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Subject Area: Economics
Topic: Free Trade

ESSAY No. XLVII. - Condy Raguet, The Principles of Free Trade [1835]

Edition used:

The Principles of Free Trade illustrated in a series of short and familiar Essays originally published in the Banner of the Constitution, 2nd ed. (Philadelphia, 1840).

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Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


ESSAY No. XLVII.

july 14, 1830.

Internal Improvements. Question of benefits resulting from, fairly tested. Influence of the impost and funding system, as promoting extravagance in government. Sinking of capital. Erroneous opinions generally entertained in respect to it.

THE question of Internal Improvement, as it is called, is one, the real character of which is less understood in the middle and Northern states, than any other which is intimately connected with the prosperity of the country; and as we consider it of great importance that the advocates of free trade should become acquainted with its true nature, we shall offer a few remarks on the subject, for their especial benefit.

It is a common notion, with the great body of the people, that the construction of roads and canals can never be otherwise than beneficial to the country. This belief arises from the general prevalence of two great fallacies, which even some sensible men have embraced without due consideration. The first is, the supposition that the public good is promoted by simply giving employment to people; and the second is, the idea that, as a road or canal cheapens the expense of transportation, it must needs be of general advantage. We shall give to each of these opinions a brief examination, and if we do not completely expose their unsoundness, we shall esteem it as a great favour, if any one who reads this paper will point out the error of our reasoning.

That industry is better in a moral point of view than idleness, we cannot dispute, and if we were writing a treatise for the use of a house of correction, we should say that it would be better to employ lazy vagrants in carrying bricks from one pile to another, and then in carrying them back again, than to indulge them in their lazy habits. But examining the subject under an economical point of view, the question is entirely altered, and assumes this form—Is it beneficial to the public that there should be employed, at the expense of others, people, the value of whose labour, after the work is completed, is not equal to the capital expended? This is a very simple proposition, and easy of solution. Let, for example, any farmer ask himself whether it would be advantageous for him to employ a labourer to work on his farm for a year, at an expense in wages of one hundred dollars cash, if the produce of his labour was worth only ninety dollars cash? Let him ask himself, whether it would be advantageous for him to employ a man to dig a ditch around his fields, to drain off the water, at an expense of a hundred dollars, if the increased productiveness of his fields, by the draining, would not be annually equal to the annual income which he could have derived from the employment of his hundred dollars in some other way? Let him ask himself, whether it would be advantageous for him to employ people to make a road for him to go to market upon, at an expense of a thousand dollars, if the saving which would accrue to him in time, in the wear and tear of wagons, cattle and horse-shoes, should not be annually equal to the annual revenue that he could have derived from the employment of his thousand dollars in some other enterprise? If any one, on putting these questions to himself, should receive an affirmative answer, we should like to hear the arguments by which it would be supported. But we are persuaded that none can be given, unless it be this: The ditch, or the road, although it may not this year produce the saving expected, yet it will do so some years hence. This, to be sure, has some speciousness about it, but it must vanish as an argument, when brought to the test of analysis, as we shall show.

In all estimates of the expenditure of capital, the calculation, to be sound, must be made in reference to the time of the expenditure; and if the income to be derived from it, does not commence until a future day, there must be added to the principal, a sum equal to what would have been gained in the interim, by its employment in some other way. Thus, in the case of the ditch, if its usefulness should not show itself for five years, and if, after that period, it should not annually produce the income of one hundred dollars, and of such additional sum as could have been made out of the one hundred dollars in five years, employed in some other way, it would have been a losing concern; at no future period would the farmer be in possession of as much revenue, as if he had let the ditch alone. The case is the same with the road. An interest account must be kept with it, and the farmer could not fail to discover that, as money doubles itself at compound interest in less than twelve years, his road, at the expiration of that term, must yield him the income of two thousand dollars, or he will be worse off than if he had let the road alone. If the saving in the mean time should have been more than sufficient to keep the road in repair, this surplus, it is true, will be a set-off on the credit side of the account, and will of course diminish the accumulating ratio of the compound interest. But, for the better elucidation of this subject, we will state an account current:

Dr.The Road.Contra.Cr.
1818. Jan. 1.Amount of cost,$10001830. Jan. 1.By amount of saving in transportation in 12 years, including compound interest, calculated on the different sums saved, up to this date$ 600
1830. Jan. 1.Compound interest, at 6 per cent. per annum,1000[oc]
1830. Jan. 1.Expenses of repairs in 12 years,100[oc]
Balance1,500
$2,100
$2,100

From this statement it would appear, that the cost of the road, to the farmer, would be $1,500, and that, consequently, unless the saving he could subsequently derive from it, would be equal to what he could derive from the employment of his $1,500 in some other investment, he would be a loser from the operation.

What has been here said in relation to an individual farmer, is equally true of a community of farmers, or of any other body of people. It is true of a township, of a county, of a state, and of a nation; and as the wife and children of an individual, have a positive interest in the judicious employment of his capital, so have all the members of a great national family a positive interest in the judicious employment of the national capital. The interest, to be sure, is not so perceptible to the great mass of the people, but this arises from two vicious features in the policy of nations, viz: the impost system, and the funding system; by the former of which, the people are taxed without knowing it, and, by the latter, are enabled to saddle posterity with the expenses resulting from their own extravagance and folly. If direct taxation were resorted to, instead of indirect taxation, and if every generation would adopt the just maxim, let us pay as we go, there would be nearly the same prudence in the expenditure of capital exercised by governments as by individuals. But it is very clear that a mere alteration of the mode of raising the funds, does not affect the question of judicious or injudicious expenditure; and the loss to the public, arising from an expenditure of capital in the construction of a road or canal, where it is not wanted, or before it is wanted, is not less a loss because the people are not sensible of it.

We have, upon several occasions, undertaken to point out the fallacy which so widely prevails, that, where labourers are employed on a public work, there is no sinking of capital, inasmuch as the money which they receive as wages, is not consumed, but circulated amongst the community. We recollect to have heard it asserted many years ago, that the Erie canal would be of great benefit to the state of New York, on account of the employment it would give to so many thousand people, even though it should never be completed. Now, to understand this subject, let us go back to our farmer, and consult him about his ditch and road. He will tell us, that the labourers employed by him, did not, it is true, eat or drink the Spanish dollars and bank notes which he paid them as wages, but that they took them to the store, and laid them out in provisions, groceries, liquors, tobacco, clothing, and other articles, which they did actually eat, drink, and wear, and otherwise consume. How will the case then stand? Why, that during the progress of the work a capital has been consumed equal to the value of the money paid as wages, which capital was not reproduced by the ditchers and road makers. Had these workmen been employed in the labours of the farm, in ploughing, harrowing, sowing, reaping, threshing, and the various other agricultural occupations, the case would have been different. There would have been reproduced by their labour, wheat and other grain, equal to the value of the things which they consumed whilst employed; and yet it will be perceived that, in this case, they would no more have eaten and drunk the money in which their wages were paid, than in the other case. A proper view of the difference between capital and money, is all important in political economy. No sort of labour can be carried on without a consumption of capital. A wind mill consumes capital, by the wear and tear of the machinery. A water mill consumes capital by wear and tear, and the destruction of dams and races. A steam mill consumes capital by wear and tear, and by its constant demand for fuel. The farmer, the merchant, the manufacturer, the mechanic, the tradesman, and all others, who by their employments add to the mass of the material products of the country, consume capital whilst they are occupied, inasmuch as they eat, drink, clothe, lodge, and warm themselves. Even the generators of immaterial products, such as lawyers, members of Congress, musicians, and play actors, who produce nothing but pleadings, speeches, concerts, and the enjoyment of crying or laughing at a tragedy or farce, consume capital whilst they are occupied. All tame animals do the same thing; and whenever the time shall arrive when the consumption of capital ceases with a man, he ceases to be needed any longer on this planet.

Now, money, it will be observed, is never consumed; and it is consequently never referred to when consumption of capital is spoken of. It is the mere instrument by which the capital, which is daily consumed by the individuals of the nation, is distributed to the various consumers. It performs the same function that wagons and carts perform; and as well might it be said, on a market day in Philadelphia, that there was no consumption of capital, consisting of meat, poultry, fruit, and vegetables, because the thousands of wagons and carts that line Second street, from Vine to South street, are not also eaten or drunk up. How such an error could have obtained such a deep root, we are at a loss to imagine. But we are not at a loss to understand why the error is perpetuated. It is because the editors of papers at the North prefer the darkness of the American System, to the light of truth, and, on that account, close their columns to the only sort of discussions which are calculated to avert calamities from this nation, which they will deplore too late.