limits outside which the consumption of wealth for this purpose becomes prejudicial.
We shall get at our subject most directly by inquiring, why is it that the laborer works at all. Clearly that he may eat. If he may eat without it, he will not work. The neglect or contempt of this very obvious truth by the British Parliament, during the latter part of the eighteenth and the early part of the nineteenth century, brought the working classes of the kingdom almost to the verge of ruin, created a vast body of hopeless and hereditary pauperism, and engendered vices in the industrial system which have been productive of evil down to the present day.
447. Establishment of the English Pauper System.—By statute of the 27th year of Henry VIII., the giving of alms was prohibited, and collections for the impotent poor were required to be made in each parish. By 1st Edward VI., bishops were authorized to proceed at law against persons who should refuse to contribute for this purpose, or should dissuade others from contributing. By 5th Elizabeth, Justices of the Peace were made judges of what constituted a reasonable contribution. By 14th Elizabeth, regular compulsory contributions were exacted. But the act of 43d Elizabeth created the permanent pauper system of England.
The increasing necessity for legal provisions for the poor, during the period covered by this recital, is attributed by judicious writers, first, to the destruction of the abbeys and monasteries, which had, in earlier times, disbursed vast revenues in charity; and, secondly, to the effects of the flood of new silver from the mines of Spanish America, which, by rapidly raising prices and thus reducing the purchasing power of fixed incomes, had caused large numbers to be thrown out of employment.
By the act of 43d Elizabeth, every person in the kingdom was given a legal right to public relief, if required; but voluntary pauperism was severely dealt with, and the able-bodied were compelled to work. At first, the body of inhabitants were to be taxed for the objects of this statute; but subsequent legislation threw the burden entirely upon the landowners, where it remains to this day, with the exception that partial grants are now made out of the Imperial revenues to meet the charges of maintaining certain classes of paupers, such as the insane.
448. Removal of the Workhouse Test.—The principle of requiring the able-bodied poor to work continued for generations to be fundamental in the English pauper system; and for the better enforcement of this requisition parishes or unions of parishes were, by an act of 9th George I., authorized to build workhouses, residence in which might be made a condition of relief. Moreover, from the days of Elizabeth to that of George III., the spirit which actuated the administration of the poor laws was jealous and severe. Doubtless in that administration unnecessary harshness was sometimes practiced; but, on the whole, the effect on the working classes was wholesome, for it was made undesirable to become a pauper.
On the accession of George III., a different theory came to direct legislation relating to poor relief, and a widely different temper of administration began to prevail. Six successive acts, passed in the first years of that reign, intimated the changed spirit in which pauperism was thereafter to be dealt with. In the 22nd year of George III., the act known as Gilbert's act gave a fuller expression to this spirit. By that act the workhouse was no longer to be used as a test of voluntary pauperism: the 29th section provided that “no person shall be sent to such poor-house except such as are become indigent by old age, sickness or infirmities, and are unable to acquire a maintenance by their labor; except such orphan children as shall be sent thither by order of the guardian or guardians of the poor, with the approbation of the visitor, and except such children as shall necessarily go with their mothers thither for sustenance.”
With respect to the rest of the poor, the act by its 32d section provided “That where there shall be in any parish, township or place, any poor person or persons, who shall be able and willing to work but who can not get employment, the guardian of the poor of such parish, etc., on application made to him by or on behalf of such poor person, is required to agree for the labor of such poor person or persons at any work or employment suited to his or her strength and capacity, in any parish or place near the place of his or her residence, and to maintain, or cause such person or persons to be properly maintained, lodged and provided for, until such employment shall be procured, and during the time of such work, and to receive the money to be earned by such work or labor, and apply it in such maintenance as far as the same will go, and make up the deficiency, if any.”
By the repeal of the workhouse test, and by the additional most injudicious provision which we have placed in italics, a deadly blow was struck at the manhood and industrial selfsufficiency of the working classes of England.
449. “The act,” says Sir George Nicholls, in his History of the English Poor Law, “appears to assume that there can never be a lack of profitable employment, and it makes the guardian of the parish answerable for finding it near the laborer's own residence, where, if it existed at all, the laborer might surely, by due diligence, find it himself. But why, it may be asked, should he use such diligence when the guardian is bound to find it for him, and take the whole responsibility of bargaining for wages and making up to him all deficiency? He is certain of employment. He is certain of receiving, either from the parish or his employer, sufficient for the maintenance of himself and his family; and if he earns a surplus, he is certain of its being paid over to him. There may be uncertainty with others, and in other occupations. The farmer, the lawyer, the merchant, the manufacturer, however industrious and observant, may labor under uncertainties in their several callings; not so the laborer. He bears, as it were, a charmed life in this respect, and is made secure, and that, too, without the exercise of care or forethought. Could a more certain way be devised for lowering character, destroying self-reliance, and discouraging, if not absolutely preventing, improvement?”
450. The Logical Outcome.—By 1832 the false and vicious principle on which Gilbert's act was based had been carried logically out to its limits in almost universal pauperism. The condition of the person who threw himself flat upon public charity was better than that of the laborer who struggled on to preserve his manhood in self-support. The commissioners appointed in that year to investigate the workings of the poor law, found that, where the independent laborer was able to earn by his week's work but 122 ounces of solid food, the pauper had 151 ounces given him in idleness. The former had only to abandon his effort to provide for himself, to be better provided for than was possible through his own exertions. The drone was better clothed, better lodged and better fed than the worker.
All the incidents of this bad system were unnecessarily bad. The allowance for each additional child was so much out of proportion to the allowance for adults, that the more numerous a man's children the better his condition, and thus the rapid increase of an already pauperized population was encouraged. Moreover, the allowance in the case of illegitimate children was even greater than for those born in wedlock. The British Parliament had turned itself into a society for the promotion of vice. “The English law,” said Commissioner Cowell, in his report, “has abolished female chastity.” “In many rural districts,” writes Miss Martineau in her History of the Peace, “it was scarcely possible to meet a young woman who was respectable, so tempting was the parish allowance for infants in a time of great pressure.” “It may safely be affirmed,” said the Poor Law Commissioners of 1831, “that the virtue of female chastity does not exist among the lower orders of England, except to a certain degree among domestic servants, who know that they hold their situations by that tenure and are more prudent in consequence.”
Such may be the effects of foolish laws. The legislator may think it hard that his power for good is so closely restricted; but he has no reason to complain of any limits upon his power for evil. On the contrary, it would seem that there is no race of men, whom a few laws respecting industry, trade and finance, passed by country squires or labor demagogues, in defiance of economic principles, could not in half a generation transform into beasts.
451. Poor Law Reform.—We have seen what a system the English squirearchy substituted for the economic law that he that would eat must work. The natural effects of this system were wrought speedily and effectually. The disposition to labor was cut up by the roots; all restraints upon increase of population disappeared under a premium upon births; selfrespect and social decency vanished before a money-premium on bastardy. The amount expended in the relief and maintenance of the poor rose to enormous and even ruinous sums. In some instances landowners relinquished their estates in order to escape the monstrous rates levied upon them, in support of local paupers.
In this exigency, which, in truth, constituted one of the gravest crises of English history, Parliament, by the Poor Law Amendment Act (4th and 5th, William IV.) returned to the principle of the act of Elizabeth. The workhouse test was restored; allowances in aid of wages were abolished; paid overseers were appointed, and a central system was created for the due supervision of the system. Illegitimacy was discouraged by punishing the father, instead of rewarding the mother; and the law of pauper settlement∗ was modified so as to facilitate the migration of laborers in search of employment.
By this great legislative reform the burden of pauperism, in spite of the continuing effects of the old evil system, was reduced in three years, by an average amount, the kingdom over, of forty-five per cent.
452. The Principle that Should Govern Poor Relief.—The moral of this episode in the industrial history of England is easily drawn. It is of the highest consequence that pauperism shall not be made inviting; that, on the contrary, the laborer shall be stimulated to the utmost possible exertions to achieve self-support, only accepting relief as an alternative to actual starvation. It is not, to this end, necessary that any brutality of administration shall deter the worthy poor who have no other recourse; but, it should be the prime object of legislation to make the situation of the pauper less agreeable than that of the independent laborer, and that, by no small interval. The workhouse test for all the able-bodied poor, and genuine hard work, up to the limit of strength, are imperatively demanded by the interests of productive labor. Wherever there is a possible choice between self-support and public support, the inclination to labor for one's own subsistence should be quickened by something of a penalty upon the pauper condition, though not in the way of cruelty or positive privation. “All,” says Mr. Geo. W. Hastings, “who have administered the Poor Law must know the fatal readiness with which those hovering on the brink of pauperism believe that they can not earn a living, and the marvelous way in which, if the test be firmly applied, the means of subsistence will be found somehow.”
the doctrine of the wage-fund.
453. The Doctrine Stated.—In opening the subject of Wages, I passed by without discussion the once generally received doctrine—generally received, that is, in England and America—of a fund set apart for the payment of wages, and proceeded at once to state affirmatively the views I hold regarding the laborer's share in the product of industry.
Inasmuch, however, as the student will find this doctrine explicitly taught in the great majority of all the systematic treatises on the shelves of our libraries, it seems important that it should be dealt with critically.
The doctrine of a Wage-Fund is, in substance, as follows: There is, in any country, at any time, an amount of wealth set apart by economic forces for the payment of wages. The ratio between the aggregate capital and the portion thus devoted to the payment of wages, is not necessarily the same in different countries at the same time, or in the same country at different times. That ratio may vary with the conditions of industry and the habits of the people; but at any given time, the amount of the wage-fund, under the conditions existing, is determined in the amount of capital.∗ Were the amount of that capital greater, the wage-fund would be greater, and greater in precisely the same proportion. Were the amount of that capital smaller, the wage-fund would be smaller, and smaller in precisely the same proportion.
The wage-fund, therefore, may be greater or less at another time; but at the time taken, it is definite. The amount of it can not be increased by force of law, or of public opinion, or through sympathy and compassion on the part of employers, or as the result of appeals or efforts on the part of the working classes.∗
The sum so destined to the payment of wages is distributed by competition. If one obtains more, another must, for that reason, receive less, or be kept out of employment. Laborers are paid out of this sum, and out of this alone. The whole of it is distributed without loss, and the average amount received by each laborer is, therefore, determined precisely by the ratio existing between the wage-fund and the number of laborers, or, as some writers have preferred to call it, between capital and population.†
The wage-fund, at any given time, being thus determined, the rate of wages will be according to the number of persons then applying for employment.† If these be more, wages will be low; if these be fewer, wages will be high.
It thus appears that the wage-fund—the aggregate amount to be distributed as wages—is, at any given time, irrespective alike of the number and of the industrial quality of the wages class. The average rate of wages is determined exclusively by a comparison of the amount of that fund with the number of that class. The industrial quality of the laborers has nothing to do, at the time, with their wages.
454. The Doctrine Examined.—What shall we say of this doctrine of a Wage-Fund? Several objections may be urged against it, any one of which would be fatal.
First. The doctrine assumes that wages are always and necessarily paid out of capital, the results of past accumulation. As a matter of fact, wages in England, where this theory of wages originated, were, at one time, early in the century, paid, financially speaking, out of capital generally, if not universally. That condition of things has continued to the present time.
Why was this? Was it of the essence of the matter, or an accident?
I answer, wages were advanced by capital in England, because capital had there been accumulated to so great extent that employers were able to lay down the whole of the wages to be paid as soon as the service was rendered, even before the products were harvested or marketed, while, at the same time, wages were and had been so low that the laborers had been able to save little or nothing out of their earnings in the past, and were consequently obliged to look to their employers for subsistence, almost from the moment they began to work.
But during the same period a very different relation between laborer and employer, as regarded the payment of wages, existed in the United States. Employers were paying their laborers by the year, giving them their wages, in full, only when the crops were harvested or the goods marketed, making meanwhile such advances as their means allowed, or as were required by the varying wants of their workmen, no small part of whom had saved enough out of the liberal earnings of former years to support themselves and their families until the year's wages should be paid.
In other words, the industrial conditions were more favorable to the payment of wages in the United States, while in England the financial conditions were more favorable. But it is the industrial conditions which determine the amount of wages, the necessaries, comforts and luxuries which the laborer receives for his services. The financial conditions only determine the manner and time of payment, whether at once or on a future day, whether in money or in goods.
455. Wages may be advanced out of Capital, but are paid out of the Product.—But even if, in fact, all wages were laid down by the employer as soon as services were rendered, before the crops were harvested or the goods marketed, it would not follow that the existence of capital furnished the reason for the employment of labor, or that the amount of that capital furnished the measure of the wages to be paid.
An employer pays wages to purchase labor, not to expend a fund of which he may be in possession. He purchases labor, not because he wishes to keep it employed, but as a means to the production of wealth. He produces wealth, not for the sake of producing it, but with a view to a profit to himself, individually, in that production.
If a person have wealth, that, of itself, constitutes no reason why he should expend any portion of it on labor, on machinery, or on materials. It is only as he sees that he can increase that wealth through production, that the impulse to employ it in those directions is felt. But for the profits by which he hopes thus to increase his store, it would be alike easier and safer for him to keep his wealth at rest than to put it in motion for the benefit of others. The mere fact that the employer has capital at his command, no more constitutes a reason why he should use it in production, when he can get no profits, than the fact that the laborer has arms and legs constitutes a reason why he should work when he can get no wages.
We repeat: the employer purchases labor with a view to the product of labor. The kind and amount of that product determine what wages he can afford to pay. He must, in the long run, pay less than that product, less by a sum which is to constitute his own profits. If the product is to be greater, he can afford to pay more; if it is to be smaller, he must, for his own interest, pay less.
It is, then, for the sake of future production that the laborers are employed, not at all because the employer has possession of a fund which he must disburse. It is the value of the product, such as it is likely to prove, which determines the amount of the wages that can be paid. Thus, it is production, not capital, which furnishes the motive for employment and the measure of wages.
In saying that production furnishes the measure of wages, it is, of course, not to be understood that wages equal the product of industry. The advocate of the wage-fund asserts that capital furnishes the measure of wages, meaning that the amount to be paid in wages is some part of the aggregate capital of the country, the ratio between the two varying from time to time, indeed, but being, for any given moment, fixed by the existing conditions of industry. So I say, production furnishes the measure of wages, meaning that the amount to be paid in wages is some part of the product of industry, the ratio between the two varying, probably, from time to time, from causes innumerable, but being, for any given moment, fixed by existing conditions.
456. No Wage-Fund Irrespective of the Industrial Quality of the Laborers.—But if production furnishes the measure of wages, the amount so to be paid can not be irrespective of the industrial quality of the laboring class. If we assume that upon a cultivated island are tools and carts and animals for draught, and other forms of capital adequate for a thousand laborers, the production will vary within a very wide range according to the industrial quality of the laborers using that capital. If we suppose them to be East Indians, we shall have a certain annual product; if we suppose Russian peasants to be substituted for East Indians, we shall have twice or three times that product; if we suppose Englishmen to be substituted for Russians, we shall have the product again multiplied two or three fold. An Englishman will do from three to thirty times as much work in a day as a Bengalee, according as the nature of the work makes smaller or larger demands upon the skill and strength of the laborer. By the wage-fund theory, the rate of wages would remain the same through these changes, inasmuch as the aggregate capital of the Island and the number of laborers in the market would be unchanged, the only difference being found in the substitution of more efficient for less efficient laborers According to the view here advanced, on the contrary, the amount to be paid in wages should and would rise with the increased production due to the higher industrial quality of the laboring population. Whether it would rise in exact proportion thereto is not the question we are now considering.
457. No Wage-Fund Irrespective of the Number of Laborers.—But, further, if production furnishes the measure of wages, the amount to be so paid cannot be irrespective of the numbers of the laboring class.
By the wage-fund theory, the amount that can and will be paid in wages is a predetermined dividend, the number of laborers being the divisor, and the average wages the quotient. Just in proportion as the number of laborers is diminished will the average wages be raised; just in proportion as the number of laborers is increased, will the average wages be lowered. “There is no use,” writes one of the expositors of this doctrine, “in arguing against any one of the four fundamental rules of arithmetic. The question of wages is a question of division. It is complained that the quotient is too small. Well, then, how many ways are there to make a quotient larger? Two ways. Enlarge your dividend, the divisor remaining the same, and the quotient will be larger; lessen your divisor, the dividend remaining the same, and the quotient will be larger.”
This theory, that the number of laborers constitutes the divisor of a predetermined dividend, is manifestly erroneous, because it leaves out of account the influence upon production of the condition of Diminishing Returns, or the reverse, in agriculture, as well as the mechanical effects of the division of labor.
Let us, first, suppose that the island occupied by the body of one thousand laborers before referred to, contains a great breadth of choice arable land, of which the laborers have been hitherto able to cultivate but a small portion. If, now, the number of laborers be increased twenty per cent. with a corresponding increase of capital, production will be more than proportionally increased (see par. 50), through the effect of the division of labor and the union of forces in production. Here, again, we find the wage-fund theory at fault. So great is the virtue of this cause that an increase of laborers—before the condition of diminishing returns is reached—might be followed by an increase of production even in the lack of a proportional increase of capital, or indeed, of any increase at all.
458. But now let us take the condition of diminishing returns in agriculture, that state where, if anywhere, it might be supposed the wage-fund theory would hold good. In such a condition, the soil, as we have seen (par. 51), fails to respond adequately to new applications of labor; the product falls off not absolutely, but relatively; and, thus, while the aggregate crops are larger through the incoming of new laborers, the actual amount falling to each laborer is diminished. Wages fall. But does this happen in accordance with the economic doctrine we are considering? No; per capita wages fall, because per capita production is diminished, although often this is coincident with an actual increase of capital.
It would be brutal to inflict further blows upon a body so exanimate as the theory of the Wage-Fund. The natural and the literary history of this doctrine will be found at length in an article in the North American Review, for January, 1875.
the multiple or tabular standard of deferred payments.
459. We saw (par. 191) that, with a view to avoiding the fluctuations to which even the precious metals are subject, through long periods of time, it has been proposed by writers of eminence to create a multiple or tabular standard of value. This is to be done by joining together a number of articles, of importance in the economy of daily life, in such a way that the fluctuations of value in the several constituent articles shall largely neutralize each other.
460. The details of the scheme as proposed by these writers may be stated as follows. A number of articles in general use, corn, beef, potatoes, wool, cotton, silk, tea, sugar, coffee, indigo, timber, iron, coal, and others, shall be taken, in a definite quantity of each, so many pounds or bushels or cords or yards, to form the standard required. The value of these articles, in the quantities specified and all of standard quality, shall be ascertained monthly or weekly by government, and the total sum which would at the time purchase this bill of goods shall be, thereupon, officially promulgated. Persons may then, if they choose, make their contracts for future payments in terms of this multiple or tabular standard.
For example, suppose I sell a house to-day, the value of which, as agreed upon between myself and the purchaser, is %20,000, one-half to be paid down at the time, two-tenths to be paid in two years, three-tenths in five years, with interest on the last two sums. One-half of the purchase money, being payable at once, is paid in money, %10,000 in gold or bank notes. For the rest, the purchaser and I look at the last published statement of the government commissioner, and find the value of a unit of the tabular standard to be %12.50; that is, %12.50 will now purchase the bill of goods which form the standard. The purchaser then gives me two notes, one for 320 units of the tabular standard, payable in two years, and one for 480 units, payable in five years, with interest at six per cent., per annum, meanwhile. At the end of the first year, the two parties interested look in the official gazette, and find the value of the unit at the time to be %12.75. There is then to be paid one year's interest on each note, amounting, in the case of the first note, to 19.2 units, which obligation is discharged by the payment of %244.80 in current money; and, in the case of the second note, to 28.8 units, which obligation is discharged by the payment of %367.20.
At the end of the second year the value of a unit of the tabular standard might be ascertained to be %13, or %12.25; in the latter case the interest on the first note is discharged by the payment of %235.20, and that on the second note by the payment of %352.80. If, however, the value of a unit has been ascertained to be %13, the interest on the first note will be %249.60, and that on the second note %374.40.
But the principal of the first note, 320 units, is now to be paid. A similar computation shows that, if the value of the tabular standard is %12.25, the maker of the note must pay %3,920 to discharge his obligation; if the value of the unit be %13, he must pay %4,160.
461. What has been Effected?—Now, without waiting for the maturity of the second note, let us see what the use of the tabular standard has thus far effected. When I sold my house, two years before, I gave the purchaser two years' credit for two-tenths of the price. Had I taken the money at the time, it would have bought me so many pounds of beef, so many bushels of corn, so much iron, coal, etc. Now, at the end of the second year, what I receive as the stipulated two-tenths payment for the house will bring me precisely the same amount of beef, corn, iron, coal, etc. Meanwhile the debtor has paid me, every year, as interest, enough to enable me to purchase six parts in a hundred of this entire list of commodities. The purchaser has had the advantage of obtaining credit, to that extent, but has derived no unearned benefit from the delay of payment; and, on the other hand, has been protected from any loss through that source.
462. It is to be observed regarding the proposed tabular standard, first, that it is not obligatory upon any one to use it. Persons buying and selling still make their contracts in terms of money if they please. The government merely affords them the opportunity to make their contracts payable in units of the tabular standard, if it be worth their while to do so. Secondly, the only machinery required for the operation of this system would be a commission to ascertain the current prices of the articles on the official list and to publish the same. No new method of accounting would be introduced. Interest and principal could be computed as easily as under the present system. The courts would enforce the obligation of contracts on precisely the same principles when expressed in units of the tabular standard, as when expressed in dollars or pounds sterling. Thirdly, no new medium of exchange would be introduced. The creditor would not be obliged to receive, at the maturity of the note, so many cartloads of vegetable, animal and mineral products, to be hawked about for sale. The payment, at the maturity of the obligation, would be made in money. The only effect of the introduction of the tabular standard would be to decide how much money at that date constituted the equivalent, in the power to purchase the necessaries, comforts and luxuries of life, of the money which would have been paid had the sale been for cash. In short, it is a means of giving and taking credit without receiving an unearned advantage or suffering an undeserved injury through fluctuations in the value of money.
463. Is it Practicable?—Such being the contemplated advantages of the system of a tabular or multiple standard, the question whether the use made of the system, if established, would be worth the small degree of effort necessary to establish it, is a question which could only be answered after trial. The mere fact that the scheme is sound and the advantages of its adoption unquestionable, would not of itself be sufficient to secure any considerable application of this standard to the actual operations of trade. It took hundreds of years for the Arabic figures to drive the abominably clumsy Roman figures out of the counting rooms of great merchants and bankers. The slow progress of the metric system, even in this age of innovations and of quick communication, affords a measure of the difficulty of supplanting one habit of trade by another, however much superior.
The practical limits of this system, were it to be once introduced and tried, are fairly a matter of doubt. Prof. Jevons deemed it practicable to extend this mode of determining the claim of the creditor, the obligation of the debtor, to ordinary commercial paper having three months or more to run. I do not myself apprehend that the system would trench, in any considerable degree, on the field of so-called commerce. The merchant, buying every day and selling every day, giving notes with one hand and taking them with the other, may fairly look to see his losses, through fluctuations in the purchase power of money, offset by his gains through the same source; or, in a worse result, he is in a position, by greater energy and economy, to make good his capital. It is essential, or at least highly important to the conduct of business, in the modern organization of industrial society, that the merchant or manufacturer shall be able to tell just where he stands, at any time; to strike an exact balance between assets and liabilities. But this would not be possible with the tabular standard. A note for 400 units, payable in September, might not offset a note for 400 units receivable in August or October. The difference might be small; it might also be large. It would thus be impracticable for the man of business to cast up, at a moment, the results of any given transaction, or ascertain precisely his own standing. By the very description of the system, every note given or taken would have to be liquidated.
Commerce will not tolerate any such obstruction; and the scheme, so far as this application is concerned, may be dismissed at once. Commerce will do the best it can with the use of money and of credit expressed in terms of money. Nothing is more characteristic of the commercial spirit than the disposition to take the evil with the good, roughly to strike the average of gain and loss, promptly to charge-off bad debts, always looking on towards the future, never regretting the past. This spirit leads, doubtless, into many errors, but it is the very life of commerce.
464. For what classes of contracts, then, might the multiple tender be advantageously employed?
Certainly the need of such a standard of deferred payments is most imperative in the case of those who are not in the way of repairing any losses they may suffer through fluctuations in the value of money; upon whom the full effects of depreciation fall directly and remain without relief. And while the advantages of such safeguards upon the value of debts here rise to their maximum, the obstruction sinks here to a minimum. In permanent investments of property not the least inconvenience will be encountered by the scheme of a multiple tender, which might be extended to the cases of all who have definitively retired from active life, carrying away with them all they will ever have to support old age and provide for their children; to the cases of trustees and guardians, under a solemn responsibility in the care of estates, where loss is more to be dreaded than gain to be desired; to the cases of institutions whose funds are sequestered from the stock of active capital, for pious and charitable uses. The funds of savings banks might be put under the same safe-guard, and government loans might also be issued in terms of the multiple tender.
trade unions and strikes.
465. Wholly a Practical Question.—It has been shown (pars. 348–56) under the title of Distribution, that the question, whether any law or institution does or does not promote the freedom of industrial movement enjoyed by the community, is a question not to be decided à priori. Consideration must be had of the actual effects of such a law or institution, comparison being made not between the state which will result therefrom and an ideal state of perfect economic mobility, but between the new condition and the condition which does exist or probably would exist without that law or institution.
Let us take the case of Trade Unions, so called, which undertake, through agreements among themselves and perhaps simultaneous strikes against their employers, to fix wages, regulate the hours of labor, and control many of the various details of industry. To the first suggestions of such associations, the economist promptly and properly objects that all combinations in the sphere of economics are opposed to competition. The objection is well taken, and it remains for the advocate of trade unions to show sufficient cause for thus obstructing competition.
The economist further alleges that such associations are liable, are even likely, to fall under the control of demagogues, who will use their power to bully or harass employers, to make unreasonable demands, and to precipitate labor contests, in which the interests of all classes will be sacrificed to the self importance of a few managers. This point, again, is well taken. That liability, that likelihood, exists, and the advocate of trade unions is bound to show no small degree of practical benefit resulting from such associations, to offset the mischief they are almost certain to commit in the ways indicated.
466. On the other hand, the advocate of trade unions alleges that these associations, though in form opposed to competition, and though subject to many abuses, do yet, in certain states of industrial society, assist the laborers as a class to assert their interests in the distribution of the product of industry. This claim is not, on the face of it, unreasonable.
We have seen (pars. 343–5) that competition, perfect competition, affords the ideal condition for the distribution of wealth. But as we saw in the case of the audience in a theater that had taken fire, the action of men in concert and under discipline, while it can never be wiser than that of men acting coolly and intelligently for themselves, may be far wiser than the action of men stricken with panic and hurried into a senseless, furious rush. Respecting trade unions, the question is not, whether joint action is superior to the individual action of persons enlightened as to their industrial interests, but whether joint action may not be better than the tumultuous action of a mass, each pursuing his individual interest with more or less of ignorance, fear and passion.
Now, with a body of employers, few, rich and powerful, having a friendly understanding among themselves and acting aggressively for the reduction of wages or the extension of the hours of work, and, on the other side, a body of laborers, numerous, ignorant, poor, mutually distrustful, while each feels under a terrible necessity to secure employment, who shall say that such a body of laborers might not be better able to resist the destructive pressure from the employing body, if organized and disciplined, with a common purse and with mutual obligations enforced by the public opinion of their class?
I said, destructive pressure, for we saw that the pressure of competition, if it be unequal, may lead to the degradation of the laboring class (pars. 345–7), just as the waves over which and through which a ship rides unharmed, when herself free to move, become crushing and destructive, let once the ship's bow be jammed between rocks or lodged in the sands.
467. II. Strikes.—The question of the economic influence of strikes is a distinct question. There have been trades unions which seldom or never resorted to strikes. Some of the greatest strikes have occurred without the agency of organized trade unions. For myself I entertain no doubt that the early strikes in England, which followed the repeal, in 1824, of the Combination acts, were essential to the breaking up of the power of custom and fear over the minds of the working classes of the Kingdom. For centuries it had been a crime, by statute, for workmen to combine to raise wages or shorten the hours of labor, while masters were left perfectly free to combine to lower wages or lengthen the hours of labor. The beginning of the century found the laboring classes of England almost destitute of political franchises, unaccustomed to discussion and the free communication of thought, tax-ridden, poverty-stricken, illiterate. What else than the series of fierce revolts, the rebellions of down-trodden labor, which followed Huskisson's act of 1824, could, in an equal period of time, or, indeed, at smaller cost, have taught the employers of England to respect their laborers, and have taught the laborers of England to respect themselves; could have made the latter equally confident and self-reliant in pressing home a just demand, or made the former equally solicitous to refuse no demand that could reasonably be conceded?
For, be it remarked, perfect competition, which affords the only absolute security possible for equitable and beneficial distribution, requires that each and every man for himself shall unremittingly seek and unfailingly find his best market. If for any reason, whether from physical obstruction or legal inhibition, or from his own poverty or weakness of will or ignorance, or through distrust of his fellows or a habit of submission to his employer or his social superiors, any man fails, in fact, to reject the lower price and to seize the higher price, the rule of competition is violated; all immunity from deep and permanent economic injury is lost; the man may be crushed in his spirit, in his health, in his habits of life, and may thus sink finally and hopelessly to a lower industrial grade. The history of mankind is full of examples of large populations broken down by a competition to which they were unequal, until they have become pauperized, brutalized and diseased beyond the power of any purely economic causes to raise them upwards and restore them to industrial manhood.
468. Strikes are the Insurrections of Labor.—In claiming that strikes may, in certain states of industrial society, in their ultimate effect really aid the laboring classes, let me not be misunderstood. To strikes I assign the same function in industry which insurrections have performed in the sphere of politics. Had it not been for the constant imminence of insurrection, England would not through several centuries have made any progress towards freedom, or even have maintained its inherited liberties.
Strikes are the insurrections of labor. They are, wholly, a destructive agency. They have no creative power, no healing virtue. Yet, as insurrections have played a most important part in the political elevation of downtrodden people, through the fear they have engendered in the minds of oppressors, or through the demolition of out-worn institutions which have become first senseless and then pernicious, so strikes may exert a most powerful and salutary influence in breaking up a crust of custom which has formed over the remuneration of a body of laborers, or in breaking through combinations of employers∗ to withstand a legitimate advance of wages. Doubtless even more important than the specific objects realized by strikes, has been the permanent impression produced upon the minds and the temper of both employers and employed. The men have acquired confidence in themselves and trust in each other; the masters have been taught respect for their men, and a reasonable fear of them.
Nothing quickens the sense of justice and equity like the consciousness that unjust and inequitable demands or acts are likely to be promptly resented and strenuously resisted. Nothing is so potent to clarify the judgment and sober the temper, in questions of right or wrong, as to know that a mistake will lead to a hard and a long fight.
469. What is the Failure of a Strike?—Nor must it be thought that because strikes often, perhaps we might say commonly, fail of their immediate object, they are, therefore, nugatory. Many an insurrection has been put down speedily, perhaps with great slaughter, which has been followed by remission of taxes, by redress of grievances, by extension of charters and franchises. It may be considered doubtful whether the successful or the unsuccessful insurrections of England have done more to advance English liberties. Of the rising of the peasantry against Richard II., which was suppressed in a few days, Prof. Thorold Rogers says: “The rebellion was put down, but the demands of the villains∗ were silently and effectually accorded. As they were masters for a week of the position, the dread of another servile war promoted the liberty of the serf.” Even an unsuccessful strike may make employers more moderate, considerate and conciliatory, as they recall the anxieties, the struggles and the sacrifices of the conflict.
470. Better than Strikes.—Yet, as insurrections mark off the first stages of the movement towards political freedom, so strikes belong to the first stages of the elevation of masses of labor, long abused and deeply debased. Happy is that people, and proud may they be, who can enlarge their franchises and perfect their political forms without bloodshed or the threat of violence, the long debate of reason resulting in the glad consent of all. In like manner, no body of laborers can get for themselves by extreme measures so much of honor and of profit as they will when, through cultivating moderation, good temper and the spirit of equity. they attain the capability of conducting their probably unavoidable disputes with the employing class to a successful conclusion without recourse to the brutal and destructive agency of strikes. With political rights such as are enjoyed by all classes in the United States, with universal education, free land, the quick communication of ideas, the cheap transportation of persons and effects, the abundant opportunities offered for accumulating and investing savings, it is a shame to us, as a people, that we have not yet made for ourselves a better way out of our industrial disputes.
471. III. Factory Acts.—We should apply the same tests to any existing or projected legislation intended for the relief of the laboring classes, such as acts restricting the hours of labor, providing for the safety of operatives against accidents from machinery, directing the sanitary inspection of workshops and factories, prohibiting the employment of children of tender age or of women underground, or in work unsuited to their sex, or immediately before or after confinement. The one question in regard to each such measure is not whether its intention is philanthropic or otherwise; not even whether it does or does not, in form, violate the principle of competition; but whether it does, in effect,∗ and in the large, the long, result, leave the laboring classes better off or worse off, as to the ability and disposition to seek and to find their best market; whether, in fact, in the condition of industrial society then and there existing, it promotes or retards competition.
The beginning of the present century found children of five, and even of three years of age, in England, working in factories and brick-yards; women working underground in mines, harnessed with mules to carts, drawing heavy loads; found the hours of labor whatever the avarice of individual mill-owners might exact, were it thirteen, or fourteen or fifteen; found no guards about machinery to protect life and limb; found the air of the factory fouler than language could describe, even could human ears bear to hear the story.
472. English Factory Legislation.—The factory legislation of England, the necessity and economic justification of which the Duke of Argyll has called (par. 248) one of the great discoveries of the century in the science of government, began in 1802, with an act which limited the hours of labor in woolen and cotton mills to twelve, exclusive of meal times, imposed many sanitary regulations upon the working and sleeping rooms of operatives, required the instruction of children during the first four years of apprenticeship, and provided an official inspection of establishments for the due execution of the law. Further legislation was had in 1816 and 1831; while in 1833 was passed the important act known as 3d and 4th William IV. (ch. 103), which forbade night work in the case of all persons under eighteen years, and limited the labor of such persons to twelve hours, inclusive of an hour and a half for meals; prohibited the employment of children under nine years of age—while, between the ages of nine and thirteen, the hours of labor were reduced to eight; prescribed a certain number of half-holidays, and required medical certificates of health on the admission of children to factories. Numerous acts have enlarged the scope of these provisions and extended them to other classes of workshops and factories; while, with the good faith and thoroughness characteristic of English administration of law, a rigid and relentless inspection compels a punctilious compliance with these provisions in every workshop and factory of the kingdom. The principle of the English Factory acts has been slowly extended over the greater part of Europe.
473. Economists Oppose Factory Legislation.—Unfortunately for political economy, its professors in the Universities, in Parliament, and in the press, generally ranged themselves in opposition to this legislation. Acting upon a series of arbitrary assumptions which fell far short of the facts of human nature, the English economists insisted upon attributing to the individual initiative of the laborer, however miserable and blind and weak, however overborne by circumstances and bound to his place and work by poverty, ignorance and inertia, all that economic virtue which belongs to the individual initiative of the laborer when fully alive to his own interest, alert in seeking the highest price for his services or commodities, and able to move freely to his best market without hindrance from any source, whether within or without himself. They asserted that labor was fully competent to protect itself against abuses, if left free by law. They asserted that all restrictions upon industry are obstructive, failing to see that while restriction and regulation are obstructive as against an imagined condition of perfect practical freedom, these may actually increase the ease and readiness of movement in a state where obstructions exist on every hand. They argued that to limit the power of the operative to sell his labor must, in the end, diminish the price he will get for it, not seeing that, just as a crutch, while it is only a hindrance and a burden to a sound man, may keep a cripple from falling to the ground, and may even enable him slowly and feebly to walk, so a restriction upon contracts for labor may correspond to an infirmity of the laboring classes under certain moral and physical conditions, in such a way as to give them a greater freedom of movement than they would have without it.
I said that it was unfortunate for political economy that the professional economists of England opposed the factory acts. This had the effect to set both men of affairs and the masses of the people against political economy. The latter were alienated by what they deemed either indifference to human suffering or subserviency to the interests of capital. The former saw how far wrong the pursuit of this so-called science could carry intelligent men, on a practical question. To them this seemed to justify the contempt so generally entertained by men of affairs for “theorists.” The cause of the trouble was not that the economists were theorists, but that they were bad theorists. Their theories did not cover the facts of the case they had undertaken to deal with. The economic men∗ they had created for the purposes of their reasoning were no more like Englishmen than were the Houyhnhnms of Jonathan Swift.
That legislation prohibiting factory labor in excess of what is compatible with health and strength, having due respect to conditions of age and sex, requiring the observance of sanitary principles, and protecting working people against abuses as to the time and form of paying wages† may be practically beneficial in a high degree, has long passed beyond controversy among the statesmen of nearly all civilized countries. If political economy objects to such legislation, so much the worse, as I said before, for political economy. But I hope there has been shown sufficient reason for holding that no such opposition of principle exists; and that both the largest production and the most equitable distribution of wealth may be subserved by legal regulations wisely conceived to meet the grave and perhaps incurable infirmities of manufacturing populations.
the knights of labor.
474. Their Relations to Trade Unions.—The public mind of England and, though in a less degree, of America, has become accustomed to the idea of the organization of bodies of laborers, for mutual support and for the promotion of their common interests. Beginning fifty or sixty years ago, the modern trade union has worked its way, against a deep prejudice on the part of employers and of economists, alike, to very general acceptance. I believe it to be true that the best publicists and the most judicious men of business in England concede that the trade unions of the kingdom, whatever errors may have been committed in the course of their development, now fully justify themselves by their acts. In the United States, I have, within the past year or two, been assured by three prominent railroad presidents that they would greatly prefer dealing with the locomotive engineers as members of their brotherhood, to dealing with them individually; and that they believed the influence of this organization to be, over the whole country, good. Generally speaking, however, employers among us are less fully reconciled to the existence and activity of trade unions than are employers in England, probably because trade unions, with us, are in a stage which in England was passed almost a generation ago; perhaps, also, because such associations are less needed here than there.
Within the past three or four years, a new development in the organization of the laboring class has taken place in the United States, in the form of a general confederation of trade unions, re-enforced by large numbers of persons not attached to any union, under the title, Knights of Labor. The essential object of the new confederation is to bring to bear upon employers, either in strikes or during those discussions, regarding hours of work, rates of wages, etc., which might be expected to result in strikes, a pressure more severe, more unremitting, more far-reaching, than any isolated body of laborers or even the most formidable trade unions could hope to produce and maintain. By drawing the whole laboring class∗ of the country into one mighty confederation, whose trade districts and assembly districts, while they provide for the local needs, or the characteristic trade requirements, of their several constituencies, shall yet be subject to the legislation of a general labor congress and to the executive authority of a supreme council, it is intended to inaugurate a new era in the so-called “conflict of labor and capital.”
In principle, this organization does not differ from the smallest trade union. The distinction between the two is one purely of degree. In practical effect, however, the Knights of Labor, if they shall accomplish as much as one-half their declared purposes, will produce a veritable revolution in industry: a change, no longer of degree, but of kind.
The difference is just here. Up to this time the labor organizations, the trade unions, have, on the whole, not done more than offset the great economic advantage which the employers of labor enjoy in the increasing struggle over the product of industry. When I say the labor organizations have not done more than this, I do not overlook the fact that they have, at times, done a great deal which was aside from this; have wrought much mischief, in bad blood or under the guidance of demagogues, through acts which were reprehended not less by their own wiser members than by the general sense of the community. What I mean to say is, that, irrespective of such sporadic acts of folly, the power given to the working classes by their organizations, added to the power which those classes would have wielded, if unorganized, has not been more than enough to secure the full, attentive and respectful consideration of their interests and claims. It has not been enough, speaking broadly, to overbear the master's rightful authority, to interfere with his necessary control of his business, to render it unsafe for him to undertake contracts, much less to transfer the initiative in production from him to his workmen.
475. The Laborer must look out for his own Interest.—The reader who has carefully followed the course of discussion in this treatise will not have failed to apprehend the opinion of the writer, not only that an active and even eager pursuit of their own interests by the working classes is a condition of their realizing the utmost economic good that might be brought to them, but that it is, not less, for the interest, the particular, selfish interest of the employing class themselves, that they should have to do with men who are acute and alert in searching out opportunities for the improvement of their own condition, with men who are bold and persistent in following up every possible advantage. I believe that the industrial republic has as little need as has the political republic, of citizens who have no opinions for themselves as to their rights and interests, but thankfully receive whatever, in the time and place, may be offered them. I believe it is eminently for the prosperity and growth of the community that each and every member, whatever his place in the industrial order, should strongly desire to improve his condition, and should seek to do so by all means which are compatible with industrial peace. I have even, under a preceding title (Strikes), expressed the opinion that, on rare occasions and for manifestly good reasons, industrial warfare itself may result in the better adjustment of economic relations.
476. The Balance of Power between Employers and Employed.—The accomplishment of the avowed purposes of the Knights of Labor, however, would lead to the complete subjugation and subjection of the employing class, a result, which, in my view, would be fraught with the most mischievous consequences. Up to this time the trade unions have, in general, brought to bear a sufficient pressure to make employers carefully considerate of the wishes and interests of their laborers, anxious to avoid all causes of offense, willing to concede whatever they possibly can. This is as it should be. No good comes from the exercise of unchecked and irresponsible power in industry, any more than in government.
On the other hand, the trade unions, up to this time, while they have been able to make themselves heard and considered, while they have had all the power necessary to cause the employer to be desirous and even anxious to concede every reasonable demand, have yet, in the main, shown a sense of responsibility for the fairness and reasonableness of their demands. They have known at the outset, or have learned as the result of unsuccessful contests, that there is a limit to their power; that, in making excessive and exorbitant claims, they are likely to be beaten; and that every defeat on such an issue weakens themselves and strengthens their antagonists for any future contest. In a word, while, under the conditions which subsisted until within the last three or four years, many employers were, by force of temperament, unreasonably arbitrary, and large bodies of laborers were, on their side, often unreasonably exacting, something approaching an equilibrium had been reached between the powers of the two parties, securing industrial peace to as great a degree as might fairly be expected under the rightful and desirable ambition and self-assertion, the fortunately growing ambition and self-assertion, of the working classes.
477. The Subjugation of the Employer.—On the other hand, such a confederation of labor as is now proposed and attempted would utterly destroy the balance of industrial power, leaving the employer only the choice between conceding any and all demands, however unreasonable, or ceasing to produce. And this object is distinctly avowed by the leaders in this movement, some of whom have carried their scheme out to its full logical consequences, declaring it to be their purpose to bring about a state of things, in which, while the employer shall still occupy his formal attitude in production, he shall be, in effect, only the paid, doubtless the well-paid, agent of what they are pleased to call “the productive classes.” The employer is still to remain the superintendent of the industrial operations; he is still to risk his own capital and the borrowed capital for which he has made himself responsible; he is still to exert his technical, administrative and financial skill in the conduct of the business over which he is placed; he is still to exercise authority, so far as permitted, over the personnel of the works or factory. But the real initiative in production is to rest, not with him, but with the council or committee or executive officer, not, indeed, of his own laborers, but of those of the whole country; he is to engage no one and to discharge no one, without consent; others are to decide for him all questions relating to the quality of work or the conduct of his workmen; the hours and general conditions of labor, the rates of wages and the times and modes of payment, are to be determined by the general parliament of labor or under its authority.
Beyond this, I do not understand that it is the present purpose of the promoters of this movement to go. For example, if I rightly understand the matter, the employer, having produced goods under the conditions recited, will be left free to dispose of them at his pleasure, selling them to whom he will, at such prices and on such terms of payment as he choose, unless, indeed, that be prevented by some “boycott,” ∗ placed upon some person or class of persons, or upon some kind of goods, or upon the product of certain machines, under authority of the parliament of labor or of its executive officers, for some industrial, political, social or personal reason.
478. Difficulties Attendant on the Scheme.—Of course, no “long headed” man, and there are many such among the promoters of this movement, expects that any one of the present employers of labor will find the conditions thus imposed agreeable, or will submit to them if he has any choice, short of leaving business. They anticipate that many employers will refuse to submit to such conditions and will relinquish production, perhaps with consequences immediately injurious to their laborers and to the community. They anticipate that others will resist violently, throwing their whole energies and fortunes into the contest, fighting with fury, as if for life, and only ceasing their struggles when bound hand and foot. But they expect that still others will submit, more or less unwillingly, to the terms imposed upon them, and will consent to carry on business under the new régime. The next generation of employers they look to see made up of men bred and trained under the new conditions, men who, born into such a state of things, and not knowing any other, except historically, as belonging to a bad past age, when the rights of labor were not respected, will accept the situation as cheerfully as the Frenchman of to-day accepts the great Revolution. Such men, it is believed, will be both glad and proud to wield the limited, delegated powers then pertaining to the position of the employer of labor; and will, in good faith and good feeling, execute the laws and decrees of the parliament of labor or of its supreme or local council or of any committee thereto authorized.
Probably, also, none of the more clear sighted of the promoters of this movement anticipate that the legislation of their congress or the decrees of their standing councils or the acts of their executive officers will, at first or for a long time, be free from much that is visionary and unpractical, or even from the influence of personal piques, jealousies and animosities. They doubtless anticipate that much that is futile will be attempted, and that much that is mischievous will be accomplished. No intelligent person could possibly believe that such tremendous and far-reaching powers could be placed, all at once, in the hands of a few men without grave abuses being generated; or that a machine so gigantic could be set up and put to working without much jarring and friction, and an occasional accident, even if a permanent breaking-down be avoided.
The men who are concerned in this movement are shrewd enough to see that the sense of the entire helplessness of the employing class must inevitably affect, and affect profoundly, the judgment and the will of the soundest, wisest, and most fair-minded representatives whom the body of laborers could select, rendering them less sound, less wise and less fairminded than they would be in dealing with a body of employers who were not helpless, but had the power to resist and to strike back, if crowded too far. These men, also, are shrewd enough to see that there is great likelihood that the sense of the helplessness of the employing class will so operate, at least in the first instance, upon the minds of the body of laborers as to cause them to select, as their representatives, not the soundest, wisest and most fair-minded of their class, but those who are extreme, arbitrary and arrogant in character and in manners, and who will fast become more and more so, through the exercise of such tremendous powers.
All this, any clear-minded person must see, on the first contemplation of such a scheme; all this, doubtless, the leaders of the Knights of Labor fully realize; but were these probabilities presented as an objection to that scheme, they would answer, that the education of the mass of laborers, to use, without abuse, such and so great industrial powers, is, in their belief, practicable, in time, in such time as would be taken for accomplishing any other great moral and intellectual advance; and that such an education and training of the mass of laborers would itself be a social and political gain, far transcending in value even the industrial blessings which the most sanguine could look for from the fullest success of the proposed scheme of democracy in industry.
479. Another View of the Knights of Labor.—I have sought to state, fully and fairly, what I understand to be the purpose of the leading promoters of the organization known as the Knights of Labor. Probably many, even among the leaders in this movement, probably most of the members of the organization, regard it as an effort to give encouragement and moral support to the constituent trade unions and to bodies of labor heretofore isolated; as a means of stimulating the self-respect and self-assertion of the laboring class, of promoting their mutual acquaintance, of strengthening the feeling of a common interest among them, rather than as a serious attempt to reverse the relations heretofore subsisting between employer and employed and to transfer the initiative in production and the control of industry from the former to the latter class. In this narrower sphere, it is conceivable that an organization like the Knights of Labor might become a great educational force; a useful agency for directing the efforts of its members toward the improvement of their condition; a source of much inspiration, through the deliberations and debates of earnest men, representing the better sense and higher purposes of vast bodies of laborers, in the main, right-minded, honest and patriotic. Indeed, it is not improbable that, should the confederation relinquish its larger designs, it will assume this less ambitious but more useful function. How fully and how long it would, in such a capacity, be supported by the efforts and contributions of its present members, we need not consider.
480. Can Profits be Confiscated?—Reverting to the larger scheme, openly avowed and vigorously advocated, of those who would make the Knights of Labor all that has been described, let us ask, how far the object aimed at is desirable; how far it is, in itself, practicable; how far such an organization is suited to accomplish that object.
In the first place, can one be mistaken in deeming it the main object of this industrial enterprise to secure to the laboring class the benefit of a part, perhaps the greater part, of the profits now realized by the body of employers, which the laborers regard as excessive? If this be, indeed, the main object of the association, the aim is, if I have rightly indicated the origin and measure of business profits, a mistaken one. Profits are not obtained by deduction from wages; they are purely the creation of the employers themselves. The mass of profits represents the wealth produced by able, skillful, resolute and far-seeing men of business, over and above that which is produced, with the same amount of labor power and capital power, by employers who fail in one or more of the qualities necessary to success.
If this view of the source of the employer's gains be just, it is not possible to wrest profits to the benefit of the body of laborers. The employers may, indeed, be prevented from realizing them, by strikes and industrial disturbances; but no part of the profits which they would otherwise have made, will, for that reason, go to any other class in the community. On the contrary, the community as a whole, and the working classes in especial, will be worse off for the impairment or destruction of the employer's interest in production, i. e., his profits.
Are there, then, no means by which the working class can operate, at once to reduce the amount going to the employing class as profits, and in the same degree to enhance their own wages? I answer, yes: there are such means. These have been pointed out in paragraphs 310 to 314. In just so far as the laboring classes, by their influence upon legislation or administration, or by their own direct action, contribute towards elevating the standard of the employing class, thus raising the lower limit of production in this respect, in just so far will they increase, not only the relative share, but the positive amount, coming to them in wages. It does not need to be said that treating employers as public enemies, levying industrial warfare upon them, concerting schemes to harass them and take them at every accidental disadvantage, rendering it unsafe for them to undertake contracts on a large scale and over long periods of time, and subjecting them to insults and indignities, as so many labor leaders seem to think it a matter of class duty to do, is not a way to effect the desired result. Such courses must not only reduce the average standard of business ability, by driving out the ablest men, but must introduce into the employment of labor whole classes of persons of lower and still lower grades of efficiency, to the great and lasting injury of the community and of the working classes, first of all, last of all, most of all.
481. Will the Machine Work?—So much for what I understand to be the main object of this industrial movement. A few words only will be needed regarding the suitability of the agencies to be employed.
One might cherish grave doubts regarding the practicability of breeding a race of conductors of business, who, possessing energy, intelligence, forethought and resolution, will rather like to execute the legislation of a parliament of labor; will cheerfully accept the condition of being ordered about by a committee of their own hands, or of a local council; will be unhesitatingly ready to embark capital in enterprises over which they have practically no control. One might entertain grave doubts as to the capability of the working classes, after any course of education, however long, painful and costly, maintaining a parliament of labor which shall be competent to deal with concerns a hundred times as large, important and difficult as those which come before the American Congress, without making a mess of it, compared with which the muddle into which Congress manages to get our industry and finances would be clearness and order and system and light. But it is probably not necessary to go so far into the matter as to inquire what might come to pass should the Knights of Labor pursue their designs through a considerable period of time. It is in the highest degree improbable that the organization itself could maintain activity long on such a scale as has been projected.
The very vastness of the scheme foredooms it to failure. The attempt to embrace so much under a single rule; to legislate in detail for so many conflicting interests; to regulate, from a central point, conditions of life and labor so widely diverse as those of city and of country, of east and of west, of agriculturist and of artisan, of common and of skilled labor, of the producer of materials and of him who uses those materials in the production of still higher classes of commodities, must result in failure. The restiveness shown by many trade unions, the open revolt of some, the early establishment of a rival Confederation, already intimate the essential weakness of the scheme, at least if it is to be administered in the masterful spirit of the last two years.
482. Is the Scheme “American”?—Nor do I believe that, if it were left to the suffrage of the laboring classes in America themselves, one in twenty of those who were born upon the soil would vote to bring about such a subjection of the employing class to the will of their workmen or to a general parliament of labor. The American well knows that there is neither hardship nor indignity in working for another man, in his shop, at his task, with his tools, on his terms. He knows that industry, to be successfully conducted, must be controlled by its responsible head. He sees all around him men who have risen from the ranks of labor to become the conductors of business, no one hindering them, all applauding their efforts and rejoicing in their success. He knows that for himself and his children the way is open clear up to the top. The American workingman can be reasoned with, and that not on a low plane only; he is capable of understanding and appreciating almost any consideration relating to the market; his spirit is that of civility, reciprocity and fair play; he cordially and intelligently accepts, in its full economic bearings, the maxim, “live and let live.” Had it been left to our native population alone, not one of those violent and reckless attacks upon production and transportation, which have, within the past two or three years, shocked the whole industrial system and have come near to produce a general crisis of trade, would ever have taken place.
attacks on the doctrine of rent.
483. Bastiat.—A doctrine of such far-reaching consequences as Ricardo's doctrine of Rent has not been allowed to stand without suffering many and vehement assaults. The French Bastiat has, in his eloquent and witty work, “The Harmonies of Political Economy,” undertaken to demonstrate that Rent, proper, economic rent, does not exist; that it is purely a fiction jointly maintained by the economists and the communists;∗ that all which the landlord receives for the use of his land is nothing but the proper remuneration for the labor and capital expended in inclosing the land, providing means of access, draining, manuring and otherwise improving the soil, erecting buildings for sheltering the produce, housing the laborers, etc. Inasmuch as Bastiat's objections to Ricardo's doctrine were far more strongly and clearly stated by the late Mr. Henry C. Carey, of Philadelphia, I pass at once to the consideration of the views of the latter.
484. Carey.—Mr. Carey's attack is twofold. His first argument is founded on a “comparison of the cost and value of existing landed capital.” To use his own phraseology, “There is not throughout the United States, a county, township, town, or city, that would sell for cost; or one whose rents are equal to the interest upon the labor and capital expended.”∗ And Mr. Carey draws what he regards as the logical inference from this alleged fact: “If we show that the land heretofore appropriated is not only not worth as much labor as it has cost to produce it in its present condition, but that it could not be reproduced by the labor that its present value would purchase, it will be obvious to the reader that its whole value is due to that which has been applied to its improvement.”†
Now, it appears to me℡ not only that this is not “obvious,” but that something very like an Irish bull is to be found here. The trouble with this argument is its superabundance of proof. The effect is much the same as that which results from a superabundance of powder in charging a gun.
Had Mr. Carey been able to show that, in any case taken, a county, township, town, or city was worth exactly as much in labor as it had cost, the coincidence of amounts would at least have suggested, if it did not create a proper presumption to that effect, that the labor expended was the cause of the value existing; but when Ricardo's critic asserts that any farm and any collection of farms, has cost more, often far more, than it is worth, he furnishes the means for his own refutation.
Suppose the present value of a piece of land to be represented by 100 units, while the value of the labor it has cost to “produce” the farms found thereon, is represented by 125. Now, says Mr. Carey, inasmuch as the land is not at present worth more than 100, while the labor invested in it was worth 125, it is clear that nothing but the labor has entered to give value to the land!
But how so? What has become of the 25 which was in excess of the 100? Lost, says Mr. Carey, since, “as labor is improved in its quality by the aid of improved instruments, all previously accumulated capital tends to fall below its cost in labor.”∗
Ah! but if that 25 can be lost and has been lost, how can you show that another 25 has not been lost, and still another 25, through the operation of the same cause? How can you prove that proper economic rent does not enter? How, indeed, can you prove that the present value of the land is due, in any part whatever, to the labor expended in the past?
John Smith's barn has been broken into, over night, by a burglar who sawed a hole through the door to effect his entrance. Mr. Carey, in the interest of justice, appears next morning among the excited throng of neighbors, and produces a board taken from James Brown's woodshed, which, though not corresponding to the guilty hole in size or shape, is yet large enough, as he explains, to allow just such a piece to be cut out of it, thus conclusively proving James Brown to have been the robber of John Smith's barn!
485. How the Value of Agricultural Improvements should be Estimated.—An argument that breaks down thus, under the slightest strain, can not be worth further notice on its own account; yet we may find matter of not a little economic interest in following out the question here raised, as to the relation between what Mr. Carey calls the cost of producing farms and the value of farms when “produced.”
First. To begin with, all statements regarding the amount so invested in any country or district are based on comparatively little information. The data are few and meager, even for making estimates. Accomplished statisticians, accustomed to deal with computations relating to agriculture, like Mr. Robert Giffen, Professor Thorold Rogers, or Sir James Caird, would scarcely presume to claim approximate accuracy for any estimates they might make regarding the amount of labor involved in bringing even a limited agricultural region into its present state of productiveness.
Second. Again, wholly in addition to the difficulty encountered in estimating the amount of labor involved, would be the difficulty of computing the money value of that labor. While some great works of improvement are effected by bodies of hired laborers working through the year or through the agricultural season, most farm improvements are effected in the off season, when the wages of hired labor are very low,—perhaps only one-half what they would be at another period of the year; and probably the greater part are effected by the labor of the owner or occupier of the land and his family, in fragments of the day which would not otherwise be utilized, or in portions of the year when little or nothing of the current work of the farm can be done.
Third. The element of interest can properly be introduced into such computations only in respect to a very small proportion of agricultural investments.
In general, where capital is applied, it is in the expectation of an immediate improvement of the productive power of the land, the annual increase of the produce being relied upon to furnish at least the annual interest upon the investment, so that, speaking broadly, in any comparison between the cost and the value of landed property, only the first cost of the improvements should be set against the ultimate value.
There are cases, of course, where capital is applied to the land in the view alone of a distant increase of value. Here, within moderate limits of time, the inclusion of interest is not unreasonable. But even here, and even within comparatively brief periods, the application of the principle of geometric progression, in the form of compound interest, is of very doubtful propriety. Geometrical increase is rarely attained and never long maintained in things human. Contemplating an actual instance of such increase within the field of industry, the most unreasonable expectation which can be formed concerning it, is that it will continue. That it should continue long, is not so much unlikely as impossible.
Sir Archibald Alison, in his discussion of the British Sinking Fund, states that “a penny laid out at compound interest at the birth of our Saviour would in the year 1775 have amounted to a solid mass of gold eighteen hundred times the whole weight of the globe.” So, doubtless, it might be shown that the value of Adam's first day's work in the Garden, properly compounded during six thousand years, would amount to more than the present value of all the lands of the world, and consequently that all the work that has been done since, in bringing the soil under cultivation, has been thrown away!
The incredibility of geometric increase through any considerable period of time can not be too strongly impressed upon the student of economics. The produce of a single acre of wheat, sown over and over for fourteen years, would cover all the solid land on this planet. The spawn of certain fish would suffice in even fewer years, if reproduction went on in geometrical progression, to fill to the brim the basin of every pond, lake, river, sea, and ocean.
Hence we see the utter inconsequence of computations into which compound interest is allowed to enter, except in strict subordination to common-sense. Probably there is no way in which a man can so quickly and so conclusively show himself unfit to be listened to, as by appealing to geometrical progression for the proof of an economic or social theory.
Fourth. But the consideration of greatest importance in computing the cost of “producing” farms, is that, in general, agricultural improvements are compensated, and are expected to be compensated, upon the principle of those annuities in which a certain number of annual payments both yield due interest on the purchase money and extinguish the capital itself, as when a man for %1,000 (on which the normal interest would be %50 or %60) purchases the right to receive %120 a year for a certain term, with no claim on the principal thereafter.
Now, is this so, or is it not? Let us satisfy our minds on this point; for if the proposition just now stated is correct, it disposes effectually of the argument against the economic doctrine of rent derived from the fact of expenditures in “producing” farms.
That this proposition is correct, is, I think, proved conclusively by the fact, abundantly established by English experience, that there are few classes of improvements known to agriculture which a tenant for 33 years will not make at his own expense, notwithstanding the certainty that he will cease to enjoy the benefit of them at the expiry of his lease.
Do not the several considerations adduced, and especially the last, take away all the force of this labored argument against the doctrine of rent?
486. Mr. Carey's Historical Argument.—But Mr. Carey was not satisfied with one refutation of Ricardo's law. He attempted and, to the satisfaction of his disciples, achieved, a second demonstration of its falsity. That this subsidiary argument against the doctrine of rent should have been for a moment admitted, affords a striking proof of the weakness and vagueness with which economic questions, especially those affecting the land, have been discussed.
“It will,” Mr. Carey says,∗ “be perceived that the whole system (of Ricardo) is based upon the assertion of the existence of a single fact, namely, that, in the commencement of cultivation, when population is small and land consequently abundant, the soils capable of yielding the largest return to any given quantity of labor alone are cultivated.
“That fact exists, or it does not. If it has no existence, the system falls to the ground. That it does not exist, that it never has existed in any country whatsoever, and that it is contrary to the nature of things that it should have existed, or can exist, we propose now to show.
“We shall commence,” he says, “our examination with the United States. Their first settlement is recent; and, the work being still in progress, we can readily trace the settler and mark his course of operation. If we find him invariably occupying the high and thin lands requiring little clearing and no drainage, those which can yield but a small return to labor, and as invariably traveling down the hills and clearing and draining the lower and richer lands, as population and wealth increase, then will the theory we have offered be confirmed by practice,—American practice, at least.
“If, however, we can thence follow him into Mexico and through South America, into Britain, and through France, Germany, Italy, Greece, and Egypt, into Asia and Australia, and show that such has been his invariable course of action, then may it be believed that when population is small and land consequently abundant, the work of cultivation is, and always must be, commenced upon the poorer soils; that, with the growth of population and wealth, other soils, yielding a larger return to labor, are always brought into activity, with a constantly increasing return to the labor expended upon them.”
487. All this is Irrelevant to the Doctrine of Rent.—I will not say, with Prof. Roscher, that Mr. Carey's lengthy exposition is “rank with inexact science and unhistorical history.” It does not matter a particle, so far as the validity of Ricardo's doctrine is concerned, whether Mr. Carey has correctly apprehended or grossly misapprehended the facts of human history, in the respect under consideration.
Let it be conceded that the order of settlement in all new countries is that which Mr. Carey has indicated,—the newcomers taking up light, dry, sandy soils, which will yield a quick return to the labor of the colonists, aided by their scanty capitals; and that it is only when wealth has been in some measure accumulated, after the first severe struggle to maintain existence, that deeper and richer, but cold and wet soils, are opened, the forests cleared, the swamps, rich with the vegetable mold of centuries, drained. What, pray, does all this prove, so far as the doctrine under consideration is concerned? It is absolutely indifferent to the matter at issue.
It is true that Ricardo assumed, for the purpose of illustrating his doctrine, that the soils first cultivated, within any considerable country, were those most productive. It also appears from the context, that Mr. Ricardo really supposed that this was the historical order of occupation. Yet the economic law of rent has reference alone to lands under cultivationat the same time; and would have precisely as much validity if every thing which Mr. Carey has contended for, regarding the actual order of settlement and cultivation, were conceded, as if the hypothesis of Ricardo were historically accurate.
488. Is this History indeed Historical?—I have said that the complete establishment of Mr. Carey's historical order would not effect the validity of Ricardo's law of rent; and that, therefore, one might, for argument's sake, concede the accuracy of the narrative concerning the early settlement of Europe, Asia, and America, which occupies so large a portion of his treatises.
But while the historical order of settlement is thus of no consequence as affecting the economic law of rent, it must be admitted that important consequences would follow the establishment of the proposition that “the work of cultivation is and always must be commenced upon the poorer soils; that, with the growth of population and wealth, other soils yielding a larger return to labor are always brought into activity;” or, as the author elsewhere expresses it, that the settler invariably travels down the hills, clearing and draining the lower and richer lands, as population and wealth increase.
What are the economic consequences which, as we have said, would follow the establishment of Mr. Carey's proposition? These: that, instead of the increase of population lowering the margin of cultivation, and thus enhancing the aggregate body of rents,∗ it would be shown to have the effect, by stimulating the cultivation of better lands, to throw out the poorer (the first cultivated) soils, and thus to raise the lower limit of cultivation, and thus at once to diminish the share of the produce going as rent to the landlord, and to increase the average produce, per capita, of the community. Rents will still be determined by the Ricardian formula; but the importance of rent as a factor in the distribution of wealth will be diminished.
In view of the importance of these consequences, let us proceed to examine Mr. Carey's sweeping assertions regarding the actual order of settlement and occupation, for the purposes of agriculture. Let us see whether this history be indeed historical or not.
In the first place, we note that the detailed accounts relate, in the main, either to the settlement and cultivation of countries in ages when military necessities were a controlling force, or else to the very earliest stages of settlement and cultivation of the land, under circumstances which made the needs of immediate subsistence peculiarly urgent, as in the new States of the American Union, eighty, sixty, forty years ago.
It would take more time than we have at command to go through the history of the settlement of Britain, Italy, Greece, Germany, and other ancient countries, and attempt to analyze the influences which determined the selection of lands for habitation and cultivation. When we contrast the sites of nearly all ancient and medieval cities, built upon the towering rock, with the utterly indefensible sites of our modern cities, we can well understand that not economic but political and military exigencies may have given a strong preference to high and rugged ground, even for agriculture, in the days of almost universal warfare. The crops, indeed, raised on such ground would neither be so ample, nor obtained with so little effort and sacrifice, as those which might have been raised in the fertile valleys below, but they would be in a less degree subject to be swept away by occasional forays of armed bands.
Fortunately, we do not need to enter into an analysis involving so much time and labor, and perplexed by so many uncertainties regarding the facts with which we should have to deal. If the forces which in those days determined population to high and poor soils were exclusively or even predominantly economic forces, we shall not fail to find them operating to control the occupation of new countries in these times of general peace. Let us then consider the course of settlement in the United States. Mr. Carey himself expresses his preference for investigation in this field. “Their first settlement,” he says, “is recent, and, the work being still in progress, we can readily trace the settler, and mark his course of operation.”∗
489. Take the Case of Ohio.—And, to further narrow the field, let us confine our view to the State of Ohio. This State is as favorable as any to the theory under consideration. “The early settlers,” says Mr. Carey, “of Ohio, Indiana, and Illinois uniformly selected the higher grounds, leaving the richer lands for their successors.”∗
The settlement of Ohio may be said to have been in progress all the time between 1802, when its inhabitants were fewer than 50,000, and 1832, when its population had reached 1,000,000: in progress in this sense, that not until the latter date had settlers found their way into every corner and county of the new State.
Now let it be conceded that throughout this period Mr. Carey's statement regarding the course of occupation holds good substantially. I say, substantially, because to justify the assertion that the settlers “uniformly” selected the higher grounds would require a greater amount of particular and local knowledge than any one man ever possessed.
How much, then, would there be in this fact, admitted for the sake of argument, which should be in contravention of the economic doctrine of rent? These early settlers of Ohio were, in the first instance, necessarily controlled in their “location” by considerations relating to the transportation of their products and to communication with the settlements they had left behind. Now, advantages of situation, as we have before seen, enter just as fully into the net productiveness of any tract of land, according to Ricardo's doctrine, as advantages arising from superior fertility. Even in illustrating the origin of rent (par. 259) we assumed the existence of a very productive tract, situated at so great a distance that it would not be occupied until cultivation had been driven to descend through several successive stages within the territory immediately surrounding the market.
But, secondly, the early settlers of Ohio were largely compelled by the immediate exigencies of pioneer life to do something different from that which would have been the most advantageous had they possessed an ample store of necessaries and of the utensils and materials of industry. New-comers must needs do, not what they would, but what they can; they must raise a quick crop, by little labor; and it is natural enough that they should generally seek the sidehill, which is self-drained, and the open country, which does not require clearing, and the thin, dry soil, which gives a speedy, though not a large return.
They still seek that land which will be most productive under the circumstances in which they find themselves placed; for, as Professor Johnston∗ has well said, that which would be rich land for a rich man may be poor land for a poor man.
490. But the question I wish now to raise is, whether, when the first exigencies of pioneer life were passed, when some store had been accumulated, when population had become sufficiently dense to allow a reasonable degree of co-operation in labor, when time had been afforded to lay out roads and bridges and to perfect the means of transportation, when the capabilities and resources of the land had become thoroughly known,—whether then it remained true that cultivators in Ohio neglected the best soils for those of an inferior quality?
If not, the fabric so laboriously reared for assaulting the stronghold of the economists, tumbles to the ground, of its own weight. How much does it matter that the people of Ohio, while they were first spreading loosely over the State, took up lands as is asserted, unless it can be proved, or at least a strong presumption can be established, that they continued to take up poorer soils, in preference to the best? Mr. Carey asserts that the hypothetical order of settlement is “universally false”; that is, it is false as applied not to one but to all stages of the history of any community. As this matter is important, let us formulate it somewhat rigidly.
Let us suppose the possibly cultivable lands of Ohio to form seven distinct grades, 1 to 7, No. 1 being the poorest, No. 7 the richest. Let us divide the economic life of Ohio, beginning in 1802 and ending—when? into seven generations, with continually increasing population.
Now, according to the view we are considering, generation No. 1, the first settlers, will take up lands No. 1, the poorest of all; generation No. 2 will take up lands No. 2, the next to the poorest; generation No. 3 will take up lands No. 3, and so on.
This, or something very like it, must take place, or our “law” breaks down; for should generation No. 3, say, have the presumption to take up lands No. 6, and generation No. 4 be thereby encouraged to take up lands No. 7, why then generation No. 5 will be compelled to take up lands No. 5, that is, lands poorer than those which had been brought in by the two generations preceding, while generation No. 6 will be driven to take up lands No. 4, far down on the scale of fertility; and generation No. 7, the flower of civilization, will actually have to “decline upon” lands No. 3, which, according to Mr. Carey, generation No. 3 should, in conscience, have taken up. In other words, we should have cultivation driven down to inferior soils, a state of things respecting which Ricardo's critic declares that it not only never has existed in any country whatsoever, but that it is contrary to the nature of things that it should have existed or can exist.
In view of such possible results, what an appalling responsibility rests upon the people of any generation in the matter of not taking up any better land than they ought! In the first place, think what a degree of virtue it requires, that they should deliberately deny themselves the enjoyment of the really best land around them, in order that the coming generations, with increasing numbers, should have the privilege of first occupying these, as Mr. Carey says they must do! Even more remarkable than this, think of the degree of intelligence that is required to point out to the men of any generation just the share of the lands of the State which Mr. Carey's theory will permit them to occupy, they being necessarily ignorant as to what the future population of the State is to be, or through how many generations or centuries the increase of population upon the territory is to be continued!
491. But let us return to Ohio. We have seen what is required to make this “historical law” true. How far do the probabilities of the case favor the application of that law throughout the settlement of that State?
We may believe that there were, in Ohio, in 1832, when the population was 1,000,000, about 4,000,000 acres of improved land in farms. By 1850, when the population had risen to 2,000,000, these 4,000,000 acres had become 10,000,000. Did the addition thus made to the inclosed and improved lands of the State include a fair proportion of the best lands within its limits, or were the new lands, also, thin, dry, sandy soils, only not quite so poor as those brought in between 1802 and 1832, —soils giving little root to grasses or to grain, but raising a small crop easily and quickly? Unless the latter was the case, this great historical law becomes little better than arrant nonsense.
There is a popular belief throughout the Eastern States of this Union, that, in the eighteen years covered by this period, —1832–50,—there was an immense amount of “clearing” done in Ohio; and the virtues of the “pioneer's ax” have been celebrated in song and story. Is this all a mistake? Or, if the people of Ohio really did cut down the primeval timber over thousands of square miles, did they, as they ought, take pains to cut down only timber which grew over comparatively poor soils, so as not to interfere with the rights vested in unborn generations by Mr. Carey's “law”?
Between 1850 and 1880, again, the population of Ohio increased to 3,000,000, and the number of acres of improved lands rose to 18,000,000. Were the 8,000,000 acres improved for the first time during this period, all, or substantially all, of a quality next above those previously brought in, but still below the best? Did this added territory embrace lands only a little less thin, a little less shallow, than those occupied in 1850? Did this vast annexation still leave the really good lands of the State uncultivated, only to be improved when the population shall reach 5,000,000 or 10,000,000?
492. I do not care to contest Mr. Carey's assertion that the first generation of settlers in any American State have spread themselves loosely over the soil, picking out the spots which offered the greatest facilities for the transportation of produce and for communication with the older settlements, perhaps giving a certain preference to naturally cleared, self-drained land. But that the second generation, in any American State, north of Mason and Dixon's line at least, have shrunk from the real problem of their economic life, have failed to grapple with the obstacles which withstood their acquisition of the richest resources of nature, have neglected to subdue the soil, the best soil they could find, with ax and spade, strenuously, manfully, with incessant toil, with unflinching courage, I, for one, do not believe; and Mr. Carey has not adduced a scintilla of evidence to prove a proposition so contrary to all we have ever learned of the character and life of the Western people. In the absence of any such statistical demonstration, common fame and common sense give the flattest contradiction to this hypothesis.
With this we may safely leave the argument against the Ricardian doctrine of rent. The person who denies the truth of the Ricardian law in effect declares that men habitually rent or sell highly fertile and comparatively infertile fields, rich corn lands and mountain pastures, at the same price; that men habitually rent or sell lands near a market at the same price with lands the most distant from the market. If he does not mean to assert this, he does not in the smallest degree traverse the path of Ricardo's argument. If he does mean to assert this, he puts himself on the level of the person who should assert that men habitually sell two bushels or ten bushels of wheat, indifferently, at one and the same price.
the nationalization of the land.
493. The Law of Rent Re-stated.—We have seen what is the nature of Rent. It represents the surplus of the produce over the cost of cultivation on the poorest lands actually contributing to the supply of the market at the time.
We saw (par. 262–4) that, conceding the private ownership of land, rent is merely a question between landlord and tenant; that so far as economic forces are concerned, rent must remain in the hands of the landlord; that, setting violence aside, it can only come into the hands of the tenant by gift from the landlord; that, were it, by virtue of the landlord's generosity, to reach the tenant, it would, so far as economic forces are concerned, go no further. It could only be carried to the agricultural laborer or to the consumer of agricultural produce, by another gift or series of gifts.
494. The Equities of Rent, as between Landlord and Tenant.—So much for the economics of rent; let us look a moment at the equities of it.
Certainly, as between the landlord and the tenant, the latter can set up no claim to any portion of rent. This is shown in the following way: It is, as we have seen, of the very essence of rent that it represents, and is measured by, the surplus of produce over the cost of cultivation on the poorest (or most distant) lands under cultivation for the supply of the same market. Now, these poorest or most distant lands have occupiers who must be presumed to be industrially, and, if you please, morally, just as meritorious as those who cultivate the better lands or the lands nearer the market. The several classes of tenants are only put on an equality when rent is exacted according to the Ricardian formula. It would clearly be inequitable that one body of occupiers should receive back, in the price of their products, only the actual cost of cultivation, while another should receive large sums in addition to this, as would be the case were rents to be remitted.
495. As between Landlord and the Agricultural Laborer.—In the same way it may be shown that the agricultural laborers on lands which bear a rent have no claim, in equity, to any portion of that rent. Why should they receive any more for their services than the laborers who cultivate the no-rent lands?
Clearly, then, as against either the tenant or the agricultural laborer, the landlord has an easy case. He can prove that neither of the two has any claim whatever to any part of what he receives as rent.
496. As between the Landlord and the Community at Large.—But suppose the issue to be raised between the landlord and the whole community, can the acquisition by individuals of the surplus of the produce above the cost of cultivation on the poorest soils, be so successfully defended on grounds either of political equity or of political expediency?
As this question has within the past few years become a “burning” question, I think it but right to present the argument of those who urge that “the unearned increment of land” should go to the State and not to individuals. This argument can not be better presented than in the language of John Stuart Mill, who, in his later days, became President of the English Land Tenure Reform Association, whose professed object was to agitate this question.
497. Mr. Mill's Argument.—“Suppose,” says Mr. Mill, “that there is a kind of income which constantly tends to increase without any exertion or sacrifice on the part of the owners, these owners constituting a class in the community whom the natural course of things progressively enriches, consistently with complete passiveness on their own part. In such a case there would be no violation of the principles on which private property is founded, if the State should appropriate this increase of wealth, or any part of it, as it arises. This would not properly be taking any thing from any body; it would merely be applying an accession of wealth, created by circumstances, to the benefit of society, instead of allowing it to become an unearned appendage to the riches of a particular class.
“Now this is actually the case with rent. The ordinary progress of a society which increases in wealth, is at all times tending to augment the income of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were, in their sleep, without working, risking or economizing.”
In the paper from which the foregoing paragraphs are extracted, Mr. Mill expressly excepted the present value of the land in possession of individuals at the time the system of the public acquisition of the increment of the land should go into effect. Such an act should, in his view, have reference only to future increase.
In another place, while expressing a general respect for the rights of property, Mr. Mill proceeds:
“Some people ask, But why single out the land? Does not all property rise in value with the increase of prosperity? I answer, No. All other property fluctuates in value, now up, now down. I defy any one to show any kind of property, not partaking of the soil, and sufficiently important to be worth considering, which tends steadily upward, without any thing being done by the owners to give it increased value. So far from it, that the other of the two kinds of property that yield income, namely, capital, instead of increasing, actually diminishes in value as society advances. The poorer the country, or the further back we go in history, the higher we find the interest of money to be. Land alone—using land as a general term for the whole material of the earth—has the privilege of steadily rising in value from natural causes; and the reason is that land is strictly limited in quantity; the supply does not increase to meet the constant increase of demand …
“Well would it have been if this diversion of the public wealth had been foreseen and guarded against long ago; let us at least prevent any more gigantic fortunes∗ from being built up in a similar manner. The Association claims for the State the right to impose special taxation upon the land, equivalent to its special advantage.”
“Those countries are fortunate,” remarks Mr. Mill, “or would be fortunate, if decently governed, in which, as in a great part of the East, the land has not been allowed to become the permanent property of individuals, and the State consequently is the sole landlord. So far as the public expenditure is covered by the proceeds of the land, those countries are untaxed, for it is the same thing as being untaxed to pay to the State only what would have to be paid to private landlords if the land were appropriated.
“The principle that the land belongs to the Sovereign, and that the expenses of government should be defrayed by it, is recognized in the theory of our own ancient institutions. The nearest thing to an absolute proprietor whom our laws know of, is the freeholder, who is a tenant of the Crown, bound originally to personal service, in the field or at the plow, and when that obligation was remitted, subject to a land tax intended to be equivalent to it.”
498. The Feudal Burdens of Land in England.—In the paragraph last quoted, Mr. Mill contemplates the feudal obligations of the tenant by military and other service as approximately the equivalent of an annual rent, which would be made, rudely indeed, to increase with the increasing value of land due to the growth of population and the progress of trade and manufactures. The chief of these obligations, as formulated by law and custom in England, are thus stated by Sir Edward S. Creasy, in his work on “The English Constitution.”
The king, as feudal lord of his barons, and other military tenants, had a right to exact from them military service, or a pecuniary payment in lieu thereof; and it seems to have been optional with the king to claim the money, whether the vassal wished to serve in person or not, and even to exact both money and personal service. This war tax is called escuage or scutage, and the constant wars and troubles of the times always furnished a ready pretext for demanding it. Other exactions of money payments, under the name of aids, were continually practiced. Besides these, the heir, on succeeding to his estate, was required to pay a sum of money to the lord, under the title of a “relief.” If the heir was a minor, the lord took possession of the land, as guardian, and used or abused it as he pleased, till the heir obtained his majority. Even then the heir was obliged to pay a fine on suing out his livery, that is, on obtaining the delivery of the land from his guardian to him. The lord also had the right of nominating and tendering a wife to his male ward, or a husband to his female ward. And if the ward declined to marry the person so selected, the ward forfeited to the lord such a sum of money as the alliance was considered worth. The lord was entitled to a fine upon alienation: that is, if the tenant disposed of the land, or any part of it, to any third party. If the tenant died without heirs the land reverted to the lord. This was termed escheat (par. 573), and, as the right of devising real property did not exist in England after the Conquest, till Henry VIII's time, escheats were numerous. The lord also claimed to take back the land whenever the tenant committed any of a numerous list of crimes or acts of feudal misconduct. Such criminality or misconduct on the tenant's part was held to work a forfeiture.
499. Composition for the Feudal Burdens Upon Land.—On the restoration of Charles II., the land-owning class secured their release from the strictly feudal burdens, the consideration received by the Crown being solely an excise upon beer; and thus the vast possibilities of revenue to be derived from the composition of the feudal obligations of the landowning class were sacrificed. In the revolution of 1688, however, there was, as Mr. Mill notes, a reaction against this sacrifice of the rights of the public revenue. Indeed, the revolution of 1688 was, in Mr. Mill's view, “a revolution made by the towns against the country gentlemen. One of the fruits of it was a tax on the land of four shillings in the pound, which, at that time, may have been an equivalent for the burdens which had been taken off the landlords.”
In 1692, accordingly, the lands of England were valued for the purposes of the land tax.
This land tax was to be a tax, not upon the community, not upon raw produce, not upon commercial agencies and manufacturing operations, but solely a tax upon landlords, in reduction of their rents: a resumption by the State, for its own benefit and for the corresponding relief of other classes, of a portion of the rents arising from the increase of population and the progress of trade and manufactures.
The following is Mr. Ricardo's statement of the incidence of a land tax:
“A land tax, levied in proportion to the rent of land,∗ and varying with every variation of rents, is, in effect, a tax on rent, and, as such a tax will not apply to that land which yields no rent, nor to the produce of that capital which is employed on the land with a view to profit merely and which never pays rent, it will not, in any way, affect the price of raw produce, but will fall wholly on the landlords.”
But if the revolution of 1688 was, indeed, as Mr. Mill conceives it, a revolt of the towns against the country gentlemen, the force of that movement was soon exhausted. The landowners resumed control of English legislation; the valuation of 1692 has remained to this day as the basis of the land tax, while the rate of that tax was in 1798 made permanent at 4 shillings in the pound on the valuation of that date. It was by this series of acts that the right of the State to participate in the increase of the rental value of the lands of the kingdom was relinquished, in consideration of an annual payment, forever, of about £2,000,000.
500. Mr. Cobden's Denunciation.—It was to this relinquishment of the rights of the revenue by parliaments composed of country gentlemen, for the benefit of landlords, at the expense of the general community, that Richard Cobden alluded in his somewhat threatening speech of December 17, 1845.
“I warn ministers and I warn landowners and the aristocracy of this country against forcing upon the attention of the middle and industrious classes the subject of taxation.
“If they make it understood by the people of this country how the landowners here one hundred and fifty years ago deprived the sovereign of his feudal rights over them; how the aristocracy retained their feudal rights over the minor copyholders: how they made a bargain with the king to give him four shillings in the pound upon their landed rentals, as a quit charge for having dispensed with these rights of feudal service from them; if the country understand, as well as I think I understand, how afterwards this landed aristocracy passed a law to make the valuation of their rental final, the bargain originally being that they should pay four shillings in the pound of the yearly rateable value of their rental, as it was worth to let for, and then stopped the progress of the rent by a law making the valuation final; that the land has gone on increasing ten-fold in many parts of Scotland, and five-fold in many parts of England, while the land tax has remained the same as it was one hundred and fifty years ago; … if they force these things to be understood, they will be making as rueful a bargain as they have already made by resisting the abolition of the Corn Law.”
501. Mr. Mill's Land-Tenure Reform Agitation.—What Mr. Cobden thus threatened in 1845, Mr. Mill undertook about 1870: an agitation of the whole question of taxation, and an active inquiry into the right of the landlord class to receive the progressive increase of rents.
The following is an extract from the programme of the Land-Tenure Reform Association, of which Mr. Mill was President:
“(IV.) To claim for the benefit of the State, the Interception by Taxation of the Future Unearned Increase of the Rent of Land (so far as the same can be ascertained), or a great part of that increase, which is continually taking place without any effort or outlay by the proprietors, merely through the growth of population and wealth; reserving to owners the option of relinquishing their property to the State, at the market value which it may have acquired at the time when this principle may be adopted by the Legislature.”
502. What Shall be Said of the Equity of this Proposal?—In their appeal alike to history and to political equity, I can not see that the Land-Tenure Reformers, under Mr. Mill's leadership, were wrong. That (1), by the original Teutonic constitutions the land belonged to the tribe or the community, and not to individuals, and was generally cultivated and enjoyed in common or by rotation of tenure, that (2), even when permanence of individual possession was established and titles were created, the occupation of land was charged with duties to the State, both of fiscal contribution and of personal service, which were onerous, and which tended to increase as the needs of the State increased and as the rental value of the land increased; that (3), in Europe, generally, when the occupiers of land were released from these duties to the State, it was upon a consideration wholly inadequate or upon no consideration at all; while that release was conceded by the landowning class, as the ruling class, to themselves as parties in interest, in a way which in this age would be regarded as corrupt; and that (4), the unqualified ownership of land, thus established, enables the land-owning class to reap an unearned benefit, at the expense of the community: these propositions seem to me indisputable.
503. What of its Expediency?—As a measure of political expediency, however, the scheme of the assumption by the State of the increment of land, appears to me fatally defective.
In the first place, it must be observed that a large part, at best, of the possible mischief has already been done, beyond repair, in the surrender of the rights of the community to individuals. As that surrender is now generations, even centuries old, and as much of the land has changed owners, sometimes over and over again in the interval, many of the present possessors having paid the full price of to-day, in good faith, under existing arrangements which were fully sanctioned by law, it would be simple robbery∗ for the State to reassert its interest in the land without fully indemnifying owners. This the English Land-Tenure Reform Association, in their programme already quoted, fully acknowledged. They proposed to “reserve to owners the option of relinquishing their property to the State at the market value which it may have acquired at the time when this principle may be adopted by the Legislature.”
It is only, then, to the future increase in the value of land that this scheme would apply. Such a limitation of its scope would not only greatly reduce the importance of the benefit to be derived by the State in every community, but would deprive it of all significance in many communities∗ where land has doubtless already reached its maximum value.
But, secondly, government could, by the confession of the Association, not realize through this scheme all that is left after the foregoing deduction has been made. Inasmuch as the State is bound to be very careful and solicitous not to do injustice, the appraisement of the present rental value, or capital value of estates, in the administration of such a scheme, must be very conservative. This, again, is admitted by Mr. Mill. “It is not necessary,” he says, “to enforce the rights of the State to the utmost farthing. A large margin should be allowed for possible miscalculation.”† Yet such an allowance would diminish, by just so much, the inducement to the State to assert its interest in the lands now held by individuals.
504. How About Depreciating Property?—Thirdly, it is clear, that the State, if it will claim the benefit of all increase in the value of lands resulting from the growth of demand, due to general causes affecting the increase of the community in numbers or productive power, is bound in equity, to make good all losses arising from the decrease in the value of lands which results from the decline of demand due to general causes acting in the opposite direction. If the so-called proprietor of land is not to be allowed to reap any gain not brought about by his own exertions, he must, in simple fairness, be protected against losses which no vigilance or effort of his could have averted. “Heads I win: tails you lose,” is not a game at which the State can, in fairness or decency, play with its citizens.
The range of this consideration is not a narrow one. In almost every community, even the most flourishing, the phenomenon of declining values is seen side by side with that of rising values. Notwithstanding the large increase during the past twenty years in the aggregate value of real estate in the city of Boston, for instance, there are extensive sections where houses will not bring any thing near their price at the beginning of this period. Now if, in 1867, the principle of collecting for public uses all excess of rents above those prevailing at that date, or, at the option of the owner, paying the capital value of the property and assuming the ownership, had been adopted by competent authority in and for the city of Boston, the city would now be paying to thousands of property holders considerable annuities, representing deficiencies in rental value which have occurred since 1867, or else it would, which is more probable, have come into possession of street on street of houses and stores whose owners preferred to surrender their property at their capital value in 1867.
505. Fourthly:—Practical objections might be multiplied; but it will be sufficient to refer to the official jobbery, trickery, and corruption which would be involved in the management by the state of all the landed property of the country, either in an attempt to administer it productively, or in the occasional re-valuation and re-leasing of it in parcels to suit the occasions of individuals. To my view, the condition of things that would result would be simply intolerable. When we contemplate the history of even petty transactions of a like character, on the part of our national government, or of the several state governments, it seems impossible to believe that any inducement should ever draw the American people, traditionally jealous of the enlargement of governmental powers, on to the adoption of such a measure.
mr. henry george's crusade.
506. The proposals for the nationalization of the land, offered, as we have stated, by Mr. Mill in 1870, while they received much serious consideration from economists and publicists, aroused no popular excitement. In 1879, Mr. Henry George, then of San Francisco, published a work entitled “Progress and Poverty,” which, about 1883, began to command public attention in an extraordinary degree. During and since that year, the agitation of the question of the public or private ownership of the soil, has gone forward with increasing vehemence, until now (1887), both in Great Britain and in the United States, large bands of enthusiastic disciples, call themselves by the name of the author of “Progress and Poverty.”
Mr. George's practical proposals require but brief notice. They differ from those of Mr. Mill∗ only in the single respect that, while Mr. Mill, like an honest man, contemplated the full compensation of the existing body of owners of land, according to the value of their several properties, at the time the scheme should be adopted and proclaimed by adequate authority, Mr. George repudiates any such obligation on the part of the State, and proposes to confiscate the entire value of the land. The attempted justification for this precious price of villainy is found in the mere, bald assertion of Mr. Henry George, that the State never had the power to give a title to any parcel of land to any person, for any purpose; and that, therefore, all land titles are, from the beginning, void. Under this scheme, alike the man who cultivates broad tracts for profit, and the man who occupies a corner with his humble dwelling; the man who inherited land from his ancestors, and the man who has bought land with the savings from years of labor, would find themselves dispoiled without redress or recompense. Even where the government itself sold the land and put the proceeds into its treasury, Mr. George would have the government confiscate the property, without refunding the price!
Mr. George is, indeed, good enough to say that he will allow improvements on the land to remain the property of those who made them, although, as he justly remarks, improvements made by any person on land not his own, appertain to the land and pass with it. The gratification naturally felt at this magnanimous proposal is, however, qualified by the reflection that, if the sovereign authority of a nation, with the full concurrence and glad consent of all its citizens, generation after generation, can not, as Mr. George assures us, avail to give the faintest title to the smallest parcel of land, possibly Mr. George's single permission to the unhappy intruder to retain possession of his improvements might not prove conclusive. In another generation, or perhaps another year, some new apostle of a regenerated humanity might become a candidate for the Mayoralty of New York, on the issue of confiscating land improvements.
So much for Mr. George's practical proposals. I will not insult my readers by discussing a project so steeped in infamy.
507. Mr. George's View of Rent.—In supporting these proposals, however, Mr. George has put forward a theory of the relation of Rent to the other shares of the product of industry, which has imposed upon so many persons that I deem it worth while to state and refute it here. Mr. George's view of Rent, as a factor in distribution, affords the key to the collocation of the words, Progress and Poverty, in the title of his work. The subject of that work is Rent; and Progress and Poverty is, in his opinion, an appropriate title for a treatise on that subject, inasmuch as, according to his theory, all social and industrial progress does, so long as land remains private property, that is, so long as rent is paid to any but the State, not only naturally but necessarily and inevitably, cause poverty to increase, at a constantly accelerating ratio. To use his own language: “Irrespective of the increase of population, the effect of improvements in methods of production and exchange is to increase rent.” The proof of this proposition is as follows:—
“Demand is not a fixed quantity that increases only as population increases. In each individual it rises with his power of getting the things demanded….
“The amount of wealth produced is nowhere commensurate with the desire for wealth; and desire mounts with every additional opportunity for gratification.
“This being the case, the effect of labor-saving improvements will be to increase the production of wealth. Now, for the production of wealth, two things are required, labor and land. Therefore, the effect of labor-saving improvements will be to extend the demand for land, and wherever the limit of the quality of land in use is reached, to bring into cultivation lands of less natural productiveness, or to extend cultivation on the same lands to a point of lower natural productiveness. And thus, while the primary effect of labor-saving improvements is to increase the power of labor, the secondary effect is to extend cultivation, and, where this lowers the margin of cultivation, to increase rent….
“Thus, where land is entirely appropriated, as in England, or where it is either appropriated or is capable of appropriation as rapidly as it is needed for use, as in the United States, the ultimate effect of labor-saving machinery or improvements is to increase rent, without increasing wages or interest.
“It is important that this be fully understood, for it shows that effects attributed by current theories to increase of population are really due to the progress of invention, and explains the otherwise perplexing fact that labor-saving machinery everywhere fails to benefit laborers.”
And he concludes, after repeating and further illustrating this view of the effect of productive improvements and inventions, with the following italicized proposition: “Wealth, in all its forms, being the product of labor applied to land, or the products of land, any increase in the power of labor, the demand for wealth being unsatisfied, will be utilized in procuring more wealth, and thus increase the demand for land.” And so, to use his own phrase, labor can not reap the benefits which advancing civilization brings, because they are “intercepted,” that is, intercepted by rent.
That it may not be supposed that I am misrepresenting Mr. George, or omitting any qualification of his propositions, I quote another extended paragraph.
“Land being necessary to labor, and being reduced to private ownership, every increase in the productive power of labor but increases rent,—the price that labor must pay for the opportunity to utilize its powers; and thus all the advantages gained by the march of progress go to the owners of land and wages do not increase. Wages can not increase; for, the greater the earnings of labor, the greater the price that labor must pay out of its earnings for the opportunity to make any earnings at all. The mere laborer has thus no more interest in the general advance of productive power than the Cuban slave has in advance in the price of sugar. And just as an advance in the price of sugar may make the condition of the slave worse, by inducing the master to drive him harder, so may the condition of the free laborer be positively, as well as relatively, changed for the worse by the increase in the productive power of his labor. For, begotten of the continuous advance of rents, arises a speculative tendency which discounts the effect of future improvements by a still further advance of rent.”
508. The Second Count of the Indictment.—The last sentence introduces Mr. George's second count in his arraignment of rent, as the great social criminal.
Please carefully to note the point. The necessary, immediate and direct effect of any addition, from whatever source, to the productive power of labor, is to increase rents by just that amount, so that nothing is left to go either into enhanced wages or enhanced profits, the landlord taking the entire increase, whatever that may be.
But now another force enters, actually to deplete the already starving laborer. This is the speculative advance in land, owing to the expectation of further increments of value at the expense of the community.
“We have,” says Mr. George, “hitherto assumed, as is generally assumed in elucidations of the theory of rent, that the actual margin of cultivation always coincides with what may be termed the necessary margin of cultivation,—that is to say, we have assumed that cultivation extends to less productive points only as it becomes necessary from the fact that natural opportunities are at the more productive points fully utilized. This, probably, is the case in stationary or very slowly progressing communities; but in rapidly progressing communities, where the swift and steady increase of rent gives confidence to calculations of further increase, it is not the case. In such communities, the confident expectation of increased prices produces, to a greater or less extent, the effects of a combination among land-holders, and tends to the withholding of land from use, in expectation of higher prices, thus forcing the margin of cultivation farther than required by the necessities of production.”
509. The Third Count.—But this is not the end of the mischief attending the private ownership of land. We have now the third and final count in this arraignment. The speculative holding of land, just described, becomes, in turn, the cause of incessant industrial disturbance, and of those great periodic convulsions of production and trade which involve the laboring classes, poor, inert, and unapt to travel or to change of occupation, in the deepest distress.
“Production,” says Mr. George, in explanation of an assumed industrial crisis, “has somewhere been checked, and this reduction in the supply of some things has shown itself in cessation of demand for others, the check propagating itself through the whole framework of industry and exchange. Now, the industrial pyramid manifestly rests on the land.
“The primary and fundamental occupations, which create a demand for all others, are evidently those which extract wealth from nature, and hence, if we trace from one exchange point to another, and from one occupation to another, this check to production, which shows itself in decreased purchasing power, we must ultimately find it in some obstacle which checks labor in expending itself on land.
“And that obstacle, it is clear, is the speculative advance in rent, or the value of land, which produces the same effects as (in fact, it is) a lock-out of labor and capital by landowners. This check to production, beginning at the basis of interlaced industry, propagates itself from exchange point to exchange point, cessation of supply becoming failure of demand, until, so to speak, the whole machine is thrown out of gear, and the spectacle is everwhere presented of labor going to waste while laborers suffer from want.”
510. This concludes Mr George's arraignment of private property in land.∗ If these successive counts can be sustained, he is fully borne out in his conclusion that “the necessary result of material progress—land being private property—is, no matter what the increase in population, to force laborers to wages which give but a bare living;” or, as he elsewhere expresses it, that “material progress does not merely fail to relieve poverty, it actually produces it;” or, again, that, “whatever be the increase of productive power, rent steadily tends to swallow up the gain and more than the gain;” or, again, that “the ownership of the land on which and from which a man must live, is virtually the ownership of the man himself, and in acknowledging the right of some individuals to the exclusive use and enjoyment of the earth, we condemn other individuals to slavery, as fully and as completely as though we had formally made them chattels.”
To a man who believed but a small fraction of this, the conclusion which Mr. George announces at the close of the following paragraph would appear irresistible:—
“As long as this institution exists, no increase in productive power can permanently benefit the masses, but, on the contrary, must tend to still further depress their condition. … Poverty deepens as wealth increases, and wages are forced down while productive power grows, because land, which is the source of all wealth and the field of all labor, is monopolized. To extirpate poverty, to make wages what justice commands they should be, the full earnings of the laborer, we must therefore substitute for the individual ownership of land a common ownership.”
511. Examination of Mr. George's Propositions.—I believe I have presented, in the foregoing extracts, every essential feature of Mr. George's economic system, without suppression or perversion. Let us now take up, in inverse order, Mr. George's three capital propositions. And, first, how much is there in the view that commercial disturbance and industrial depression are chiefly due to the speculative holding of land?
That land, in its own degree, shares with other species of property in the speculative impulses of exchange, is a matter of course. Every body knows it; no one ever thought of denying it. Mr. George makes no point against private property in land, however, unless he can show that it is, of all species of property, peculiarly the subject of speculative impulses. Now, this is so far from being either self-evident or established by adequate induction, that the contrary is the general opinion of economic writers. Of all species of property, land, especially agricultural land, starts latest and stops earliest in any upward movement of prices, as induced, for instance, by a paper-money inflation, which perhaps affords the best opportunity for the study of purely speculative impulses.
512. We now come to Mr. George's second count. The allegation that the enhancement of the value of land, above what should be regarded as the capitalized value of its present productive or income-yielding power, withdraws large bodies of land from cultivation, thus driving labor and capital to poorer and more distant soils, in order to secure the needed subsistence of the community, can only be characterized, so far as all the agricultural∗ uses of land are concerned, as a baseless assumption, for which not a particle of proper statistical proof can be adduced, and which is directly contrary to the reason of the case.
Because, forsooth, a man is holding a tract of land in the hope of a rise in its value, years hence, does that constitute any reason why he should refuse to rent it, this year or next, and get from it what he can, were it no more than enough to pay his taxes and a part of the interest on the money borrowed to “carry” the property? How unreasonable to assume that men owning good productive land will refuse to allow it to be cultivated now, simply because they can not get for it a rent which corresponds to what they look forward ultimately to realize as its capital price!
Undoubtedly the speculative treatment of building lots does cause a certain amount of city real estate to be held out of use. Nobody needed Mr. George to tell him this; but that the amount of land so reserved is such as seriously to retard the development of population, trade, or manufactures, except in a craze like that which seized the people of San Francisco in 1868,∗ seems highly improbable.
513. Progress and Poverty?—Let us now proceed to deal with Mr. George's main proposition, the proposition to which the others are subsidiary. If this be established, it really does not matter much whether the others are true or not, since the condition of humanity under the grinding pressure of this main force will be about as bad as it could be; while, if this be disproved, Mr. George's whole system must break down ridiculously, leaving it to matter little whether the minor evils attributed to the private ownership of land be found to have any real existence or not. This it is which constitutes the original feature of Mr. George's book, the proposition, namely, that, “irrespective of the increase in population, the effect of improvements in methods of production and exchange is to increase rent;” this effect being carried so far that “all the advantages gained by the march of progress go to the owners of land, and wages do not increase,” the laboring man having “no more interest in the general advance of productive power than the Cuban slave has in advance in the price of sugar,” capital also, in its turn, suffering, and to an equal extent, since, as Mr. George states, the effect of labor-saving machinery or improvements is to increase rent without increasing either wages or interest.
Now this is not only false, but ridiculously false, blunder being piled on blunder, to reach a conclusion so monstrous.
514. In the first place, the proposition is contradicted by plain facts of common observation and by unimpeachable testimony of industrial statistics. The laborer has gained in wages through the labor-saving inventions and improvements of modern times. Speaking of England, Sir James Caird says: “The laborer's earning power in procuring the staff of life cost him five days' work to pay for a bushel of wheat in 1770, four days' in 1840, and two and a half days' in 1870.” So much for bread. “Thirty years ago,” says Sir James, “probably not one-third of the people of this country consumed animal food more than once a week. Now, nearly all of them eat it in meat or cheese or butter, once a day.” The same high authority adds: “The laborer is better lodged than he ever was before.” We need no one to tell us that the laborer's power to purchase manufactured articles has increased, since 1770, much more rapidly than his power to purchase agricultural produce, whether animal or vegetable.
To the assertion of Mr. George that even the capitalist gains nothing by inventions and improvements in the agencies of trade or manufactures, because the landlord usurps and absorbs all possible increase of productive power, what better answer can we give than that of Professor Emile de Lavelèye, himself a qualified advocate of the state ownership of land?
“Who occupy the pretty houses and villas which are springing up in every direction in all prosperous towns? Certainly, more than two-thirds of these occupants are fresh capitalists. The value of capital engaged in industrial enterprise exceeds that of land itself, and its power of accumulation is far greater than that of ground rents. … We see, then, that the increase of profits and of interest takes a much larger proportion of the total value of labor, and is a more general and powerful cause of inequality, than the increase of rent.”∗
515. So much for industrial statistics and facts of common observation. Let us now turn to the reason of the case. And, first, let us recite Mr. George's own argument. “The effect,” he says, “of labor-saving improvements will be to increase the production of wealth. Now, for the production of wealth, two things are required—labor and land. Therefore the effect of labor-saving improvements will be to extend the demand for land.”
A pretty piece of reasoning this! Two things are needed for the production of wealth, land and labor; therefore an increase of production will “extend” the demand for land, for-sooth! But why not also for labor, since both are concerned in production?
But Mr. George is further in error, even, than would so far appear. He has got the thing exactly wrong. It is not only true that an increased production of wealth may involve an enhanced demand for labor as well as for land; but it is also incontestably true that the increased production of wealth rarely if ever causes an increased demand for land without a corresponding demand for labor, while, on the contrary, an increased production of wealth may cause an enormous increase in the demand for labor without enhancing the demand for the products of the soil in any degree whatsoever.
Here is a pound of raw cotton, the production of which makes a certain demand, or drain, upon the land. To that cotton may be applied the labor of one operative for half an hour, worth, say, five cents. Successive demands for the production of wealth may lead to the application of, first, a full hour's labor, then of two hours', then of three, four, or five; finer and finer fabrics being successively produced, until at last the pound of cotton has been wrought into the most exquisite articles. Mr. George says that the whole effect of any increase in the production of wealth is to enhance the demand for land. Here is a large increase of production, two-fold, threefold, tenfold, with no additional demand, or drain, upon the soil.
516. But I go further, and assert, without fear of contradiction, that not only is no increase in the demand for land necessarily involved in an increased production of wealth, but that the enhancement of the demand for land, in the progress of society, habitually falls short of the enhancement of the demand for labor, the increase of production taking two great forms,—one which involves no increase whatever in the materials derived from the soil; the other in which the increased demand for land falls short, generally far short, often almost infinitely short, of the increased demand for labor.
Let us look around. I have cited one instance, that of the use made in the mill of a pound of cotton, manufactured successively into fabrics worth, perhaps, twenty cents a pound, then thirty, then fifty, then one dollar. This is not an extreme case.
Here is the rude furniture of a laborer's cottage, worth perhaps %30. The same amount of wood may be made into furniture worth %200 for the home of the clerk, or into furniture worth %2,000 for the home of the banker. The steel that would be needed to make a cheap scythe worth eighty cents may be rendered into watch-springs, or surgical or philosophical instruments worth %100 or %200. A gentleman of means goes to Delmonico's, and pays two, three or five dollars for a dinner which makes no heavier drain upon the productive essences of the soil than a dinner of corned beef and cabbage for which a laborer pays twenty-five cents. A part of the difference between the prices of the two dinners, to be sure, represents the cost of an expensive business “stand” on Fifth Avenue; but by far the greater part represents service of one kind or another, at one stage or another, in making the dishes exquisite in appearance and flavor, in serving them neatly and elegantly with all the appliances of taste and fashion. Our gentleman, before dining, had perhaps been measured for a pair of boots for which he was to pay %12 or %15, yet containing no more leather, and so making no more draught upon the productive essences of the soil, in the way of nourishing the animal from which the leather was cut, than the laborer's %3 pair of “stogies”; he had also ordered a suit of clothes for %60 or %75, at his tailor's, no thicker, no warmer, containing no more fiber, than the laborer's %15 tweeds. In all these cases (and they fairly represent the facts of personal consumption in modern society) the main cause for the excess of value in products of higher price is not the use of a larger quantity of material, involving a greater demand or drain upon the productive essences of the soil, but the application of more labor to the same quantity of material.
517. How Far Mr. George is in Error.—In contradiction, then, of Mr. George's proposition that the entire effect of an increase of production is expended in raising rents, neither wages nor the interest of capital deriving any gain whatsoever therefrom, rent indeed absorbing the entire gain, “and more than the gain,” we have seen,—
518. Influence, upon Rents, of Improvements in Transportation.—With few exceptions, all improvements and inventions fall naturally under one or another of three great classes,—first, those which affect manufacturing industry; second, those which affect transportation; third, those which affect the cultivation of the soil.
Of these three classes it has always been admitted by economists that the first tends to enhance the demand for land, and thus to raise rents, although, as we have just now seen, not necessarily, or indeed usually, without also enhancing the demand for labor and capital, and thus raising wages and interest. The two remaining classes of improvements and inventions tend directly, and indeed operate exclusively,∗ to reduce the demand for land, leaving, thus, the whole advantage of such improvements and inventions to be acquired by either labor or capital, or, in one proportion or another, by both labor and capital.
And, first, of improvements in transportation. I need not waste time in calling to mind the mighty strides which invention has made, during the past fifty years, in this direction, substituting for the sailing vessel of 400 tons, which carried its petty cargo of wheat in forty or sixty days from New York to Liverpool, the steamship of 5,000 tons, which makes the passage in nine days or twelve; substituting for the tedious wagon carriage which in forty or fifty miles, perhaps in twenty or thirty only, ate up the whole value of the freight, carriage by steam cars, drawn on steel rails, which, allowing for transport from Dakota to New York, leaves enough of the value of the freight to pay for the ocean passage and for the support of the producer upon those distant plains. Add the telegraph and the fast mail, for transmitting orders and transacting sales, and one will hardly question the assertion that the greatest of all the classes of improvements and inventions effected within the last half-century, has been that which relates to transportation.
Is it the effect of improvements of this class to enhance rents? Absolutely and exclusively the reverse. Whatever quickens and cheapens transport, acts directly in the reduction of rents, and can not act in any other way, since it throws out of cultivation the poorer lands previously in use for the supply of the market, enabling the better soils at a distance to take their place, thus raising the lower limit, or, as it is called, the “margin” of cultivation, and thus reducing rents.
519. Influence, upon Rents, of Improvements in Agriculture.—But, secondly, take the case of agricultural improvements and inventions. Here the effect on rents is not so simple. Yet it is perfectly demonstrable that, of the two groups∗ into which such inventions or improvements are divided, all of one kind diminish rent in a certain degree, while all of the other kind diminish it in a much higher degree.
The two kinds of agricultural improvements and inventions referred to are:
First, those which do not actually increase the amount of produce, but diminish the labor and expense by which that amount is obtained, such as the improved construction of tools, or the introduction of new instruments which spare manual labor.
Second, those which enable the land to yield a greater absolute produce, such as the disuse of fallows by means of the rotation of crops, the introduction of new vegetable species, the introduction of new and more powerful fertilizing agents or a better application of familiar manures, and mechanical inventions, like sub-soil plowing or tile-draining.
Now, improvements or inventions of the first class, as, by the supposition, they do not increase the produce of the land, so they do not, supposing them to be equally applicable to all grades of soil, diminish the share of that produce going to the landlords as rent. But while the actual number of pounds, bushels, etc., of agricultural products going to the owners of the soil remains the same, in the face of such improvements and inventions, those products are cheapened through the saving of labor in their production. Thus, while rents remain the same, in kind, their money value, or power to purchase the products of other branches of industry or the services of other classes of producers, is diminished in just so far as such improvements are effectual.
520. Next, it is clear that those agricultural improvements and inventions which enable a given area to yield a greater quantity of produce, act even more directly in diminution of rent. Take, for illustration, the disuse of fallows by rotation of crops. Formerly it was thought necessary to let even the best land lie out of cultivation one year in three or four. On the contrary, it is now perfectly established that, if crops be duly varied, land may be continuously cultivated without exhaustion. It is evident that this discovery is equivalent to increasing the capacity of any tract by one-half or one-third: so that, for a given amount of agricultural produce required for the sustentation of the community and for the raw materials of manufacture, such an improvement would allow vast bodies of the poorer grades of soil to be thrown out of cultivation, thus diminishing (paragraph 257) the aggregate amount to be received, as rents, by landlords, in that community. A similar effect, in a greater or less degree, would be produced by the introduction of new and more powerful fertilizers, or by sub-soil plowing and under-drainage.
521. Summing up.—We thus see that all real agricultural inventions and improvements tend, as all improvements and inventions in transportation tend, directly and exclusively, to diminish rents. So that of the three grand classes into which industrial improvements and inventions are divided, two act in a direction exactly opposite to that in which Mr. George's theory would require them to act. Of the third grand class of improvements and inventions, viz., those relating to manufactures, we have admitted that some do, by calling for larger amounts of raw material, enhance the demand for land; but we have shown, that in these very cases, the increase in the demand for labor is almost always equal to the increase in the demand for land, is often greater, is sometimes vastly greater. We have, also, shown that there are other, still more numerous and more important, improvements and inventions in manufactures which do not enhance the land in any degree, while they call for greater and still greater applications of labor to the same amounts of material.
Can any thing more be required to show how groundless and preposterous is the view of the hitherto unsuspected importance of rent as a factor in the distribution of wealth, which Mr. George has presented as a marvelous discovery in economics, and upon which he has built his pretentious super-structure: the necessary relation of Progress to Ever Increasing Poverty? That such an argument should for a moment have imposed upon anybody, is enough to give one a new conception of the intellectual capabilities of mankind.
the banking functions.
522. “The trade or profession of banking,” says Lord Liverpool, “has been exercised in all countries and all ages. It existed in the republic of Greece and in ancient Rome. There were, in all these States, men who received money as a deposit, repaid it upon the drafts of those who had intrusted them with it, and derived their profits from having this money in their custody.”
1st. Financiering.—In modern times, the first banks appear in Italy. Mr. Bagehot states that the earliest of these “were finance companies. The Bank of St. George, at Genoa, and other banks founded in imitation of it, were at first only companies to make loans to, and to float loans for, the governments of the cities in which they were founded.”
“Financiering,” then, may be regarded as the first banking function developed, in modern times. In the reign of William and Mary certain capitalists made a loan of £1,200,000 to the English government, receiving, in consideration therefor, a charter constituting them the Governor and Company of the Bank of England. Robert Morris's Bank of North America had a very similar origin. Under the present National Banking system of the United States, the bank begins by lending all, or nearly all, its capital to the government. The great war loans of the United States, 1861-5, were, in the main, “floated” by the banks.
523. 2d. Book Credits of the Bank of Amsterdam.—The next banking function historically developed was that of giving the people good money in place of a medley of worn and clipped coins, of a great diversity of coinages, belonging to many nations. It was to serve this office that the banks of Northern Europe were created.
“Before 1609,” says Adam Smith, “the great quantity of clipped and worn foreign coin which the extensive trade of Amsterdam brought from all parts of Europe, reduced the value of its currency about 9 per cent. below that of good money, fresn from the mint. Such money no sooner appeared than it was melted down or carried away, as it always is in such circumstances.∗ The merchants, with plenty of currency, could not always find a sufficient quantity of good money to pay their bills of exchange; and the value of those bills, in spite of several regulations which were made to prevent it, became in a great measure uncertain.
“In order to remedy these inconveniences, a bank was established, in 1609, under the guarantee of the city. This bank received both foreign coin and the light and worn coin of the country, at its real intrinsic value in the good standard money of the country, deducting only so much as was necessary for defraying the expense of coinage and the other necessary expenses of management. For the value which remained after this small deduction was made, it gave a credit on its books. This credit was called bank-money, which, as it represented money exactly according to the standard of the mint, was always of the same real value, and intrinsically worth more than current money. It was at the same time enacted “that all bills drawn upon or negotiated at Amsterdam, of the value of 60 guilders or upwards, should be paid in bank money, which at once took away all uncertainty in the value of those bills.”
It will be observed that Adam Smith calls these credits inscribed upon the books of the Bank of Amsterdam, “bankmoney;” but this money, if it is to be called so, will be seen to differ widely from the bank money of to-day, already described: 1st. It did not circulate from hand to hand, as the ordinary medium of effecting exchanges; 2d. It was never in excess of the amount of metallic money actually in the vaults on deposit.
524. 3d. Cancellation of Indebtedness.—The next banking function, which we are called upon to notice, is the Cancellation of Indebtedness.
An enormous volume of indebtedness at all times exists in any highly progressive country, which has to be paid and renewed from day to day. The labor and loss of time involved in collecting debts and paying moneys, with the probable delay and disappointment involved therein, would be almost intolerable unless some special agency were established for doing this work upon a large scale and with all the advantages which we have found to result from the application of the division of labor. This function the bank performs.
If, in any great city, many banks are required to carry on this function, these banks, in turn, establish a common agency for settling their mutual obligations, called a Clearing House.∗
The transactions of such an institution in New York or London may amount to thirty or forty thousand millions of dollars a year. This vast body of indebtedness is adjusted through the labor of a hundredth part as many clerks and messengers, and the use of a hundredth part as much actual money as would have been required, had each person who had money owing to him been obliged to attend to the collection himself, or through his own clerks or messengers.
525. 4th. Exchange.—The next banking function is to remit money and conduct exchange.
What is termed “Exchange,” is merely the principle of the cancellation of indebtedness between individuals of the same city, carried out to trading communities and nations. We shall speak, under a subsequent title, of the principles regulating Foreign Exchanges.
This function, again, the bank to a great extent performs, and in so doing renders the trading community an immense service. If every merchant who had to pay money in another city or country were obliged to find out, for himself, some person who had the right to receive money at that place, at that time, and perhaps in the same sum, an inconceivable amount of inconvenience and delay, of vexation and disappointment, often resulting in commercial discredit, would be experienced.
If we may accept Mr. Henry Thornton's account∗ of the rise of the country banks of England, it was through the gradual growth of exchange-operations between country shopkeepers and those of the cities, that these institutions came, almost unnoticed, into existence.
526.—5th.—Safe Deposit.—The fifth banking function is to serve as a place of safe deposit. Mr. Francis, in his History of the Bank of England, attributes the rise of the city banks primarily to the need of this service. In the unguarded and unlighted London which Macaulay so graphically describes in his memorable Third Chapter, robberies and burglaries were of frequent occurrence. No man's home was safe, if known to contain any considerable amount of treasure, unless barricaded and defended by armed servants. The goldsmiths, having in the way of their trade to keep large quantities of gold and silver, had strong houses strongly guarded. To them, men of smaller means, private gentlemen, or shopkeepers, intrusted what they dared not keep at home, paying, at first, for the privilege.
In the course of time, the goldsmiths found that this custody of funds afforded a legitimate opportunity for realizing a profit, through loaning some part of these deposits. Then the depositors were no longer required to pay for the safe keeping. In time, the bankers came, perhaps, to pay interest on the deposits, themselves, which they loaned out to others, at higher rates, while the depositors received certificates of the value of what they had left with the goldsmiths. The certificates soon began to circulate from hand to hand. “These,” says Mr. Francis, “may be considered the first kind of bank notes issued in England.” In this way the goldsmiths' street in London, Lombard Street, came to be the bankers' street, the greatest banking street of the world.
The ordinary bank is still, to a great extent, a place of safe deposit for money, family jewels, deeds, and bonds, although special institutions for safe deposit are now found in many large cities.
527.—6th. Deposit and Discount.—The sixth and the chief of the legitimate functions of the modern bank is to serve as an intermediary in the loan of capital, in aid of commerce and manufactures and other private enterprises, not merely to loan its own capital, as in the case of the Bank of Genoa and others that have been spoken of, or to conduct loans for government, or for great corporations.
The technical terms, deposit and discount, serve to characterize this function. It is in this way that banks make their largest contribution to the advancement of commerce and industry. This office of banking is, however, as much overrated by some as it is underrated by others. Men who are not versed in economic principles, when they see the wonderful effects wrought by gathering into one great reservoir the wealth of ten thousand individuals, much of which would otherwise be hoarded or unwisely applied, and conducting it thence, as occasions require, in various directions, through channels judiciously devised to secure the highest and most effective irrigation of the field of industry, are apt to imagine that the bank in some way creates capital. This is a wholly mistaken notion. The bank adds to the wealth of the community only by economizing and directing capital to the best ends.
So important is this function that most European writers, when they speak of banking, have only in mind deposit and discount, all other functions being held to be minor and subordinate.
528.—7th. Issue of Paper Money.—To an American, however, the word, banking, is more likely to bring up the notion of paper money. The issue of such money is the seventh and the last of the banking functions which we have occasion to consider.
That the making of money is not necessarily connected with deposit and discount, is abundantly established by the consent of all writers of authority in this field, as well as by the example of many of the greatest deposit banks of the world. “Issuing,” says Mr. Nicholson, “is creating money; banking is managing money after it has been issued.”
“A bank of issue,” says Lord Overstone, “is intrusted with the creation of the circulating medium; a bank of deposit and discount is concerned only with the use, distribution or application of that circulating medium. The principles upon which these two branches of business ought to be conducted are perfectly distinct, and never can be reduced to one and the same rule.”
The great London joint-stock banks, a single one of which holds deposits rising into tens of millions, and whose ordinary dividends are three times as great as those of the Bank of England, never issue a note.
In this country, however, the word bank, through much of our history, has to most people signified little more than a place where paper money was manufactured.
529. The Banking Agencies.—Such are the banking functions. The agencies by which the functions are performed may be grouped under four heads: (1), state banks; (2), joint-stock banks; (3), private banks; (4), bill-brokers and dealers in exchange. These agents enter in very different proportions to effect the banking work to be done in different countries. In this country, so large a part of the banking work was, from the beginning of the country till the outbreak of the war of secession, done by joint-stock banks, that it may be broadly said that this was the sole banking agency known to our people, although, in a few cities, private banking houses of high reputation were early started and well maintained, and the business of bill-broking was not unrecognized. Under another title, we shall give a brief sketch of the present “National Banking System” of the United States.
the present banking system of the united states.
530.—The National Banking System of the U. S.∗ —No bank, in the modern sense of that term, was established in America during the colonial period. The word, bank, was indeed sometimes used, with reference, however, to a batch of paper money issued from a colonial treasury. During the revolution the eminent financier, Robert Morris, established a bank in aid of the continental finances. In 1790 there were three banks in the United States; the Bank of North America, in Philadelphia, established, as related, by Robert Morris, but then under a charter from the state of Pennsylvania; the Bank of New York, in the city of that name; and the Bank of Massachusetts, in Boston. In 1791 was created the first Bank of the United States, with a capital of ten millions of dollars, having a charter for twenty years, with power to issue notes payable on demand in specie. So completely without regulation and without inspection was the so-called paper money of the United States in that period, that it is impossible to recover the facts of banking capital, circulation, deposits or specie. Scarcely a statistical fragment survives. There is reason to suppose that the officers of many banks did not themselves know the liabilities of their own institutions. The paper money issued by such an institution, was, in every economic sense, inconvertible. The pretense of conversion could only be maintained by a stringent public opinion, hostile to the presentation of bank notes for redemption, by bank retaliations, and even, in frontier communities, by “lynch law.”
531. On the refusal of Congress to re-charter the bank of the United States, a large number of the state banks sprang into existence, almost all of the usual American “joint-stock” type, on the principle of limited liability. In not a single state were the banks subject to regulation or even supervision, to make sure that they did their duty or that they did not commit injury. The language of Mr. J. R. McCulloch, regarding the American banking system of that day, is hardly extravagant. “Had a committee of clever men been selected to devise means by which the public might be tempted to engage in all manner of absurd projects, and be most easily duped and swindled, we do not know that they could have hit upon any thing half so likely to effect their object as the existing American banking system. It has no redeeming quality about it, but is, from beginning to end, a compound of quackery and imposture.”
532. The outbreak of war with England caused the suspension of specie payments by nearly all banks except those of New England; but this was followed by an enormous increase of issues, so that the outstanding notes, which had been estimated at twenty millions in 1811, rose, according to Secretary Crawford, to somewhere between sixty-two and seventy millions in 1813, and to somewhere between ninety-nine and a hundred and ten millions in 1815. The fact that it was impossible for the secretary of the treasury to tell, within eleven millions, the amount of the notes outstanding, is fairly characteristic of the monetary system at this time. The circulating paper was of every degree of value down to utter worthlessness. Many banks were ably managed by honest men, with reasonable regard to the public interest. Many were organized and conducted by sharpers and swindlers, as a means of wholesale robbery.∗
At the close of the war, in 1815, the depreciation of bank paper reached, in some cases, fifteen, twenty and even twentyfive per cent. The excess of circulating paper had also been promoted by the extensive issue of United States treasury notes. These were not of forced circulation; they failed to be paid at maturity, and added greatly to commercial distrust and distress. Throughout 1816 the banks continued to issue their discredited notes, while floods of unchartered scrip were poured out, in bills of all denominations from six cents upward.
533. The evils of the financial situation led to the establishment, in 1816, of the second Bank of the United States, with a capital of thirty-five millions, of which the United States government owned one-fifth, and with a charter having twenty years to run. Before 1836, however, the bank had been broken down by the relentless attacks of President Jackson, and it was finally driven to take refuge under a Pennsylvania charter. Our space will not serve to discuss how far the failure of the second United States Bank to perform its anticipated office of regulating the paper circulation and of preventing excessive and improper issues by the state banks, was due to its original constitution; how far to false management; how far to circumstances; how far to persecution by the administration. Suffice it to say that the paper money of the country, during this period, was a weltering chaos. The wildly extravagant issues of really inconvertible paper money, supplied the motive and the means for every species of extravagant, wanton and irresponsible speculation. Words could scarcely exaggerate the extent to which the distortion of production and the misapplication of capital were carried.∗ The whole head was sick and the whole heart faint.
The retribution came in the panic of 1837, in the second and heavier shock of 1839, and in the long and dreary prostration of industry which followed.
534. The experiences of this period led, in several states, to legislation designed to place the issue of bank notes on a sounder basis. In 1838 the free banking system of New York was established, under which all circulating notes were to be secured by deposit, with the state comptroller, of United States or New York stocks or bonds, and of mortgages on improved or productive real estate. A little later a law was passed requiring each bank to redeem its notes at some agency in New York city, Albany or Troy. Subsequent acts increased the proportion of securities to notes issued, and furnished further guaranties to holders.
This is the scheme of secured circulation, known as the New York system, which came to be imitated, more or less fully; and on which, to a considerable extent, the banking laws of the United States are framed.
The plan of basing a circulation upon securities is not to be altogether approved. It does not give convertibility, in the sense of preventing excessive issues, even in the view of the advocates of the “banking principle.”∗ It does not so much as secure the perfect acceptability of the notes, as a medium of exchange, since the receiver desires to be assured that the notes will, at any moment, be worth what he has taken them for, whereas the New York system only gives him a pledge that, should the bank fail to redeem its notes, he will, at some future date, after the bank shall have been wound up and the securities disposed of by the comptroller, receive the face value of all the notes which he may then hold.
535. But while this system can not be accepted as based upon perfectly sound principles of money, or even of banking policy, it proved at the time so great a check on reckless paper money banking, and it has had so great an effect in educating the public mind to more correct views of the banking function and of the responsibilities attaching to note issues, that it deserves to be treated with much consideration by the historian of American money. The painful experiences of 1837–40, and the active discussion of the principles of money and banking which they called forth; the growth of a public sentiment condemning an excess of paper issues, and the formulation of precepts, more or less carefully observed by bank managers; a vast improvement in the commercial morality of the country, due partly to education, and even more to the development of manufactures which, to a vastly greater degree than agriculture, rest on good faith and commercial honesty; the shortening of the terms of credit;∗ these causes, together with the legislation which has been described and the development of the Suffolk bank system∗ in New England, served to place the paper money issues of the United States on an improved basis between 1840 and 1860. The rapid improvement of trade and industry after the panic of 1857, already alluded to (par. 243), affords a striking proof of the comparative soundness of credit, trade and industry in the later period.
536. Early in the war of secession, the treasury being in great distress, Secretary Chase initiated the movement which resulted in the establishment of the present banking system of the United States. This system was to be essentially modeled on that established in New York by the law of 1838, all note issues being secured by an abundant deposit, at the Treasury Department in Washington, of United States stocks. Indeed, it was this feature which furnished the real motive to the scheme. The Treasury was to sell to the banks some hundreds of millions of bonds, as the basis for their note circulation, while all notes of state banks not coming under the new system were to be “taxed out of circulation.”
As a measure of fiscal resource, the national bank law was essentially a failure. Owing to the delay in securing the desired legislation∗ and in transmuting the existing state banks into national banks, it was not until the war was nearly over and until the credit of the United States had become so well established as to give the Treasury the ability to borrow freely, at home or abroad, that the new national banks began to call for bonds in large amounts, as a basis of circulation.
537. But while that banking system failed to answer the expectations of Secretary Chase as a fiscal resource, it resulted in placing the paper money banking of the country on a more secure and convenient basis than it had ever before occupied. In all previous periods of our national history the bank money of some sections had been liable to a discount—often a considerable discount—if offered far away from the place of issue; while, in addition to the actual losses sustained by holders, the annoyance resulting from the frequent refusal to receive banknotes by those who did not know about the individual bank whose name and devices they bore, was almost intolerable. Under the existing system, a national banknote from Texas or Minnesota, if not suspected to be counterfeit, passes as readily in Massachussetts or Pennsylvania as the notes of local banks. By the new law, the United States Comptroller of the Currency, whose office was then created, was authorized to permit the establishment, for a term not exceeding twenty years, of banking associations consisting of not less than five persons, with a minimum capital, except in small places, of one hundred thousand dollars. Such associations were required to deposit, with the Treasury Department, United States bonds to the extent of at least one-third their capital, for which there should be issued to them circulating notes in amount equal to ninety per cent. of the market value of their bonds, but not beyond ninety per cent. of the par value of such bonds. The issue of currency, under this act, was to be limited to three hundred millions, that amount to be apportioned among the States according to population and banking capital.
In 1882, a new law was passed, providing for extending the charters of national banks.
538. The operation of the law regarding the deposit of United States bonds as a basis of circulation, may be illustrated as follows: A national bank expends %160,000 in the purchase of bonds, then selling at 80 per cent. of their par or face value. The bank would then hold bonds to the amount (at par) of %200,000. On the deposit of these, the treasury department would issue circulating notes thereon to the extent of ninety per cent., not of their par, but of their market value, viz.: one hundred and forty-four thousand dollars. These notes, bearing its own corporate title and its characteristic devices, the bank would issue in the discount of commercial paper. This might, in fact, constitute the greater part of what the bank had, at the outset, to loan—its own promises to pay. If we suppose the bank to keep out the whole body of notes received from the treasury on loans bearing interest at an average rate of five per cent., the annual income from this source will be %7,200. In addition thereto, the bank will receive from the treasury department, semi-annually or quarterly, drafts for the amount of the interest falling due on the bonds held for the redemption of the notes. If the rate of interest on the bonds were four per cent. (on the par value, of course), the amount so received would be %8,000 a year, making the aggregate income on both accounts, %15,200. This would be a return of 9 ½ per cent. on the amount—%160,000—expended in the purchase of the bonds. In addition thereto, would be the expectation of profit arising from the fact that, at the maturity of the bonds, be that five, fifteen, thirty or fifty years hence, the government is bound to pay the face value of the bonds, whereas the bank purchased them at eighty per cent. Now, the “present value” of twenty (100–80) dollars, at five per cent. interest, is considerable if payable in five years, is worth considering if payable in fifteen years, is inconsiderable if payable in thirty or fifty years: so that this element may amount to much, little or nothing, according to the term which the bonds have to run.
If, in a second case, the bank invested the same sum—%160,000, in United States bonds, at par, it would receive bonds to the amount of %160,000, on which the treasury department would issue %144,000 worth of circulating notes, as before, being ninety per cent., this time, alike of the market and of the par value of the bonds held for redemption. Making the same assumptions as before, regarding the average rate of interest realized by the bank on its loans, and the rate of interest on the bonds themselves, we should have the income from the former source, %7,200, and from the latter source, %6,400; an aggregate of %13,600, being eight and a half per cent. on the amount invested, with no longer any expectation of profit from the difference between the amount of purchase money and the principal of the bonds to be paid at maturity.
If, in a third case, we suppose that the bank expends the same amount, as before, in the purchase of United States bonds, bearing a premium of twenty-five per cent. (and the bonds of the United States have almost always been at a premium, greater or less, at times rising, on some classes of bonds, to the rate assumed), the face value of the bonds so purchased would be but %128,000, on which the treasury department would issue notes to the amount of %115,200, being ninety per cent. of the face value of the bonds, though but seventy-two per cent., this time, of their market value. On the same assumption as to interest, etc., as before, the bank would receive from the loan of its notes %5,760; from the government, as interest on the bonds, %5,120; an aggregate of %10,880, or only six and eight-tenths per cent. on the %160,000 invested. In this case, moreover, there must be taken into account an ultimate loss of one-fifth of the purchase money. Although the bank has paid %125 for each %100 bond, the government will, at maturity, pay only the face value, namely, %100. The “present value” of the amount thus to be, sooner or later, lost, is to be determined by the same principles which would be applied to obtaining the “present value” of the amount to be ultimately gained, had the bank purchased bonds at a discount. As we said before, their “present value” would be much, little or practically nothing, according to the term which the bonds had to run.
539. The profit to the banks, under the present system, largely depends, it will be seen, upon two elements: the rate of interest on the bonds themselves, and the premium or discount at which the bonds can be, at any given time, purchased. During the war, a bank could purchase, for %100,000 in greenbacks, an equal amount of six per cent. bonds, payable, principal and interest, in gold. Depositing these in the treasury, it would receive %90,000 in circulating notes, which it would loan at such rates of interest as the commercial demands of the time allowed, and would receive each year, as interest, %6,000 in gold, which it could sell at twenty-five, fifty or even a hundred per cent. advance in greenbacks, according to the enormously high, though fluctuating, war premiums on gold then prevailing. The gradual decline and finally the disappearance of the premium on gold∗ ; the reduction in the rate of interest on government bonds from six per cent. to five, to four and a half, and ultimately to three and a half and even three per cent., through successive refunding operations; and lastly the appearance of high premiums upon bonds bearing the reduced rates of interest, these three causes have concurred to diminish, point by point, the profit, to the bank, in buying United States bonds and depositing them with the treasury department, as the basis of note circulation, until, at the present time (1887), many banks are surrendering their circulation, finding it more to their interest to use the capital at their command in other ways. The number of national banks at the present time in existence, is about two thousand nine hundred. These are, of course, distributed very irregularly over the surface of the country.
540. The money of the United States now consists of gold coin (twenty, ten, five, two and a half or one dollar pieces), legal tender for debts in any amount; (2) of silver dollars, legal tender in any amount; (3) of subsidiary silver coins (fifty, twenty-five, twenty, ten or five cent. pieces), legal tender in small amounts as change; (4) of copper or nickel coins (five, three, two or one cent pieces); (5) of “greenbacks,” of various denominations, from one dollar to one thousand dollars; (6) of “gold notes” and (7) of “silver notes,” of various denominations, issued solely upon the deposit, at the several sub-treasuries,∗ of equivalent amounts of gold or silver; (8) of national banknotes, issued as hereinbefore described. In this highly complex mass, the proportion of banknotes is continually diminishing, owing to the reduction in the profits of banknote circulation already accounted for. This fact constitutes one of the gravest features of the financial situation, and threatens the country with the speedy loss of all the advantages thus far enjoyed under the national banking system.
541. Meaning of Exchange.—Formerly, when debts were paid by the merchants of one country to those of another, it was almost always necessary actually to change the money of the debtor country into that of the creditor country. Thus, if a merchant in Paris had occasion to pay a debt to a merchant in Antwerp, it was necessary first to compute the quantity of “fine“ (i. e. pure) silver contained in the amount of Antwerp money due under the contract; then to find out how many French coins (their weight and fineness being known) would be required to make up that amount of pure silver. This being ascertained, the Paris merchant paid down the French money (plus the premium, or minus the discount, of which we shall speak later) and received the Paris banker's order upon some Antwerp banker to pay the Antwerp merchant the amount of Antwerp money due him. It was with reference to this changing of one kind of money into another, that the term exchange was first applied to this class of transactions. It came in time, however, to be equally applied to transactions between cities under the same government, having the same kinds of money, where, hence, no actual changing of money pieces was required.
At the present time, this changing of money pieces plays a very much less important part in exchange. Instead of many states having independent authority to coin money, there is now but one coining authority in all Italy. The money of Germany is now uniform in weight and fineness. France, Italy, Belgium, Switzerland, Greece and Austria have certain money coins which may be said to be in common, i. e., they contain the same amount of pure metal, though under different denominations and with different inscriptions. The vast extension of the British empire has made the “sovereign” current money over a large part of the globe.
542. What is Exchange?—In essence, where a man buys exchange—he buys the right to have paid to him, or his agent, or his creditor, a certain amount of fine gold or silver, to be delivered in some other place mentioned in the contract. If I buy in New York “exchange on London,” some one who has gold in London, or who has a right to demand gold there, sells me his claim to receive a definite amount of that metal, in London, at a definite time, or at my convenience if we so agree. I may then, either go to London and get the metal, as, for instance, if I am starting out on a European tour, or I may send an order, by post or telegraph, for some one else to get it there, as, for instance, if I have bought cotton goods or pictures in London, and have agreed to pay for them in this way.
543. Par of Exchange.—Now, we may suppose that, in order to induce some person to sell me “exchange on London,” I have to pay him, not in goods, but in a certain amount of gold in New York, where we both live. How much gold shall I pay him in New York to induce him to give me the right to receive a certain amount, say 1,000 ounces, of gold in London? Shall I have to pay him 1,000 ounces, or more, or less? That depends on whether exchange is at par (equality), or above par, or below par.
Exchange between two places is at par, when, by paying a certain amount of money metal, or its equivalent, in one place, you can purchase the right to receive an equal amount of the same metal in the other. I say, the same metal, for there can be no par of exchange between countries having gold money and countries having silver money, unless, indeed, the bi-metallists (par. 563) shall make good the claim that their system will establish and maintain a certain definite ratio between the values of the two metals.
Exchange is above par or below par, when the right to receive elsewhere a given amount of gold or silver, is to be purchased by paying, in the one case, a larger, and, in the other case, a smaller amount of the same money metal, in the place where the transaction is effected.
Exchange will be at par when the sums of the payments to be made to and from any two places, within a given time, exactly balance each other. If the sum of the payments to be made within a limited period by the merchants of one place, say New York, to the merchants of another place, say London, is greater than the sum of the payments to be made in New York by the merchants of London, then exchange on London will be above par in New York; that is, a New York merchant having to pay a debt, within that period, in London, will have to pay down more than 1,000 ounces of gold in New York to buy the right to have paid to him, or to his creditor, 1,000 ounces of gold in London.
544. The upward limit of the premium∗ on bills of exchange is the cost of remitting specie. The New York merchant, in the case supposed, will not pay more, in addition to 1,000 ounces, than the cost of sending 1,000 ounces from New York to London, interest, freight, insurance, and commissions being taken into account. If the holders of bills demand a premium above this, the New York merchant will send the metal, and in that way pay his debt. Within the limit thus assigned, the premium on bills rises or falls with the fluctuations of the market, according to the law of supply and demand.
While, thus, exchange on London is at a premium in New York, exchange on New York will, conversely, be at a corresponding discount in London. If a New York merchant, owing 1,000 ounces of gold in London, has to pay somewhat more than that amount, a London merchant, owing 1,000 ounces in New York, will be able to purchase the right to receive that amount there for something less than 1,000 ounces. The downward limit† of the discount on bills of exchange is, again, fixed by the cost of remitting specie.
545. The Balance of Trade.—We have said that exchange between two places will be at par when the sum of the payments falling due on the one side is equal to the sum of the payments falling due at the same time on the other side. It may happen—it frequently does happen—in the trade between countries A and B, that country A may at one season of the year have the larger payments to make, while in another season the relations will be reversed. The exports from the United States, for example, tend to take place predominantly in the few months following the harvest. At that time the United States becomes chiefly a creditor country. The merchants of other countries have large amounts to pay in New York, on account of produce received; and consequently exchange on New York is at a premium in London, Paris, Amsterdam, etc. Conversely, exchange on London, Paris, Amsterdam, etc., is at a corresponding discount in New York. During the other half of the year, the United States generally import more largely than they export, and the course of exchange is reversed. Bills on London are at a premium in New York, on account of large payments to be made abroad; bills on New York are at a discount in London. The discrepancy thus arising from the nature of the industry of any given country, between the times at which its payments are chiefly to be made and those at which it is to receive the bulk of the amounts due to it, on account of its own exports, is, in a degree, often very largely, removed by bills drawn, as the phrase is, in blank. These are bills which do not discharge a debt, but create a debt. Exporters often draw such bills, generally with permission obtained in advance, upon those to whom they habitually sell or consign their shipments, in anticipation of the goods being actually dispatched. Such a course is liable to very grave abuses, being often resorted to, not merely in promotion of reckless and outrageous speculation, but even for the purposes of downright swindling; and the courts and newspapers are much given to reflecting severely upon this practice, in general, whenever some case of its perversion is brought to light. Yet this system of credits, when kept within bounds, confined to proper parties, and, as Mr. Goschen says, “jealously and even suspiciously watched,” serves a very important purpose in equalizing the income and outgo of nations and in diminishing the extent to which shipments of specie require to be made.
The point we have now reached introduces the vexed question of the Balance of Trade. Few subjects are more complicated or more generally misunderstood. The question, whether a year's commercial transactions have, in the net result, brought a nation more in debt to other nations than they, in the aggregate, have come to owe to it, is commonly decided, offhand, by simple reference to the custom-house statistics of the values of exports from and imports into that country. Such a test is altogether fallacious. The statistics of exports and imports, if fairly well collected and compiled, are of great value; but it is necessary, first, to make correction for their internal errors, and, secondly, to take into account several elements which the custom-house statistics do not undertake to include.
546. Errors in Commercial Statistics.—The official statements of imports and exports are more or less disturbed by errors from two exactly opposite sources. If the goods imported or exported are subject to duties at the custom house, the importer or exporter comes under a very strong temptation to misrepresent their value or amount. If, on the other hand, the goods are free of duty, both the custom-house officials and the merchants are liable to become very careless in making the required statements as to the quantity of such goods, and still more careless regarding statements of value.
How far these two causes together may result in vitiating the official statistics of imports and exports, will, of course, depend greatly upon the organization of the civil service, upon the general morality of the trading and official classes, and upon the integrity and severity with which the laws are enforced; but it is not possible under any organization or administration wholly to eliminate errors of importance, from one or both of these sources. Imported goods subject to duty will be largely undervalued, in spite of all the vigilance of honest officials. Exports are probably even more grossly undervalued, because being, by the fiscal system of most nations, free of duty, even the most honest officials are likely to attach little importance to the statements of value, since they are aware that no revenue interest of the government is concerned therein.
In addition to these general causes, affecting, though in very different degrees, the commercial statistics of all nations, there are apt to be special liabilities to error affecting the commercial statistics of any given country. Thus, with regard to the United States, it is found that while a reasonable degree of care and pains is taken to ascertain the values of goods exported by ocean-going vessels, the statement of our exports by rail, by ferry-boat, or by small river and lake vessels to Canada and Mexico, are exceedingly defective, so much so as to be almost wholly worthless. It is notorious that many millions are omitted yearly from our statistics on these accounts.
547. Elements not included in Custom House Statistics.—Passing now to elements, other than internal errors in custom-house statistics, which require to be taken into account, in order to reach the true balance of trade, I will briefly mention the most important. The reader who desires to pursue the subject, will find it treated in a most interesting and instructive manner in Mr. Goschen's work on Foreign Exchanges.
The principal elements to be considered are, first, the exportation or importation of government securities, shares and bonds of corporations, titles to property, etc. This is an element, which, at times, may rise to an enormous importance; at other times, it may sink into insignificance. It may be considerable as between certain countries, while as between either of those countries and any other, it may amount to little or nothing.
During the war of secession the United States sold its bonds in Europe∗ to the amount of hundreds of millions of dollars, bringing back arms, ammunition, clothing and other supplies. The latter went into the statistics of imports; while the statistics of exports took no account of the former. As these bonds had many years to run, the value of the goods so imported did not enter into the amount to be paid for abroad in those years. In the same way, many of our great railroads have been built mainly or wholly with foreign capital, shares in the stock of those railroads, or more commonly, first-mortgage bonds, being sent abroad without passing through our custom-houses, while rails and other supplies were brought back through the custom-house, thus swelling our tables of imports. In like manner, large quantities of foreign goods, of all sorts, have been sent to us year after year, in consideration of which foreigners have received from us, not our corn, cotton or petroleum, but the titles to mines, to agricultural and grazing lands, mortgages on western farms, the bonds of cities and counties, etc.
The aggregate amount of such securities and titles exported from the United States has been enormous, though the movement has been very irregular from year to year. Nor has the current been all one way. When our government began to refund its debt at a lower rate of interest—at three and a half or three per cent., instead of six or seven per cent., nearly all our national bonds which had been held in Europe were returned. Now and then some large mass of railroad or city bonds are sent back, at maturity, for redemption,—the proceeds to be reinvested in other securities, of which the custom-house would not take notice, or to be “drawn against” in payment for corn or cotton, of which the custom-house would take notice.
While the element which we have been considering is of enormous importance to the United States, as affecting the balance of trade within any given year, England is the nation whose commercial statistics need most to be supplemented from this source. Hers has been the greater part of the capital which has come to us from Europe, for loan or investment; and for the last forty years she has been doing a similar work in every part of the world, building railroads in Canada, Australia, Mexico, South America, India and Persia, even in France, Germany and Russia, providing capital, out of her superabundance, for every species of enterprise in any land that promised a profit, and even furnishing the means with which half the wars of the present generation have been waged.
548. Interest on Government Securities.—But while, as we have said, it is true that in these modern times, enormous amounts of imports or of exports of merchandise are, in the case of any given country, set off, not against equal amounts of exports or of imports of merchandise, but against shares, stocks, bonds, or mortgages, sent abroad or brought home, as the case may be, it is also true, that dividends or interest on such shares, bonds, etc., become due annually, semi-annually, or quarterly, immediately thereafter, and require, therefore, to be added to the amounts which the debtor nations have to pay; which the creditor nations have to receive, thus affecting at once the course of exchange. Some nations have to pay millions annually, others, tens of millions, on this account. Those nations, which, in some past period have spent vast sums in great wars or on costly public improvements, without paying for them at the time through taxation, now find a certain portion of their exports of merchandise going every year to pay the interest on their debts. Against this is set nothing of which the custom-house takes notice. No goods come back to pay for these exports: only some packages of canceled coupons.
549. Expenses of Fleets on Foreign Stations, etc.—Another item which should be added to the imports of a country, in making up its current accounts with other nations, consists of the expenses of its fleets on foreign stations, or of its armies, if in occupation of other countries. In the case of great naval nations, this item is not of small importance. For a little while after vessels of war leave the home ports, their petty expenses may be met with gold taken from home, which may or may not have passed the custom-house; but subsequently, the expenses of the fleet will be met by bills of exchange, which will be just so much added to the volume of bills which represent the commercial imports of the home country.
The expenses of foreign embassies and legations and of the consular service stand in the same relation to the imports of the country represented.
550. Expenses of Foreign Travel.—In like manner the sums expended by tourists and travelers abroad constitute a very considerable item in those accounts which go to determine the balance of trade. The good things eaten or drunk by our citizens abroad are as much a part of our imports, for the purposes of such a computation, as if they had been brought to the United States in vessels and had been consumed here. Every year, many millions are expended by our citizens abroad, out of the proceeds of bills of exchange. Mr. Goschen states that several millions sterling are annually expended by the rich Russian nobility in traveling or in foreign residence.
551. Tributes, War Indemnities, Etc.—From whatever motive an independent country, a colony or a province may have occasion to make payments to another power, or to the sovereign or mother country, whether that motive be found in protection extended, in privileges conceded, in fear of hostility, or as a fine for past conduct, such payments affect exchanges in all respects as if they were on account of foreign goods imported. Yet, here, again, we have an element of which the statistics of commerce take no account. Whenever these payments are regular, they affect the course of exchange no more, if not less, than ordinary commercial payments. Thus, trade and exchange adjust themselves to the tribute paid by Java to Holland with perhaps even more of exactness and certainty than as if the payments were on account of goods imported into Java for the improvement of its agriculture, or for starting manufactures. On the other hand, an extraordinary payment of this character, is likely to produce great and far reaching, and it may be long enduring effects upon the market of exchange. The gigantic war indemnity paid by France to Germany, in 1871,∗ notwithstanding the transcendent financial skill with which the negotiations were conducted, set in motion forces which were felt by trade and industry to the remotest parts of the earth.
552. Freight, Insurance, Profits, Commissions, Etc.—But we have not yet reached the largest of the elements which determine the balance of trade, of which ordinary commercial statistics take no account. Let us suppose, for illustration, that country A imports from country B goods, whose value, at the ports of B, is one hundred and fifty millions of dollars, and exports to B goods, whose value, at its own ports, is correctly stated at one hundred millions. Now, here is an apparent difference of fifty millions of dollars. If, however, we can reach the facts regarding the carriage, insurance, etc., of these goods, amounting in the aggregate to two hundred and fifty millions of dollars, we may find the apparent balance greatly modified, in the way either of increase or reduction. Suppose, for example, that country A owns all the shipping engaged in this traffic; the charges for freight on its own exports might easily reach ten or fifteen millions of dollars, which would require to be added to the custom-house valuation, in order to make up the true balance between the two countries. On the other hand, the ten or fifteen per cent. charged for carriage on its imports would be paid to its own citizens. In the same way country A might do all the insurance business relating to both sides of the traffic; and its merchants and factors might conduct all, or nearly all, the commercial operations involved. In such a case the premiums for insurance, the commissions and profits of trade would go still further to reduce the apparent balance between the two countries. On the other hand that apparent balance might have been greatly extended by the fact that all the shipping merchants and most of the importers, factors and insurers engaged in the traffic belonged to country B.
The suppositions above made are not in themselves unreasonable. It generally happens that, in the commerce between two nations, one or the other does by far the larger part, often, practically, the whole carrying business,∗ as well as obtains an altogether disproportionate share of the premiums of insurance, and of the profits and commissions of traffic.
553. It is not necessary to extend our enumeration to minor items of the accounts between trading nations, in order to show the reader how greatly the ordinary statistics of imports and exports must be corrected and supplemented before we can reach a decision as to the amounts by which the payments to be made in any given period by one country to any other country or to all other countries, exceed the payments due to itself. Mr. Goschen states that Russia has more than once, in times of peace, as I understand it, so far fallen behind in her dealings with other countries, as to be obliged to contract a foreign loan, exporting public securities made for the purpose, as a means of restoring the balance. Of course, such a temporary expedient in the end serves to increase the commercial and financial difficulties of a country.
554. Our illustrations have thus far been drawn mainly from the commercial transactions of two countries, real or supposed. We have perhaps sufficiently shown that, of the amount of payments falling due on one side or the other in a given period, only the balance will require to be discharged in money, the principle of cancellation being applied to all but that excess.
Even this, however, would involve a very much larger use of money in the adjustment of national balances than actually takes place. Although the total exports of a country will always tend to approach its total imports, yet its exports to and imports from any single country may be very unequal. Thus, the United States import tea, silk, etc., to an enormous value, from China, while exporting very little to China. Again, our imports from England are very large, but our exports to that country are vastly greater still. If the United States adjusted its accounts with each foreign country separately, the balances requiring to be paid in money during a year would rise into hundreds of millions of dollars.
555. To further reduce the balances to be paid in money; to still further extend the principle of the cancellation of indebtedness, resort is had to a common market of exchange for all the nations. If, for example, the United States imports from Great Britain manufactured goods to the value of one hundred millions, and exports to Great Britain two hundred and fifty millions, it uses its favorable balance of one hundred and fifty millions in London as a sort of bank on which to draw for the payment of its indebtedness to many other countries from which it imports more than it exports to them. For example, it pays its Chinese creditors in accepted bills drawn on London importers of American wheat, cotton or petroleum. These bills Chinese merchants, having to pay for large amounts of English manufactures, are glad to get possession of; and thus an additional body of indebtedness is canceled. The operation of this force is greatly accelerated by the course of events which have made London the great settling place for the transactions of international commerce.∗ Prof. Jevons, in his work on “Money and the Mechanism of Exchange,” stated that there were then (1875) no less than sixty important colonial and foreign banks which had their own London offices or houses; and that there were, in addition, fully one thousand foreign and colonial houses in correspondence with London bankers. Here, then, in this Exchange of the World, as Edmund Burke called it, a hundred years ago, meet all the claims of all the creditors in the world, and all the acknowledgments of all the debtors in the world, which have not been adjusted nearer home. In the portfolios of the London banker or exchange broker are found bills representing the shipment of every kind of agricultural produce, of every class of manufactured goods, not to or from England merely, but from the country of production, however distant, to every other country known to commerce. And these bills are of all amounts, from the pettiest sums up to thousands of pounds sterling, falling due at all dates from to-morrow up to this day six months. From this varied mass to pick out accepted bills, recognized obligations which, in amount and time of maturity, shall cancel each other, is a work to which the highest intelligence is applied. Although the aggregate profits are large, the amount of exchanges thus effected is so enormous that the percentage charged for the negotiation is very small.
556. It is by this complicated agency that the balance of payments between nations, requiring to be made in money, is reduced to a minimum. Out of hundreds or thousands of millions of “exchange” negotiated, the bodies of indebtedness which bankers or brokers can not find means to offset amount to but a few millions. Except for the continuous production of the precious metals in certain countries which thereby become gold or silver-exporting countries, and except for the acts of government in replacing metal money by paper money, or, conversely, in resuming specie payments after periods of suspension, or, again, in changing “the standard,” from silver to gold or gold to silver, the amount of metal money which would be required to go, now here and now there, to make up for local and temporary failures of coincidence between the amounts to be received and the amounts to be paid, in international trade, would be almost inconsiderable, in comparison either with the aggregate of commercial transactions or with the total body of the precious metals in use.
557. Operating Upon the Exchanges.—The peculiarly important and responsible position which London occupies, as the center of the exchange transactions of the world, has led to the establishment of a well-recognized policy of dealing with the outflow of gold from that point, whenever such a movement is caused by what is called “an unfavorable turn of the exchanges.”
In spite of the great perfection to which the cancellation of international indebtedness is there carried, it will at times happen that a “drain” of bullion continues so long as to cause acute alarm as to the integrity of the financial system of the kingdom. When the act of 1844 was passed, it was believed that the provisions of this law, to the effect that no bank note (beyond the fixed amount of fifteen million pounds) should be issued except on the actual deposit of an equivalent amount of specie, and that, conversely, no specie should be withdrawn except upon the surrender of an equivalent amount of notes, would have the effect, automatically, to check a drain, from whatever cause proceeding. Inasmuch however, as the painful experiences of several commercial crises showed that this force could not always be relied upon as sufficient,∗ the directors of the Bank of England have adopted the policy of raising the rate of discount, sharply and rapidly, whenever signs of a considerable export of gold shall appear. Of course, the decree of the directors can absolutely control the rate of discount only upon the capital which the Bank itself has to loan; but the moral influence of such an act upon the joint-stock and private banks and upon individual capitalists is naturally very great, and the general rate of interest is at once appreciably affected.
In doing this, the object of the directors of the Bank, who deem themselves, by the force of tradition, though not of law,∗ largely responsible for the financial integrity of the kingdom, is so to raise the rate of interest, or of discount, as to induce foreign creditors, who have the right, at the time, to demand gold from England, to leave that gold for a while in England, thus checking a “drain” which is considered dangerous. By raising the rate of interest at once, from three or four to six or eight† per cent., the profit on the investment of funds in England is made so great that any foreign creditor, who is not absolutely required by his financial circumstances to draw his money away to his own country, feels a strong inducement to leave it still longer in England.
It is in this way that the financial authorities of the kingdom seek to “tide over” a highly unfavorable state of the exchanges; and it may be said that the policy, although involving a resort to means which are altogether artificial and highly exceptional in finance, uniformly proves successful. “The fact,” said Mr. Goschen, “has been that almost every advance in the bank rate of discount is followed by a turn of the exchanges in favor of England. Foreign creditors give their English debtors a respite, and prefer to wait longer for remittances, gaining interest meanwhile at the profitable English rate.”
558. The Special Case of England and the United States.—We have said all that the limits of our space will allow concerning foreign exchange in general. A word may, however, be added regarding the exchange between England and the United States. The valuation, in American money, of the English pound sterling, has been several times changed. Prior to 1792, the pound sterling was valued at %4.44 4-9, according to the bullion standard of the Spanish dollar, then universally current among us. From that date down to 1834, the American dollar was worth
cents in gold, at which rate a pound sterling was worth %4.56 ½ cents. By the coinage act of 1834 our standard was so reduced that the bullion contained in the American dollar was worth only 91 ¼ cents, so that the pound sterling became worth about %4.87. The United States custom-house valuation of the “sovereign,” that is, the coin representing the English pound sterling, was, however, fixed at %4.84. By this difference in bullion value between our dollar and the English standard money, a fictitious par of exchange was created between England and the United States, so that an American stock or bond worth %100 in New York, would be quoted in London at about %109, whenever the amounts respectively to be paid and received between the two countries were equal.
By an act of Congress of January, 1874, the custom-house valuation of the English sovereign was again changed, this time to %4.87
, at which point it now remains. The London stock exchange responded to this action, the same year, by valuing the American dollar at four English shillings, equivalent to about
cents of our money, from which it results that American stocks or bonds worth %100 are quoted in London at about %102.75, subject to variations on account of the fluctuations in commercial transactions.
559. The question of Bi-metallism is to be decided solely upon the principles which have been laid down in Part III., as governing the value of money; but the question is one of so much popular interest and has been so confused by the passionate controversy waged over it, that it may be worth while to set the points at issue fairly forth, for the assistance of the beginner in economics.
And first let us depict the situation, in view of which the controversy has arisen.
560. The Gold-Using Countries.—We find one group of States, of great importance in international commerce, whose habits of trade make gold money, or bank notes predicated upon a reserve of gold money, the most agreeable and convenient medium of exchange. These are rich countries, having vast accumulations of wealth, derived from the industry of the past. In them, because their productive power is large, wages are high. In them, trade and industry are organized with a great degree of complexity and minuteness. It is not needful for our present purpose to name all the countries of this group; but clearly it embraces England, France, Belgium and Holland, in Europe, and on this continent, the United States.
It is admitted, that, in these countries, the use of silver as the ordinary money of trade would be attended with great inconvenience, and would meet so much prejudice on the part of the people as to render it inexpedient for any government to propose the introduction of that metal as the sole money of full legal-tender power. These countries, however, use a large amount of silver as fractionary money, for the purpose of making change in transactions, and for retail purchases.
561. The Silver-Using Countries.—On the other hand, we find a group of countries, embracing an aggregate number of inhabitants several times greater than those previously mentioned, in which the facts of industry and the habits of the people respecting exchange are such as to make gold an impossible money. Such countries, beyond a doubt, are China and India, where the ordinary wages of labor range from two to eight cents a day. There are other countries—some in Europe and some in America—settled by the people of Southern Europe, in which wages range from twelve to thirty cents a day, in some of which the ordinary use of gold as money can not be pronounced exactly impossible; yet where reasons, both of practical convenience and of sentiment. and habit, give a decided preference to silver for that purpose: a preference so decided that it is not reasonable to anticipate that these countries will soon, if ever, pass over from the silver-using to the gold-using group of countries. The group of countries in respect to which we have spoken of the use of silver money as more consonant with the facts of industry and the habits of the people than the use of gold, comprise the Spanish American states, Russia, and most, if not all, of the southern states of Europe.
I have said that it is not necessary for our present purpose that all commercial countries should be named on the one side or the other of the dividing line drawn. Controversy might easily arise as to the proper location of Italy or Germany,∗ perhaps also of Austria; but we have no call to undertake the question. It is enough if it appear not only that there is one great group of states which, in fact, use gold as their principal money, and another great group which use silver, but that the preference for the one metal or the other is so far determined by economic causes, such as the rate of wages, the degree of accumulated wealth, etc., as to make it highly probable that the two money metals will continue to be used, as now, each within a wide field that is peculiar to itself.
562. What the Bi-Metallist Proposes.—It is this situation which the bi-metallist has in view when he propounds his scheme. Accepting the existence of a large group of countries in which gold naturally circulates as money and another in which silver is so used, he proposes to create a league of states, some of which are what we may, for brevity, call silver states, and some, gold states, which shall, each for itself, but by simultaneous action, establish the free coinage† of the two metals, making the money of one metal to be legal-tender indifferently with money of the other metal, in payment of debts, at a certain ratio determined upon in advance by the consenting states. Say, for example, 15 ½ dwt. of silver to 1 dwt. of gold, the ratio adopted by the states of the Latin Union, viz., France, Italy, Belgium and Switzerland. The bi-metallist asserts that, if such league be formed between a considerable number of important commercial countries, even though it does not embrace all countries, the relative value of gold and silver will be kept close to the mint-ratio so established.
When asked what is the object in view in such an international arrangement; what advantage is anticipated of sufficient importance to make it worth while to endeavor to overcome the natural reluctance of nations to bind themselves to act in common respecting matters which touch their sovereignty, to make it worth while to resort to international conferences and congresses, the bi-metallist adduces two considerations which he alleges to be of vast importance to the world's trade and industry.
563. A Par of Exchange∗Desired between Gold Countries and Silver Countries.—The first is the establishment of a par of exchange between silver-using and gold-using countries.
We saw (par. 543) that between two countries having the same money metal, a par of exchange exists. This par of exchange is realized whenever the sum of the payments to be made in one country by merchants of the other country, within a certain brief period, is equal to the sum of the payments to be made in the latter by the merchants of the former country, in which event a merchant paying down a certain amount, say 1,000 ounces, of the common money metal, say gold, in his own country, can thereby purchase the right to receive, himself, or through his agent or representative—his creditor, let us suppose—1,000 ounces of that metal in the country in question. Exchange will, in fact, fluctuate about this par of exchange, now above and now below, according to the movements of supply and demand, as these are determined by the relative amounts of debts to be paid and of payments to be received, respectively, in the course of trade between the two countries. The outside limits of these movements of exchange are, as we saw, fixed by the cost of exporting or importing specie.
But between two countries having money of different metals, say of gold in one country and of silver in the other, there is no par of exchange, irrespective of a bi-metallic league like that under consideration. Wholly in addition to the usual movements of exchange, the question, how much gold an Indian merchant can obtain the right to receive in London, by paying down a certain amount of silver in Calcutta, depends on the silver price of gold and the gold price of silver, at the time. And as the two metals have their separate sources of supply, and, to a certain extent, independent uses, whether in the arts or as money, their respective values are likely to fluctuate greatly.
564. It is a necessary result of this that much more uncertainty is involved in trade between a gold and a silver country than between two gold countries, or two silver countries: the chances of undeserved losses or unearned gains are greatly increased. No merchant in a silver country selling to a gold country, no merchant in a gold country selling to a silver country, can know for how much of the metal which forms the money of the country to which he exports his wares he must sell them, in order to make himself good for the metal which he has expended at home in producing or purchasing them.
The English merchant who sells to Calcutta or Hong Kong or Mexico, may do all that lies within him with the highest wisdom and skill; he may buy the right sort of goods and buy them at a bargain, ship them at the proper season to the best market, sell them at the highest ruling prices, and bring the proceeds safely home to Liverpool, yet a fall in silver, between the sale of the goods and the receipt of the proceeds, may strip him of all the profits of his venture, of all the fruits of the year's business, or even entail a heavy loss upon him.
It is true that, in one sense, what one merchant in an individual case loses, some other merchant, or some banker, or some speculator, may gain. But it is not true that unearned gains encourage industry to the extent to which undeserved losses discourage it. On the contrary, not only does the good done almost always fall far short of compensating for the evil wrought, but it often happens that, as mercy between man and man blesses both him that gives and him that takes, so the sums of wealth transferred by speculation or accident, not only leave the loser grieving and crippled, but curse and blight him whom they seemingly enrich.
565. Now this grievous disadvantage under which international trade suffers, the bi-metallist professes to be able to remove, through the scheme that has been described. It is not now the question whether this can, indeed, be done; but whether the result be desirable, and, if so, whether desirable in a degree to justify a considerable effort, perhaps some sacrifice.
It is one of the accidents of the controversy over this question that the mono-metallist writers are estopped from denying that this result would, if practicable, be desirable in a very high degree. There are but few of those writers who have not, in discussion of the effects of inconvertible paper money, treated the loss of a par of exchange with foreign nations (par. 220) as a serious disaster. In dealing with such a case, for example, as that of France between 1871 and 1877, they have attributed most unfortunate consequences to the inconvertibility of the money of the Republic into that which was the money of the commercial world, even though the notes of the Bank of France were at a very slight, often hardly appreciable, discount. In the same way these writers, during the continuance of the American suspension, 1862 to 1879, were accustomed (and rightly) to attribute to the inconvertibility of the green-backs most injurious effects upon the trade and production of the United States, and this, even after the premium on gold had sunk to a low average, and had ceased to fluctuate violently or rapidly. “Any degree of depreciation, however small, even the liability to depreciation, without its reality,” to use Mr. Bagehot's phrase, was declared to be a cause of mischief, to be eradicated by the most heroic efforts of the suffering nation, at almost any sacrifice.
566. The Greater Stability of Value in Bi-metallic Money.—A second benefit which, according to the bi-metallist claim, would result from the establishment of an international league for the free coinage of both metals, as indifferent legal tender, at a certain fixed ratio, in payment of debts, is that the two metals, thus bound together, would constitute a better money than either metal by itself could be. The inequalities of mining production would tend in a degree to equalize each other, with the result of greater uniformity in the production of the compound mass, and hence of greater steadiness in the value of money.
Here, again, the mono-metallists are at a controversial disadvantage. In order to establish the impracticability of the bi-metallic scheme, they have dwelt strongly on the tendency of the two metals to vary widely in value, and this view is fully borne out by the facts of the last three or four centuries.∗ But this argument against the practicability of the bi-metallic scheme virtually amounts to an admission of the merits of that scheme, if found practicable.
I think it must be conceded, on this statement, that the bi-metallic scheme, if it could be carried out so as to realize the expectations of its advocates, would confer very great benefits upon international trade, and, by consequence, upon the production of wealth.∗
567. Is it Practicable?—Let us, then, inquire what are the economic conditions of the case; how far it is reasonable to believe that this scheme could be successfully established.
What is the force to which the bi-metallist looks to restrain the tendency to divergence between the values of the two money metals, silver and gold? It is evident that any rational scheme to influence value must aim at affecting either supply or demand. Can, then, government influence the supply of or the demand for a money metal? Clearly, unmistakably, yes. Government can in a very great degree influence the demand for either of the money metals by coining it into money and conferring on the coin legal tender power.
To illustrate this, let us suppose that, in any country, both gold and silver are made legal tender in payment of debts, at the ratio of 15 ½ of silver to 1 of gold: that is, the law decrees that a debtor may extinguish an obligation by the payment of coins containing a certain number of ounces of gold, or, at his option, coins containing fifteen and a half times that number of ounces of silver. Let it be assumed that, at the moment of the decree, this was the actual market ratio between the metals.
Let it now be supposed that causes, natural or commercial, that is, affecting the supply of one metal or the other, or affecting the demand for the one or the other, begin to operate to produce a divergence from this ratio: say, to make an ounce of gold worth 15.60 ounces of silver, what will occur? The bi-metallic principle will at once begin to act in restraint of this movement toward divergence. How will it operate? Through the desire of every debtor to meet his maturing obligations in the cheapening metal. All debtors will, in the case supposed, seek silver. This extension of demand acts directly in contravention of the force which is lowering its value. On the other hand, the metal—gold—which is tending to become dearer, from that fact falls out of demand. No debtor seeks it as the means of paying his debts. This diminution of demand at once operates in counteraction of the forces tending to raise the value of gold.
568. The Opinion of Mono-Metallic Writers.—Now, is this a purely fanciful view of the subject, taken only by advocates of the bi-metallic scheme? On the contrary, it has been seen in operation over extensive countries, of great commercial importance, through long periods of time; and the validity of the cause is fully confessed by mono-metallic writers of the highest reputation.
M. Chevalier, the eminent French economist, writing of this system as it prevailed in his own country in 1857, when, in consequence of the great gold discoveries in California and Australia, gold was tending to fall and silver to rise, and thus to pull away from the mint ratio of 15 ½: 1, then established in France, speaks thus emphatically: “Whilst this state of things lasts, it will be impossible at London, Brussels, Hamburg, or even at New York, or at any other great center of commerce, for gold to fall much below 15 ½ times its weight in silver.” And Prof. Cairnes, writing of the same period, said: “The crop of gold has been unusually large; the increase in the supply has caused a fall in its value; the fall in its value has led to its being substituted for silver; a mass of silver has thus been disengaged from purposes which it was formerly employed to serve; and the result has been that the two metals have fallen in value together.”
Mr. Bagehot wrote in the London Economist: “Whenever the values of the two metals altered, these [bi-metallic] countries acted as equalizing machines; they took the metal which fell, they sold the metal which rose; and thus the relative value of the two was kept at its old point.”
And the late Prof. Jevons, writing in 1874, under the title, the Equivalence of Commodities (see par. 142), says: “It is upon this principle that we must explain the extraordinary permanence of the ratio of exchange of gold and silver: that this fixedness of ratio does not depend upon the amount and cost of production is proved by the very slight effect of the Australian or Californian discoveries.”
And elsewhere Prof. Jevons thus illustrates the compensatory action of the two metals: “Imagine two reservoirs of water, each subject to independent variations of supply and demand. In the absence of any connecting pipe, the level of the water in each reservoir will be subject to its own fluctuations only. But, if we open a connection, the water in both will assume a certain mean level, and the effects of any excessive supply or demand will be distributed over the whole area of both reservoirs.
“The mass of the metals, gold and silver, circulating in Western Europe in late years, is exactly represented by the water in these reservoirs, and the connecting pipe is the law of the 7th Germinal an XI,∗ which enables one metal to take the place of the other as an unlimited legal tender.”
569. Bi-Metallism not a Chimera.—We see, thus, that the bi-metallic scheme is based upon economic principles which are incontestable. If it be worth while for any nation to undertake this work of holding silver and gold together, it can do so just as long as it has any considerable quantity of the metal which at the time tends to become dearer, to dispose of. If it be worth while for any group of nations to undertake this, they can maintain the approximate equivalency of the two metals just as long as their joint stock of the metal which at that time tends to become dearer remains unexhausted. Every additional state that joins the bi-metallic group strengthens the system in two ways, first, by contributing to the supply of the metal which may, under the natural or commercial conditions prevailing at the time, tend to become dearer, and, secondly, by withdrawing itself from the list of States which may possibly contribute to the demand for that metal.
570. The Operation Illustrated.—We may suppose the commercial world to be divided into sixteen states, A to P, the first six having the single gold standard; four, G to J, the so-called double standard of gold and silver, under the bi-metallic system: say at 15 ½: 1; the remaining states having the single standard of silver, thus:
A, B, C, D, E, F, (G, H, I, J,) K, L, M, N, O, P.
It is evident that, in the event of a change in the conditions of supply tending to cheapen silver relatively to gold, the new silver would pass into the countries of the double standard, G to J, and be there exchanged for gold, at the rate of 15 ½: 1, with some small premium as the profit of the transaction, and, as a result, the gold displaced from the circulation would be exported to the gold countries, A to F, in settlement of trade balances.
The rapidity with which this substitution of silver for gold in the bi-metallic states will proceed must depend, first, on the force of the natural causes operating to cheapen silver; and, secondly, on the force of the commercial causes operating to maintain or advance the value of gold. The length of time during which the drain of the dearer metal can be sustained without exhaustion, will (given the rate of movement) depend solely upon the stock of that metal existing in the bi-metallic states when the drain begins.
But chief among the causes operating to advance the value of gold, is the exclusive power with which gold is invested by law to pay debts in states A to F; while the stock of the dearer metal available to sustain the drain described, is made up, not of all the gold in the sixteen states A to P, or in the ten states A to J, but only of the gold in the four bi-metallic states, G to J.
Now, let us suppose the sixteen commercial states to be somewhat differently divided, as follows:
A, B, C, D, (E, F, G, H, I, J, K, L,) M, N, O, P.
The bi-metallic system is now not twice merely, but many times as strong, since not only is the amount of the dearer metal subject to drain increased, but the demand for that metal, in preference to silver at 15 ½: 1, now comes from four countries only, instead of six, as formerly.
The transfer of still another state from each of the two single-standard groups, would vastly increase the stability of the bi-metallic system.
A, B, C, (D, E, F, G, H, I, J, K, L, M,) N, O, P. Not only would the base of the system be broadened by bringing the dearer metal of ten states, D to M, under tribute, in the event of changes operating on the supply of either metal; but the force threatening the equilibrium of the system would be reduced, since the demand for the dearer metal would now come from only three states: A, B, C, in the case of a cheapening of silver relatively to gold; N, O, P, in the case of a cheapening of gold relatively to silver. Those three states can not take the dearer metal indefinitely. They would soon be surfeited. A further increase of money in them would be followed by a fall in its value, which would soon proceed so far as to bring the metals together again.
And it is to be noted that, with a bi-metallic league embracing so many states, those which tended naturally to the use of silver as money would continue to use silver predominantly; those which tended to use gold would still use gold as their main money of circulation. Whenever causes began to operate to cheapen silver relatively to gold (at the mint ratio between the two metals established by the league), the gold using countries would take some additional silver and discard some gold; but this increase of demand for silver and diminution of demand for gold would check the movement to divergence before the character of the circulating medium became greatly changed. In the event of a cheapening of gold relatively to silver, the substitution of gold for silver, in the silver-using states, to the extent only of a small fraction of their circulation, would suffice to put a stop to the movement.
571. This is the bi-metallic scheme. The question of securing the co-operation of independent states to any end, is a political, not an economic question: that is, the desired end is to be obtained by the action of governments, moved by various considerations and interests, and not by the laws of trade.
Our limits will not permit us to enter into a discussion of the causes which have, since 1874, suspended the bi-metallic policy of the Latin Union, or of the probabilities of the future respecting the indifferent use of gold and silver as money.
the revenue of the state.
572. The revenue of the State may be derived from:
I. Voluntary Contributions.∗
It is, to most of us, difficult to conceive a state of society where the expenses of government should be met through spontaneous self-assessment; yet, in a more primitive condition, such a state of things has existed widely,† and in a few happy instances has come down nearly to our day.
The papal revenues∗ may perhaps be brought under this title. Adam Smith cites Hamburg, Basle, Zurich, Underwald, Holland, and other communities, where the self-valuation of the citizen was accepted.
An American,† long resident in Europe, thus describes his experience in a community where the principle of self-assessment still survived:
“For four years it was the good fortune of the present writer to be domiciled in one of these communities. Incredible as it may seem to believers in the necessity of a legal enforcement of taxes by pains and penalties, he was, for that period, by law and usage, in the strictest sense of the term, his own assessor and his own tax gatherer. In common with the other citizens, he was invited, without sworn statement or declaration, to make such contribution to the public charges as seemed to him just and equal. That sum, uncounted by any official, unknown to any but himself, he was asked to drop, with his own hand, into a strong public chest; on doing which, his name was checked off the list of contributors, his duty done.”
573. II. Luorative Prerogatives, Public Property, and State Enterprise.
The following may be named as the chief sources of revenue under this head:
It is evident that the scope of this principle will widen or contract in correspondence with the laws regulating the descent and bequest of property and prescribing the times and modes of proving claims. Under the feudal system, escheat constituted a most important source of revenue. In England, the right of devising real property did not exist after the Conquest, until the time of Henry VIII. Modern society, however, has given continually wider extension to the power of bequest and the principle of inheritance, until escheat has ceased to be of much importance.
In 1795, the great English law reformer, Jeremy Bentham, in a pamphlet entitled, “Escheat vice Taxation,” propounded a scheme by which the entire revenue of the state should be derived from this source.
Bentham proposed an extension of the existing law of escheat, “a law coeval with the very first elements of the Constitution,” and a corresponding limitation of the power of bequest. The effect intended was to be “the appropriating to the use of the public all vacant successions, property of every denomination included, on the failure of near relations, will or no will, subject only to the power of bequest, as hereinafter limited.”
By near relations, he means “such relations as stand within the degrees termed prohibited with reference to marriage.”
Further, in the case of “such relations within the pale as are not only childless, but without prospect of children,” he proposes, that, instead of taking their share in money, they should take only the interest of it for life.
“As to the latitude to be left to the power of bequest,” he writes, “I should propose it to be continued in respect to the half of whatever property would be at present subject to that power.”
Bentham argues that in the distribution of property there is no sense of hardship but in proportion to disappointment: expectation thwarted. “Hardship,” he says, “depends upon disappointment; disappointment upon expectation; expectation upon the dispensations, meaning the known dispensations, of the law.”
If, therefore, the law were so framed, distant relations∗ would not expect to succeed; would consequently not be disappointed; and would consequently suffer no hardship.
574. (3.) Fines and forfeitures for Criminality and Delinquency. Since government exists largely for the protection of life, property and labor, the cost of maintaining government and administering justice might properly be drawn, if it were found possible, from the delinquent and criminal class.
In feudal times, fines and forfeitures constituted a very important source of revenue to the crown.
In the present age political crimes have become comparatively infrequent, and the criminal class are now mainly drawn from the poor, who are not proper, perhaps not possible, subjects for pecuniary exaction.
Hence this branch of public revenue has shrunk into comparative insignificance. Fines and forfeitures pay a part of the expense of strictly judicial establishments, especially of the lower or police courts; but they add little to the general receipts of the state.
(4.) Tributes from colonies, dependencies and conquered nations, including war fines, requisitions and indemnities.
The subject is a fascinating one;† but I must resist the temptation to enlarge upon it.
575. (5.) The sale of offices, honors and titles.
This source of revenue makes a very prominent figure in the history of finance; but has, at present, mainly a curious interest.
The sale of offices, titles, etc., by the state, may fall into several different categories.
576. (6.) Domains (L'Etat Capitaliste.)
Even under the modern European principle of the private ownership of land, the state is, in all countries, the possessor of larger or smaller domains from which a revenue may be derived.
It is the habit of writers on finance to speak, and perhaps justly, in the most disparaging tone of the administration of public estates, for productive uses.∗ Adam Smith expresses himself in the strongest terms. “The servants of the most negligent master are better superintended than the servants of the most vigilant sovereign.” Referring to his own country, he says: “The crown-lands of Great Britain∗ do not, at present, afford the fourth part of the rent which could probably be drawn from them, if they were the property of private persons. If the crown-lands were more extensive, it is probable they would be still worse managed.” And, not to disparage English administration too greatly, he adds: “In the present state of the greater part of the civilized monarchies of Europe, the rent of all lands in the country, managed as they would probably be if they all belonged to one proprietor, would scarce amount, perhaps, to the ordinary revenue which they levy upon the people, even in peaceful times.”
However much this statement might require to be modified with respect to the management of government property in a country like Germany, with its admirable civil service and its systematic administration of public trusts, no one would think of questioning the full literal truth of Adam Smith's declaration if applied to our own country, with its civil service based upon the principles of rotation in office and appointment as the reward of partisan activity.
Of the present Enropean States, Russia, Prussia, Bavaria, Sweden, and Hanover, derive considerable revenue from public domains, the first named being so pre-eminent in this respect that M. Cherbuliez∗ mentions it as almost the only state which draws a notable proportion of its revenue from such a source.
577. (7) State Enterprise (L'Etat Entrepreneur).—Whatever the disabilities of the state in acquiring a revenue from the rental or sale of property, whether that consist of agricultural lands, or mines, or forests, or fisheries, or phosphate deposits, those disabilities are greatly increased when the state undertakes the management of commercial or manufacturing business.† The state as capitalist is at no small disadvantage; as entrepreneur, that disadvantage is vastly aggravated.
Yet the rule of failure, on this side of governmental agency, is not unbroken. Dr. Smith mentions the republic of Hamburg as deriving a considerable revenue from a public wine cellar and from an apothecary's shop. The profits of banking‡ have been realized in a notable degree by several cities, among them Hamburg, Venice and Amsterdam. The post-office can be made, and has been made, “to pay,” and that handsomely. If the post-office in the United States is not a source of revenue, it is because our ‘people have chosen to make it an agency for promoting the settlement of the country. The business of distilling in Russia, of sugar refining in Egypt, and of opium manufacture in British India, have been made the subject of no inconsiderable profit to government, The supply of towns in the matter of water, and, in a smaller number of instances, of gas, has been attempted, not unsuccessfully, by municipal governments.
The instance which goes furthest to contradict the generally received opinion of the hopeless incapacity of the state to conduct industrial enterprises, is afforded by the railways of Germany.
578. III. Quasi Taxes.—The following may be named as sources of revenue under this head:
(1.) Monopolies conferred upon individuals or corporations, in consideration of a capital sum paid down, or of a share in the resulting profits.
Monopolies have played a conspicuous part in the history of public revenues; and, in spite of the spirit of the age which is, in general, strongly opposed to exclusive privileges of manufacture and sale, they still form a prominent feature in the budget of many countries of Europe.
Monopolies may be commercial, industrial or financial. The distinction between the monopolies of the past and those of the present day is marked. Formerly monopolies were granted, for the profit of the government, to persons and corporations to carry on a vast variety of operations,∗ great and small alike, most of which were susceptible of private management.
Such were the monopolies of the 17th and 18th centuries. To-day, under the light of political economy, all prudent governments restrict the principle of monopoly to a very few highly important interests, and, by preference, to those which in their nature tend toward monopoly. Thus Bentham, that arch enemy of monopolies, proposed the collection of large revenues from bankers, who were to be compensated by a monopoly within their several districts, on the ground that banking was a business tending to monopoly.
In the same way, taxes on railway goods and passenger traffic in England and France have been defended, even by free-traders, on the ground that railway transportation is necessarily very much of a monopoly; that full and effective competition can rarely be introduced and never long maintained; and that the state may, therefore, accepting the fact of a substantial monopoly, properly derive a profit therefrom.
But there are also certain special interests of great commercial importance, in every way fitted for private management, which, on account of their high capability for yielding revenue, some enlightened nations still constitute exceptions to the principle of open public competition.
Among the subjects thus specially excepted from the principle of competition, are opium, salt, tobacco and matches.
579.—(2.) Lotteries. This needs only to be mentioned as a source of revenue largely made use of, in the past, and still forming an important feature in the budgets of many civilized countries. Of the moral and social objections∗ to this system of raising money, we are not called to speak here. Economically speaking, there can be no doubt that, while lotteries afford a most effective means of securing a present revenue, appealing, as they do, to one of the strongest passions of human nature, they yet, in their ultimate effect, weaken the state by discouraging patient industry, and thus impair the revenue capabilities of any people among whom they come to be extensively employed. In two of the states of the American union, lotteries are still conducted under government patronage. Every one is familiar with them as agencies for collecting money for charitable and religious associations.
580.—(3.) Purveyance.—The right of buying provisions and other necessaries for the use of the royal household, at an appraised valuation, in preference to all other purchasers and even without the consent of the owner, might have been included among the “lucrative prerogatives “mentioned under a former head, or may indifferently be regarded as a quasi tax. Once extensively practiced, purveyance is now greatly restrained and confined, and in almost all highly civilized countries is wholly discontinued—except during actual war, or in the case of a royal progress.
581.—(4.) Fees.—A fourth mode of raising revenue, which partakes largely of the nature of a tax, without bearing its form, is through the exaction of fees for stated or occasional services performed by the agents of the State.
So far as fees are, in the phrase of Garnier, not fiscal, that is, so far as they constitute merely a return for the expense to which the individual receiving the benefit has put the state, on his own behalf, they do not come under the present title. We are only concerned here with fees exacted by the state as a means of revenue, in excess of the expense to which the state is put by the performance of the service, and where, perhaps, the so-called service is itself interposed only as an occasion for the imposition of a tax, as in the case of many custom-house services.
Into the same category would properly fall all the fees exacted from individuals where the main benefit is received by the community, even though the aggregate of such receipts should not equal the expense to the state of maintaining some necessary service. Judicial fees are often of this nature, the cost of obtaining the adjudication of a great principle having been formerly thrown upon single individuals, who were frequently less benefited than thousands of others by the decisions reached. This system was fiercely attacked by Bentham.
“Who goeth to warfare at any time at his own charges? saith St. Paul. It is the poor litigant who makes war upon injustice.”
It is also fairly a question whether the maintenance of the ordinary roads of a country is not, in such a sense and in so far, a general charge, that fees, under the name of tolls, constitute a quasi tax, instead of being, according to the assumption on which they are collected, the price paid by the individual for a service rendered to himself directly and exclusively.
Of other forms of quasi taxes (5) seigniorage on the coin, and (6) the issue of paper money, enough has been said in Part III.
582. IV. Taxation in its Various Forms.—Taxation may be considered (a) according to its ultimate Bases, which may be Rent-bearing land, Wealth, Revenue, Faculty, or Expenditure, one or all of these.
The first we have already discussed under the title “The Nationalization of the Land.” A tax on rent, we have seen, is not a general tax. It does not fall upon those members of the community who do not own land. It does not affect the price of produce. It amounts merely to the assumption, or usurpation, as one is disposed to regard it, by the state, of the surplus of produce above the cost of cultivating the no-rent lands.
A tax upon the no-rent lands, either by themselves, or in common with other lands, is a tax on produce.
583. Again, taxation may be considered (b) with reference to the equities of contribution. In this connection we might discuss:
584. (c.) The foregoing discussions are introductory to the consideration of any specific tax or group of taxes, or existing tax system, respecting which we may inquire how far it answers the requirements of equitable contribution, or, on the other hand, if we abandon the rule of equity altogether—as did Mr. McCulloch—how far it secures to the state the needed revenue, with a minimum of irritation to the public mind, with a minimum of expense and loss in collection, and with a minimum disturbance to trade and industry.
the principles of taxation.
585. Inadequacy of the Literature of Taxation.—According to an eminent German financier, Hoffmann, it would be difficult to find, in the whole realm of political economy, a subject more generally misconceived, more disfigured by false views, more degraded by a partial study, than Taxation. “If,” adds M. de Parieu, author of the ablest French work on the subject, “this proposition appeared true in a country where the problem of instruction in administration has for a long time been studied, it is probably still more so in France, where the practice is even further separated from the science of administration.”
586. The body of English literature in finance is extremely unsatisfactory.∗ Adam Smith, indeed, gave to taxation about one-fourth of his Wealth of Nations; but his treatment shows little grasp of the subject, at any point; while his ignorance of the law of rent goes far to vitiate his general views. Ricardo dealt with taxation, at great length; and as a study of the propagation of an economic impulse from object to object, and from class to class, his discussion is masterly. But Ricardo's underlying assumption of perfect competition has necessarily resulted in conclusions which are widely inconsistent with the facts of industrial society. J. R. McCulloch discussed taxation and the funding system in a distinct treatise, which is not without value. Later English contributions to finance have, with few exceptions, either been trivial in character or have been confined to single phases of the general subject. No great, comprehensive English work on Taxation exists.
587. Perhaps we shall get as good an idea of the inconsequence of the English literature in this department, as can be obtained in any other way, by referring to Adam Smith's maxims respecting taxation. Dr. Smith proposed four maxims,∗ or principles, “which,” says Mr. Mill, “having been generally concurred in by subsequent writers, may be said to have become classical.” A vast deal of importance has been assigned by English economists to these maxims. They have been quoted over and over again, as if they contained truths of great moment; yet if one examines them, he finds them, at the best, trivial; while the first and most famous of these can not be subjected to the slightest test without going all to pieces.
588. The Social Dividend Theory of Taxation.—“The subjects of every state,” says Dr. Smith, “ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”
This maxim, though it sounds fairly, will not bear examination. What mean those last words, “under the protection of the state”? They are either irrelevant, or else they mean that the protection enjoyed affords the measure of the duty to contribute. But the doctrine that the members of the community ought to contribute in proportion to the benefits they derive from the protection of the state, or according as the services performed in their behalf cost less or cost more to the state, involves the grossest practical absurdities. Those who derive the greatest benefit from the protection of the state are the poor and the weak—women and children and the aged; the infirm, the ignorant, the indigent.
Even as among the well-to-do and wealthy classes of the community, does the protection enjoyed furnish a measure of the duty to contribute? If so, the richer the subject or citizen is, the less, proportionally, should he pay. A man who buys protection in large quantities should get it at wholesale prices, like the man who buys flour and meat by the car-load. Moreover, it costs the state less to collect a given amount from one taxpayer than from many.
Returning to the maxim of Dr. Smith, I ask, does it put forward ability to contribute, or protection enjoyed, as affording the true basis of taxation? Which? If both, on what principles and by what means are the two to be combined in practice?
589. Taxation According to Ability.—But if we take the last six words as merely a half-conscious recognition of the social-dividend theory of taxation, and throw them aside, we shall still find this much-quoted maxim far from satisfactory: “The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy.”
But is the ability of two persons to contribute necessarily in proportion to their respective revenues? Take the case of the head of a family having an income of %500 a year, of which %400 is absolutely essential to the maintenance of himself and wife and children in health and strength to labor. Is the ability of such a person, who has only %100 which could possibly be taken for public uses, one half as great as that of another head of a family similarly situated in all respects except that his income amounts to %1000, and who has therefore %600 which could conceivably be brought under contribution? Manifestly not.
We shall, then, still further improve Dr. Smith's maxim if we cut away all after the first clause: “The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities.” The maxim as it stands is unexceptionable, but does not shed much light on the difficult question of assessment.
590. The Leave-them-as-you-find-them Rule of Taxation.—The best statement I have met of the principle of contribution based on ability is contained in an article in the Edinburgh Review of 1833: “No tax is a just tax unless it leaves individuals in the same relative condition in which it finds them.” What does the precept, which we may call the leave-them-as-you-find-them rule of taxation, demand? In seeking an answer to this question, let us inquire, historically, what bases have been taken for assessment. Leaving out Rent-Bearing Land, whose fiscal relations have been sufficiently dwelt upon, we note four:
These are the four historical bases of taxation. Let us see how far each in turn answers the requirement of the Edinburgh Reviewer's maxim that the tax ought to leave the members of the community in the same relative condition in which it finds them.
And, first, of Realized Wealth. Wealth is accumulated by savings out of revenue. If, then, wealth alone is to be taxed, it is saving, not production, which contributes to the support of the state. Economically there can not be a moment's doubt that for government thus to draw its revenue from only that part of the produced wealth of the community which is reserved from immediate expenditure, must be prejudicial. The question also arises, where is the political or social justice of such a rule of contribution? If my income belongs to me, to spend for my own comfort and gratification, without any deduction for the uses of the state, why should I lose my right to any part of it because I save it? To tax realized wealth is to punish men for not consuming their earnings as they receive them. Yet it is eminently for the public interest that men should save of their means to increase the capital of the country.
591. Revenue as the Basis of Taxation.—Turning to Revenue, it would seem, on the first thought, that we had reached a rule of equitable contribution. Yet the rule of contribution according to revenue is subject to grave impeachment.
Here are two men of equal natural powers. One is active, energetic, industrious; he toils early and late and realizes a considerable revenue, on a portion of which the state lays its hand. The other lets his natural powers run to waste; trifles with life, lounges, hunts, fishes, gambles, and is content with a bare and mean subsistence. Was his duty to contribute to the support of the state different in kind or degree from that of the other? If not, how has his idleness, shiftlessness, worth-lessness, forfeited the state's right to a contribution from him in proportion to his abilities?
We must, I think, conclude that, while to tax wealth instead of revenue is to put a premium upon self-indulgence in the expenditure of wealth for present enjoyment, to tax revenue instead of faculty is to put a premium upon self-indulgence in the form of indolence, the waste of opportunities, and the abuse of natural powers.
592. Expenditure as the Basis of Taxation.—Passing for the moment by our third title, we find that the fourth basis taken for taxation has been Expenditure. This must not be confounded with taxes on consumption, as constituting a part of a tax system in which taxes on realized wealth, taxes on revenue, taxes on faculty, one or all of these, also appear. Nor do we speak here of taxes on expenditure imposed in practical despair of an equitable distribution of the burdens of government. We are now concerned with expenditure only as the single basis of taxation, in the interest of political equity.
“It is generally allowed,” wrote Sir William Petty, two hundred years ago, “that men should contribute to the public charge but according to the share and interest they have in the public peace; that is, according to their estate or riches.
“Now, there are two sorts of riches, one actual and the other potential. A man is actually and truly rich according to what he eateth, drinketh, weareth, or in any other way really and actually enjoyeth. Others are but potentially and imaginatively rich, who, though they have power over much, make little use of it, these being rather stewards and exchangers for the other sort than owners for themselves.
“Concluding, therefore, that every man ought to contribute according to what he taketh to himself and actually enjoyeth, the first thing to be done is,” etc., etc.
Arthur Young seems to have had the same view. After saying that every individual should contribute in proportion to his ability, he added in a note: “By ability must not be understood either capital or income, but that superlucration, as Davenant called it, which melts into consumption.”
In this view, so far as any one possesses wealth in forms available for the future production of wealth, he is regarded as a trustee or guardian, in that respect and to that extent, of the public interests. Just this is said by Young—taxes “can reach with propriety the expenses of his living only. If they touch any other part of his expenditure, they deprive him of those tools that are working the business of the state.”
593. Fallacy of this Doctrine.—I do not see but that, if capital, or revenue in excess of personal expenditure, is to be exempted from taxation, on the plea that it has not yet become the subject of individual and exclusive appropriation, and is, therefore, presumably held and used in a way which primarily benefits society, the state has the right to inquire whether the use made or proposed to be made of wealth is such as will, in fact, benefit society, and benefit society, moreover, in the highest degree of which it is capable.
The citizen says to the state, “You must not tax this wealth because I have not yet appropriated it exclusively to myself. Indeed, I am going to use it for the benefit of society.” The state rejoins: “Yes, but of that we must satisfy ourselves. We must be the judge whether your use of your wealth will benefit society. Pay your taxes, and you can do with your wealth as you like. Claim exemption on the ground of public service, and you rightfully come under state supervision and control.”
The fallacy of the theory we are considering lies in the failure to recognize the fact that the selfish and exclusive appropriation and enjoyment of wealth are inseparable from its possession. The pride of ownership, the social distinction which attends great possessions, the power which wealth confers, are additional to the merely sensual enjoyment to be derived from personal expenditure. Would I resent the interference of the government, or of my neighbors, in the management of my property, upon the ground that it was not being used in the best way? What is that resentment but the proof of a personal appropriation, an exclusive appropriation, of that wealth? My resentment would spring out of the deeply seated feeling that my management of my own property is my right: and that he who should deprive me of it would take from me what is as truly mine as the right to eat, drink, wear, or otherwise consume and enjoy any portion of it; that, short of absolute mental incapacity, it is my prerogative to control my own estate, even though not to the highest advantage of the community, or even of myself: though not wisely or well. In other words, I am not a trustee, but a proprietor.
594. The Dangerous Nature of this Doctrine.—This doctrine of the Trusteeship of Capital is not more irrational than it is socially dangerous. It is held by men who are fierce in denouncing graded taxation as confiscation; yet it is, in its very essence, communistic. If the owner of wealth is but a trustee; if “his tools are working the business of the state,” then the real beneficiary may enter and dispossess the trustee if any substantial reason for dissatisfaction as to the management of the property exists; the state may take the tools into its own hands and “work its business” for itself.
595. Faculty as the Basis of Taxation.—I reach, then, the conclusion that Faculty, the power of production, constitutes the only theoretically just basis of contribution; that men are bound to serve the state in the degree in which they have the ability to serve themselves.
I think we shall more clearly see Faculty to be the true natural basis of taxation if we contemplate a primitive community, where occupations are few, industries simple, realized wealth at a minimum, the members of the society nearly on a level, the wants of the state limited. Suppose, now, a work of general concern, perhaps of vital importance, requires to be constructed: a dyke against inundation, or a road, with occasional bridges, for communication with neighboring settlements. What would be the rule of contribution? Why, that all able-bodied persons should turn out and each man work according to his faculties, in the exact way in which he could be most useful.
In regard to a community thus for the time engaged, we note two things: first, no man would be held to be exempt because he took no interest in the work; he would not be allowed to escape contribution because he was willing to relinquish his share of the benefits to be derived, preferring to get a miserable subsistence for himself by hunting or fishing; secondly, between those working, a higher order of faculties, greater muscular power, or superior skill would make no distinction as to the time for which the individuals of the community should severally remain at work.
596. The Ideal Tax.—This is the ideal tax. It is the form of contribution to which all primitive communities instinctively resort. It is the tax which, but for purely practical difficulties, would afford a perfectly satisfactory measure of the obligation of every citizen to contribute to the sustentation and defense of the state. Any mode of taxation which departs in essence from this involves a greater or smaller sacrifice of the equities of contribution; and any mode of taxation which departs from this in form is almost certain to involve a greater or smaller departure in essence.
And it deserves to be noted that the largest tax of modern times, even in the most highly organized societies of Europe, the obligation of compulsory military service, is assessed and collected on precisely this principle.
597. The Faculty Tax Impracticable.—But while the tax on Faculty is the ideal tax, it has usually been deemed impracticable, as the sole tax, in a complicated condition of industrial society. As occupations multiply and the forms of production become diversified, the state can not to advantage call upon each member, by turns, to serve in person for a definite portion of each day or of the year. Hence modern statesmanship has invented taxes on expenditure, on revenue, on capital, not as theoretically just, but with a view to reduce the aggregate burden on the community, and to save production and trade from vexation and obstruction.
598. We recur to the Tax on Revenue.—The politicians of the existing order, as we have seen, shrink from the effort involved in levying the public contributions entirely, or even chiefly, according to faculty. Next in point of political equity comes the tax on incomes, or the revenues of individuals. That tax, as we now contemplate it, is a tax on the revenues of all classes, with exception only of the amount requisite for the maintenance of the laborer and his family, after the simplest possible manner, in health and strength to labor. It is not a compensatory tax, constituting a part of a system in which realized wealth and various forms of expenditure are also brought under contribution, but the sole tax imposed by the state.
599. Exemption of the Actual Necessaries of Life.—It has been said that from such an income tax the necessary cost of subsistence must be exempted. Mr. D. A. Wells has, indeed, laid down two propositions: first, that “any income tax which permits of any exemption whatever is a graduated income tax;” and, secondly, that “a graduated income tax to the extent of its discrimination is an act of confiscation.” But the exemption of a certain minimum annual revenue is a matter of sheer necessity, whether the state will or no. Economically speaking, it is not possible to tax an income of this class. A man in the receipt of such an income can not contribute to the expenses of government. Should the state, with one hand, take any thing from such a person as a taxpayer, it must, with the other, give it back to him as a pauper.
Conceding the exemption, on purely economic grounds, of the amount required for the maintenance of the laborer's family, one of the most vital questions in finance arises immediately thereupon, to wit: shall the excess above the minimum, shall the superfluity of revenue, which may be spent or saved at the will of the owner, be taxed at a uniform rate, or at rates rising with the increase of income?
600. The Question of Progressive Taxation.—The question of progressive taxation has always been one of great interest while the fiscal policy of states rested with the wealthy and well-to-do classes. It is certain to acquire vastly greater importance as political power passes more and more into the hands of the class of small incomes.
Upon the question of the equity of progressive taxation writers on finance are divided. One party holds that any recognition of this principle is sheer confiscation: the other admits that progressive taxation may be carried to a certain point without injury either to the sense of political justice or to the instincts of industry and frugality, some even holding with J. B. Say that “taxation can not be equitable unless its ratio is progressive.” Both parties agree that there is great danger that, under popular impulse, progressive taxation may be carried so far as not only to violate all the equities of contribution but seriously to shock the habits of acquiring and saving property.
The system of progressive taxation prevailed at Athens. There were four Solonian classes of citizens, arranged according to wealth. Of these the first paid no taxes; the class next above them were entered on the tax-books at a sum equal to five times their income; the next class at ten times their income; the richest class at twelve times their income.
The principle of graduation, or progressive taxation, was a favorite one with the statesmen of the French Revolution. It was for a time adopted by the Convention in 1793. In consequence, perhaps, of the appetite thus created among the people for laying the burdens of government mainly on the rich, many of the later French writers on finance have been very strenuous in denouncing the principle.
Yet this system was approved, as we saw, by Say, and also by Montesquieu. In the personal tax, wrote the latter, “ the unjust proportion would be that which should follow exactly the proportion of goods.” Referring to the Solonian Categories at Athens, he said: “The tax was just, though it was not proportional. If it did not follow the proportion of goods, it did follow the proportion of needs. It was judged that each had equal physical necessities, and that those necessities ought not to be taxed; that the useful came next, and that it ought to be taxed, but less than what was superfluous; and lastly, that the greatness of the tax on the superfluity should repress the superfluity.”
In 1848, at the Revolution, the idea of progressivity was revived. The provisional government in a decree, said: “Before the Revolution taxation was proportional; then it was unjust. To be truly equitable, taxation must be progressive.”
M. Joseph Garnier, editor of the Journal des Economistes, makes a distinction between progressive taxation, properly so called, and progressional taxation. It is, he says, against the first that all the objections are directed which we find in writers who declare that progressive taxation is a species of confiscation, tending to the absorption of great fortunes by the state, to the leveling of conditions, to the destruction of property, to the discouragement of frugality and industry, to the emigration of capital. There is, M. Garnier holds, a species of increasing taxation which is rational and discreet, to which he applies the term progressional, which is held within moderate limits, which is collected by virtue of a tariff of duties slowly progressive, and which, at the maximum, can not pass beyond a definite portion of the income of the individual.
In Prussia the tax on small incomes, known as the Klassensteuer, is levied on a scale of twelve degrees.
In England the principle of progression has never been admitted into the income tax further than is involved in the exemption of a certain minimum. How the subtraction of a constant amount from all incomes, and the taxation of the excess at a uniform rate, causes the rate on the total incomes to rise, from lowest to highest, will appear from the following table.
601. The Effect of Exemptions.—If we suppose the constant amount exempted to be %1,000, and the rate of taxation on the excess to be ten per cent., incomes of different amounts will in effect be taxed as follows:
But while the principle of progressivity has never been admitted into the income tax of England, it has been extensively applied to the so-called “Assessed Taxes;” that is, taxes on carriages, horses, servants, etc.
602. The question of progressive taxation is a nice one in theory, while in its practical application it is beset with the gravest difficulty, arising out of the instincts of spoliation which are deeply rooted in the human breast, an inheritance from ages of universal warfare and robbery. The appetite for plundering the accumulated stock of wealth, once aroused, may become a formidable social and political evil.
Were the highest human wisdom, with perfect disinterestedness, to frame a scheme of contribution, I must believe that the progressive principle would in some degree be admitted; but in what degree, and by what means, I am at a loss to suggest.
That progressive taxation would be the demand of triumphant socialism, as it was of the Revolutionists of 1793 and 1848, we already know. That progressive taxation will be urged in the spirit of spoliation and confiscation, is most probable. The friends of the existing order will do well to be prepared to take their ground intelligently and maintain it with firmness and temper.
603. A Tax on Revenue Impracticable as the Sole Tax.—While, as the sole tax, the tax on revenue has been approved, on grounds of political justice, by many, perhaps most, writers on finance, it has, like the tax on faculty, generally been rejected as impracticable, in view of difficulties in assessment, affecting incomes both high and low, more indeed the higher than the lower, and difficulties of collection, affecting especially incomes of the lowest class. Few writers of reputation, have, without qualification, advocated such an income tax as both politically expedient and economically advantageous. Fewer statesmen have had the courage to propose it to the legislature.
Revenue, or income, having, then, been abandoned generally throughout modern society as the sole basis of taxation, and only in exceptional cases forming even an important feature of existing tax systems, Expenditure has been resorted to increasingly, in the past and present century, from considerations not so much of political equity as of political and fiscal expediency. By far the greater portion of the revenue of the most advanced states is derived from taxes on consumption, as they are called; and every new demand of the treasury is met mainly from this source.
Yet even now Wealth is still employed in many communities as the sole basis of taxation, the measure of the obligation to contribute to the support of government. It was the preferred form of taxation throughout the American colonies. It is still the principal form of non-federal taxation in the United States, as the Grand Lists of townships, cities and counties testify.
604. Is a Tax on Capital Equitable?—How can a tax on realized wealth or capital be justified?
Let us take two cases: first, when income is not taxed; secondly, when income is taxed.
First, when income is not taxed. It is claimed that the result of realized wealth affords the best practical measure of income or of productive faculty. Now, that such a claim in behalf of a property-tax should be conceded, or even seriously considered, clearly requires two things: first, that the ne'erdo-weels shall be comparatively few in number; and secondly, that the disposition to save out of income, for the accumulation of wealth, shall be the general rule in the community. These requirements were met in the American colonies generally. Barring the effects of intemperance, it was a rule with few exceptions that Americans in those times were disposed to labor, and to labor hard, that they might produce wealth; while, so general was the desire of wealth, so stalwart the manhood of those times, so simple the habits of the people, so high the social importance attributed to the possession of capital, that all the surplus above decent, wholesome subsistence, after adequate provision for intellectual and religious culture, was likely to go towards accumulation.
The mere statement of these elements of the case suffices to show the difficulties besetting such a principle of taxation, in its application to communities like those of the present day, with a less stringent public sentiment, with more extravagant modes of living, with a less general elevation of tastes and ambitions, with greater proneness to self-indulgence, with vast classes that do not even try to save. In such a state of society, to tax only that part of revenue which is laid by for future consumption, or to assist in the further production of wealth, is both politically unjust and economically vicious, exciting to extravagance and discouraging frugality.
Secondly. But if a tax be imposed on income, how can a property-tax be justified at all? Have not the whole community been once taxed upon income, as affording a measure of the ability to contribute to the public service, and shall now a portion of the wealth so excised be again subject to deduction, on no other ground than that it has been saved, presumably to assist in future production?
605. The Purely Economic Theory of Taxation.—Mr. McCulloch, the author of one of the few works of value in the English literature of Taxation, boldly proposed to abandon altogether the attempt to follow out the equities of contribution. I have already quoted his statement: “The distinguishing feature of the best tax, is, not that it is most nearly proportioned to the means of individuals, but that it is easily assessed and collected, and is, at the same time, most conducive to the public interests.”
The line of reasoning which leads up to Mr. McCulloch's conclusions may be stated as follows: Government springs from injustice, and, in the constitution of things, must commit more or less injustice. It is of no use to attempt to pursue the equities of contribution; they will elude you. It is admitted that it is impossible to distribute equally the benefits of government; why make the hopeless effort to apportion its burdens with absolute justice? Get the best government you can; maintain it at the least expense consistently with efficiency; collect the revenue for the service by the most convenient, simple and inexpensive means. By undertaking to effect an equitable apportionment of the burden, through complicated methods or by personal assessment, you are not only likely to fail; you are certain, at the best, to add to the aggregate cost of the service, and are in great danger of generating new and distinct evils by disturbing economic relations and obstructing the processes of production and exchange.
606. The Theory of the Repercussion or Diffusion of Taxes.—While writers on finance have commonly insisted that the equities of contribution should govern in assessment, a belief in the so-called Repercussion, or diffusion, of taxes has led economists very generally to give their approval to the system of indirect taxation, the growth of which forms the most marked feature of the fiscal history of the present century.
Let the state, it is said, levy its contribution on such articles of general consumption as are most easily reached, or on such of the processes of production or exchange as lie most open to view, trusting to the laws of trade to distribute the burden over the whole body of the population.
This plea raises the question of the Incidence, the ultimate incidence, of taxation. “I hold it to be true,” said Lord Mansfield in his speech on taxing the Colonies, “that a tax laid in any place is like a pebble falling into and making a circle in a lake, till one circle produces and gives motion to another, and the whole circumference is agitated from the center.” Taxes uniformly advanced on all like competing property,” says Mr. Wells, “will always tend to equate themselves, and will never be a special burden to those who originally made the advances to the government.”
607. How do Taxes Tend to Diffusion?—This, which may be called the Diffusion-theory of taxation, rests upon the assumption of perfect competition. It is true, to the full extent, only under conditions which secure the complete mobility of all economic agents. As far as members of the community are impeded in their resort to their best market by ignorance, poverty, fear, superstition, misapprehension, inertia, just so far is it possible that the burden of taxation may rest where it first falls. It requires, as Prof. Thorold Rogers has said, an effort on the part of the person who is assessed to shift the burden on to the shoulders of others. Not only is that effort made with varying degrees of ease or difficulty; but the resistance offered may be of any degree of effectiveness: powerful, intelligent, tenacious, or weak, ignorant, spasmodic. The result of the struggle thus provoked will depend on the relative strength of the two parties; and as the two parties are never precisely the same in the case of two taxes, or two forms of the same tax, it must make a difference upon what subjects duties are laid, what is the severity of the imposition, and at what stage of production or exchange the contribution is exacted. It is not, it never can be, a matter of indifference when, where, and how taxes are imposed. “The ability to evade taxation,” writes M. Say, “is infinitely varied, according to the form of assessment and the position of each individual in the social system. Nay, more, it varies at different times. There are few things so unsteady and fluctuating as the ratio of the pressure of taxation upon each class, by turns, in the community.”
608. M. Say's Views.—It has always seemed to me strange that J. B. Say should be cited, as he so often is, as an authority on the side of the Diffusion-theory of taxation. Not only in the paragraph from which I have quoted does he recognize the vital importance of the right “seating” of taxes; but in his references to the essay of Canard, which had been crowned by the Academy (1802), he is even more pronounced. Canard had said that it is of little importance whether a tax press upon one branch of revenue or another, provided it be of long standing, because every tax in the end affects every class of revenue proportionally, as bleeding in the arm reduces the circulating blood in every portion of the human frame. To this M. Say rejoins that the object taken for comparison has no analogy with taxation. The wealth of society is not a fluid, tending continually to a level. It is, the rather, an organism, like a tree or a man, no part of which can be lopped off without permanently disfiguring and crippling the whole.
609. M. de Parieu's Views.—M. de Parieu has given a chapter of his great work to the Incidence of Taxation. In respect to what he calls taxes levied upon the conditions of every human existence, he reaches the result that they have effects very obscure, and in a still greater degree subject to dispute. Where taxes are levied in cities upon the necessaries of life, he finds no considerable danger of evil effects, since there is a constant intercommunication between the laborers of towns and those of rural districts, and migration will soon restore the equilibrium after the disturbance created by the new impost. It is otherwise when a new tax is imposed throughout the whole extent of a country. The emigration of laborers to foreign parts is only accomplished against a certain resistance, arising out of their habitudes and affections. It is always, moreover, accomplished at a definite loss and an indefinite risk. To throw taxes on consumption back upon the capitalist or the employer becomes, in M. de Parieu's judgment, a task very difficult and often wholly impracticable.
610. Conclusion.—I reach the conclusion that, in a condition of imperfect competition, we have no assurance that indirect taxes will be diffused equably over the whole community, leaving each class and each individual in the same relative condition as before the imposition. Something less, it may be much less, than a proportional contribution must result from the differing strength and opportunities of the several classes and individuals. The legislator can not, then, adopt the comfortable doctrine of the indifference of the place and the person where and on whom the burden shall be laid. His responsibility abides for the ultimate effects of the taxes he imposes. Whether with reference to the equities of contribution or to the general interests of trade and production, he is bound carefully to consider the nature and probable tendencies of every projected impost.
protection vs. freedom of production.
611. The Doctrine of Laissez-Faire.—The question of Protection, as against Freedom of Production—not, as it is commonly stated, against Freedom of Trade—is rarely discussed, on both sides, upon purely economic principles; perhaps has never been, in an actual instance, decided without the intermixture of political or social considerations.
The arguments of those who have favored the policy of so far limiting the territorial division of labor (see par. 83), as to constitute industrial entities corresponding to existing political entities (which I take to be the real intent of what is called Protection) have been of every degree of vagueness; but it seems to me that the confusion of the public mind need not have existed, at least to so great an extent, had not the professional economists taken an unjustifiably lofty attitude on this subject, practically refusing to argue the question at all as one of national expediency, contenting themselves with occupying the high ground of Laissez-Faire.
Now, that doctrine, although established by the older economists to their own satisfaction, as containing a principle of universal application, and thus deemed by them a conclusive answer to all arguments specially directed to justify restrictions upon international trade, has never been accepted, in the fullness of significance by them given it, throughout any wide constituency, not by any large proportion of the educated classes, not even generally by publicists, or statesmen, or men of affairs.
612. Opposition of the Economists to Factory Legislation.—Thus, when factory legislation was first proposed in England, nearly the whole body of professional economists opposed any interference with the freedom of contract respecting labor. They asserted the entire competence of the laboring classes to protect their own interests. They declared that interference on behalf of the laboring classes could only be mischievous, in the long run, to the laborers themselves. They put themselves on record in the most formal manner against all measures of restriction upon factory and workshop labor. They cast in their lot with the opposition to this class of legislation, and staked the reputation and influence of political economy upon their being right in this matter.
Had they won upon that issue; had the results of the factory acts been proven deleterious to the interests of the working classes themselves, or even to the industrial power of the kingdom, it would have been a rare triumph for the economists, and their influence would have been greatly strengthened. But it did not turn out so. Although in the first instance, that of the act of 1802, Sir Robert Peel, the elder, had been so solicitous not to violate the principle of the self-sufficiency of labor that he made the bill apply only to apprentices, the wards of the state, the political rightfulness and the economic expediency of regulating the contract for labor so grew upon the public mind of England, that act after act extended the supervision of the state over factory and workshop until the policy of restriction had vindicated itself to the complete satisfaction of the working-classes, even, in the main, of the master class, themselves, and of the statesmen of the kingdom and publicists almost without exception.
613. Freedom the Rule: Restraint the Exception.—The fact that in the controversy over the factory acts the economists of the laissez-faire∗ school are proved to have been in the wrong, does not show, or go to show, that they are wrong in their opposition to laws in restraint of international commerce. It does not even create a presumption to that effect.
Although the necessity of making exceptions to the rule of freedom of individual action has been established as completely in respect to industry as in respect to politics, freedom of action is yet so far the condition of health and power and growth in the field alike of politics and of industry, that those who propose to make exceptions in either are bound to show cause for every such exception. A heavy burden of proof rests upon them. Their case is to be made, and made against a powerful presumption in favor of liberty, as that condition which hath the promise not only of that which now is, but, in a higher degree, of that which is to come. There is not and there can never be any positive virtue in restraint. Its only office for good is to prevent waste and save the misdirection of energy. There is no life in it, and no force can come out of it.
That which is called “protection” operates only by restraint; it has and can have neither creative power nor healing efficacy. All the energy that is to produce wealth exists before it and without respect to it; and just to the extent to which protection operates at all, it operates by impairing that energy, and reducing the sum of wealth that might be produced if protection did not exist.
I say, that might be produced, not that would be produced. The latter point may fairly be disputed between the free-trader, who should rather be called the free-producer, and the advocate of the system of restricted production. The force of the steam at the piston-head is less than the force of the steam in the boiler, less by all that is necessary to conduct it thither from the boiler; yet it is the force of the steam at the piston-head, and not where it is generated, which moves the wheels of the engine. The harness hampers the movements of the horse; but it is the harnessed horse that draws the load. Discipline operates directly to reduce the sum of the impulses by which soldiers are actuated, and, by consequence to reduce their individual energy; but a disciplined army will defeat a mob of many times its own numbers.
614. What the Protectionist Has to Prove.—If the protectionist can show that restraints imposed by law upon the industrial action of his countrymen, or the men of any country he chooses to take for the purposes of the debate, have the effect, not, indeed, to generate productive force, but to direct the productive force generated by human wants setting in motion human labor with a better actual result∗ than under the rule of freedom, he will make his case. But this is to be proved, not taken for granted; and it is to be proved only by sound and serious argument, not by strenuous assertion and senseless clamor.
615. Why Should Industrial Correspond to Political Entities?—In proceeding to establish the importance of checking the extension of the territorial division of labor at the boundary lines of nationalities, the protectionist writers have been seriously embarrassed from the lack of reasons to give why industrial entities ought to correspond to political entities. Had they undertaken to show that every million or five millions of people might advantageously be organized into a separate industrial entity, having either no commercial intercourse at all with communities on the outside, or a commercial intercourse much reduced and retarded; or had the protectionist writers undertaken to show that every ten or twenty square degrees upon the earth's surface, whatever the number of inhabitants, should become an industrial entity, trade within the limiting parallels and meridians being unrestrained and even encouraged, while trade across those lines should be deemed in a higher or lower degree mischievous; or had these writers undertaken to show that every important river basin or drainage system should be constituted an industrial entity, in as great a degree as possible independent of others, they would have had a much less difficult task. A good deal might be said upon the theme that the world-wide extension of the principle of the division of labor needs to be crossed and checked by artificial obstructions to prevent certain economic and social evils.
We have shown (par. 227 to 243) that grave industrial mischiefs may originate in this principle, though which producer and consumer are set apart, often by a vast distance, sometimes by half the circumference of the globe; that misunderstandings may arise between producer and consumer which will result in a smaller production of wealth, a lower satisfaction of human wants, and that these misunderstandings are sometimes aggravated by suspicion or panic with the most deplorable consequences. The fact is incontestable, and it would be easy to exaggerate its importance.
But when the attempt is to prove that the principle of the division of labor should be allowed to extend itself freely within the bounds of nationality but not beyond them, additional difficulties of a grave character are encountered at the outset, in the great and, from the economic point of view, unaccountable irregularity and whimsicalness with which the surface of the earth is divided among independent sovereignties. One nation comprises two millions of inhabitants, like Denmark, Greece or Chili; another ten, like Mexico, Brazil or Siam; another thirty, like Italy or Japan; another sixty, like the United States; another eighty, like Russia; another three hundred and fifty, like China. The territory occupied by one nation crosses and includes two, three or five great river systems; in other cases, one river system embraces the territory of two, three or five nations. A stream which a boy can wade may form the dividing line of two independent states; a third state may collect its revenues across the Atlantic and the Pacific oceans, and its magistracy send their warrants alike to Hudson's Bay and into the South Sea. One people may stretch from North to South across sixty degrees of latitude; another from East to West, through half the daily journey of the sun. One country maybe occupied by a population as homogeneous as the inhabitants of some old city; while under the same flag, and subject to the same laws, may live the representatives of many races: some dressed in the latest Paris fashion, others tattooed upon the naked skin; some using the telephone, others the assegai; some finding their choicest amusement in the Wagnerian opera, others in the war dance that opens the feast of human flesh.
616. The United States as an Instance.—It will readily appear that the protectionist writers have a difficult task in establishing the necessity of drawing the lines of industrial circumvallation along the boundaries of empire.
Take the United States for example. Here are thirty-eight states trading among themselves with the utmost activity, the exchange of commodities and services being as free as the movements of the air; and in this freedom all good citizens rejoice.∗ But this condition of things is made, by the doctrine under examination, to be dependent entirely upon the political relations of these states. Were they under different governments, the exchange of commodities and services which now promotes the general wealth and the general welfare would be fraught with mischief and possible ruin.
It is, of course, possible that some new analysis of the conditions of production may yet disclose the law which thus makes trade within the limits of sovereignty beneficial, and trade across the boundaries of separate states deleterious to one or both parties; but thus far assertion coupled with vituperation has taken the place of the analysis required.
617. Protecting the Strong against the Weak.—In the old world, the argument for protection is based on the importance of protecting the industrially weak against the industrially strong; and I am not certain that something might not be said for this. Russia strives to protect her labor against the better paid labor of Germany; Germany, in turn, strives to protect her labor against the vastly better paid labor of England. Among all fully settled countries, the rule, without exception so far as I am aware, is that that country in which the higher wages are paid offers its products at lower prices than the competing products of countries where the lower wages are paid.
In the United States, however, the argument for protection has based itself on the assumed necessity of protecting the strong against the weak. In Australia and Canada it is the same. It is alleged to be essential to the maintenance of the high wages prevailing in these countries, that the products of the “pauper labor of Europe” shall not be sold freely in their markets.
Why is it that the plea of those who desire to check the extension of the division of labor on the lines of nationality, suddenly changes as they pass from old and fully settled countries, to countries but recently, and perhaps still but partially, occupied and cultivated?
618. Why Wages are High in New Countries.—The explanation is found in the fact that the populations of what we call “new countries,” that is, countries where an inadequate population is applying progressively to fresh fields advanced methods and machinery, possess an immense advantage in the conditions of living over the populations of “old countries,” where the land has long been fully occupied, where the capabilities of the soil, even on fields of small natural productiveness, are heavily taxed to furnish subsistence to the inhabitants, and where systematic, continuous manuring has to be practiced in order to keep the land in condition.
The enomous profit of cultivating a virgin soil without the need of artificial fertilization, and the abundance of food and other necessaries of life enjoyed by the agricultural class have tended continually to disparage mechanical industries in the eyes alike of the American capitalist and of the American laborer.
619. The Competition of the Farm with the Shop.—It has been the competition of the farm with the shop which has, from the first, most effectually retarded the growth of manufactures in the United States. A population which is privileged to live upon a virgin soil, cultivating only the choicest fields and cropping these through a succession of years without returning any thing to the land, can live in plenty. If that population possess the added advantage of great skill in the use of tools and great adroitness in meeting the large and the little exigencies of the occupation and cultivation of the soil, the fruits of agriculture will still further be greatly increased. The dietary of an American farmer, cultivating his own land with the aid of his growing sons, would amaze a peasant from any portion of Europe. An abundance of nutritious food is and has been, ever since the revolutionary period, the sure condition of the life of the agriculturist in the United States. It was not with our fathers, even in New England, a struggle for the necessaries of life, but for social decencies and what, in any old country, would have been called luxuries.
Now, the mode of living on the part of the agricultural population has necessarily set a minimum standard of wages for mechanical labor. With an abundance of cheap land, with a population facile to the last degree in making change of avocation and of residence, few able-bodied men are likely to be drawn into factories and shops on terms which imply a meaner subsistence than that secured in the cultivation of the soil.
620. The Hand Trades.—There are certain classes of mechanical pursuits, however, which, by their nature, secure to those who follow them a minimum remuneration fully up to the standard of the agricultural wages of the region. Such, for instance, are the trades of carpenter, blacksmith and mason, in which the work is of a kind which can only be done upon the spot. The house can not be built abroad and imported for the farmer's use; the wagon must be mended near the place where it broke down; the horse must be shod, the tools sharpened, by the artisans of the neighborhood. If, then, the farmer will have such services performed, he must admit those who perform them to share his own abundance; he must pay wages or prices which will attract men, and those, by necessity, men exceptionally intelligent and skillful, into those trades. Hence we find the mason, the blacksmith, the plumber, the carpenter, the house painter, the cobbler, in every part of the United States, receiving wages which bear no relation whatever to the wages paid for the same class of services in other countries, but which stand in a very exact relation to the rewards of agricultural labor here.
Nor has it ever been found necessary to encourage or stimulate these trades for the good of the country. What statesman ever introduced into Congress a bill intended to increase the number of carpenters or blacksmiths, or to enhance their wages?
621. Personal and Professional Service.—But, again, there are certain classes of services, of a personal or professional nature, which have also secured for those rendering them a participation in the abundance enjoyed by the tillers of the soil in the same region. The remuneration received by the members of these classes, whether called the wages of domestic servants, or the fees of physicians and lawyers, or the salaries of schoolmasters and clergymen, or the profits of retail trade, has been out of all relation to the remuneration of similar services in other countries, and has amounted to just what I have termed it, a participation in the abundance enjoyed by the agricultural population. Since these services could only be performed upon the spot, the agriculturists have been obliged, if they would have the services rendered, to pay for them, out of the large surplus of their own produce, at least enough to make these professions and avocations equally desirable with their own, uncertainty of result, loss of time in preparation, expense of education and training, healthfulness and agreeableness of work, etc., being taken into account; and, since the agricultural classes have desired that these services should be performed, and have been willing to pay for them on the scale indicated, there has never been any call for Congressional action to secure the requisite number of lawyers, physicians, clergymen, schoolmasters, domestic servants or retail tradesmen.
622. The Factory Industries.—But now we note that there are still other important classes of services to be rendered, respecting which the rule changes. The remuneration of the persons rendering these services no longer has reference to the abundance of agricultural production in the several sections of the United States; is no longer irrespective of the remuneration of similar classes elsewhere. These persons are not, necessarily, admitted to a participation in the fruits of American agriculture.
The services referred to are such as can be performed without respect to the location of the consumer of the product. They are nearly identical with what we call, in the technical sense of the term, manufactures.
Whenever the American farmer wants a pane of glass set, or a pair of boots mended, or a horse shod, he must pay some one, his neighbor, enough for doing the job to keep him in his trade and to keep him out of agriculture, in the face of the great advantages of tilling the soil in New York, or Ohio or Dakota, or wherever else the farmer in question may live; but how much he shall pay the man who makes the pane of glass, or the pair of boots, or the set of horseshoes, will depend upon the advantages of tilling the soil, not where he himself lives, but where the maker of the horseshoes, the boots, or the glass may live.
If he will have the work done he must pay some one, somewhere, enough to keep him in his trade and out of agriculture; but not necessarily out of New York agriculture, or Ohio agriculture, or Dakota agriculture; but, perhaps, out of English agriculture, or French agriculture, or Norwegian agriculture, under the the requirements of constant fertilization, deep plowing and thorough drainage, and subject to that stringent necessity which economists express by the term, “the law of Diminishing Returns.”
Now, to offset and overcome the inducements to engage in agriculture, even in Merry England, is a different thing, a very different thing, from keeping a man in his trade and out of agriculture in the United States.
The American agriculturist, having large quantities of grain and meat, of cotton and tobacco, left on his hands, after providing ample subsistence for his family, and even after hiring the carpenter, mason and blacksmith, the schoolmaster, lawyer and doctor, for as much time as he requires their respective services, and still further, after putting a good deal into farm implements and increase of stock, is desirous of obtaining with the remainder sundry articles more or less necessary to health, comfort and decency. To him it makes no difference whether the articles he requires are made on one side of the Atlantic or on the other; but it makes a great difference what he is obliged to pay for them; how much of his surplus grain and meat, tobacco and cotton must go to secure a certain definite satisfaction of his urgent and oft-recurring wants. If he must needs pay some one to stay out of American agriculture and do this work, his surplus will not go so far as if he were allowed to pay some one to stay out of English agriculture to do it.
623. What the State Can Do.—But here the State enters and declares that it is socially or politically necessary that these articles, these nails, these horseshoes, this cotton or woolen cloth, or what not, shall be made on this side of the Atlantic. That necessity the agriculturist, as consumer, can not be expected to feel; he does not care where the things were made; he only wants them to use. He does not care who makes them; he does not even care whether they are made at all; they would answer his purpose just as well were they the gratuitous gifts of nature, spontaneous fruits of the soil, or the sea, or the sky. Whatever his own economic theories may be, he will, as purchaser, every time select the cheapest article which will precisely answer his need. He will not, of his own motion, pay more for an article because it is made on his side of the Atlantic than he could get an equally good article for, bearing the brand of Sheffield or Birmingham or Manchester. But if the State says he must, he must; and consequently the American maker of this article is by force of law admitted to a participation in the abundance enjoyed by the American agricultural class. The tiller of the soil is now compelled, by the ordinance of the State, to share his bread and meat with the maker of nails or of horseshoes, of cotton or of woolen cloth, just as he was before compelled by the ordinance of Nature to share his bread and meat with the blacksmith, carpenter and mason, the schoolmaster, lawyer and doctor.
It is perfectly true, therefore, as the protectionist asserts, that a tariff of customs duties upon foreign goods imported into new countries tends to create and maintain high rates of wages in the factory industries. But for protective duties, those articles which, in their nature, can be readily and cheaply transported will be produced predominantly in countries where the minimum standard of mechanical wages is set by agricultural conditions far less favorable than those which obtain in the United States, in Canada, or in Australia.
But while the law thus can and does create high rates of wages in factory industries, it does not and it can not create the wealth out of which that excess of manufacturing wages over those of older countries is paid. That wealth is created by the labor and capital employed in the cultivation of the soil.
624. Difficulty of Defining Socialism.—It is not easy to define the word socialism, for the purposes either of controversy or of description. It is, perhaps, impossible to give a definition which shall be satisfactory to all. One man invidiously calls another a socialist, only to receive the same appellation himself from a third person differing from him in political opinion. Let us, however, do the best we can, in the confusion which prevails on this subject, to characterize socialism.
We find that term applied to a great variety of political schemes, in all of which is present one quality, in higher or lower degree. This quality is the essence of socialism; and, as it is found more and more fully developed, the socialist character of any political scheme becomes more and more distinctly pronounced. We may apply the term, socialistic, to this quality.
625. Meaning of the Word Socialistic.—What then does the word socialistic signify? I answer, it is properly applied to an unconscious tendency or a conscious purpose to extend the powers of the state beyond a certain necessary, minimum, line of duties, for a supposed public good, under popular impulse. It may be added, though rather in explanation than in qualification of our definition, that the supposed public good in view generally involves a greater or a smaller change in the distribution of wealth, as effected under the rule of competition and individual initiative. This, however, is not always the case.
626. Anarchism.—We have spoken of extending the powers of government beyond a necessary, minimum, line of duties. What is that line? On this question opinions differ, but I deem it conducive to a clear understanding of our subject to conceive that line as drawn along the Police Powers of the state. Those, indeed, who call themselves Anarchists hold that government is not a necessary means of social existence; but that, on the contrary, government produces most of the very evils which are made the excuse for government. They profess to believe that government represses individual activities for good, at many points, and paralyzes forces which otherwise would continually operate to ameliorate the conditions of life, to harmonize social relations, and to give inspiration and impulse to human efforts seeking at once the good of the individual and of the community. The Anarchist even asserts that certain vicious and destructive appetites and passions, which have been held to be inherent in human nature and to place the necessity of government beyond the possiibility of question, are, in fact, generated by government itself, and would soon disappear in a state where no man presumed to make a law for another or to place any restraint upon his actions.∗ Apart, however, from the small and as yet insignificant body of men known as Anarchists, it is held by all persons, of high or low degree, of much or little political experience, that government is at least a necessary evil; and most men cheerfully submit to whatever restraints or sacrifices are involved in its maintenance. There are certain functions known as the police powers, which are, with substantial unanimity, admitted to belong to government. These are, speaking in a very general way, the protection of life, person and property and the preservation of the civil peace. These powers clearly embrace the repression of obtrusive vice and the protection of the common air and the common water from pollution. The term socialistic can not be properly applied to any measure undertaken, in good faith, for the attainment of these objects. In a highly organized industrial or social state, the police powers will naturally be exercised through agencies and instrumentalities unknown in a more primitive condition; but these are not, on that account, to be considered in any degree socialistic, so long as they are directed toward the end indicated.
627. Examples of Socialistic Measures.—Whenever and wherever, for any supposed public good, measures are undertaken or proposed, from a popular impulse, or in obedience to a popular demand, which carry, or would carry, the functions of government beyond the line we have drawn, the term socialistic is properly to be used, not as a term of reproach or contumely, but as a strictly descriptive title. The line of the police powers may, in any given instance, be transcended by much or by little; the object sought may be thoroughly practicable or wildly fanciful; the results may be highly beneficial or deeply injurious to society; but every measure or proposal of the nature we have described is socialistic. Thus, public schools are distinctly socialistic. Education is a matter proper to individual initiative and enterprise, within the family or, by voluntary association, within larger groups. It is only during the last twenty years that this function has been assumed by government in a country so free, prosperous and enlightened as England. When this great step was taken it was distinctly and unmistakably socialistic, yet not the less meritorious and beneficial. That step had been taken, generations before, in the United States, with the consent of all parties and all classes, and with the happiest results in peace, order and prosperity. On the other hand, the government in England owns and operates the telegraph, a policy from which we in the United States shrink with reluctance as dangerously socialistic.
628. Public roads and bridges also exhibit the socialistic character in a highly marked degree. In a very primitive state of society, where, yet, all the police powers are fully exercised, each man looks out for his own paths of travel or transport, and maintains his own communications with friends and neighbors, across the commons or through the forest. Even after roads are laid out, and, later still, are graded, drained and perhaps paved, at great expense, and streams and ravines are bridged, this work continues to be regarded as altogether a matter for private enterprise. Individuals or associations lay out the roads and build the bridges, collecting toll from every one who passes over them. Those who use the roads much pay much; those who use them little pay little; those who stay at home pay nothing at all. At last∗ there comes a time when it is seen that, though this function naturally belongs to individuals, and has indeed been exercised by individuals with a reasonable degree of success, yet a great public advantage will result from making these avenues of communication free to all and supporting them thereafter at the public expense. The step thus taken is purely, highly socialistic. The responsibility, the labor, the expenditure involved in these undertakings pass from private citizens to public officials. Individuals no longer pay for this service according to the proportion in which they enjoy it. Each contributes, whether he will or not, to the construction and maintenance of roads and bridges, which he may use much or may not use at all.
629. Protectionism is purely and highly socialistic. Its purpose is so to operate upon individual choices and aims, so to influence private enterprise and the investments of capital, as to secure the building up, within the country concerned, of certain branches of production which could not be carried on, or would grow but slowly, under the rule of competition and individual initiative. With this object in view, government begins by preventing the citizen from buying where he can buy cheapest; it compels him to pay ten, thirty or fifty per cent. advance, it may be, upon the prices at which he could otherwise purchase; it even assumes the right to make existing industries support the industries which are thus to be called into being. Not incidentally, but primarily and of purpose, it affects vitally every man's industrial conditions and relations. It does this for a supposed public good.
630. The Socialists.—We have, perhaps, sufficiently illustrated the significance of the word socialistic. What then is socialism? Perhaps we had better first ask, who is a socialist? Under our definition, the advocacy of a socialistic act or measure will not necessarily characterize a socialist. Thus, protection, as we have said, is socialistic. Yet the protectionist is not, as such, a socialist. Most protectionists are not socialists. Many protectionists are, in their general views, as strongly anti-socialist as men can well be.
The socialist is one who, in general, distrusts the effects of individual initiative and enterprise; who is readily convinced of the necessity or utility of the assumption, by the State, of functions which have hitherto been left to personal choices and personal aims; and who, in fact, approves and advocates many and large schemes of this character.
The person of whom all this could be said might properly be called a socialist; yet there are many such persons who would wish, after enlarging the powers of government at many points, correcting, as they conceive it, many of the infirmities and evil liabilities of society by force of law, and introducing incentives and impulses which, as they believe, can only be administered by the organized power of the State, still to leave individual initiative and enterprise the general rule of life. The extreme socialist is he who would make the State all in all: private enterprise, personal choices and aims being lost in the general movement of a society dominated and directed by a majority vote. In the view of the extreme socialist, the powers and the rights of the State are the sum of all the powers and all the rights of the individuals who compose it; and government becomes the organ of society in respect to all its interests and all its acts.
631. Socialism.—The term “socialism” may, then, properly be applied (1) to the aggregate of many and large schemes for the extension of the powers of the State, actually urged for present or early adoption; or (2) to a programme contemplated, at whatever distance, for the gradual replacement of private by public activity; or (3) to an observed movement or tendency of a highly marked character in the direction indicated.
It will be seen that socialism and anarchism are in theory absolutely antipodal. The former would proceed by magnifying the powers of the State and enlarging the sphere of its operation, until personal choices and aims should wholly disappear in respect to all matters in which others, or the community as a whole, could possibly be interested. The complete establishment of socialism would, therefore, involve a tyranny more far-reaching and searching than that of the most absolute despotism ever founded among men. Anarchism, on the contrary, aims at the complete abolition of government: the removal of every form of restraint, leaving personal aims and choices wholly unchecked by law or authority, subject only to moral influences, to persuasion and to the force of public sentiment.
632. Socialism vs. Communism.—The distinction between Socialism and Communism is not to be drawn so easily. The two schemes have, necessarily, much in common; while the boundaries of that which, theoretically, each has to itself have been much confused by vague or passionate treatment. In a previous publication,∗ I have sought to express as clearly as the nature of the case would allow, the essential differences between Socialism and Communism, as follows:
1st. Communism confines itself mainly, if not exclusively, to the one subject matter—wealth. On the other hand, Socialism, conspicuously, in all its manifestations, in all lands where it has appeared, asserts its claim to control every interest of human society, to enlist for its purposes every form of energy.
2nd. So far as wealth becomes the subject matter both of Communism, on the one hand, and of Socialism, on the other, we note a difference of treatment. Communism, in general, regards wealth as produced, and confines itself to effecting an equal, or what it esteems an equitable distribution.
Socialism, on the other hand, gives its first and chief attention to the production of wealth; and, passing lightly over the questions of distribution, with or without assent to the doctrine of an equal division among producers, it asserts the right to inquire into and control the consumption of wealth for the general good, whether through sumptuary laws and regulations, or through taxation for public expenditure.
3rd. Communism is essentially negative, confined to the prohibition that one shall not have more than another. Socialism is positive and aggressive, declaring that each man shall have enough. It purposes to introduce new forces into society and industry, to put a stop to the idleness, the waste of resources, the misdirection of force, inseparable, in some large proportion of instances, from individual initiative; and to drive the whole mass forward in the direction determined by the intelligence of its better half.
4th. While communism might conceivably be established upon the largest scale, and has, in a hundred experiments, been upon a small scale established, by voluntary consent, Socialism begins with the use of the powers of the State, and proceeds and operates through them alone. It is by the force of law that the Socialist purposes to whip up the laggards and the delinquents in the social and industrial order. It is by the public treasurer, armed with powers of assessment and sale, that he plans to gather the means for carrying on enterprises to which individual resources would be inadequate. It is through penalties that he would check wasteful or mischievous expenditures.
If what has been said above would be found true, were one studying Communism and Socialism as a philosophical critic, much more important will be the distinction between them to the eyes of the politician or the statesman. Communism is, if not moribund, at the best everywhere at a stand-still, generally on the wane; nor does it show any sign of returning vitality. On the other hand, Socialism was never more full of lusty vigor, more rich in the promise of things to come, than now.
633. It seems only needful to add, that, while the doctrines of Anarchism, Socialism and Communism are respectively held by not a few sincere and disinterested men, of a high order of intelligence, large numbers of those who embrace one or the other of these systems do so with no appreciation of the differences between them, being influenced wholly by a general discontent with the results of the existing social and industrial order, either as affecting themselves or as controlling the fortunes of their class. In addition to these, every public demonstration of socialistic or communistic organizations almost inevitably draws out a swarm of “lewd fellows of the baser sort,” who for the time attach themselves to that party, out of a general hatred of law and order, or in the hope of plunder, or from a delight in riot and mischief.
[∗]37, Henry VIII. Though thus legalized, public sentiment and particularly the opinions of the clergy remained in a high degree hostile to usury. “I do wish,” said Dr. Wilson, in his Discourse upon Usury, published more than twenty years after the act of Henry VIII., “some penal law of death to be made against usurers, as well as against thieves and murderers, for that they deserve death much more than such men do; for these usurers destroy and devour up, not only whole families, but also whole countries, and bring all folks to beggary that have to do with them.”
[∗]The reader is referred to par. 286 for the demonstration that interest is paid for the use of capital, not always, not generally, not often, for the use of money, as such. In the present article, however, in writing of usury laws and the means of evading them, I shall use the phrases of the so-called Money Market, more properly the market for the loan of capital; and shall speak of money being scarce, money being worth such a per cent., etc., meaning always thereby, capital.
[†]Samuel Jones Lloyd, afterwards Lord Overstone, in his testimony before the British Commons Committee of 1841, said: “The compensation to the banker for his loss in advancing money upon discount, at a rate below its real value, would be found in the value of the accounts kept with him by the parties to whom such advances were made.”
[∗]In his standard work on usury, Plowden states that “Dry Exchange” was sometimes carried, in his day, to a very great extent. The borrower “draws” on an imaginary person in a foreign country. After the expiration of the time the bill is to run, comes a “protest” from that country for the non-payment of the bill, with the re-exchange of the money thence to the place where the money was drawn, the paper having, in fact, never been out of the country. “The borrower,” says this writer, “being thus charged with exchange, re-exchange, protest and incidental expense, pays in all, some twenty or thirty per cent.”
[∗]A witness before the Commons Committee of 1841. testified that he once negotiated in a period of stringency a loan of £100,000 to a mercantile house, for the term of seven years, although the borrowers only wanted the use of the capital for a few months, and would have been glad to take it for that time, at a high rate of interest, had this been permitted by the law.
[∗]It is to this Lord Bacon alludes when he says, “Were it not for this easy borrowing upon interest, men's necessities would draw upon them a most sudden undoing, in that they would be forced to sell their means (be it lands or goods) far underfoot; and so whereas usury doth but gnaw upon them, bad markets would swallow them quite up.”
[∗]“It is in vain,” says John Locke, “to go about effectually to reduce the price of interest by a law; and you may as rationally hope to set a fixed rate upon the hire of houses, or ships, as of money.” And elsewhere this eminent philosopher calls a law to regulate the rate of interest “a law to hedge-in the cuckoo.”
[∗]Prof. Thorold Rogers defines co-operation justly, as “a scheme … by which the laborer can unite the functions and earn the wages of laborer and employer, by superseding the necessity of using the services of the latter functionary.”
[∗]By many called Distributive.
[∗]Within the last three or four years, a fresh crop of co-operative enterprises has sprung up, especially in the United States. Time has not yet served to determine the question of success or failure. The fullest accounts of these enterprises will be found in the publications of the American Economic Association.
[∗]In the same vein, Alexander Hamilton: “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 levying of taxes, that a government in the practice of paper emissions would rarely fail to indulge itself too far in the employment of this resource.”
[∗]Thus M. Chevalier says: “Such a change will benefit those who live by current labor: it will injure those who live upon the fruits of past labor, whether their fathers' or their own. In this it will work in the same direction with most of the developments which are brought about by that great law of civilization to which we give the noble name of progress.”
[∗]The law of parochial settlement was enacted in the reign of Charles II. While other restrictions upon the movements of population gradually gave way, during the two centuries following, before the expansion of industrial enterprise and the liberalizing tendencies of modern thought, the mischievous tendencies of the Law of Settlement were given a wider scope and an increased severity, from reign to reign. Migration within the Kingdom was practically prohibited. If the laborer, in search of employment crossed the boundaries of that one of the fifteen thousand parishes of England in which he belonged, he was liable to be apprehended and returned to the place of his settlement. Parish officers were perpetually incited by the fears of the rate-payers to the utmost zeal in hunting down and running out all possible claimants for public charity, on whom, if unmolested, residence would confer a right to support. “Where,” says Prof. Rogers, “an employer wished to engage a servant from a foreign parish, he was not permitted to do so unless he entered into a recognizance, often to a considerable amount, to the effect that the new-comer should not obtain a settlement, else the bond to be good against the employer. Parochial registers are full of such acknowledgments.”
[∗]“There is supposed to be, at any given instant, a sum of wealth which is unconditionally devoted to the payment of wages of labor This sum is not regarded as unalterable, for it is augmented by saving and increases with the progress of wealth; but it is reasoned upon as, at any given moment, a predetermined amount.”—J. S. Mill: The Fortnightly. May, 1869.
[∗]“That which pays for labor in every country is a certain portion of actually accumulated capital, which can not be increased by the proposed action of government, nor by the influence of public opinion, nor by combinations among the workmen themselves. There is, also, in every country, a certain number of laborers, and this number can not be diminished by the proposed action of government, nor by public opinion, nor by combinations among themselves. There is to be a division now, among all these laborers, of the portion of capital actually there present.”—Prof. A. L. Perry, Pol. Econ. In the later editions of his treatise, Prof. Perry modifies his statement.
[†]“The circulating capital of a country is its wage-fund. Hence, if we desire to calculate the average money wages received by each laborer, we have simply to divide the amount of this capital by the number of the laboring population.”—Prof. H. Fawcett: The Economic Position of the British Laborer.
[†]“More than that amount (the wage-fund), it is assumed, the wages-receiving class can not possibly divide among them; that amount, and no less, they can not but obtain: so that, the sum to be divided being fixed, the wages of each depend solely on the divisor, the number of participants.—J. S. Mill: The Fortnightly. May, 1869.
[∗]“Masters are always and everywhere in a sort of tacit, but constant and uniform, combination not to raise the wages of labor above their actual rate.”—Adam Smith.
[∗]Persons holding land by a servile tenure.
[∗]“In discussing these matters, we need, above all things, discrimination. One hundred modes of government interference might be mentioned of which fifty might be very desirable and fifty condemnable. In each case, as I contend, we must look to the peculiar aim, purpose, means and circumstances of the case.”—Prof. Jevons: The State in Relation to Labor.
[∗]See par. 21.
[†]A long series of parliamentary battles have been fought over the question of Truck, that is, the payment of wages in commodities instead of the money of the realm. By the act of 1833, this practice (except in the form of giving “board” as a part of wages) was prohibited in respect to mining and manufacturing industry generally.
[∗]In fact, the Knights of Labor, at their maximum, included about ten per cent. of the laboring population, agricultural or mechanical. Within the large factory industries, however, the proportion was very much greater, the “Knights” having almost complete control of many trades.
[∗]The designation of this new weapon of industrial and social warfare is derived from an Irish gentleman, one Captain Boycott, against whom it was, a few years ago, so conspicuously employed by his hostile tenants as to cause his name to be permanently affixed thereto. To boycott is simply to place under a ban. No person who respects the authority which lays the boycott will deal with a person thus placed under the ban, or with any person who does deal with him.
[∗]In stigmatizing this doctrine he continually joins together the names of “Ricardo and Proudhon.”
[∗]Carey: The Past, Present and Future, p. 60.
[†]Carey: Political Economy, vol. I., p. 102.
[℡]This discussion of Mr. Carey's propositions is abridged from my work, “Land and Its Rent,” published in 1883.
[∗]Political Economy, vol. I., p. 35.
[∗]Past, Present, and Future, p. 23.
[∗]See par. 257.
[∗]Past, Present, and Future, p. 24.
[∗]Past, Present, and Future, p. 32.
[∗]A distinguished agricultural chemist of Great Britain, author of “Notes on North America.”
[∗]“If the Grosvenor, Portman and Portland estates belonged to the municipality of London, the gigantic incomes of those estates would probably suffice for the whole expense of the local government of the capital. But these gigantic incomes are still swelling; by the growth of London they may again be doubled in as short a time as they have doubled already.”—Ibid. Prof. Adolph Wagner, of the University of Berlin, advocates the assumption by the State of all urban real estate, while deprecating the extension of the principle to agricultural land.
[∗]On the other hand, Mr. Ricardo says, “If a land tax be imposed on all cultivated land, however moderate that tax may be, it will be a tax on produce, and will therefore raise the price of produce.”
[∗]It will be seen from what follows that it is only in this respect that Mr. Henry George's proposal differs from that of Mr. Mill.
[∗]For example, all over England, Ireland and Scotland, agricultural rents have been steadily falling through the past ten years or more. So it has been in many of the States of the American Union.
[†]No one who has studied with care, as Mr. Mill had done, the question of “Unexhausted Improvements” as an element in tenant right, could fail to appreciate the appalling difficulties which would attend the appraisement of real estate for a purpose like that in view of the LandTenure Reform Association.
[∗]Neither Mr. Mill nor Mr. George proposes that the title of land shall pass to the state. They agree on the plan of advancing the taxes upon the land so as to conflscate the successive increments of value.
[∗]The paragraphs following are condensed from my work, Land and Its Rent.
[∗]It will be observed that in the extracts quoted it is cultivation which is spoken of.
[∗]This episode, consequent on the fast approaching completion of the first trans-continental railway, appears to have profoundly affected Mr. George's mind, and have produced in him the belief that what there and then took place, under extraordinary circumstances, is a common incident of land ownership.
[∗]“Contemporary Review,” November, 1882.
[∗]“Irrespective of the increase of population,” to use Mr. George's own voluntary qualification.
[∗]As justly characterized by Mr. J. S. Mill.
[∗]See statement of Gresham's Law, par. 181.
[∗]The subject of the Clearing House and, indeed, all the agencies and instrumentalities of trade will be found treated most lucidly and justly in Prof. Jevons' work “Money and the Mechanism of Exchange.”
[∗]In his famous work on Paper Credit, published in 1802.
[∗]The first part of this article is condensed from the twelfth chapter of my work on Money, Trade and Industry.
[∗]Prof. Sumner, in his History of American Currency, states that the Farmers' Exchange bank, of Gloucester, Mass., was organized with a nominal capital of one million dollars. Only %19,141.46 was ever paid in; and of this the directors subsequently withdrew their own subscriptions, leaving %3,081.11. One man bought out eleven directors for %1,300 each and then loaned himself %760,265. When the bank failed it had %86.46 in specie. The bank notes outstanding were estimated at %580,000.
[∗]“That the evils of this period were due chiefly to vices of paper money banking seems too clear to be questioned. The opening up of the western country would inevitably have led to much wild adventure, commercially and industrially; but it was the ‘elasticity’ of the circulation, the facility of local issue, without the reality, or scarcely the pretense, of redemption, which made the banks, even the best of them, reckless as to the character of the enterprises to which they gave assistance; while the money thus put into circulation, without ‘reflux,’ enhanced prices, and still further stimulated both speculative investments and speculative trading. When the courage of the better class of banks gave way, hundreds of ‘wild cat’ or ‘coon-box banks,’ so called, without capital, without a constituency, with no past and no expectations of a future, whose managers risked nothing and had nothing to lose, came forward with loans of notes to speculators who planned to build cities in the wilderness, or contractors who proposed to construct roads and bridges without materials, tools, or money to pay wages. Again, as in early New England, a bank meant a batch of paper money.”—Walker: Money, Trade and Industry.
[∗]See paragraphs 224–6.
[∗]Prior to 1837 commercial credits were often extended to twelve and even eighteen months.
[∗]This was a system, gradually developed, by which substantially all the banks of New England were brought to maintain a deposit with the Suffolk Bank of Boston, in consideration of which that bank bound itself to redeem their notes on presentation.
[∗]The act establishing the national banking system bears date February, 1863.
[∗]Specie payments were resumed on January 1, 1879.
[∗]After the destruction of the second United States Bank and the crisis of 1837–9, the United States government adopted the policy of keeping its funds in its own treasury at Washington, or in the custody of “assistant treasurers,” appointed in the great commercial cities. The offices of the assistant treasurers are popularly called “sub-treasuries.” The origin and development of the sub-treasury system will afford an admirable economic exercise for advanced students.
[∗]Except, of course, in great and sudden emergencies, like the outbreak of a war, or the occurrence of a commercial crisis.
[†]Except in great and sudden emergencies, as indicated in a previous note.
[∗]“To contract a foreign loan is [with regard to the Balance of Trade] equivalent to an increase of exportation.”—Goschen.
[∗]A study of the methods used in the payment of this indemnity, and of its financial and industrial effects, will constitute an admirable exercise for a pupil well-grounded in economic principles.
[∗]“An exclusively maritime country could discharge its obligations to other countries which supply it with necessaries, simply by becoming their carrier, without exporting any produce or manufactures to them in return.”—Goschen.
[∗]Of this Mr. Goschen says the “primary cause is to be found in the stupendous and never-ceasing exports of England, which have for effect that every country in the world, being in constant receipt of English manufactures, is under the necessity of making remittance to pay for them, either in bullion, in produce, or in bills.”
[∗]Bagehot's “Lombard Street” will be found most interesting and instructive to an advanced student in economics and finance.
[∗]Walker: Money, Trade and Industry, pages 292–98.
[†]The Bank has, in pursuance of this policy, more than once raised the rate of discount as high as eleven per cent.
[∗]If, for example, Germany were resolved into its constituent States, several would naturally gravitate towards the gold-using group; more, still, towards the silver-using group. In like manner, Northern Italy might go to the gold-using group, while Southern Italy would tend the other way.
[†]The distinction between free and gratuitous coinage is noted in par. 196.
[∗]The question of foreign exchanges has been treated under a preceding title.
[∗]Take the present century only, for illustration. When the century opened, silver was in course of rapid production. Three dollars' worth of silver was taken out, where one dollar's worth of gold was produced. Then came the series of South American and Mexican revolts and revolutions, between 1809 and 1829, by which mining machinery was destroyed, mining populations scattered, and the most prolific mines of the world closed. Mr. Jacob estimates that the stock of the precious metals in civilized hands fell off one-sixth in those twenty years. But gold now came in to fill the void. In 1823, the mines of the Oural began to yield largely, while about 1830 the gold sands of Siberia became known. And now only 68 cents' worth of silver was produced to a dollar's worth of gold.
[∗]I do not here present the argument from thestatus in favor of the remonetization of silver in Europe and America, as money of full legal tender power, at a certain ratio to money of gold, under free coinage. That argument has respect to the vast bodies of debts and fixed charges, both public and private, contracted before the German demonetization of silver (say, 1873). It is urged that to require these debts, whether interest or principal, or both, to be paid in money whose purchasing power has been enhanced by the diminution of its volume through the extrusion of silver (except as small change) from the money system of Europe and America, will prove both a grievous injustice, as between debtor and creditor, and a great source of injury to trade and production. The English economic statisticians are generally agreed that the purchasing power of gold has largely increased since the German demonetization. How far this has been in consequence of that demonetization, is matter of dispute. The aggregate amount of national debts is now stated at %27,000,000,000. There are, in addition, vast bodies of public or political indebtedness, on the part of counties, cities and towns. Then we have the enormous mass of corporate (industrial), and private debts, the burden of which (at any time) depends primarily upon the purchasing power of the money in which interest or principal is to be paid.
[∗]French revolutionary style for the year 1808, the date commonly assigned to the establishment of the bi-metallic system in France.
[∗]Voluntary Taxation, says Emile de Girardin, it is the State stimulated; it is the State economical; it is the State Republican and Democratic.
[†]The words Dona, Benevolences, etc., in the history of revenue, testify to the original assumption that contribution was voluntary.
[∗]The Pope was the greatest capitalist of the Middle Ages. The British Parliament at one time declared the revenues derived from the people of that Kingdom by the Pope to be five times as great as those obtained by the Crown.
[†]Rev. Dr. Warren, President of Boston University.
[∗]The principle of Bentham's proposal is sanctioned by the legacy and succession duties of England, which exact ten per cent. from strangers, and only one per cent. from children.
[†]It would be specially interesting to compare the system of exaction practiced by the Greeks, Carthaginians and Romans, in ancient times, and by the Dutch and Portuguese, in modern times, with the English system of seeking the interest of the mother country, or the conquering country, in the right to impose navigation laws and commercial restrictions, and in the benefits of patronage in officering the public service of colonies and dependencies.
[∗]The sum paid to constitute a Baron was £10,000; a viscount, £15,000, an Earl, £20,000.—Taylor, Hist. of Taxation in England.
[∗]M. Leroy Beaulieu dwells upon the distinction between the property of the State, which is left to the enjoyment of the community, or which is devoted to government uses, and that which is sought to be administered productively. The former he terms domains public; the latter domaine privé de l'Etat.
[∗]Did our space allow, it would be interesting to refer to the alienations and resumptions and renewed alienations of the Crown-lands, through the reigns of the Tudors and the Stuarts. Strangely enough, it was that model financier, William III., who effected the greatest havoc among the royal domains. One can scarcely read of the wholesale squandering of the property of the Crown by this monarch, without the suspicion that he clearly saw the coming on of the modern system of finance, when the necessities of the state should be met, no longer by rents and fines and forfeitures and escheats and purveyance, but by systematic taxation; and that, in something like contempt for the feudal sources of revenue, he purposely chose to dissipate the patrimony on which his predecessors had relied. “At the end of William's reign,” says Sir E. May, “Parliament, having obtained accounts of the state of the land revenues, found that they had been reduced by grants, alienations, incumbrances, reversions, and pensions, until they scarcely exceeded the rent-roll of a squire.”
[∗]Science Economique. Worth mentioning in this connection are the sugar plantations, private property of the Khedive of Egypt, the guano deposits of Peru and Chili, and the mahogany forests of Honduras, on the credit of which vast loans have been obtained, within recent years, in the London market.
[†]Adam Smith remarks that no two characters are more inconsistent than those of trader and sovereign. “If the trading spirit of the English East India Company rendered them very bad sovereigns, the spirit of sovereignty seems to have rendered them equally bad traders.”
[‡]The Prussian Bank in 1874 declared dividends of 12 3–4 per cent. One-half the net gains of the bank go to the state. The United States was a partner to the extent of one-fifth in the bank of 1791–1811, and again in that of 1816–1836.
[∗]The story of the rapid extension of monopolies in England under Elizabeth, of the indignation aroused thereby throughout the realm, and of the submission of the haughty Tudor to the rising storm, is familiar to every school-boy. Hume remarked that, had Elizabeth's system of monopolies been continued, the England of his day would have contained as little industry as Morocco or the coast of Barbary.
[∗]It is to be noted that the laws against private lotteries which, doubtless, did much to educate that public sentiment which now makes even public lotteries impossible in many countries, originated in the desire to secure to the state the profits of this source of gain.
[∗]“Ils établissent d'abord que la terre seule donne un revenu net, c'està-dire, un revenu qui excede les dépenses nécessaires pour l'entretien des cultures et des cultivateurs; ils établissent ensuite que ce revenu net est la source qui alimente tous les au es revenus; ils en concluent qu'il est inutile de poursuivre les revenus mobiliers à travers les mille canaux où ils circulent: qu'il est plus commode et plus juste de les atteindre à leur source, et ils aboutissent à la théorie de l'impôt unique sur le revenu foncier.”—Clamageran: Hist. de l'Impôt en France.
[†]“The distinguishing feature of the best tax is, not that it is most nearly proportioned to the means of individuals, but that it is easily assessed and collected, and is, at the same time, most conducive to the public interests.”
[∗]I have been severely blamed for using language even stronger than this, in former editions of this work. I dare say my statements were too sweeping. Mr. Newmarch's papers on public debts and Mr. Gladstone's Budget speeches are never to be mentioned without honor. Mr. Robert Giffen, Prof. Cliffe Leslie, Mr. Inglis Palgrave, and Prof. Thorold Rogers have made important contributions to many questions touching local or imperial taxation.
[∗]“I. The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
[∗]“Now I beg you to remark the strange assumptions that underlie this reasoning. Human interests are naturally harmonious; therefore we have only to leave people free, and social harmony must result; as if it were an obvious thing that people knew their interests in the sense in which they coincide with the interests of others, and that, knowing them, they must follow them; as if there were no such things in the world as passion, prejudice, custom, esprit de corps, class interest, to draw people aside from the pursuit of their interests in the largest and highest sense. Nothing is easier than to show that people follow their interest, in the sense in which they understand their interest. But between this and following their interest in the sense in which it is coincident with that of other people, a chasm yawns. That chasm in the argument of the laissez-faire school has never been bridged. The advocates of the doctrine shut their eyes and leap over it.”—Prof. John E. Cairnes.
[∗]Much as I admire the pithiness and vigor of Prof. Sumner's argument before the Tariff Commission, in 1883, I can not but think that he unduly disparages the losses to production which occur under the regime of free-exchange. I have in another place (pars. 99–109, and again 236 to 243) adduced considerations which seem to me to justify a very serious view of the extent and importance of these losses. Let the protectionist, if he can, show good grounds for believing that under the system he proposes there would be a better outcome.
[∗]“If it be asserted that states which pursue different industries can not afford to trade freely with one another, here we have them, New York and Pennsylvania, Massachusetts and Minnesota, Maine and Louisiana. If it be asserted that states with like industries can not afford to trade freely with one another, here we have them, Indiana and Illinois, Iowa and Minnesota, Massachusetts and Rhode Island, Alabama and Mississippi. If it be said that small states can not afford to trade freely with great empires, here are New York and Connecticut, Pennsylvania and Delaware. Why do not the great states suck the life out of the small ones? If it be said that new states, with little capital, and on the first stage of culture, can not afford to exchange freely with old states having large capital and advanced social organization, here are New York and Oregon, Massachusetts and Idaho. How can any territories ever grow into states under the pressure? If it be said that a state which relies on one industry can not afford to exchange freely with one which has a diversified industry, here are Pennsylvania and Colorado, California and Nevada, any of the cotton states and any of the Northeastern states.”—W. G. Sumner, “Protection in the United States.”
[∗]The reader who may be interested to see the most and best that can be said in behalf of this strange doctrine of anarchy, is referred to an article by Prince Kropotkin in the Nineteenth Century for August, 1887.
[∗]The general movement by which roads and bridges have almost universally been made free, began, even in the most enlightened countries, only sixty or seventy years ago.
[∗]Scribner's Magazine. January, 1887.