Front Page Titles (by Subject) THE GROWTH OF CAPITAL. - The Works and Life of Walter Bagehot, vol. 7 (Economic Studies and Essays)
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THE GROWTH OF CAPITAL. - Walter Bagehot, The Works and Life of Walter Bagehot, vol. 7 (Economic Studies and Essays) 
The Works and Life of Walter Bagehot, ed. Mrs. Russell Barrington. The Works in Nine Volumes. The Life in One Volume. (London: Longmans, Green, and Co., 1915). Vol. 7.
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THE GROWTH OF CAPITAL.
The conclusion that English Political Economy is an analysis only of industrial societies which are to a certain extent developed, will be strengthened by a consideration of the doctrines which that Political Economy teaches us as to one of the principal parts of the subject—the theory of the growth of capital. Our Political Economy does not recognise that there is a vital distinction between the main mode in which capital grows in such countries as England now, and the mode in which it grew in all countries at first.
The principal way in which capital increases in England now, is by abstinence from enjoyment. We receive our incomes in money, and either we spend them on our enjoyments, in which case capital is not increased, for our incomes are all gone and no new productive thing is made, or we abstain from enjoyment and put our money into trade ourselves, supposing that we are in trade, and supposing that we are not in trade, lend it to those who are. The productive part of wealth—the wealth which creates other wealth—is augmented mainly by our not enjoying our incomes.
But there is another mode of augmenting capital of which Defoe gives us, perhaps, a more vivid notion than we can get elsewhere. “I cannot say,” says Robinson Crusoe, “that after this, for five years, any extraordinary thing happened to me; but I lived on in the same course, in the same posture and place just as before; the chief thing I was employed in, besides my yearly labour of planting my barley and rice, and curing my raisins, of both which I always kept up just enough to have sufficient stock of the year’s provisions beforehand: I say, besides this yearly labour, and my daily labour of going out with my gun, I had one labour to make me a canoe, which at last I finished; so that by digging a canal to it, six feet wide and four feet deep, I brought it into the creek, almost half a mile. As for the first, that was so vastly big, as I made it without considering beforehand, as I ought to do, how I should be able to launch it; so never being able to bring it to the water, or bring the water to it, I was obliged to let it lie where it was, as a memorandum to teach me to be wiser next time. Indeed the next time though I could not get a tree proper for it, and was in a place where I could not get the water to it, at any less distance than, as I have said, of near half a mile; yet as I saw it was practicable at last, I never gave it over; and though I was near two years about it, yet I never grudged my labour, in hopes of having a boat to go off to sea at last.” But in this case there was evidently no abstinence from enjoyment. Robinson Crusoe had only the bare means of subsistence: he had no pleasant things to give up; but he employed his time and labour in making a vessel, a piece of capital, if ever there was one.
Just similar is the practice of primitive societies. When a savage in the stone age made a flint implement he relinquished no satisfaction. Having nothing else to do he made a tool, which has been the beginning of all other tools. “Mankind,” says a recent writer,1 “may have discovered how to manufacture earthen vessels in various ways. Sir John Lubbock points out that Captain Cook saw stones surrounded with a rim of clay in use among the Aleutians on Unalashka; but this might be an imitation of European vessels with which the islanders had already become acquainted through Russian sailors. The practice of the Australians on the Lower Murray River, of puddling holes in the earth with clay and cooking food in them, might perhaps have led an inventive mind to the manufacture of earthen vessels. But the process is better explained by the account of the French sailor Gonneville, who, in 1504, landed on a South Atlantic coast, probably in Brazil.1 He describes certain wooden vessels in use among the natives (in whom D’Avezac fancies that he recognises Brazilian Carijo) enveloped in a coating of clay as a protection from the fire.2 If by chance the wooden bowl separated itself from the covering of clay, an earthen vessel would remain. In examining the site of an old pottery manufactory of the Red Indians on the Cahokia, which falls into the Mississippi below St. Louis, Carl Rau discovered half-finished vessels, that is to say, baskets of rushes or willow, lined inside with clay.”
These primitive potters had no luxuries to forgo, and had no “income” to spend on luxuries. They simply had spare time and unused handiness, and with this they made the first pots, which were the beginning of all pots—the ancestors first of the tea kettle and then of the condensing engine.
In the same way there was no sacrifice of pleasure in the greatest source of early capital—the taming of animals; on the contrary, according to the most probable theory, there was a new pleasure in taming them which did not require the surrender of any old pleasure.
Mr. Galton has shown that in all probability the taming of animals began, not in the restraining of any impulses, but in the indulgence of some very simple ones.3 “The domestication of animals,” he tells us, “is one of the few relics of the past whence we may reasonably speculate on man’s social condition in very ancient times. We know that the domestication of every important member of our existing stock originated in prehistoric ages, and, therefore, that our remote ancestors accomplished in a variety of cases, what we have been unable to effect in any single instance. The object of my paper is to discuss the character of ancient civilisation, as indicated by so great an achievement. Was there a golden age of advanced enlightenment? Have extraordinary geniuses arisen who severally taught their contemporaries to tame and domesticate the dog, the ox, the sheep, the hog, the fowl, the camel, the llama, the reindeer, and the rest? Or again, Is it possible that the ordinary habits of rude races, combined with the qualities of the animals in question, have sufficed to originate every instance of established domestication? The conclusion to which I have arrived is entirely in favour of the last hypothesis. My arguments are contained in the following paper; but I will commence by stating their drift, lest the details I introduce should seem trifling or inconsequent. It will be this: all savages maintain pet animals, many tribes have sacred ones, and kings of ancient states have imported captive animals, on a vast scale, from their barbarian neighbours. I infer that every animal, of any pretensions, has been tamed over and over again, and has had numerous opportunities of becoming domesticated. But the cases are rare in which these opportunities can lead to any result. No animal is fitted for domestication unless it fulfils certain stringent conditions, which I will endeavour to state and to discuss. My conclusion is, that all domesticable animals of any note, have long ago fallen under the yoke of man. In short, that the animal creation has been pretty thoroughly, though half unconsciously, explored, by the everyday habits of rude races and simple civilisations.”
And after enumerating the qualities which a tameable animal must possess, which are hardiness, fondness for man (which some animals now used have, while others have not), desire of comfort, easiness to tend, willingness to breed, and usefulness to the human race, he adds:1 “The utility of the animals, as a store of future food, is undoubtedly the most durable reason for maintaining them; but I think it was probably not so early a motive as the chief’s pleasure in possessing them. That was the feeling under which the menageries, described above, were established. Whatever the despot of savage tribes is pleased with, becomes invested with a sort of sacredness. His tame animals would be the care of all his people, who would become skilful herdsmen under the pressure of fear. It would be as much as their lives were worth if one of the creatures were injured through their neglect. I believe that the keeping of a herd of beasts, with the sole motive of using them as a reserve for food, or as a means of barter, is a late idea in the history of civilisation. It has now become established among the pastoral races of South Africa, owing to the traffickings of the cattle traders, but it was by no means prevalent in Damara-Land when I travelled there twelve years ago. I then was surprised to observe the considerations that induce the chiefs to take pleasure in their vast herds of cattle. They were valued for their stateliness and colour, far more than for their beef. They were as the deer of an English squire, or as the stud of a man who has many more horses than he can ride. An ox was almost a sacred beast in Damara-Land, not to be killed except on momentous occasions, and then as a sort of sacrificial feast, in which all bystanders shared. The payment of two oxen was hush-money for the life of a man. I was considerably embarrassed by finding that I had the greatest trouble in buying oxen for my own use, with the ordinary articles of barter. The possessors would hardly part with them for any remuneration; they would never sell their handsomest beasts.” And he concludes: “I see no reason to suppose that the first domestication of any animal, except the elephant, implies a high civilisation among the people who established it. I cannot believe it to have been the result of a preconceived intention, followed by elaborate trials, to administer to the comfort of man. Neither can I think it arose from one successful effort made by an individual, who might thereby justly claim the title of benefactor to his race; but, on the contrary, that a vast number of half-conscious attempts have been made throughout the course of ages, and that ultimately, by slow degrees, after many relapses, and continued selection, our several domestic breeds became firmly established.”
This theory is one of the most valuable fruits of that contact of the most cultivated living minds with the least so—of men of science with savages, which is characteristic of this generation. And though its details may be modified, its essence seems certain, and it shows that this great form of early capital, the live form, did not begin with abstinence at all.
Even in such times as are described in the Book of Genesis—the specially pastoral times—abstinence was not the main source of capital. When we are told that the flocks and herds of certain patriarchs “grew and multiplied exceedingly,” those patriarchs were sacrificing nothing. They had enough to eat and to drink—the women of their household made their clothes—they had few other conscious wants, and still fewer means of supplying those which they had. The vast increase of animal power which helped on after-wealth so much, had probably its origin in the pride of the eye, in the love of the spectacle of wealth, as much as in anything. Abraham and Jacob were pleased to see “their cattle wax great and cover the whole land,” and, therefore, they let them cover it. There was no luxury to them equal to this. There was not even a competing one.
Another analogous source of capital in early times was making slaves and breeding slaves. Yet neither in the capture nor in the breeding was there any kind of relinquishment of enjoyment. The slaves were gained in the fortune of war, and and if A had not enslaved B, B would have enslaved A. The joy of the combat was, perhaps, the greatest known in those times. And even in the cruellest times it was probably pleasanter to spare the life of the captive than to take it.
A similar source is marriage, which, indeed, is all but the same, for even the highest wives of primitive ages worked in the house, much like slaves, and the concubines, who really were slaves, were but faintly divided from these wives. But it would be absurd to call keeping a harem a kind of abstinence, though harems were a great form of capital, and the members of them made a great deal of wealth.
The reason why we now so closely connect “abstinence” with capital is, that the final product of our industry is almost always received in what I may call an “optional” medium. Almost all our wealth is created to be exchanged, and that exchange is effected by means of money; we can either use that money to buy perishable things which produce nothing, or we can “invest” it, as we say, in some producing business, or lend it to some one—generally to some one engaged in production—who will pay an interest upon it. But in a state of society where things are not created to be exchanged, “abstinence” plays no such constant part. Men must, it is true, abstain from eating the food which is necessary for their subsistence hereafter, and the food so obtained is, certainly, “capital” obtained by abstinence. But most permanent things which are made are like the “flint implement,” and the primitive clay vessel, things which contribute to daily comfort because they are in daily use. The industry which created them never assumed an optional form, it was from the beginning fixed in the particular form in which it was created; neither can be sold or exchanged, for we are supposing a state of society in which there is no exchange or sale.
A primitive patriarchal society is in fact very like this. Either exchange or sale was a very rare act in the lives of such persons as Lot or Abraham. They rarely saw any one to exchange with. They rarely went down into Egypt to buy anything; they rarely saw any sort of travelling merchant to whom they could sell anything. The life of such persons is a life of production, not for sale, but for use, as far as it is a life of production at all.
Hire is a still rarer phenomenon at such a period. Hire as a rule involves proximity of residence, so that the lender may be sure the hirer will return his article. If the borrower goes off to an unknown distance no one can be sure that he will do so. Nor for the most part is trust, which is essential in a loan, developed in societies till men have long lived near together, till they have learnt to know one another, and till they have created some sort of law, or formed some effectual custom which partly punishes and partly prevents bad faith. The diffused habit of lending things, which is the basis of so much of modern industry, is in truth a habit hard to diffuse, and one which the earliest men could not learn.
Nor even when the hire of capital does begin to be an important part of industrial organisation is there necessarily any abstinence from enjoyment in the possessor. Sir Henry Maine describes, in his Early Institutions, a condition of Irish society which was based on the loan of “cattle”—the main capital then existing—in which there was no abstinence in the lender at all. “Every considerable tribe,” he tells us, “and almost every smaller body of men contained in it, is under a chief, whether he be one of the many tribal rulers whom the Irish records call kings, or whether he be one of those heads of joint families whom the Anglo-Irish lawyers at a later date called the Capita Cognationum. But he is not owner of the tribal land. His own land he may have, consisting of private estate or of official domain, or of both, and over the general tribal land he has a general administrative authority, which is ever growing greater over that portion of it which is unappropriated waste. He is meanwhile the military leader of his tribesmen, and, probably in that capacity, he has acquired great wealth in cattle. It has somehow become of great importance to him to place out portions of his herds among the tribesmen, and they on their part occasionally find themselves through stress of circumstance in pressing need of cattle for employment in tillage. Thus the chiefs appear in the Brehon law as perpetually “giving stock,” and the tribesmen as receiving it. The remarkable thing is, that out of this practice grew, not only the familiar incidents of ownership, such as the right to rent and the liability to pay it, together with some other incidents less pleasantly familiar to the student of Irish history, but, above and besides these, nearly all the well-known incidents of feudal tenure. It is by taking stock that the free Irish tribesman becomes the Ceile or Kyle, the vassal or man of his chief, owing him not only rent but service and homage.”
Upon the very surface of this description it is palpable that the chieftain gave up no enjoyment when he hired out these cattle; he doubtless kept quite enough fully to feed himself with all his people, and after that he wanted no more. The power and place he gained by this quasi feudal use of them were the keenest kinds of pleasure then possible to him.
“Cattle” fill so subordinate a place in English industry that many English writers evidently never think of them when they speak of capital; they have in their minds the machines which they see; and they forget that once men bred capital more than they made it. Yet not only are cattle and capital, of course, etymologically the same word, but cattle fill a very curious place in the history of the subject.
First,—They are a kind of capital at once co-operative and remunerative; they can be used either to aid labour or to reward it; they are both helps to industry and means of pleasure. Their vital force is the best of early machines, and their milk and their flesh are the greatest of primitive luxuries. There is scarcely anything which primitive labourers more desire, and scarcely anything which helps them so much. And it is very curious that the sort of capital which first bore the name, and etymologically is the beginning of all the rest, should be a link between, and combine, the nature of two things, now so dissimilar, that at first it hardly seems right that they should have the same name,—the bread which the labourer eats and for which he works, and the spindle or the loom with which he works.
Secondly,—Cattle unquestionably, on account of this double desirability, are among the earliest forms of money, probably the very earliest in which “large transactions,” as we should now speak, were settled. It was the first, or among the first, of “wholesale” moneys.
In this way, though English Political Economy often neglects the use of cattle as capital, and though some of its doctrines are inapplicable to “cattle” in the primitive condition of industry, cattle have nevertheless been a main agent in creating the developed state of industry in which English Political Economy was thought out, and to which alone it is entirely applicable. Cattle rendered possible primitive agriculture, which first kept men close together, and so made the division of labour possible; were the beginning of “wages-paying capital” which that “division” first requires and then extends; were among the first things hired, and the first money. We should be careful to watch in this single article the transitions of industry, for the so doing may save us from the greatest of all mistakes, that of riveting as a universal form upon all societies axioms only fitting societies like our own.
These illustrations might be multiplied almost endlessly, but what have been given are enough to prove that capital is created by any series of acts by which men make, or bring into existence, useful things, and that only some of these acts are accompanied by abstinence, while others are not.
Thirdly,—Neither is the loan of capital always accompanied by abstinence; it may or may not be according to circumstances.
. . . . . . . . . .
If, to simplify the matter, we look at the state of things which is going on around us, we see that capital augments in this way. People’s incomes are paid in money; out of that money some is spent on necessary subsistence, some on temporary enjoyment, and some on durable means of comfort; the rest is left in “money,” and this we call the saving, the new “capital”. The amount of it depends on three elements, first, and evidently, on the amount of the income out of which the saving is to be made; secondly, on the degree in which future wants preponderate over present ones; and lastly, on the efficiency of saving, the success it obtains.
The first and greatest future want is what I may call the “old stocking” one, that is, the craving to have some stock of money laid against the unknown future. The strength of this craving differs much in various races of men; and, as a rule, the strong races, used to prosperity, have much less of it than the weak ones familiar with adversity. You will find much more laid up in the cabin of an Irish peasant than in the cottage of an English artisan, though the latter has five times the greater means. And this is natural, because the English artisan believes, and probably believes with truth, that he is sure to be able to earn money; whereas the Irishman’s notions are based on a world where it has often been impossible to earn a farthing, and in which those ready to live even on potatoes could not get potatoes to live on. Even in higher life very considerable sums, for their circumstances, are often saved by timid, weak people. I know a case in which a sum of (I think) £120 was made up for a gentleman who had become incapacitated; he enjoyed it a few years, and when he died from £700 to £800 were found in his room. He always feared that his income, or part of it, might cease, and wanted to be able to live if it did. Against all contingent evils this “stocking” fund is a resource, and against old age, the most likely of those evils. The next greatest—or probably an equally great—future want is the desire to provide for the next generation. People insure their lives who save in no other way. There is probably no greater anxiety in the world than the wish of parents to start children in the same level of life in which they started themselves, and few greater ambitions than to start them on a higher level. Lastly, there is the desire to be rich, especially in countries where wealth makes the man, where it not only buys commodities, but where without it some of the best unbought things—respect and deference—are not easy to be had. I need not enumerate the present wants which come into collision with these, nor go into any detail as to them.
But we must observe what is incessantly forgotten, that it is not a Spartan and ascetic state of society which most generates saving. On the contrary, if a whole society has few wants there is little motive for saving. The reserve, the old stocking store of those who want little, need only be small Those who want to start their children with little, need save little; those who reckon £100 a year “riches,” need not, and will not, deprive themselves of anything to obtain more; a state of society which encourages that feeling is not likely to be rich. Nothing is commoner than to read homilies on luxury, because it is a “waste of money,” and “bad for the poor”. But without the multifarious accumulation of wants which are called luxury, there would in such a state of society be far less saving than there is. If you look at the West-end of London with its myriad comforts and splendours, it looks at first sight like a mere apparatus for present enjoyment. And so far as the present feelings of those who live there go, it often is. Very many of the inhabitants are thinking only of themselves. But there is no greater benefit to the community for all that than this seemingly thoughtless enjoyment. It is the bait by which the fish is caught; it is the attraction by which capital is caught. To lead a bright life like that, at least that their children may lead it or something like it, many times as many as those who now live it, spare and save. And if it be good for the poor that capital should be saved, then the momentary luxury which causes that saving is good for the poor. The analogy of animal life is reversed, for it is the butterfly which begins as the grub.
On the other side we must remember what, in books of Political Economy, is sometimes forgotten, that saving is not necessarily good. The capital may come too dear. A clergyman who gives his children a good education, does more really to increase wealth, not to say anything of anything else, than if he saved the money. The engineer, the lawyer, the physician, are in their various ways productive people; and the nation would have been poorer, not richer, if their father had kept the money which educated them, in order to leave them at his death so much more. The same may not be so conspicuously true of the daughters, but it is as much so really. A good mother of a family causes more wealth than half the men, for she trains from the beginning boys to be fit for the world, and to make wealth; and if she fails at that beginning the boys will be worse gold finders all their lives.
It must be observed, too, that there is an intellectual element in the matter. Besides the two kinds of wants, future and present, there is the faculty of making the comparison. And the habits of some people’s lives fit them much more for this than those of others. An actor who is concerned with the momentary impression on passing audiences has nothing to bring the future close to him at all. An artisan has little more; his daily work passes with the day. But a capitalist in business has the future for ever brought home to him. He has to look into the future, perhaps a distant one, for the profit on the goods which he buys, and to find in the near future the money with which these goods are to be paid for. The first thing in his mind is a list of “acceptances” soon to be provided for; the next is the balance-sheet to be made up sometime hence. A banker, above all men, incessantly lives in the future. He is, or ought to be, for ever thinking how he should pay his deposits if he were asked for them; he must think daily how he will find means for the current demands of every day. He too has a balance-sheet to be looked to upon the results of which he will have to live. A man thus living in the future, has a greater disposition to provide for it. And this is the one main reason why the man of business, of whatever species—the manufacturer, the merchant, or the banker—will save much more than any kind of person who lives upon the fruits of a momentary skill or talent.
In many minds this feeling coalesces with the “old stocking want”—that is to say, the desire to provide for definite engagements, those engagements being an incessant series, passes into and is blended with the desire to provide for the unknown. The pecuniary classes have a general feeling of “liability” about their minds to which other classes are strangers. And justly, because their risks, not only their known, but their unknown ones, are greater. I once heard a very experienced man lay down this principle: “A man of business,” he said, “ought not to be over cautious; he ought to take what seem good things in his trade pretty much as they come; he won’t get any good by trying to see through a mill-stone. But he ought to put all his caution into his ‘reserve fund’; he may depend on it he will be ‘done’ somehow before long, and probably when he least thinks it; he ought to heap up a great fund in a shape in which he can use it, against the day at which he wants it.” It is the disposition so generated, which is in a trading nation among the strongest motives to save.
Besides these two factors in the growth of capital, the amount of the income out of which saving has to be made, and the disposition to sacrifice what is present to what is future, there is, I have said, a third, viz., the efficiency of saving in creating capital. There is a whole scale of various degrees of this efficiency in actual life. At the bottom is the brisk peasant who puts away his money into an old stocking, who has no means of employing it, who will not trust any one else with it. Here, all that the saving of £10 will produce is £10; it is sure never to get any more. At the top of the scale is the able capitalist in a large and growing business; every penny he can put into it yields him a high profit, because he gets an income from unusual ability, unusual opportunity, as well as the common rate. Such a man will almost always save more than others, because he has a far greater reward per cent. for saving it. The rate of profit depends on the efficiency of industry. When more is made at less cost, the profit is greater; when less at greater, the profit is less. I am not sure whether, to many minds, this language will not present a difficulty. I know it long did so to my own. I was conscious of a haze about it. “It is stated,” I said to myself, “that there is ‘more’ of something or other, but of what is there more?” And I could not answer the question very well. More “exchangeable value,” more “money’s worth,” were the natural answers, but I was not satisfied that they were the complete ones. We must analyse a little further. The easiest case to analyse is the gold-mining, the money-making business. If 10,000 sovereigns are invested in gold-mining—in paying wages, in buying machinery, and in accompanying expenses—and if that produce per annum, gold, which can be made into £11,000, this measures the rate of profit in the country. If the efficiency of industry were less, so many additional sovereigns would not be produced; if more, a proportionately greater number would be produced. In the profit of all trades there is the same fundamental fact; an addition to the “exchangeable value” of the commodities of a country; but in the profit of the gold-mining business we can see that fact most easily, because we can take the capital before it is invested as so much gold, and it comes back as that much, plus some more. In other cases there is a change necessary into money; in this case the profit palpably results from the mere production.
We must observe, however, that this profit in the gold-mining trade is only a measure of the general rate of profit in the country, and of the general efficiency of industry which causes that rate; it has no peculiarity about it, except that which has been said. If the profit in this trade were more than in any other, capital would go thither, the production of gold would augment, and prices, measured in gold, would rise. This would raise the price of gold-mining machinery, the rate of gold-miners’ wages, and all the incidental out-goings of the trade. And, as the number of sovereigns, which that “machinery” and those “miners” could produce is not increased, the profit in the trade will fall. And the reverse will happen if that profit be less. A contrary series of changes will make it rise.
In a country in which the productive arts are high, other things being equal, profits will be high also. If the outlay of the capitalist on all means of production is the same, his renumeration will be greatest where most is produced. Suppose by a sudden series of inventions the productive power of industry were augmented in all trades ten per cent. (including the gold-mining trade, so that we may be clear of all questions as to money and price), the revenue of the capitalist would be augmented by that ten per cent., on condition of course of his outlay in all ways remaining the same, including that on wages; and his power of saving would be augmented equally.
Single sudden inventions which help in everything, do not happen, but the general progress of the productive arts in the last thirty years has been very like it, as far as effects go. Almost everything has been made more easily; many things far more easily. Even the growth of raw produce for sale has been facilitated, if not as much as some other things, yet still very much. Railways have made land which was far from the market able to compete with that near it. The daily subsistence of such a city as London would have been excessively costly in the pre-railway time, perhaps it would have been impossible. The amount of things produced on purpose to be exchanged now, as compared with fifty years ago, is so much increased that our fathers would not have comprehended it or believed it. The rise of prices would have been enormous, if the same extension of productive power had not extended to the money trades, to gold and silver. For many years before 1840 the production of these metals had been excessively slow, and their value was rising. Mr. Jevons thinks “that prices had on the average fallen between the years 1820 and 1844 in the ratio of 103 to 69, or by 33 per cent., whereas between 1844 and 1857 they rose in the ratio of 69 to 85, or by about 23 per cent.”.1 Thus the effect of the great gold discoveries consisted more in arresting the previous continuous appreciation of the precious metals than in causing a positive depreciation. Indeed, in 1863, Mr. Jevons stated the depreciation of gold at the very moderate amount of 13 to 16 per cent.1
If the increase in the productive power of general industry had come upon an age straitened as to money-making industry, the fall of prices would have been such as we have no example of, and the effects would have been harassing and confusing. But fortunately the production of gold and silver has been even more facilitated than that of most other things. There has been no such confusing fall of prices, as, except for the new discoveries of gold in California and Australia, there would have been. The effect of the productiveness of industry has been greatly to retard and almost to prevent the equally confusing rise of prices, which would otherwise have happened. The productive power of men of business has thus been incalculably augmented, and with that their saving power.
The second main source of capital in the present day is the saving of men—of persons out of business. Such persons not being able to make anything themselves must put such part of their income as they wish to save into the hands of others, and far the most important way in which they do this is by lending. They lend it on interest, and what they can save varies, other things being the same, with that interest. What then will that amount be? This is determined as other market prices are determined.2
The most important factors in fixing it are the amounts of money to be lent, and the amounts which borrowers are willing to borrow upon such security as the lenders are willing to accept. The most important of these borrowers are men of business. These will be most anxious to borrow money when the rate of profit is high, and when, therefore, they can employ it to the most advantage; at such times they will strain every nerve to obtain as much as possible. But in the earlier states of industry they have great difficulty in obtaining it. They have no security which will satisfy those who wish to lend. In such epochs, the only sort of “security,” the only way in which the borrower can make the lender sure of his money, is by depositing with him fixed property, or at least giving him the control over it. He must pledge movables, or transfer the indicia of ownership over immovables. But in such a commercial civilisation as ours, there is an immense and very powerful machinery for conducting the money of the accumulating class into the hands of the using class. Bankers and bill-brokers form a class whose business it is to know the credit of different persons, and to say when and how far they singly, or together, can be trusted. Millions are lent in this country upon bills of exchange with only two signatures—that is, upon an order to pay money accepted by the person to whom it is addressed, and which the person who gives the order engages to pay if the other does not. The money is, therefore, in fact, advanced on an estimated probability that one or other of these two persons will pay, of which the skilled advancing class—the bankers and the bill-brokers—form their judgment. We are so familiar with it that we forget how marvellous it is. But probably our modern civilisation, notwithstanding its railways, telegraphs, and other like things, has nothing similar. That an endless succession of slips of written promises should be turned into money as readily as if they were precious stones, would have seemed incredible in commerce till very recent times. Our ancestors would have understood that something like it might happen with the promises of a few millionaires or Governments, but they would have never thought it possible that such an infinity of names could be known, or promises estimated. And the wonder is greater because they are not estimated equally; the relative possibility of different “parties” not paying is materially determined to the minutest gradations; and a bill is done at 3⅞ or 4 per cent. accordingly. The intermediate dealers—the bill-brokers and bankers—live upon this knowledge; they gain if they are right, and are ruined if they are often much wrong; and, therefore, they are right. Through these expedients an immense tide of money flows into commerce at most times, though occasionally they are impaired, and it is impeded.
Our commercial civilisation also tends more and more to improve the means by which actual property can be pledged. The indicia of ownership are made more easily transferable. The English law of real property does not bear a very good reputation, but it is indisputable that in this respect it is more advanced than any similar law in the world. In the last century the Courts of Equity decided that the deposit of title-deeds with, or even without, a written memorandum was an adequate security for a loan. And on this sort of “equitable” mortgage a very large sum is lent for short periods, especially by country bankers, who know the people to whom, and the land on which, they are lending. Most individual transactions of this sort are small, but the sum total is very great. Dock and warehouse warrants for goods deposited are also fruits and indications of a highly improved commercial state. They, and all similar means of pledging property, tend to augment the borrowing power of men of business, and so to raise the rate of interest.
Besides men of business, who borrow in order to make, a large class of people borrow in order to hold. The pride and pleasure of possessing property are so great that people will very often pledge that property in order to obtain it. A large part of the titles of our richest landowners are mortgaged in this way to “insurance offices,” who have much money constantly to lend. The arrangement suits both parties, for no one knows of the loan; as the insurance office is permanent, the loan is rarely called in, and thus the landowner gets the pomp of ownership, while the office enjoys the perfection of a security.
There is also a class of persons who borrow in order to spend, that is, to spend the principal (for all borrowers spend the interest, else they would not want to borrow). In such countries as England, where the producing and the preserving classes are such large borrowers, the demand of spendthrifts has but little influence on the rate of interest. It is overpowered by the comparative greatness of other demands. But in simpler states of society the demand of the “prodigal” fills a conspicuous place in the money market, and in some of the books which have come down to us from those early times he seems the principal borrower that is thought of. But the growth of civilisation, though diminishing this species of spending borrowers, creates another much more efficient species. Governments obtain a vast credit, and borrow for war and other non-productive purposes, such as in the early history of mankind could never have been imagined. The loss of France by individual “prodigals” will not, for ages, be as great as her loss by the folly of the seven months’ war with Germany. This is, of course, so much to be deducted from the capital of the country, but nevertheless the sum so borrowed tends to raise the rate of interest, and thus to augment the means of future saving by those who wish to save.
At the present day, therefore, the amount of saving in a nation depends, as we have seen, on the amount of the annual income out of which saving is to be made. The disposition to save out of it (varying in different classes), and the efficiency of saving in creating new capital, depend partly on the rate of profit and partly on the rate of interest. And from this saving arises the annual increment of capital—the amount of yearly addition to it; but there is also a yearly decrement—an annual waste. The amount of this depends in such a country as England mainly on the amount of unsuccessfulness, of absolute loss in business. Certain adventures not only bring no profit, but never return the capital spent on them. The liabilities of bankruptcy estates in England, including liquidations and compositions, but excluding public companies, in 1870 were £17,456,000; the apparent assets were £5,382,000; the difference therefore, or £12,074,000, was so much pure loss. And there is much other loss in business which does not figure here.
To this must be added the loss in such a country and age as ours—usually loss by private prodigals and by State follies. If we could only know the amount of the diminutions and augmentations in any nation, could deduct the one from the other, we should know the increase of the capital during this time by that nation.
We must be careful, however, to observe that our account of the growth of capital is only applicable to such times as ours—to times when the division of labour has been carried out, and where almost everything is produced by one man for sale to others. The result of this is that every sale changes a man’s product into a form in which he has the choice of saving or not saving it. The money which is the proceed of the sale may either be spent on immediate enjoyment, or set aside in some way for the future. The incomes of men are in an adult economic society received in an optional medium. But in early societies this is not so. Things not being produced for sale are only what they are by nature; there is no choice in the way of using most of them; they are by their essential character either fit for present use, or fit to be set apart for the future. They are very rarely in the same degree fit for both. Defoe illustrates this better than many graver authors.
Our account of the growth of capital also assumes that men can always find something to save in, that a person who wants to provide for his future wants, can do so if he will give up present ones. But this is not true in early times at all. Most primitive wants are for rapidly perishable things; and it is of no use to keep a store of those things. If you do, you will be “keeping stale fish,” you will have sacrificed the present without obtaining the future; you will have that which was of use once, but now is so no longer. “Food” is the greatest want of early times. But most food—vegetable or animal—will not of itself last long. It is of no use for a tribe of hunters to set aside the game they kill. It is not till the pastoral age has arrived that men have any means of storing up the food they require. The first “granaries” of men were, if the phrase be allowed, “live granaries”; the flocks and herds which walked the fields, and could be left, when not wanted to be slaughtered, where they were. Clothes, the second great want of man, are always short-lived, and it is not much use to store them up. There was, in early times, no mode of supplying those wants for the future; men had to live from hand to mouth.
[1 ] Oscar Peschel’s Races of Man and their Geographical Distribution, p. 168.
[1 ] Pierre Margry, Les Navigations Françaises, 1867.
[2 ] D’Avezac, Voyage du Capitaine Gonneville, 1869.
[3 ]Domestication of Animals, by Francis Galton, F.R.S. Reprinted from the Transactions of the Ethnological Society, 1865, p. 1.
[1 ]Domestication of Animals, by Francis Galton, F.R.S. Reprinted from the Transactions of the Ethnological Society, 1865, p. 14.
[1 ]Journal of the London Statistical Society, vol. xxviii., p. 315.
[1 ]Serious Fall in the Value of Gold, etc., p. 30.