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Title: Principles of Political Economy

Author: John Stuart Mill

Editor: J. Laurence Laughlin

Release date: September 27, 2009 [eBook #30107]
Most recently updated: October 4, 2022

Language: English


Principles Of Political Economy


John Stuart Mill

Abridged, with Critical, Bibliographical,

and Explanatory Notes, and a Sketch

of the History of Political Economy,


J. Laurence Laughlin, Ph. D.

Assistant Professor of Political Economy in Harvard University

A Text-Book For Colleges.

New York:

D. Appleton And Company,

1, 3, and 5 Bond Street.



[pg iii]


An experience of five years with Mr. Mill's treatise in the class-room not only convinced me of the great usefulness of what still remains one of the most lucid and systematic books yet published which cover the whole range of the study, but I have also been convinced of the need of such additions as should give the results of later thinking, without militating against the general tenor of Mr. Mill's system; of such illustrations as should fit it better for American students, by turning their attention to the application of principles in the facts around us; of a bibliography which should make it easier to get at the writers of other schools who offer opposing views on controverted questions; and of some attempts to lighten those parts of his work in which Mr. Mill frightened away the reader by an appearance of too great abstractness, and to render them, if possible, more easy of comprehension to the student who first approaches Political Economy through this author. Believing, also, that the omission of much that should properly be classed under the head of Sociology, or Social Philosophy, would narrow the field to Political Economy alone, and aid, perhaps, in [pg iv] clearer ideas, I was led to reduce the two volumes into one, with, of course, the additional hope that the smaller book would tempt some readers who might hesitate to attack his larger work. In consonance with the above plan, I have abridged Mr. Mill's treatise, yet have always retained his own words; although it should be said that they are not always his consecutive words. Everything in the larger type on the page is taken literally from Mr. Mill, and, whenever it has been necessary to use a word to complete the sense, it has been always inserted in square brackets. All additional matter introduced by me has been printed in a smaller but distinctive type. The reader can see at a glance which part of the page is Mr. Mill's and which my own.

It has seemed necessary to make the most additions to the original treatise under the subjects of the Wages Question; of Wages of Superintendence; of Socialism; of Cost of Production; of Bimetallism; of the Paper Money experiments in this country; of International Values; of the Future of the Laboring-Classes (in which the chapter was entirely rewritten); and of Protection. The treatment of Land Tenures has not been entirely omitted, but it does not appear as a separate subject, because it has at present less value as an elementary study for American students. The chapters on Land Tenures, the English currency discussion, and much of Book V, on the Influence of Government, have been simply omitted. In one case I have changed the order of the chapters, by inserting Chap. XV of Book III, treating of a standard of value, under the chapter treating of money and its functions. In other respects, the same order has been followed as in the original work.

Wherever it has seemed possible, American illustrations have been inserted instead of English or Continental ones.

[pg v]

To interest the reader in home problems, twenty-four charts have been scattered throughout the volume, which bear upon our own conditions, with the expectation, also, that the different methods of graphic representation here presented would lead students to apply them to other questions. They are mainly such as I have employed in my class-room. The use and preparation of such charts ought to be encouraged. The earlier pages of the volume have been given up to a “Sketch of the History of Political Economy,” which aims to give the story of how we have arrived at our present knowledge of economic laws. The student who has completed Mill will then have a very considerable bibliography of the various schools and writers from which to select further reading, and to select this reading so that it may not fall wholly within the range of one class of writers. But, for the time that Mill is being first studied, I have added a list of the most important books for consultation. I have also collected, in Appendix I, some brief bibliographies on the Tariff, on Bimetallism, and on American Shipping, which may be of use to those who may not have the means of inquiring for authorities, and in Appendix II a number of questions and problems for the teacher's use.

In some cases I have omitted Mr. Mill's statement entirely, and put in its stead a simpler form of the same exposition which I believed would be more easily grasped by a student. Of such cases, the argument to show that Demand for Commodities is not Demand for Labor, the Doctrine of International Values, and the Effect of the Progress of Society on wages, profits, and rent, are examples. Whether I have succeeded or not, must be left for the experience of the teacher to determine. Many small figures and diagrams have been used throughout the text, in order [pg vi] to suggest the concrete means of getting a clear grasp of a principle.

In conclusion, I wish to acknowledge my indebtedness to several friends for assistance in the preparation of this volume, among whom are Professor Charles F. Dunbar, Dr. F. W. Taussig, Dr. A. B. Hart, and Mr. Edward Atkinson.

J. Laurence Laughlin.
Harvard University, Cambridge, Massachusetts,
September, 1884.

Illustration: Population Map of eastern United States, 1830
Chart I

Illustration: Population Map of United States, 1880
Chart II
[pg 001]


A Sketch Of The History Of Political Economy.

General Bibliography.—There is no satisfactory general history of political economy in English. Blanqui's Histoire de l'économie politique en Europe (Paris, 1837) is disproportioned and superficial, and he labors under the disadvantage of not understanding the English school of economists. He studies to give the history of economic facts, rather than of economic laws. The book has been translated into English (New York, 1880).

Villeneuve-Bargemont, in his Histoire de l'économie politique (Paris, 1841), aims to oppose a Christian political economy to the English political economy, and indulges in religious discussions.

Travers Twiss, View of the Progress of Political Economy in Europe since the Sixteenth Century (London, 1847), marked an advance by treating the subject in the last four centuries, and by separating the history of principles from the history of facts. It is brief, and only a sketch. Julius Kautz has published in German the best existing history, Die geschichtliche Entwickelung der National-Oekonomie und ihrer Literatur (Vienna, 1860). (See Cossa, Guide to the Study of Political Economy, page 80.) Cossa in his book has furnished a vast amount of information about writers, classified by epochs and countries, and a valuable discussion of the divisions of political economy by various writers, and its relation to other sciences. It is a very desirable little hand-book. McCulloch, in his Introduction to the Wealth of Nations, gives a brief sketch of the growth of economic doctrine. The editor begs to acknowledge his great indebtedness for information to his colleague, Professor Charles F. Dunbar, of Harvard University.

Systematic study for an understanding of the laws of political economy is to be found no farther back than the [pg 002] sixteenth century. The history of political economy is not the history of economic institutions, any more than the history of mathematics is the history of every object possessing length, breadth, and thickness. Economic history is the story of the gradual evolution in the thought of men of an understanding of the laws which to-day constitute the science we are studying. It is essentially modern.1

Aristotle2 and Xenophon had some comprehension of the theory of money, and Plato3 had defined its functions with some accuracy. The economic laws of the Romans were all summed up in the idea of enriching the metropolis at the expense of the dependencies. During the middle ages no systematic study was undertaken, and the nature of economic laws was not even suspected.

It is worth notice that the first glimmerings of political economy came to be seen through the discussions on money, and the extraordinary movements of gold and silver. About the time of Charles V, the young study was born, accompanied by the revival of learning, the Reformation, the discovery of America, and the great fall in the value of gold and silver. Modern society was just beginning, and had already brought manufactures into existence—woolens in England, silks in France, Genoa, and Florence; Venice had become the great commercial city of the world; the Hanseatic League was carrying goods from the Mediterranean to the Baltic; and the Jews of Lombardy had by that time brought into use the bill of exchange. While the supply of the precious metals had been tolerably constant hitherto, the steady increase of business brought about a fall of prices. From the middle of the fourteenth to the end of the fifteenth century [pg 003] the purchasing power of money increased in the ratio of four to ten. Then into this situation came the great influx of gold and silver from the New World. Prices rose unequally; the trading and manufacturing classes were flourishing, while others were depressed. In the sixteenth century the price of wheat tripled, but wages only doubled; the laboring-classes of England deteriorated, while others were enriched, producing profound social changes and the well-known flood of pauperism, together with the rise of the mercantile classes. Then new channels of trade were opened to the East and West. Of course, men saw but dimly the operation of these economic causes; although the books now began to hint at the right understanding of the movements and the true laws of money.

Even before this time, however, Nicole Orêsme, Bishop of Lisieux (died 1382), had written intelligently on money;4 but, about 1526, the astronomer Copernicus gave a very good exposition of some of the functions of money. But he, as well as Latimer,5 while noticing the economic changes, gave no correct explanation. The Seigneur de Malestroit, a councilor of the King of France, however, by his errors drew out Jean Bodin6 to say that the rise of prices was due to the abundance of money brought from America. But he was in advance of his time, as well as William Stafford,7 the author of the first English treatise on money, which showed a perfect insight into the subject. Stafford distinctly grasped [pg 004] the idea that the high prices brought no loss to merchants, great gain to those who held long leases, and loss to those who did not buy and sell; that, in reality, commodities were exchanged when money was passed from hand to hand.

Such was the situation8 which prefaced the first general system destined to be based on supposed economic considerations, wrongly understood, to be sure, but vigorously carried out. I refer to the well-known mercantile system which over-spread Europe.9 Spain, as the first receiver of American gold and silver, attributed to it abnormal power, and by heavy duties and prohibitions tried to keep the precious metals to herself. This led to a general belief in the tenets of the mercantile system, and its adoption by all Europe. 1. It was maintained that, where gold and silver abounded, there would be found no lack of the necessaries of life; 2. Therefore governments should do all in their power to secure an abundance of money. Noting that commerce and political power seemed to be in the hands of the states having the greatest quantity of money, men wished mainly to create such a relation of exports and imports of goods as would bring about an importation of money. The natural sequence of this was, the policy of creating a favorable “balance of trade” by increasing exports and diminishing imports, thus implying that the gain in international trade was not a mutual one. The error consisted in supposing that a nation could sell without buying, and in overlooking the instrumental character of money. The errors even went so far as to create prohibitory legislation, in the hope of shutting out imported goods and keeping the precious metals at home. The system [pg 005] spread over Europe, so that France (1544) and England (1552) forbade the export of specie. But, with the more peaceful conditions at the end of the sixteenth century, the expansion of commerce, the value of money became steadier, and prices advanced more slowly.

Italian writers were among the first to discuss the laws of money intelligently,10 but a number of acute Englishmen enriched the literature of the subject,11 and it may be said that any modern study of political economy received its first definite impulse from England and France.

The prohibition of the export of coin was embarrassing to the East India Company and to merchants; and Mun tried to show that freedom of exportation would increase the amount of gold and silver in a country, since the profits in foreign trade would bring back more than went out. It probably was not clear to them, however, that the export of bullion to the East was advantageous, because the commodities brought back in return were more valuable in England than the precious metals. The purpose of the mercantilists was to increase the amount of gold and silver in the country. Mun, with some penetration, had even pointed out that too much money was an evil; but in 1663 the English Parliament removed the restriction on the exportation of coin. The balance-of-trade heresy, that exports should always exceed [pg 006] imports (as if merchants would send out goods which, when paid for in commodities, should be returned in a form of less value than those sent out!), was the outcome of the mercantile system, and it has continued in the minds of many men to this day. The policy which aimed at securing a favorable balance of trade, and the plan of protecting home industries, had the same origin. If all consumable goods were produced at home, and none imported, that would increase exports, and bring more gold and silver into the country. As all the countries of Europe had adopted the mercantile theory after 1664, retaliatory and prohibitory tariffs were set up against each other by England, France, Holland, and Germany. Then, because it was seen that large sums were paid for carrying goods, in order that no coin should be required to pay foreigners in any branch of industry, navigation laws were enacted, which required goods to be imported only in ships belonging to the importing nation. These remnants of the mercantile system continue to this day in the shipping laws of this and other countries.12

A natural consequence of the navigation acts, and of the mercantile system, was the so-called colonial policy, by which the colonies were excluded from all trade except with the mother-country. A plantation like New England, which produced commodities in competition with England, was looked upon with disfavor for her enterprise; and all this because of the fallacy, at the foundation of the mercantile [pg 007] system, that the gain in international trade is not mutual, but that what one country gains another must lose.13

An exposition of mercantilism would not be complete without a statement of the form it assumed in France under the guidance of Colbert,14 the great minister of Louis XIV, from 1661 to 1683. In order to create a favorable balance of trade, he devoted himself to fostering home productions, by attempts to abolish vexatious tolls and customs within the country, and by an extraordinary system of supervision in manufacturing establishments (which has been the stimulus to paternal government from which France has never since been able to free herself). Processes were borrowed from England, Germany, and Sweden, and new establishments for making tapestries and silk goods sprang up; even the sizes of fabrics were regulated by Colbert, and looms unsuitable for these sizes destroyed. In 1671 wool-dyers were given a code of detailed instructions as to the processes and materials that might be used. Long after, French industry felt the difficulty of struggling with stereotyped processes. His system, however, naturally resulted in a series of tariff measures (in 1664 and 1667). Moderate duties on the exportation of raw materials were first laid on, followed by heavy customs imposed on the importation of foreign goods. The shipment of coin was forbidden; but Colbert's criterion of prosperity was the favorable balance of trade. French agriculture was overlooked. The tariff of 1667 was based on the theory that foreigners must of necessity buy French wines, lace, and wheat; that the French could sell, but not buy; but the act of 1667 cut off the demand for French goods, and Portuguese [pg 008] wines came into the market. England and Holland retaliated and shut off the foreign markets from France. The wine and wheat growers of the latter country were ruined, and the rural population came to the verge of starvation. Colbert's last years were full of misfortune and disappointment; and a new illustration was given of the fallacy that the gain from international trade was not mutual.

From this time, economic principles began to be better apprehended. It is to be noted that the first just observations arose from discussions upon money, and thence upon international trade. So far England has furnished the most acute writers: now France became the scene of a new movement. Marshal Vauban,15 the great soldier, and Boisguillebert16 both began to emphasize the truth that wealth really consists, not in money alone, but in an abundance of commodities; that countries which have plenty of gold and silver are not wealthier than others, and that money is only a medium of exchange. It was not, however, until 1750 that evidences of any real advance began to appear; for Law's famous scheme (1716-1720) only served as a drag upon the growth of economic truth. But in the middle of the eighteenth century an intellectual revival set in: the “Encyclopædia” was published, Montesquieu wrote his “l'Ésprit des Lois,” Rousseau was beginning to write, and Voltaire was at the height of his power. In this movement political economy had an important share, and there resulted the first school of Economists, termed the Physiocrats.

The founder and leader of this new body of economic thinkers was François Quesnay,17 a physician and favorite at [pg 009] the court of Louis XV. Passing by his ethical basis of a natural order of society, and natural rights of man, his main doctrine, in brief, was that the cultivation of the soil was the only source of wealth; that labor in other industries was sterile; and that freedom of trade was a necessary condition of healthy distribution. While known as the “Economists,” they were also called the “Physiocrats,”18 or the “Agricultural School.” Quesnay and his followers distinguished between the creation of wealth (which could only come from the soil) and the union of these materials, once created, by labor in other occupations. In the latter case the laborer did not, in their theory, produce wealth. A natural consequence of this view appeared in a rule of taxation, by which all the burdens of state expenditure were laid upon the landed proprietors alone, since they alone received a surplus of wealth (the famous net produit) above their sustenance and expenses of production. This position, of course, did not recognize the old mercantile theory that foreign commerce enriched a nation solely by increasing the quantity of money. To a physiocrat the wealth of a community was increased not by money, but by an abundant produce from its own soil. In fact, Quesnay argued that the right of property included the right to dispose of it freely at home or abroad, unrestricted by the state. This doctrine was formulated in the familiar expression, Laissez faire, laissez passer.”19 Condorcet and Condillac favored the new ideas. The “Economists” became the fashion in France; and even included in their number Joseph II of Austria, the Kings of Spain, Poland, Sweden, Naples, Catharine [pg 010] of Russia, and the Margrave of Baden.20 Agriculture, therefore, received a great stimulus.

Quesnay had many vigorous supporters, of whom the most conspicuous was the Marquis de Mirabeau21 (father of him of the Revolution), and the culmination of their popularity was reached about 1764. A feeling that the true increase of wealth was not in a mere increase of money, but in the products of the soil, led them naturally into a reaction against mercantilism, but also made them dogmatic and overbearing in their one-sided system, which did not recognize that labor in all industries created wealth. As the mercantile system found a great minister in Colbert to carry those opinions into effect on a national scale, so the Physiocrats found in Turgot22 a minister, under Louis XVI, who gave them a national field in which to try the doctrines of the new school. Benevolently devoted to bettering the condition of the people while Intendant of Limoges (1751), he was made comptroller-general of the finances by Louis XVI in 1774. Turgot had the ability to separate political economy from politics, law, and ethics. His system of freeing industry from governmental interference resulted in abolishing many abuses, securing a freer movement of grain, and in lightening the taxation. But the rigidity of national prejudices [pg 011] was too strong to allow him success. He had little tact, and raised many difficulties in his way. The proposal to abolish the corvées (compulsory repair of roads by the peasants), and substitute a tax on land, brought his king into a costly struggle (1776), and attempts to undermine Turgot's power were successful. With his downfall ended the influence of the Economists. The last of them was Dupont de Nemours,23 who saw a temporary popularity of the Physiocrats in the early years of the French Revolution, when the Constituent Assembly threw the burden of taxes on land. But the fire blazed up fitfully for a moment, only to die away entirely.

All this, however, was the slow preparation for a newer and greater movement in political economy than had yet been known, and which laid the foundation of the modern study as it exists to-day. The previous discussions on money and the prominence given to agriculture and economic considerations by the Economists made possible the great achievements of Adam Smith and the English school. A reaction in England against the mercantile system produced a complete revolution in political economy. Vigorous protests against mercantilism had appeared long before,24 and the true functions of money had come to be rightly understood.25 More [pg 012] than that, many of the most important doctrines had been either discussed, or been given to the public in print. It is at least certain that hints of much that made so astonishing an effect in Adam Smith's “Wealth of Nations” (1776) had been given to the world before the latter was written. To what sources, among the minor writers, he was most indebted, it is hard to say. Two, at least, deserve considerable attention, David Hume and Richard Cantillon. The former published his “Economic Essays” in 1752, which contained what even now would be considered enlightened views on money, interest, balance of trade, commerce, and taxation; and a personal friendship existed between Hume and Adam Smith dating back as far as 1748, when the latter was lecturing in Edinburgh on rhetoric. The extent of Cantillon's acquirements and Adam Smith's possible indebtedness to him have been but lately recognized. In a recent study26 on Cantillon, the late Professor Jevons has pointed out that the former anticipated many of the doctrines later ascribed to Adam Smith, Malthus, and Ricardo. Certain it is that the author of the “Wealth of Nations” took the truth wherever he found it, received substantial suggestions from various sources, but, after having devoted himself in a peculiarly successful way to collecting facts, he wrought out of all he had gathered the first rounded system of political economy the world had yet known; which pointed out that labor was at the basis of production, not merely in agriculture, as the French school would have it, but in all industries; and which battered down all the defenses of the mediæval mercantile system. In a marked degree Adam Smith27 combined a logical precision and a [pg 013] power of generalizing results out of confused data with a practical and intuitive regard for facts which are absolutely necessary for great achievements in the science of political economy. At Glasgow (1751-1764) Adam Smith gave lectures on natural theology, ethical philosophy, jurisprudence, and political economy, believing that these subjects were complementary to each other.

A connected and comprehensive grasp of principles was the great achievement of Adam Smith;28 for, although the “Wealth of Nations” was naturally not without faults, it has been the basis of all subsequent discussion and advance in political economy. In Books I and II his own system is elucidated, while Book IV contains his discussion of the Agricultural School and the attacks on the mercantile system. Seeing distinctly that labor was the basis of all production (not merely in agriculture), he shows (Books I and II) that the wealth of a country depends on the skill with which its labor is applied, and upon the proportion of productive to unproductive laborers. The gains from division of labor are explained, and money appears as a necessary instrument after society has reached such a division. He is then led to discuss prices (market price) and value; and, since from the price a distribution takes place among the factors of production, he is brought to wages, profit, and rent. The functions [pg 014] of capital are explained in general; the separation of fixed from circulating capital is made; and he discusses the influence of capital on the distribution of productive and unproductive labor; the accumulation of capital, money, paper money, and interest. He, therefore, gets a connected set of ideas on production, distribution, and exchange. On questions of production not much advance has been made since his day; and his rules of taxation are now classic. He attacked vigorously the balance-of-trade theory, and the unnatural diversion of industry in England by prohibitions, bounties, and the arbitrary colonial system. In brief, he held that a plan for the regulation of industry by the Government was indefensible, and that to direct private persons how to employ their capital was either hurtful or useless. He taught that a country will be more prosperous if its neighbors are prosperous, and that nations have no interest in injuring each other. It was, however, but human that his work should have been somewhat defective.29 A new period in the history of political [pg 015] economy, however, begins with Adam Smith. As Roscher says, he stands in the center of economic history.

New writers now appear who add gradually stone after stone to the good foundation already laid, and raise the edifice to fairer proportions. The first considerable addition comes from a contribution by a country clergyman, Thomas Robert Malthus,30 in his “Essay on the Principles of Population” (1798). Against the view of Pitt that “the man who had a large family was a benefactor to his country,” Malthus argued conclusively that “a perfectly happy and virtuous community, by physical law, is constrained to increase very rapidly.... By nature human food increases in a slow arithmetical ratio; man himself increases in a quick geometrical ratio, unless want and vice stop him.” In his second edition (1803), besides the positive check of vice and want, he gave more importance to the negative check of “self-restraint, moral and prudential.” The whole theory was crudely stated at first; and it raised the cry that such a doctrine was inconsistent with the belief in a benevolent Creator. In its essence, the law of population is simply that a tendency and ability exist in mankind to increase its numbers faster than subsistence, and that this result actually will happen unless checks retard it, or new means of getting subsistence [pg 016] arise. If an undue increase of population led to vice and misery, in Malthus's theory, he certainly is not to be charged with unchristian feelings if he urged a self-restraint by which that evil result should be avoided. Malthus's doctrines excited great discussion: Godwin says that by 1820 thirty or forty answers to the essay had been written; and they have continued to appear. The chief contributions have been by A. H. Everett, “New Ideas on Population” (1823), who believed that an increase of numbers increased productive power; by M. T. Sadler, “Law of Population” (1830), who taught that human fertility varied inversely with numbers, falling off with density of population; by Sir Archibald Alison, “Principles of Population” (1840), who reasoned inductively that the material improvement of the human race is a proof that man can produce more than he consumes, or that in the progress of society preventive checks necessarily arise; by W. R. Greg, “Enigmas of Life” (1873); and by Herbert Spencer, “Westminster Review” (April, 1852), and “Principles of Biology,” (part vi, ch. xii and xiii), who worked out a physiological check, in that with a mental development out of lower stages there comes an increased demand upon the nervous energy which causes a diminution of fertility. Since Darwin's studies it has been very generally admitted that it is the innate tendency of all organic life to increase until numbers press upon the limit of food-production; not that population has always done so in every country.31 Malthus's teachings resulted in the modern poor-house system, beginning with 1834 in England, and they corrected some of the abuses of indiscriminate charity.

While Adam Smith had formulated very correctly the laws of production, in his way Malthus was adding to the [pg 017] means by which a better knowledge of the principles of distribution was to be obtained; and the next advance, owing to the sharp discussions of the time on the corn laws, was, by a natural progress, to the law of diminishing returns and rent. An independent discovery of the law of rent is to be assigned to no less than four persons,32 but for the full perception of its truth and its connection with other principles of political economy the credit has been rightly given to David Ricardo,33 next to Adam Smith without question the greatest economist of the English school. Curiously enough, although Adam Smith was immersed in abstract speculations, his “homely sagacity” led him to the most practical results; but while Ricardo was an experienced and successful man of business, he it was, above all others, who established the abstract political economy, in the sense of a body of scientific laws to which concrete phenomena, in spite of temporary inconsistencies, must in the end conform. His work, therefore, supplemented that of Adam Smith; and there are very few doctrines fully worked out to-day of which hints have not been found in Ricardo's wonderfully compact statements. [pg 018] With no graces of exposition, his writings seem dry, but are notwithstanding mines of valuable suggestions.

In the field of distribution and exchange Ricardo made great additions. Malthus and West had shown that rent was not an element in cost of production; but both Malthus and Ricardo seemed to have been familiar with the doctrine of rent long before the former published his book. Ricardo, however, saw into its connection with other parts of a system of distribution.34 The Malthusian doctrine of a pressure of population on subsistence naturally forced a recognition of the law of diminishing returns from land;35 then as soon as different qualities of land were simultaneously cultivated, the best necessarily gave larger returns than the poorest; and the idea that the payment of rent was made for a superior instrument, and in proportion to its superiority over the poorest instrument which society found necessary to use, resulted in the law of rent. Ricardo, moreover, carried out this principle as it affected wages, profits, values, and the fall of profits; but did not give sufficient importance to the operation of forces in the form of improvements acting in opposition to the tendency toward lessened returns. The theory of rent still holds its place, although it has met with no little opposition.36 A doctrine, quite as important in its effects on free [pg 019] exchange, was clearly established by Ricardo, under the name of the doctrine of “Comparative Cost,” which is the reason for the existence of any and all international trade.

The work of Adam Smith was soon known to other countries, apart from translations. A most lucid and attractive exposition was given to the French by J. B. Say, “Traité d'économie politique” (1803), followed, after lecturing in Paris from 1815-1830, by a more complete treatise,37 “Cours complète d'économie politique” (1828). While not contributing much that was new, Say did a great service by popularizing previous results in a happy and lively style, combined with good arrangement, and many illustrations. The theory that general demand and supply are identical is his most important contribution to the study. Although he translated Ricardo's book, he did not grasp the fact that rent did not enter into price. Say's work was later supplemented by an Italian, Pellegrino Rossi,38 who, in his “Cours d'économie politique” (1843-1851), naturalized the doctrines of Malthus and Ricardo on French soil. His work is of solid value, and he and Say have given rise to an active school of [pg 020] political economy in France. In Switzerland, Sismondi expounded Adam Smith's results in his “De la richesse commerciale” (1803), but was soon led into a new position, explained in his “Nouveaux principes d'économie politique” (1819). This has made him the earliest and most distinguished of the humanitarian economists. Seeing the sufferings caused by readjustments of industries after the peace, and the warehouses filled with unsold goods, he thought the excess of production over the power of consumption was permanent, and attacked division of labor, labor-saving machinery, and competition. Discoveries which would supersede labor he feared would continue, and the abolition of patents, together with the limitation of population,39 was urged. These arguments furnished excellent weapons to the socialistic agitators. Heinrich Storch40 aimed to spread the views of Adam Smith41 in Russia, by his “Cours d'économie politique” (1815). Without further developing the theory of political economy, he produced a book of exceptional merit by pointing out the application of the principles to Russia, particularly in regard to the effect of a progress of wealth on agriculture and manufactures; to the natural steps by which a new country changes from agriculture to a manufacturing régime; and to finance and currency, with an account of Russian depreciated paper since Catharine II.

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For the next advance, we must again look to England. Passing by McCulloch42 and Senior, a gifted writer, the legitimate successor of Ricardo is John Stuart Mill.43 His father, [pg 022] James Mill,44 introduced him into a circle of able men, of which Bentham was the ablest, although his father undoubtedly exercised the chief influence over his training. While yet but twenty-three, in his first book, “Essays on some Unsettled Questions of Political Economy” (1829-1830), he gained a high position as an economist. In one form or another, all his additions to the study are to be found here in a matured condition. The views on productive and unproductive consumption, profits, economic methods, and especially his very clever investigation on international values, were there presented. His “Logic” (1843) contains (Book VI) a careful statement of the relation of political economy to other sciences, and of the proper economic method to be adopted in investigations. Through his “Principles of Political Economy” (1848) he has exercised a remarkable influence upon men in all lands; not so much because of great originality, since, in truth, he only put Ricardo's principles in better and more attractive form, but chiefly by a method of systematic treatment more lucid and practical than had been hitherto reached, by improving vastly beyond the dry treatises of his predecessors (including Ricardo, who was concise and dull), by infusing a human element into his aims, and by illustrations and practical applications. Even yet, however, some parts of his book show the tendency to too great a fondness for abstract statement, induced probably by a dislike to slighting his reasons (due to his early training), and by the limits of his book, which obliged him to omit many possible illustrations. With a deep sympathy for the laboring-classes, he was [pg 023] tempted into the field of sociology in this book, although he saw distinctly that political economy was but one of the sciences, a knowledge of which was necessary to a legislator in reaching a decision upon social questions. Mill shows an advance beyond Ricardo in this treatise, by giving the study a more practical direction. Although it is usual to credit Mill with originating the laws of international values, yet they are but a development of Ricardo's doctrine of international trade, and Mill's discussions of the progress of society toward the stationary state were also hinted at, although obscurely, by Ricardo. In the volumes of Mr. Mill the subject is developed as symmetrically as a proof in geometry. While he held strongly to free trade,45 he gave little space to the subject in his book. All in all, his book yet remains the best systematic treatise in the English language, although much has been done since his day.46

He who has improved upon previous conceptions, and been the only one to make any very important advance in the science since Mill's day, is J. E. Cairnes,47 in his “Leading Principles of [pg 024] Political Economy newly expounded” (1874). Scarcely any previous writer has equaled him in logical clearness, originality, insight into economic phenomena, and lucidity of style. He subjected value, supply and demand, cost of production, and international trade, to a rigid investigation, which has given us actual additions to our knowledge of the study. The wages-fund theory was re-examined, and was stated in a new form, although Mr. Mill had given it up. Cairnes undoubtedly has given it its best statement. His argument on free trade (Part III, chapter iv) is the ablest and strongest to be found in modern writers. This volume is, however, not a systematic treatise on all the principles of political economy; but no student can properly pass by these great additions for the right understanding of the science. His “Logical Method of Political Economy” (1875) is a clear and able statement of the process to be adopted in an economic investigation, and is a book of exceptional merit and usefulness, especially in view of the rising differences in the minds of economists as to method.

A group of English writers of ability in this period have written in such a way as to win for them mention in connection with Cairnes and Mill. Professor W. Stanley Jevons48 [pg 025] put himself in opposition to the methods of the men just mentioned, and applied the mathematical process to political economy, but without reaching new results. His most serviceable work has been in the study of money, which appears in an excellent form, “The Money and Mechanism of Exchange” (1875), and in an investigation which showed a fall of the value of gold since the discoveries of 1849. In this latter he has furnished a model for any subsequent investigator. Like Professor Jevons, T. E. Cliffe Leslie49 opposed the older English school (the so-called “orthodox”), but in the different way of urging with great ability the use of the historical method, of which more will be said in speaking of later German writers.50 He also distinguished himself by a study of land tenures, in his “Land Systems and Industrial [pg 026] Economy of Ireland, England, and Continental Countries” (1870), which was a brilliant exposition of the advantages of small holdings.

By far the ablest of the group, both by reason of his natural gifts and his training as a banker and financial editor, was Walter Bagehot.51 In his “Economic Studies” (1880) he has discussed with a remarkable economic insight the postulates of political economy, and the position of Adam Smith, Ricardo, and Malthus; in his “Lombard Street” (fourth edition, 1873), the money market is pictured with a vivid distinctness which implies the possession of rare qualities for financial writing; indeed, it is in this practical way also, as editor of the London “Economist,”52 that he made his great reputation.

Of living English economists, Professor Henry Fawcett,53 in his “Manual of Political Economy” (1865; sixth edition, 1883), is a close follower of Mill, giving special care to co-operation, silver, nationalization of land, and trades-unions. He is an exponent of the strict wages-fund theory, and a vigorous free-trader. Professor J. E. Thorold Rogers, of Oxford, also holds aloof from the methods of the old school. [pg 027] His greatest contribution has been a “History of Agriculture and Prices in England,” from 1255 to 1793, in four volumes54 (1866-1882).

Of all the writers55 since Cairnes, it may be said that, while adding to the data with which political economy has to do, and putting principles to the test of facts, they have made no actual addition to the existing body of principles; although questions of distribution and taxation are certainly not yet fully settled, as is seen by the wide differences of opinion expressed on subjects falling within these heads by writers of to-day.

It now remains to complete this sketch of the growth of political economy by a brief account of the writers on the Continent and in the United States, beginning with France. About the time of the founding of the London “Economist” (1844) and “The Statistical Journal” (1839) in England, there was established in Paris the “Journal des Économistes” (1842), which contains many valuable papers. On the whole, the most popular writer since J. B. Say has been Bastiat,56 who aspired to be the French Cobden. He especially urged [pg 028] a new57 view of value, which he defined as the relation established by an exchange of services; that nature's products are gratuitous, so that man can not exact anything except for a given service. Chiefly as a foe of protection, which he regarded as qualified socialism, he has won a reputation for popular and clever writing; and he was led to believe in a general harmony of interests between industrial classes; but in general he can not be said to have much influenced the course of French thought. On value, rent, and population, he is undoubtedly unsound. A writer of far greater depth than Bastiat, with uncommon industry and wide knowledge, was Michel Chevalier,58 easily the first among modern French economists. He has led in the discussion upon the fall of gold, protection, banking, and particularly upon money; an ardent free-trader, he had influence enough to induce France to enter into the commercial treaty of 1860 with England. One of the ablest writers on special topics is [pg 029] Levasseur,59 who has given us a history of the working-classes before and since the Revolution, and the best existing monograph on John Law. The most industrious and reliable of the recent writers is the well-known statistician, Maurice Block,60 while less profound economists were J. A. Blanqui61 and Wolowski.62 The latter devoted himself enthusiastically [pg 030] to banks of issue, and bimetallism. A small group gave themselves up chiefly to studies on agriculture and land-tenures—H. Passy,63 Laveleye, and Lavergne.64 The latter is by far the most important, as shown by his “L'économie rurale de la France depuis 1789” (1857), which gives a means of comparing recent French agriculture with that before the Revolution, as described in Arthur Young's “Travels in France” (1789). The best systematic treatise in French is the “Précis de la science économique” (1862), by Antoine-Élise Cherbuliez,65 a Genevan. The French were the first to produce an alphabetical encyclopædia of economics, [pg 031] by Coquelin and Guillaumin, entitled the “Dictionnaire de l'économie politique” (1851-1853, third edition, 1864). Courcelle-Seneuil,66 by his “Traité théorique et pratique d'économie politique” (second edition, 1867); and Baudrillart, by a good compendium. Joseph Garnier, Dunoyer,67 Paul Leroy-Beaulieu,68 Reybaud,69 De Parieu,70 Léon Say,71 Boiteau, and others, have done excellent work in France, and Walras72 in Switzerland.

As Cobden had an influence on Bastiat, so both had an influence in Germany in creating what has been styled by opponents the “Manchester school,” led by Prince-Smith (died 1874). They have worked to secure complete liberty of [pg 032] commerce and industry, and include in their numbers many men of ability and learning. Yearly congresses have been organized for the purpose of disseminating liberal ideas, and an excellent review, the “Vierteljahrschrift für Volkswirthschaft, Politik, und Kulturgeschichte,”73 has been established. They have devoted themselves successfully to reforms of labor-laws, interest, workingmen's dwellings, the money system, and banking, and strive for the abolition of protective duties. Schulze-Delitzsch has acquired a deserved reputation for the creation of people's banks, and other forms of co-operation. The translator of Mill into German, Adolph Soetbeer,74 is the most eminent living authority on the production of the precious metals, and a vigorous monometallist. The school is represented in the “Handwörterbuch der Volkswirthschaftslehre” (1865) of Reutzsch. The other writers of this group are Von Böhmert,75 Faucher, Braun, Wolff, Michaelis, Emminghaus,76 Wirth,77 Hertzka, and Von Holtzendorf. The best known of the German protectionists is Friedrich List, the author of “Das nationale System der politischen Oekonomie” (1841), whose doctrines are very similar to those of H. C. Carey in this country.78 An able writer on [pg 033] administrative functions and finance79 is Lorenz Stein, of Vienna.

But German economists are of interest, inasmuch as they have established a new school who urge the use of the historical method in political economy, and it is about the question of method that much of the interest of to-day centers. In 1814 Savigny introduced this method into jurisprudence, and about 1850 it was applied to political economy. The new school claim that the English “orthodox” writers begin by an a priori process, and by deductions reach conclusions which are possibly true of imaginary cases, but are not true of man as he really acts. They therefore assert that economic laws can only be truly discovered by induction, or a study of phenomena first, as the means of reaching a generalization. To them Bagehot80 answers that scientific bookkeeping, or collections of facts, in themselves give no results ending in scientific laws; for instance, since the facts of banking change and vary every day, no one can by induction alone reach any laws of banking; or, for example, the study of a panic from the concrete phenomena would be like trying to explain the bursting of a boiler without a theory of steam. More lately,81 since it seems that the new school claim that induction does not preclude deduction, and as the old school never intended to disconnect themselves from “comparing conclusions with external facts,” there is not such a cause of difference as has previously appeared. Doubtless the insistence upon the merits of induction will be fruitful of good to “orthodox” writers, in the more general resort to the collection of statistics and means of verification. It is suggestive also that the leaders of the new school in Germany [pg 034] and England have reached no different results by their new method, and in the main agree with the laws evolved by the old English school. The economist does not pretend that his assumptions are descriptions of economic conditions existing at a given time; he simply considers them as forces (often acting many on one point or occasion) to be inquired into separately, inasmuch as concrete phenomena are the resultants of several forces, not to be known until we know the separate operation of each of the conjoined forces.

The most prominent of the new school is Wilhelm Roscher,82 of Leipsic, who wrote a systematic treatise, “System der Volkswirthschaft” (1854, sixteenth edition, 1883), in the first division of which the notes contain a marvelous collection of facts and authorities. He agrees in results with Adam Smith, Ricardo, Malthus, and Mill, but does not seem to have known much of Cairnes. This book, however, is only a first of four treatises eventually intended to include the political economy of (2) agriculture, (3) industry and commerce, [pg 035] and (4) the state and commune. The ablest contemporary of Roscher, who was probably the first to urge the historical method, is Karl Knies,83 in “Die politische Oekonomie vom Standpunkte der geschichtlichen Methode” (1853, second edition, 1881-1883). The third of the group who founded the historical school is Bruno Hildebrand,84 of Jena, author of “Die Nationalökonomie der Gegenwart und Zukunft” (1848).

The German mind has always been familiar with the interference of the state, and a class of writers has arisen, not only advocating the inductive method, but strongly imbued with a belief in a close connection of the state with industry; and, inasmuch as the essence of modern socialism is a resort to state-help, this body of men, with Wagner at their head, has received the name of “Socialists85 of the Chair,” and now wield a wide influence in Germany. Of these writers,86 Wagner, Engel, Schmoller, Von Scheel, Brentano, Held, Schönberg, and Schäffle are the most prominent.

The historical school has received the adhesion of Émile [pg 036] de Laveleye,87 in Belgium, and other economists in England and the United States. While Cliffe Leslie has been the most vigorous opponent of the methods of the old school, there have been many others of less distinction. Indeed, the period, the close of which is marked by J. R. McCulloch's book, was one in which the old school had seemingly come to an end of its progress, from too close an adhesion to deductions from assumed premises. Mill's great merit was that he began the movement to better adapt political economy to society as it actually existed; and the historical school will probably give a most desirable impetus to the same results, even though its exaggerated claims as to the true method88 can not possibly be admitted.

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Italian writers have not received hitherto the attention they deserve. After 1830, besides Rossi, who went to France, there was Romagnosi, who dealt more with the relations of economics to other studies; Cattanes, who turned to rural questions and free trade (combating the German, List); Scialoja, at the University of Turin; and Francesco Ferrara, also at Turin from 1849 to 1858. The latter was a follower of Bastiat and Carey, as regards value and rent, and at the same time was a radical believer in laissez-faire. Since the union of Italy there has been a new interest in economic study, as with us after our war. The most eminent living Italian economist is said to be Angelo Messedaglia, holding a chair at Padua since 1858. He has excelled in statistical and financial subjects, and is now engaged on a treatise on money, “Moneta,” of which one part has been issued (1882). Marco Minghetti and Fedele Lampertico stand above others, the former for a study of the connection of political economy [pg 038] with morals, and for his public career as a statesman; the latter for his studies on paper money and other subjects. Carlo Ferrais presented a good monograph on “Money and the Forced Currency” (1879); and Boccardo issued a library of selected works of the best economists, and a large Dictionary of Political Economy, “Dizionario universale di Economia Politica e di Commercio” (2 vols., second edition, 1875). Luigi Luzzati is a vigorous advocate of co-operation; and Elia Lattes has made a serious study of the early Venetian banks.

Political economy has gained little from American writers. Of our statesmen none have made any additions to the science, and only Hamilton and Gallatin can properly be called economists. Hamilton, in his famous “Report on Manufactures” (1791), shared in some of the erroneous conceptions of his day; but this paper, together with his reports on a national bank and the public credit, are evidences of a real economic power. Gallatin's “Memorial in Favor of Tariff Reform” (1832) is as able as Hamilton's report on manufactures, and a strong argument against protection. Both men made a reputation as practical financiers.

“With few exceptions, the works produced in the United States have been prepared as text-books89 by authors engaged in college instruction, and therefore chiefly interested in bringing principles previously worked out by others within the easy comprehension of undergraduate students.”90 Of these [pg 039] exceptions, Alexander H. Everett's “New Ideas on Population”91 (1822), forms a valuable part in the discussion which followed the appearance of Malthus's “Essay.” The writer, however, who has drawn most attention, at home and abroad, for a vigorous attack on the doctrines of Ricardo is Henry Charles Carey.92 Beginning with “The Rate of Wages” (1835), he developed a new theory of value (see “Principles of Political Economy,” 1837-1840), “which he defined as a measure of the resistance to be overcome in obtaining things required for use, or the measure of the power of nature over man. In simpler terms, value is measured by the cost of reproduction. The value of every article thus declines as the arts advance, while the general command of commodities constantly increases. This causes a constant fall in the value of accumulated capital as compared with the results of present labor, from which is inferred a tendency toward harmony rather than divergence of interests between capitalist and laborer.” This theory of value93 he applied to land, and even to man, in his desire to give it universality. He next claimed to have discovered a law of increasing production from land in his “Past, Present, and Future” (1848), which was diametrically opposed to Ricardo's law of diminishing returns. His proof was an historical one, that in fact the poorer, not the richer lands, were first taken into cultivation. This, however, did not explain the fact that different grades of [pg 040] land are simultaneously under cultivation, on which Ricardo's doctrine of rent is based. The constantly increasing production of land naturally led Carey to believe in the indefinite increase of population. He, however, was logically brought to accept the supposed law of an ultimate limit to numbers suggested by Herbert Spencer, based on a diminution of human fertility. He tried to identify physical and social laws, and fused his political economy in a system of “Social Science” (1853), and his “Unity of Law” (1872). From about 1845 he became a protectionist, and his writings were vigorously controversial. In his doctrines on money he is distinctly a mercantilist;94 but, by his earnest attacks on all that has been gained in the science up to his day, he has done a great service in stimulating inquiry and causing a better statement of results. While undoubtedly the best known of American writers, yet, because of a prolix style and an illogical habit of mind, he has had no extended influence on his countrymen.95

The effect of the civil war is now beginning to show itself in an unmistakable drift toward the investigation of economic questions, and there is a distinctly energetic tone which may bring new contributions from American writers. General Francis A. Walker,96 in his study on “The Wages Question” (1876), has combated the wages-fund theory, and [pg 041] proposed in its place a doctrine that wages are paid out of the product, and not out of accumulated capital. Professor W. G. Sumner97 is a vigorous writer in the school of Mill and Cairnes, and has done good work in the cause of sound money doctrines. Both General Walker and Professor Sumner hold to the method of economic investigation as expounded by Mr. Cairnes; although several younger economists show the influence of the German school. Professor A. L. Perry,98 of Williams College, adopted Bastiat's theory of value. He also accepts the wages-fund theory, rejects the law of Malthus, and, although believing in the law of diminishing returns from land, regards rent as the reward for a service rendered. Another writer, Henry George,99 has gained an abnormal prominence by a plausible book, “Progress and Poverty” (1880), which rejects the doctrine of Malthus, and argues that the increase of production of any kind augments the [pg 042] demand for land, and so raises its value. His conclusions lead him to advocate the nationalization of land. Although in opposition to almost all that political economy has yet produced, his writing has drawn to him very unusual notice. The increasing interest in social questions, and the general lack of economic training, which prevents a right estimate of his reasoning by people in general, sufficiently account for the wide attention he has received.

Of late, however, new activity has been shown in the establishment of better facilities for the study of political economy in the principal seats of learning—Harvard, Yale, Cornell, Columbia, Michigan, and Pennsylvania: and a “Cyclopædia of Political Science” (1881-1884, three volumes) has been published by J. J. Lalor, after the example of the French dictionaries.

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Books For Consultation (From English, French, And German Authors).

General Treatises forming a Parallel Course of Reading with Mill.

Professor Fawcett's “Manual of Political Economy” (London, sixth edition, 1883) is a brief statement of Mill's book, with additional matter on the precious metals, slavery, trades-unions, co-operation, local taxation, etc.

Antoine-Élise Cherbuliez's “Précis de la science économique” (Paris, 1862, 2 vols.) follows the same arrangement as Mill, and is considered the best treatise on economic science in the French language. He is methodical, profound, and clear, and separates pure from applied political economy.

Other excellent books in French are: Courcelle-Seneuil's “Traité théorique et pratique d'économie politique” (1858), (Paris, second edition, 1867, 2 vols.), and a compendium by Henri Baudrillart, “Manuel d'économie politique” (third edition, 1872).

Roscher's “Principles of Political Economy” is a good example of the German historical method; its notes are crowded with facts; but the English translation (New York, 1878) is badly done. There is an excellent translation of it into French by Wolowski.

A desirable elementary work, “The Economics of Industry” (London, 1879), was prepared by Mr. and Mrs. Marshall.

Professor Jevons wrote a “Primer of Political Economy” (1878), which is a simple, bird's-eye view of the subject in a very narrow compass.

Important General Works.

Adam Smith's “Wealth of Nations” (1776). The edition of McCulloch is perhaps more serviceable than that of J. E. T. Rogers.

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Ricardo's “Principles of Political Economy and Taxation” (1817).

J. S. Mill's “Principles of Political Economy” (2 vols., 1848—sixth edition, 1865).

Schönberg's “Handbuch der politischen Oekonomie” (1882). This is a large co-operative treatise by twenty-one writers from the historical school.

Cairnes's “Leading Principles of Political Economy” (1874); “Logical Method” (1875), lectures first delivered in Dublin in 1857.

Carey's “Social Science” (1877). This has been abridged in one volume by Kate McKean.

F. A. Walker's “Political Economy” (1883). This author differs from other economists, particularly on wages and questions of distribution.

H. George's “Progress and Poverty” (1879). In connection with this, read F. A. Walker's “Land and Rent” (1884).

Treatises on Special Subjects.

W. T. Thornton's “On Labor” (1869).

McLeod's “Theory and Practice of Banking” (second edition, 1875-1876).

M. Block's “Traité théorique et pratique de statistique” (1878).

Goschen's “Theory of Foreign Exchanges” (eighth edition, 1875).

J. Caird's “Landed Interest” (fourth edition, 1880), treating of English land and the food-supply.

W. G. Sumner's “History of American Currency” (1874).

John Jay Knox's “United States Notes” (1884).

Jevons's “Money and the Mechanism of Exchange” (1875).

Tooke and Newmarch's “History of Prices” (1837-1856), in six volumes.

Leroy-Beaulieu's “Traité de la science des finances” (1883). This is an extended work, in two volumes, on taxation and finance; “Essai sur la répartition des richesses” (second edition, 1883).

F. A. Walker's “The Wages Question” (1876); “Money” (1878).

L. Reybaud's “Études sur les réformateurs contemporains, ou socialistes modernes” (seventh edition, 1864).


McCulloch's “Commercial Dictionary” (new and enlarged edition, 1882).

Lalor's “Cyclopædia of Political Science” (1881-84) is devoted to articles on political science, political economy, and American history.

Coquelin and Guillaumin's “Dictionnaire de l'économie politique” (1851-1853, third edition, 1864), in two large volumes.

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Reports and Statistics.

The “Compendiums of the Census” for 1840, 1850, 1860, and 1870, are desirable. The volumes of the tenth census (1880) are of great value for all questions; as is also F. A. Walker's “Statistical Atlas” (1874).

The United States Bureau of Statistics issues quarterly statements; and annually a report on “Commerce and Navigation,” and another on the “Internal Commerce of the United States.”

The “Statistical Abstract” is an annual publication, by the same department, compact and useful. It dates only from 1878.

The Director of the Mint issues an annual report dealing with the precious metals and the circulation. Its tables are important.

The Comptroller of the Currency (especially during the administration of J. J. Knox) has given important annual reports upon the banking systems of the United States.

The reports of the Secretary of the Treasury deal with the general finances of the United States. These, with the two last mentioned, are bound together in the volume of “Finance Reports,” but often shorn of their tables.

There are valuable special reports to Congress of commissioners on the tariff, shipping, and other subjects, published by the Government.

The report on the “International Monetary Conference of 1878” contains a vast quantity of material on monetary questions.

The British parliamentary documents contain several annual “Statistical Abstracts” of the greatest value, of which the one relating to other European states is peculiarly convenient and useful. These can always be purchased at given prices.

A. R. Spofford's “American Almanac” is an annual of great usefulness.

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Preliminary Remarks.

Writers on Political Economy profess to teach, or to investigate, the nature of Wealth, and the laws of its production and distribution; including, directly or remotely, the operation of all the causes by which the condition of mankind, or of any society of human beings, in respect to this universal object of human desire, is made prosperous or the reverse.

It will be noticed that political economy does not include ethics, legislation, or the science of government. The results of political economy are offered to the statesman, who reaches a conclusion after weighing them in connection with moral and political considerations. Political Economy is distinct from Sociology; although it is common to include in the former everything which concerns social life. Some writers distinguish between the pure, or abstract science, and the applied art, and we can speak of a science of political economy only in the sense of a body of abstract laws or formulas. This, however, does not make political economy less practical than physics, for, after a principle is ascertained, its operation is to be observed in the same way that we study the force of gravitation in a falling stone, even when retarded by opposing forces. An economic force, or tendency, can be likewise distinctly observed, although other influences, working at the same time, prevent the expected effect from following its cause. It is, in short, the aim of political economy to investigate the laws which govern the phenomena of material wealth. (Cf. Cossa, Guide, chap. iii.)

While the [Mercantile] system prevailed, it was assumed, either expressly or tacitly, in the whole policy of nations, [pg 048] that wealth consisted solely of money; or of the precious metals, which, when not already in the state of money, are capable of being directly converted into it. According to the doctrines then prevalent, whatever tended to heap up money or bullion in a country added to its wealth.

More correctly the Mercantilists (in the sixteenth and seventeenth centuries) held that where money was most plentiful, there would be found the greatest abundance of the necessaries of life.100

Whatever sent the precious metals out of a country impoverished it. If a country possessed no gold or silver mines, the only industry by which it could be enriched was foreign trade, being the only one which could bring in money. Any branch of trade which was supposed to send out more money than it brought in, however ample and valuable might be the returns in another shape, was looked upon as a losing trade. Exportation of goods was favored and encouraged (even by means extremely onerous to the real resources of the country), because, the exported goods being stipulated to be paid for in money, it was hoped that the returns would actually be made in gold and silver. Importation of anything, other than the precious metals, was regarded as a loss to the nation of the whole price of the things imported; unless they were brought in to be re-exported at a profit, or unless, being the materials or instruments of some industry practiced in the country itself, they gave the power of producing exportable articles at smaller cost, and thereby effecting a larger exportation. The commerce of the world was looked upon as a struggle among nations, which could draw to itself the largest share of the gold and silver in existence; and in this competition no nation could gain anything, except by making others lose as much, or, at the least, preventing them from gaining it.

The Mercantile Theory could not fail to be seen in its true character when men began, even in an imperfect manner, [pg 049] to explore into the foundations of things. Money, as money, satisfies no want; its worth to any one consists in its being a convenient shape in which to receive his incomings of all sorts, which incomings he afterwards, at the times which suit him best, converts into the forms in which they can be useful to him. The difference between a country with money, and a country altogether without it, would be only one of convenience; a saving of time and trouble, like grinding by water instead of by hand, or (to use Adam Smith's illustration) like the benefit derived from roads; and to mistake money for wealth is the same sort of error as to mistake the highway, which may be the easiest way of getting to your house or lands, for the house and lands themselves.

Money, being the instrument of an important public and private purpose, is rightly regarded as wealth; but everything else which serves any human purpose, and which nature does not afford gratuitously, is wealth also. To be wealthy is to have a large stock of useful articles, or the means of purchasing them. Everything forms, therefore, a part of wealth, which has a power of purchasing; for which anything useful or agreeable would be given in exchange. Things for which nothing could be obtained in exchange, however useful or necessary they may be, are not wealth in the sense in which the term is used in Political Economy. Air, for example, though the most absolute of necessaries, bears no price in the market, because it can be obtained gratuitously; to accumulate a stock of it would yield no profit or advantage to any one; and the laws of its production and distribution are the subject of a very different study from Political Economy. It is possible to imagine circumstances in which air would be a part of wealth. If it became customary to sojourn long in places where the air does not naturally penetrate, as in diving-bells sunk in the sea, a supply of air artificially furnished would, like water conveyed into houses, bear a price: and, if from any revolution in nature the atmosphere became too scanty for the consumption, [pg 050] or could be monopolized, air might acquire a very high marketable value. In such a case, the possession of it, beyond his own wants, would be, to its owner, wealth; and the general wealth of mankind might at first sight appear to be increased, by what would be so great a calamity to them. The error would lie in not considering that, however rich the possessor of air might become at the expense of the rest of the community, all persons else would be poorer by all that they were compelled to pay for what they had before obtained without payment.

Wealth, then, may be defined, all useful or agreeable things which possess exchangeable value; or, in other words, all useful or agreeable things except those which can be obtained, in the quantity desired, without labor or sacrifice.

This is the usual definition of wealth. Henry George (see Progress and Poverty, pp. 34-37) regards wealth as consisting of natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion, so as to fit them for the gratification of human desires.... Nothing which Nature supplies to man without his labor is wealth.... All things which have an exchange value are, therefore, not wealth. Only such things can be wealth the production of which increases and the destruction of which decreases the aggregate of wealth.... Increase in land values does not represent increase in the common wealth, for what land-owners gain by higher prices the tenants or purchasers who must pay them will lose. Jevons (Primer, p. 13) defines wealth very properly as what is transferable, limited in supply, and useful. F. A. Walker defines wealth as comprising all articles of value and nothing else (Political Economy, p. 5). Levasseur's definition (Précis, p. 15) is, all material objects possessing utility (i.e., the power to satisfy a want). (Cf. various definitions in Roscher's Political Economy, section 9, note 3.) Perry (Political Economy, p. 99) rejects the term wealth as a clog to progress in the science, and adopts property in its stead, defining it as that which can be bought or sold. Cherbuliez (Précis, p. 70) defines wealth as the material product of nature appropriated by labor for the wants of man. Carey (Social Science, i, 186) asserts that wealth consists in the power to command Nature's services, including in wealth such intangible things as mental qualities.
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Book I. Production.

Chapter I. Of The Requisites Of Production.

§ 1. The Requisites of Production are Two: Labor, and Appropriate Natural Objects.

There is a third requisite of production, capital (see page 58). Since the limitation to only two requisites applies solely to a primitive condition of existence, so soon as the element of time enters into production, then a store of capital becomes necessary; that is, so soon as production requires such a term that during the operation the laborer can not at the same time provide himself with subsistence, then capital is a requisite of production. This takes place also under any general division of labor in a community. When one man is making a pin-head, he must be supplied with food by some person until the pins are finished and exchanged.

Labor is either bodily or mental; or, to express the distinction more comprehensively, either muscular or nervous; and it is necessary to include in the idea, not solely the exertion itself, but all feelings of a disagreeable kind, all bodily inconvenience or mental annoyance, connected with the employment of one's thoughts, or muscles, or both, in a particular occupation.

The word sacrifice conveys a just idea of what the laborer undergoes, and it corresponds to the abstinence of the capitalist.
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Of the other requisite—appropriate natural objects—it is to be remarked that some objects exist or grow up spontaneously, of a kind suited to the supply of human wants. There are caves and hollow trees capable of affording shelter; fruits, roots, wild honey, and other natural products, on which human life can be supported; but even here a considerable quantity of labor is generally required, not for the purpose of creating, but of finding and appropriating them.

Of natural powers, some are unlimited, others limited in quantity. By an unlimited quantity is of course not meant literally, but practically unlimited: a quantity beyond the use which can in any, or at least in present circumstances, be made of it. Land is, in some newly settled countries, practically unlimited in quantity: there is more than can be used by the existing population of the country, or by any accession likely to be made to it for generations to come. But, even there, land favorably situated with regard to markets, or means of carriage, is generally limited in quantity: there is not so much of it as persons would gladly occupy and cultivate, or otherwise turn to use. In all old countries, land capable of cultivation, land at least of any tolerable fertility, must be ranked among agents limited in quantity. Coal, metallic ores, and other useful substances found in the earth, are still more limited than land.

For the present I shall only remark that, so long as the quantity of a natural agent is practically unlimited, it can not, unless susceptible of artificial monopoly, bear any value in the market, since no one will give anything for what can be obtained gratis. But as soon as a limitation becomes practically operative—as soon as there is not so much of the thing to be had as would be appropriated and used if it could be obtained for asking—the ownership or use of the natural agent acquires an exchangeable value.

Rich lands in our Western Territories a few years ago could be had practically for the asking; but now, since railways and an increase of population have brought them nearer to the markets, they have acquired a distinct exchange value. The value [pg 055] of a commodity (it may be anticipated) is the quantity of other things for which it can be exchanged.

When more water-power is wanted in a particular district than there are falls of water to supply it, persons will give an equivalent for the use of a fall of water. When there is more land wanted for cultivation than a place possesses, or than it possesses of a certain quality and certain advantages of situation, land of that quality and situation may be sold for a price, or let for an annual rent.

§ 2. The Second Requisite of Production, Labor.

It is now our purpose to describe the second requisite of production, labor, and point out that it can be either direct or indirect. This division and subdivision can be seen from the classification given below. Under the head of indirect labor are to be arranged all the many employments subsidiary to the production of any one article, and which, as they furnish but a small part of labor for the one article (e.g., bread), are subsidiary to the production of a vast number of other articles; and hence we see the interdependence of one employment on another, which comes out so conspicuously at the time of a commercial depression.

We think it little to sit down to a table covered with articles from all quarters of the globe and from the remotest isles of the sea—with tea from China, coffee from Brazil, spices from the East, and sugar from the West Indies; knives from Sheffield, made with iron from Sweden and ivory from Africa; with silver from Mexico and cotton from South Carolina; all being lighted with oil brought from New Zealand or the Arctic Circle. Still less do we think of the great number of persons whose united agency is required to bring any one of these [pg 056] finished products to our homes—of the merchants, insurers, sailors, ship-builders, cordage and sail makers, astronomical-instrument makers, men of science, and others, before a pound of tea can appear in our market.101

The labor102 which terminates in the production of an article fitted for some human use is either employed directly about the thing, or in previous operations destined to facilitate, perhaps essential to the possibility of, the subsequent ones. In making bread, for example, the labor employed about the thing itself is that of the baker; but the labor of the miller, though employed directly in the production not of bread but of flour, is equally part of the aggregate sum of labor by which the bread is produced; as is also the labor of the sower, and of the reaper. Some may think that all these persons ought to be considered as employing their labor directly about the thing; the corn, the flour, and the bread being one substance in three different states. Without disputing about this question of mere language, there is still the plowman, who prepared the ground for the seed, and whose labor never came in contact with the substance in any of its states; and the plow-maker, whose share in the result was still more remote. We must add yet another kind of labor; that of transporting the produce from the place of its production to the place of its destined use: the labor of carrying the corn to market, and from market to the miller's, the flour from the miller's to the baker's, and the bread from the baker's to the place of its final consumption.

Besides the two classes of indirect laborers here mentioned, those engaged in producing materials and those in transportation, there are several others who are paid fractions out of the bread. Subsidiary to the direct labor of the bread-maker is the labor of all those who make the instruments employed in the process (as, e.g., the oven). Materials are completely changed in character by one use, as when the coal is burned, or the flour baked into bread; while an instrument, like an oven, is [pg 057] capable of remaining intact throughout many operations. The producer of materials and the transporter are paid by the bread-maker in the price of his coal and flour when left at his door, so that the price of the loaf is influenced by these payments. Those persons, moreover, who, like the police and officers of our government, act to protect property and life, are also to be classed as laborers indirectly aiding in the production of the given article, bread (and by his taxes the bread-maker helps pay the wages of these officials). Shading off into a more distant, although essential, connection is another class—that of those laborers who train human beings in the branches of knowledge necessary to the attainment of proper skill in managing the processes and instruments of an industry. The acquisition of the rudiments of education, and, in many cases, the most profound knowledge of chemistry, physics and recondite studies, are essential to production; and teachers are indirect laborers in producing almost every article in the market. In this country, especially, are inventors a class of indirect laborers essential to all ultimate production as it now goes on. The improvements in the instruments of production are the results of an inventive ability which has made American machinery known all over the world. They, too, as well as the teacher, are paid (a small fraction, of course) out of the ultimate result, by an indirect path, and materially change the ease or difficulty, cheapness or dearness, of production in nearly every branch of industry. In the particular illustration given they have improved the ovens, ranges, and stoves, so that the same or better articles are produced at a less cost than formerly. All these indirect laborers receive, in the way of remuneration, a fraction, some more, some less (the farther they are removed from the direct process), of the value of the final result.

§ 3. Of Capital as a Requisite of Production.

But another set of laborers are to be placed in distinct contrast with these, so far as the grounds on which they receive their remuneration is concerned. These are the men engaged previously in providing the subsistence, and articles by which the former classes of labor can carry on their operations.

The previous employment of labor is an indispensable condition to every productive operation, on any other than the very smallest scale. Except the labor of the hunter and fisher, there is scarcely any kind of labor to which the returns are immediate. Productive operations require to be continued a certain time before their fruits are obtained. Unless the laborer, before commencing his work, possesses a [pg 058] store of food, or can obtain access to the stores of some one else, in sufficient quantity to maintain him until the production is completed, he can undertake no labor but such as can be carried on at odd intervals, concurrently with the pursuit of his subsistence.

The possession of capital is thus a third requisite of production, together with land and labor, as noted above. Henry George (Progress and Poverty, chap. iv) holds an opposite opinion: The subsistence of the laborers who built the Pyramids was drawn, not from a previously hoarded stock (does he not forget the story of Joseph's store of corn?), but from the constantly recurring crops of the Nile Valley.

He can not obtain food itself in any abundance; for every mode of so obtaining it requires that there be already food in store. Agriculture only brings forth food after the lapse of months; and, though the labors of the agriculturist are not necessarily continuous during the whole period, they must occupy a considerable part of it. Not only is agriculture impossible without food produced in advance, but there must be a very great quantity in advance to enable any considerable community to support itself wholly by agriculture. A country like England or the United States is only able to carry on the agriculture of the present year because that of past years has provided, in those countries or somewhere else, sufficient food to support their agricultural population until the next harvest. They are only enabled to produce so many other things besides food, because the food which was in store at the close of the last harvest suffices to maintain not only the agricultural laborers, but a large industrious population besides.

The claim to remuneration founded on the possession of food, available for the maintenance of laborers, is of another kind; remuneration for abstinence, not for labor. If a person has a store of food, he has it in his power to consume it himself in idleness, or in feeding others to attend on him, or to fight for him, or to sing or dance for him. If, instead of these things, he gives it to productive laborers to support [pg 059] them during their work, he can, and naturally will, claim a remuneration from the produce. He will not be content with simple repayment; if he receives merely that, he is only in the same situation as at first, and has derived no advantage from delaying to apply his savings to his own benefit or pleasure. He will look for some equivalent for this forbearance:103 he will expect his advance of food to come back to him with an increase, called, in the language of business, a profit; and the hope of this profit will generally have been a part of the inducement which made him accumulate a stock, by economizing in his own consumption; or, at any rate, which made him forego the application of it, when accumulated, to his personal ease or satisfaction.

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Chapter II. Of Unproductive Labor.

§ 1. Definition of Productive and Unproductive Labor.

Labor is indispensable to production, but has not always production for its effect. There is much labor, and of a high order of usefulness, of which production is not the object. Labor has accordingly been distinguished into Productive and Unproductive. Productive labor means labor productive of wealth. We are recalled, therefore, to the question touched upon in our [Preliminary Remarks], what Wealth is.

By Unproductive Labor, on the contrary, will be understood labor which does not terminate in the creation of material wealth. And all labor, according to our present definition, must be classed as unproductive, which terminates in a permanent benefit, however important, provided that an increase of material products forms no part of that benefit. The labor of saving a friend's life is not productive, unless the friend is a productive laborer, and produces more than he consumes.

The principle on which the distinction is made is perfectly clear, but in many cases persons may be misled chiefly in regard to matters of fact. A clergyman may at first sight be classed as an unproductive laborer; but, until we know the facts, we can not apply the principle of our definition. Unless we know that no clergyman, by inculcating rules of morality and self-control, ever caused an idler or wrong-doer to become a steady laborer, we can not say that a clergyman is a laborer unproductive of material wealth. Likewise the army, or the officers of our government at Washington, may or may not have aided in producing material wealth according as they do or do not, in fact, accomplish the protective purposes for which [pg 061] they exist. So with teachers. There is, however, no disparagement implied in the word unproductive; it is merely an economic question, and has to do only with forces affecting the production of wealth.

Unproductive may be as useful as productive labor; it may be more useful, even in point of permanent advantage; or its use may consist only in pleasurable sensation, which when gone leaves no trace; or it may not afford even this, but may be absolute waste. In any case, society or mankind grow no richer by it, but poorer. All material products consumed by any one while he produces nothing are so much subtracted, for the time, from the material products which society would otherwise have possessed.

To be wasted, however, is a liability not confined to unproductive labor. Productive labor may equally be waste, if more of it is expended than really conduces to production. If defect of skill in laborers, or of judgment in those who direct them, causes a misapplication of productive industry, labor is wasted. Productive labor may render a nation poorer, if the wealth it produces, that is, the increase it makes in the stock of useful or agreeable things, be of a kind not immediately wanted: as when a commodity is unsalable, because produced in a quantity beyond the present demand; or when speculators build docks and warehouses before there is any trade.

§ 2. Productive and Unproductive Consumption.

The distinction of Productive and Unproductive is applicable to Consumption as well as to Labor. All the members of the community are not laborers, but all are consumers, and consume either unproductively or productively. Whoever contributes nothing directly or indirectly to production is an unproductive consumer. The only productive consumers are productive laborers; the labor of direction being of course included, as well as that of execution. But the consumption even of productive laborers is not all of it Productive Consumption. There is unproductive consumption by productive consumers. What they consume in keeping up or improving their health, strength, and capacities [pg 062] of work, or in rearing other productive laborers to succeed them, is Productive Consumption. But consumption on pleasures or luxuries, whether by the idle or by the industrious, since production is neither its object nor is in any way advanced by it, must be reckoned Unproductive: with a reservation, perhaps, of a certain quantum of enjoyment which may be classed among necessaries, since anything short of it would not be consistent with the greatest efficiency of labor. That alone is productive consumption which goes to maintain and increase the productive powers of the community; either those residing in its soil, in its materials, in the number and efficiency of its instruments of production, or in its people.

I grant that no labor really tends to the enrichment of society, which is employed in producing things for the use of unproductive consumers. The tailor who makes a coat for a man who produces nothing is a productive laborer; but in a few weeks or months the coat is worn out, while the wearer has not produced anything to replace it, and the community is then no richer by the labor of the tailor than if the same sum had been paid for a stall at the opera. Nevertheless, society has been richer by the labor while the coat lasted. These things also [such as lace and pine-apples] are wealth until they have been consumed.

§ 3. Distinction Between Labor for the Supply of Productive Consumption and Labor for the Supply of Unproductive Consumption.

We see, however, by this, that there is a distinction more important to the wealth of a community than even that between productive and unproductive labor; the distinction, namely, between labor for the supply of productive, and for the supply of unproductive, consumption; between labor employed in keeping up or in adding to the productive resources of the country, and that which is employed otherwise. Of the produce of the country, a part only is destined to be consumed productively; the remainder supplies the unproductive consumption of producers, and the entire consumption of the unproductive class. Suppose that the proportion of the annual produce applied to the first purpose amounts to half; then one half the productive laborers of the country [pg 063] are all that are employed in the operations on which the permanent wealth of the country depends. The other half are occupied from year to year and from generation to generation in producing things which are consumed and disappear without return; and whatever this half consume is as completely lost, as to any permanent effect on the national resources, as if it were consumed unproductively. Suppose that this second half of the laboring population ceased to work, and that the government maintained them in idleness for a whole year: the first half would suffice to produce, as they had done before, their own necessaries and the necessaries of the second half, and to keep the stock of materials and implements undiminished: the unproductive classes, indeed, would be either starved or obliged to produce their own subsistence, and the whole community would be reduced during a year to bare necessaries; but the sources of production would be unimpaired, and the next year there would not necessarily be a smaller produce than if no such interval of inactivity had occurred; while if the case had been reversed, if the first half of the laborers had suspended their accustomed occupations, and the second half had continued theirs, the country at the end of the twelvemonth would have been entirely impoverished. It would be a great error to regret the large proportion of the annual produce, which in an opulent country goes to supply unproductive consumption. That so great a surplus should be available for such purposes, and that it should be applied to them, can only be a subject of congratulation.

This principle may be seen by the following classification:

(A) Idlers; or unproductive laborers—e.g., actors.
(B) Productive laborers—e.g., farmers.
   (C) Producing wealth for productive consumption, one half the annual produce.
   (D) Producing wealth for unproductive consumption (A), one half the annual produce.

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Group D are productive laborers, and their own necessaries are productively consumed, but they are supplied by C, who keep themselves and D in existence. So long as C work, both C and D can go on producing. If D stopped working, they could be still subsisted as before by C; but A would be forced to produce for themselves. But, if C stopped working, D and C would be left without the necessaries of life, and would be obliged to cease their usual work. In this way it may be seen how much more important to the increase of material wealth C are than D, who labor “for the supply of unproductive consumption.” Of course, group D are desirable on other than economic grounds, because their labor represents what can be enjoyed beyond the necessities of life.

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Chapter III. Of Capital.

§ 1. Capital is Wealth Appropriated to Reproductive Employment.

It has been seen in the preceding chapters that besides the primary and universal requisites of production, labor and natural agents, there is another requisite without which no productive operations beyond the rude and scanty beginnings of primitive industry are possible—namely, a stock, previously accumulated, of the products of former labor. This accumulated stock of the produce of labor is termed Capital. What capital does for production is, to afford the shelter, protection, tools, and materials which the work requires, and to feed and otherwise maintain the laborers during the process. These are the services which present labor requires from past, and from the produce of past, labor. Whatever things are destined for this use—destined to supply productive labor with these various prerequisites—are Capital.

Professor Fawcett, Manual (chap. ii), says: Since the laborer must be fed by previously accumulated food, ... some of the results of past labor are required to be set aside to sustain the laborer while producing. The third requisite of production, therefore, is a fund reserved from consumption, and devoted to sustain those engaged in future production.... Capital is not confined to the food which feeds the laborers, but includes machinery, buildings, and, in fact, every product due to man's labor which can be applied to assist his industry (chap. iv). General Walker (Political Economy, pages 68-70) defines capital as that portion of wealth (excluding unimproved land and natural agents) which is employed in the production of new forms of wealth. Henry George (Progress and Poverty, page 41) returns to Adam Smith's definition: [pg 066] That part of a man's stock which he expects to yield him a revenue is called his capital. Cherbuliez (Précis, page 70) points out the increasing interdependence of industrial operations as society increases in wealth, and that there is not a single industry which does not demand the use of products obtained by previous labor. These auxiliary products accumulated with a view to the production to which they are subservient form what is called capital. Carey (Social Science, iii, page 48) regards as capital all things which in any way form the machinery by which society obtains wealth. Roscher's definition is, Every product laid by for purposes of further production. (Political Economy, section 42.) By some, labor is regarded as capital.104

A manufacturer, for example, has one part of his capital in the form of buildings, fitted and destined for carrying on this branch of manufacture. Another part he has in the form of machinery. A third consists, if he be a spinner, of raw cotton, flax, or wool; if a weaver, of flaxen, woolen, silk, or cotton thread; and the like, according to the nature of the manufacture. Food and clothing for his operatives it is not the custom of the present age that he should directly provide; and few capitalists, except the producers of food or clothing, have any portion worth mentioning of their capital in that shape. Instead of this, each capitalist has money, which he pays to his work-people, and so enables them to supply themselves. What, then, is his capital? Precisely that part of his possessions, whatever it be, which he designs to employ in carrying on fresh production. It is of no consequence that a part, or even the whole of it, is in a form in which it can not directly supply the wants of laborers.

Care should be taken to distinguish between wealth, capital, and money. Capital may be succinctly defined as saved wealth devoted to reproduction, and the relations of the three terms mentioned may be illustrated by the following figure: The area of the circle, A, represents the wealth of a country; the area of the inscribed circle, B, the quantity out of the whole wealth which is saved and devoted to reproduction and called capital. But money is only one part of capital, as shown by the area of circle C. Wherefore, it can be plainly [pg 067] seen that not all capital, B, is money; that not all wealth, A, is capital, although all capital is necessarily wealth as included within it. It is not always understood that money is merely a convenient article by which other forms of wealth are exchanged against each other, and that a man may have capital without ever having any actual money in his possession. In times of commercial depression, that which is capital to-day may not to-morrow satisfy any desires (i.e., not be in demand), and so for the time it may, so to speak, drop entirely out of our circles above. For the moment, not having an exchange value, it can not be wealth, and so can the less be capital.

Illustration. Outer circle A, enclosing inner circle B, with small circle C overlapping edge of circle B.

Suppose, for instance, that the capitalist is a hardware manufacturer, and that his stock in trade, over and above his machinery, consists at present wholly in iron goods. Iron goods can not feed laborers. Nevertheless, by a mere change of the destination of the iron goods, he can cause laborers to be fed. Suppose that [the capitalist changed into wages what he had before spent] in buying plate and jewels; and, in order to render the effect perceptible, let us suppose that the change takes place on a considerable scale, and that a large sum is diverted from buying plate and jewels to employing productive laborers, whom we shall suppose to have been previously, like the Irish peasantry, only half employed and half fed. The laborers, on receiving their increased wages, will not lay them out in plate and jewels, but in food. There is not, however, additional food in the country; nor any unproductive laborers or animals, as in the former case, whose food is set free for productive purposes. Food will therefore be imported if possible; if not possible, the laborers will remain for a season on their short allowance: but the consequence of this change in the demand for commodities, occasioned by the change in the expenditure of capitalists from unproductive to productive, is that next year more food will be produced, and less plate and jewelry. So that again, without having had anything to do with the food of [pg 068] the laborers directly, the conversion by individuals of a portion of their property, no matter of what sort, from an unproductive destination to a productive, has had the effect of causing more food to be appropriated to the consumption of productive laborers. The distinction, then, between Capital and Not-capital, does not lie in the kind of commodities, but in the mind of the capitalist—in his will to employ them for one purpose rather than another; and all property, however ill adapted in itself for the use of laborers, is a part of capital, so soon as it, or the value to be received from it, is set apart for productive reinvestment.

§ 2. More Capital Devoted to Production than Actually Employed in it.

As whatever of the produce of the country is devoted to production is capital, so, conversely, the whole of the capital of the country is devoted to production. This second proposition, however, must be taken with some limitations and explanations. (1) A fund may be seeking for productive employment, and find none adapted to the inclinations of its possessor: it then is capital still, but unemployed capital. (2) Or the stock may consist of unsold goods, not susceptible of direct application to productive uses, and not, at the moment, marketable: these, until sold, are in the condition of unemployed capital.

This is not an important distinction. The goods are doubtless marketable at some price, if offered low enough. If no one wants them, then, by definition, they are not wealth so long as that condition exists.

(3) [Or] suppose that the Government lays a tax on the production in one of its earlier stages, as, for instance, by taxing the material. The manufacturer has to advance the tax, before commencing the manufacture, and is therefore under a necessity of having a larger accumulated fund than is required for, or is actually employed in, the production which he carries on. He must have a larger capital to maintain the same quantity of productive labor; or (what is equivalent) with a given capital he maintains less labor. (4) For another example: a farmer may enter on his farm at such a time of the year that he may be required to pay one, two, or even [pg 069] three quarters' rent before obtaining any return from the produce. This, therefore, must be paid out of his capital.

(5) Finally, that large portion of the productive capital of a country which is employed in paying the wages and salaries of laborers, evidently is not, all of it, strictly and indispensably necessary for production. As much of it as exceeds the actual necessaries of life and health (an excess which in the case of skilled laborers is usually considerable) is not expended in supporting labor, but in remunerating it, and the laborers could wait for this part of their remuneration until the production is completed.

The previous accumulation of commodities requisite for production must inevitably be large enough to cover necessaries, but need not be more, if the laborer is willing to wait for the additional amount of his wages (the amount of his unproductive consumption) until the completion of the industrial operation. In fact, however, the accumulation must be sufficient to pay the laborer all his wages from week to week, by force of custom (wherever there is any considerable division of labor), and also sufficient to purchase tools and materials. The various elements of capital are materials, instruments, and subsistence, giving instruments its wide signification which includes money (the tool of exchange), and other necessary appliances of each special kind of production.

In truth, it is only after an abundant capital had already been accumulated that the practice of paying in advance any remuneration of labor beyond a bare subsistence could possibly have arisen: since whatever is so paid is not really applied to production, but to the unproductive consumption of productive laborers, indicating a fund for production sufficiently ample to admit of habitually diverting a part of it to a mere convenience.

It will be observed that I have assumed that the laborers are always subsisted from capital:105 and this is obviously the fact, though the capital need not necessarily be furnished by a person called a capitalist.

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The peasant does not subsist this year on the produce of this year's harvest, but on that of the last. The artisan is not living on the proceeds of the work he has in hand, but on those of work previously executed and disposed of. Each is supported by a small capital of his own, which he periodically replaces from the produce of his labor. The large capitalist is, in like manner, maintained from funds provided in advance.

§ 3. Examination of Cases Illustrative of the Idea of Capital.

That which is virtually capital to the individual is or is not capital to the nation, according as the fund which by the supposition he has not dissipated has or has not been dissipated by somebody else.

Let the reader consider, in the four following suppositions, whether or not the given capital has wholly dropped out of the circle in the diagram, page 67. In (3) and (4) the wealth is entirely dissipated; as it can not longer be in circle A, it can not, of course, be in circle B.

(1.) For example, let property of the value of ten thousand pounds, belonging to A, be lent to B, a farmer or manufacturer, and employed profitably in B's occupation. It is as much capital as if it belonged to B. A is really a farmer or manufacturer, not personally, but in respect of his property. Capital worth ten thousand pounds is employed in production—in maintaining laborers and providing tools and materials—which capital belongs to A, while B takes the trouble of employing it, and receives for his remuneration the difference between the profit which it yields and the interest he pays to A. This is the simplest case.

(2.) Suppose next that A's ten thousand pounds, instead of being lent to B, are lent on mortgage to C, a landed proprietor, by whom they are employed in improving the productive powers of his estate, by fencing, draining, road-making, or permanent manures. This is productive employment. The ten thousand pounds are sunk, but not [pg 071] dissipated. They yield a permanent return; the land now affords an increase of produce, sufficient in a few years, if the outlay has been judicious, to replace the amount, and in time to multiply it manifold. Here, then, is a value of ten thousand pounds, employed in increasing the produce of the country. This constitutes a capital, for which C, if he lets his land, receives the returns in the nominal form of increased rent; and the mortgage entitles A to receive from these returns, in the shape of interest, such annual sum as has been agreed on.

(3.) Suppose, however, that C, the borrowing landlord, is a spendthrift, who burdens his land not to increase his fortune but to squander it, expending the amount in equipages and entertainments. In a year or two it is dissipated, and without return. A is as rich as before; he has no longer his ten thousand pounds, but he has a lien on the land, which he could still sell for that amount. C, however, is ten thousand pounds poorer than formerly; and nobody is richer. It may be said that those are richer who have made profit out of the money while it was being spent. No doubt if C lost it by gaming, or was cheated of it by his servants, that is a mere transfer, not a destruction, and those who have gained the amount may employ it productively. But if C has received the fair value for his expenditure in articles of subsistence or luxury, which he has consumed on himself, or by means of his servants or guests, these articles have ceased to exist, and nothing has been produced to replace them: while if the same sum had been employed in farming or manufacturing, the consumption which would have taken place would have been more than balanced at the end of the year by new products, created by the labor of those who would in that case have been the consumers. By C's prodigality, that which would have been consumed with a return is consumed without return. C's tradesmen may have made a profit during the process; but, if the capital had been expended productively, an equivalent profit would have been made by builders, fencers, tool-makers, and the tradespeople [pg 072] who supply the consumption of the laboring-classes; while, at the expiration of the time (to say nothing of an increase), C would have had the ten thousand pounds or its value replaced to him, which now he has not. There is, therefore, on the general result, a difference, to the disadvantage of the community, of at least ten thousand pounds, being the amount of C's unproductive expenditure. To A, the difference is not material, since his income is secured to him, and while the security is good, and the market rate of interest the same, he can always sell the mortgage at its original value. To A, therefore, the lien of ten thousand pounds on C's estate is virtually a capital of that amount; but is it so in reference to the community? It is not. A had a capital of ten thousand pounds, but this has been extinguished—dissipated and destroyed by C's prodigality. A now receives his income, not from the produce of his capital, but from some other source of income belonging to C, probably from the rent of his land, that is, from payments made to him by farmers out of the produce of their capital.

(4.) Let us now vary the hypothesis still further, and suppose that the money is borrowed, not by a landlord, but by the state. A lends his capital to Government to carry on a war: he buys from the state what are called government securities; that is, obligations on the Government to pay a certain annual income. If the Government employed the money in making a railroad, this might be a productive employment, and A's property would still be used as capital; but since it is employed in war, that is, in the pay of officers and soldiers who produce nothing, and in destroying a quantity of gunpowder and bullets without return, the Government is in the situation of C, the spendthrift landlord, and A's ten thousand pounds are so much national capital which once existed, but exists no longer—virtually thrown into the sea, as wealth or production is concerned; though for other reasons the employment of it may have been justifiable. A's subsequent income is derived, not from the produce of his own capital, but from taxes drawn from the produce [pg 073] of the remaining capital of the community; to whom his capital is not yielding any return, to indemnify them for the payment; it is all lost and gone, and what he now possesses is a claim on the returns to other people's capital and industry.

The breach in the capital of the country was made when the Government spent A's money: whereby a value of ten thousand pounds was withdrawn or withheld from productive employment, placed in the fund for unproductive consumption, and destroyed without equivalent.

The United States had borrowed in the late civil war, by August 31, 1865, $2,845,907,626; and, to June 30, 1881, the Government had paid in interest on its bonds, from taxes drawn from the produce of the remaining capital, $1,270,596,784, as an income to bondholders. From this can be seen the enormous waste of wealth to the United States during the war, and consequently the less existing capital to-day in this country; since, under the same inducements to save, the smaller the outside circle (wealth), the less the inside circle (capital) must be.
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Chapter IV. Fundamental Propositions Respecting Capital.

§ 1. Industry is Limited by Capital.

The first of these propositions is, that industry is limited by capital. To employ labor in a manufacture is to invest capital in the manufacture. This implies that industry can not be employed to any greater extent than there is capital to invest. The proposition, indeed, must be assented to as soon as it is distinctly apprehended. The expression “applying capital” is of course metaphorical: what is really applied is labor; capital being an indispensable condition. The food of laborers and the materials of production have no productive power; but labor can not exert its productive power unless provided with them. There can be no more industry than is supplied with materials to work up and food to eat. Self-evident as the thing is, it is often forgotten that the people of a country are maintained and have their wants supplied, not by the produce of present labor, but of past.

Therefore, as capital increases, more labor can be employed. When the Pittsburg rioters, in 1877, destroyed property, or the product of past labor, they did not realize then that that property might, but now could never again, be employed for productive purposes, and thereby support laborers.

They consume what has been produced, not what is about to be produced. Now, of what has been produced, a part only is allotted to the support of productive labor; and there will not and can not be more of that labor than the portion [pg 075] so allotted (which is the capital of the country) can feed, and provide with the materials and instruments of production.

Because industry is limited by capital, we are not, however, to infer that it always reaches that limit. There may not be as many laborers obtainable as the capital would maintain and employ. This has been known to occur in new colonies, where capital has sometimes perished uselessly for want of labor.

In the farming districts of our Middle and Western States, in harvest-time, crops have been often of late years ruined because farm-hands could not be obtained. In earlier days, President John Adams was unable to hire a man in Washington to cut wood in the surrounding forests with which to warm the White House.

The unproductive consumption of productive laborers, the whole of which is now supplied by capital, might cease, or be postponed, until the produce came in; and additional productive laborers might be maintained with the amount.

[Governments] can create capital. They may lay on taxes, and employ the amount productively. They may do what is nearly equivalent: they may lay taxes on income or expenditure, and apply the proceeds toward paying off the public debts. The fund-holder, when paid off, would still desire to draw an income from his property, most of which, therefore, would find its way into productive employment, while a great part of it would have been drawn from the fund for unproductive expenditure, since people do not wholly pay their taxes from what they would have saved, but partly, if not chiefly, from what they would have spent.

§ 2. Increase of Capital gives Increased Employment to Labor, Without Assignable Bounds.

While, on the one hand, industry is limited by capital, so, on the other, every increase of capital gives, or is capable of giving, additional employment to industry; and this without assignable limit. I do not mean to deny that the capital, or part of it, may be so employed as not to support laborers, being fixed in machinery, buildings, improvement of land, and the like. In any large increase of capital a considerable portion will generally be thus employed, and will only co-operate with laborers, not maintain them.

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It will be remembered, however, that subsistence is but one part or element of capital; that instruments and materials form a large part of capital. But still the question of mere maintenance is rightfully discussed, because it is asserted to-day that, while the rich are growing richer, the poor lack even the food to keep them alive; and throughout this discussion Mr. Mill has in view the fact that laborers may exist in the community either half fed or unemployed.

What I do intend to assert is, that the portion which is destined to their maintenance may (supposing no alteration in anything else) be indefinitely increased, without creating an impossibility of finding the employment: in other words, that if there are human beings capable of work, and food to feed them, they may always be employed in producing something. It is very much opposed to common doctrines.106 There is not an opinion more general among mankind than this, that the unproductive expenditure of the rich is necessary to the employment of the poor.

It is to be noticed that, in fact, after the arts have so far advanced in a community that mankind can obtain by their exertion more than the amount of the mere necessaries of life sufficient on the average for the subsistence of all, any further production rendered possible to the human race by new discoveries and processes is naturally unproductively consumed, and that consequently a demand for labor for unproductive consumption is essential for the employment of all existing laborers. This, however, can be done, because enough capital has been brought into existence to create the demand for the labor. Yet it is clear that it is not expenditure, but capital, by which employment is given to the poor.

Suppose that every capitalist came to be of opinion that, not being more meritorious than a well-conducted laborer, he ought not to fare better; and accordingly laid by, from conscientious motives, the surplus of his profits; unproductive expenditure is now reduced to its lowest limit: and it is asked, How is the increased capital to find employment? [pg 077] Who is to buy the goods which it will produce? There are no longer customers even for those which were produced before. The goods, therefore (it is said), will remain unsold; they will perish in the warehouses, until capital is brought down to what it was originally, or rather to as much less as the demand of the customers has lessened. But this is seeing only one half of the matter. In the case supposed, there would no longer be any demand for luxuries on the part of capitalists and land-owners. But, when these classes turn their income into capital, they do not thereby annihilate their power of consumption; they do but transfer it from themselves to the laborers to whom they give employment. Now, there are two possible suppositions in regard to the laborers: either there is, or there is not, an increase of their numbers proportional to the increase of capital. (1.) If there is, the case offers no difficulty. The production of necessaries for the new population takes the place of the production of luxuries for a portion of the old, and supplies exactly the amount of employment which has been lost. (2.) But suppose that there is no increase of population. The whole of what was previously expended in luxuries, by capitalists and landlords, is distributed among the existing laborers, in the form of additional wages. We will assume them to be already sufficiently supplied with necessaries.

What follows? That the laborers become consumers of luxuries; and the capital previously employed in the production of luxuries is still able to employ itself in the same manner; the difference being, that the luxuries are shared among the community generally, instead of being confined to a few, supposing that the power of their labor were physically sufficient to produce all this amount of indulgences for their whole number. Thus the limit of wealth is never deficiency of consumers, but of producers and productive power. Every addition to capital gives to labor either additional employment or additional remuneration.

That laborers should get more (a) by capitalists abstaining from unproductive expenditure than (b) by expenditure [pg 078] in articles unproductively consumed is a question difficult for many to comprehend, and needs all the elucidation possible. To start with, no one ever knew of a community all of whose wants were satisfied: in fact, civilization is constantly leading us into new fields of enjoyment, and results in a constant differentiation of new desires. To satisfy these wants is the spring to nearly all production and industry. There can, therefore, be no stop to production arising from lack of desire for commodities. The limit of wealth is never deficiency of consumers, but of productive power.

Now, in supposition (2) of the text, remember that the laborers are supposed not to be employed up to their full productive power. If all capitalists abstain from unproductive consumption, and devote that amount of wealth to production, then, since there can be no production without labor, the same number of laborers have offered to them in the aggregate a larger sum of articles for their exertions, which is equivalent to saying they receive additional wages.

But some persons want to see the process in the concrete, and the same principle may be illustrated by a practical case. It is supposed that all laborers have the necessaries of life only, but none of the comforts, decencies, and luxuries. Let A be a farmer in New York, who can also weave carpets, and B a lumberman in Maine. A begins to want a better house, and B wishes a carpet, both having food, clothing, and shelter. One of the capitalists abstaining from unproductive consumption, as above, is X, who, knowing the two desires of A and B, presents himself as a middle-man (i.e., he gives a market for both men, as is found in every center of trade, as well as in a country store), furnishing A the tools, materials, etc., and giving him the promise of lumber if he will create the carpet, and promising B the carpet if he will likewise produce the additional lumber. To be more matter of fact, X buys the carpet of A, and sells it to B for the lumber. Thus two new articles have been created, and for their exertions A has received additional wages (either in the form of lumber, or of the money paid him for the carpet), and B has received additional wages (either in the form of a carpet, or the money paid him by X for the lumber). If A and B are regarded as typifying all the laborers, and X all the above capitalists, in the multiplicity of actual exchanges, it will be seen that A and B are creating new articles to satisfy their own demand, instead of meeting the demands of X. If their primary wants are already supplied, then they take their additional wages in the form of comforts and decencies. When Class X forego their consumption, but add that amount to capital, they do not give up their title to that capital, but they transfer the use of [pg 079] it, or their consuming power, to others for the time being. This question will be more fully discussed in § 6.

§ 3. Capital is the result of Saving, and all Capital is Consumed.

A second fundamental theorem respecting capital relates to the source from which it is derived. It is the result of saving.

If all persons were to expend in personal indulgences all that they produce, and all the income that they receive from what is produced by others, capital could not increase. Some saving, therefore, there must have been, even in the simplest of all states of economical relations; people must have produced more than they used, or used less than they produced. Still more must they do so before they can employ other laborers, or increase their production beyond what can be accomplished by the work of their own hands. If it were said, for instance, that the only way to accelerate the increase of capital is by increase of saving, the idea would probably be suggested of greater abstinence and increased privation. But it is obvious that whatever increases the productive power of labor, creates an additional fund to make savings from, and enables capital to be enlarged, not only without additional privation, but concurrently with an increase of personal consumption. Nevertheless, there is here an increase of saving, in the scientific sense. Though there is more consumed, there is also more spared. There is a greater excess of production over consumption. To consume less than is produced is saving; and that is the process by which capital is increased; not necessarily by consuming less, absolutely.

The economic idea of saving involves, of course, the intention of using the wealth in reproduction. Saving, without this meaning, results only in hoarding of wealth, and while hoarded this amount is not capital. To explain the process by which capital comes into existence, Bastiat has given the well-known illustration of the plane in his Sophisms of Protection.107

A fundamental theorem respecting capital, closely connected with the one last discussed, is, that although saved, [pg 080] and the result of saving, it is nevertheless consumed. The word saving does not imply that what is saved is not consumed, nor even necessarily that its consumption is deferred; but only that, if consumed immediately, it is not consumed by the person who saves it. If merely laid by for future use, it is said to be hoarded; and, while hoarded, is not consumed at all. But, if employed as capital, it is all consumed, though not by the capitalist. Part is exchanged for tools or machinery, which are worn out by use; part for seed or materials, which are destroyed as such by being sown or wrought up, and destroyed altogether by the consumption of the ultimate product. The remainder is paid in wages to productive laborers, who consume it for their daily wants; or if they in their turn save any part, this also is not, generally speaking, hoarded, but (through savings-banks, benefit clubs, or some other channel) re-employed as capital, and consumed. To the vulgar, it is not at all apparent that what is saved is consumed. To them, every one who saves appears in the light of a person who hoards. The person who expends his fortune in unproductive consumption is looked upon as diffusing benefits all around, and is an object of so much favor, that some portion of the same popularity attaches even to him who spends what does not belong to him; who not only destroys his own capital, if he ever had any, but, under pretense of borrowing, and on promise of repayment, possesses himself of capital belonging to others, and destroys that likewise.

This popular error comes from attending to a small portion only of the consequences that flow from the saving or the spending; all the effects of either, which are out of sight, being out of mind. There is, in the one case, a wearing out of tools, a destruction of material, and a quantity of food and clothing supplied to laborers, which they destroy by use; in the other case, there is a consumption, that is to say, a destruction, of wines, equipages, and furniture. Thus far, the consequence to the national wealth has been much the same; an equivalent quantity of it has been destroyed in [pg 081] both cases. But in the spending, this first stage is also the final stage; that particular amount of the produce of labor has disappeared, and there is nothing left; while, on the contrary, the saving person, during the whole time that the destruction was going on, has had laborers at work repairing it; who are ultimately found to have replaced, with an increase, the equivalent of what has been consumed.

Almost all expenditure being carried on by means of money, the money comes to be looked upon as the main feature in the transaction; and since that does not perish, but only changes hands, people overlook the destruction which takes place in the case of unproductive expenditure. The money being merely transferred, they think the wealth also has only been handed over from the spendthrift to other people. But this is simply confounding money with wealth. The wealth which has been destroyed was not the money, but the wines, equipages, and furniture which the money purchased; and, these having been destroyed without return, society collectively is poorer by the amount. In proportion as any class is improvident or luxurious, the industry of the country takes the direction of producing luxuries for their use; while not only the employment for productive laborers is diminished, but the subsistence and instruments which are the means of such employment do actually exist in smaller quantity.

§ 4. Capital is kept up by Perpetual Reproduction, as shown by the Recovery of Countries from Devastation.

To return to our fundamental theorem. Everything which is produced is consumed—both what is saved and what is said to be spent—and the former quite as rapidly as the latter. All the ordinary forms of language tend to disguise this. When people talk of the ancient wealth of a country, of riches inherited from ancestors, and similar expressions, the idea suggested is, that the riches so transmitted were produced long ago, at the time when they are said to have been first acquired, and that no portion of the capital of the country was produced this year, except as much as may have been this year added to the total amount. The fact is far otherwise. The greater part, in value, of the [pg 082] wealth now existing [in the United States] has been produced by human hands within the last twelve months.

In the State of Massachusetts it is estimated that the capital, on the average, belonging to each individual does not exceed $600, and that the average annual product per capita is about $200; so that the total capital is the product of only two or three years' labor.108

The land subsists, and the land is almost the only thing that subsists. Everything which is produced perishes, and most things very quickly. Most kinds of capital are not fitted by their nature to be long preserved. Westminster Abbey has lasted many centuries, with occasional repairs; some Grecian sculptures have existed above two thousand years; the Pyramids perhaps double or treble that time. But these were objects devoted to unproductive use. Capital is kept in existence from age to age not by preservation, but by perpetual reproduction; every part of it is used and destroyed, generally very soon after it is produced, but those who consume it are employed meanwhile in producing more. The growth of capital is similar to the growth of population. Every individual who is born, dies, but in each year the number born exceeds the number who die; the population, therefore, always increases, though not one person of those composing it was alive until a very recent date.

This perpetual consumption and reproduction of capital afford the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation. The possibility of a rapid repair of their disasters mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterward, then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their [pg 083] former amount of production. If there is as much of food left to them, or of valuables to buy food, as enables them by any amount of privation to remain alive and in working condition, they will, in a short time, have raised as great a produce, and acquired collectively as great wealth and as great a capital, as before, by the mere continuance of that ordinary amount of exertion which they are accustomed to employ in their occupations. Nor does this evince any strength in the principle of saving, in the popular sense of the term, since what takes place is not intentional abstinence, but involuntary privation.

The world has at any given period the power, under existing conditions of production and skill, to create a certain amount of wealth, as represented by the inner rectangle, W. Each increased power of production arising from conquests over Nature's forces, as the use of steam and labor-saving machinery, permits the total wealth to be enlarged, as, in the figure, to rectangle W'. For the production of wealth are required labor, capital, and land; therefore, if the labor and land are not destroyed by war, there need not necessarily be in existence all the previous capital. If there are the necessaries for all, and only sufficient tools to accomplish the work, they will, in a few years, again recreate all the wealth that formerly existed, regain the same position as before, and go on slowly increasing the total wealth just as fast as improvements in the arts of production render it possible.

Illustration. Inner rectangle W, surrounded by rectangle W'.

§ 5. Effects of Defraying Government Expenditure by Loans.

[An application of this truth has been made to the question of raising government supplies for war purposes.] Loans, being drawn from capital (in lieu of taxes, which would generally have been paid from income, and made up in part or altogether by increased economy), must, according to the principles we have laid down, tend to impoverish the country: yet the years in which expenditure of this sort has been on the greatest scale have often been years of great apparent prosperity: the wealth and resources of the country, instead of diminishing, have given every sign of [pg 084] rapid increase during the process, and of greatly expanded dimensions after its close.

During our civil war, at the same time that wealth was being destroyed on an enormous scale, there was a very general feeling that trade was good, and large fortunes were made. At the close of the war a period of speculation and overtrading continued until it was brought to a disastrous close by the panic of 1873. Much of this speculation, however, was due to an inflated paper currency.

We will suppose the most unfavorable case possible: that the whole amount borrowed and destroyed by the Government was abstracted by the lender from a productive employment in which it had actually been invested. The capital, therefore, of the country, is this year diminished by so much. But, unless the amount abstracted is something enormous, there is no reason in the nature of the case why next year the national capital should not be as great as ever. The loan can not have been taken from that portion of the capital of the country which consists of tools, machinery, and buildings. It must have been wholly drawn from the portion employed in paying laborers: and the laborers will suffer accordingly. But if none of them are starved, if their wages can bear such an amount of reduction, or if charity interposes between them and absolute destitution, there is no reason that their labor should produce less in the next year than in the year before. If they produce as much as usual, having been paid less by so many millions sterling, these millions are gained by their employers. The breach made in the capital of the country is thus instantly repaired, but repaired by the privations and often the real misery of the laboring-class.

As Mr. Mill points out, during the Napoleonic wars, in France the withdrawal of laborers from industry into the army was so large that it caused a rise of wages, and a fall in the profits of capital; while in England, inasmuch as capital, rather than men, was sent to the Continent in the war, the very reverse took place: the diversion of hundreds of millions of capital from productive employment caused a fall of wages, [pg 085] and the prosperity of the capitalist class, while the permanent productive resources did not fall off.

This leads to the vexed question to which Dr. Chalmers has very particularly adverted: whether the funds required by a government for extraordinary unproductive expenditure are best raised by loans, the interest only being provided by taxes, or whether taxes should be at once laid on to the whole amount; which is called, in the financial vocabulary, raising the whole of the supplies within the year. Dr. Chalmers is strongly for the latter method. He says the common notion is that, in calling for the whole amount in one year, you require what is either impossible, or very inconvenient; that the people can not, without great hardship, pay the whole at once out of their yearly income; and that it is much better to require of them a small payment every year in the shape of interest, than so great a sacrifice once for all. To which his answer is, that the sacrifice is made equally in either case. Whatever is spent can not but be drawn from yearly income. The whole and every part of the wealth produced in the country forms, or helps to form, the yearly income of somebody. The privation which it is supposed must result from taking the amount in the shape of taxes is not avoided by taking it in a loan. The suffering is not averted, but only thrown upon the laboring-classes, the least able, and who least ought, to bear it: while all the inconveniences, physical, moral, and political, produced by maintaining taxes for the perpetual payment of the interest, are incurred in pure loss. Whenever capital is withdrawn from production, or from the fund destined for production, to be lent to the state and expended unproductively, that whole sum is withheld from the laboring-classes: the loan, therefore, is in truth paid off the same year; the whole of the sacrifice necessary for paying it off is actually made: only it is paid to the wrong persons, and therefore does not extinguish the claim; and paid by the very worst of taxes, a tax exclusively on the laboring-class. And, after having, in this most painful and unjust of ways, gone through [pg 086] the whole effort necessary for extinguishing the debt, the country remains charged with it, and with the payment of its interest in perpetuity.

The United States, for example, borrows capital from A, with which it buys stores from B. If the loan all comes from within the country, A's capital is borrowed, when the United States should have taken that amount outright by taxation. When the money is borrowed of A, the laborers undergo the sacrifice, the title to the whole sum remains in A's hands, and the claim against the Government by A still exists; while, if the amount were taken by taxation, the title to the sum raised is in the state, and it is paid to the right person.

The experience of the United States during the civil war is an illustration of this principle. It is asserted that, as a matter of fact, the total expenses of the war were defrayed by the Northern States, during the four years of its continuance, out of surplus earnings; and yet at the close of the conflict a debt of $2,800,000,000 was saddled on the country.

The United States borrowed$2,400,000,000
Revenue during that time1,700,000,000
Total cost of the war$4,100,000,000

In reality we borrowed only about $1,500,000,000 instead of $2,400,000,000, since (1) the Government issued paper which depreciated, and yet received it at par in subscriptions for loans. Moreover, the total cost would have been much reduced had we issued no paper and (2) thereby not increased the prices of goods to the state, and (3) if no interest account had been created by borrowing. But could the country have raised the whole sum each year by taxation? In the first fiscal year after the war the United States paid in war taxes $650,000,000. At the beginning of the struggle, to June 30, 1862, the expenditure was $515,000,000, and by June 30, 1863, it had amounted to $1,098,000,000; so that $600,000,000 of taxes a year would have paid the war expenses, and left us free of debt at the close.

A confirmatory experience is that of England during the Continental wars, 1793-1817:

Total war expenditures£1,060,000,000
Interest charge on the existing debt235,000,000
Total amount required£1,295,000,000
Revenue for that period1,145,000,000

To provide for this deficit, the Government actually increased [pg 087] its debt by £600,000,000. A slight additional exertion would have provided £150,000,000 more of revenue, and saved £450,000,000 to the taxpayers.109

The practical state of the case, however, seldom exactly corresponds with this supposition. The loans of the less wealthy countries are made chiefly with foreign capital, which would not, perhaps, have been brought in to be invested on any less security than that of the Government: while those of rich and prosperous countries are generally made, not with funds withdrawn from productive employment, but with the new accumulations constantly making from income, and often with a part of them which, if not so taken, would have migrated to colonies, or sought other investments abroad.

§ 6. Demand for Commodities is not Demand for Labor.

Mr. Mill's statement of the theorem respecting capital, discussed in the argument that demand for commodities is not demand for labor, needs some simplification. For this purpose represent by the letters of the alphabet, A, B, C, ... X, Y, Z, the different kinds of commodities produced in the world which are exchanged against each other in the process of reaching the consumers. This exchange of commodities for each other, it need hardly be said, does not increase the number or quantity of commodities already in existence; since their production, as we have seen, requires labor and capital in connection with natural agents. Mere exchange does not alter the quantity of commodities produced.

To produce a plow, for example, the maker must have capital (in the form of subsistence, tools, and materials) of which some one has foregone the use by a process of saving in order that something else, in this case a plow, may be produced. This saving must be accomplished first to an amount sufficient to keep production going on from day to day. This capital is all consumed, but in a longer or shorter term (depending on the particular industrial operation) it is reproduced in new forms adapted to the existing wants of man. Moreover, without any new exertion of abstinence, this amount of capital may be again consumed and reproduced, and so go on forever, after once being saved (if never destroyed in the mean while, thereby passing out of the category not only of capital, but also of wealth). The total capital of the country, then, is not the sum [pg 088] of one year's capital added to that of another; but that of last year reproduced in a new form this year, plus a fractional increase arising from new savings. But, once saved, capital can go on constantly aiding in production forever. This plow when made is exchanged (if a plow is wanted, and the production is properly adjusted to meet desires) for such other products, food, means for repairing tools, etc., as give back to the plow-maker all the commodities consumed in its manufacture (with an increase, called profit).

Returning to our illustration of the alphabet, it is evident that a certain amount of capital united with labor (constituting what may be called a productive engine) lies behind the production of A (such as the plow, for example), and to which its existence is due. The same is true of Z. Suppose that 5,000 of Z is produced, of which 4,000 is enough to reimburse the capital used up by labor in the operation, and that the owner of commodity Z spends the remaining 1,000 Z in exchange for 1,000 of commodity A. It is evident (no money being used as yet) that this exchange of goods is regulated entirely by the desires of the two parties to the transaction. No more goods are created simply by the exchange; the simple process of exchange does not keep the laborers engaged on A occupied. And yet the owner of Z had a demand for commodity A; his demand was worthless, except through the fact of his production, which gave him actual wealth, or purchasing power, in the form of Z. His demand for commodity A was not the thing which employed the laborers engaged in producing A, although the demand (if known beforehand) would cause them to produce A rather than some other article—that is, the demand of one quantity of wealth for a certain thing determines the direction taken by the owner of capital A. But, since the exchange is merely the form in which the demand manifests itself, it is clear that the demand does not add to production, and so of itself does not employ labor. Of course, if there were no desires, there would be no demand, and so no production and employment of labor. But we may conclude by formulating the proposition, that wealth (Z) offered for commodities (A) necessitates the use of other wealth (than Z) as capital to support the operation by which those commodities (A) are produced. It makes no difference to the existing employment of labor what want is supplied by the producers of A, whether it is velvet (intended for unproductive consumption) or plows (intended for productive consumption). Even if Z is no longer offered in exchange for A, and if then A is no longer to be made, the laborers formerly occupied in producing A—if warning is given of the coming change; if not, loss results—having the plant, can produce something else wanted by the owner of Z.

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Now into a community, as here pictured, all laborers supposed to be occupied, and all capital employed in producing A, B, C, ... X, Y, Z, imagine the coming of a shipwrecked crew. Instead of exchanging Z for A, as before, the owner of Z may offer his wealth to the crew to dance for him. The essential question is, Is more employment offered to labor by this action than the former exchange for A? That is, it is a question merely of distribution of wealth among the members of a community. The labor engaged on A is not thrown out of employment (if they have warning). There is no more wealth in existence, but it is differently distributed than before: the crew, instead of the former owner, now have 1,000 of Z. So far as the question of employment is concerned, it makes no difference on what terms the crew got it: they might have been hired to stand in a row and admire the owner of Z when he goes out. But yet it may naturally be assumed that the crew were employed productively. In this case, after they have consumed the wealth Z, they have brought into existence articles in the place of those they consumed. But, although this last operation is economically more desirable for the future growth of wealth, yet no more laborers for the time were employed than if the crew had merely danced. The advantages or disadvantages of productive consumption are not to be discussed here. It is intended, however, to establish the proposition that wealth paid out in wages, or advanced to producers, itself supports labor; that wealth offered directly to laborers in this way employs more labor than when merely offered in exchange for other goods, or, in other words, by a demand for commodities; that an increased demand for commodities does not involve an increased demand for labor, since this can only be created by capital. The essential difference is, that the owner of Z in one case, by exchanging goods for A, did not forego his consuming power; in the other case, by giving Z to the unemployed crew, he actually went through the process of saving by foregoing his personal consumption, and handing it over to the crew. If the crew use it unproductively, it is in the end the same as if the owner of Z had done it; but meanwhile the additional laborers were employed. If the crew be employed productively, then the saving once made will go on forever, as explained above, and the world will be the richer by the wealth this additional capital can create.

It may now be objected that, if A is no longer in demand, the laborers in that industry will be thrown out of employment. Out of that employment certainly, but not out of every other. One thousand of Z was able to purchase certain results of labor and capital in industry A, when in the hands of its former owner; and now when in the hands of the crew it will [pg 090] control, as purchasing power, equivalent results of labor and capital. The crew may not want the same articles as the former owner of Z, but they will want the equivalents of 1,000 of Z in something, and that something will be produced now instead of A. The whole process may be represented by this diagram.

Illustration, showing interrelationships between A, Z, and Crew.

1. Z is exchanged against A, and the crew remain unemployed.

2. Here the crew possess Z, and they themselves exchange Z for whatever A may produce in satisfaction of their wants, and the crew are then employed.

It is possible that the intervention of money blinds some minds to a proper understanding of the operations described above. The supposition, as given, applies to a condition of barter, but is equally true if money is used.110 Imagine a display of all the industries of the world, A, B, C, ... X, Y, Z, presented within sight on one large field, and at the central spot the producer of gold and silver. When Z is produced, it is taken to the gold-counter, and exchanged for money; when A is produced, the same is done. Then the former money is given for A, and the latter for Z, so that in truth A is exchanged against Z through the medium of money, just as before money was considered. Now, it may be said by an objector, If A is not wanted, after it is produced, and can not be sold, because the demand from Z has been withdrawn, then the capital used for A will not be returned, and the laborers in A will be thrown out of employment. The answer is, of course, that the state of things here contemplated is a permanent and normal one wherein production is correctly adapted to human desires. If A is found not to be wanted, after the production of it, an industrial blunder has been committed, and wealth is wasted just as when burned up. It is ill-assorted production. The trouble is not in a lack of demand for what A may produce (of something else), but with the producers of A in not making that for which there were desires, from ignorance or lack of early information of the disposition of wealth Z. In practice, however, it will be found that most goods are made upon orders, and, except under peculiar circumstances, [pg 091] not actually produced unless a market is foreseen. Indeed, as every man knows, the most important function of a successful business man is the adaptation of production to the market, that is, to the desires of consumers.

One other form of this question needs brief mention. It is truly remarked that a large portion of industrial activity is engaged to-day, not in supplying productive consumption, such as food, shelter, and clothing, but in supplying the comforts and luxuries of low and high alike, or unproductive consumption; now, if there were not a demand for luxuries and comforts, many vast industries would cease to exist, and labor would be thrown out of employment. Is not a demand for such commodities, then, a cause of the present employment of labor? No, it is not. Luxuries and comforts are of course the objects of human wants; but a desire alone, without purchasing power, can not either buy or produce these commodities. To obtain a piano, one must produce goods, and this implies the possession of capital, by which to bring into existence goods, or purchasing power, to be offered for a piano. Nor is this sufficient. Even after a man, A, for example, offers purchasing power, he will not get a piano unless there exists an accumulation of unemployed capital, together with labor ready to manufacture the instrument. If capital were all previously occupied, no piano could be made, although A stood offering an equivalent in valuable goods. It may be said that A himself has the means. He has the wealth, and if he is willing to forego the use of this wealth, or, in other words, save it by devoting it to reproduction in the piano industry—that is, create the capital necessary for the purpose—then the piano can be made. But this shows again that, not a mere desire, but the existence of capital, is necessary to the production, and so to the employment of labor. An increased demand for commodities, therefore, does not give additional employment to labor, unless there be capital to support the labor.

Some important corollaries result from this proposition: (a.) When a country by legislation creates a home demand for commodities, that does not of itself give additional employment to labor. If the goods had before been purchased abroad, under free discretion, then if produced at home they must require more capital and labor, or they would not have been brought from foreign countries. If produced at home, it would require, to purchase them, more of what was formerly sent abroad; or some must do without. The legislation can not, ipso facto, create capital, and only by an increase of capital can more employment result. It is possible, however, that legislation might cause a more effective use of existing capital; but that must be a question of fact, to be settled by circumstances [pg 092] in each particular case. It is not a thing to be governed by principles.

(b.) It follows from the above proposition also that taxes levied on the rich, and paid by a saving from their consumption of luxuries, do not fall on the poor because of a lessened demand for commodities; since, as we have seen, that demand does not create or diminish the demand for labor. But, if the taxes levied on the rich are paid by savings from what the rich would have expended in wages, then if the Government spends the amount of revenue thus taken in the direct purchase of labor, as of soldiers and sailors, the tax does not fall on the laboring-class taken as a whole. When the Government takes that wealth which was formerly capital, burns it up, or dissipates it in war, it ceases to exist any longer as a means of again producing wealth, or of employing labor.

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Chapter V. On Circulating And Fixed Capital.

§ 1. Fixed and Circulating Capital.

Of the capital engaged in the production of any commodity, there is a part which, after being once used, exists no longer as capital; is no longer capable of rendering service to production, or at least not the same service, nor to the same sort of production. Such, for example, is the portion of capital which consists of materials. The tallow and alkali of which soap is made, once used in the manufacture, are destroyed as alkali and tallow. In the same division must be placed the portion of capital which is paid as the wages, or consumed as the subsistence, of laborers. That part of the capital of a cotton-spinner which he pays away to his work-people, once so paid, exists no longer as his capital, or as a cotton-spinner's capital. Capital which in this manner fulfills the whole of its office in the production in which it is engaged, by a single use, is called Circulating Capital. The term, which is not very appropriate, is derived from the circumstance that this portion of capital requires to be constantly renewed by the sale of the finished product, and when renewed is perpetually parted with in buying materials and paying wages; so that it does its work, not by being kept, but by changing hands.

Another large portion of capital, however, consists in instruments of production, of a more or less permanent character; which produce their effect not by being parted with, but by being kept; and the efficacy of which is not exhausted by a single use. To this class belong buildings, [pg 094] machinery, and all or most things known by the name of implements or tools. The durability of some of these is considerable, and their function as productive instruments is prolonged through many repetitions of the productive operation. In this class must likewise be included capital sunk (as the expression is) in permanent improvements of land. So also the capital expended once for all, in the commencement of an undertaking, to prepare the way for subsequent operations: the expense of opening a mine, for example; of cutting canals, of making roads or docks. Other examples might be added, but these are sufficient. Capital which exists in any of these durable shapes, and the return to which is spread over a period of corresponding duration, is called Fixed Capital.

Of fixed capital, some kinds require to be occasionally or periodically renewed. Such are all implements and buildings: they require, at intervals, partial renewal by means of repairs, and are at last entirely worn out. In other cases the capital does not, unless as a consequence of some unusual accident, require entire renewal. A dock or a canal, once made, does not require, like a machine, to be made again, unless purposely destroyed. The most permanent of all kinds of fixed capital is that employed in giving increased productiveness to a natural agent, such as land.

To return to the theoretical distinction between fixed and circulating capital. Since all wealth which is destined to be employed for reproduction comes within the designation of capital, there are parts of capital which do not agree with the definition of either species of it; for instance, the stock of finished goods which a manufacturer or dealer at any time possesses unsold in his warehouses. But this, though capital as to its destination, is not yet capital in actual exercise; it is not engaged in production, but has first to be sold or exchanged, that is, converted into an equivalent value of some other commodities, and therefore is not yet either fixed or circulating capital, but will become either one or the other, or be eventually divided between them.

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§ 2. Increase of Fixed Capital, when, at the Expense of Circulating, might be Detrimental to the Laborers.

There is a great difference between the effects of circulating and those of fixed capital, on the amount of the gross produce of the country. Circulating capital being destroyed as such, the result of a single use must be a reproduction equal to the whole amount of the circulating capital used, and a profit besides. This, however, is by no means necessary in the case of fixed capital. Since machinery, for example, is not wholly consumed by one use, it is not necessary that it should be wholly replaced from the product of that use. The machine answers the purpose of its owner if it brings in, during each interval of time, enough to cover the expense of repairs, and the deterioration in value which the machine has sustained during the same time, with a surplus sufficient to yield the ordinary profit on the entire value of the machine.

From this it follows that all increase of fixed capital, when taking place at the expense of circulating, must be, at least temporarily, prejudicial to the interests of the laborers. This is true, not of machinery alone, but of all improvements by which capital is sunk; that is, rendered permanently incapable of being applied to the maintenance and remuneration of labor.

It is highly probable that in the twenty-five years preceding the panic of 1873, owing to the progress of invention, those industries in the United States employing much machinery were unduly stimulated in comparison with other industries, and that the readjustment was a slow and painful process. After the collapse vast numbers left the manufacturing to enter the extractive industries.

The argument relied on by most of those who contend that machinery can never be injurious to the laboring-class is, that by cheapening production it creates such an increased demand for the commodity as enables, ere long, a greater number of persons than ever to find employment in producing it. The argument does not seem to me to have the weight commonly ascribed to it. The fact, though too broadly stated, is, no doubt, often true. The copyists who were thrown out of employment by the invention of printing [pg 096] were doubtless soon outnumbered by the compositors and pressmen who took their place; and the number of laboring persons now employed in the cotton manufacture is many times greater than were so occupied previously to the inventions of Hargreaves and Arkwright, which shows that, besides the enormous fixed capital now embarked in the manufacture, it also employs a far larger circulating capital than at any former time. But if this capital was drawn from other employments, if the funds which took the place of the capital sunk in costly machinery were supplied not by any additional saving consequent on the improvements, but by drafts on the general capital of the community, what better are the laboring-classes for the mere transfer?

There is a machine used for sizing the cotton yarn to prepare it for weaving, by which it is dried over a steam cylinder, the wages for attendance on which were only two dollars per day, as compared with an expenditure for labor of fourteen dollars per day to accomplish the same ends before the machine was invented.

All attempts to make out that the laboring-classes as a collective body can not suffer temporarily by the introduction of machinery, or by the sinking of capital in permanent improvements, are, I conceive, necessarily fallacious.111 That they would suffer in the particular department of industry to which the change applies is generally admitted, and obvious to common sense; but it is often said that, though employment is withdrawn from labor in one department, an exactly equivalent employment is opened for it in others, because what the consumers save in the increased cheapness of one particular article enables them to augment their consumption of others, thereby increasing the demand for other kinds of labor. This is plausible, but, as was shown in the last chapter, involves a fallacy; demand for commodities being a totally different thing from demand [pg 097] for labor. It is true, the consumers have now additional means of buying other things; but this will not create the other things, unless there is capital to produce them, and the improvement has not set at liberty any capital, even if it has not absorbed some from other employments.

If the improvement has lowered the cost of production, it has often required less capital (as well as less labor) to produce the same quantity of goods; or, what is the same thing, an increased product with the same capital.

§ 3. —This seldom, if ever, occurs.

Nevertheless, I do not believe that, as things are actually transacted, improvements in production are often, if ever, injurious, even temporarily, to the laboring-classes in the aggregate. They would be so if they took place suddenly to a great amount, because much of the capital sunk must necessarily in that case be provided from funds already employed as circulating capital. But improvements are always introduced very gradually, and are seldom or never made by withdrawing circulating capital from actual production, but are made by the employment of the annual increase. I doubt if there would be found a single example of a great increase of fixed capital, at a time and place where circulating capital was not rapidly increasing likewise.

In the United States, while the cost per yard of the manufactured goods has decreased, and so made accessible to poorer classes than before, the capital engaged in manufactures has increased so as to allow a vastly greater number of persons to be employed, as will be seen by the following comparison of 1860 with 1880 taken from the last census returns. (Compendium, 1880, pp. 928, 930.)

Number of establishments.Capital (Thousands). Average number of hands employed. Total amount paid in wages during the year.
1860140,433$1,009,855 1,311,246$378,878,966
1880253,8522,790,272 2,732,595947,953,795

A hundred years ago, one person in every family of five or six must have been absolutely needed to spin and weave by [pg 098] hand the fabrics required for the scanty clothing of the people; now one person in two hundred or two hundred and fifty only need work in the factory to produce the cotton and woolen fabrics of the most amply clothed nation of the world.112

To these considerations must be added, that, even if improvements did for a time decrease the aggregate produce and the circulating capital of the community, they would not the less tend in the long run to augment both. This tendency of improvements in production to cause increased accumulation, and thereby ultimately to increase the gross produce, even if temporarily diminishing it, will assume a still more decided character if it should appear that there are assignable limits both to the accumulation of capital and to the increase of production from the land, which limits once attained, all further increase of produce must stop; but that improvements in production, whatever may be their other effects, tend to throw one or both of these limits farther off. Now, these are truths which will appear in the clearest light in a subsequent stage of our investigation. It will be seen that the quantity of capital which will, or even which can, be accumulated in any country, and the amount of gross produce which will, or even which can, be raised, bear a proportion to the state of the arts of production there existing; and that every improvement, even if for the time it diminish the circulating capital and the gross produce, ultimately makes room for a larger amount of both than could possibly have existed otherwise. It is this which is the conclusive answer to the objections against machinery; and the proof thence arising of the ultimate benefit to laborers of mechanical inventions, even in the existing state of society, will hereafter be seen to be conclusive.113

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Chapter VI. Of Causes Affecting The Efficiency Of Production.

§ 1. General Causes of Superior Productiveness.

The most evident cause of superior productiveness is what are called natural advantages. These are various. Fertility of soil is one of the principal. The influence of climate [is another advantage, and] consists in lessening the physical requirements of the producers.

In spinning very fine cotton thread, England's natural climate gives in some parts of the country such advantages in proper moisture and electric conditions that the operation can be carried on out-of-doors; while in the United States it is generally necessary to create an artificial atmosphere. In ordinary spinning in our country more is accomplished when the wind is in one quarter than in another. The dry northwest wind in New England reduces the amount of product, while the dry northeast wind in England has a similar effect, and it is said has practically driven the cotton-spinners from Manchester to Oldham, where the climate is more equably moist. The full reasons for these facts are not yet ascertained.

Experts in the woolen industry, also, explain that the quality and fiber of wool depend upon the soil and climate where the sheep are pastured. When Ohio sheep are transferred to Texas, in a few years their wool loses the distinctive quality it formerly possessed, and takes on a new character belonging to the breeds of Texas. The wool produced by one set of climatic conditions is quite different from that of another set, and is used by the manufacturers for different purposes.

In hot regions, mankind can exist in comfort with less perfect housing, less clothing; fuel, that absolute necessary of life in cold climates, they can almost dispense with, except for industrial uses. They also require less aliment. Among natural advantages, besides soil and climate, must be [pg 100] mentioned abundance of mineral productions, in convenient situations, and capable of being worked with moderate labor. Such are the coal-fields of Great Britain, which do so much to compensate its inhabitants for the disadvantages of climate; and the scarcely inferior resource possessed by this country and the United States, in a copious supply of an easily reduced iron-ore, at no great depth below the earth's surface, and in close proximity to coal-deposits available for working it. But perhaps a greater advantage than all these is a maritime situation, especially when accompanied with good natural harbors; and, next to it, great navigable rivers. These advantages consist indeed wholly in saving of cost of carriage. But few, who have not considered the subject, have any adequate notion how great an extent of economical advantage this comprises.

As the second of the [general] causes of superior productiveness, we may rank the greater energy of labor. By this is not to be understood occasional, but regular and habitual energy. The third element which determines the productiveness of the labor of a community is the skill and knowledge therein existing, whether it be the skill and knowledge of the laborers themselves or of those who direct their labor. That the productiveness of the labor of a people is limited by their knowledge of the arts of life is self-evident, and that any progress in those arts, any improved application of the objects or powers of nature to industrial uses, enables the same quantity and intensity of labor to raise a greater produce. One principal department of these improvements consists in the invention and use of tools and machinery.114

The deficiency of practical good sense, which renders the majority of the laboring-class such bad calculators—which makes, for instance, their domestic economy so improvident, lax, and irregular—must disqualify them for any but a low grade of intelligent labor, and render their industry far less productive than with equal energy it otherwise might be. [pg 101] The moral qualities of the laborers are fully as important to the efficiency and worth of their labor as the intellectual. Independently of the effects of intemperance upon their bodily and mental faculties, and of flighty, unsteady habits upon the energy and continuity of their work (points so easily understood as not to require being insisted upon), it is well worthy of meditation how much of the aggregate effect of their labor depends on their trustworthiness.

Among the secondary causes which determine the productiveness of productive agents, the most important is Security. By security I mean the completeness of the protection which society affords to its members.

§ 2. Combination and Division of Labor Increase Productiveness.

In the enumeration of the circumstances which promote the productiveness of labor, we have left one untouched, which is co-operation, or the combined action of numbers. Of this great aid to production, a single department, known by the name of Division of Labor, has engaged a large share of the attention of political economists; most deservedly, indeed, but to the exclusion of other cases and exemplifications of the same comprehensive law. In the lifting of heavy weights, for example, in the felling of trees, in the sawing of timber, in the gathering of much hay or corn during a short period of fine weather, in draining a large extent of land during the short season when such a work may be properly conducted, in the pulling of ropes on board ship, in the rowing of large boats, in some mining operations, in the erection of a scaffolding for building, and in the breaking of stones for the repair of a road, so that the whole of the road shall always be kept in good order: in all these simple operations, and thousands more, it is absolutely necessary that many persons should work together, at the same time, in the same place, and in the same way. [But] in the present state of society, the breeding and feeding of sheep is the occupation of one set of people; dressing the wool to prepare it for the spinner is that of another; spinning it into thread, of a third; weaving the thread into broadcloth, of a fourth; dyeing the cloth, of a fifth; making it into a coat, of a sixth; without [pg 102] counting the multitude of carriers, merchants, factors, and retailers put in requisition at the successive stages of this progress.

Without some separation of employments, very few things would be produced at all. Suppose a set of persons, or a number of families, all employed precisely in the same manner; each family settled on a piece of its own land, on which it grows by its labor the food required for its own sustenance, and, as there are no persons to buy any surplus produce where all are producers, each family has to produce within itself whatever other articles it consumes. In such circumstances, if the soil was tolerably fertile, and population did not tread too closely on the heels of subsistence, there would be, no doubt, some kind of domestic manufactures; clothing for the family might, perhaps, be spun and woven within it, by the labor, probably, of the women (a first step in the separation of employments); and a dwelling of some sort would be erected and kept in repair by their united labor. But beyond simple food (precarious, too, from the variations of the seasons), coarse clothing, and very imperfect lodging, it would be scarcely possible that the family should produce anything more.

Suppose that a company of artificers, provided with tools, and with food sufficient to maintain them for a year, arrive in the country and establish themselves in the midst of the population. These new settlers occupy themselves in producing articles of use or ornament adapted to the taste of a simple people; and before their food is exhausted they have produced these in considerable quantity, and are ready to exchange them for more food. The economical position of the landed population is now most materially altered. They have an opportunity given them of acquiring comforts and luxuries. Things which, while they depended solely upon their own labor, they never could have obtained, because they could not have produced, are now accessible to them if they can succeed in producing an additional quantity of food and necessaries. They are thus incited to increase the productiveness [pg 103] of their industry. The new settlers constitute what is called a market for surplus agricultural produce; and their arrival has enriched the settlement, not only by the manufactured articles which they produce, but by the food which would not have been produced unless they had been there to consume it.

There is no inconsistency between this doctrine and the proposition we before maintained,115 that a market for commodities does not constitute employment for labor. The labor of the agriculturists was already provided with employment; they are not indebted to the demand of the new-comers for being able to maintain themselves. What that demand does for them is to call their labor into increased vigor and efficiency; to stimulate them, by new motives, to new exertions.

From these considerations it appears that a country will seldom have a productive agriculture unless it has a large town population, or, the only available substitute, a large export trade in agricultural produce to supply a population elsewhere. I use the phrase “town population” for shortness, to imply a population non-agricultural.

It is found that the productive power of labor is increased by carrying the separation further and further; by breaking down more and more every process of industry into parts, so that each laborer shall confine himself to an ever smaller number of simple operations. And thus, in time, arise those remarkable cases of what is called the division of labor, with which all readers on subjects of this nature are familiar. Adam Smith's illustration from pin-making, though so well known, is so much to the point that I will venture once more to transcribe it: “The business of making a pin is divided into about eighteen distinct operations. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business; [pg 104] to whiten the pins is another; it is even a trade by itself to put them into the paper.... I have seen a small manufactory where ten men only were employed, and where some of them, consequently, performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upward of four thousand pins of a middling size. Those ten persons, therefore, could make among them upward of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day.”

§ 3. Advantages of Division of Labor.

The causes of the increased efficiency given to labor by the division of employments are some of them too familiar to require specification; but it is worth while to attempt a complete enumeration of them. By Adam Smith they are reduced to three: “First, the increase of dexterity in every particular workman; secondly, the saving of the time which is commonly lost in passing from one species of work to another; and, lastly, the invention of a great number of machines which facilitate and abridge labor, and enable one man to do the work of many.”

(1.) Of these, the increase of dexterity of the individual workman is the most obvious and universal. It does not follow that because a thing has been done oftener it will be done better. That depends on the intelligence of the workman, and on the degree in which his mind works along with his hands. But it will be done more easily. This is as true of mental operations as of bodily. Even a child, after much practice, sums up a column of figures with a rapidity which resembles intuition. The act of speaking any language, of [pg 105] reading fluently, of playing music at sight, are cases as remarkable as they are familiar. Among bodily acts, dancing, gymnastic exercises, ease and brilliancy of execution on a musical instrument, are examples of the rapidity and facility acquired by repetition. In simpler manual operations the effect is, of course, still sooner produced.

(2.) The second advantage enumerated by Adam Smith as arising from the division of labor is one on which I can not help thinking that more stress is laid by him and others than it deserves. To do full justice to his opinion, I will quote his own exposition of it: “It is impossible to pass very quickly from one kind of work to another, that is carried on in a different place, and with quite different tools. A country weaver, who cultivates a small farm, must lose a good deal of time in passing from his loom to the field, and from the field to his loom. When the two trades can be carried on in the same workhouse, the loss of time is no doubt much less. It is even in this case, however, very considerable. A man commonly saunters a little in turning his hand from one sort of employment to another.” I am very far from implying that these considerations are of no weight; but I think there are counter-considerations which are overlooked. If one kind of muscular or mental labor is different from another, for that very reason it is to some extent a rest from that other; and if the greatest vigor is not at once obtained in the second occupation, neither could the first have been indefinitely prolonged without some relaxation of energy. It is a matter of common experience that a change of occupation will often afford relief where complete repose would otherwise be necessary, and that a person can work many more hours without fatigue at a succession of occupations, than if confined during the whole time to one.116 Different occupations employ different muscles, or different energies of the mind, some of which rest and are refreshed while [pg 106] others work. Bodily labor itself rests from mental, and conversely. The variety itself has an invigorating effect on what, for want of a more philosophical appellation, we must term the animal spirits—so important to the efficiency of all work not mechanical, and not unimportant even to that.

(3.) The third advantage attributed by Adam Smith to the division of labor is, to a certain extent, real. Inventions tending to save labor in a particular operation are more likely to occur to any one in proportion as his thoughts are intensely directed to that occupation, and continually employed upon it.

This also can not be wholly true. The founder of the cotton manufacture was a barber. The inventor of the power-loom was a clergyman. A farmer devised the application of the screw-propeller. A fancy-goods shopkeeper is one of the most enterprising experimentalists in agriculture. The most remarkable architectural design of our day has been furnished by a gardener. The first person who supplied London with water was a goldsmith. The first extensive maker of English roads was a blind man, bred to no trade. The father of English inland navigation was a duke, and his engineer was a millwright. The first great builder of iron bridges was a stone-mason, and the greatest railway engineer commenced his life as a colliery engineer.117

(4.) The greatest advantage (next to the dexterity of the workmen) derived from the minute division of labor which takes place in modern manufacturing industry, is one not mentioned by Adam Smith, but to which attention has been drawn by Mr. Babbage: the more economical distribution of labor by classing the work-people according to their capacity. Different parts of the same series of operations require unequal degrees of skill and bodily strength; and those who have skill enough for the most difficult, or strength enough for the hardest parts of the labor, are made much more useful by being employed solely in them; the operations which everybody is capable of being left to those who are fit for no others.

[pg 107]

The division of labor, as all writers on the subject have remarked, is limited by the extent of the market. If, by the separation of pin-making into ten distinct employments, forty-eight thousand pins can be made in a day, this separation will only be advisable if the number of accessible consumers is such as to require, every day, something like forty-eight thousand pins. If there is only a demand for twenty-four thousand, the division of labor can only be advantageously carried to the extent which will every day produce that smaller number. The increase of the general riches of the world, when accompanied with freedom of commercial intercourse, improvements in navigation, and inland communication by roads, canals, or railways, tends to give increased productiveness to the labor of every nation in particular, by enabling each locality to supply with its special products so much larger a market that a great extension of the division of labor in their production is an ordinary consequence. The division of labor is also limited, in many cases, by the nature of the employment. Agriculture, for example, is not susceptible of so great a division of occupations as many branches of manufactures, because its different operations can not possibly be simultaneous.

(5.) In the examples given above the advantage obtained was derived from the mere fact of the separation of employments, altogether independently of the mode in which the separated employments were distributed among the persons carrying them on, as well as of the places in which they were conducted. But a further gain arises when the employments are of a kind which, in order to their effective performance, call for special capacities in the workman, or special natural resources in the scene of operation. There would be a manifest waste of special power in compelling to a mere mechanical or routine pursuit a man who is fitted to excel in a professional career; and similarly, if a branch of industry were established on some site which offered greater facilities to an industry of another sort, a waste, analogous in character, would be incurred. In a word, while a great number of the occupations in which men engage are such as, with proper preparation for them, might equally well be carried on by any of those engaged in them, or in any of the localities in which they are respectively established, there are others which demand for [pg 108] their effective performance special personal qualifications and special local conditions; and the general effectiveness of productive industry will, other things being equal, be proportioned to the completeness with which the adaptation is accomplished between occupation on the one hand and individuals and localities on the other.118

§ 4. Production on a Large and Production on a Small Scale.

Whenever it is essential to the greatest efficiency of labor that many laborers should combine, the scale of the enterprise must be such as to bring many laborers together, and the capital must be large enough to maintain them. Still more needful is this when the nature of the employment allows, and the extent of the possible market encourages, a considerable division of labor. The larger the enterprise the further the division of labor may be carried. This is one of the principal causes of large manufactories. Every increase of business would enable the whole to be carried on with a proportionally smaller amount of labor.

As a general rule, the expenses of a business do not increase by any means proportionally to the quantity of business. Let us take as an example a set of operations which we are accustomed to see carried on by one great establishment, that of the Post-Office. Suppose that the business, let us say only of the letter-post, instead of being centralized in a single concern, were divided among five or six competing companies. Each of these would be obliged to maintain almost as large an establishment as is now sufficient for the whole. Since each must arrange for receiving and delivering letters in all parts of the town, each must send letter-carriers into every street, and almost every alley, and this, too, as many times in the day as is now done by the Post-Office, if the service is to be as well performed. Each must have an office for receiving letters in every neighborhood, with all subsidiary arrangements for collecting the letters from the different offices and redistributing them. To this must be added the much greater number of superior officers [pg 109] who would be required to check and control the subordinates, implying not only a greater cost in salaries for such responsible officers, but the necessity, perhaps, of being satisfied in many instances with an inferior standard of qualification, and so failing in the object.

Whether or not the advantages obtained by operating on a large scale preponderate in any particular case over the more watchful attention and greater regard to minor gains and losses usually found in small establishments, can be ascertained, in a state of free competition, by an unfailing test. Wherever there are large and small establishments in the same business, that one of the two which in existing circumstances carries on the production at greatest advantage will be able to undersell the other. The power of permanently underselling can only, generally speaking, be derived from increased effectiveness of labor; and this, when obtained by a more extended division of employment, or by a classification tending to a better economy of skill, always implies a greater produce from the same labor, and not merely the same produce from less labor; it increases not the surplus only, but the gross produce of industry. If an increased quantity of the particular article is not required, and part of the laborers in consequence lose their employment, the capital which maintained and employed them is also set at liberty, and the general produce of the country is increased by some other application of their labor.

A considerable part of the saving of labor effected by substituting the large system of production for the small, is the saving in the labor of the capitalists themselves. If a hundred producers with small capitals carry on separately the same business, the superintendence of each concern will probably require the whole attention of the person conducting it, sufficiently, at least, to hinder his time or thoughts from being disposable for anything else; while a single manufacturer possessing a capital equal to the sum of theirs, with ten or a dozen clerks, could conduct the whole of their amount of business, and have leisure, too, for other occupations.

[pg 110]

Production on a large scale is greatly promoted by the practice of forming a large capital by the combination of many small contributions; or, in other words, by the formation of stock companies. The advantages of the principle are important, [since] (1) many undertakings require an amount of capital beyond the means of the richest individual or private partnership. [Of course] the Government can alone be looked to for any of those works for which a great combination of means is requisite, because it can obtain those means by compulsory taxation, and is already accustomed to the conduct of large operations. For reasons, however, which are tolerably well known, government agency for the conduct of industrial operations is generally one of the least eligible of resources when any other is available. Of [the advantages referred to above] one of the most important is (2) that which relates to the intellectual and active qualifications of the directing head. The stimulus of individual interest is some security for exertion, but exertion is of little avail if the intelligence exerted is of an inferior order, which it must necessarily be in the majority of concerns carried on by the persons chiefly interested in them. Where the concern is large, and can afford a remuneration sufficient to attract a class of candidates superior to the common average, it is possible to select for the general management, and for all the skilled employments of a subordinate kind, persons of a degree of acquirement and cultivated intelligence which more than compensates for their inferior interest in the result. It must be further remarked that it is not a necessary consequence of joint-stock management that the persons employed, whether in superior or in subordinate offices, should be paid wholly by fixed salaries. In the case of the managers of joint-stock companies, and of the superintending and controlling officers in many private establishments, it is a common enough practice to connect their pecuniary interest with the interest of their employers, by giving them part of their remuneration in the form of a percentage on the profits.

[pg 111]

The possibility of substituting the large system of production for the small depends, of course, in the first place, on the extent of the market. The large system can only be advantageous when a large amount of business is to be done: it implies, therefore, either a populous and flourishing community, or a great opening for exportation.

In the countries in which there are the largest markets, the widest diffusion of commercial confidence and enterprise, the greatest annual increase of capital, and the greatest number of large capitals owned by individuals, there is a tendency to substitute more and more, in one branch of industry after another, large establishments for small ones. These are almost always able to undersell the smaller tradesmen, partly, it is understood, by means of division of labor, and the economy occasioned by limiting the employment of skilled agency to cases where skill is required; and partly, no doubt, by the saving of labor arising from the great scale of the transactions; as it costs no more time, and not much more exertion of mind, to make a large purchase, for example, than a small one, and very much less than to make a number of small ones. With a view merely to production, and to the greatest efficiency of labor, this change is wholly beneficial.

A single large company very often, instead of being a monopoly, is generally better than two large companies; for there is little likelihood of competition and lower prices when the competitors are so few as to be able to agree not to compete. As Mr. Mill says in regard to parallel railroads: No one can desire to see the enormous waste of capital and land (not to speak of increased nuisance) involved in the construction of a second railway to connect the same places already united by an existing one; while the two would not do the work better than it could be done by one, and after a short time would probably be amalgamated. The actual tendency of charges to diminish on the railways, before the matter of parallel railways was suggested is clearly seen by reference to Chart V (p. 137).
[pg 112]

Chapter VII. Of The Law Of The Increase Of Labor.

§ 1. The Law of the Increase of Production Depends on those of Three Elements—Labor. Capital, and Land.

Production is not a fixed but an increasing thing. When not kept back by bad institutions, or a low state of the arts of life, the produce of industry has usually tended to increase; stimulated not only by the desire of the producers to augment their means of consumption, but by the increasing number of the consumers.

We have seen that the essential requisites of production are three—labor, capital, and natural agents; the term capital including all external and physical requisites which are products of labor, the term natural agents all those which are not. The increase of production, therefore, depends on the properties of these elements. It is a result of the increase either of the elements themselves, or of their productiveness. We proceed to consider the three elements successively, with reference to this effect; or, in other words, the law of the increase of production, viewed in respect of its dependence, first on Labor, secondly on Capital, and lastly on Land.

§ 2. The Law of Population.

The increase of labor is the increase of mankind; of population. The power of multiplication inherent in all organic life may be regarded as infinite. There are many species of vegetables of which a single plant will produce in one year the germs of a thousand; if only two come to maturity, in fourteen years the two will have multiplied to sixteen thousand and more. It is but a moderate case of fecundity in animals to be capable of quadrupling their numbers in a single year; if they only do as much in half a century, [pg 113] ten thousand will have swelled within two centuries to upward to two millions and a half. The capacity of increase is necessarily in a geometrical progression: the numerical ratio alone is different.

To this property of organized beings, the human species forms no exception. Its power of increase is indefinite, and the actual multiplication would be extraordinarily rapid, if the power were exercised to the utmost. It never is exercised to the utmost, and yet, in the most favorable circumstances known to exist, which are those of a fertile region colonized from an industrious and civilized community, population has continued, for several generations, independently of fresh immigration, to double itself in not much more than twenty years.

2511 millsx
2522 mills2x
2544 mills3x
2588 mills4x
25176 mills5x

By this table it will be seen that if population can double itself in twenty-five years, and if food can only be increased by as much as x (the subsistence of eleven millions) by additional application of another equal quantity of labor on the same land in each period, then at the end of one hundred years there would be the disproportion of one hundred and seventy-six millions of people, with subsistence for only fifty-five millions. Of course, this is prevented either by checking population to the amount of the subsistence; by sending off the surplus population; or by bringing in food from new lands.

In the United States to 1860 population has doubled itself about every twenty years, while in France there is practically no increase of population. It is stated that the white population of the United States between 1790 and 1840 increased 400.4 per cent, deducting immigration. The extraordinary advance of population with us, where subsistence is easily attainable, is to be seen in the chart on the next page (No. III), which shows the striking rapidity of increase in the United States when compared with the older countries of Europe. The steady demand for land can be seen by the gradual westward movement of the center of population, as seen in chart No. IV (p. 116), and by the rapid settlement of the distant parts of our country, as shown by the two charts (frontispieces), which represent to the eye by heavier colors the areas of the more densely settled districts in 1830 and in 1880.

[pg 114]

Chart III: Population of European Countries, XIXth Century.
[pg 115]

§ 3. By what Checks the Increase of Population is Practically Limited.

The obstacle to a just understanding of the subject arises from too confused a notion of the causes which, at most times and places, keep the actual increase of mankind so far behind the capacity.

The conduct of human creatures is more or less influenced by foresight of consequences, and by some impulses superior to mere animal instincts; and they do not, therefore, propagate like swine, but are capable, though in very unequal degrees, of being withheld by prudence, or by the social affections, from giving existence to beings born only to misery and premature death.

Malthus found an explanation of the anomaly that in the Swiss villages, with the longest average duration of life, there were the fewest births, by noting that no one married until a cow-herd's cottage became vacant, and precisely because the tenants lived so long were the new-comers long kept out of a place.

In proportion as mankind rise above the condition of the beast, population is restrained by the fear of want, rather than by want itself. Even where there is no question of starvation, many are similarly acted upon by the apprehension of losing what have come to be regarded as the decencies of their situation in life. Among the middle classes, in many individual instances, there is an additional restraint exercised from the desire of doing more than maintaining their circumstances—of improving them; but such a desire is rarely found, or rarely has that effect, in the laboring-classes. If they can bring up a family as they were themselves brought up, even the prudent among them are usually satisfied. Too often they do not think even of that, but rely on fortune, or on the resources to be found in legal or voluntary charity.

Chart IV: Westward Movement of Center of Population.
This, in effect, is the well-known Malthusian doctrine. The thorough reader will also consult the original Essay of Malthus. Mr. Bowen119 and other writers oppose it, saying it has [pg 116] no relation to the times in which we live, or to any which are near at hand. He thinks the productive power of the whole world prevents the necessity of considering the pressure of population upon subsistence as an actuality now or in the future. This, however, does not deny the existence of Malthus's principles, but opposes them only on the methods of their action. Mr. Rickards120 holds that man's food—as, e.g., wheat—has the power to increase geometrically faster than man; but he omits to consider that for the growth of this food land is demanded; that land is not capable of such geometrical increase; and that without it the food can not be grown. Of course, any extension of the land area, as happened when England abolished the corn laws and drew her food from our prairies, removes the previous pressure of population on subsistence. No believer in the Malthusian doctrine is so absurd as to hold that the growth of population actually exceeds subsistence, but that there is a constant tendency in all animated life to increase beyond the nourishment prepared for it, no one can possibly doubt. This is not inconsistent with the fact that subsistence has at any time increased faster than population. It is as if a block of wood on the floor were acted on by two opposing forces, one tending to move it forward, one backward: if it moves backward, that does not prove the absence of any force working to move it forward, but only that the other force is the stronger of the two, [pg 117] and that the final motion is the resultant of the two forces. It is only near-sighted generalization to say that since the block moves forward, there is therefore no opposing force to its advance.121 Mr. Doubleday maintains that, as people become better fed, they become unprolific. Mr. Mill's answer, referring to the large families of the English peerage, is unfortunate.122 In Sweden the increase of the peasantry is six times that of the middle classes, and fourteen times that of the nobility. The diminishing fertility of New England families gives a truer explanation, when it is seen that with the progress in material wealth later marriages are the rule. When New-Englanders emigrate to the Western States, where labor is in demand and where it is less burdensome to have large families, there is no question as to their fertility.123

(1.) In a very backward state of society, like that of Europe in the middle ages, and many parts of Asia at present, population is kept down by actual starvation. The starvation does not take place in ordinary years, but in seasons of scarcity, which in those states of society are much more frequent and more extreme than Europe is now accustomed to. (2.) In a more improved state, few, even among the poorest of the people, are limited to actual necessaries, and to a bare sufficiency of those: and the increase is kept within bounds, not by excess of deaths, but by limitation of births.124 The limitation is brought about in various ways. In some countries, it is the result of prudent or conscientious self-restraint. There is a condition to which the laboring-people are habituated; they perceive that, by having too numerous families, they must sink below that condition, or fail to transmit it to their children; and this they do not choose to submit to.

There are other cases in which the prudence and forethought, which perhaps might not be exercised by the people [pg 118] themselves, are exercised by the state for their benefit; marriage not being permitted until the contracting parties can show that they have the prospect of a comfortable support. There are places, again, in which the restraining cause seems to be not so much individual prudence, as some general and perhaps even accidental habit of the country. In the rural districts of England, during the last century, the growth of population was very effectually repressed by the difficulty of obtaining a cottage to live in. It was the custom for unmarried laborers to lodge and board with their employers; it was the custom for married laborers to have a cottage: and the rule of the English poor-laws, by which a parish was charged with the support of its unemployed poor, rendered land-owners averse to promote marriage. About the end of the century, the great demand for men in war and manufactures made it be thought a patriotic thing to encourage population: and about the same time the growing inclination of farmers to live like rich people, favored as it was by a long period of high prices, made them desirous of keeping inferiors at a greater distance, and, pecuniary motives arising from abuses of the poor-laws being superadded, they gradually drove their laborers into cottages, which the landowners now no longer refused permission to build.

It is but rarely that improvements in the condition of the laboring-classes do anything more than give a temporary margin, speedily filled up by an increase of their numbers. Unless, either by their general improvement in intellectual and moral culture, or at least by raising their habitual standard of comfortable living, they can be taught to make a better use of favorable circumstances, nothing permanent can be done for them; the most promising schemes end only in having a more numerous but not a happier people. There is no doubt that [the standard] is gradually, though slowly, rising in the more advanced countries of Western Europe.125 [pg 119] Subsistence and employment in England have never increased more rapidly than in the last forty years, but every census since 1821 showed a smaller proportional increase of population than that of the period preceding; and the produce of French agriculture and industry is increasing in a progressive ratio, while the population exhibits, in every quinquennial census, a smaller proportion of births to the population.

This brings forward the near connection between land-tenures and population. France is pre-eminently a country of small holdings, and it is undoubtedly true that the system has checked the thoughtless increase of numbers. On his few hectares, the French peasant sees in the size of his farm and the amount of its produce the limit of subsistence for himself and his family; as in no other way does he see beforehand the results of any lack of food from his lack of prudence.126 From 1790 to 1815 the average yearly increase of population was 120,000; from 1815 to 1846, the golden age of French agriculture, 200,000; from 1846 to 1856, when agriculture was not prosperous, 60,000; from 1856 to 1880 the increase has been not more than 36,000 yearly. In France the question shapes itself to the peasant proprietor, How many can be subsisted by the amount of produce, not on an unlimited area of land in other parts of the world, but on this particular property of a small size? While in England there are ten births to six deaths, in France there are about ten births to every nine deaths.127 In no country has the doctrine of Malthus been more attacked than in France, and yet in no other country has there been a more marked obedience to its principles in actual practice. Since the French are practically not at all an emigrating people, population has strictly adapted itself to subsistence. For the relative increase of population in France and the United States, see also the movement of lines indicating the increase of population in chart No. III (p. 114).
[pg 120]

Chapter VIII. Of The Law Of The Increase Of Capital.

§ 1. Means for Saving in the Surplus above Necessaries.

The requisites of production being labor, capital, and land, it has been seen from the preceding chapter that the impediments to the increase of production do not arise from the first of these elements. But production has other requisites, and, of these, the one which we shall next consider is Capital. There can not be more people in any country, or in the world, than can be supported from the produce of past labor until that of present labor comes in [although it is not to be supposed that capital consists wholly of food]. We have next, therefore, to inquire into the conditions of the increase of capital: the causes by which the rapidity of its increase is determined, and the necessary limitations of that increase.

Since all capital is the product of saving, that is, of abstinence from present consumption for the sake of a future good, the increase of capital must depend upon two things—the amount of the fund from which saving can be made, and the strength of the dispositions which prompt to it.

[pg 121]

(1.) The fund from which saving can be made is the surplus of the produce of labor, after supplying the necessaries of life to all concerned in the production (including those employed in replacing the materials, and keeping the fixed capital in repair). More than this surplus can not be saved under any circumstances. As much as this, though it never is saved, always might be. This surplus is the fund from which the enjoyments, as distinguished from the necessaries of the producers, are provided; it is the fund from which all are subsisted who are not themselves engaged in production, and from which all additions are made to capital. The capital of the employer forms the revenue of the laborers, and, if this exceeds the necessaries of life, it gives them a surplus which they may either expend in enjoyments or save.

It is evident that the whole unproductive consumption of the laborer can be saved. When it is considered how enormous a sum is spent by the working-classes in drink alone (and also in the great reserves of the Trades-Unions collected for purposes of strikes), it is indisputable that the laborers have the margin from which savings can be made, and by which they themselves may become capitalists. The great accumulations in the savings-banks by small depositors in the United States also show somewhat how much is actually saved. In 1882-1883 there were 2,876,438 persons who had deposited in the savings-banks of the United States $1,024,856,787, with an average to each depositor of $356.29. The unproductive consumption, however, of all classes—not merely that of the working-men—is the possible fund which may be saved. That being the amount which can be saved, how much will be saved depends on the strength of the desire to save.

The greater the produce of labor after supporting the laborers, the more there is which can be saved. The same thing also partly contributes to determine how much will be saved. A part of the motive to saving consists in the prospect of deriving an income from savings; in the fact that capital, employed in production, is capable of not only reproducing itself but yielding an increase. The greater the profit that can be made from capital, the stronger is the motive to its accumulation.

[pg 122]

§ 2. Motive for Saving in the Surplus above Necessaries.

But the disposition to save does not wholly depend on the external inducement to it; on the amount of profit to be made from savings. With the same pecuniary inducement, the inclination is very different, in different persons, and in different communities.

(2.) All accumulation involves the sacrifice of a present, for the sake of a future good.

This is the fundamental motive underlying the effective desire of accumulation, and is far more important than any other. It is, in short, the test of civilization. In order to induce the laboring-classes to improve their condition and save capital, it is absolutely necessary to excite in them (by education or religion) a belief in a future gain greater than the present sacrifice. It is, to be sure, the whole problem of creating character, and belongs to sociology and ethics rather than to political economy.

In weighing the future against the present, the uncertainty of all things future is a leading element; and that uncertainty is of very different degrees. “All circumstances,” therefore, “increasing the probability of the provision we make for futurity being enjoyed by ourselves or others, tend” justly and reasonably “to give strength to the effective desire of accumulation. Thus a healthy climate or occupation, by increasing the probability of life, has a tendency to add to this desire. When engaged in safe occupations and living in healthy countries, men are much more apt to be frugal, than in unhealthy or hazardous occupations and in climates pernicious to human life. Sailors and soldiers are prodigals. In the West Indies, New Orleans, the East Indies, the expenditure of the inhabitants is profuse. The same people, coming to reside in the healthy parts of Europe, and not getting into the vortex of extravagant fashion, live economically. War and pestilence have always waste and luxury among the other evils that follow in their train. For similar reasons, whatever gives security to the affairs of the community is favorable to the strength of this principle. In this respect the general prevalence of law and [pg 123] order and the prospect of the continuance of peace and tranquillity have considerable influence.”128

It is asserted that the prevalence of homicide in certain parts of the United States has had a vital influence in retarding the material growth of those sections. The Southern States have received but a very small fraction (from ten to thirteen per cent) of foreign immigration. A country where law and order prevail to perfection may find its material prosperity checked by a deadly and fatal climate; or, on the other hand, a people may destroy all the advantages accruing from matchless natural resources and climate by persistent disregard of life and property. A rather startling confirmation of this economic truth is afforded by the fact that homicide has been as destructive of life in the South as yellow fever. Although there have been forty thousand deaths from yellow fever since the war, the deaths from homicide, for the same period, have been even greater.129 The influence of the old slave régime, and its still existing influences, in checking foreign immigration into the South can be seen by the colored chart, No. VIII, showing the relative density of foreign-born inhabitants in the several parts of the United States. The deeper color shows the greater foreign-born population.

The more perfect the security, the greater will be the effective strength of the desire of accumulation. Where property is less safe, or the vicissitudes ruinous to fortunes are more frequent and severe, fewer persons will save at all, and, of those who do, many will require the inducement of a higher rate of profit on capital to make them prefer a doubtful future to the temptation of present enjoyment.

In the circumstances, for example, of a hunting tribe, “man may be said to be necessarily improvident, and regardless of futurity, because, in this state, the future presents nothing which can be with certainty either foreseen or governed.... Besides a want of the motives exciting to provide for the needs of futurity through means of the abilities of the present, there is a want of the habits of perception [pg 124] and action, leading to a constant connection in the mind of those distant points, and of the series of events serving to unite them. Even, therefore, if motives be awakened capable of producing the exertion necessary to effect this connection, there remains the task of training the mind to think and act so as to establish it.”

§ 3. Examples of Deficiency in the Strength of this Desire.

For instance: “Upon the banks of the St. Lawrence there are several little Indian villages. The cleared land is rarely, I may almost say never, cultivated, nor are any inroads made in the forest for such a purpose. The soil is, nevertheless, fertile, and, were it not, manure lies in heaps by their houses. Were every family to inclose half an acre of ground, till it, and plant it in potatoes and maize, it would yield a sufficiency to support them one half the year. They suffer, too, every now and then, extreme want, insomuch that, joined to occasional intemperance, it is rapidly reducing their numbers. This, to us, so strange apathy proceeds not, in any great degree, from repugnance to labor; on the contrary, they apply very diligently to it when its reward is immediate. It is evidently not the necessary labor that is the obstacle to more extended culture, but the distant return from that labor. I am assured, indeed, that among some of the more remote tribes, the labor thus expended much exceeds that given by the whites. On the Indian, succeeding years are too distant to make sufficient impression; though, to obtain what labor may bring about in the course of a few months, he toils even more assiduously than the white man.”

This view of things is confirmed by the experience of the Jesuits, in their interesting efforts to civilize the Indians of Paraguay. The real difficulty was the improvidence of the people; their inability to think for the future; and the necessity accordingly of the most unremitting and minute superintendence on the part of their instructors. “Thus at first, if these gave up to them the care of the oxen with which they plowed, their indolent thoughtlessness would probably leave them at evening still yoked to the implement. Worse than this, instances occurred where they cut them up [pg 125] for supper, thinking, when reprehended, that they sufficiently excused themselves by saying they were hungry.”

As an example intermediate, in the strength of the effective desire of accumulation, between the state of things thus depicted and that of modern Europe, the case of the Chinese deserves attention. “Durability is one of the chief qualities, marking a high degree of the effective desire of accumulation. The testimony of travelers ascribes to the instruments formed by the Chinese a very inferior durability to similar instruments constructed by Europeans. The houses, we are told, unless of the higher ranks, are in general of unburnt bricks, of clay, or of hurdles plastered with earth; the roofs, of reeds fastened to laths. A greater degree of strength in the effective desire of accumulation would cause them to be constructed of materials requiring a greater present expenditure, but being far more durable. From the same cause, much land, that in other countries would be cultivated, lies waste. All travelers take notice of large tracts of lands, chiefly swamps, which continue in a state of nature. To bring a swamp into tillage is generally a process to complete which requires several years. It must be previously drained, the surface long exposed to the sun, and many operations performed, before it can be made capable of bearing a crop. Though yielding, probably, a very considerable return for the labor bestowed on it, that return is not made until a long time has elapsed. The cultivation of such land implies a greater strength of the effective desire of accumulation than exists in the empire. The amount of self-denial would seem to be small. It is their great deficiency in forethought and frugality in this respect which is the cause of the scarcities and famines that frequently occur.”

That it is defect of providence, not defect of industry, that limits production among the Chinese, is still more obvious than in the case of the semi-agriculturized Indians. “Where the returns are quick, where the instruments formed require but little time to bring the events for which they were formed to an issue,” it is well known that “the great [pg 126] progress which has been made in the knowledge of the arts suited to the nature of the country and the wants of its inhabitants” makes industry energetic and effective. “What marks the readiness with which labor is forced to form the most difficult materials into instruments, where these instruments soon bring to an issue the events for which they are formed, is the frequent occurrence, on many of their lakes and rivers, of structures resembling the floating gardens of the Peruvians, rafts covered with vegetable soil and cultivated. Labor in this way draws from the materials on which it acts very speedy returns. Nothing can exceed the luxuriance of vegetation when the quickening powers of a genial sun are ministered to by a rich soil and abundant moisture. It is otherwise, as we have seen, in cases where the return, though copious, is distant. European travelers are surprised at meeting these little floating farms by the side of swamps which only require draining to render them tillable.”

When a country has carried production as far as in the existing state of knowledge it can be carried with an amount of return corresponding to the average strength of the effective desire of accumulation in that country, it has reached what is called the stationary state; the state in which no further addition will be made to capital, unless there takes place either some improvement in the arts of production, or an increase in the strength of the desire to accumulate. In the stationary state, though capital does not on the whole increase, some persons grow richer and others poorer. Those whose degree of providence is below the usual standard become impoverished, their capital perishes, and makes room for the savings of those whose effective desire of accumulation exceeds the average. These become the natural purchasers of the lands, manufactories, and other instruments of production owned by their less provident countrymen.

In China, if that country has really attained, as it is supposed to have done, the stationary state, accumulation has stopped when the returns to capital are still as high as is indicated by a rate of interest legally twelve per cent, and practically [pg 127] varying (it is said) between eighteen and thirty-six. It is to be presumed, therefore, that no greater amount of capital than the country already possesses can find employment at this high rate of profit, and that any lower rate does not hold out to a Chinese sufficient temptation to induce him to abstain from present enjoyment. What a contrast with Holland, where, during the most flourishing period of its history, the government was able habitually to borrow at two per cent, and private individuals, on good security, at three!

§ 4. Examples of Excess of this Desire.

In [the United States and] the more prosperous countries of Europe, there are to be found abundance of prodigals: still, in a very numerous portion of the community, the professional, manufacturing, and trading classes, being those who, generally speaking, unite more of the means with more of the motives for saving than any other class, the spirit of accumulation is so strong that the signs of rapidly increasing wealth meet every eye: and the great amount of capital seeking investment excites astonishment, whenever peculiar circumstances turning much of it into some one channel, such as railway construction or foreign speculative adventure, bring the largeness of the total amount into evidence.

There are many circumstances which, in England, give a peculiar force to the accumulating propensity. The long exemption of the country from the ravages of war and the far earlier period than elsewhere at which property was secure from military violence or arbitrary spoliation have produced a long-standing and hereditary confidence in the safety of funds when trusted out of the owner's hands, which in most other countries is of much more recent origin, and less firmly established.

The growth of deposit-banking in Great Britain, therefore, advances with enormous strides, while in Continental countries it makes very little headway. The disturbed condition of the country in France, owing to wars, leads the thrifty to hoard instead of depositing their savings. But in the United States the same growth is seen as among the English. The net deposits of the national banks of the United States in 1871 were $636,000,000, but in 1883 they had increased more than 83 [pg 128] per cent to $1,168,000,000. Deposit accounts are the rule even with small tradesmen; and the savings-banks of Massachusetts alone show deposits in 1882-1883 of $241,311,362, and those of New York of $412,147,213. The United States also escapes from the heavy taxation which in Europe is imposed to maintain an extravagant army and navy chest. The effect of institutions, moreover, in stimulating the growth of material prosperity is far more true of the United States than of England, for the barriers raised against the movement from lower to higher social classes in the latter country are non-existent here, and consequently there is more stimulus toward acquiring the means of bettering a man's social condition.

The geographical causes which have made industry rather than war the natural source of power and importance to Great Britain [and the United States] have turned an unusual proportion of the most enterprising and energetic characters into the direction of manufactures and commerce; into supplying their wants and gratifying their ambition by producing and saving, rather than by appropriating what has been produced and saved. Much also depended on the better political institutions of this country, which, by the scope they have allowed to individual freedom of action, have encouraged personal activity and self-reliance, while, by the liberty they confer of association and combination, they facilitate industrial enterprise on a large scale. The same institutions, in another of their aspects, give a most direct and potent stimulus to the desire of acquiring wealth. The earlier decline of feudalism [in England] having removed or much weakened invidious distinctions between the originally trading classes and those who had been accustomed to despise them, and a polity having grown up which made wealth the real source of political influence, its acquisition was invested with a factitious value independent of its intrinsic utility. And, inasmuch as to be rich without industry has always hitherto constituted a step in the social scale above those who are rich by means of industry, it becomes the object of ambition to save not merely as much as will afford a large income while in business, but enough to retire from business and live in affluence on realized gains.

[pg 129]

In [the United States,] England, and Holland, then, for a long time past, and now in most other countries in Europe, the second requisite of increased production, increase of capital, shows no tendency to become deficient. So far as that element is concerned, production is susceptible of an increase without any assignable bounds. The limitation to production, not consisting in any necessary limit to the increase of the other two elements, labor and capital, must turn upon the properties of the only element which is inherently, and in itself, limited in quantity. It must depend on the properties of land.

[pg 130]

Chapter IX. Of The Law Of The Increase Of Production From Land.

§ 1. The Law of Production from the Soil, a Law of Diminishing Return in Proportion to the Increased Application of Labor and Capital.

Land differs from the other elements of production, labor, and capital, in not being susceptible of indefinite increase. Its extent is limited, and the extent of the more productive kinds of it more limited still. It is also evident that the quantity of produce capable of being raised on any given piece of land is not indefinite. This limited quantity of land and limited productiveness of it are the real limits to the increase of production.

The limitation to production from the properties of the soil is not like the obstacle opposed by a wall, which stands immovable in one particular spot, and offers no hindrance to motion short of stopping it entirely. We may rather compare it to a highly elastic and extensible band, which is hardly ever so violently stretched that it could not possibly be stretched any more, yet the pressure of which is felt long before the final limit is reached, and felt more severely the nearer that limit is approached.

After a certain, and not very advanced, stage in the progress of agriculture—as soon, in fact, as mankind have applied themselves to cultivation with any energy, and have brought to it any tolerable tools—from that time it is the law of production from the land, that in any given state of agricultural skill and knowledge, by increasing the labor, the produce is not increased in an equal degree; doubling the labor does not double the produce; or, to express the same thing in other words, every increase of produce is obtained [pg 131] by a more than proportional increase in the application of labor to the land. This general law of agricultural industry is the most important proposition in political economy. Were the law different, nearly all the phenomena of the production and distribution of wealth would be other than they are.

It is not generally considered that in the United States, where in many sparsely settled parts of the country new land is constantly being brought into cultivation, an additional population under existing conditions of agricultural skill can be maintained with constantly increasing returns up to a certain point before the law of diminishing returns begins to operate. Where more laborers are necessary, and more capital wanted, to co-operate in a new country before all the land can give its maximum product, in such a stage of cultivation it can not be said that the law of diminishing returns has yet practically set in.

When, for the purpose of raising an increase of produce, recourse is had to inferior land, it is evident that, so far, the produce does not increase in the same proportion with the labor. The very meaning of inferior land is land which with equal labor returns a smaller amount of produce. Land may be inferior either in fertility or in situation. The one requires a greater proportional amount of labor for growing the produce, the other for carrying it to market. If the land A yields a thousand quarters of wheat to a given outlay in wages, manure, etc., and, in order to raise another thousand, recourse must be had to the land B, which is either less fertile or more distant from the market, the two thousand quarters will cost more than twice as much labor as the original thousand, and the produce of agriculture will be increased in a less ratio than the labor employed in procuring it.

Instead of cultivating the land B, it would be possible, by higher cultivation, to make the land A produce more. It might be plowed or harrowed twice instead of once, or three times instead of twice; it might be dug instead of being plowed; after plowing, it might be gone over with a hoe instead of a harrow, and the soil more completely pulverized; it might be oftener or more thoroughly weeded; [pg 132] the implements used might be of higher finish, or more elaborate construction; a greater quantity or more expensive kinds of manure might be applied, or, when applied, they might be more carefully mixed and incorporated with the soil.

The example of market-gardens in the vicinity of great cities and towns shows how the intensive culture permits an increase of labor and capital with larger returns. These lands, by their situation, are superior lands for this particular purpose, although they might be inferior lands as regards absolute productiveness when compared with the rich wheat-lands of Dakota. New England and New Jersey farms, generally speaking, no longer attempt the culture of grains, but (when driven out of that culture by the great railway lines which have opened up the West) they have arranged themselves in a scale of adaptability for stock, grass, fruit, dairy, or vegetable farming; and have thereby given greater profits to their owners than the same land did under the old régime. Even on lands where any grain can still be grown, corn, buckwheat, barley, oats, and rye, cover the cultivated areas instead of wheat.

Inferior lands, or lands at a greater distance from the market, of course yield an inferior return, and an increasing demand can not be supplied from them unless at an augmentation of cost, and therefore of price. If the additional demand could continue to be supplied from the superior lands, by applying additional labor and capital, at no greater proportional cost than that at which they yield the quantity first demanded of them, the owners or farmers of those lands could undersell all others, and engross the whole market. Lands of a lower degree of fertility or in a more remote situation might indeed be cultivated by their proprietors, for the sake of subsistence or independence; but it never could be the interest of any one to farm them for profit. That a profit can be made from them, sufficient to attract capital to such an investment, is a proof that cultivation on the more eligible lands has reached a point beyond which any greater application of labor and capital would yield, at the best, no greater return than can be obtained at the same expense from less fertile or less favorably situated lands.

[pg 133]

“It is long,” says a late traveler in the United States,130 “before an English eye becomes reconciled to the lightness of the crops and the careless farming (as we should call it) which is apparent. One forgets that, where land is so plentiful and labor so dear as it is here, a totally different principle must be pursued from that which prevails in populous countries, and that the consequence will of course be a want of tidiness, as it were, and finish, about everything which requires labor.” Of the two causes mentioned, the plentifulness of land seems to me the true explanation, rather than the dearness of labor; for, however dear labor may be, when food is wanted, labor will always be applied to producing it in preference to anything else. But this labor is more effective for its end by being applied to fresh soil than if it were employed in bringing the soil already occupied into higher cultivation.

The Western movement of what might be called the wheat-center is quite perceptible. Until recently Minnesota has been a great wheat-producing State, and vast tracts of land were there planted with that grain when the soil was first broken. The profits on the first few crops have been enormous, but it is now said to be more desirable for wheat-growers to move onward to newer lands, and to sell the land to cultivators of a different class (of fruit and varied products), who produce for a denser population. So that (in 1884) Dakota, instead of Minnesota, has become the district of the greatest wheat production.131

Only when no soils remain to be broken up, but such as either from distance or inferior quality require a considerable rise of price to render their cultivation profitable, can it become advantageous to apply the high farming of Europe to any American lands; except, perhaps, in the immediate vicinity of towns, where saving in cost of carriage may compensate for great inferiority in the return from the soil itself.

[pg 134]

The principle which has now been stated must be received, no doubt, with certain explanations and limitations. Even after the land is so highly cultivated that the mere application of additional labor, or of an additional amount of ordinary dressing, would yield no return proportioned to the expense, it may still happen that the application of a much greater additional labor and capital to improving the soil itself, by draining or permanent manures, would be as liberally remunerated by the produce as any portion of the labor and capital already employed. It would sometimes be much more amply remunerated. This could not be, if capital always sought and found the most advantageous employment.

§ 2. Antagonist Principle to the Law of Diminishing Return; the Progress of Improvements in Production.

That the produce of land increases, cæteris paribus, in a diminishing ratio to the increase in the labor employed, is, as we have said (allowing for occasional and temporary exceptions), the universal law of agricultural industry. This principle, however, has been denied. So much so, indeed, that (it is affirmed) the worst land now in cultivation produces as much food per acre, and even as much to a given amount of labor, as our ancestors contrived to extract from the richest soils in England.

The law of diminishing returns is the physical fact upon which the economic doctrine of rent is based, and requires careful attention. Carey asserts, instead, that there is a law of increasing productiveness, since, as men grow in numbers and intelligence, there arises an ability to get more from the soil.132 Some objectors even deny that different grades of land are cultivated, and that there is no need of taking inferior soils into cultivation. If this were true, why would not one half an acre of land be as good as a whole State? Johnston133 says: In a country and among poor settlers ... poor land is a relative term. Land is called poor which is not suitable to a poor man, which on mere clearing and burning will not yield good first crops. Thus that which is poor land for a poor man may prove rich land to a rich man.134 Moreover, as is constantly the case in our country, it often happens that a railway may bring new lands into competition with old lands in a given [pg 135] market; of which the most conspicuous example is the competition of Western grain-fields with the Eastern farms. In these older districts, before the competition came, there was a given series of grades in the cultivated land; after the railway was built there was a disarrangement of the old series, some going out of cultivation, some remaining, and some of the new lands entering the list. The result is a new series of grades better suited to satisfy the wants of men.

This, however, does not prove that the law of which we have been speaking does not exist, but only that there is some antagonizing principle at work, capable for a time of making head against the law. Such an agency there is, in habitual antagonism to the law of diminishing return from land; and to the consideration of this we shall now proceed. It is no other than the progress of civilization. The most obvious [part of it] is the progress of agricultural knowledge, skill, and invention. Improved processes of agriculture are of two kinds: (1) some enable the land to yield a greater absolute produce, without an equivalent increase of labor; (2) others have not the power of increasing the produce, but have that of diminishing the labor and expense by which it is obtained. (1.) Among the first are to be reckoned the disuse of fallows, by means of the rotation of crops; and the introduction of new articles of cultivation capable of entering advantageously into the rotation. The change made in agriculture toward the close of the last century, by the introduction of turnip-husbandry, is spoken of as amounting to a revolution. Next in order comes the introduction of new articles of food, containing a greater amount of sustenance, like the potato, or more productive species or varieties of the same plant, such as the Swedish turnip. In the same class of improvements must be placed a better knowledge of the properties of manures, and of the most effectual modes of applying them; the introduction of new and more powerful fertilizing agents, such as guano, and the conversion to the same purpose of substances previously wasted; inventions like subsoil-plowing or tile-draining, by which the produce of some kinds of lands is so greatly multiplied; improvements in the breed or feeding of [pg 136] laboring cattle; augmented stock, of the animals which consume and convert into human food what would otherwise be wasted; and the like. (2.) The other sort of improvements, those which diminish labor, but without increasing the capacity of the land to produce, are such as the improved construction of tools; the introduction of new instruments which spare manual labor, as the winnowing and thrashing machines. These improvements do not add to the productiveness of the land, but they are equally calculated with the former to counteract the tendency in the cost of production of agricultural produce, to rise with the progress of population and demand.

§ 3. —In Railways.

Analogous in effect to this second class of agricultural improvements are improved means of communication. Good roads are equivalent to good tools. It is of no consequence whether the economy of labor takes place in extracting the produce from the soil, or in conveying it to the place where it is to be consumed.

The functions performed by railways in the system of production is highly important. They are among the most influential causes affecting the cost of producing commodities, particularly those which satisfy the primary wants of man, of which food is the chief. The amount of tonnage carried is enormous; and the cost of this service to the producers and consumers of the United States is a question of very great magnitude. The serious reduction in the cost of transportation on the railways will be a surprise to all who have not followed the matter very closely; the more so, that it has been brought about by natural causes, and independent of legislation. Corn, meat, and dairy products form, it is said, at least 50 per cent, and coal and timber about 30 per cent, of the tonnage moved on all the railways of the United States. If a lowered cost of transportation has come about, it has then cost less to move the main articles of immediate necessity. Had the charge in 1880 remained as high even as it was from 1866 to 1869, the number of tons carried in 1880 would have cost the United States from $500,000,000 to $800,000,000 more than the charge actually made, owing to the reductions by the railways. It seems, however, that this process of reduction culminated about 1879. In order to show the facts of this process, note the changes in the following chart, No. V. The railways of the State of New York are taken, but the same is also true of those of Ohio:
[pg 137]

Chart V.

Cost of 20 Barrels of Flour, 10 Beef, 10 Pork, 100 Bushels Wheat, 100 Corn, 100 Oats, 100 Pounds Butter, 100 Lard, and 100 Fleece Wool, in New York City, at the Average of each Year, Compiled by Months, in Gold; Compared Graphically with the Decrease in the Charge per Ton per Mile, on all the Railroads of the State of New York, during the Same Period.

Year.Price in gold of staple farm products. (Dollars) Charge for carrying one ton one mile. (Cents) Decrease in the railroad expenses per ton. (Cents) Decrease in the profits of the railroads for carrying one ton. (Cents)
1870776.021.70161.1471 .5545
1871735.331.70051.1450 .5555
1872675.921.66451.1490 .5155
1873662.501.60001.0864 .5136
1874748.541.4480.9730 .4750
1875696.401.3039.9587 .3452
1876651.741.1604.8561 .3043
1877751.951.0590.7740 .2850
1878569.81.9994.6900 .3094
1879568.34.8082.5847 .2295
1880631.32.9220.6030 .3190
1881703.10.8390.5880 .2510
1882776.12.8170.6010 .2160
1883662.11.8990.6490 .2500

In 1855 the charge per ton per mile was 3.27 cents, as compared with 0.89 in 1883.

Tons moved 1 m. in 1883 by railroads of N.Y. 9,286,216,628
At rate of 1855, would cost$303,659,283
Actual cost in 188383,464,919
Saving to the State$220,194,364
[pg 138]

The explanation of this reduced cost is given by Mr. Edward Atkinson135 as (1) the competition of water-ways, (2) the competition of one railway with another, and (3) the competition of other countries, which forces our railways to try to lay our staple products down in foreign markets at a price which will warrant continued shipment. Besides these reasons, much ought also (4) to be assigned to the progress of inventions and the reduced cost of steel and all appliances necessary to the railways.

The large importance of the railways shows itself in an influence on general business prosperity, and as a place for large investments of a rapidly growing capital. The building of railways, however, has been going on, at some times with greater speed than at others. Instead of 33,908 miles of railways at the close of our war, we have now (1884) over 120,000 miles. How the additional mileage has been built year by year, with two distinct eras of increased building—one from 1869 to 1873, and another from 1879 to 1884—may be seen by the shorter lines of the subjoined chart, No. VI.

That speculation has been excited at different times by the opening up of our Western country, there can be no doubt. And if a comparison be made with Chart No. XVII (Book IV, Chap. III), which gives the total grain-crops of the United States, it will be seen that since 1879, although our population has increased from 12-½ per cent to 14 per cent, our grain-crops only 5 per cent, yet our railway mileage has increased 40 per cent.

The extent to which the United States has carried railway-building, as compared with European countries, although we have a very much greater area, is distinctly shown by Chart No. VII. This application of one form of improvement to oppose the law of diminishing returns in the United States has produced extraordinary results, especially when we consider that we are probably not yet using all our best lands, or, in other words, that we have not yet felt the law of diminishing returns in some large districts.

Chart VI.

Miles of Railroad in Operation on the 1st January in each Year, and the Miles added in the Year Ensuing.

Year.Miles of Railroad.Miles added.

Railways and canals are virtually a diminution of the cost of production of all things sent to market by them; and literally so of all those the appliances and aids for producing which they serve to transmit. By their means land can be [pg 140] cultivated, which would not otherwise have remunerated the cultivators without a rise of price. Improvements in navigation have, with respect to food or materials brought from beyond sea, a corresponding effect.

§ 4. —In Manufactures.

From similar considerations, it appears that many purely mechanical improvements, which have, apparently, at least, no peculiar connection with agriculture, nevertheless enable a given amount of food to be obtained with a smaller expenditure of labor. A great improvement in the process of smelting iron would tend to cheapen agricultural implements, diminish the cost of railroads, of wagons and carts, ships, and perhaps buildings, and many other things to which iron is not at present applied, because it is too costly; and would thence diminish the cost of production of food. The same effect would follow from an improvement in those processes of what may be termed manufacture, to which the material of food is subjected after it is separated from the ground. The first application of wind or water power to grind corn tended to cheapen bread as much as a very important discovery in agriculture would have done; and any great improvement in the construction of corn-mills would have, in proportion, a similar influence.

Those manufacturing improvements which can not be made instrumental to facilitate, in any of its stages, the actual production of food, and therefore do not help to counteract or retard the diminution of the proportional return to labor from the soil, have, however, another effect, which is practically equivalent. What they do not prevent, they yet, in some degree, compensate for.136

Chart VII.

Ratio of Miles of Railroad to the Areas of States and Countries—United States and Europe. The relative proportion is 1 Mile Railroad to 4 Square Miles of Area.

No.Name.Rank in Size. Relative.
3England and Wales2988
4New Jersey6281
6Rhode Island7165
12New Hampshire6545
14New York3941
16German Empire438
27Austrian Empire321
33South Carolina4914
37West Virginia5512
39North Carolina3712
55Russia in Europe15
60New Mexico123
62Indian Territory252
68Bosnia and Herzegovina530
70Eastern Roumelia610

(The United States have substantially one mile of railway to each 540 inhabitants. Europe has one mile to each 3,000 inhabitants, if Russia be included; about one mile to each 2,540, exclusive of Russia.)

The materials of manufactures being all drawn from the land, and many of them from agriculture, which supplies in particular the entire material of clothing, the general law of production from the land, the law of diminishing return, must in the last resort be applicable to manufacturing as well as to agricultural history. As population increases, and [pg 142] the power of the land to yield increased produce is strained harder and harder, any additional supply of material, as well as of food, must be obtained by a more than proportionally increasing expenditure of labor. But the cost of the material forming generally a very small portion of the entire cost of the manufacture, the agricultural labor concerned in the production of manufactured goods is but a small fraction of the whole labor worked up in the commodity.

Mr. Babbage137 gives an interesting illustration of this principle. Bar-iron of the value of £1 became worth, when manufactured into—

Slit-iron, for nails1.10
Natural steel1.42
Gun-barrels, ordinary9.10
Scissors, best446.94
Sword-handles, polished steel972.82

It can not, however, be said of such manufactures as coarse cotton cloth, wherein the increased cost of raw cotton causes an immediate effect upon the price of the cloth, that the cost of the materials forms but a small portion of the cost of the manufacture.138

All the labor [not engaged in preparing materials] tends constantly and strongly toward diminution, as the amount of production increases. Manufactures are vastly more susceptible than agriculture of mechanical improvements and contrivances for saving labor. In manufactures, accordingly, the causes tending to increase the productiveness of industry preponderate greatly over the one cause which tends to diminish it; and the increase of production, called forth by the progress of society, takes place, not at an increasing, but at a continually diminishing proportional cost. This fact has manifested itself in the progressive fall of the prices and values of almost every kind of manufactured goods during two centuries past; a fall accelerated by the mechanical inventions of the last seventy or eighty years, and susceptible [pg 143] of being prolonged and extended beyond any limit which it would be safe to specify. The benefit might even extend to the poorest class. The increased cheapness of clothing and lodging might make up to them for the augmented cost of their food.

There is, thus, no possible improvement in the arts of production which does not in one or another mode exercise an antagonistic influence to the law of diminishing return to agricultural labor. Nor is it only industrial improvements which have this effect. Improvements in government, and almost every kind of moral and social advancement, operate in the same manner. We may say the same of improvements in education. The intelligence of the workman is a most important element in the productiveness of labor. The carefulness, economy, and general trustworthiness of laborers are as important as their intelligence. Friendly relations and a community of interest and feeling between laborers and employers are eminently so. In the rich and idle classes, increased mental energy, more solid instruction, and stronger feelings of conscience, public spirit, or philanthropy, would qualify them to originate and promote the most valuable improvements, both in the economical resources of their country and in its institutions and customs.

§ 5. Law Holds True of Mining.

We must observe that what we have said of agriculture is true, with little variation, of the other occupations which it represents; of all the arts which extract materials from the globe. Mining industry, for example, usually yields an increase of produce at a more than proportional increase of expense.

It does worse, for even its customary annual produce requires to be extracted by a greater and greater expenditure of labor and capital. As a mine does not reproduce the coal or ore taken from it, not only are all mines at last exhausted, but even when they as yet show no signs of exhaustion they must be worked at a continually increasing cost; shafts must be sunk deeper, galleries driven farther, greater power applied to keep them clear of water; the produce must be [pg 144] lifted from a greater depth, or conveyed a greater distance. The law of diminishing return applies therefore to mining in a still more unqualified sense than to agriculture; but the antagonizing agency, that of improvements in production, also applies in a still greater degree. Mining operations are more susceptible of mechanical improvements than agricultural: the first great application of the steam-engine was to mining; and there are unlimited possibilities of improvement in the chemical processes by which the metals are extracted. There is another contingency, of no unfrequent occurrence, which avails to counterbalance the progress of all existing mines toward exhaustion: this is, the discovery of new ones, equal or superior in richness.

Professor Jevons has applied this economic law to the industrial situation of England.139 While explaining that the supply of cheap coal is the basis of English manufacturing prosperity, yet he insists that, if the demand for coal is constantly increasing, the point must inevitably be reached in the future when the increased supply can be obtained only at a higher cost. When coal costs England as much as it does any other nation, then her exclusive industrial advantage will cease to exist. In the United States the outlying iron deposits of Lake Superior, Lake Champlain, and Pennsylvania, so geologists tell us, will find competition arising from the new grades of greater productiveness in the richer deposits of States like Alabama. In that case we shall be going from poorer to better grades of iron-mines, but after the change is made a series of different grades of productiveness will be established as before.

To resume: all natural agents which are limited in quantity are not only limited in their ultimate productive power, but, long before that power is stretched to the utmost, they yield to any additional demands on progressively harder terms. This law may, however, be suspended, or temporarily controlled, by whatever adds to the general power of mankind over nature, and especially by any extension of their knowledge, and their consequent command, of the properties and powers of natural agents.

[pg 145]

Chapter X. Consequences Of The Foregoing Laws.

§ 1. Remedies for Weakness of the Principle of Accumulation.

From the preceding exposition it appears that the limit to the increase of production is twofold: from deficiency of capital, or of land. Production comes to a pause, either because the effective desire of accumulation is not sufficient to give rise to any further increase of capital, or because, however disposed the possessors of surplus income may be to save a portion of it, the limited land at the disposal of the community does not permit additional capital to be employed with such a return as would be an equivalent to them for their abstinence.

In countries where the principle of accumulation is as weak as it is in the various nations of Asia, the desideratum economically considered is an increase of industry, and of the effective desire of accumulation. The means are, first, a better government: more complete security of property; moderate taxes, and freedom from arbitrary exaction under the name of taxes; a more permanent and more advantageous tenure of land, securing to the cultivator as far as possible the undivided benefits of the industry, skill, and economy he may exert. Secondly, improvement of the public intelligence. Thirdly, the introduction of foreign arts, which raise the returns derivable from additional capital to a rate corresponding to the low strength of the desire of accumulation.

An excellent example of what might be done by this process is to be seen under our very eyes in the present development of Mexico, to which American capital and enterprise have been [pg 146] so prominently drawn of late. All these proposed remedies, if put into use in Mexico, would undoubtedly result in a striking increase of wealth.

§ 2. Even where the Desire to Accumulate is Strong, Population must be Kept within the Limits of Population from Land.

But there are other countries, and England [and the United States are] at the head of them, in which neither the spirit of industry nor the effective desire of accumulation need any encouragement. In these countries there would never be any deficiency of capital, if its increase were never checked or brought to a stand by too great a diminution of its returns. It is the tendency of the returns to a progressive diminution which causes the increase of production to be often attended with a deterioration in the condition of the producers; and this tendency, which would in time put an end to increase of production altogether, is a result of the necessary and inherent conditions of production from the land.

This, of course, is based on the supposition that no new lands, such as those of the United States, can be opened for cultivation. If there is no prohibition to the importation of cheaper food, new and richer land in any part of the world, within reach of the given country, is an influence which works against the tendency. Yet the tendency, or economic law, is there all the same, forever working.

In all countries which have passed beyond a very early stage in the progress of agriculture, every increase in the demand for food, occasioned by increased population, will always, unless there is a simultaneous improvement in production, diminish the share which on a fair division would fall to each individual. An increased production, in default of unoccupied tracts of fertile land, or of fresh improvements tending to cheapen commodities, can never be obtained but by increasing the labor in more than the same proportion. The population must either work harder or eat less, or obtain their usual food by sacrificing a part of their other customary comforts. Whenever this necessity is postponed, it is because the improvements which facilitate production continue progressive; because the contrivances of mankind for making their labor more effective keep up an [pg 147] equal struggle with Nature, and extort fresh resources from her reluctant powers as fast as human necessities occupy and engross the old.

From this results the important corollary, that the necessity of restraining population is not, as many persons believe, peculiar to a condition of great inequality of property. A greater number of people can not, in any given state of civilization, be collectively so well provided for as a smaller. The niggardliness of nature,140 not the injustice of society, is the cause of the penalty attached to over-population. An unjust distribution of wealth does not even aggravate the evil, but, at most, causes it to be somewhat earlier felt. It is in vain to say that all mouths which the increase of mankind calls into existence bring with them hands. The new mouths require as much food as the old ones, and the hands do not produce as much.

After a degree of density has been attained, sufficient to allow the principal benefits of combination of labor, all further increase tends in itself to mischief, so far as regards the average condition of the people; but the progress of improvement has a counteracting operation, and allows of increased numbers without any deterioration, and even consistently with a higher average of comfort. Improvement must here be understood in a wide sense, including not only new industrial inventions, or an extended use of those already known, but improvements in institutions, education, opinions, and human affairs generally, provided they tend, as almost all improvements do, to give new motives or new facilities to production.

The increase in the population of the United States has been enormous, as already seen, but the increase of production has been still greater, owing to the fertility of our land, to improvements in the arts, and to our great genius for invention, as may be seen by the following table (amounts in the second [pg 148] column are given in millions).141 The steady increase of the valuation of our wealth goes on faster than the increase of population, so that it manifests itself in a larger average wealth to each inhabitant.

Decades.Valuation. Per cent of increase.Population. Per cent of increase.Per capital valuation.
1800$1,742..5,308,483 ..$328
18102,382377,239,881 36329
18203,734579,633,882 33386
18304,3281612,866,020 34336
18406,1244117,069,453 33359
18508,8004423,191,876 36379
186016,1608431,443,321 35514
187030,0688638,558,371 23780
188040,0003350,155,783 30798

If the productive powers of the country increase as rapidly as advancing numbers call for an augmentation of produce, it is not necessary to obtain that augmentation by the cultivation of soils more sterile than the worst already under culture, or by applying additional labor to the old soils at a diminished advantage; or at all events this loss of power is compensated by the increased efficiency with which, in the progress of improvement, labor is employed in manufactures. In one way or the other, the increased population is provided for, and all are as well off as before. But if the growth of human power over nature is suspended or slackened, and population does not slacken its increase; if, with only the existing command over natural agencies, those agencies are called upon for an increased produce; this greater produce will not be afforded to the increased population, without either demanding on the average a greater effort from each, or on the average reducing each to a smaller ration out of the aggregate produce.

Ever since the great mechanical inventions of Watt, Arkwright, and their contemporaries, the return to labor has probably increased as fast as the population; and would [pg 149] even have outstripped it, if that very augmentation of return had not called forth an additional portion of the inherent power of multiplication in the human species. During the twenty or thirty years last elapsed, so rapid has been the extension of improved processes of agriculture [in England], that even the land yields a greater produce in proportion to the labor employed; the average price of corn had become decidedly lower, even before the repeal of the corn laws had so materially lightened, for the time being, the pressure of population upon production. But though improvement may during a certain space of time keep up with, or even surpass, the actual increase of population, it assuredly never comes up to the rate of increase of which population is capable: and nothing could have prevented a general deterioration in the condition of the human race, were it not that population has in fact been restrained. Had it been restrained still more, and the same improvements taken place, there would have been a larger dividend than there now is, for the nation or the species at large. The new ground wrung from nature by the improvements would not have been all tied up in the support of mere numbers. Though the gross produce would not have been so great, there would have been a greater produce per head of the population.

§ 3. Necessity of Restraining Population not superseded by Free Trade in Food.

When the growth of numbers outstrips the progress of improvement, and a country is driven to obtain the means of subsistence on terms more and more unfavorable, by the inability of its land to meet additional demands except on more onerous conditions, there are two expedients, by which it may hope to mitigate that disagreeable necessity, even though no change should take place in the habits of the people with respect to their rate of increase. One of these expedients is the importation of food from abroad. The other is emigration.

The admission of cheaper food from a foreign country is equivalent to an agricultural invention by which food could be raised at a similarly diminished cost at home. It equally increases the productive power of labor. The return was [pg 150] before, so much food for so much labor employed in the growth of food: the return is now, a greater quantity of food for the same labor employed in producing cottons or hardware, or some other commodity to be given in exchange for food. The one improvement, like the other, throws back the decline of the productive power of labor by a certain distance: but in the one case, as in the other, it immediately resumes its course; the tide which has receded, instantly begins to readvance. It might seem, indeed, that, when a country draws its supply of food from so wide a surface as the whole habitable globe, so little impression can be produced on that great expanse by any increase of mouths in one small corner of it that the inhabitants of the country may double and treble their numbers without feeling the effect in any increased tension of the springs of production, or any enhancement of the price of food throughout the world. But in this calculation several things are overlooked.

In the first place, the foreign regions from which corn can be imported do not comprise the whole globe, but those parts of it almost alone which are in the immediate neighborhood of coasts or navigable rivers; and of such there is not, in the productive regions of the earth, so great a multitude as to suffice during an indefinite time for a rapidly growing demand, without an increasing strain on the productive powers of the soil.

In the next place, even if the supply were drawn from the whole instead of a small part of the surface of the exporting countries, the quantity of food would still be limited, which could be obtained from them without an increase of the proportional cost. The countries which export food may be divided into two classes: those in which the effective desire of accumulation is strong, and those in which it is weak. In Australia and the United States of America, the effective desire of accumulation is strong; capital increases fast, and the production of food might be very rapidly extended. But in such countries population [pg 151] also increases with extraordinary rapidity. Their agriculture has to provide for their own expanding numbers, as well as for those of the importing countries. They must, therefore, from the nature of the case, be rapidly driven, if not to less fertile, at least what is equivalent, to remoter and less accessible lands, and to modes of cultivation like those of old countries, less productive in proportion to the labor and expense.

The extraordinary resources of the United States are scarcely understood even by Americans. Chart No. XVIII (see Book IV, Chap. III) may give some idea of the agricultural possibilities of our land. It will be seen from this that the quantity of fertile land in but one of our States—Texas—is greater than that of Austria-Hungary.

But the countries which have at the same time cheap food and great industrial prosperity are few, being only those in which the arts of civilized life have been transferred full-grown to a rich and uncultivated soil. Among old countries, those which are able to export food, are able only because their industry is in a very backward state, because capital, and hence population, have never increased sufficiently to make food rise to a higher price. Such countries are Russia, Poland, and Hungary.

The law, therefore, of diminishing return to industry, whenever population makes a more rapid progress than improvement, is not solely applicable to countries which are fed from their own soil, but in substance applies quite as much to those which are willing to draw their food from any accessible quarter that can afford it cheapest.

§ 4. —Nor by Emigration.

Besides the importation of corn, there is another resource which can be invoked by a nation whose increasing numbers press hard, not against their capital, but against the productive capacity of their land: I mean Emigration, especially in the form of Colonization. Of this remedy the efficacy as far as it goes is real, since it consists in seeking elsewhere those unoccupied tracts of fertile land which, if they existed at home, would enable the demand of an increasing [pg 152] population to be met without any falling off in the productiveness of labor. Accordingly, when the region to be colonized is near at hand, and the habits and tastes of the people sufficiently migratory, this remedy is completely effectual. The migration from the older parts of the American Confederation to the new Territories, which is to all intents and purposes colonization, is what enables population to go on unchecked throughout the Union without having yet diminished the return to industry, or increased the difficulty of earning a subsistence.

How strictly true this is may be seen by examining the map given in the last census returns,142 showing the residence of the natives of the State of New York. The greater or less frequency of natives of New York, residing in other States, is shown by different degrees of shading on the map. A large district westward as far as the Mississippi shows a density of natives of New York of from two to six to a square mile, and a lesser density from Minnesota to Indian Territory, on the other side of the Mississippi. The same is shown of other older States. The explanation of the movement can not be anything else than the same as that for the larger movement from Europe to America.

There is no probability that even under the most enlightened arrangements (in older countries) a permanent stream of emigration could be kept up, sufficient to take off, as in America, all that portion of the annual increase (when proceeding at its greatest rapidity) which, being in excess of the progress made during the same short period in the arts of life, tends to render living more difficult for every averagely situated individual in the community. And, unless this can be done, emigration can not, even in an economical point of view, dispense with the necessity of checks to population.

The influence of immigration to the United States from European countries, in lessening the tension in the relation between food and numbers, is one of the most marked events in this century. The United States has received about one fourth of its total population in 1880 from abroad since the foundation of the republic, as will be seen by this table:

[pg 153]

Total Immigration Into The United States.

From 1789-1820 250,000143

Of this number, 5,333,991 came from the British Isles, of which 3,367,624 were Irish.

There came 3,860,624 Germans, 593,021 Scandinavians, and 334,064 French. (See United States “Statistical Abstract,” 1878, 1880, 1883.)

The causes operating on this movement of men—a movement unequaled in history—are undoubtedly economic. Like the migration of the early Teutonic races from the Baltic to Southern Europe, it is due to the pressure of numbers on subsistence.

A still more interesting study is that of the causes which attempt to explain the direction of this stream after it has reached our shores. It is a definite fact that the old slave States have hitherto received practically none of this vast foreign immigration.144 The actual distribution of the foreign born in the United States is to be seen in a most interesting way by aid of the colored map, Chart No. VIII, giving the different densities of foreign-born population in different parts of the Union. It seems almost certain that the general belief hitherto in the insecurity of life and property in the old slave States has worked against the material prosperity of that section.

The different ages of the native- and foreign-born inhabitants of the United States may be seen from the accompanying diagrams145 comparing the aggregate population of the United States with the foreign-born. This may profitably be compared with a similar diagram relating to the Chinese in the United States (Book II, Chap. III, § 3).

Aggregate: 1870. The figures give the number of thousands of each sex.

Decade of Life.Males.Females.

Foreign: 1870.

Decade of Life.Males.Females.
[pg 155]

Book II. Distribution.

Chapter I. Of Property.

§ 1. Individual Property and its opponents.

The laws and conditions of the Production of Wealth partake of the character of physical truths. There is nothing optional or arbitrary in them. It is not so with the Distribution of Wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively, can do with them as they like. They can place them at the disposal of whomsoever they please, and on whatever terms. The Distribution of Wealth depends on the laws and customs of society. The rules by which it is determined are what the opinions and feelings of the ruling portion of the community make them, and are very different in different ages and countries; and might be still more different, if mankind so chose. We have here to consider, not the causes, but the consequences, of the rules according to which wealth may be distributed. Those, at least, are as little arbitrary, and have as much the character of physical laws, as the laws of production.

We proceed, then, to the consideration of the different modes of distributing the produce of land and labor, which have been adopted in practice, or may be conceived in theory. Among these, our attention is first claimed by that primary and fundamental institution, on which, unless in [pg 156] some exceptional and very limited cases, the economical arrangements of society have always rested, though in its secondary features it has varied, and is liable to vary. I mean, of course, the institution of individual property.

Private property, as an institution, did not owe its origin to any of those considerations of utility which plead for the maintenance of it when established. Enough is known of rude ages, both from history and from analogous states of society in our own time, to show that tribunals (which always precede laws) were originally established, not to determine rights, but to repress violence and terminate quarrels. With this object chiefly in view, they naturally enough gave legal effect to first occupancy, by treating as the aggressor the person who first commenced violence, by turning, or attempting to turn, another out of possession.

In considering the institution of property as a question in social philosophy, we must leave out of consideration its actual origin in any of the existing nations of Europe. We may suppose a community unhampered by any previous possession; a body of colonists, occupying for the first time an uninhabited country. (1.) If private property were adopted, we must presume that it would be accompanied by none of the initial inequalities and injustice which obstruct the beneficial operation of the principle in old society. Every full-grown man or woman, we must suppose, would be secured in the unfettered use and disposal of his or her bodily and mental faculties; and the instruments of production, the land and tools, would be divided fairly among them, so that all might start, in respect to outward appliances, on equal terms. It is possible also to conceive that, in this original apportionment, compensation might be made for the injuries of nature, and the balance redressed by assigning to the less robust members of the community advantages in the distribution, sufficient to put them on a par with the rest. But the division, once made, would not again be interfered with; individuals would be left to their own exertions and to the [pg 157] ordinary chances for making an advantageous use of what was assigned to them. (2.) If individual property, on the contrary, were excluded, the plan which must be adopted would be to hold the land and all instruments of production as the joint property of the community, and to carry on the operations of industry on the common account. The direction of the labor of the community would devolve upon a magistrate or magistrates, whom we may suppose elected by the suffrages of the community, and whom we must assume to be voluntarily obeyed by them. The division of the produce would in like manner be a public act. The principle might either be that of complete equality, or of apportionment to the necessities or deserts of individuals, in whatever manner might be conformable to the ideas of justice or policy prevailing in the community.

The assailants of the principle of individual property may be divided into two classes: (1) those whose scheme implies absolute equality in the distribution of the physical means of life and enjoyment, and (2) those who admit inequality, but grounded on some principle, or supposed principle, of justice or general expediency, and not, like so many of the existing social inequalities, dependent on accident alone. The characteristic name for this [first] economical system is Communism, a word of Continental origin, only of late introduced into this country. The word Socialism, which originated among the English Communists, and was assumed by them as a name to designate their own doctrine, is now, on the Continent, employed in a larger sense; not necessarily implying Communism, or the entire abolition of private property, but applied to any system which requires that the land and the instruments of production should be the property, not of individuals, but of communities, or associations, or of the government.

It should be said, moreover, that Socialism is to-day used in the distinct sense of a system which abolishes private property, and places the control of the capital, labor, and combined industries of the country in the hands of the state. The essence [pg 158] of modern socialism is the appeal to state-help and the weakening of individual self-help. Collectivism is also a term now used by German and French writers to describe an organization of the industries of a country under a collective instead of an individual management. Collectivism is but the French expression for the system of state socialism.

§ 2. The case for Communism against private property presented.

The objection ordinarily made to a system of community of property and equal distribution of the produce, that each person would be incessantly occupied in evading his fair share of the work, points, undoubtedly, to a real difficulty. But those who urge this objection forget to how great an extent the same difficulty exists under the system on which nine tenths of the business of society is now conducted. And though the “master's eye,” when the master is vigilant and intelligent, is of proverbial value, it must be remembered that, in a Socialist farm or manufactory, each laborer would be under the eye, not of one master, but of the whole community. If Communistic labor might be less vigorous than that of a peasant proprietor, or a workman laboring on his own account, it would probably be more energetic than that of a laborer for hire, who has no personal interest in the matter at all.

Another of the objections to Communism is that if every member of the community were assured of subsistence for himself and any number of children, on the sole condition of willingness to work, prudential restraint on the multiplication of mankind would be at an end, and population would start forward at a rate which would reduce the community through successive stages of increasing discomfort to actual starvation. But Communism is precisely the state of things in which opinion might be expected to declare itself with greatest intensity against this kind of selfish intemperance. An augmentation of numbers which diminished the comfort or increased the toil of the mass would then cause (which now it does not) immediate and unmistakable inconvenience to every individual in the association; inconvenience which could not then be imputed to the avarice of employers, or the unjust privileges of the rich.

[pg 159]

A more real difficulty is that of fairly apportioning the labor of the community among its members. There are many kinds of work, and by what standard are they to be measured one against another? Who is to judge how much cotton-spinning, or distributing goods from the stores, or brick-laying, or chimney-sweeping, is equivalent to so much plowing? Besides, even in the same kind of work, nominal equality of labor would be so great a real inequality that the feeling of justice would revolt against its being enforced. All persons are not equally fit for all labor; and the same quantity of labor is an unequal burden on the weak and the strong, the hardy and the delicate, the quick and the slow, the dull and the intelligent.146

If, therefore, the choice were to be made between Communism with all its chances and the present state of society with all its sufferings and injustices, all the difficulties, great or small, of Communism, would be but as dust in the balance. But, to make the comparison applicable, we must compare Communism at its best with the régime of individual property, not as it is, but as it might be made. The laws of property have never yet conformed to the principles on which the justification of private property rests. They have made property of things which never ought to be property, and absolute property where only a qualified property ought to exist. Private property, in every defense made of it, is supposed to mean the guarantee to individuals of the fruits of their own labor and abstinence. The guarantee to them of the fruits of the labor and abstinence of others, transmitted to them without any merit or exertion of their own, is not of the essence of the institution, but a mere incidental consequence, which, when it reaches a certain height, does not promote, but conflicts with the ends which render private property legitimate. To judge of the final destination of the institution of property, we must suppose everything [pg 160] rectified which causes the institution to work in a manner opposed to that equitable principle, of proportion between remuneration and exertion, on which, in every vindication of it that will bear the light, it is assumed to be grounded. We must also suppose two conditions realized, without which neither Communism nor any other laws or institutions could make the condition of the mass of mankind other than degraded and miserable. One of these conditions is, universal education; the other, a due limitation of the numbers of the community. With these, there could be no poverty, even under the present social institutions: and, these being supposed, the question of socialism is not, as generally stated by Socialists, a question of flying to the sole refuge against the evils which now bear down humanity, but a mere question of comparative advantages, which futurity must determine. We are too ignorant either of what individual agency in its best form, or socialism in its best form, can accomplish, to be qualified to decide which of the two will be the ultimate form of human society.

If a conjecture may be hazarded, the decision will probably depend mainly on one consideration, viz., which of the two systems is consistent with the greatest amount of human liberty and spontaneity. It is yet to be ascertained whether the communistic scheme would be consistent with that multiform development of human nature, those manifold unlikenesses, that diversity of tastes and talents, and variety of intellectual points of view, which not only form a great part of the interest of human life, but, by bringing intellects into stimulating collision and by presenting to each innumerable notions that he would not have conceived of himself, are the mainspring of mental and moral progression.

§ 3. The Socialists who appeal to state-help.

For general purposes, a clearer understanding of the various schemes may be gained by observing that (1) one class of socialists intend to include the state itself within their plan, and (2) another class aim to form separate communities inside the state, and under its protection.

Of this first system there are no present examples; but the object of most of the socialistic organizations in the United [pg 161] States and Europe is to strive for the assumption by the state of the production and distribution of wealth.147 At present the most active Socialists are to be found in Germany. The origin of this influence, however, is to be traced to France.148 Louis Blanc,149 in his Organisation du Travail, considers property the great scourge of society. The Government, he asserts, should regulate production; raise money to be appropriated without interest for creating state workshops, in which the workmen should elect their own overseers, and all receive the same wages; and the sums needed should be raised from the abolition of collateral inheritance. The important practical part of his scheme was that the great state workshops, aided by the Government, would make private competition in those industries impossible, and thus bring about the change from the private to the socialistic system.

The founder of modern German socialism was Karl Marx,150 and almost the only Socialist who pretended to economic knowledge. He aimed his attack on the present social system against the question of value, by asserting that the amount of labor necessary for the production of an article is the sole measure of its exchange value. It follows from this that the [pg 162] right of property in the article vests wholly in the laborer, while the capitalist, if he claims a share of the product, is nothing less than a robber. No just system, he avers, can properly exist so long as the rate of wages is fixed by free contract between the employer and laborer; therefore the only remedy is the nationalization of all the elements of production, land, tools, materials, and all existing appliances, which involves, of course, the destruction of the institution of private property. An obvious weakness in this scheme is the provision that the Government should determine what goods are to be produced, and that every one is bound to perform that work which is assigned by the state. In this there is no choice of work, and the tyranny of one master would be supplanted by the tyranny of a greater multiplex master in the officers of Government. Moreover, it can not be admitted that exchange value is determined by the quantity of labor alone. Every one knows that the result of ten days' labor of a skilled watch-maker does not exchange for the result of ten days' labor of an unskilled hodman. Of two men making shoes, one may produce a good the other a poor article, although both may work the same length of time; so that their exchange value ought not to be determined by the mere quantity of labor expended. Above all, Marx would extend the equality of wages for the same time to the manager and superintendent also. In other words, he proposes to take away all the incentives to the acquirement or exercise of superior and signal ability in every work of life, the result of which would inevitably lead to a deadening extension of mediocrity.

This system gained an undue attention because it was made the instrument of a socialist propaganda under the leadership of Ferdinand Lassalle.151 This active leader, in 1863, founded the German Workingmen's Union, a year earlier than the International152 Association. In 1869 Liebknecht and his friends established the Social Democratic Workingmen's Party, which after some difficulties absorbed the followers of Lassalle in a congress at Gotha in 1875, and form the [pg 163] present Socialist party in Germany. Their programme,153 as announced at Gotha, is as follows:

I. Labor is the source of all riches and of all culture. As general profitable labor can only be done by the human society, the whole product of labor belongs to society—i.e., to all its members—who have the same duties and the same right to work, each according to his reasonable wants.

In the present society the means of work are the monopoly of the class of capitalists. The class of workingmen thus become dependent on them, and consequently are given over to all degrees of misery and servitude.

In order to emancipate labor it is requisite that the means of work be transformed into the common property of society, that all production be regulated by associations, and that the entire product of labor be turned over to society and justly distributed for the benefit of all.

None but the working-class itself can emancipate labor, as in relation to it all other classes are only a reactionary mass.

II. Led by these principles, the German Social Workingmen's party, by all legal means, strives for a free state and society, the breaking down of the iron laws of wages by abolishing the system of hired workingmen, by abolishing exploitation in every shape, and doing away with all social and political inequality.

The German Social Workingmen's party, although first working within its national confines, is fully conscious of the international character of the general workingmen's movement, and is resolved to fulfill all duties which it imposes on each workingman in order to realize the fraternity of all men.

The German Social Workingmen's party, for the purpose of preparing the way, and for the solution of the social problem, demands the creation of social productive associations, to be supported by the state government, and under the control of the working-people. The productive associations are to be founded in such numbers that the social organization of the whole production can be effected by them.

The German Social Workingmen's party requires as the basis of state government:

1. Universal, equal, direct, and secret suffrage, which, beginning with the twentieth year, obliges all citizens to vote in all State, county, and town elections. Election-day must be a Sunday or a holiday.

2. Direct legislation by the people; decision as to war and peace by the people.

[pg 164]

3. General capability of bearing arms; popular defense in place of standing armies.

4. Abolition of all exceptional laws, especially those relating to the press, public meetings, and associations—in short, of all laws which hinder the free expression of ideas and thought.

5. Gratuitous administration of justice by the people.

6. General and equal, popular and gratuitous education by the Government in all classes and institutes of learning; general duty to attend school; religion to be declared a private affair.

The German Social Workingmen's party insists on realizing in the present state of society:

1. The largest possible extension of political rights and freedom in conformity to the above six demands.

2. A single progressive income-tax for State, counties, and towns, instead of those which are imposed at present, and in place of indirect taxes, which unequally burden the people.

3. Unlimited right of combination.

4. A normal working-day corresponding with the wants of society; prohibition of Sunday labor.

5. Prohibition of children's work and of women's work, so far as it injures their health and morality.

6. Protective laws for the life and health of workingmen; sanitary control of their dwellings; superintendence of mines, factories, industry, and home work by officers chosen by the workingmen; an effectual law guaranteeing the responsibility of employers.

7. Regulation of prison-work.

8. Unrestricted self-government of all banks established for the mutual assistance of workingmen.

The above scheme also represents very well the character of the Socialist agitators in the United States, who are themselves chiefly foreigners, and have foreign conceptions of socialism. On this form of socialism it is interesting to have Mr. Mill's later opinions154 in his own words.

“Among those who call themselves Socialists, two kinds of persons may be distinguished. There are, in the first place, (1) those whose plans for a new order of society, in which private property and individual competition are to be superseded and other motives to action substituted, are on the scale of a village community or township, and would be applied to an entire country by the multiplication of such [pg 165] self-acting units; of this character are the systems of Owen, of Fourier, and the more thoughtful and philosophic Socialists generally. The other class (2) who are more a product of the Continent than of Great Britain, and may be called the revolutionary Socialists, propose to themselves a much bolder stroke. Their scheme is the management of the whole productive resources of the country by one central authority, the general Government. And with this view some of them avow as their purpose that the working-classes, or somebody in their behalf, should take possession of all the property of the country, and administer it for the general benefit. The aim of that is to substitute the new rule for the old at a single stroke, and to exchange the amount of good realized under the present system, and its large possibilities of improvement, for a plunge without any preparation into the most extreme form of the problem of carrying on the whole round of the operations of social life without the motive power which has always hitherto worked the social machinery. It must be acknowledged that those who would play this game on the strength of their own private opinion, unconfirmed as yet by any experimental verification, must have a serene confidence in their own wisdom on the one hand, and a recklessness of people's sufferings on the other, which Robespierre and St. Just, hitherto the typical instances of those united attributes, scarcely came up to.”

§ 4. Of various minor schemes, Communistic and Socialistic.

[Of the schemes to be tried within a state], the two elaborate forms of non-communistic Socialism known as Saint-Simonism and Fourierism are totally free from the objections usually urged against Communism. The Saint-Simonian155 scheme does not contemplate an equal, but an [pg 166] unequal division of the produce; it does not propose that all should be occupied alike, but differently, according to their vocation or capacity; the function of each being assigned, like grades in a regiment, by the choice of the directing authority, and the remuneration being by salary, proportioned to the importance, in the eyes of that authority, of the function itself, and the merits of the person who fulfills it. But to suppose that one or a few human beings, howsoever selected, could, by whatever machinery of subordinate agency, be qualified to adapt each person's work to his capacity, and proportion each person's remuneration to his merits, is a supposition almost too chimerical to be reasoned against.156

The most skillfully combined, and with the greatest foresight of objections, of all the forms of Socialism is that commonly known as Fourierism.157 This system does not contemplate the abolition of private property, nor even of inheritance: on the contrary, it avowedly takes into consideration, as an element in the distribution of the produce, capital as well as labor. It proposes that the operations of industry should be carried on by associations of about two thousand members, combining their labor on a district of about a square league in extent, under the guidance of chiefs selected by themselves (the “phalanstery”). In the distribution a certain minimum is first assigned for the subsistence of every member of the community, whether capable or not of labor. The remainder of the produce is shared in certain proportions, to be determined beforehand, among the three elements, Labor, Capital, and Talent. [pg 167] The capital of the community may be owned in unequal shares by different members, who would in that case receive, as in any other joint-stock company, proportional dividends. The claim of each person on the share of the produce apportioned to talent is estimated by the grade or rank which the individual occupies in the several groups of laborers to which he or she belongs, these grades being in all cases conferred by the choice of his or her companions. The remuneration, when received, would not of necessity be expended or enjoyed in common; there would be separate ménages for all who preferred them, and no other community of living is contemplated than that all the members of the association should reside in the same pile of buildings; for saving of labor and expense, not only in building, but in every branch of domestic economy; and in order that, the whole buying and selling operations of the community being performed by a single agent, the enormous portion of the produce of industry now carried off by the profits of mere distributors might be reduced to the smallest amount possible.

Fourierism was tried in West Virginia by American disciples, and it was advocated by Horace Greeley. A modified form appeared in the famous community at Brook Farm (near Dedham, Massachusetts), which drew there George Ripley, Margaret Fuller, and even George William Curtis and Nathaniel Hawthorne.

There have been many smaller communities established in the United States, but it can not be said that they have been successful from the point of view either of numbers or material prosperity. The followers of Rapp, or the Harmonists, in Pennsylvania and Indiana; the Owenites,158 in Indiana; the community of Zoar, in Ohio; the Inspirationists, in New York [pg 168] and Iowa; the Perfectionists, at Oneida and Wallingford—are all evidently suffering from the difficulties due to the absence of family life, from the increasing spirit of personal independence which carries away the younger members of the organizations,159 and the want of that executive ability which distinguishes the successful manager in private enterprises.

§ 5. The Socialist objections to the present order of Society examined.

“The attacks160 on the present social order are vigorous and earnest, but open to the charge of exaggeration.

“In the first place, it is unhappily true that the wages of ordinary labor, in all the countries of Europe, are wretchedly insufficient to supply the physical and moral necessities of the population in any tolerable measure. But when it is further alleged that even this insufficient remuneration has a tendency to diminish; that there is, in the words of M. Louis Blanc, une baisse continue des salaires; the assertion is in opposition to all accurate information, and to many notorious facts. It has yet to be proved that there is any country in the civilized world where the ordinary wages of labor, estimated either in money or in articles of consumption, are declining; while in many they are, on the whole, on the increase; and an increase which is becoming, not slower, but more rapid. There are, occasionally, branches of industry which are being gradually superseded by something else, and in those, until production accommodates itself to demand, wages are depressed.

“M. Louis Blanc appears to have fallen into the same error which was at first committed by Malthus and his followers, that of supposing because population has a greater power of [pg 169] increase than subsistence, its pressure upon subsistence must be always growing more severe. It is a great point gained for truth when it comes to be seen that the tendency to over-population is a fact which Communism, as well as the existing order of society, would have to deal with. However this may be, experience shows that in the existing state of society the pressure of population on subsistence, which is the principal cause of low wages, though a great, is not an increasing evil; on the contrary, the progress of all that is called civilization has a tendency to diminish it, partly by the more rapid increase of the means of employing and maintaining labor, partly by the increased facilities opened to labor for transporting itself to new countries and unoccupied fields of employment, and partly by a general improvement in the intelligence and prudence of the population. It is, of course, open to discussion what form of society has the greatest power of dealing successfully with the pressure of population on subsistence, and on this question there is much to be said for Socialism; but it has no just claim to be considered as the sole means of preventing the general and growing degradation of the mass of mankind through the peculiar tendency of poverty to produce over-population.

“Next, it must be observed that Socialists generally, and even the most enlightened of them, have a very imperfect and one-sided notion of the operation of competition. They see half its effects, and overlook the other half. They forget that competition is a cause of high prices and values as well as of low; that the buyers of labor and of commodities compete with one another as well as the sellers; and that, if it is competition which keeps the prices of labor and commodities as low as they are, it is competition which keeps them from falling still lower. To meet this consideration, Socialists are reduced to affirm that, when the richest competitor has got rid of all his rivals, he commands the market and can demand any price he pleases. But in the ordinary branches of industry no one rich competitor has it in his power to drive [pg 170] out all the smaller ones. Some businesses show a tendency to pass out of the hands of small producers or dealers into a smaller number of larger ones; but the cases in which this happens are those in which the possession of a larger capital permits the adoption of more powerful machinery, more efficient by more expensive processes, or a better organized and more economical mode of carrying on business, and this enables the large dealer legitimately and permanently to supply the commodity cheaper than can be done on the small scale; to the great advantage of the consumers, and therefore of the laboring-classes, and diminishing, pro tanto, that waste of the resources of the community so much complained of by Socialists, the unnecessary multiplication of mere distributors, and of the various other classes whom Fourier calls the parasites of industry.

“Another point on which there is much misapprehension on the part of Socialists, as well as of trades-unionists and other partisans of labor against capital, relates to the proportion in which the produce of the country is really shared and the amount of what is actually diverted from those who produce it, to enrich other persons. When, for instance, a capitalist invests £20,000 in his business, and draws from it an income of (suppose) £2,000 a year, the common impression is as if he were the beneficial owner both of the £20,000 and of the £2,000, while the laborers own nothing but their wages. The truth, however, is that he only obtains the £2,000 on condition of applying no part of the £20,000 to his own use. He has the legal control over it, and might squander it if he chose, but if he did he would not have the £2,000 a year also. For all personal purposes they have the capital and he has but the profits, which it only yields to him on condition that the capital itself is employed in satisfying not his own wants, but those of laborers. Even of his own share a small part only belongs to him as the owner of capital. The portion of the produce which falls to capital merely as capital is measured by the interest of money, since that is all that the owner of capital obtains [pg 171] when he contributes to production nothing except the capital itself.

“The result of our review of the various difficulties of Socialism has led us to the conclusion that the various schemes for managing the productive resources of the country by public instead of private agency have a case for a trial, and some of them may eventually establish their claims to preference over the existing order of things, but that they are at present workable only by the élite of mankind, and have yet to prove their power of training mankind at large to the state of improvement which they presuppose.”

§ 6. Property in land different from property in Movables.

It is next to be considered what is included in the idea of private property and by what considerations the application of the principle should be bounded.

The institution of property, when limited to its essential elements, consists in the recognition, in each person, of a right to the exclusive disposal of what he or she have produced by their own exertions, or received either by gift or by fair agreement, without force or fraud, from those who produced it. The foundation of the whole is, the right of producers to what they themselves have produced. Nothing is implied in property but the right of each to his (or her) own faculties, to what he can produce by them, and to whatever he can get for them in a fair market: together with his right to give this to any other person if he chooses, and the right of that other to receive and enjoy it.

It follows, therefore, that although the right of bequest, or gift after death, forms part of the idea of private property, the right of inheritance, as distinguished from bequest, does not. That the property of persons who have made no disposition of it during their lifetime should pass first to their children, and, failing them, to the nearest relations, may be a proper arrangement or not, but is no consequence of the principle of private property. I see no reason why collateral inheritance should exist at all. Mr. Bentham long ago proposed, and other high authorities have agreed in the opinion, that, if there are no heirs either in the descending or in the [pg 172] ascending line, the property, in case of intestacy, should escheat to the state. The parent owes to society to endeavor to make the child a good and valuable member of it, and owes to the children to provide, so far as depends on him, such education, and such appliances and means, as will enable them to start with a fair chance of achieving by their own exertions a successful life. To this every child has a claim; and I can not admit that as a child he has a claim to more.

The essential principle of property being to assure to all persons what they have produced by their labor and accumulated by their abstinence, this principle can not apply to what is not the produce of labor, the raw material of the earth. If the land derived its productive power wholly from nature, and not at all from industry, or if there were any means of discriminating what is derived from each source, it not only would not be necessary, but it would be the height of injustice, to let the gift of nature be engrossed by individuals. [But] the use of the land in agriculture must indeed, for the time being, be of necessity exclusive; the same person who has plowed and sown must be permitted to reap.

But though land is not the produce of industry, most of its valuable qualities are so. Labor is not only requisite for using, but almost equally so for fashioning, the instrument. Considerable labor is often required at the commencement, to clear the land for cultivation. In many cases, even when cleared, its productiveness is wholly the effect of labor and art. One of the barrenest soils in the world, composed of the material of the Goodwin Sands, the Pays de Waes in Flanders, has been so fertilized by industry as to have become one of the most productive in Europe. Cultivation also requires buildings and fences, which are wholly the produce of labor. The fruits of this industry can not be reaped in a short period. The labor and outlay are immediate, the benefit is spread over many years, perhaps over all future time. A holder will not incur this labor and outlay when strangers and not himself will be benefited by it. If he [pg 173] undertakes such improvements, he must have a sufficient period before him in which to profit by them; and he is in no way so sure of having always a sufficient period as when his tenure is perpetual.

These are the reasons which form the justification, in an economical point of view, of property in land. It is seen that they are only valid in so far as the proprietor of land is its improver. Whenever, in any country, the proprietor, generally speaking, ceases to be the improver, political economy has nothing to say in defense of landed property, as there established.

When the “sacredness of property” is talked of, it should always be remembered that any such sacredness does not belong in the same degree to landed property. No man made the land. It is the original inheritance of the whole species. Its appropriation is wholly a question of general expediency. When private property in land is not expedient, it is unjust. The reverse is the case with property in movables, and in all things the product of labor: over these, the owner's power both of use and of exclusion should be absolute, except where positive evil to others would result from it; but, in the case of land, no exclusive right should be permitted in any individual which can not be shown to be productive of positive good. To be allowed any exclusive right at all, over a portion of the common inheritance, while there are others who have no portion, is already a privilege. No quantity of movable goods which a person can acquire by his labor prevents others from acquiring the like by the same means; but, from the very nature of the case, whoever owns land keeps others out of the enjoyment of it. When land is not intended to be cultivated, no good reason can in general be given for its being private property at all. Even in the case of cultivated land, a man whom, though only one among millions, the law permits to hold thousands of acres as his single share, is not entitled to think that all this is given to him to use and abuse, and deal with as if it concerned nobody but himself. [pg 174] The rents or profits which he can obtain from it are at his sole disposal; but with regard to the land, in everything which he does with it, and in everything which he abstains from doing, he is morally bound, and should, whenever the case admits, be legally compelled to make his interest and pleasure consistent with the public good.

[pg 175]

Chapter II. Of Wages.

§ 1. Of Competition and Custom.

Political economists generally, and English political economists above others, have been accustomed to lay almost exclusive stress upon the first of [two] agencies [competition and custom]; to exaggerate the effect of competition, and to take into little account the other and conflicting principle. They are apt to express themselves as if they thought that competition actually does, in all cases, whatever it can be shown to be the tendency of competition to do. This is partly intelligible, if we consider that only through the principle of competition has political economy any pretension to the character of a science. So far as rents, profits, wages, prices, are determined by competition, laws may be assigned for them. Assume competition to be their exclusive regulator, and principles of broad generality and scientific precision may be laid down, according to which they will be regulated. The political economist justly deems this his proper business: and, as an abstract or hypothetical science, political economy can not be required to do, and indeed can not do, anything more. But it would be a great misconception of the actual course of human affairs to suppose that competition exercises in fact this unlimited sway. I am not speaking of monopolies, either natural or artificial, or of any interferences of authority with the liberty of production or exchange. Such disturbing causes have always been allowed for by political economists. I speak of cases in which there is nothing to restrain competition; no hindrance [pg 176] to it either in the nature of the case or in artificial obstacles; yet in which the result is not determined by competition, but by custom or usage; competition either not taking place at all, or producing its effect in quite a different manner from that which is ordinarily assumed to be natural to it.

As stated by Mr. Cairnes,161 political economy is a science just as is any recognized physical science—astronomy, chemistry, physiology. The economic facts we find existing are the results of causes, between which and them the connection is constant and invariable. It is, then, the constant relations exhibited in economic phenomena that we have in view when we speak of the laws of the phenomena of wealth; and in the exposition of these laws consists the science of political economy. It is to be remembered that economic laws are tendencies, not actual descriptions of any given conditions in this or that place.

Competition, in fact, has only become in any considerable degree the governing principle of contracts, at a comparatively modern period. The further we look back into history, the more we see all transactions and engagements under the influence of fixed customs. The relations, more especially between the land-owner and the cultivator, and the payments made by the latter to the former, are, in all states of society but the most modern, determined by the usage of the country. The custom of the country is the universal rule; nobody thinks of raising or lowering rents, or of letting land, on other than the customary conditions. Competition, as a regulator of rent, has no existence.

Prices, whenever there was no monopoly, came earlier under the influence of competition, and are much more universally subject to it, than rents. The wholesale trade, in the great articles of commerce, is really under the dominion of competition. But retail price, the price paid by the actual consumer, seems to feel very slowly and imperfectly the effect of competition; and, when competition does exist, [pg 177] it often, instead of lowering prices, merely divides the gains of the high price among a greater number of dealers. The influence of competition is making itself felt more and more through the principal branches of retail trade in the large towns.

All professional remuneration is regulated by custom. The fees of physicians, surgeons, and barristers, the charges of attorneys, are nearly invariable. Not certainly for want of abundant competition in those professions, but because the competition operates by diminishing each competitor's chance of fees, not by lowering the fees themselves.

These observations must be received as a general correction to be applied whenever relevant, whether expressly mentioned or not, to the conclusions contained in the subsequent portions of this treatise. Our reasonings must, in general, proceed as if the known and natural effects of competition were actually produced by it, in all cases in which it is not restrained by some positive obstacle. Where competition, though free to exist, does not exist, or where it exists, but has its natural consequences overruled by any other agency, the conclusions will fail more or less of being applicable. To escape error, we ought, in applying the conclusions of political economy to the actual affairs of life, to consider not only what will happen supposing the maximum of competition, but how far the result will be affected if competition falls short of the maximum.

§ 2. The Wages-fund, and the Objections to it Considered.

Under the head of Wages are to be considered, first, the causes which determine or influence the wages of labor generally, and secondly, the differences that exist between the wages of different employments. It is convenient to keep these two classes of considerations separate; and in discussing the law of wages, to proceed in the first instance as if there were no other kind of labor than common unskilled labor, of the average degree of hardness and disagreeableness.

Competition, however, must be regarded, in the present state of society, as the principal regulator of wages, and custom [pg 178] or individual character only as a modifying circumstance, and that in a comparatively slight degree.

Wages, then, depend mainly upon the demand and supply of labor; or, as it is often expressed, on the proportion between population and capital. By population is here meant the number only of the laboring-class, or rather of those who work for hire; and by capital, only circulating capital, and not even the whole of that, but the part which is expended in the direct purchase of labor. To this, however, must be added all funds which, without forming a part of capital, are paid in exchange for labor, such as the wages of soldiers, domestic servants, and all other unproductive laborers. There is unfortunately no mode of expressing, by one familiar term, the aggregate of what may be called the wages-fund of a country: and, as the wages of productive labor form nearly the whole of that fund, it is usual to overlook the smaller and less important part, and to say that wages depend on population and capital. It will be convenient to employ this expression, remembering, however, to consider it as elliptical, and not as a literal statement of the entire truth.

With these limitations of the terms, wages not only depend upon the relative amount of capital and population, but can not, under the rule of competition, be affected by anything else. Wages (meaning, of course, the general rate) can not rise, but by an increase of the aggregate funds employed in hiring laborers, or a diminution in the number of the competitors for hire; nor fall, except either by a diminution of the funds devoted to paying labor, or by an increase in the number of laborers to be paid.

Illustration: Pie chart of Fixed Capital, Raw Materials, and Wages Fund.

This is the simple statement of the well-known Wages-Fund Theory, which has given rise to no little animated discussion. Few economists now assent to this doctrine when stated as above, and without changes. The first attack on this explanation of the rate of wages came from what is now a very scarce pamphlet, written by F. D. Longe, entitled A Refutation of the Wage-Fund Theory of Modern Political Economy (1866). Because laborers do not really compete with each other, he [pg 179] regarded the idea of average wages as absurd as the idea of an average price of ships and cloth; he declared that there was no predetermined wages-fund necessarily expended on labor; and that demand for commodities determined the amount of wealth devoted to paying wages (p. 46). While the so-called wages-fund limits the total amount which the laborers can receive, the employer would try to get his workmen at as much less than that amount as possible, so that the aggregate fund would have no bearing on the actual amount paid in wages. The quantity of work to be done, he asserts, determines the quantity of labor to be employed. About the same time (but unknown to Mr. Longe), W. T. Thornton was studying the same subject, and attracted considerable attention by his publication, On Labor (1868), which in Book II, Chap. I, contained an extended argument to show that demand and supply (i.e., the proportion between wages-fund and laborers) did not regulate wages, and denied the existence of a predetermined wages-fund fixed in amount. His attack, however, assumes a very different conception of an economic law from that which we think right to insist upon. The character of mankind being what it is, it will be for their interest to invest so much and no more in labor, and we must believe that in this sense there is a predetermination of wealth to be paid in wages. In order to make good investments, a certain amount must, if capitalists follow their best interests, go to the payment of labor.162 Mr. Thornton's argument attracted the more attention because Mr. Mill163 admitted that Mr. Thornton had induced him to abandon his Wages-Fund Theory. The subject was, however, taken up, re-examined by Mr. Cairnes,164 and stated in a truer form. (1.) The total wealth of a country (circle A in the diagram) is the outside limit of its capital. How much capital will be saved out of this depends upon the effective desire of accumulation in the community (as set forth in Book I, Chap. VIII). The size of circle B within circle A, therefore, depends on the character of the people. The wages-fund, then, depends ultimately on the extent of A, and proximately on the extent of B. It can never [pg 180] be larger than B. So far, at least, its amount is predetermined in the economic sense by general laws regarding the accumulation of capital and the expectation of profit. Circle B contracts and expands under influences which have nothing to do with the immediate bargains between capitalists and laborers. (2.) Another influence now comes in to affect the amount of capital actually paid as wages, one also governed by general causes outside the reach of laborer or capitalist, that is, the state of the arts of production. In production, the particular conditions of each industry will determine how much capital is to be set apart for raw material, how much for machinery, buildings, and all forms of fixed capital, and how many laborers will be assigned to a given machine for a given amount of material. With some kinds of hand-made goods the largest share of capital goes to wages, a less amount for materials, and a very small proportion for machinery and tools. In many branches of agriculture and small farming this holds true. The converse, however, is true in many manufactures, where machinery is largely used. No two industries will maintain the same proportion between the three elements. The nature of the industry, therefore, will determine whether a greater or a less share of capital will be spent in wages. It is needless to say that this condition of things is not one to be changed at the demand of either of the two parties to production, Labor and Capital; it responds only to the advance of mechanical science or general intelligence. It is impossible, then, to escape the conclusion that general causes restrict the amount which will, under any normal investment, go to the payment of wages. Only within the limits set by these forces can any further expansion or contraction take place. (3.) Within these limits, of course, minor changes may take place, so that the fund can not be said to be fixed or absolutely predetermined; but these changes must take place within such narrow limits that they do not much affect the practical side of the question. How these changes act, may be seen in a part of the following illustration of the above principles:

Suppose a cotton-mill established in one of the valleys of Vermont, for the management of which the owner has $140,000 of capital. Of this, $100,000 is given for buildings, machinery, and plant. If he turns over his remaining capital ($40,000) each month, we will suppose that $28,000 spent in raw materials will keep five hundred men occupied at a monthly expenditure of $12,000. The present state of cotton-manufacture itself settles the relation between a given quantity of raw cotton and a certain amount of machinery. A fixed amount of cotton, no more, no less, can be spun by each spindle and woven by each loom; and the nature of the process determines [pg 181] the number of laborers to each machine. This proportion is something which an owner must obey, if he expects to compete with other manufacturers: the relationship is fixed for, not by, him. Now, each of the five hundred laborers being supposed to receive on an average $1.00 a day, imagine an influx of a body of French Canadians who offer to work, on an average, for eighty cents a day.165 The five hundred men will now receive but $9,600 monthly instead of $12,000, as before, as a wages-fund; the monthly payment for wages now is nearly seven per cent, while formerly it was nearly nine per cent of the total capital invested ($140,000). Thus it will be seen that the wages-fund can change with a change in the supply of labor: but the point to be noticed is that it is a change in the subdivision, $12,000, of the total $140,000. That is, this alteration can take place only within the limits set by the nature of the industry. Now, if this $2,400 (i.e., $12,000 less $9,600) saved out of the wages-fund were to be reinvested, it must necessarily be divided between raw materials, fixed capital, and wages in the existing relations, that is, only seven per cent of the new $2,400 would be added to the wages-fund. It is worth while calling attention to this, if for no other reason than to show that in this way a change can be readily made in the wages-fund by natural movements; and that no one can be so absurd as to say that it is absolutely fixed in amount. But it certainly is predetermined in the economic sense, in that any reinvestments, as well as former funds, must necessarily be distributed according to the above general principles, independent of the higgling in the labor market. The following is Mr. Cairnes's statement of the amount and predetermination of the wages-fund:

I believe that, in the existing state of the national wealth, the character of Englishmen being what it is, a certain prospect of profit will determine a certain proportion of this wealth to productive investment; that the amount thus determined will increase as the field for investment is extended, and that it will not increase beyond what this field can find employment for at that rate of profit which satisfies English commercial expectation. Further, I believe that, investment thus taking place, the form which it shall assume will be determined by the nature of the national industries—determined, not under acts of Parliament, or in virtue of any physical law, but through the influence of the investor's interests; while this, the form of the investment, will again determine the proportion of the whole capital which shall be paid as [pg 182] wages to laborers.166 In this excellent and masterly conception, the doctrine of a wages-fund is not open to the objections usually urged against it. Indeed, with the exception of Professor Fawcett, scarcely any economist believes in an absolutely fixed wages-fund. In this sense, then, and in view of the above explanation, it will be understood what is meant by saying that wages depend upon the proportion of the wages-fund to the number of the wage-receivers.167

In applying these principles to the question of strikes, it is evident enough that if they result in an actual expansion of the whole circle B, by forcing saving from unproductive expenditure, a real addition, of some extent, may be made to the wages-fund; but only by increasing the total capital. If, however, they attempt to increase one of the elements of capital, the wages-fund, without also adding to the other elements, fixed capital and materials, in the proportion fixed by the nature of the industry, they will destroy all possibility of continuing that production in the normal way, and the capitalist must withdraw from the enterprise.

Francis A. Walker168 has also offered a solution of this problem in his Wages Question (1876), in which he holds that wages are, in a philosophical view of the subject, paid out of the product of present industry, and hence that production furnishes the true measure of wages (p. 128). It is the prospect of a profit in production which determines the employer to hire laborers; it is the anticipated value of the product which determines how much he can pay him (p. 144). No doubt wages can be (and often are) paid out of the current product; but what amount? What is the principle of distribution? Wherever the incoming product is a moral certainty (and, unless this is true, in no case could wages be paid out of the future product), saving is as effective upon it as upon the actual accumulations of the past; and the amount of the coming product which will be saved and used as capital is determined by the same principles which govern the saving of past products. An increase of circle A by a larger production makes possible an increase of circle B, but whether it will be enlarged [pg 183] or not depends on the principle of accumulation. The larger the total production of wealth, the greater the possible wages, all must admit; but it does not seem clear that General Walker has given us a solution of the real question at issue. The larger the house you build, the larger the rooms may be; but it does not follow that the rooms will be necessarily large—as any inmate of a summer hotel will testify.

§ 3. Examination of some popular Opinions respecting Wages.

There are, however, some facts in apparent contradiction to this [the Wages-Fund] doctrine, which it is incumbent on us to consider and explain.

1. For instance, it is a common saying that wages are high when trade is good. The demand for labor in any particular employment is more pressing, and higher wages are paid, when there is a brisk demand for the commodity produced; and the contrary when there is what is called a stagnation: then work-people are dismissed, and those who are retained must submit to a reduction of wages; though in these cases there is neither more nor less capital than before. This is true; and is one of those complications in the concrete phenomena which obscure and disguise the operation of general causes; but it is not really inconsistent with the principles laid down. Capital which the owner does not employ in purchasing labor, but keeps idle in his hands, is the same thing to the laborers, for the time being, as if it did not exist. All capital is, from the variations of trade, occasionally in this state. A manufacturer, finding a slack demand for his commodity, forbears to employ laborers in increasing a stock which he finds it difficult to dispose of; or if he goes on until all his capital is locked up in unsold goods, then at least he must of necessity pause until he can get paid for some of them. But no one expects either of these states to be permanent; if he did, he would at the first opportunity remove his capital to some other occupation, in which it would still continue to employ labor. The capital remains unemployed for a time, during which the labor market is overstocked, and wages fall. Afterward the demand revives, and perhaps becomes unusually brisk, enabling the manufacturer to sell his commodity [pg 184] even faster than he can produce it; his whole capital is then brought into complete efficiency, and, if he is able, he borrows capital in addition, which would otherwise have gone into some other employment. These, however, are but temporary fluctuations: the capital now lying idle will next year be in active employment, that which is this year unable to keep up with the demand will in its turn be locked up in crowded warehouses; and wages in these several departments will ebb and flow accordingly: but nothing can permanently alter general wages, except an increase or a diminution of capital itself (always meaning by the term, the funds of all sorts, destined for the payment of labor) compared with the quantity of labor offering itself to be hired.

2. Again, it is another common notion that high prices make high wages; because the producers and dealers, being better off, can afford to pay more to their laborers. I have already said that a brisk demand, which causes temporary high prices, causes also temporary high wages. But high prices, in themselves, can only raise wages if the dealers, receiving more, are induced to save more, and make an addition to their capital, or at least to their purchases of labor. Wages will probably be temporarily higher in the employment in which prices have risen, and somewhat lower in other employments: in which case, while the first half of the phenomenon excites notice, the other is generally overlooked, or, if observed, is not ascribed to the cause which really produced it. Nor will the partial rise of wages last long: for, though the dealers in that one employment gain more, it does not follow that there is room to employ a greater amount of savings in their own business: their increasing capital will probably flow over into other employments, and there counterbalance the diminution previously made in the demand for labor by the diminished savings of other classes.

A clear distinction must be made between real wages and money wages; the former is of importance to the laborer as being his real receipts. The quantity of commodities satisfying [pg 185] his desires which the laborer receives for his exertion constitutes his real wages. The mere amount of money he receives for his exertions, irrespective of what the money will exchange for, forms his money wages. Since the functions of money have not yet been explained, it is difficult to discuss the relation between prices and money wages here. But, as the total value of the products in a certain industry is the sum out of which both money wages and profits are paid, this total will rise or fall (efficiency of labor remaining the same) with the price of the particular article. If the price rises, profits will be greater than elsewhere, and more capital will be invested in that one business; that is, the capital will be a demand for more labor, and, until equalization is accomplished in all trades between wages and profits, money wages will be higher in some trades than in others.169

When reference is had to the connection between real wages and prices, the question is a different one. General high prices would not change general real wages. But if high prices cause higher money wages in particular branches of trade, then, because the movement is not general, there will accrue, to those receiving more money, the means to buy more of real wages. And, as in practice, changes in prices which arise from an increased demand are partial, and not general, it often happens that high prices produce high real wages (not general high wages) in some, not in all employments. (For a further study of this relation between prices and wages the reader is advised to recall this discussion in connection with that in a later part of the volume, Book III, Chaps. XX and XXI.)

3. Another opinion often maintained is, that wages (meaning of course money wages) vary with the price of food; rising when it rises, and falling when it falls. This opinion is, I conceive, only partially true; and, in so far as true, in no way affects the dependence of wages on the proportion between capital and labor: since the price of food, when it affects wages at all, affects them through that law. Dear or cheap food caused by variety of seasons does not affect wages (unless they are artificially adjusted to it by law or charity): or rather, it has some tendency to affect them in the contrary way to that supposed; since in times of scarcity people generally compete more violently for employment, and lower the labor market against themselves. But dearness [pg 186] or cheapness of food, when of a permanent character, and capable of being calculated on beforehand, may affect wages. (1.) In the first place, if the laborers have, as is often the case, no more than enough to keep them in working condition and enable them barely to support the ordinary number of children, it follows that, if food grows permanently dearer without a rise of wages, a greater number of the children will prematurely die; and thus wages will ultimately be higher, but only because the number of people will be smaller, than if food had remained cheap. (2.) But, secondly, even though wages were high enough to admit of food's becoming more costly without depriving the laborers and their families of necessaries; though they could bear, physically speaking, to be worse off, perhaps they would not consent to be so. They might have habits of comfort which were to them as necessaries, and sooner than forego which, they would put an additional restraint on their power of multiplication; so that wages would rise, not by increase of deaths but by diminution of births. In these cases, then, wages do adapt themselves to the price of food, though after an interval of almost a generation.170 If wages were previously so high that they could bear reduction, to which the obstacle was a high standard of comfort habitual among the laborers, a rise of the price of food, or any other disadvantageous change in their circumstances, may operate in two ways: (a) it may correct itself by a rise of wages, brought about through a gradual effect on the prudential check to population; or (b) it may permanently lower the standard of living of the class, in case their previous habits in respect of population prove stronger than their previous habits in respect of comfort. In that case the injury done to them will be permanent, and their deteriorated condition will become a new minimum, tending to perpetuate [pg 187] itself as the more ample minimum did before. It is to be feared that, of the two modes in which the cause may operate, the last (b) is the most frequent, or at all events sufficiently so to render all propositions, ascribing a self-repairing quality to the calamities which befall the laboring-classes, practically of no validity.

The converse case occurs when, by improvements in agriculture, the repeal of corn laws, or other such causes, the necessaries of the laborers are cheapened, and they are enabled with the same [money] wages to command greater comforts than before. Wages will not fall immediately: it is even possible that they may rise; but they will fall at last, so as to leave the laborers no better off than before, unless during this interval of prosperity the standard of comfort regarded as indispensable by the class is permanently raised. Unfortunately this salutary effect is by no means to be counted upon: it is a much more difficult thing to raise, than to lower, the scale of living which the laborers will consider as more indispensable than marrying and having a family. According to all experience, a great increase invariably takes place in the number of marriages in seasons of cheap food and full employment.

This is to be seen by some brief statistics of marriages in Vermont and Massachusetts.


In Vermont, while the average number of marriages was reached in 1860 and 1861, it fell off on the breaking out of the war; rose in 1863, under the fair progress of the Northern arms; again fell off in 1864, during the period of discouragement; and since 1865 has kept a steadily higher average. In manufacturing Massachusetts the number fell earlier than in agricultural Vermont, at the beginning of the difficulties.

1856, July to Jan.6,418
1857, Jan. to July5,803
1857, July to Jan.5,936
1858, Jan. to July4,917
1858, July to Jan.5,610

The effects of the financial panic of 1857, in Massachusetts, [pg 188] show a similar movement in the number of marriages. The crisis came in October, 1857. In the three months following that date there were 400 less marriages.

To produce permanent advantage, the temporary cause operating upon them must be sufficient to make a great change in their condition—a change such as will be felt for many years, notwithstanding any stimulus which it may give during one generation to the increase of people. When, indeed, the improvement is of this signal character, and a generation grows up which has always been used to an improved scale of comfort, the habits of this new generation in respect to population become formed upon a higher minimum, and the improvement in their condition becomes permanent.

§ 4. Certain rare Circumstances excepted, High Wages imply Restraints on Population.

Wages depend, then, on the proportion between the number of the laboring population and the capital or other funds devoted to the purchase of labor; we will say, for shortness, the capital. If wages are higher at one time or place than at another, if the subsistence and comfort of the class of hired laborers are more ample, it is for no other reason than because capital bears a greater proportion to population. It is not the absolute amount of accumulation or of production that is of importance to the laboring-class; it is not the amount even of the funds destined for distribution among the laborers; it is the proportion between those funds and the numbers among whom they are shared. The condition of the class can be bettered in no other way than by altering that proportion to their advantage: and every scheme for their benefit which does not proceed on this as its foundation is, for all permanent purposes, a delusion.

In countries like North America and the Australian colonies, where the knowledge and arts of civilized life and a high effective desire of accumulation coexist with a boundless extent of unoccupied land, the growth of capital easily keeps pace with the utmost possible increase of population, and is chiefly retarded by the impracticability of obtaining laborers enough. All, therefore, who can possibly be born can find employment without overstocking the market: every [pg 189] laboring family enjoys in abundance the necessaries, many of the comforts, and some of the luxuries of life; and, unless in case of individual misconduct, or actual inability to work, poverty does not, and dependence need not, exist. [In England] so gigantic has been the progress of the cotton manufacture since the inventions of Watt and Arkwright, that the capital engaged in it has probably quadrupled in the time which population requires for doubling. While, therefore, it has attracted from other employments nearly all the hands which geographical circumstances and the habits or inclinations of the people rendered available; and while the demand it created for infant labor has enlisted the immediate pecuniary interest of the operatives in favor of promoting, instead of restraining, the increase of population; nevertheless wages in the great seats of the manufacture are still so high that the collective earnings of a family amount, on an average of years, to a very satisfactory sum; and there is as yet no sign of decrease, while the effect has also been felt in raising the general standard of agricultural wages in the counties adjoining.

But those circumstances of a country, or of an occupation, in which population can with impunity increase at its utmost rate, are rare and transitory. Very few are the countries presenting the needful union of conditions. Either the industrial arts are backward and stationary, and capital therefore increases slowly, or, the effective desire of accumulation being low, the increase soon reaches its limit; or, even though both these elements are at their highest known degree, the increase of capital is checked, because there is not fresh land to be resorted to of as good quality as that already occupied. Though capital should for a time double itself simultaneously with population, if all this capital and population are to find employment on the same land, they can not, without an unexampled succession of agricultural inventions, continue doubling the produce; therefore, if wages do not fall, profits must; and, when profits fall, increase of capital is slackened.

Except, therefore, in the very peculiar cases which I have [pg 190] just noticed, of which the only one of any practical importance is that of a new colony, or a country in circumstances equivalent to it, it is impossible that population should increase at its utmost rate without lowering wages. In no old country does population increase at anything like its utmost rate; in most, at a very moderate rate: in some countries, not at all. These facts are only to be accounted for in two ways. Either the whole number of births which nature admits of, and which happen in some circumstances, do not take place; or, if they do, a large proportion of those who are born, die. The retardation of increase results either from mortality or prudence; from Mr. Malthus's positive, or from his preventive check: and one or the other of these must and does exist, and very powerfully too, in all old societies. Wherever population is not kept down by the prudence either of individuals or of the state, it is kept down by starvation or disease.

§ 5. Due Restriction of Population the only Safeguard of a Laboring-Class.

Where a laboring-class who have no property but their daily wages, and no hope of acquiring it, refrain from over-rapid multiplication, the cause, I believe, has always hitherto been, either actual legal restraint, or a custom of some sort which, without intention on their part, insensibly molds their conduct, or affords immediate inducements not to marry. It is not generally known in how many countries of Europe direct legal obstacles are opposed to improvident marriages.

Where there is no general law restrictive of marriage, there are often customs equivalent to it. When the guilds or trade corporations of the middle ages were in vigor, their by-laws or regulations were conceived with a very vigilant eye to the advantage which the trade derived from limiting competition; and they made it very effectually the interest of artisans not to marry until after passing through the two stages of apprentice and journeyman, and attaining the rank of master.

Unhappily, sentimentality rather than common sense usually presides over the discussions of these subjects. Discussions [pg 191] on the condition of the laborers, lamentations over its wretchedness, denunciations of all who are supposed to be indifferent to it, projects of one kind or another for improving it, were in no country and in no time of the world so rife as in the present generation; but there is a tacit agreement to ignore totally the law of wages, or to dismiss it in a parenthesis, with such terms as “hard-hearted Malthusianism”; as if it were not a thousand times more hard-hearted to tell human beings that they may, than that they may not, call into existence swarms of creatures who are sure to be miserable, and most likely to be depraved!

I ask, then, is it true or not, that if their numbers were fewer they would obtain higher wages? This is the question, and no other: and it is idle to divert attention from it, by attacking any incidental position of Malthus or some other writer, and pretending that to refute that is to disprove the principle of population. Some, for instance, have achieved an easy victory over a passing remark of Mr. Malthus, hazarded chiefly by way of illustration, that the increase of food may perhaps be assumed to take place in an arithmetical ratio, while population increases in a geometrical: when every candid reader knows that Mr. Malthus laid no stress on this unlucky attempt to give numerical precision to things which do not admit of it, and every person capable of reasoning must see that it is wholly superfluous to his argument. Others have attached immense importance to a correction which more recent political economists have made in the mere language of the earlier followers of Mr. Malthus. Several writers had said that it is the tendency of population to increase faster than the means of subsistence. The assertion was true in the sense in which they meant it, namely, that population would in most circumstances increase faster than the means of subsistence, if it were not checked either by mortality or by prudence. But inasmuch as these checks act with unequal force at different times and places, it was possible to interpret the language of these writers as if they had meant that population is usually [pg 192] gaining ground upon subsistence, and the poverty of the people becoming greater. Under this interpretation of their meaning, it was urged that the reverse is the truth: that as civilization advances, the prudential check tends to become stronger, and population to slacken its rate of increase, relatively to subsistence; and that it is an error to maintain that population, in any improving community, tends to increase faster than, or even so fast as, subsistence.171 The word tendency172 is here used in a totally different sense from that of the writers who affirmed the proposition; but waiving the verbal question, is it not allowed, on both sides, that in old countries population presses too closely upon the means of subsistence?

[pg 193]

Chapter III. Of Remedies For Low Wages.

§ 1. A Legal or Customary Minimum of Wages, with a Guarantee of Employment.

The simplest expedient which can be imagined for keeping the wages of labor up to the desirable point would be to fix them by law; and this is virtually the object aimed at in a variety of plans which have at different times been, or still are, current, for remodeling the relation between laborers and employers. No one, probably, ever suggested that wages should be absolutely fixed, since the interests of all concerned often require that they should be variable; but some have proposed to fix a minimum of wages, leaving the variations above that point to be adjusted by competition. Another plan, which has found many advocates among the leaders of the operatives, is that councils should be formed, which in England have been called local boards of trade, in France “conseils de prud'hommes,” and other names; consisting of delegates from the work-people and from the employers, who, meeting in conference, should agree upon a rate of wages, and promulgate it from authority, to be binding generally on employers and workmen; the ground of decision being, not the state of the labor market, but natural equity; to provide that the workmen shall have reasonable wages, and the capitalist reasonable profits.

The one expedient most suggested by politicians and labor-reformers in the United States is an eight-hour law, mandatory upon all employers. It is to be remembered, however, that in very many industries piece-work exists, and if a diminution of hours is enforced, that will mean a serious reduction in the amount of wages which can be possibly earned in a day. [pg 194] Even if all industries were alike in the matter of arranging their work, this plan means higher wages for the same work, or the same wages for less work, and so an increased cost of labor. This would, then, take its effect on profits at once; and the effects would be probably seen in a withdrawal of capital from many industries, where, as now, the profits are very low. It must be recalled, however, that in the United States there has been, under the influence of natural causes, unaided by legislation, a very marked reduction in the hours of labor, accompanied by an increase of wages. For example, in 1840, Rhode Island operatives in the carding-room of the cotton-mills worked fourteen hours a day for $3.28 a week, while in 1884 they work eleven hours and receive $5.40 a week. This result is most probably due to the gain arising from the invention of labor-saving machinery.

Others again (but these are rather philanthropists interesting themselves for the laboring-classes, than the laboring people themselves) are shy of admitting the interference of authority in contracts for labor: they fear that if law intervened, it would intervene rashly and ignorantly; they are convinced that two parties, with opposite interests, attempting to adjust those interests by negotiation through their representatives on principles of equity, when no rule could be laid down to determine what was equitable, would merely exasperate their differences instead of healing them; but what it is useless to attempt by the legal sanction, these persons desire to compass by the moral. Every employer, they think, ought to give sufficient wages; and if he does it not willingly, should be compelled to it by general opinion; the test of sufficient wages being their own feelings, or what they suppose to be those of the public. This is, I think, a fair representation of a considerable body of existing opinion on the subject.

I desire to confine my remarks to the principle involved in all these suggestions, without taking into account practical difficulties, serious as these must at once be seen to be. I shall suppose that by one or other of these contrivances wages could be kept above the point to which they would be brought by competition. This is as much as to say, above the highest rate which can be afforded by the existing capital [pg 195] consistently with employing all the laborers. For it is a mistake to suppose that competition merely keeps down wages. It is equally the means by which they are kept up. When there are any laborers unemployed, these, unless maintained by charity, become competitors for hire, and wages fall; but when all who were out of work have found employment, wages will not, under the freest system of competition, fall lower. There are strange notions afloat concerning the nature of competition. Some people seem to imagine that its effect is something indefinite; that the competition of sellers may lower prices, and the competition of laborers may lower wages, down to zero, or some unassignable minimum. Nothing can be more unfounded. Goods can only be lowered in price by competition to the point which calls forth buyers sufficient to take them off; and wages can only be lowered by competition until room is made to admit all the laborers to a share in the distribution of the wages-fund. If they fell below this point, a portion of capital would remain unemployed for want of laborers; a counter-competition would commence on the side of capitalists, and wages would rise.

The assumption in the last chapter in regard to competition and custom should be kept in mind in all this reasoning. As a matter of fact, there is not that mobility of labor which insures so free an operation of competition that equality of payment always exists. In reality there is no competition at all between the lower grades of laborers and the higher classes of skilled labor. Of course, the tendency is as explained by Mr. Mill, and as time goes on there is a distinctly greater mobility of labor visible. Vast numbers pass from Scandinavia and other countries of Europe to the United States, or from England to Australia, urged by the desire to go from a community of low to one of higher wages.

Since, therefore, the rate of wages which results from competition distributes the whole wages-fund among the whole laboring population, if law or opinion succeeds in fixing wages above this rate, some laborers are kept out of employment; and as it is not the intention of the philanthropists that these should starve, they must be provided for [pg 196] by a forced increase of the wages-fund—by a compulsory saving. It is nothing to fix a minimum of wages unless there be a provision that work, or wages at least, be found for all who apply for it. This, accordingly, is always part of the scheme, and is consistent with the ideas of more people than would approve of either a legal or a moral minimum of wages. Popular sentiment looks upon it as the duty of the rich, or of the state, to find employment for all the poor. If the moral influence of opinion does not induce the rich to spare from their consumption enough to set all the poor at work at “reasonable wages,” it is supposed to be incumbent on the state to lay on taxes for the purpose, either by local rates or votes of public money. The proportion between labor and the wages-fund would thus be modified to the advantage of the laborers, not by restriction of population, but by an increase of capital.

§ 2. —Would Require as a Condition Legal Measures for Repression of Population.

If this claim on society could be limited to the existing generation; if nothing more were necessary than a compulsory accumulation, sufficient to provide permanent employment at ample wages for the existing numbers of the people; such a proposition would have no more strenuous supporter than myself. Society mainly consists of those who live by bodily labor; and if society, that is, if the laborers, lend their physical force to protect individuals in the enjoyment of superfluities, they are entitled to do so, and have always done so, with the reservation of a power to tax those superfluities for purposes of public utility; among which purposes the subsistence of the people is the foremost. Since no one is responsible for having been born, no pecuniary sacrifice is too great to be made by those who have more than enough, for the purpose of securing enough to all persons already in existence.

But it is another thing altogether when those who have produced and accumulated are called upon to abstain from consuming until they have given food and clothing, not only to all who now exist, but to all whom these or their descendants may think fit to call into existence. Such an obligation [pg 197] acknowledged and acted upon, would suspend all checks, both positive and preventive; there would be nothing to hinder population from starting forward at its rapidest rate; and as the natural increase of capital would, at the best, not be more rapid than before, taxation, to make up the growing deficiency, must advance with the same gigantic strides. But let them work ever so efficiently, the increasing population could not, as we have so often shown, increase the produce proportionally; the surplus, after all were fed, would bear a less and less proportion to the whole produce and to the population: and the increase of people going on in a constant ratio, while the increase of produce went on in a diminishing ratio, the surplus would in time be wholly absorbed; taxation for the support of the poor would engross the whole income of the country; the payers and the receivers would be melted down into one mass.

It would be possible for the state to guarantee employment at ample wages to all who are born. But if it does this, it is bound in self-protection, and for the sake of every purpose for which government exists, to provide that no person shall be born without its consent. To give profusely to the people, whether under the name of charity or of employment, without placing them under such influences that prudential motives shall act powerfully upon them, is to lavish the means of benefiting mankind without attaining the object. But remove the regulation of their wages from their own control; guarantee to them a certain payment, either by law or by the feeding of the community; and no amount of comfort that you can give them will make either them or their descendants look to their own self-restraint as the proper means for preserving them in that state.

The famous poor-laws of Elizabeth, enacted in 1601, were at first intended to relieve the destitute poor, sick, aged, and impotent, but in their administration a share was given to all who begged it. Employers, of course, found it cheaper to hire labor partly paid for by the parish, and the independent farm-laborer who would not go on the parish found his own wages lowered by this kind of competition. This continued a crying [pg 198] evil until it reached the proportions described by May: As the cost of pauperism, thus encouraged, was increasing, the poorer rate-payers were themselves reduced to poverty. The soil was ill-cultivated by pauper labor, and its rental consumed by parish rates. In a period of fifty years, the poor-rates were quadrupled, and had reached, in 1833, the enormous amount of £8,600,000. In many parishes they were approaching the annual value of the land itself.173 The old poor-laws were repealed, and there went into effect in 1834 the workhouse system, which, while not denying subsistence to all those born, required that the giving of aid should be made as disagreeable as possible, in order to stimulate among the poor a feeling of repugnance to all aid from the community. This is also the general idea of poor-relief in the United States.

The cultivation of the principle of self-help in each laborer is certainly the right object at which to aim. In the United States voluntary charitable organizations have associated together, in some cities, in order to scrutinize all cases of poverty through a number of visitors in each district, who advise and counsel the unfortunate, but never give money. This system has been very successful, and, by basing its operations on the principle of self-help, has given the best proof of its right to an increasing influence.

§ 3. Allowances in Aid of Wages and the Standard of Living.

Next to the attempts to regulate wages, and provide artificially that all who are willing to work shall receive an adequate price for their labor, we have to consider another class of popular remedies, which do not profess to interfere with freedom of contract; which leave wages to be fixed by the competition of the market, but, when they are considered insufficient, endeavor by some subsidiary resource to make up to the laborers for the insufficiency. Of this nature was the allowance system. The principle of this scheme being avowedly that of adapting the means of every family to its necessities, it was a natural consequence that more should be given to the married than to the single, and to those who had large families than to those who had not: in fact, an allowance was usually granted for every child. It is obvious that this is merely another mode of fixing a minimum of wages.

There is a rate of wages, either the lowest on which the [pg 199] people can, or the lowest on which they will consent, to live. We will suppose this to be seven shillings a week. Shocked at the wretchedness of this pittance, the parish authorities humanely make it up to ten. But the laborers are accustomed to seven, and though they would gladly have more, will live on that (as the fact proves) rather than restrain the instinct of multiplication. Their habits will not be altered for the better by giving them parish pay. Receiving three shillings from the parish, they will be as well off as before, though they should increase sufficiently to bring down wages to four shillings. They will accordingly people down to that point; or, perhaps, without waiting for an increase of numbers, there are unemployed laborers enough in the workhouse to produce the effect at once. It is well known that the allowance system did practically operate in the mode described, and that under its influence wages sank to a lower rate than had been known in England before.

The operation of a low standard upon the wages of those in the community who have a higher one, has been seen in the United States to a certain extent by the landing on our shores of Chinese laborers, who maintain a decidedly lower standard of living than either their American or Irish competitors. If they come in such numbers as to retain their lower standard by forming a group by themselves, and are thereby not assimilated into the body of laborers who have a higher standard of comfort, they can, to the extent of their ability to do work, drive other laborers out of employment. This, moreover, is exactly what was done by the Irish, who drove Americans out of the mills of New England, and who are now being driven out, probably, by the French Canadians, with a standard lower than the Irish. The Chinese come here now without their families, as may be seen by the accompanying diagram, in which the shaded side represents the males on the left, and the unshaded the females on the right, of the perpendicular line.

[pg 200]

The horizontal lines show the ages, the largest number being about thirty years of age. It will be noted how many come in the prime of life, and how few children and females there are.

It need hardly be said that the economic side of a question is here discussed, which requires for its solution many ethical and political considerations besides.

§ 4. Grounds for Expecting Improvement in Public Opinion on the Subject of Population.

By what means, then, is poverty to be contended against? How is the evil of low wages to be remedied? If the expedients usually recommended for the purpose are not adapted to it, can no others be thought of? Is the problem incapable of solution? Can political economy do nothing, but only object to everything, and demonstrate that nothing can be done? Those who think it hopeless that the laboring-classes should be induced to practice a sufficient degree of prudence in regard to the increase of their families, because they have hitherto stopped short of that point, show an inability to estimate the ordinary principles of human action. Nothing more would probably be necessary to secure that result, than an opinion generally diffused that it was desirable.

But let us try to imagine what would happen if the idea became general among the laboring-class that the competition of too great numbers was the principal cause of their poverty. We are often told that the most thorough perception of the dependence of wages on population will not influence the conduct of a laboring-man, because it is not the children he himself can have that will produce any effect in generally depressing the labor market. True, and it is also true that one soldier's running away will not lose the battle; accordingly, it is not that consideration which keeps each soldier in his rank: it is the disgrace which naturally and inevitably attends on conduct by any one individual which, if pursued by a majority, everybody can see would be fatal. Men are seldom found to brave the general opinion of their class, unless supported either by some principle higher than regard for opinion, or by some strong body of opinion elsewhere.

If the opinion were once generally established among the [pg 201] laboring-class that their welfare required a due regulation of the numbers of families, the respectable and well-conducted of the body would conform to the prescription, and only those would exempt themselves from it who were in the habit of making light of social obligations generally; and there would be then an evident justification for converting the moral obligation against bringing children into the world, who are a burden to the community, into a legal one; just as in many other cases of the progress of opinion, the law ends by enforcing against recalcitrant minorities obligations which, to be useful, must be general, and which, from a sense of their utility, a large majority have voluntarily consented to take upon themselves.

The dependence of wages on the number of the competitors for employment is so far from hard of comprehension, or unintelligible to the laboring-classes, that by great bodies of them it is already recognized and habitually acted on. It is familiar to all trades-unions: every successful combination to keep up wages owes its success to contrivances for restricting the number of competitors; all skilled trades are anxious to keep down their own numbers, and many impose, or endeavor to impose, as a condition upon employers, that they shall not take more than a prescribed number of apprentices. There is, of course, a great difference between limiting their numbers by excluding other people, and doing the same thing by a restraint imposed on themselves; but the one as much as the other shows a clear perception of the relation between their numbers and their remuneration. The principle is understood in its application to any one employment, but not to the general mass of employment. For this there are several reasons: first, the operation of causes is more easily and distinctly seen in the more circumscribed field; secondly, skilled artisans are a more intelligent class than ordinary manual laborers; and the habit of concert, and of passing in review their general condition as a trade, keeps up a better understanding of their collective interests; thirdly and lastly, they are the most [pg 202] provident, because they are the best off, and have the most to preserve.

§ 5. Twofold means of Elevating the Habits of the Laboring-People; by Education, and by Foreign and Home Colonization.

For the purpose, therefore, of altering the habits of the laboring people, there is need of a twofold action, directed simultaneously upon their intelligence and their poverty. An effective national education of the children of the laboring-class is the first thing needful; and, coincidently with this, a system of measures which shall (as the Revolution did in France) extinguish extreme poverty for one whole generation. Without entering into disputable points, it may be asserted without scruple that the aim of all intellectual training for the mass of the people should be to cultivate common sense; to qualify them for forming a sound practical judgment of the circumstances by which they are surrounded. [But] education is not compatible with extreme poverty. It is impossible effectually to teach an indigent population. Toward effecting this object there are two resources available, without wrong to any one, without any of the liabilities of mischief attendant on voluntary or legal charity, and not only without weakening, but on the contrary strengthening, every incentive to industry, and every motive to forethought.

The first is a great national measure of colonization. I mean, a grant of public money, sufficient to remove at once, and establish in the colonies, a considerable fraction of the youthful agricultural population. It has been shown by others that colonization on an adequate scale might be so conducted as to cost the country nothing, or nothing that would not be certainly repaid; and that the funds required, even by way of advance, would not be drawn from the capital employed in maintaining labor, but from that surplus which can not find employment at such profit as constitutes an adequate remuneration for the abstinence of the possessor, and which is therefore sent abroad for investment, or wasted at home in reckless speculations.

The second resource would be to devote all common land, hereafter brought into cultivation, to raising a class of [pg 203] small proprietors. What I would propose is, that common land should be divided into sections of five acres or thereabout, to be conferred in absolute property on individuals of the laboring-class who would reclaim and bring them into cultivation by their own labor.

This suggestion works to the same purpose as the proposal that our Government should retain its public lands and aid in the formation of a great number of small farmers, rather than, by huge grants, to foster large holdings in the Western States and Territories.174

The preference should be given to such laborers, and there are many of them, as had saved enough to maintain them until their first crop was got in, or whose character was such as to induce some responsible person to advance to them the requisite amount on their personal security. The tools, the manure, and in some cases the subsistence also, might be supplied by the parish, or by the state; interest for the advance, at the rate yielded by the public funds, being laid on as a perpetual quitrent, with power to the peasant to redeem it at any time for a moderate number of years' purchase. These little landed estates might, if it were thought necessary, be indivisible by law; though, if the plan worked in the manner designed, I should not apprehend any objectionable degree of subdivision. In case of intestacy, and in default of amicable arrangement among the heirs, they might be bought by government at their value, and re-granted to some other laborer who could give security for the price. The desire to possess one of these small properties would probably become, as on the Continent, an inducement to prudence and economy pervading the whole laboring population; and that great desideratum among a people of hired laborers would be provided, an intermediate class between them and their employers; affording them the double advantage of an object for their hopes, and, as there would be good reason to anticipate, an example for their imitation.

[pg 204]

It would, however, be of little avail that either or both of these measures of relief should be adopted, unless on such a scale as would enable the whole body of hired laborers remaining on the soil to obtain not merely employment, but a large addition to the present wages—such an addition as would enable them to live and bring up their children in a degree of comfort and independence to which they have hitherto been strangers.

[pg 205]

Chapter IV. Of The Differences Of Wages In Different Employments.

§ 1. Differences of Wages Arising from Different Degrees of Attractiveness in Different Employments.

In treating of wages, we have hitherto confined ourselves to the causes which operate on them generally, and en masse; the laws which govern the remuneration of ordinary or average labor, without reference to the existence of different kinds of work which are habitually paid at different rates, depending in some degree on different laws. We will now take into consideration these differences, and examine in what manner they affect or are affected by the conclusions already established.

The differences, says [Adam Smith], arise partly “from certain circumstances in the employments themselves, which either really, or at least in the imaginations of men, make up for a small pecuniary gain in some, and counterbalance a great one in others.” These circumstances he considers to be: “First, the agreeableness or disagreeableness of the employments themselves; secondly, the easiness and cheapness, or the difficulty and expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and, fifthly, the probability or improbability of success in them.”

(1.) “The wages of labor vary with the ease or hardship, the cleanliness or dirtiness, the honorableness or dishonorableness of the employment. A journeyman blacksmith, though an artificer, seldom earns so much in twelve hours as a collier, who is only a laborer, does in eight. His work [pg 206] is not quite so dirty, is less dangerous, and is carried on in daylight and above ground. Honor makes a great part of the reward of all honorable professions. In point of pecuniary gain, all things considered,” their recompense is, in his opinion, below the average. “Disgrace has the contrary effect. The trade of a butcher is a brutal and an odious business; but it is in most places more profitable than the greater part of common trades. The most detestable of all employments, that of the public executioner, is, in proportion to the quantity of work done, better paid than any common trade whatever.”

(2.) “Employment is much more constant,” continues Adam Smith, “in some trades than in others. In the greater part of manufactures, a journeyman may be pretty sure of employment almost every day in the year that he is able to work. A mason or brick-layer, on the contrary, can work neither in hard frost nor in foul weather, and his employment at all other times depends upon the occasional calls of his customers. He is liable, in consequence, to be frequently without any. What he earns, therefore, while he is employed, must not only maintain him while he is idle, but make him some compensation for those anxious and desponding moments which the thought of so precarious a situation must sometimes occasion.”

“When (1) the inconstancy of the employment is combined with (2) the hardship, disagreeableness, and dirtiness of the work, it sometimes raises the wages of the most common labor above those of the most skillful artificers. A collier working by the piece is supposed, at Newcastle, to earn commonly about double, and in many parts of Scotland about three times, the wages of common labor. His high wages arise altogether from the hardship, disagreeableness, and dirtiness of his work. His employment may, upon most occasions, be as constant as he pleases. The coal-heavers in London exercise a trade which in hardship, dirtiness, and disagreeableness almost equals that of colliers; and from the unavoidable irregularity in the arrivals of coal-ships, the [pg 207] employment of the greater part of them is necessarily very inconstant. If colliers, therefore, commonly earn double and triple the wages of common labor, it ought not to seem unreasonable that coal-heavers should sometimes earn four or five times those wages. In the inquiry made into their condition a few years ago, it was found that, at the rate at which they were then paid, they could earn about four times the wages of common labor in London.”

These inequalities of remuneration, which are supposed to compensate for the disagreeable circumstances of particular employments, would, under certain conditions, be natural consequences of perfectly free competition: and as between employments of about the same grade, and filled by nearly the same description of people, they are, no doubt, for the most part, realized in practice.

But it is altogether a false view of the state of facts to present this as the relation which generally exists between agreeable and disagreeable employments. The really exhausting and the really repulsive labors, instead of being better paid than others, are almost invariably paid the worst of all, because performed by those who have no choice. If the laborers in the aggregate, instead of exceeding, fell short of the amount of employment, work which was generally disliked would not be undertaken, except for more than ordinary wages. But when the supply of labor so far exceeds the demand that to find employment at all is an uncertainty, and to be offered it on any terms a favor, the case is totally the reverse. Partly from this cause, and partly from the natural and artificial monopolies, which will be spoken of presently, the inequalities of wages are generally in an opposite direction to the equitable principle of compensation, erroneously represented by Adam Smith as the general law of the remuneration of labor.

(3.) One of the points best illustrated by Adam Smith is the influence exercised on the remuneration of an employment by the uncertainty of success in it. If the chances are great of total failure, the reward in case of success must be [pg 208] sufficient to make up, in the general estimation, for those adverse chances. Put your son apprentice to a shoemaker, there is little doubt of his learning to make a pair of shoes; but send him to study the law, it is at least twenty to one if ever he makes such proficiency as will enable him to live by the business. In a perfectly fair lottery, those who draw the prizes ought to gain all that is lost by those who draw the blanks. In a profession where twenty fail for one that succeeds, that one ought to gain all that should have been gained by the unsuccessful twenty. How extravagant soever the fees of counselors-at-law may sometimes appear, their real retribution is never equal to this.

§ 2. Differences arising from Natural Monopolies.

The preceding are cases in which inequality of remuneration is necessary to produce equality of attractiveness, and are examples of the equalizing effect of free competition. The following are cases of real inequality, and arise from a different principle.

(4.) “The wages of labor vary according to the small or great trust which must be reposed in the workmen. The wages of goldsmiths and jewelers are everywhere superior to those of many other workmen, not only of equal but of much superior ingenuity, on account of the precious materials with which they are intrusted.” The superiority of reward is not here the consequence of competition, but of its absence: not a compensation for disadvantages inherent in the employment, but an extra advantage; a kind of monopoly price, the effect not of a legal, but of what has been termed a natural monopoly. If all laborers were trustworthy, it would not be necessary to give extra pay to working goldsmiths on account of the trust. The degree of integrity required being supposed to be uncommon, those who can make it appear that they possess it are able to take advantage of the peculiarity, and obtain higher pay in proportion to its rarity.

This same explanation of a natural monopoly applies exactly to the causes which give able executive managers, who watch over productive operations, the usually high rewards for [pg 209] labor under the name of wages of superintendence. If successful managers of cotton or woolen mills were as plentiful, in proportion to the demand for them, as ordinary artisans, in proportion to the demand for them, then the former would get no higher rewards than the latter. Able executive and business managers secure high wages solely on the ground—as explained above—of monopoly; that is, because their numbers, owing to natural causes, are few relatively to the demand for them in every industry in the land.

(5.) Some employments require a much longer time to learn, and a much more expensive course of instruction, than others; and to this extent there is, as explained by Adam Smith, an inherent reason for their being more highly remunerated. Wages, consequently, must yield, over and above the ordinary amount, an annuity sufficient to repay these sums, with the common rate of profit, within the number of years [the laborer] can expect to live and be in working condition.

But, independently of these or any other artificial monopolies, there is a natural monopoly in favor of skilled laborers against the unskilled, which makes the difference of reward exceed, sometimes in a manifold proportion, what is sufficient merely to equalize their advantages. But the fact that a course of instruction is required, of even a low degree of costliness, or that the laborer must be maintained for a considerable time from other sources, suffices everywhere to exclude the great body of the laboring people from the possibility of any such competition. Until lately, all employments which required even the humble education of reading and writing could be recruited only from a select class, the majority having had no opportunity of acquiring those attainments.

Here is found the germ of the idea, which has been elaborately worked out by Mr. Cairnes175 in his theory of non-competing groups of laborers: What we find, in effect, is not a whole population competing indiscriminately for all occupations, but a series of industrial layers superposed on one another, within each of which the various candidates for employment [pg 210] possess a real and effective power of selection, while those occupying the several strata are, for all purposes of effective competition, practically isolated from each other. (Mr. Mill certainly understood this fully, and stated it clearly again in Book III, Chap. II, § 2.)

The changes, however, now so rapidly taking place in usages and ideas, are undermining all these distinctions; the habits or disabilities which chained people to their hereditary condition are fast wearing away, and every class is exposed to increased and increasing competition from at least the class immediately below it. The general relaxation of conventional barriers, and the increased facilities of education which already are, and will be in a much greater degree, brought within the reach of all, tend to produce, among many excellent effects, one which is the reverse: they tend to bring down the wages of skilled labor.

§ 3. Effect on Wages of the Competition of Persons having other Means of Support.

A modifying circumstance still remains to be noticed, which interferes to some extent with the operation of the principles thus far brought to view. While it is true, as a general rule, that the earnings of skilled labor, and especially of any labor which requires school education, are at a monopoly rate, from the impossibility, to the mass of the people, of obtaining that education, it is also true that the policy of nations, or the bounty of individuals, formerly did much to counteract the effect of this limitation of competition, by offering eleemosynary instruction to a much larger class of persons than could have obtained the same advantages by paying their price.

[Adam Smith has pointed out that] “whenever the law has attempted to regulate the wages of workmen, it has always been rather to lower them than to raise them. But the law has upon many occasions attempted to raise the wages of curates, and, for the dignity of the Church, to oblige the rectors of parishes to give them more than the wretched maintenance which they themselves might be willing to accept of. And in both cases the law seems to have been equally ineffectual, and has never been either able to raise [pg 211] the wages of curates or to sink those of laborers to the degree that was intended, because it has never been able to hinder either the one from being willing to accept of less than the legal allowance, on account of the indigence of their situation and the multitude of their competitors, or the other from receiving more, on account of the contrary competition of those who expected to derive either profit or pleasure from employing them.”

Although the highest pecuniary prizes of successful authorship are incomparably greater than at any former period, yet on any rational calculation of the chances, in the existing competition, scarcely any writer can hope to gain a living by books, and to do so by magazines and reviews becomes daily more difficult. It is only the more troublesome and disagreeable kinds of literary labor, and those which confer no personal celebrity, such as most of those connected with newspapers, or with the smaller periodicals, on which an educated person can now rely for subsistence. Of these, the remuneration is, on the whole, decidedly high; because, though exposed to the competition of what used to be called “poor scholars” (persons who have received a learned education from some public or private charity), they are exempt from that of amateurs, those who have other means of support being seldom candidates for such employments.

When an occupation is carried on chiefly by persons who derive the main portion of their subsistence from other sources, its remuneration may be lower almost to any extent than the wages of equally severe labor in other employments. The principal example of the kind is domestic manufactures. When spinning and knitting were carried on in every cottage, by families deriving their principal support from agriculture, the price at which their produce was sold (which constituted the remuneration of their labor) was often so low that there would have been required great perfection of machinery to undersell it. The amount of the remuneration in such a case depends chiefly upon whether the quantity of the commodity produced by this description of labor [pg 212] suffices to supply the whole of the demand. If it does not, and there is consequently a necessity for some laborers who devote themselves entirely to the employment, the price of the article must be sufficient to pay those laborers at the ordinary rate, and to reward, therefore, very handsomely the domestic producers. But if the demand is so limited that the domestic manufacture can do more than satisfy it, the price is naturally kept down to the lowest rate at which peasant families think it worth while to continue the production. Thus far, as to the remuneration of the subsidiary employment; but the effect to the laborers of having this additional resource is almost certain to be (unless peculiar counteracting causes intervene) a proportional diminution of the wages of their main occupation.

For the same reason it is found that, cæteris paribus, those trades are generally the worst paid in which the wife and children of the artisan aid in the work. The income which the habits of the class demand, and down to which they are almost sure to multiply, is made up in those trades by the earnings of the whole family, while in others the same income must be obtained by the labor of the man alone. It is even probable that their collective earnings will amount to a smaller sum than those of the man alone in other trades, because the prudential restraint on marriage is unusually weak when the only consequence immediately felt is an improvement of circumstances, the joint earnings of the two going further in their domestic economy after marriage than before.

This statement seems to be borne out by the statistics of wages176 both in England and the United States. In our cotton-mills, where women do certain kinds of work equally well with men, the wages of the men are lower than in outside employments into which women can not enter.

Blacksmiths, per week: $16.74
Family of four: Drawers-in, cotton-mill—man, per week: $5.50
Family of four: Drawers-in, cotton-mill—woman, per week: $5.50
Family of four: Tenders, two boys: $4.50
Total: $15.50

[pg 213]

In this case the family of four all together receive only about the same as the wages of the single blacksmith alone.

§ 4. Wages of Women, why Lower than those of Men.

Where men and women work at the same employment, if it be one for which they are equally fitted in point of physical power, they are not always unequally paid. Women in factories sometimes earn as much as men; and so they do in hand-loom weaving, which, being paid by the piece, brings their efficiency to a sure test. When the efficiency is equal, but the pay unequal, the only explanation that can be given is custom. But the principal question relates to the peculiar employments of women. The remuneration of these is always, I believe, greatly below that of employments of equal skill and equal disagreeableness carried on by men. In some of these cases the explanation is evidently that already given: as in the case of domestic servants, whose wages, speaking generally, are not determined by competition, but are greatly in excess of the market value of the labor, and in this excess, as in almost all things which are regulated by custom, the male sex obtains by far the largest share. In the occupations in which employers take full advantage of competition, the low wages of women, as compared with the ordinary earnings of men, are a proof that the employments are overstocked: that although so much smaller a number of women than of men support themselves by wages, the occupations which law and usage make accessible to them are comparatively so few that the field of their employment is still more overcrowded.

Yet within the employments open to women, such as millinery and dress-making, certain women are able to charge excessively high prices for work, because, having obtained a reputation for especial skill and taste, they can exact in the high prices of their articles what is really their high wages. Within these employments women are unable to earn a living not so much by the lack of work, as by not bringing to their occupation that amount of skill and those business qualities (owing, of course, to their being brought up unaccustomed to business methods) which are requisite for the success of any one, either man or woman.
[pg 214]

It must be observed that, as matters now stand, a sufficient degree of overcrowding may depress the wages of women to a much lower minimum than those of men. The wages, at least of single women, must be equal to their support, but need not be more than equal to it; the minimum, in their case, is the pittance absolutely requisite for the sustenance of one human being. Now the lowest point to which the most superabundant competition can permanently depress the wages of a man is always somewhat more than this. Where the wife of a laboring-man does not by general custom contribute to his earnings, the man's wages must be at least sufficient to support himself, a wife, and a number of children adequate to keep up the population, since, if it were less, the population would not be kept up.

§ 5. Differences of Wages Arising from Laws, Combinations, or Customs.

Thus far we have, throughout this discussion, proceeded on the supposition that competition is free, so far as regards human interference; being limited only by natural causes, or by the unintended effect of general social circumstances. But law or custom may interfere to limit competition. If apprentice laws, or the regulations of corporate bodies, make the access to a particular employment slow, costly, or difficult, the wages of that employment may be kept much above their natural proportion to the wages of common labor. In some trades, however, and to some extent, the combinations of workmen produce a similar effect. Those combinations always fail to uphold wages at an artificial rate unless they also limit the number of competitors. Putting aside the atrocities sometimes committed by workmen in the way of personal outrage or intimidation, which can not be too rigidly repressed, if the present state of the general habits of the people were to remain forever unimproved, these partial combinations, in so far as they do succeed in keeping up the wages of any trade by limiting its numbers, might be looked upon as simply intrenching round a particular spot against the inroads of over-population, and making the wages of the class depend upon their own rate of [pg 215] increase, instead of depending on that of a more reckless and improvident class than themselves.

To conclude this subject, I must repeat an observation already made, that there are kinds of labor of which the wages are fixed by custom, and not by competition. Such are the fees or charges of professional persons—of physicians, surgeons, barristers, and even attorneys.

[pg 216]

Chapter V. Of Profits.

§ 1. Profits include Interest and Risk; but, correctly speaking, do not include Wages of Superintendence.

Having treated of the laborer's share of the produce, we next proceed to the share of the capitalist; the profits of capital or stock; the gains of the person who advances the expenses of production—who, from funds in his possession, pays the wages of the laborers, or supports them during the work; who supplies the requisite buildings, materials, and tools or machinery; and to whom, by the usual terms of the contract, the produce belongs, to be disposed of at his pleasure. After indemnifying him for his outlay, there commonly remains a surplus, which is his profit; the net income from his capital [and skill]; the amount which he can afford to expend in necessaries or pleasures, or from which by further saving he can add to his wealth.

As the wages of the laborer are the remuneration of labor, so [a part of] the profits of the capitalist are properly, according to Mr. Senior's well-chosen expression, the remuneration of abstinence. They are what he gains by forbearing to consume his capital for his own uses, and allowing it to be consumed by productive laborers for their uses. For this forbearance he requires a recompense.

Of the gains, however, which the possession of a capital enables a person to make, (1) a part only is properly an equivalent for the use of the capital itself; namely, as much as a solvent person would be willing to pay for the loan of it. This, which as everybody knows is called interest, is all that a person is enabled to get by merely abstaining from the [pg 217] immediate consumption of his capital, and allowing it to be used for productive purposes by others. The remuneration which is obtained in any country for mere abstinence is measured by the current rate of interest on the best security; such security as precludes any appreciable chance of losing the principal. What a person expects to gain, who superintends the employment of his own capital, is always more, and generally much more, than this. The rate of profit greatly exceeds the rate of interest. (2.) The surplus is partly compensation for risk. By lending his capital on unexceptionable security he runs little or no risk. But if he embarks in business on his own account, he always exposes his capital to some, and in many cases to very great, danger of partial or total loss. For this danger he must be compensated, otherwise he will not incur it. (3.) He must likewise be remunerated for the devotion of his time and labor. The control of the operations of industry usually belongs to the person who supplies the whole or the greatest part of the funds by which they are carried on, and who, according to the ordinary arrangement, is either alone interested, or is the person most interested (at least directly), in the result. To exercise this control with efficiency, if the concern is large and complicated, requires great assiduity, and often no ordinary skill. This assiduity and skill must be remunerated.

The gross profits from capital, the gains returned to those who supply the funds for production, must suffice for these three purposes; and the three parts into which profit may be considered as resolving itself may be described respectively as interest, insurance, and wages of superintendence.

Inasmuch as risk is the cause affecting the rate of interest, it would be much simpler to consider the whole reward for abstinence as interest, the rate of which is affected by the risk; and to carefully exclude from the profits of capital the payment for assiduity and skill, which is distinctly wages of labor. The wages of superintendence, as every one on a moment's reflection must admit, have no necessary connection whatever with the possession of capital. The thing with which the laborer is occupied does not give the reason for associating his [pg 218] wages with the name of that thing; because a highly-qualified manager supervises the operations of capital, it does not follow that he has capital, or should be regarded as being paid for the possession of capital. The man who shovels ashes is not paid wages of ashes, any more than a man who superintends other people's capital is paid the reward of capital. The payment for services, in the one case as in the other, depends upon the skill of the manager, just as it does with an ordinary mechanic, rising or falling with his fitness for the peculiar work. Skill as a manager is the cause; the amount of the remuneration is the consequence. If so, then the wages of superintendence have no logical connection, in the economic sense, with capital as the thing which determines the amount of its reward, any more than it affects the wages of any and all labor. The payment for the use of capital, simply as capital, may be seen by the amount which a widow who is not engaged in active business receives from her property invested as trust funds. Moreover, it is less and less true that the manager of the operations of industry is necessarily the capitalist. To see this, mark the executive managers (called treasurers by custom) of cotton and woolen mills, who receive a remuneration entirely distinct from any capital they may have invested in the shares of the corporation; and the officials of the great mutual insurance companies, who receive the wages of managers, but for managing the capital of others. A large—by far the largest—part of what is usually called profit, therefore, should be treated as wages, and the forces which govern its amount are the same as those affecting the amounts of all other kinds of wages, such as are discussed in the preceding chapter. The acknowledgment of this distinction is of extreme importance, and affects, in a profound way, the whole question of distribution. To include wages of superintendence in profits of capital is to unnecessarily complicate one of the most serious economic questions—namely, the relations of capital and labor.

§ 2. The Minimum of Profits; what produces Variations in the Amount of Profits.

The lowest rate of profit that can permanently exist is that which is barely adequate, at the given place and time, to afford an equivalent for the abstinence, risk, and exertion implied in the employment of capital. From the gross profit has first to be deducted as much as will form a fund sufficient on the average to cover all losses incident to the employment. Next, it must afford such an equivalent to the owner of the capital for forbearing to consume it as is then and there a sufficient motive to him to persist in his abstinence. How much will be required to form this equivalent depends [pg 219] on the comparative value placed, in the given society, upon the present and the future (in the words formerly used): on the strength of the effective desire of accumulation. Further, after covering all losses, and remunerating the owner for forbearing to consume, there must be something left to recompense the labor and skill of the person who devotes his time to the business.

Such, then, is the minimum of profits: but that minimum is exceedingly variable, and at some times and places extremely low, on account of the great variableness of two out of its three elements. That the rate of necessary remuneration for abstinence, or in other words the effective desire of accumulation, differs widely in different states of society and civilization, has been seen in a former chapter. There is a still wider difference in the element which consists in compensation for risk.

The remuneration of capital in different employments, much more than the remuneration of labor, varies according to the circumstances which render one employment more attractive or more repulsive than another. The profits, for example, of retail trade, in proportion to the capital employed, exceed those of wholesale dealers or manufacturers, for this reason among others, that there is less consideration attached to the employment. The greatest, however, of these differences, is that caused by difference of risk. The profits of a gunpowder-manufacturer must be considerably greater than the average, to make up for the peculiar risks to which he and his property are constantly exposed. When, however, as in the case of marine adventure, the peculiar risks are capable of being, and commonly are, commuted for a fixed payment, the premium of insurance takes its regular place among the charges of production, and the compensation which the owner of the ship or cargo receives for that payment does not appear in the estimate of his profits, but is included in the replacement of his capital.

The minimum of profits can not properly include wages of superintendence, nor is it so included, practically, in Mr. Mill's [pg 220] discussions on the minimum of profits in a later part of this volume. The operation of the various elements in changing the amount of profits might be expressed as follows: As between different countries and communities, who have a different effective desire of accumulation, profits may vary with the element of interest and risk; within the same district, where interest is generally the same on the same security, profits may vary with the risk attached to different industries; and, within the same occupations, interest and risk being given, the wages of superintendence may make a greater variation than either of the other two causes—since a skillful manager may make a large return, a poor one none at all. Or between two employments, interest and risk remaining the same, wages of superintendence sometimes produce a wide difference.

The portion, too, of the gross profit, which forms the remuneration for the labor and skill of the dealer or producer, is very different in different employments. This is the explanation always given of the extraordinary rate of apothecaries' profit. There are cases, again, in which a considerable amount of labor and skill is required to conduct a business necessarily of limited extent. In such cases a higher than common rate of profit is necessary to yield only the common rate of remuneration.

All the natural monopolies (meaning thereby those which are created by circumstances, and not by law) which produce or aggravate the disparities in the remuneration of different kinds of labor, operate similarly between different employments of capital.

In this passage Mr. Mill points out distinctly that the movement up and down in the wages of a manager are governed by the same laws as those which regulate differences in the different rewards of labor, but yet he connects it improperly with capital. It will be seen that Mr. Mill uses the term gross profit on the next page in order to avoid the difficulty, which rises unconsciously in his mind, of the anomalous presence of the wages of the manager in the question of profit.

§ 3. General Tendency of Profits to an Equality.

After due allowance is made for these various causes of inequality, namely, difference in the risk or agreeableness of different employments, and natural or artificial monopolies [which give greater or less wages of superintendence], [pg 221] the rate of profit on capital in all employments tends to an equality. That portion of profit which is properly interest, and which forms the real remuneration for abstinence, is strictly the same at the same time and place, whatever be the employment. The rate of interest, on equally good security, does not vary according to the destination of the principal, though it does vary from time to time very much, according to the circumstances of the market.

It is far otherwise with gross profit, which, though (as will presently be seen) it does not vary much from employment to employment, varies very greatly from individual to individual, and can scarcely be in any two cases the same. It depends on the knowledge, talents, economy, and energy of the capitalist himself, or of the agents whom he employs; on the accidents of personal connection; and even on chance. Hardly any two dealers in the same trade, even if their commodities are equally good and equally cheap, carry on their business at the same expense, or turn over their capital in the same time. That equal capitals give equal profits, as a general maxim of trade, would be as false as that equal age or size gives equal bodily strength, or that equal reading or experience gives equal knowledge. The effect depends as much upon twenty other things as upon the single cause specified. On an average (whatever may be the occasional fluctuations) the various employments of capital are on such a footing as to hold out, not equal profits, but equal expectations of profit, to persons of average abilities and advantages. By equal, I mean after making compensation for any inferiority in the agreeableness or safety of an employment. If the case were not so; if there were, evidently, and to common experience, more favorable chances of pecuniary success in one business than in others, more persons would engage their capital in the business. If, on the contrary, a business is not considered thriving; if the chances of profit in it are thought to be inferior to those in other employments; capital gradually leaves it, or at least new capital is not attracted to it; and by this change in the distribution of [pg 222] capital between the less profitable and the more profitable employments, a sort of balance is restored.

Illustration: Parallel vertical lines AB and GD, with horizontal lines EG and FC joining them.
This may be easily shown by a diagram in which the capital in one employment is represented by A B, and which exceeds C D, that in another employment, by the amount of A F. It is not necessary that the whole of the excess, A F should be transferred to C D to make the two capitals equal, but only A E, which, added to C D, brings C D to an equality with E B.

This equalizing process, commonly described as the transfer of capital from one employment to another, is not necessarily the onerous, slow, and almost impracticable operation which it is very often represented to be. In the first place, it does not always imply the actual removal of capital already embarked in an employment. In a rapidly progressive state of capital, the adjustment often takes place by means of the new accumulations of each year, which direct themselves in preference toward the more thriving trades. Even when a real transfer of capital is necessary, it is by no means implied that any of those who are engaged in the unprofitable employment relinquish business and break up their establishments. The numerous and multifarious channels of credit through which, in commercial nations, unemployed capital diffuses itself over the field of employment, flowing over in greater abundance to the lower levels, are the means by which the equalization is accomplished. The process consists in a limitation by one class of dealers or producers and an extension by the other of that portion of their business which is carried on with borrowed capital.

Political economists say that capital sets toward the most profitable trades, and that it rapidly leaves the less profitable and non-paying trades. But in ordinary countries this is a slow process, and some persons, who want to have ocular demonstrations of abstract truths, have been inclined to doubt it because they could not see it. The process would be visible enough if you could only see the books of the bill-brokers and the bankers. If the iron-trade ceases to be as profitable as [pg 223] usual, less iron is sold; the fewer the sales the fewer the bills; and in consequence the number of iron bills [at the banks] is diminished. On the other hand, if, in consequence of a bad harvest, the corn trade becomes on a sudden profitable, immediately corn bills are created in large numbers, and, if good, are discounted [at the banks]. Thus capital runs as surely and instantly where it is most wanted, and where there is most to be made of it, as water runs to find its level.177

In the case of an altogether declining trade, in which it is necessary that the production should be, not occasionally varied, but greatly and permanently diminished, or perhaps stopped altogether, the process of extricating the capital is, no doubt, tardy and difficult, and almost always attended with considerable loss; much of the capital fixed in machinery, buildings, permanent works, etc., being either not applicable to any other purpose, or only applicable after expensive alterations; and time being seldom given for effecting the change in the mode in which it would be effected with least loss, namely, by not replacing the fixed capital as it wears out. There is besides, in totally changing the destination of a capital, so great a sacrifice of established connection, and of acquired skill and experience, that people are always very slow in resolving upon it, and hardly ever do so until long after a change of fortune has become hopeless.

In general, then, although profits are very different to different individuals, and to the same individual in different years, there can not be much diversity at the same time and place in the average profits of different employments (other than the standing differences necessary to compensate for difference of attractiveness), except for short periods, or when some great permanent revulsion has overtaken a particular trade. It is true that, to persons with the same amount of original means, there is more chance of making a large fortune in some employments than in others. But it would be found that in those same employments bankruptcies also are more frequent, and that the chance of greater success is balanced by a greater probability of complete failure.

[pg 224]

§ 4. The Cause of the Existence of any Profit; the Advances of Capitalists consist of Wages of Labor.

The preceding remarks have, I hope, sufficiently elucidated what is meant by the common phrase, “the ordinary rate of profit,” and the sense in which, and the limitations under which, this ordinary rate has a real existence. It now remains to consider what causes determine its amount.

The cause of profit is, that labor produces more than is required for its support; the reason why capital yields a profit is, because food, clothing, materials, and tools last longer than the time which is required to produce them; so that if a capitalist supplies a party of laborers with these things, on condition of receiving all they produce, they will, in addition to reproducing their own necessaries and instruments, have a portion of their time remaining, to work for the capitalist. We thus see that profit arises, not from the incident of exchange, but from the productive power of labor; and the general profit of the country is always what the productive power of labor makes it, whether any exchange takes place or not. I proceed, in expansion of the considerations thus briefly indicated, to exhibit more minutely the mode in which the rate of profit is determined.

I assume, throughout, the state of things which, where the laborers and capitalists are separate classes, prevails, with few exceptions, universally; namely, that the capitalist advances the whole expenses, including the entire remuneration of the laborer. That he should do so is not a matter of inherent necessity; the laborer might wait until the production is complete for all that part of his wages which exceeds mere necessaries, and even for the whole, if he has funds in hand sufficient for his temporary support. But in the latter case the laborer is to that extent really a capitalist, investing capital in the concern, by supplying a portion of the funds necessary for carrying it on; and even in the former case he may be looked upon in the same light, since, contributing his labor at less than the market price, he may be regarded as lending the difference to his employer, and receiving it back with interest (on whatever principle computed) from the proceeds of the enterprise.

[pg 225]

The capitalist, then, may be assumed to make all the advances and receive all the produce. His profit consists of the excess of the produce above the advances; his rate of profit is the ratio which that excess bears to the amount advanced.

For example, if A advances 8,000 bushels of corn to laborers in return for 10,000 yards of cloth (and if one bushel of corn sells for the same sum as one yard of cloth), his profit consists of 2,000 yards of cloth. The ratio of the excess, 2,000, to 8,000, the outlay, or 25 per cent, is the rate of profit. It is not the ratio of 2,000 to 10,000.

But what do the advances consist of? It is, for the present, necessary to suppose that the capitalist does not pay any rent; has not to purchase the use of any appropriated natural agent. The nature of rent, however, we have not yet taken into consideration; and it will hereafter appear that no practical error, on the question we are now examining, is produced by disregarding it.

If, then, leaving rent out of the question, we inquire in what it is that the advances of the capitalist, for purposes of production, consist, we shall find that they consist of wages of labor.

A large portion of the expenditure of every capitalist consists in the direct payment of wages. What does not consist of this is composed of materials and implements, including buildings. But materials and implements are produced by labor; and as our supposed capitalist is not meant to represent a single employment, but to be a type of the productive industry of the whole country, we may suppose that he makes his own tools and raises his own materials. He does this by means of previous advances, which, again, consist wholly of wages. If we suppose him to buy the materials and tools instead of producing them, the case is not altered: he then repays to a previous producer the wages which that previous producer has paid. It is true he repays it to him with a profit; and, if he had produced the things himself, he himself must have had that profit on this part of his outlay [pg 226] as well as on every other part. The fact, however, remains, that in the whole process of production, beginning with the materials and tools and ending with the finished product, all the advances have consisted of nothing but wages, except that certain of the capitalists concerned have, for the sake of general convenience, had their share of profit paid to them before the operation was completed.

This idea may be more clear, perhaps, if we imagine a large corporation, not only making woolen cloth, but owning sheep-ranches, where the raw materials are produced; the shops where all machinery is made; and who even produce on their own property all the food, clothing, shelter, and consumption of the laborers employed by them. A line of division may be passed through the returns in all these branches of the industry, separating what is wages from what is profit. Then it can be easily imagined that all the returns on one side, representing profits, go to capitalists, no matter whether they are thousands in number, or only one capitalist typifying the rest, or a single corporation acting for many small capitalists.

§ 5. The Rate of Profit depends on the Cost of Labor.

It thus appears that the two elements on which, and which alone, the gains of the capitalists depend, are, first, the magnitude of the produce, in other words, the productive power of labor; and secondly, the proportion of that produce obtained by the laborers themselves; the ratio which the remuneration of the laborers bears to the amount they produce.

We thus arrive at the conclusion of Ricardo and others, that the rate of profits depends upon wages; rising as wages fall, and falling as wages rise. In adopting, however, this doctrine, I must insist upon making a most necessary alteration in its wording. Instead of saying that profits depend on wages, let us say (what Ricardo really meant) that they depend on the cost of labor.

This is an entirely different question from that concerning the rate of wages before discussed (Book II, Chap. II). That had to do with the amount of the capital which each laborer, on an average, received as real wages, and this average rate was affected by the number of competitors for labor, as compared with the existing capital, taking into account the nature of the industries in a country. An increase of population, bringing more laborers to compete for employment, will lower [pg 227] the average amount of real wages received by each one; and a decrease of population will bring about the reverse. The rate of wages, however, now that we are considering the matter from the point of view of the capitalist, is but one of the things to be considered affecting cost of labor. The former question was one as to the distribution of capital; the latter is one as to the amount by which the total production is greater than the total capital advanced. Since all capital consists of advances to labor, the present inquiry is one in regard to the quantity of advances compared with the quantity returned; that is, the relation of the total capital to the total production arising from the use of that capital. In the diagram before used (p. 179) the question is not how the contents of circle B are to be distributed, but the relative size of circle B to circle A. In order to produce circle A, it is necessary to advance what is represented by circle B.

Wages and the cost of labor; what labor brings in to the laborer and what it costs to the capitalist are ideas quite distinct, and which it is of the utmost importance to keep so. For this purpose it is essential not to designate them, as is almost always done, by the same name. Wages, in public discussions, both oral and printed, being looked upon from the same point of view of the payers, much oftener than from that of the receivers, nothing is more common than to say that wages are high or low, meaning only that the cost of labor [to the capitalist] is high or low. The reverse of this would be oftener the truth: the cost of labor is frequently at its highest where wages are lowest. This may arise from two causes. (1.) In the first place, the labor, though cheap, may be inefficient.

The facts presented by Mr. Brassey178 very fully illustrate this principle. Although French workmen in their ship-yards receive less wages for the same kind of work than the English workmen in English yards, yet it costs less per ton to build ships in England than in France. The same correspondence between high wages and efficient work was found to be true of railway construction in different parts of the world. With different character, varying amounts of industrial energy, varying intelligence, and endurance, different people do not have the same efficiency of labor. It is ascertained that inefficiency is, as a rule, accompanied by low wages. Even though wages paid for ordinary labor in constructing railways were in India [pg 228] only from nine to twelve cents a day, and in England from seventy-five to eighty-seven cents a day, yet it cost as much to build a mile of railway in India as in England. The English laborer gave a full equivalent for his higher wages. Moreover, while an English weaver tends from two to three times as many looms as his Russian competitor, the workman in the United States, it is said, will tend even more than the Englishman. In American sailing-vessels, also, a less number of sailors, relatively to the tonnage, is required than in English sailing-ships. Mr. Brassey, besides, came to the conclusion that the working power, or efficiency, of ordinary English laborers was to the French as five to three.

(2.) The other cause which renders wages and the cost of labor no real criteria of one another is the varying costliness of the articles which the laborer consumes. If these are cheap, wages, in the sense which is of importance to the laborer, may be high, and yet the cost of labor may be low; if dear, the laborer may be wretchedly off, though his labor may cost much to the capitalist. This last is the condition of a country over-peopled in relation to its land; in which, food being dear, the poorness of the laborer's real reward does not prevent labor from costing much to the purchaser, and low wages and low profits coexist. The opposite case is exemplified in the United States of America. The laborer there enjoys a greater abundance of comforts than in any other country of the world, except some of the newest colonies; but owing to the cheap price at which these comforts can be obtained (combined with the great efficiency of the labor), the cost of labor to the capitalist is considerably lower than in Europe. It must be so, since the rate of profit is higher; as indicated by the rate of interest, which is six per cent at New York when it is three or three and a quarter per cent in London.

The cost of labor, then, is, in the language of mathematics, a function of three variables: (1) the efficiency of labor; (2) the wages of labor (meaning thereby the real reward [or real wages] of the laborer); and (3) the greater or less cost179 [pg 229] at which the articles composing that real reward can be produced or purchased. It is plain that the cost of labor to the capitalist must be influenced by each of these three circumstances, and by no others. These, therefore, are also the circumstances which determine the rate of profit; and it can not be in any way affected except through one or other of them.

The efficiency of labor, in this connection, is highly important in its practical aspects, and as affecting the labor question, because as a function of cost of labor, that is, as an element affecting the quantity of things advanced to the laborers in comparison with the quantity of things returned to the employer, it includes the whole influence of machinery, labor-saving devices, and the results of invention. The quantity of produce depends, for a given advance, on the kind of machinery, the speed with which it is run, and on the general state of the arts and industrial inventions. The extent to which the productive capacity of a single laborer has been increased in the United States has been almost incredible. Instead of weaving cloth by hand, as was done a hundred years ago, one operative in Lowell, working one year, can produce the cotton fabric needed for the year's supply of 1,500 to 1,800 Chinese. Moreover, there is no question as to the fact that no nation in the world compares with ours in the power to invent, construct, and manage the most ingenious and complicated machinery. The inventive faculty belongs to every class in our country; and, in studying cost of labor, it must be well borne in mind that the efficiency of American labor, particularly as combined with mechanical appliances, is one of the great causes of our enormous production. The result of this, for instance, has been that, without lowering profits, although the price of cloth has been greatly reduced, employers have been able to raise the wages of operatives, and shorten their hours of labor, because machinery has so vastly increased the production for a given outlay. As one of a few facts showing this tendency in the last fifty years, note the following table, taken from the books of the Namquit cotton-mill in Bristol, Rhode Island:

Kind Of Labor.1841.1884.
Card-room help, per week$3.28$5.40
Card-strippers, per week4.986.00
Weavers, per week4.756.00
Carding-room overseer, per week7.0013.50

The hours per week have decreased in the same time from 84 to 66, while the product of the mill in pounds has increased 25 per cent. It may be unnecessary, perhaps, to say that these figures represent the current wages in [pg 230] other mills at the same periods; and that these facts can be sustained by the records of other mills.

In its economic effect we must also consider, under efficiency, the whole question of natural advantages of soil, climate, and natural resources. Laborers of the same skill, paid the same real wages, of the same cost, will produce a vastly greater amount of wheat in Dakota than in Vermont or England. This is the chief reason why profits are so high in the United States. In many industries we have very marked natural advantages, which permits a high reward to labor, and yet yields a high profit to the capitalist. This applies not merely to agriculture, but to all the extractive industries, such as the production of petroleum, wood, copper, etc.

In short, the whole matter of ease and difficulty of production, of high or low cost of production, taking it in the sense of great or little sacrifice (compare carefully Book III, Chap. II, § 4), comes in under the element of efficiency, in cost of labor. The reader can not be too strongly urged to connect different parts of the economic system together. And the questions of Cost of Labor and Cost of Production are of paramount importance to a proper understanding of political economy.

If labor generally became more efficient, without being more highly rewarded; if, without its becoming less efficient, its remuneration fell, no increase taking place in the cost of the articles composing that remuneration; or if those articles became less costly, without the laborers obtaining more of them; in any one of these three cases, profits would rise. If, on the contrary, labor became less efficient (as it might do from diminished bodily vigor in the people, destruction of fixed capital, or deteriorated education); or if the laborer obtained a higher remuneration, without any increased cheapness in the things composing it; or if, without his obtaining more, that which he did obtain became more costly; profits, in all these cases, would suffer a diminution. And there is no other combination of circumstances in which the general rate of profit of a country, in all employments indifferently, can either fall or rise.

The connection of profit with the three constituents of cost of labor may probably be better seen by aid of the following illustration; it being premised that as yet money is not used, [pg 231] and that the laborers are paid in the articles which their money wages would have bought had money been used. For simplicity we will suppose that all articles of the laborer's consumption are represented by corn. Imagine a large woolen-mill employing 500 men, and paying them in corn; and suppose that one yard of woolen cloth exchanges for one bushel of corn in the open market. In the beginning, with a given condition of efficiency, suppose that each man produces on an average 1,200 yards of cloth, for which he is paid 1,000 bushels of corn:

500 men, each producing 1,200 yards, give a total product of 600,000 yards.
500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards.
Profit: 100,000 yards.

(1.) Now suppose a change increasing the efficiency of labor to such an extent that each laborer produces 1,300 instead of 1,200 yards, then the account will stand, if the other elements remain unchanged:

500 men, each producing 1,300 yards, give a total product of 650,000 yards.
500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards.
Profit: 150,000 yards.

(2.) If efficiency and the cost of producing food remain the same as at first, suppose a change to occur which raises the quantity of corn each laborer receives from 1,000 to 1,100, or, as it is called, increases his real wages—then the account will be:

500 men, each producing 1,200 yards, give a total product of 600,000 yards.
500 men, each paid 1,100 bushels, cause an outlay of 550,000 yards.
Profit: 50,000 yards.

(3.) If efficiency and real wages remain the same, suppose such an increase in the cost to the employers of obtaining corn that they are obliged to give one and one tenth yard of their goods for one bushel of corn (1,000 bushels of corn costing them 1,100 yards of cloth), then the statement will read:

500 men, each producing 1,200 yards, give a total product of 600,000 yards.
500 men, each paid 1,000 bushels, cause an outlay of 550,000 yards.
Profit: 50,000 yards.

[pg 232]

Chapter VI. Of Rent.

§ 1. Rent the Effect of a Natural Monopoly.

The requisites of production being labor, capital, and natural agents, the only person, besides the laborer and the capitalist, whose consent is necessary to production, and who can claim a share of the produce as the price of that consent, is the person who, by the arrangements of society, possesses exclusive power over some natural agent. The land is the principal of the natural agents which are capable of being appropriated, and the consideration paid for its use is called rent. Landed proprietors are the only class, of any numbers or importance, who have a claim to a share in the distribution of the produce, through their ownership of something which neither they nor any one else have produced. If there be any other cases of a similar nature, they will be easily understood, when the nature and laws of rent are comprehended.

It is at once evident that rent is the effect of a monopoly. The reason why land-owners are able to require rent for their land is, that it is a commodity which many want, and which no one can obtain but from them. If all the land of the country belonged to one person, he could fix the rent at his pleasure. This case, however, is nowhere known to exist; and the only remaining supposition is that of free competition; the land-owners being supposed to be, as in fact they are, too numerous to combine.

The ratio of the land to the cultivators shows the limited quantity of land. It is very desirable to keep the connection [pg 233] of one part of the subject with another wherever possible. Agricultural rent, as it actually exists, says Mr. Cairnes,180 truly, is not a consequence of the monopoly of the soil, but of its diminishing productiveness. The doctrine of rent depends upon the law of diminishing returns; and it is only by the pressure of population upon land that the lessened productiveness of land, whether because of poorer qualities or poorer situations, is made apparent. Or, to take things in their natural sequence, an increase of population necessitates more food; and this implies a resort to more expensive methods, or poorer soils, so soon as land is pushed to the extent that it will not yield an increased crop for the same application of labor and capital as formerly. Different qualities of land, then, being in cultivation at the same time, the better qualities must, of course, yield a greater return than the poorer, and the conditions then exist under which land pays rent. Those, therefore, who admit the law of diminishing returns are inevitably led to the doctrine of rent.

§ 2. No Land can pay Rent except Land of such Quality or Situation as exists in less Quantity than the Demand.

A thing which is limited in quantity, even though its possessors do not act in concert, is still a monopolized article. But even when monopolized, a thing which is the gift of nature, and requires no labor or outlay as the condition of its existence, will, if there be competition among the holders of it, command a price only if it exist in less quantity than the demand.

If the whole land of a country were required for cultivation, all of it might yield a rent. But in no country of any extent do the wants of the population require that all the land, which is capable of cultivation, should be cultivated. The food and other agricultural produce which the people need, and which they are willing and able to pay for at a price which remunerates the grower, may always be obtained without cultivating all the land; sometimes without cultivating more than a small part of it; the more fertile lands, or those in the more convenient situations, being of course preferred. There is always, therefore, some land which can not, in existing circumstances, pay any rent; and no land ever pays rent unless, in point of fertility or situation, it belongs to those superior kinds which exist in less quantity [pg 234] than the demand—which can not be made to yield all the produce required for the community, unless on terms still less advantageous than the resort to less favored soils. (1.) The worst land which can be cultivated as a means of subsistence is that which will just replace the seed and the food of the laborers employed on it, together with what Dr. Chalmers calls their secondaries; that is, the laborers required for supplying them with tools, and with the remaining necessaries of life. Whether any given land is capable of doing more than this is not a question of political economy, but of physical fact. The supposition leaves nothing for profits, nor anything for the laborers except necessaries: the land, therefore, can only be cultivated by the laborers themselves, or else at a pecuniary loss; and, a fortiori, can not in any contingency afford a rent. (2.) The worst land which can be cultivated as an investment for capital is that which, after replacing the seed, not only feeds the agricultural laborers and their secondaries, but affords them the current rate of wages, which may extend to much more than mere necessaries, and leaves, for those who have advanced the wages of these two classes of laborers, a surplus equal to the profit they could have expected from any other employment of their capital. (3.) Whether any given land can do more than this is not merely a physical question, but depends partly on the market value of agricultural produce. What the land can do for the laborers and for the capitalist, beyond feeding all whom it directly or indirectly employs, of course depends upon what the remainder of the produce can be sold for. The higher the market value of produce, the lower are the soils to which cultivation can descend, consistently with affording to the capital employed the ordinary rate of profit.

As, however, differences of fertility slide into one another by insensible gradations; and differences of accessibility, that is, of distance from markets do the same; and since there is land so barren that it could not pay for its cultivation at any price; it is evident that, whatever the [pg 235] price may be, there must in any extensive region be some land which at that price will just pay the wages of the cultivators, and yield to the capital employed the ordinary profit, and no more. Until, therefore, the price rises higher, or until some improvement raises that particular land to a higher place in the scale of fertility, it can not pay any rent. It is evident, however, that the community needs the produce of this quality of land; since, if the lands more fertile or better situated than it could have sufficed to supply the wants of society, the price would not have risen so high as to render its cultivation profitable. This land, therefore, will be cultivated; and we may lay it down as a principle that, so long as any of the land of a country which is fit for cultivation, and not withheld from it by legal or other factitious obstacles, is not cultivated, the worst land in actual cultivation (in point of fertility and situation together) pays no rent.

§ 3. The Rent of Land is the Excess of its Return above the Return to the worst Land in Cultivation.

If, then, of the land in cultivation, the part which yields least return to the labor and capital employed on it gives only the ordinary profit of capital, without leaving anything for rent, a standard [i.e., the “margin of cultivation”] is afforded for estimating the amount of rent which will be yielded by all other land. Any land yields just as much more than the ordinary profits of stock as it yields more than what is returned by the worst land in cultivation. The surplus is what the farmer can afford to pay as rent to the landlord; and since, if he did not so pay it, he would receive more than the ordinary rate of profit, the competition of other capitalists, that competition which equalizes the profits of different capitals, will enable the landlord to appropriate it. The rent, therefore, which any land will yield, is the excess of its produce, beyond what would be returned to the same capital if employed on the worst land in cultivation.

It has been denied that there can be any land in cultivation which pays no rent, because landlords (it is contended) would not allow their land to be occupied without payment. [pg 236] Inferior land, however, does not usually occupy, without interruption, many square miles of ground; it is dispersed here and there, with patches of better land intermixed, and the same person who rents the better land obtains along with it the inferior soils which alternate with it. He pays a rent, nominally for the whole farm, but calculated on the produce of those parts alone (however small a portion of the whole) which are capable of returning more than the common rate of profit. It is thus scientifically true that the remaining parts pay no rent.

This point seems to need some illustration. Suppose that all the lands in a community are of five different grades of productiveness. When the price of agricultural produce was such that grades one, two, and three all came into cultivation, lands of poorer quality would not be cultivated. When a man rents a farm, he always gets land of varying degrees of fertility within its limits. Now, in determining what he ought to pay as rent, the farmer will agree to give that which will still leave him a profit on his working capital; if in his fields he finds land which would not enter into the question of rental, because it did not yield more than the profit on working it, after he rented the farm he would find it to his interest to cultivate it, simply because it yielded him a profit, and because he was not obliged to pay rent upon it; if required to pay rent for it, he would lose the ordinary rate of profit, would have no reason for cultivating it, of course, and would throw it out of cultivation. Moreover, suppose that lands down to grade three paid rent when A took the farm; now, if the price of produce rises slightly, grade four may pay something, but possibly not enough to warrant any rent going to a landlord. A will put capital on it for this return, but certainly not until the price warrants it; that is, not until the price will return him at least the cost of working the land, plus the profit on his outlay. But the community needed this land, or the price would not have gone up to the point which makes possible its cultivation even for a profit, without rent. There must always be somewhere some land affected in just this way.

§ 4. —Or to the Capital employed in the least advantageous Circumstances.

Let us, however, suppose that there were a validity in this objection, which can by no means be conceded to it; that, when the demand of the community had forced up food to such a price as would remunerate the expense of producing it from a certain quality of soil, it happened nevertheless [pg 237] that all the soil of that quality was withheld from cultivation, the increase of produce, which the wants of society required, would for the time be obtained wholly (as it always is partially), not by an extension of cultivation, but by an increased application of labor and capital to land already cultivated.

Now we have already seen that this increased application of capital, other things being unaltered, is always attended with a smaller proportional return. The rise of price enables measures to be taken for increasing the produce, which could not have been taken with profit at the previous price. The farmer uses more expensive manures, or manures land which he formerly left to nature; or procures lime or marl from a distance, as a dressing for the soil; or pulverizes or weeds it more thoroughly; or drains, irrigates, or subsoils portions of it, which at former prices would not have paid the cost of the operation; and so forth. The farmer or improver will only consider whether the outlay he makes for the purpose will be returned to him with the ordinary profit, and not whether any surplus will remain for rent. Even, therefore, if it were the fact that there is never any land taken into cultivation, for which rent, and that too of an amount worth taking into consideration, was not paid, it would be true, nevertheless, that there is always some agricultural capital which pays no rent, because it returns nothing beyond the ordinary rate of profit: this capital being the portion of capital last applied—that to which the last addition to the produce was due; or (to express the essentials of the case in one phrase) that which is applied in the least favorable circumstances. But the same amount of demand and the same price, which enable this least productive portion of capital barely to replace itself with the ordinary profit, enable every other portion to yield a surplus proportioned to the advantage it possesses. And this surplus it is which competition enables the landlord to appropriate.

If land were all occupied, and of only one grade, the first installment of labor and capital produced, we will say, twenty bushels of wheat; when the price of wheat rose, and it became [pg 238] profitable to resort to greater expense on the soil, a second installment of the same amount of labor and capital when applied, however, only yielded fifteen bushels more; a third, ten bushels more; and a fourth, five bushels more. The soil now gives fifty bushels only under the highest pressure. But, if it was profitable to invest the same installment of labor and capital simply for the five bushels that at first had received a return of twenty bushels, the price must have gone up so that five bushels should sell for as much as the twenty did formerly; so, mutatis mutandis, of installments second and third. So that if the demand is such as to require all of the fifty bushels, the agricultural capital which produced the five bushels will be the standard according to which the rent of the capital, which grew twenty, fifteen, and ten bushels respectively, is measured. The principle is exactly the same as if equal installments of capital and labor were invested on four different grades of land returning twenty, fifteen, ten, and five bushels for each installment. Or, as if in the table on page 240, A, B, C, and D each represented different installments of the same amount of labor and capital put upon the same spot of ground, instead of being, as there, put upon different grades of land.

The rent of all land is measured by the excess of the return to the whole capital employed on it above what is necessary to replace the capital with the ordinary rate of profit, or, in other words, above what the same capital would yield if it were all employed in as disadvantageous circumstances as the least productive portion of it: whether that least productive portion of capital is rendered so by being employed on the worst soil, or by being expended in extorting more produce from land which already yielded as much as it could be made to part with on easier terms.

It will be true that the farmer requires the ordinary rate of profit on the whole of his capital; that whatever it returns to him beyond this he is obliged to pay to the landlord, but will not consent to pay more; that there is a portion of capital applied to agriculture in such circumstances of productiveness as to yield only the ordinary profits; and that the difference between the produce of this and of any other capital of similar amount is the measure of the tribute which that other capital can and will pay, under the name of rent, to the landlord. This constitutes a law of rent, as near the [pg 239] truth as such a law can possibly be; though of course modified or disturbed, in individual cases, by pending contracts, individual miscalculations, the influence of habit, and even the particular feelings and dispositions of the persons concerned.

The law of rent, in the economic sense, operates in the United States as truly as elsewhere, although there is no separate class of landlords here. With us, almost all land is owned by the cultivator; so that two functions, those of the landlord and farmer, are both united in one person. Although one payment is made, it is still just as distinctly made up of two parts, one of which is a payment to the owner for the superior quality of his soil, and the other a payment (to the same person, if the owner is the cultivator) of profit on the farmer's working capital. Land which in the United States will only return enough to pay a profit on this capital can not pay any rent. And land which can pay more than a profit on this working capital, returns that excess as rent, even if the farmer is also the owner and landlord. The principle which regulates the amount of that excess—which is the essential point—is the principle which determines the amount of economic rent, and it holds true in the United States or Finland, provided only that different grades of land are called into cultivation. The governing principle is the same, no matter whether a payment is made to one man as profit and to another as rent, or whether the two payments are made to the same man in two capacities. It has been urged that the law of rent does not hold in the United States, because the price of grain and other agricultural produce has not risen in proportion to the increase of our numbers, as it ought to have done if Ricardo's theory were true, but has fallen, since 1830, though since that time our population has been more than tripled.181 This overlooks the fact that we have not even yet taken up all our best agricultural lands, so that for some products the law of diminishing productiveness has not yet shown itself. The reason is, that the extension of our railway system has only of late years brought the really good grain-lands into cultivation. The fact that there has been no rise in agricultural products is due to the enormous extent of marvelously fertile grain-lands in the West, and to the cheapness of transportation from those districts to the seaboard.

For a general understanding of the law of rent the following table will show how, under constant increase of population (represented by four different advances of population, in the [pg 240] first column), first the best and then the poorer lands are brought into cultivation. We will suppose (1) that the most fertile land, A, at first pays no rent; then (2), when more food is wanted than land A can supply, it will be profitable to till land B, but which, as yet, pays no rent. But if eighteen bushels are a sufficient return to a given amount of labor and capital, then when an equal amount of labor and capital engaged on A returns twenty-four bushels, six of that are beyond the ordinary profit, and form the rent on land A, and so on; C will next be the line of comparison, and then D; as the poorer soils are cultivated, the rent of A increases:

Population Increase.A BCD
24 bushels 18 bushels12 bushels 6 bushels
Total productRent in Bushels Total productRent in Bushels Total productRent in Bushels Total productRent in Bushels
I.240.... ........
II.246180 ........
III.2412186 120....
IV.24181812 12660

§ 5. Opposing Views of the Law of Rent.

Under the name of rent, many payments are commonly included, which are not a remuneration for the original powers of the land itself, but for capital expended on it. The buildings are as distinct a thing from the farm as the stock or the timber on it; and what is paid for them can no more be called rent of land than a payment for cattle would be, if it were the custom that the landlord should stock the farm for the tenant. The buildings, like the cattle, are not land, but capital, regularly consumed and reproduced; and all payments made in consideration for them are properly interest.

But with regard to capital actually sunk in improvements, and not requiring periodical renewal, but spent once for all in giving the land a permanent increase of productiveness, it appears to me that the return made to such capital loses altogether the character of profits, and is governed by the principles of rent. It is true that a landlord will not expend capital in improving his estate unless he expects from the improvement an increase of income surpassing the interest [pg 241] of his outlay. Prospectively, this increase of income may be regarded as profit; but, when the expense has been incurred and the improvement made, the rent of the improved land is governed by the same rules as that of the unimproved.

Mr. Carey (as well as Bastiat) has declared that there is a law of increasing returns from land. He points out that everything now existing could be reproduced to-day at a less cost than that involved in its original production, owing to our advance in skill, knowledge, and all the arts of production; that, for example, it costs less to make an axe now than it did five hundred years ago; so also with a farm, since a farm of a given amount of productiveness can be brought into cultivation at less cost to-day than that originally spent upon it. The gain of society has, we all admit, been such that we produce almost everything at a less cost now than long ago; but to class a farm and an axe together overlooks, in the most remarkable way, the fact that land can not be created by labor and capital, while axes can, and that too indefinitely. Nor can the produce from the land be increased indefinitely at a diminishing cost. This is sometimes denied by the appeal to facts: It can be abundantly proved that, if we take any two periods sufficiently distant to afford a fair test, whether fifty or one hundred or five hundred years, the production of the land relatively to the labor employed upon it has progressively become greater and greater.182 But this does not prove that an existing tendency to diminishing returns has not been more than offset by the progress of the arts and improvements. The advance of a ship against wind and tide is [no] proof that there is no wind and tide.

In a work entitled “The Past, the Present, and the Future,” Mr. Carey takes [a] ground of objection to the Ricardo theory of rent, namely, that in point of historical fact the lands first brought under cultivation are not the most fertile, but the barren lands. “We find the settler invariably occupying the high and thin lands requiring little clearing and no drainage. With the growth of population and wealth, other soils yielding a larger return to labor are always brought into activity, with a constantly increasing return to the labor expended upon them.”

In whatever order the lands come into cultivation, those [pg 242] which when cultivated yield the least return, in proportion to the labor required for their culture, will always regulate the price of agricultural produce; and all other lands will pay a rent simply equivalent to the excess of their produce over this minimum. Whatever unguarded expressions may have been occasionally used in describing the law of rent, these two propositions are all that was ever intended by it. If, indeed, Mr. Carey could show that the return to labor from the land, agricultural skill and science being supposed the same, is not a diminishing return, he would overthrow a principle much more fundamental than any law of rent. But in this he has wholly failed.

Another objection taken against the law of diminishing returns, and so against the law of rent, is that the potential increase of food, e.g., of a grain of wheat, is far greater than that of man.183 No one disputes the fact that one grain of wheat can reproduce itself more times than man, and that too in a geometric increase; but not without land. A grain of wheat needs land in which it can multiply itself, and this necessary element of its increase is limited; and it is the very thing which limits the multiplication of the grains of wheat. On the same piece of land, one can not get more than what comes from one act of reproduction in the grain. If one grain produces 100 of its kind, doubling the capital will not repeatedly cause a geometric increase in the ratio of reproduction of each grain on this same land, so that one grain, by one process, produces of its kind 200, 400, 800, or 1,600, because you can not multiply the land in any such ratio as would accompany this potential reduplication of the grain. This objection would not seem worth answering, were it not that it furnishes some difficulty to really honest inquirers.

Others, again, allege as an objection against Ricardo, that if all land were of equal fertility it might still yield a rent. But Ricardo says precisely the same. It is also distinctly a portion of Ricardo's doctrine that, even apart from differences of situation, the land of a country supposed to be of uniform fertility would, all of it, on a certain supposition, pay rent, namely, if the demand of the community required [pg 243] that it should all be cultivated, and cultivated beyond the point at which a further application of capital begins to be attended with a smaller proportional return.

This is simply the question, before discussed, whether, if only one class of land were cultivated, some agricultural capital would pay rent or not. It all depends on the fact whether population—and so the demand for food—has increased to the point where it calls out a recognition of the diminishing productiveness of the soil. In that case different capitals would be invested, so that there would be different returns to the same amount of capital; and the prior or more advantageous investments of capital on the land would yield more than the ordinary rate of profit, which could be claimed as rent.

A. L. Perry184 admits the law of diminishing returns, but holds that, as land is capital, and as every form of capital may be loaned or rented, and thus become fruitful in the hands of another, the rent of land does not differ essentially in its nature from the rent of buildings in cities, or from the interest of money. Henry George admits Ricardo's law of rent to its full extent, but very curiously says: Irrespective of the increase of population, the effect of improvements in methods of production and exchange is to increase rent.... The effect of labor-saving improvements will be to increase the production of wealth. Now, for the production of wealth, two things are required, labor and land. Therefore, the effect of labor-saving improvements will be to 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.185 Francis Bowen186 rejects Ricardo's law, and says, Rent depends, not on the increase, but on the distribution, of the population—asserting that the existence of large cities and towns determines the amount of rent paid by neighboring land.187

[pg 244]

§ 6. Rent does not enter into the Cost of Production of Agricultural Produce.

Rent does not really form any part of the expenses of [agricultural] production, or of the advances of the capitalist. The grounds on which this assertion was made are now apparent. It is true that all tenant-farmers, and many other classes of producers, pay rent. But we have now seen that whoever cultivates land, paying a rent for it, gets in return for his rent an instrument of superior power to other instruments of the same kind for which no rent is paid. The superiority of the instrument is in exact proportion to the rent paid for it. If a few persons had steam-engines of superior power to all others in existence, but limited by physical laws to a number short of the demand, the rent which a manufacturer would be willing to pay for one of these steam-engines could not be looked upon as an addition to his outlay, because by the use of it he would save in his other expenses the equivalent of what it cost him: without it he could not do the same quantity of work, unless at an additional expense equal to the rent. The same thing is true of land. The real expenses of production are those incurred on the worst land, or by the capital employed in the least favorable circumstances. This land or capital pays, as we have seen, no rent, but the expenses to which it is subject cause all other land or agricultural capital to be subjected to an equivalent expense in the form of rent. Whoever does pay rent gets back its full value in extra advantages, and the rent which he pays does not place him in a worse position than, but only in the same position as, his fellow-producer who pays no rent, but whose instrument is one of inferior efficiency.

Soils are of every grade: some, which if cultivated, might replace the capital, but give no profit; some give a slight but not an ordinary profit; some, the ordinary profit. That is, there is a point up to which it is profitable to cultivate, and beyond which it is not profitable to cultivate. The price of corn will not, for any long time, remain at a higher rate than is sufficient to cover with ordinary profit the cost of that portion of the general crop which is raised at greatest expense.188 For similar reasons the price will not remain at a [pg 245] lower rate. If, then, the cost of production of grain is determined by that land which replaces the capital, yields only the ordinary profit, and pays no rent, rent forms no part of this cost, since that land does not and can not pay any rent. McLeod,189 however, says it is not the cost of production which regulates the value of agricultural produce, but the value which regulates the cost.
[pg 249]

Book III. Exchange.

Chapter I. Of Value.

§ 1. Definitions of Value in Use, Exchange Value, and Price.

It is evident that, of the two great departments of Political Economy, the production of wealth and its distribution, the consideration of Value has to do with the latter alone; and with that only so far as competition, and not usage or custom, is the distributing agency.

The use of a thing, in political economy, means its capacity to satisfy a desire, or serve a purpose. Diamonds have this capacity in a high degree, and, unless they had it, would not bear any price. Value in use, or, as Mr. De Quincey calls it, teleologic value, is the extreme limit of value in exchange. The exchange value of a thing may fall short, to any amount, of its value in use; but that it can ever exceed the value in use implies a contradiction; it supposes that persons will give, to possess a thing, more than the utmost value which they themselves put upon it, as a means of gratifying their inclinations.

The word Value, when used without adjunct, always means, in political economy, value in exchange.

Exchange value requires to be distinguished from Price. Writers have employed Price to express the value of a thing in relation to money—the quantity of money for which it will exchange. By the price of a thing, therefore, we shall [pg 250] henceforth understand its value in money; by the value, or exchange value of a thing, its general power of purchasing; the command which its possession gives over purchasable commodities in general. What is meant by command over commodities in general? The same thing exchanges for a greater quantity of some commodities, and for a very small quantity of others. A coat may exchange for less bread this year than last, if the harvest has been bad, but for more glass or iron, if a tax has been taken off those commodities, or an improvement made in their manufacture. Has the value of the coat, under these circumstances, fallen or risen? It is impossible to say: all that can be said is, that it has fallen in relation to one thing, and risen in respect to another. Suppose, for example, that an invention has been made in machinery, by which broadcloth could be woven at half the former cost. The effect of this would be to lower the value of a coat, and, if lowered by this cause, it would be lowered not in relation to bread only or to glass only, but to all purchasable things, except such as happened to be affected at the very time by a similar depressing cause. Those [changes] which originate in the commodities with which we compare it affect its value in relation to those commodities; but those which originate in itself affect its value in relation to all commodities.

There is such a thing as a general rise of prices. All commodities may rise in their money price. But there can not be a general rise of values. It is a contradiction in terms. A can only rise in value by exchanging for a greater quantity of B and C; in which case these must exchange for a smaller quantity of A. All things can not rise relatively to one another. If one half of the commodities in the market rise in exchange value, the very terms imply a fall of the other half; and, reciprocally, the fall implies a rise. Things which are exchanged for one another can no more all fall, or all rise, than a dozen runners can each outrun all the rest, or a hundred trees all overtop one another. A general rise or a general fall of prices is merely tantamount to an alteration [pg 251] in the value of money, and is a matter of complete indifference, save in so far as it affects existing contracts for receiving and paying fixed pecuniary amounts.

Before commencing the inquiry into the laws of value and price, I have one further observation to make. I must give warning, once for all, that the cases I contemplate are those in which values and prices are determined by competition alone. In so far only as they are thus determined, can they be reduced to any assignable law. The buyers must be supposed as studious to buy cheap as the sellers to sell dear.

The reader is advised to study the definitions of value given by other writers. Cairnes190 defines value as the ratio in which commodities in open market are exchanged against each other. F. A. Walker191 holds that value is the power which an article confers upon its possessor, irrespective of legal authority or personal sentiments, of commanding, in exchange for itself, the labor, or the products of the labor, of others. Carey192 says, Value is the measure of the resistance to be overcome in obtaining those commodities or things required for our purposes—of the power of nature over man. Value is thus, with him, the antithesis of wealth, which is (according to Carey) the power of man over nature. In this school, value is the service rendered by any one who supplies the article for the use of another. This is also Bastiat's idea,193 le rapport de deux services échangés. Following Bastiat, A. L. Perry194 defines value as always and everywhere the relation of mutual purchase established between two services by their exchange. Roscher195 explains exchange value as the quality which makes them exchangeable against other goods. He also makes a distinction between utility and value in use: Utility is a quality of things themselves, in relation, it is true, to human wants. Value in use is a quality imputed to them, the result of man's thought, or his view of them. Thus, for instance, in a beleaguered city, the stores of food do not increase in utility, but their value in use does. Levasseur196 regards value as the relation resulting from exchangele rapport resultant de l'échange. Cherbuliez197 asserts that the value of a product or [pg 252] of a service can be expressed only as the products or services which it obtains in exchange.... If I exchange the thing A against B, A is the value of B, B is the value of A. Jevons198 defines value as proportion in exchange.

§ 2. Conditions of Value: Utility, Difficulty of Attainment, and Transferableness.

That a thing may have any value in exchange, two conditions are necessary. 1. It must be of some use; that is (as already explained), it must conduce to some purpose, satisfy some desire. No one will pay a price, or part with anything which serves some of his purposes, to obtain a thing which serves none of them. 2. But, secondly, the thing must not only have some utility, there must also be some difficulty in its attainment.

The question is one as to the conditions essential to the existence of any value. Very justly Cairnes199 adds also a third condition, the possibility of transferring the possession of the articles which are the subject of the exchange. For instance, a cargo of wheat at the bottom of the sea has value in use and difficulty of attainment, but it is not transferable. Jevons (following J. B. Say) maintains that value depends entirely on utility. If utility means the power to satisfy a desire, things which merely have utility and no difficulty of attainment could have no exchange value.200 F. A. Walker201 believes that value depends wholly on the relation between demand and supply. Carey202 holds that value depends merely on the cost of reproduction of the given article. Roscher203 finds that exchange value is based on a combination of value in use with cost value. Cherbuliez204 calls the conditions of value two, the ability to give satisfaction, and inability of attainment without effort. The first element is subjective; it is determined wholly by the needs or desires of the parties to the exchange. The second is objective; it depends upon material considerations, which are the conditions of the existence of the thing, and upon which the needs of the persons exchanging have no influence whatever. It is, as usual, one of Cherbuliez's clear expositions. A. L. Perry205 states that, while value always takes its rise in the desires of men, it is never realized except through the efforts of men, and through these efforts as mutually exchanged.
[pg 253]

The difficulty of attainment which determines value is not always the same kind of difficulty: (1.) It sometimes consists in an absolute limitation of the supply. There are things of which it is physically impossible to increase the quantity beyond certain narrow limits. Such are those wines which can be grown only in peculiar circumstances of soil, climate, and exposure. Such also are ancient sculptures; pictures by the old masters; rare books or coins, or other articles of antiquarian curiosity. Among such may also be reckoned houses and building-ground, in a town of definite extent.

De Quincey206 has presented some ingenious diagrams to represent the operations of the two constituents of value in each of the three following cases: U represents the power of the article to satisfy some desire, and D difficulty of attainment. In the first case, exchange value is not hindered by D from going up to any height, and so it rises and falls entirely according to the force of U. D being practically infinite, the horizontal line, exchange value, is not kept down by D, but it rises just as far as U, the desires of purchasers, may carry it.

Illustration: Vertical line D, paralleled by shorter vertical line U, D and U connected at top of U by horizontal line.

(2.) But there is another category (embracing the majority of all things that are bought and sold), in which the obstacle to attainment consists only in the labor and expense requisite to produce the commodity. Without a certain labor and expense it can not be had; but, when any one is willing to incur these, there needs be no limit to the multiplication of the product. If there were laborers enough and machinery enough, cottons, woolens, or linens might be produced by thousands of yards for every single yard now manufactured.

In case (2) the horizontal line, representing exchange value, follows the force of D entirely. The utility of the article is very great, but the value is only limited by the difficulty of obtaining it. So far as U is concerned, exchange value can go up a great distance, but will go no higher than the point where the article can be [pg 254] obtained. The dotted lines underneath the horizontal line indicate that the exchange value of articles in this class tend to fall in value.

Illustration: Parallel vertical lines U and D, U being longer, joined by several horizontal lines of Exchange Value.

(3.) There is a third case, intermediate between the two preceding, and rather more complex, which I shall at present merely indicate, but the importance of which in political economy is extremely great. There are commodities which can be multiplied to an indefinite extent by labor and expenditure, but not by a fixed amount of labor and expenditure. Only a limited quantity can be produced at a given cost; if more is wanted, it must be produced at a greater cost. To this class, as has been often repeated, agricultural produce belongs, and generally all the rude produce of the earth; and this peculiarity is a source of very important consequences; one of which is the necessity of a limit to population; and another, the payment of rent.

In case (3) articles like agricultural produce have a very great power to satisfy desires, and if scarce would have a high value. So far as U is concerned, here also, as in case (2), exchange value might mount upward to almost any height, but it can go no higher than D permits. In commodities of this class, affected by the law of diminishing returns, the tendency is for D to increase, and so for exchange value to rise, as indicated by the dotted lines above that of the exchange value.

Illustration: Same as before.

§ 3. Commodities limited in Quantity by the law of Demand and Supply: General working of this Law.

These being the three classes, in one or other of which all things that are bought and sold must take their place, we shall consider them in their order. And first, of things absolutely limited in quantity, such as ancient sculptures or pictures.

Of such things it is commonly said that their value depends on their scarcity; others say that the value depends on the demand and supply. But this statement requires much explanation. The supply of a commodity is an intelligible expression: it means the quantity offered for sale; the quantity that is to be had, at a given time and place, by those who wish to purchase it. But what is meant by the demand? Not the mere desire for the commodity. A beggar [pg 255] may desire a diamond; but his desire, however great, will have no influence on the price. Writers have therefore given a more limited sense to demand, and have defined it, the wish to possess, combined with the power of purchasing.207 To distinguish demand in this technical sense from the demand which is synonymous with desire, they call the former effectual demand.

General supply consists in the commodities offered in exchange for other commodities; general demand likewise, if no money exists, consists in the commodities offered as purchasing power in exchange for other commodities. That is, one can not increase the demand for certain things without increasing the supply of some articles which will be received in exchange for the desired commodities. Demand is based upon the production of articles having exchange value, in its economic sense; and the measure of this demand is necessarily the quantity of commodities offered in exchange for the desired goods. General demand and supply are thus reciprocal to each other. But as soon as money, or general purchasing power, is introduced, Mr. Cairnes208 defines demand as the desire for commodities or services, seeking its end by an offer of general purchasing power; and supply, as the desire for general purchasing power, seeking its end by an offer of specific commodities or services. But many persons find a difficulty because they insist upon separating the idea of supply from that of demand, owing to the fact that producers seem to be a distinct class in the community, different from consumers. That they are in reality the same persons can be easily explained by the following statement: A certain number of people, A, B, C, D, E, F, etc., are engaged in industrial occupations—A produces for B, C, D, E, F; B for A, C, D, E, F; C for A, B, D, E, F, and so on. In each case the producer and the consumers are distinct, and hence, by a very natural fallacy, it is concluded that the whole body of consumers is distinct from the whole body of producers, whereas they consist of precisely the same persons.

But in regard to demand and supply of particular commodities (not general demand and supply), the increase of the demand [pg 256] is not necessarily followed by an increased supply, or vice versa. Out of the total production (which constitutes general demand) a varying amount, sometimes more, sometimes less, may be directed by the desires of men to the purchase of some given thing. This should be borne in mind, in connection with the future discussion of over-production. The identity of general demand with general supply shows there can be no general over-production: but so long as there exists the possibility that the demand for a particular commodity may diminish without a corresponding effect being thereby produced on the supply of that commodity, by a necessary connection, we see that there may be over-production of particular commodities; that is, a production in excess of the demand.

The proper mathematical analogy [between demand and supply] is that of an equation. If unequal at any moment, competition equalizes them, and the manner in which this is done is by an adjustment of the value. If the demand increases, the value rises; if the demand diminishes, the value falls; again, if the supply falls off, the value rises; and falls, if the supply is increased. The rise or the fall continues until the demand and supply are again equal to one another: and the value which a commodity will bring in any market is no other than the value which, in that market, gives a demand just sufficient to carry off the existing or expected supply.

Mr. Cairnes209 finally defined market value as the price “which is sufficient, and no more than sufficient, to carry the existing supply over, with such a surplus as circumstances may render advisable, to meet the new supplies forthcoming,” which is nothing more than a paraphrase of the words “existing or expected supply” just used by Mr. Mill. It seems unnecessary, therefore, that Mr. Cairnes should have added: “According to Mr. Mill, the actual market price is the price which equalizes supply and demand in a given market; as I view the case, the ‘proper market price’ is the price which equalizes supply and demand, not as existing in the particular market, but in the larger sense which I have assigned to the terms. To this price the actual market price will, according to my view, approximate, in proportion to the intelligence and knowledge of the dealers.”

[pg 257]

Adam Smith, who introduced the expression “effectual demand,” employed it to denote the demand of those who are willing and able to give for the commodity what he calls its natural price—that is, the price which will enable it to be permanently produced and brought to market.210

This, then, is the Law of Value, with respect to all commodities not susceptible of being multiplied at pleasure.

§ 4. Miscellaneous Cases falling under this Law.

There are but few commodities which are naturally and necessarily limited in supply. But any commodity whatever may be artificially so. The monopolist can fix the value as high as he pleases, short of what the consumer either could not or would not pay; but he can only do so by limiting the supply. Monopoly value, therefore, does not depend on any peculiar principle, but is a mere variety of the ordinary case of demand and supply.

Again, though there are few commodities which are at all times and forever unsusceptible of increase of supply, any commodity whatever may be temporarily so; and with some commodities this is habitually the case. Agricultural produce, for example, can not be increased in quantity before the next harvest; the quantity of corn already existing in the world is all that can be had for sometimes a year to come. During that interval, corn is practically assimilated to things of which the quantity can not be increased. In the case of most commodities, it requires a certain time to increase their quantity; and if the demand increases, then, until a corresponding supply can be brought forward, that is, until the supply can accommodate itself to the demand, the value will so rise as to accommodate the demand to the supply.

There is another case the exact converse of this. There are some articles of which the supply may be indefinitely increased, but can not be rapidly diminished. There are things so durable that the quantity in existence is at all times very great in comparison with the annual produce. Gold [pg 258] and the more durable metals are things of this sort, and also houses. The supply of such things might be at once diminished by destroying them; but to do this could only be the interest of the possessor if he had a monopoly of the article, and could repay himself for the destruction of a part by the increased value of the remainder. The value, therefore, of such things may continue for a long time so low, either from excess of supply or falling off in the demand, as to put a complete stop to further production; the diminution of supply by wearing out being so slow a process that a long time is requisite, even under a total suspension of production, to restore the original value. During that interval the value will be regulated solely by supply and demand, and will rise very gradually as the existing stock wears out, until there is again a remunerating value, and production resumes its course.

The total value of gold and silver in the world is variously estimated at from $10,000,000,000 to $14,000,000,000; while the annual production of both gold and silver in the world during 1882211 was only $212,000,000. The loss of gold by abrasion is about 1/1000 annually, and of silver about 1/700, but much depends on the size of the coin. A change in the annual production of the precious metals can have a perceptible effect on their value only after such a time as will permit the change to affect the existing quantity in a way somewhat comparable with its previous amount. The quantity, however, of wheat produced is nearly all consumed between harvests; and the annual supply bears a very large ratio to the existing quantity. Consequently the price of wheat will be very seriously affected by the quantity coming from the annual product.

Finally, there are commodities of which, though capable of being increased or diminished to a great and even an unlimited extent, the value never depends upon anything but demand and supply. This is the case, in particular, with the commodity Labor, of the value of which we have treated copiously in the preceding book; and there are many cases besides in which we shall find it necessary to call in this [pg 259] principle to solve difficult questions of exchange value. This will be particularly exemplified when we treat of International Values; that is, of the terms of interchange between things produced in different countries, or, to speak more generally, in distant places.

§ 5. Commodities which are Susceptible of Indefinite Multiplication without Increase of Cost. Law of their Value Cost of Production.

When the production of a commodity is the effect of labor and expenditure, whether the commodity is susceptible of unlimited multiplication or not, there is a minimum value which is the essential condition of its being permanently produced. The value at any particular time is the result of supply and demand, and is always that which is necessary to create a market for the existing supply. But unless that value is sufficient to repay the Cost of Production, and to afford, besides, the ordinary expectation of profit, the commodity will not continue to be produced. Capitalists will not go on permanently producing at a loss. When such profit is evidently not to be had, if people do not actually withdraw their capital, they at least abstain from replacing it when consumed. The cost of production, together with the ordinary profit, may, therefore, be called the necessary price or value of all things made by labor and capital. Nobody willingly produces in the prospect of loss.

When a commodity is not only made by labor and capital, but can be made by them in indefinite quantity, this Necessary Value, the minimum with which the producers will be content, is also, if competition is free and active, the maximum which they can expect. If the value of a commodity is such that it repays the cost of production not only with the customary but with a higher rate of profit, capital rushes to share in this extra gain, and, by increasing the supply of the article, reduces its value. This is not a mere supposition or surmise, but a fact familiar to those conversant with commercial operations. Whenever a new line of business presents itself, offering a hope of unusual profits, and whenever any established trade or manufacture is believed to be yielding a greater profit than customary, there is sure to be in a short time so large a production or importation of [pg 260] the commodity as not only destroys the extra profit, but generally goes beyond the mark, and sinks the value as much too low as it had before been raised too high, until the over-supply is corrected by a total or partial suspension of further production. As already intimated,212 these variations in the quantity produced do not presuppose or require that any person should change his employment. Those whose business is thriving, increase their produce by availing themselves more largely of their credit, while those who are not making the ordinary profit, restrict their operations, and (in manufacturing phrase) work short time. In this mode is surely and speedily effected the equalization, not of profits, perhaps, but of the expectations of profit, in different occupations.

As a general rule, then, things tend to exchange for one another at such values as will enable each producer to be repaid the cost of production with the ordinary profit; in other words, such as will give to all producers the same rate of profit on their outlay. But in order that the profit may be equal where the outlay, that is, the cost of production, is equal, things must on the average exchange for one another in the ratio of their cost of production; things of which the cost of production is the same, must be of the same value.

Mr. Mill has here used cost of production almost exactly in the sense of cost of labor, and as excluding profit (while in the next chapter he includes some part of profit in the analysis). It will be well, for the sake of definiteness, to collect the phrases above in which he describes cost of production: Unless that value is sufficient to repay the cost of production, and to afford, besides, the ordinary expectation of profit, the commodity will not continue to be produced; the cost of production, together with the ordinary profit, may therefore be called the necessary price, or value; it repays the cost of production, not only with the customary, but with a higher rate of profit; the cost of production with the ordinary profit—in other words, such as will give to all producers the same rate of profit on their outlay; that the profit may be [pg 261] equal where the outlay, that is, the cost of production, is equal. This is a view which distinctly uses cost of production in the sense of the outlay to the capitalist, or cost of labor. In no other way can profit vary with cost of production than in the sense that it is what a given article costs to the capitalist; but that is Mr. Mill's definition of cost of labor (p. 227). It is, however, very puzzling when in the next section he speaks of the natural value, that is, the cost of production. Above, value included cost of production and profit also. Having thus pointed out what is Mr. Mill's conception of cost of production, it will remain for us in the next chapter to consider whether any other view of it is more satisfactory.

Adam Smith and Ricardo have called that value of a thing which is proportional to its cost of production, its Natural Value (or its Natural Price). They meant by this, the point about which the value oscillates, and to which it always tends to return; the center value, toward which, as Adam Smith expresses it, the market value of a thing is constantly gravitating; and any deviation from which is but a temporary irregularity which, the moment it exists, sets forces in motion tending to correct it. On an average of years sufficient to enable the oscillations on one side of the central line to be compensated by those on the other, the market value agrees with the natural value; but it very seldom coincides exactly with it at any particular time. The sea everywhere tends to a level, but it never is at an exact level; its surface is always ruffled by waves, and often agitated by storms. It is enough that no point, at least in the open sea, is permanently higher than another. Each place is alternately elevated and depressed; but the ocean preserves its level.

§ 6. The Value of these Commodities confirm, in the long run, to their Cost of Production through the operation of Demand and Supply.

The latent influence by which the values of things are made to conform in the long run to the cost of production is the variation that would otherwise take place in the supply of the commodity. The supply would be increased if the thing continued to sell above the ratio of its cost of production, and would be diminished if it fell below that ratio.

If one dollar covers the expense of making one spade, then when a spade, by virtue of a sudden demand, rises in value to one [pg 262] dollar and ten cents, the manufacturers get an extra profit of ten cents. This could not long remain so, because other capital would enter this industry, and so increase the supply that one spade would sell for only one dollar; then all would receive the average profit. If, owing to a cessation of demand for spades, the price fell to ninety cents, then the manufacturers would lose ten cents on each one made and sold. Thereupon they would cease to do a losing business, capital would be withdrawn, and spades would not be made until the supply was suited to the necessary expense of making them (one dollar). In this way, whenever there is a departure of the value from the normal cost, there is set in motion ipso facto a series of forces which automatically restores the value to that cost. So here again we see the nature of an economic law: the value may not often correspond exactly with cost of production, but there is a tendency in all values to conform to that cost, and this tendency they irresistibly obey. A body possessing weight does not move downward under all circumstances (stones may be thrown upward), but the law of gravitation holds true, nevertheless.

There is no need that there should be any actual alteration of supply; and when there is, the alteration, if permanent, is not the cause but the consequence of the alteration in value. If, indeed, the supply could not be increased, no diminution in the cost of production would lower the value; but there is by no means any necessity that it should. The mere possibility often suffices; the dealers are aware of what would happen, and their mutual competition makes them anticipate the result by lowering the price.

Before the electric light was yet known as a feasible means of lighting (in 1878), the mere rumor of Edison's invention, before it was made public, and long before it became practicable, caused a serious fall in the price of gas stocks.

It is, therefore, strictly correct to say that the value of things which can be increased in quantity at pleasure does not depend (except accidentally, and during the time necessary for production to adjust itself) upon demand and supply; on the contrary, demand and supply depend upon it. There is a demand for a certain quantity of the commodity at its natural or cost value, and to that the supply in the long run endeavors to conform.

[pg 263]
Mr. Cairnes213 fitly says: The supply of a commodity always tends to adapt itself to the demand at the normal price. I may here say briefly that by the normal price of a commodity I mean that price which suffices, and no more than suffices, to yield to the producers what is considered to be the average and usual remuneration on such sacrifices as they undergo.

When at any time it fails of so conforming, it is either from miscalculation, or from a change in some of the elements of the problem; either in the natural value, that is, in the cost of production, or in the demand, from an alteration in public taste, or in the number or wealth of the consumers. If a value different from the natural value be necessary to make the demand equal to the supply, the market value will deviate from the natural value; but only for a time, for the permanent tendency of supply is to conform itself to the demand which is found by experience to exist for the commodity when selling at its natural value. If the supply is either more or less than this, it is so accidentally, and affords either more or less than the ordinary rate of profit, which, under free and active competition, can not long continue to be the case.

To recapitulate: demand and supply govern the value of all things which can not be indefinitely increased; except that even for them, when produced by industry, there is a minimum value, determined by the cost of production. But in all things which admit of indefinite multiplication, demand and supply only determine the perturbations of value during a period which can not exceed the length of time necessary for altering the supply. While thus ruling the oscillations of value, they themselves obey a superior force, which makes value gravitate toward Cost of Production, and which would settle it and keep it there, if fresh disturbing influences were not continually arising to make it again deviate.

[pg 264]

Chapter II. Ultimate Analysis Of Cost Of Production.

§ 1. Of Labor, the principal Element in Cost of Production.

The component elements of Cost of Production have been set forth in the First Part of this inquiry.214 The principal of them, and so much the principal as to be nearly the sole, was found to be Labor. What the production of a thing costs to its producer, or its series of producers, is the labor expended in producing it. If we consider as the producer the capitalist who makes the advances, the word Labor may be replaced by the word Wages: what the produce costs to him, is the wages which he has had to pay. At the first glance, indeed, this seems to be only a part of his outlay, since he has not only paid wages to laborers, but has likewise provided them with tools, materials, and perhaps buildings. These tools, materials, and buildings, however, were produced by labor and capital; and their value, like that of the article to the production of which they are subservient, depends on cost of production, which again is resolvable into labor. The cost of production of broadcloth does not wholly consist in the wages of weavers; which alone are directly paid by the cloth-manufacturer. It consists also of the wages of spinners and wool-combers, and, it may be added, of shepherds, all of which the clothier has paid for in the price of yarn. It consists, too, of the wages of builders and brick-makers, which he has reimbursed in the contract price of erecting his factory. It partly consists of the wages of machine-makers, iron-founders, and miners. And to these must be added the wages of the carriers who transported any of [pg 265] the means and appliances of the production to the place where they were to be used, and the product itself to the place where it is to be sold.

Confirmation is here given, in the above words, of the opinion that, in Mr. Mill's mind, Cost of Production was looked at wholly from the stand-point of the capitalist, and was identical with Cost of Labor to the capitalist.

The value of commodities, therefore, depends principally (we shall presently see whether it depends solely) on the quantity of labor required for their production, including in the idea of production that of conveyance to the market. But since the cost of production to the capitalist is not labor but wages, and since wages may be either greater or less, the quantity of labor being the same, it would seem that the value of the product can not be determined solely by the quantity of labor, but by the quantity together with the remuneration, and that values must partly depend on wages.

Now the relation of one thing to another can not be altered by any cause which affects them both alike. A rise or fall of general wages is a fact which affects all commodities in the same manner, and therefore affords no reason why they should exchange for each other in one rather than in another proportion. Though there is no such thing as a general rise of values, there is such a thing as a general rise of prices. As soon as we form distinctly the idea of values, we see that high or low wages can have nothing to do with them; but that high wages make high prices, is a popular and widely spread opinion. The whole amount of error involved in this proposition can only be seen thoroughly when we come to the theory of money; at present we need only say that if it be true, there can be no such thing as a real rise of wages; for if wages could not rise without a proportional rise of the price of everything, they could not, for any substantial purpose, rise at all. It must be remembered, too, that general high prices, even supposing them to exist, can be of no use to a producer or dealer, considered as such; for, if they increase his money returns, they increase in the same degree [pg 266] all his expenses. There is no mode in which capitalists can compensate themselves for a high cost of labor, through any action on values or prices. It can not be prevented from taking its effect in low profits. If the laborers really get more, that is, get the produce of more labor, a smaller percentage must remain for profit.

§ 2. Wages affect Values, only if different in different employments; non-competing groups.

Although, however, general wages, whether high or low, do not affect values, yet if wages are higher in one employment than another, or if they rise or fall permanently in one employment without doing so in others, these inequalities do really operate upon values. Things, for example, which are made by skilled labor, exchange for the produce of a much greater quantity of unskilled labor, for no reason but because the labor is more highly paid. We have before remarked that the difficulty of passing from one class of employments to a class greatly superior has hitherto caused the wages of all those classes of laborers who are separated from one another by any very marked barrier to depend more than might be supposed upon the increase of the population of each class considered separately, and that the inequalities in the remuneration of labor are much greater than could exist if the competition of the laboring people generally could be brought practically to bear on each particular employment. It follows from this that wages in different employments do not rise or fall simultaneously, but are, for short and sometimes even for long periods, nearly independent of one another. All such disparities evidently alter the relative cost of production of different commodities, and will therefore be completely represented in their natural or average value.

This is again a clear recognition of the influence of Mr. Cairnes's theory of non-competing groups.215

Wages do enter into value. The relative wages of the labor necessary for producing different commodities affect their value just as much as the relative quantities of labor. [pg 267] It is true, the absolute wages paid have no effect upon values; but neither has the absolute quantity of labor. If that were to vary simultaneously and equally in all commodities, values would not be affected. If, for instance, the general efficiency of all labor were increased, so that all things without exception could be produced in the same quantity as before with a smaller amount of labor, no trace of this general diminution of cost of production would show itself in the values of commodities.

§ 3. Profits an element in Cost of Production.

Thus far of labor or wages as an element in cost of production. But in our analysis, in the First Book, of the requisites of production, we found that there is another necessary element in it besides labor. There is also capital; and this being the result of abstinence, the produce, or its value, must be sufficient to remunerate, not only all the labor required, but the abstinence of all the persons by whom the remuneration of the different classes of laborers was advanced. The return from abstinence is Profit. And profit, we have also seen, is not exclusively the surplus remaining to the capitalist after he has been compensated for his outlay, but forms, in most cases, no unimportant part of the outlay itself. The flax-spinner, part of whose expenses consists of the purchase of flax and of machinery, has had to pay, in their price, not only the wages of the labor by which the flax was grown and the machinery made, but the profits of the grower, the flax-dresser, the miner, the iron-founder, and the machine-maker. All these profits, together with those of the spinner himself, were again advanced by the weaver, in the price of his material—linen yarn; and along with them the profits of a fresh set of machine-makers, and of the miners and iron-workers who supplied them with their metallic material. All these advances form part of the cost of production of linen. Profits, therefore, as well as wages, enter into the cost of production which determines the value of the produce.

§ 4. Cost of Production properly represented by sacrifice, or cost, to the Laborer as well as to the Capitalist; the relation of this conception to the Cost of Labor.

In discussing Cost of Labor (supra, pp. 225, 226), Mr. Mill found that the advances of the immediate producer consisted [pg 268] not only of wages, but also of tools, materials, etc., in the price of which he was including the profits of an auxiliary capitalist who advanced the capital for making these tools, etc. But, then, if a line of division were to be passed down through all these advances, separating wages from profits, he urged that, if all the capitalists (auxiliary and immediate both) were one, all the advances of the capitalist might be considered as wages. Profits did not form a part of the outlay to the capitalists in the former analysis. And this seems correct enough. Now, however, he suggests that the outlay of the immediate producers should include the profit of the auxiliary capitalist. More than this, Mr. Mill now includes in cost to the capitalist the profit of the immediate capitalist. For example, in his illustration of the manufacture of linen, he includes not merely the profit of the auxiliary capital engaged in spinning and weaving, but the profit of the immediate and last capitalist, the linen-manufacturer, also. This includes in the cost of producing an article a profit not realized until after the commodity is produced.

It is now time to give a more correct idea of cost of production. Every one admits, for example, that the cost of production of wheat is less in the United States than in England. If, for instance, three men with a capital of one hundred dollars may on a plot of ground, A, in the United States produce one hundred bushels of wheat, it will happen that the same men and capital will only produce sixty bushels on ground, B, in England.

Illustration: Cost of Production.

In ordinary language, then, we say that the cost of production is greater in England than in the United States, because the same labor and capital here produce one hundred bushels for sixty in England; or, what amounts to the same thing, that less labor and capital could produce sixty bushels in the United States than sixty bushels in England. If we suppose that one fourth of the crop is profit, and three fourths is assigned to wages in both countries, then in the United States the one hundred dollars of capital receives twenty-five bushels of profit, while in England it receives only fifteen; and the three men receive as wages in the United States twenty-five bushels each, while in England they receive only fifteen bushels each. The first important induction to be made is that where cost of production [pg 269] is low, wages and profits are high. The high productiveness of extractive industries in the United States is the reason why wages and profits are higher here than in older countries.

Now the second important question is, Is cost of production made up of wages and profits, and is it true that the cost rises with a rise of wages and profits? Certainly not. Wages and profits are both higher in the United States than in England, but no one is so absurd as to say that the cost of production of wheat (as above explained) is higher here than there. It is exactly because cost of production of wheat is lower in the United States that wages and profits measured in wheat are higher here than in England. Therefore, it can not be granted, as Mr. Mill expounds the doctrine, that cost of production is made up of wages and profits. When we speak of an increased cost of production of a given article, we mean that its production requires more labor and capital than before; and of a decrease in cost of production, that it requires less labor and capital than before; meaning by more labor that a given quality of labor is exerted for a longer or shorter time, and by more capital that a greater or less quantity of wealth abstained from is employed for a longer or shorter time; or, in other words, that laborers and capitalists undergo more or less sacrifice in exertion and abstinence, respectively, to attain a given result. This is the contribution to cost of production made by Mr. Cairnes, and briefly defined as follows: In the case of labor, the cost of producing a given commodity will be represented by the number of average laborers employed in its production—regard at the same time being had to the severity of the work and the degree of risk it involves—multiplied by the duration of their labors. In that of abstinence, the principle is analogous; the sacrifice will be measured by the quantity of wealth abstained from, taken in connection with the risk incurred, and multiplied by the duration of the abstinence.216

This view of cost of production takes into consideration, in the act of production, what Mr. Mill does not include, the cost, or real sacrifice, to the laborer as well as to the capitalist. It may, then, be well to state the relations of cost of production, taken in this better sense, to value.

Within competing groups, where there is free choice for labor and capital to select the most remunerative occupations, the hardest and most disagreeable employments will be best paid, and the wages and profits will be in proportion to the sacrifice involved in each case. If so, the amount paid in wages and profits represents the sacrifices in each case. [pg 270] Now, the aggregate product of an industry is the source from which is drawn its wages and profits: the aggregate wages and profits, therefore, must vary with the value of the total product. If the total value depart from the sum hitherto sufficient to pay the given wages and profits, then some will be paid proportionally less than their sacrifice. The value of a commodity, therefore, within the competing group, must conform to the costs of production. If, for example (a), the value at any time were such as not to give the laborer the usual equivalent for his sacrifice, he would change his employment to another within the group where he could get it; if (b) the share of the capitalist were at any time insufficient to give him the usual reward for his abstinence, he would change the investment of his capital. Therefore, within such limits as allow a free competition of labor and capital, value must conform itself to cost of production.

Not so, however, with the products of non-competing industrial groups. As shown by Mr. Mill, labor does not pass freely from one employment to another; and it must be said that capital does not either, although vastly more ready to move than labor. In a large and thinly settled country capital does not move freely over the whole area of industry; if it did, different rates of profit would not prevail, as we all know they do, in the United States. Now, as before stated, the total value of the commodities resulting from the exertions of each group of producers is the source from which wages and profits are drawn. The aggregate wages and profits in each industry will vary with the value of the aggregate products. But this total value depends upon what it will exchange for of the products of other groups; that is, this value depends on the reciprocal demand of one group for the commodities of the other groups, as compared with the demand of the other groups for its products. For example, although cost of production is low in group A, if the demand from outside groups were to be strong, the exchange value of A's products would rise, and A would get more of other goods in exchange; that is, the total produce is large, but a second increment, arising from a higher exchange value, is to be shared among A's laborers and capitalists. A few years ago, about 1878-1879, the value of wheat in the United States rose because of the increased demand from Europe, where the harvests had been unusually deficient. There had been no falling off in the productiveness of the farming industry of the United States to cause the increased price; but the relative demand of other industrial groups for wheat, the product of the farming industry, raised the exchange value of wheat, and so increased the industrial rewards of those engaged as laborers and capitalists in farming. So [pg 271] it is to be concluded that since there is no free movement of labor and capital between non-competing groups, wages and profits may constantly remain at rates which are not in correspondence with the actual sacrifice, or cost, to labor and capital in different groups; hence, their products do not exchange for each other in proportion to their costs of production. Reciprocal demand is the law of their value.

It will be said, at once, that the foregoing conception of cost of production is entirely opposed to the language of practical men of affairs. They constantly speak of higher or lower wages as increasing their cost of production, or as affecting their ability to compete with foreigners. So universal a usage implies a foundation of truth which demands attention. Wages do represent cost to the capitalist, that is, the chief part of the outlay he makes in order to get a given return; but we have already seen this, and, in the language of Political Economy, termed it cost of labor to the capitalist. When the business world use the phrase cost of production, they use it in the sense of cost of labor, as hitherto explained. When they are obliged by strikers to pay more wages, they say that it increases their cost of production, meaning the cost to them of getting their product, and that it affects their profits. This, then, will show that there is no objection to be urged, in its true sense, against the phrase cost of production, arising from its misuse in the common language of business.

The real connection between the proper conception of cost of production and cost of labor is, however, worth attention. It touches cost of labor through that one of its elements called efficiency of labor. The more productive an industry is, the higher its wages and profits may be, and it is exactly at this point that more attention should be given to the relations of labor and capital. If productiveness can be increased, higher wages as well as higher profits are possible. The proper understanding of the idea that where cost of production is low wages and profits are high, throws a flood of light on many industrial questions in the United States. In the connection in which it stands, as I have shown, to cost of labor, it means that if commodities can be produced at a less sacrifice to labor and capital by the use of machinery and new processes, higher wages are consistent with a lower price of the given product. It explains the fact that, owing to skill or natural resources, labor, although paid much higher rates, can produce articles cheaper than laborers who are less highly paid. Mr. Brassey217 has pointed out that English wages are higher than on the Continent; and yet England, through low cost of production, [pg 272] owing to skill, natural resources, etc., can produce so much more of commodities for a given outlay that (while keeping her usual rate of profit) she can generally undersell her competitors who employ cheaper labor. The same observations apply to the United States; but the question of foreign competition will be further discussed (Book III, Chap. XX) after we have studied international trade and values.

And here it may be well to state precisely what is to be understood by a fluctuation of the market, as distinguished from those changes of normal price which we have been considering. Normal price, as we have seen, is governed, according to the circumstances of the case [as to whether there is free industrial competition or not], by one or other of two causes—cost of production and reciprocal demand. A change in normal price, therefore, is a change which is the consequence of an alteration in one or other of these conditions. So long as the determining condition—be it cost of production or reciprocal demand—remains constant, the normal price must be considered as remaining constant; but, the normal price remaining constant, the market price (which, as we have seen, depends on the opinion of dealers respecting the state of supply and demand in relation to the particular article) may undergo a change—may deviate, that is to say, either upward or downward from the normal level. Such changes of price, occurring while the permanent conditions of production remain unaffected, can only be temporary, calling into action, as they do, forces which at once tend to restore the normal state of things: they may therefore be properly described as fluctuations of the market. ”218

§ 5. When profits vary from Employment to Employment, or are spread over unequal lengths of Time, they affect Values accordingly.

Value, however, being purely relative, can not depend upon absolute profits, no more than upon absolute wages, but upon relative profits only. High general profits can not, any more than high general wages, be a cause of high values, because high general values are an absurdity and a contradiction. In so far as profits enter into the cost of production of all things, they can not affect the value of any. It is only by entering in a greater degree into the cost of production of some things than of others, that they can have any influence on value.

Profits, however, may enter more largely into the conditions of production of one commodity than of another, even [pg 273] though there be no difference in the rate of profit between the two employments. The one commodity may be called upon to yield a profit during a longer period of time than the other. The example by which this case is usually illustrated is that of wine. Suppose a quantity of wine and a quantity of cloth, made by equal amounts of labor, and that labor paid at the same rate. The cloth does not improve by keeping; the wine does. Suppose that, to attain the desired quality, the wine requires to be kept five years. The producer or dealer will not keep it, unless at the end of five years he can sell it for as much more than the cloth as amounts to five years' profit, accumulated at compound interest. The wine and the cloth were made by the same original outlay. Here, then, is a case in which the natural values, relatively to one another, of two commodities, do not conform to their cost of production alone, but to their cost of production plus something else—unless, indeed, for the sake of generality in the expression, we include the profit which the wine-merchant foregoes during the five years, in the cost of production of the wine, looking upon it as a kind of additional outlay, over and above his other advances, for which outlay he must be indemnified at last.

Regarding cost of production as the amounts of labor and abstinence required in production, and not as Mr. Mill regards it, as the amounts of wages and profits, the above is simply a case where, in the production of wine, there is a longer duration of the abstinence than in the production of cloth. If there is a free movement of labor and capital between the two industries, they will exchange for each other in proportion to the sacrifices involved; so that the wine would exchange for more of cloth, because there was more sacrifice undergone. The same explanation also holds good in the following illustration:

All commodities made by machinery are assimilated, at least approximately, to the wine in the preceding example. In comparison with things made wholly by immediate labor, profits enter more largely into their cost of production. Suppose two commodities, A and B, each requiring a year for its production, by means of a capital which we will on [pg 274] this occasion denote by money, and suppose it to be £1,000. A is made wholly by immediate labor, the whole £1,000 being expended directly in wages. B is made by means of labor which cost £500 and a machine which cost £500, and the machine is worn out by one year's use. The two commodities will be of exactly the same value, which, if computed in money, and if profits are 20 per cent per annum, will be £1,200. But of this £1,200, in the case of A, only £200, or one sixth, is profit; while in the case of B there is not only the £200, but as much of £500 (the price of the machine) as consisted of the profits of the machine-maker; which, if we suppose the machine also to have taken a year for its production, is again one sixth. So that in the case of A only one sixth of the entire return is profit, while in B the element of profit comprises not only a sixth of the whole, but an additional sixth of a large part.

From the unequal proportion in which, in different employments, profits enter into the advances of the capitalist, and therefore into the returns required by him, two consequences follow in regard to value. (1). One is, that commodities do not exchange in the ratio simply of the quantities of labor required to produce them; not even if we allow for the unequal rates at which different kinds of labor are permanently remunerated.

(2.) A second consequence is, that every rise or fall of general profits will have an effect on values. Not, indeed, by raising or lowering them generally (which, as we have so often said, is a contradiction and an impossibility), but by altering the proportion in which the values of things are affected by the unequal lengths of time for which profit is due. When two things, though made by equal labor, are of unequal value because the one is called upon to yield profit for a greater number of years or months than the other, this difference of value will be greater when profits are greater, and less when they are less. The wine which has to yield five years' profit more than the cloth will surpass it in value much more if profits are forty per cent than if they are only twenty.

[pg 275]

It follows from this that even a general rise of wages, when it involves a real increase in the cost of labor, does in some degree influence values. It does not affect them in the manner vulgarly supposed, by raising them universally; but an increase in the cost of labor lowers profits, and therefore lowers in natural values the things into which profits enter in a greater proportion than the average, and raises those into which they enter in a less proportion than the average. All commodities in the production of which machinery bears a large part, especially if the machinery is very durable, are lowered in their relative value when profits fall; or, what is equivalent, other things are raised in value relatively to them. This truth is sometimes expressed in a phraseology more plausible than sound, by saying that a rise of wages raises the value of things made by labor in comparison with those made by machinery. But things made by machinery, just as much as any other things, are made by labor—namely, the labor which made the machinery itself—the only difference being that profits enter somewhat more largely into the production of things for which machinery is used, though the principal item of the outlay is still labor.

§ 6. Occasional Elements in Cost of Production; taxes and ground-rent.

Cost of Production consists of several elements, some of which are constant and universal, others occasional. The universal elements of cost of production are the wages of the labor, and the profits of the capital. The occasional elements are taxes, and any extra cost occasioned by a scarcity value of some of the requisites. Besides the natural and necessary elements in cost of production—labor and profits—there are others which are artificial and casual, as, for instance, a tax. The taxes on hops and malt are as much a part of the cost of production of those articles as the wages of the laborers. The expenses which the law imposes, as well as those which the nature of things imposes, must be reimbursed with the ordinary profit from the value of the produce, or the things will not continue to be produced. But the influence of taxation on value is subject to the same conditions as the influence of wages and of profits. It is not [pg 276] general taxation, but differential taxation, that produces the effect. If all productions were taxed so as to take an equal percentage from all profits, relative values would be in no way disturbed. If only a few commodities were taxed, their value would rise; and if only a few were left untaxed, their value would fall.

But the case in which scarcity value chiefly operates in adding to cost of production is the case of natural agents. These, when unappropriated, and to be had for the taking, do not enter into the cost of production, save to the extent of the labor which may be necessary to fit them for use. Even when appropriated, they do not (as we have already seen) bear a value from the mere fact of the appropriation, but only from scarcity—that is, from limitation of supply. But it is equally certain that they often do bear a scarcity value.

No one can deny that rent sometimes enters into cost of production [of other than agricultural products]. If I buy or rent a piece of ground, and build a cloth-manufactory on it, the ground-rent forms legitimately a part of my expenses of production, which must be repaid by the product. And since all factories are built on ground, and most of them in places where ground is peculiarly valuable, the rent paid for it must, on the average, be compensated in the values of all things made in factories. In what sense it is true that rent does not enter into the cost of production or affect the value of agricultural produce will be shown in the succeeding chapter.

These occasional elements in cost of production, such as taxes, insurance, ground-rent, etc., are to be considered as just so much of an increase in the quantity of capital required for the operation involved in the particular production, and, consequently, result in an increased cost of production, because there is either more abstinence, or abstinence for a longer time, to be rewarded. These elements, therefore, if they are not universal (or common to all articles), will affect the exchange value of commodities, wherever there is a free competition.
[pg 277]

Chapter III. Of Rent, In Its Relation To Value.

§ 1. Commodities which are susceptible of indefinite Multiplication, but not without increase of Cost. Law of their Value, Cost of Production in the most unfavorable existing circumstances.

We have investigated the laws which determine the value of two classes of commodities—the small class which, being limited to a definite quantity, have their value entirely determined by demand and supply, save that their cost of production (if they have any) constitutes a minimum below which they can not permanently fall; and the large class, which can be multiplied ad libitum by labor and capital, and of which the cost of production fixes the maximum as well as the minimum at which they can permanently exchange [if there be free competition]. But there is still a third kind of commodities to be considered—those which have, not one, but several costs of production; which can always be increased in quantity by labor and capital, but not by the same amount of labor and capital; of which so much may be produced at a given cost, but a further quantity not without a greater cost. These commodities form an intermediate class, partaking of the character of both the others. The principal of them is agricultural produce. We have already made abundant reference to the fundamental truth that in agriculture, the state of the art being given, doubling the labor does not double the produce; that, if an increased quantity of produce is required, the additional supply is obtained at a greater cost than the first. Where a hundred quarters of corn are all that is at present required from the lands of a given village, if the growth of population made it necessary to raise a hundred more, either by breaking up worse land now uncultivated, or by a more elaborate cultivation of the land already under the plow, the additional hundred, or some part of them, at least, might cost double or treble as much per quarter as the former supply.

[pg 278]

If the first hundred quarters were all raised at the same expense (only the best land being cultivated), and if that expense would be remunerated with the ordinary profit by a price of 20s. the quarter, the natural price of wheat, so long as no more than that quantity was required, would be 20s.; and it could only rise above or fall below that price from vicissitudes of seasons, or other casual variations in supply. But if the population of the district advanced, a time would arrive when more than a hundred quarters would be necessary to feed it. We must suppose that there is no access to any foreign supply. By the hypothesis, no more than a hundred quarters can be produced in the district, unless by either bringing worse land into cultivation, or altering the system of culture to a more expensive one. Neither of these things will be done without a rise in price. This rise of price will gradually be brought about by the increasing demand. So long as the price has risen, but not risen enough to repay with the ordinary profit the cost of producing an additional quantity, the increased value of the limited supply partakes of the nature of a scarcity value. Suppose that it will not answer to cultivate the second best land, or land of the second degree of remoteness, for a less return than 25s. the quarter; and that this price is also necessary to remunerate the expensive operations by which an increased produce might be raised from land of the first quality. If so, the price will rise, through the increased demand, until it reaches 25s. That will now be the natural price; being the price without which the quantity, for which society has a demand at that price, will not be produced. At that price, however, society can go on for some time longer; could go on perhaps forever, if population did not increase. The price, having attained that point, will not again permanently recede (though it may fall temporarily from accidental abundance); nor will it advance further, so long as society can obtain the supply it requires without a second increase of the cost of production.

In the case supposed, different portions of the supply of [pg 279] corn have different costs of production. Though the twenty, or fifty, or one hundred and fifty quarters additional have been produced at a cost proportional to 25s., the original hundred quarters per annum are still produced at a cost only proportional to 20s. This is self-evident, if the original and the additional supply are produced on different qualities of land. It is equally true if they are produced on the same land. Suppose that land of the best quality, which produced one hundred quarters at 20s., has been made to produce one hundred and fifty by an expensive process, which it would not answer to undertake without a price of 25s. The cost which requires 25s. is incurred for the sake of fifty quarters alone: the first hundred might have continued forever to be produced at the original cost, and with the benefit, on that quantity, of the whole rise of price caused by the increased demand: no one, therefore, will incur the additional expense for the sake of the additional fifty, unless they alone will pay for the whole of it. The fifty, therefore, will be produced at their natural price, proportioned to the cost of their production; while the other hundred will now bring in 5s. a quarter more than their natural price—than the price corresponding to, and sufficing to remunerate, their lower cost of production.

If the production of any, even the smallest, portion of the supply requires as a necessary condition a certain price, that price will be obtained for all the rest. We are not able to buy one loaf cheaper than another because the corn from which it was made, being grown on a richer soil, has cost less to the grower. The value, therefore, of an article (meaning its natural, which is the same with its average value) is determined by the cost of that portion of the supply which is produced and brought to market at the greatest expense. This is the Law of Value of the third of the three classes into which all commodities are divided.

§ 2. Such commodities, when Produced in circumstances more favorable, yield a Rent equal to the difference of Cost.

If the portion of produce raised in the most unfavorable circumstances obtains a value proportioned to its cost of production; all the portions raised in more favorable circumstances, [pg 280] selling as they must do at the same value, obtain a value more than proportioned to their cost of production.

The owners, however, of those portions of the produce enjoy a privilege; they obtain a value which yields them more than the ordinary profit. The advantage depends on the possession of a natural agent of peculiar quality, as, for instance, of more fertile land than that which determines the general value of the commodity; and when this natural agent is not owned by themselves, the person who does own it is able to exact from them, in the form of rent, the whole extra gain derived from its use. We are thus brought by another road to the Law of Rent, investigated in the concluding chapter of the Second Book. Rent, we again see, is the difference between the unequal returns to different parts of the capital employed on the soil. Whatever surplus any portion of agricultural capital produces, beyond what is produced by the same amount of capital on the worst soil, or under the most expensive mode of cultivation, which the existing demands of society compel a recourse to, that surplus will naturally be paid as rent from that capital, to the owner of the land on which it is employed.

The discussion of rent is here followed wholly from the point of view of value, while before (Book II, Chap. VI) the law of rent was reached through a limitation of the quantity of land due to the influence of population. In the former case the rent and produce were stated in bushels. By introducing price now (as the convenient symbol of value), instead of the separate increased demands of population in our illustration than used (p. 240), it will be seen how the same operation, looking at it solely in respect to value, brings us to the same law:

Price per Bushel.A BCD
24 bushels 18 bushels12 bushels 6 bushels
Total value of product.Rent. Total value of product.Rent. Total value of product.Rent. Total value of product.
$1.00$24.00$0.00 ................ ....
$1.33$32.00$8.00 $24.00$0.00........ ....
$2.00$48.00$24.00 $36.00$12.00$24.00$0.00 ....
$4.00$96.00$72.00 $72.00$48.00$48.00$24.00 $24.00
[pg 281]

It was long thought by political economists, among the rest even by Adam Smith, that the produce of land is always at a monopoly value, because (they said), in addition to the ordinary rate of profit, it always yields something further for rent. This we now see to be erroneous. A thing can not be at a monopoly value when its supply can be increased to an indefinite extent if we are only willing to incur the cost. As long as there is any land fit for cultivation, which at the existing price can not be profitably cultivated at all, there must be some land a little better, which will yield the ordinary profit, but allow nothing for rent: and that land, if within the boundary of a farm, will be cultivated by the farmer; if not so, probably by the proprietor, or by some other person on sufferance. Some such land at least, under cultivation, there can scarcely fail to be.

Rent, therefore, forms no part of the cost of production which determines the value of agricultural produce. The land or the capital most unfavorably circumstanced among those actually employed, pays no rent, and that land or capital determines the cost of production which regulates the value of the whole produce. Thus rent is, as we have already seen, no cause of value, but the price of the privilege which the inequality of the returns to different portions of agricultural produce confers on all except the least favored portion.

Rent, in short, merely equalizes the profits of different farming capitals, by enabling the landlord to appropriate all extra gains occasioned by superiority of natural advantages. If all landlords were unanimously to forego their rent, they would but transfer it to the farmers, without benefiting the consumer; for the existing price of corn would still be an indispensable condition of the production of part of the existing supply, and if a part obtained that price the whole would obtain it. Rent, therefore, unless artificially increased by restrictive laws, is no burden on the consumer: it does not raise the price of corn, and is no otherwise a detriment to the public than inasmuch as if the [pg 282] state had retained it, or imposed an equivalent in the shape of a land-tax, it would then have been a fund applicable to general instead of private advantage.

The nationalization of the land, consequently, would not benefit the laboring-classes a whit through lowering the price to them, or any consumer, of food or agricultural produce.

§ 3. Rent of Mines and Fisheries and ground-rent of Buildings, and cases of gain analogous to Rent.

Agricultural productions are not the only commodities which have several different costs of production at once, and which, in consequence of that difference, and in proportion to it, afford a rent. Mines are also an instance. Almost all kinds of raw material extracted from the interior of the earth—metals, coals, precious stones, etc.—are obtained from mines differing considerably in fertility—that is, yielding very different quantities of the product to the same quantity of labor and capital. There are, perhaps, cases in which it is impossible to extract from a particular vein, in a given time, more than a certain quantity of ore, because there is only a limited surface of the vein exposed, on which more than a certain number of laborers can not be simultaneously employed. But this is not true of all mines. In collieries, for example, some other cause of limitation must be sought for. In some instances the owners limit the quantity raised, in order not too rapidly to exhaust the mine; in others there are said to be combinations of owners, to keep up a monopoly price by limiting the production. Whatever be the causes, it is a fact that mines of different degrees of richness are in operation, and since the value of the produce must be proportional to the cost of production at the worst mine (fertility and situation taken together), it is more than proportional to that of the best. All mines superior in produce to the worst actually worked will yield, therefore, a rent equal to the excess. They may yield more; and the worst mine may itself yield a rent. Mines being comparatively few, their qualities do not graduate gently into one another, as the qualities of land do; and the demand may be such as to keep the value of the produce considerably above the cost of production at the worst mine now worked, without [pg 283] being sufficient to bring into operation a still worse. During the interval, the produce is really at a scarcity value.

Fisheries are another example. Fisheries in the open sea are not appropriated, but fisheries in lakes or rivers almost always are so, and likewise oyster-beds or other particular fishing-grounds on coasts. We may take salmon-fisheries as an example of the whole class. Some rivers are far more productive in salmon than others. None, however, without being exhausted, can supply more than a very limited demand. All others, therefore, will, if appropriated, afford a rent equal to the value of their superiority.

Both in the case of mines and of fisheries, the natural order of events is liable to be interrupted by the opening of a new mine, or a new fishery, of superior quality to some of those already in use. In this case, when things have permanently adjusted themselves, the result will be that the scale of qualities which supply the market will have been cut short at the lower end, while a new insertion will have been made in the scale at some point higher up; and the worst mine or fishery in use—the one which regulates the rents of the superior qualities and the value of the commodity—will be a mine or fishery of better quality than that by which they were previously regulated.

The ground-rent of a building, and the rent of a garden or park attached to it, will not be less than the rent which the same land would afford in agriculture, but may be greater than this to an indefinite amount; the surplus being either in consideration of beauty or of convenience, the convenience often consisting in superior facilities for pecuniary gain. Sites of remarkable beauty are generally limited in supply, and therefore, if in great demand, are at a scarcity value. Sites superior only in convenience are governed as to their value by the ordinary principles of rent. The ground-rent of a house in a small village is but little higher than the rent of a similar patch of ground in the open fields.

Suppose the various kinds of land to be represented by the alphabet; that those below O pay no agricultural rent, and that [pg 284] all lands increase in fertility and situation as we approach the beginning of the alphabet, but which, as far up as K, are used in agriculture; that higher than K all are more profitably used for building purposes, viz.:

A, B, C, ... | K, L, M, N, O, | ... X, Y, Z.

Now it will happen that land is chosen for building purposes irrespective of its fertility for agricultural purposes. It will not be true, as some may think, that no land will be used for building until it will pay a ground-rent greater than the greatest agricultural rent paid by any piece of land. It is not true, for example, if N be selected for a building-lot, that it must pay a ground-rent as high as the agricultural rent of K, the most fertile land cultivated in agriculture. It must pay a ground-rent higher only than it itself would pay, if cultivated. It is only necessary that it pay more than the same (not better) land would pay as rent if used only in agriculture.

The rents of wharfage, dock, and harbor room, water-power, and many other privileges, may be analyzed on similar principles. Take the case, for example, of a patent or exclusive privilege for the use of a process by which the cost of production is lessened. If the value of the product continues to be regulated by what it costs to those who are obliged to persist in the old process, the patentee will make an extra profit equal to the advantage which his process possesses over theirs. This extra profit is essentially similar to rent, and sometimes even assumes the form of it, the patentee allowing to other producers the use of his privilege in consideration of an annual payment.

The extra gains which any producer or dealer obtains through superior talents for business, or superior business arrangements, are very much of a similar kind. If all his competitors had the same advantages, and used them, the benefit would be transferred to their customers through the diminished value of the article; he only retains it for himself because he is able to bring his commodity to market at a lower cost, while its value is determined by a higher.219

[pg 285]

§ 4. Résumé of the laws of value of each of the three classes of commodities.

A general résumé of the laws of value, where a free movement of labor and capital exists, may now be briefly made in the following form:

Exchange value has three conditions, viz.:
1. Utility, or ability to satisfy a desire (U).
2. Difficulty of attainment (D), according to which there are three classes of commodities.
3. Transferableness.

Of the second condition, there are three classes:
1. Those limited in supply—e.g., ancient pictures or monopolized articles.
2. Those whose supply is capable of indefinite increase by the use of labor and capital.
3. Those whose supply is gained at a gradually increasing cost, under the law of diminishing returns.

Of those limited in supply, their value is regulated by Demand and Supply. The only limit is U.

Of those whose supply is capable of indefinite increase, their normal and permanent value is regulated by Cost of Production, and their temporary or market value is regulated by Demand and Supply, oscillating around Cost of Production (which consists of the amount of labor and abstinence required).

Of those whose supply is gained at a gradually increasing cost, their normal value is regulated by the Cost of Production of that portion of the whole amount of the whole amount needed, which is brought to market at the greatest expense, and their market value is regulated by Demand and Supply (as in class 2).

If there be no free competition between industries, then the value of those commodities which has been said, in the above classification, to depend on cost of production, will be governed by the law of Reciprocal Demand.

[pg 286]

Chapter IV. Of Money.

§ 1. The three functions of Money—a Common Denominator of Value, a Medium of Exchange, a Standard of Value.

Having proceeded thus far in ascertaining the general laws of Value, without introducing the idea of Money (except occasionally for illustration), it is time that we should now superadd that idea, and consider in what manner the principles of the mutual interchange of commodities are affected by the use of what is termed a Medium of Exchange.

As Professor Jevons220 has pointed out, money performs three distinct services, capable of being separated by the mind, and worthy of separate definition and explanation:

1. A Common Measure, or Common Denominator, of Value.

2. A Medium of Exchange.

3. A Standard of Value.

F. A. Walker,221 however, says: Money is the medium of exchange. Whatever performs this function, does this work, is money, no matter what it is made of.... That which does the money-work is the money-thing.

(1.) [If we had no money] the first and most obvious [inconvenience] would be the want of a common measure for values of different sorts. If a tailor had only coats, and wanted to buy bread or a horse, it would be very troublesome to ascertain how much bread he ought to obtain for a coat, or how many coats he should give for a horse. The calculation must be recommenced on different data every time he bartered his coats for a different kind of article, and there could be no current price or regular quotations of value. As it is much easier to compare different lengths by expressing [pg 287] them in a common language of feet and inches, so it is much easier to compare values by means of a common language of [dollars and cents].

The need of a common denominator of values (an excellent term, introduced by Storch), to whose terms the values of all other commodities may be reduced, and so compared, is as great as that the inhabitants of the different States of the United States should have a common language as a means by which ideas could be communicated to the whole nation. A man may have a horse, whose value he wishes to compare in some common term with the value of his house, although he might not wish to sell either. A valuation by the State for taxation could not exist but for this common denominator, or register, of value.

(2.) The second function is that of a medium of exchange. The distinction between this function and the common denominator of value is that the latter measures value, the former transfers value. The man owning the horse, after having measured its value by comparison with a given thing, may now wish to exchange it for other things. This discloses the need of another quality in money.

The inconveniences of barter are so great that, without some more commodious means of effecting exchanges, the division of employments could hardly have been carried to any considerable extent. A tailor, who had nothing but coats, might starve before he could find any person having bread to sell who wanted a coat: besides, he would not want as much bread at a time as would be worth a coat, and the coat could not be divided. Every person, therefore, would at all times hasten to dispose of his commodity in exchange for anything which, though it might not be fitted to his own immediate wants, was in great and general demand, and easily divisible, so that he might be sure of being able to purchase with it whatever was offered for sale. The thing which people would select to keep by them for making purchases must be one which, besides being divisible and generally desired, does not deteriorate by keeping. This reduces the choice to a small number of articles.

This need is well explained by the following facts furnished by Professor Jevons: Some years since, Mademoiselle Zélie, [pg 288] a singer of the Théâtre Lyrique at Paris, made a professional tour round the world, and gave a concert in the Society Islands. In exchange for an air from Norma and a few other songs, she was to receive a third part of the receipts. When counted, her share was found to consist of three pigs, twenty-three turkeys, forty-four chickens, five thousand cocoanuts, besides considerable quantities of bananas, lemons, and oranges. In the Society Islands, however, pieces of money were very scarce; and, as mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the mean time to feed the pigs and poultry with the fruit.222

(3.) The third function desired of money is what is usually termed a standard of value. It is, perhaps, better expressed by F. A. Walker223 as a standard of deferred payments. Its existence is due to the desire to have a means of comparing the purchasing power of a commodity at one time with its purchasing power at another distant time; that is, that for long contracts, exchanges may be in unchanged ratios at the beginning and at the end of the contracts. There is no distinction between this function and the first, except one arising from the introduction of time. At the same time and place, the standard of value is given in the common denominator of value.

A Measure of Value,224 in the ordinary sense of the word measure, would mean something by comparison with which we may ascertain what is the value of any other thing. When we consider, further, that value itself is relative, and that two things are necessary to constitute it, independently of the third thing which is to measure it, we may define a Measure of Value to be something, by comparing with which any two other things, we may infer their value in relation to one another.

In this sense, any commodity will serve as a measure of value at a given time and place; since we can always infer the proportion in which things exchange for one another, when we know the proportion in which each exchanges for any third thing. To serve as a convenient measure of value is one of the functions of the commodity selected as a medium [pg 289] of exchange. It is in that commodity that the values of all other things are habitually estimated.

But the desideratum sought by political economists is not a measure of the value of things at the same time and place, but a measure of the value of the same thing at different times and places: something by comparison with which it may be known whether any given thing is of greater or less value now than a century ago, or in this country than in America or China. To enable the money price of a thing at two different periods to measure the quantity of things in general which it will exchange for, the same sum of money must correspond at both periods to the same quantity of things in general—that is, money must always have the same exchange value, the same general purchasing power. Now, not only is this not true of money, or of any other commodity, but we can not even suppose any state of circumstances in which it would be true.

It being very clear that money, or the precious metals, do not themselves remain absolutely stable in value for long periods, the only way in which a standard of value can be properly established is by the proposed multiple standard of value, 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 a standard required. The value of these articles, in the quantities specified, and all of standard quality, shall be ascertained monthly or weekly by Government, and the total sum [in money] which would then purchase this bill of goods shall be, thereupon, officially promulgated. Persons may then, if they choose, make their contracts for future payments in terms of this multiple or tabular standard.225 A, who had borrowed $1,000 of B in 1870 for ten years, would make note of the total money value of all these articles composing the multiple standard, which we will suppose is $125 in 1870. Consequently, A would promise to pay B eight multiple units in ten years (that is, eight times $125, or $1,000). But, if other things change in value relatively [pg 290] to money during these ten years, the same sum of money—$1,000—in 1880 will not return to B the same just amount of purchasing power which he parted with in 1870. Now, if, in 1880, when his note falls due, the government list is examined, and it is found that commodities in general have fallen in value relatively to gold, the multiple unit will not amount to as much gold as it did in 1870; perhaps each unit may be rated only at $100. In that case, A is obliged to pay back but eight multiple units, which costs him only $800 in money, while B receives from A the same amount of purchasing power over other commodities which he loaned to him. B had no just claim to ten units, since the fall of all commodities relatively to gold was not due to his exertions. On the other hand, if, between 1870 and 1880, prices had risen, mutatis mutandis, the eight units would have cost A more than $1,000 in gold; but he would have been justly obliged to return the same amount of purchasing power to B which he received from him.

§ 2. Gold and Silver, why fitted for those purposes.

By a tacit concurrence, almost all nations, at a very early period, fixed upon certain metals, and especially gold and silver, to serve this purpose. No other substances unite the necessary qualities in so great a degree, with so many subordinate advantages. These were the things which it most pleased every one to possess, and which there was most certainty of finding others willing to receive in exchange for any kind of produce. They were among the most imperishable of all substances. They were also portable, and, containing great value in small bulk, were easily hid; a consideration of much importance in an age of insecurity. Jewels are inferior to gold and silver in the quality of divisibility; and are of very various qualities, not to be accurately discriminated without great trouble. Gold and silver are eminently divisible, and, when pure, always of the same quality; and their purity may be ascertained and certified by a public authority.

Jevons226 has more fully stated the requisites for a perfect money as—

1. Value.
2. Portability.
3. Indestructibility.
4. Homogeneity.
5. Divisibility.
6. Stability of value.
7. Cognizability.
[pg 291]

Accordingly, though furs have been employed as money in some countries, cattle in others, in Chinese Tartary cubes of tea closely pressed together, the shells called cowries on the coast of Western Africa, and in Abyssinia at this day blocks of rock-salt, gold and silver have been generally preferred by nations which were able to obtain them, either by industry, commerce, or conquest. To the qualities which originally recommended them, another came to be added, the importance of which only unfolded itself by degrees. Of all commodities, they are among the least influenced by any of the causes which produce fluctuations of value. No commodity is quite free from such fluctuations. Gold and silver have sustained, since the beginning of history, one great permanent alteration of value, from the discovery of the American mines.

In the present age the opening of new sources of supply, so abundant as the Ural Mountains, California, and Australia, may be the commencement of another period of decline, on the limits of which it would be useless at present to speculate. But, on the whole, no commodities are so little exposed to causes of variation. They fluctuate less than almost any other things in their cost of production. And, from their durability, the total quantity in existence is at all times so great in proportion to the annual supply, that the effect on value even of a change in the cost of production is not sudden: a very long time being required to diminish materially the quantity in existence, and even to increase it very greatly not being a rapid process. Gold and silver, therefore, are more fit than any other commodity to be the subject of engagements for receiving or paying a given quantity at some distant period.

Since Mr. Mill wrote, two great changes in the production of the precious metals have occurred. The discoveries of gold, briefly referred to by him, have led to an enormous increase of the existing fund of gold (see chart No. IX, Chap. VI), and a fall in the value of gold within twenty years after the discoveries, according to Mr. Jevons's celebrated study,227 of from nine [pg 292] to fifteen per cent. Another change took place, a change in the value, of silver, in 1876, which has resulted in a permanent fall of its value since that time (see chart No. X, Chap. VII). Before that date, silver sold at about 60d. per ounce in the central market of the world, London; and now it remains about 52d. per ounce, although it once fell to 47d., in July, 1876. In spite of Mr. Mill's expressions of confidence in their stability of value—although certainly more stable than other commodities—the events of the last thirty-five years have fully shown that neither gold nor silver—silver far less than gold—can successfully serve as a perfect standard of value for any considerable length of time.

When gold and silver had become virtually a medium of exchange, by becoming the things for which people generally sold, and with which they generally bought, whatever they had to sell or to buy, the contrivance of coining obviously suggested itself. By this process the metal was divided into convenient portions, of any degree of smallness, and bearing a recognized proportion to one another; and the trouble was saved of weighing and assaying at every change of possessors—an inconvenience which, on the occasion of small purchases, would soon have become insupportable. Governments found it their interest to take the operation into their own hands, and to interdict all coining by private persons.

§ 3. Money a mere contrivance for facilitating exchanges, which does not affect the laws of value.

It must be evident, however, that the mere introduction of a particular mode of exchanging things for one another, by first exchanging a thing for money, and then exchanging the money for something else, makes no difference in the essential character of transactions. It is not with money that things are really purchased. Nobody's income (except that of the gold or silver miner) is derived from the precious metals. The [dollars or cents] which a person receives weekly or yearly are not what constitutes his income; they are a sort of tickets or orders which he can present for payment at any shop he pleases, and which entitle him to receive a certain value of any commodity that he makes choice of. The farmer pays his laborers and his landlord in these tickets, as the most convenient plan for himself and them; [pg 293] but their real income is their share of his corn, cattle, and hay, and it makes no essential difference whether he distributes it to them directly, or sells it for them and gives them the price. There can not, in short, be intrinsically a more insignificant thing, in the economy of society, than money; except in the character of a contrivance for sparing time and labor. It is a machine for doing quickly and commodiously what would be done, though less quickly and commodiously, without it; and, like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order.

The introduction of money does not interfere with the operation of any of the Laws of Value laid down in the preceding chapters. The reasons which make the temporary or market value of things depend on the demand and supply, and their average and permanent values upon their cost of production, are as applicable to a money system as to a system of barter. Things which by barter would exchange for one another will, if sold for money, sell for an equal amount of it, and so will exchange for one another still, though the process of exchanging them will consist of two operations instead of only one. The relations of commodities to one another remain unaltered by money; the only new relation introduced is their relation to money itself; how much or how little money they will exchange for; in other words, how the Exchange Value of money itself is determined. Money is a commodity, and its value is determined like that of other commodities, temporarily by demand and supply, permanently and on the average by cost of production.

[pg 294]

Chapter V. Of The Value Of Money, As Dependent On Demand And Supply.

§ 1. Value of Money, an ambiguous expression.

The Value of Money is to appearance an expression as precise, as free from possibility of misunderstanding, as any in science. The value of a thing is what it will exchange for; the value of money is what money will exchange for, the purchasing power of money. If prices are low, money will buy much of other things, and is of high value; if prices are high, it will buy little of other things, and is of low value. The value of money is inversely as general prices; falling as they rise, and rising as they fall. When one person lends to another, as well as when he pays wages or rent to another, what he transfers is not the mere money, but a right to a certain value of the produce of the country, to be selected at pleasure; the lender having first bought this right, by giving for it a portion of his capital. What he really lends is so much capital; the money is the mere instrument of transfer. But the capital usually passes from the lender to the receiver through the means either of money, or of an order to receive money, and at any rate it is in money that the capital is computed and estimated. Hence, borrowing capital is universally called borrowing money; the loan market is called the money market; those who have their capital disposable for investment on loan are called the moneyed class; and the equivalent given for the use of capital, or, in other words, interest, is not only called the interest of money, but, by a grosser perversion of terms, the value of money.

§ 2. The Value of Money depends on its quantity.

The value or purchasing power of money depends, [pg 295] in the first instance, on demand and supply. But demand and supply, in relation to money, present themselves in a somewhat different shape from the demand and supply of other things.

The supply of a commodity means the quantity offered for sale. But it is not usual to speak of offering money for sale. People are not usually said to buy or sell money. This, however, is merely an accident of language. In point of fact, money is bought and sold like other things, whenever other things are bought and sold for money. Whoever sells corn, or tallow, or cotton, buys money. Whoever buys bread, or wine, or clothes, sells money to the dealer in those articles. The money with which people are offering to buy, is money offered for sale. The supply of money, then, is the quantity of it which people are wanting to lay out; that is, all the money they have in their possession, except what they are hoarding, or at least keeping by them as a reserve for future contingencies. The supply of money, in short, is all the money in circulation at the time.

The demand for money, again, consists of all the goods offered for sale. Every seller of goods is a buyer of money, and the goods he brings with him constitute his demand. The demand for money differs from the demand for other things in this, that it is limited only by the means of the purchaser.

In this last statement Mr. Mill is misled by his former definition of demand as quantity demanded. He has the true idea of demand in this case regarding money; but the demand for money does not, as he thinks, differ from the demand for other things, inasmuch as, in our corrected view of demand for other things (p. 255), it was found that the demand for other things than money was also limited by the means of the purchaser.228
[pg 296]

As the whole of the goods in the market compose the demand for money, so the whole of the money constitutes the demand for goods. The money and the goods are seeking each other for the purpose of being exchanged. They are reciprocally supply and demand to one another. It is indifferent whether, in characterizing the phenomena, we speak of the demand and supply of goods, or the supply and the demand of money. They are equivalent expressions.

Supposing the money in the hands of individuals to be increased, the wants and inclinations of the community collectively in respect to consumption remaining exactly the same, the increase of demand would reach all things equally, and there would be a universal rise of prices. Let us rather suppose, therefore, that to every pound, or shilling, or penny in the possession of any one, another pound, shilling, or penny were suddenly added. There would be an increased money demand, and consequently an increased money value, or price, for things of all sorts. This increased value would do no good to any one; would make no difference, except that of having to reckon [dollars and cents] in higher numbers. It would be an increase of values only as estimated in money, a thing only wanted to buy other things with; and would not enable any one to buy more of them than before. Prices would have risen in a certain ratio, and the value of money would have fallen in the same ratio.

It is to be remarked that this ratio would be precisely that in which the quantity of money had been increased. If the whole money in circulation was doubled, prices would be doubled. If it was only increased one fourth, prices would rise one fourth. There would be one fourth more money, all of which would be used to purchase goods of some description. When there had been time for the increased supply of money to reach all markets, or (according to the conventional metaphor) to permeate all the channels of circulation, all prices would have risen one fourth. But the general rise of price is independent of this diffusing and equalizing process. Even if some prices were raised more, and others less, [pg 297] the average rise would be one fourth. This is a necessary consequence of the fact that a fourth more money would have been given for only the same quantity of goods. General prices, therefore, would in any case be a fourth higher.

So that the value of money, other things being the same, varies inversely as its quantity; every increase of quantity lowering the value, and every diminution raising it, in a ratio exactly equivalent. This, it must be observed, is a property peculiar to money. We did not find it to be true of commodities generally, that every diminution of supply raised the value exactly in proportion to the deficiency, or that every increase lowered it in the precise ratio of the excess. Some things are usually affected in a greater ratio than that of the excess or deficiency, others usually in a less; because, in ordinary cases of demand, the desire, being for the thing itself, may be stronger or weaker; and the amount of what people are willing to expend on it, being in any case a limited quantity, may be affected in very unequal degrees by difficulty or facility of attainment. But in the case of money, which is desired as the means of universal purchase, the demand consists of everything which people have to sell; and the only limit to what they are willing to give, is the limit set by their having nothing more to offer. The whole of the goods being in any case exchanged for the whole of the money which comes into the market to be laid out, they will sell for less or more of it, exactly according as less or more is brought.

§ 3. —Together with the Rapidity of Circulation.

It might be supposed that there is always in circulation in a country a quantity of money equal in value to the whole of the goods then and there on sale. But this would be a complete misapprehension. The money laid out is equal in value to the goods it purchases; but the quantity of money laid out is not the same thing with the quantity in circulation. As the money passes from hand to hand, the same piece of money is laid out many times before all the things on sale at one time are purchased and finally removed from the market; and each pound or dollar must be counted [pg 298] for as many pounds or dollars as the number of times it changes hands in order to effect this object.

If we assume the quantity of goods on sale, and the number of times those goods are resold, to be fixed quantities, the value of money will depend upon its quantity, together with the average number of times that each piece changes hands in the process. The whole of the goods sold (counting each resale of the same goods as so much added to the goods) have been exchanged for the whole of the money, multiplied by the number of purchases made on the average by each piece. Consequently, the amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation. And the quantity of money in circulation is equal to the money value of all the goods sold, divided by the number which expresses the rapidity of circulation.

This may be expressed in mathematical language, where V is the value of money, Q is the quantity in circulation, and R the number expressing the rapidity of circulation, as follows:

V = 1 / (Q × R).

The phrase, rapidity of circulation, requires some comment. It must not be understood to mean the number of purchases made by each piece of money in a given time. Time is not the thing to be considered. The state of society may be such that each piece of money hardly performs more than one purchase in a year; but if this arises from the small number of transactions—from the small amount of business done, the want of activity in traffic, or because what traffic there is mostly takes place by barter—it constitutes no reason why prices should be lower, or the value of money higher. The essential point is, not how often the same money changes hands in a given time, but how often it changes hands in order to perform a given amount of traffic. We must compare the number of purchases made by the money in a given time, not with the time itself, but with the goods sold in that same time. If each piece of [pg 299] money changes hands on an average ten times while goods are sold to the value of a million sterling, it is evident that the money required to circulate those goods is £100,000. And, conversely, if the money in circulation is £100,000, and each piece changes hands, by the purchase of goods, ten times in a month, the sales of goods for money which take place every month must amount, on the average, to £1,000,000. [The essential point to be considered is] the average number of purchases made by each piece in order to affect a given pecuniary amount of transactions.

There is no doubt that the rapidity of circulation varies very much between one country and another. A thrifty people with slight banking facilities, like the French, Swiss, Belgians, and Dutch, hoard coin much more than an improvident people like the English, or even a careful people, with a perfect banking system, like the Scotch. Many circumstances, too, affect the rapidity of circulation. Railways and rapid steamboats enable coin and bullion to be more swiftly remitted than of old; telegraphs prevent its needless removal, and the acceleration of the mails has a like effect. So different are the commercial habits of different peoples, that there evidently exists no proportion whatever between the amount of currency in a country and the aggregate of the exchanges which can be effected by it.229

§ 4. Explanations and Limitations of this Principle.

The proposition which we have laid down respecting the dependence of general prices upon the quantity of money in circulation must be understood as applying only to a state of things in which money—that is, gold or silver—is the exclusive instrument of exchange, and actually passes from hand to hand at every purchase, credit in any of its shapes being unknown. When credit comes into play as a means of purchasing, distinct from money in hand, we shall hereafter find that the connection between prices and the amount of the circulating medium is much less direct and intimate, and that such connection as does exist no longer admits of so simple a mode of expression. That an increase of the quantity of money raises prices, and a diminution lowers them, is the most elementary proposition in the theory of [pg 300] currency, and without it we should have no key to any of the others. In any state of things, however, except the simple and primitive one which we have supposed, the proposition is only true, other things being the same.

It is habitually assumed that whenever there is a greater amount of money in the country, or in existence, a rise of prices must necessarily follow. But this is by no means an inevitable consequence. In no commodity is it the quantity in existence, but the quantity offered for sale, that determines the value. Whatever may be the quantity of money in the country, only that part of it will affect prices which goes into the market of commodities, and is there actually exchanged against goods. Whatever increases the amount of this portion of the money in the country tends to raise prices.

This statement needs modification, since the change in the amounts of specie in the bank reserves, particularly of England and the United States, determines the amount of credit and purchasing power granted, and so affects prices in that way; but prices are affected not by this specie being actually exchanged against goods.

It frequently happens that money to a considerable amount is brought into the country, is there actually invested as capital, and again flows out, without having ever once acted upon the markets of commodities, but only upon the market of securities, or, as it is commonly though improperly called, the money market.

A foreigner landing in the country with a treasure might very probably prefer to invest his fortune at interest; which we shall suppose him to do in the most obvious way by becoming a competitor for a portion of the stock, railway debentures, mercantile bills, mortgages, etc., which are at all times in the hands of the public. By doing this he would raise the prices of those different securities, or in other words would lower the rate of interest; and since this would disturb the relation previously existing between the rate of interest on capital in the country itself and that in [pg 301] foreign countries, it would probably induce some of those who had floating capital seeking employment to send it abroad for foreign investment, rather than buy securities at home at the advanced price. As much money might thus go out as had previously come in, while the prices of commodities would have shown no trace of its temporary presence. This is a case highly deserving of attention; and it is a fact now beginning to be recognized that the passage of the precious metals from country to country is determined much more than was formerly supposed by the state of the loan market in different countries, and much less by the state of prices.

If there be, at any time, an increase in the number of money transactions, a thing continually liable to happen from differences in the activity of speculation, and even in the time of year (since certain kinds of business are transacted only at particular seasons), an increase of the currency which is only proportional to this increase of transactions, and is of no longer duration, has no tendency to raise prices.

For example, bankers in Eastern cities each year send in the autumn to the West, as the crops are gathered, very large sums of money, to settle transactions in the buying and selling of grain, wool, etc., but it again flows back to the great centers of business in a short time, in payment of purchases from Eastern merchants.
[pg 302]

Chapter VI. Of The Value Of Money, As Dependent On Cost Of Production.

§ 1. The value of Money, in a state of Freedom, conforms to the value of the Bullion contained in it.

But money, no more than commodities in general, has its value definitely determined by demand and supply. The ultimate regulator of its value is Cost of Production.

We are supposing, of course, that things are left to themselves. Governments have not always left things to themselves. It was, until lately, the policy of all governments to interdict the exportation and the melting of money; while, by encouraging the exportation and impeding the importation of other things, they endeavored to have a stream of money constantly flowing in. By this course they gratified two prejudices: they drew, or thought that they drew, more money into the country, which they believed to be tantamount to more wealth; and they gave, or thought that they gave, to all producers and dealers, high prices, which, though no real advantage, people are always inclined to suppose to be one.

We are, however, to suppose a state, not of artificial regulation, but of freedom. In that state, and assuming no charge to be made for coinage, the value of money will conform to the value of the bullion of which it is made. A pound-weight of gold or silver in coin, and the same weight in an ingot, will precisely exchange for one another. On the supposition of freedom, the metal can not be worth more in the state of bullion than of coin; for as it can be melted without any loss of time, and with hardly any expense, this would of course be done until the quantity in circulation was so much diminished [pg 303] as to equalize its value with that of the same weight in bullion. It may be thought, however, that the coin, though it can not be of less, may be, and being a manufactured article will naturally be, of greater value than the bullion contained in it, on the same principle on which linen cloth is of more value than an equal weight of linen yarn. This would be true, were it not that Government, in this country and in some others, coins money gratis for any one who furnishes the metal. If Government, however, throws the expense of coinage, as is reasonable, upon the holder, by making a charge to cover the expense (which is done by giving back rather less in coin than has been received in bullion, and is called levying a seigniorage), the coin will rise, to the extent of the seigniorage, above the value of the bullion. If the mint kept back one per cent, to pay the expense of coinage, it would be against the interest of the holders of bullion to have it coined, until the coin was more valuable than the bullion by at least that fraction. The coin, therefore, would be kept one per cent higher in value, which could only be by keeping it one per cent less in quantity, than if its coinage were gratuitous.

In the United States there was no charge for seigniorage on gold and silver to 1853, when one half of one per cent was charged as interest on the delay if coin was immediately delivered on the deposit of bullion; in 1873 it was reduced to one fifth of one per cent; and in 1875, by a provision of the Resumption Act, it was wholly abolished (the depositor, however, paying for the copper alloy). For the trade-dollars, as was consistent with their being only coined ingots and not legal money, a seigniorage was charged equal simply to the expense of coinage, which was one and a quarter per cent at Philadelphia, and one and a half per cent at San Francisco on the tale value.

§ 2. —Which is determined by the cost of production.

The value of money, then, conforms permanently, and in a state of freedom almost immediately, to the value of the metal of which it is made; with the addition, or not, of the expenses of coinage, according as those expenses are borne by the individual or by the state.

To the majority of civilized countries gold and silver are [pg 304] foreign products: and the circumstances which govern the values of foreign products present some questions which we are not yet ready to examine. For the present, therefore, we must suppose the country which is the subject of our inquiries to be supplied with gold and silver by its own mines [as in the case of the United States], reserving for future consideration how far our conclusions require modification to adapt them to the more usual case.

Of the three classes into which commodities are divided—those absolutely limited in supply, those which may be had in unlimited quantity at a given cost of production, and those which may be had in unlimited quantity, but at an increasing cost of production—the precious metals, being the produce of mines, belong to the third class. Their natural value, therefore, is in the long run proportional to their cost of production in the most unfavorable existing circumstances, that is, at the worst mine which it is necessary to work in order to obtain the required supply. A pound weight of gold will, in the gold-producing countries, ultimately tend to exchange for as much of every other commodity as is produced at a cost equal to its own; meaning by its own cost the cost in labor and expense at the least productive sources of supply which the then existing demand makes it necessary to work. The average value of gold is made to conform to its natural value in the same manner as the values of other things are made to conform to their natural value. Suppose that it were selling above its natural value; that is, above the value which is an equivalent for the labor and expense of mining, and for the risks attending a branch of industry in which nine out of ten experiments have usually been failures. A part of the mass of floating capital which is on the lookout for investment would take the direction of mining enterprise; the supply would thus be increased, and the value would fall. If, on the contrary, it were selling below its natural value, miners would not be obtaining the ordinary profit; they would slacken their works; if the depreciation was great, some of the inferior mines would [pg 305] perhaps stop working altogether: and a falling off in the annual supply, preventing the annual wear and tear from being completely compensated, would by degrees reduce the quantity, and restore the value.

When examined more closely, the following are the details of the process: If gold is above its natural or cost value—the coin, as we have seen, conforming in its value to the bullion—money will be of high value, and the prices of all things, labor included, will be low. These low prices will lower the expenses of all producers; but, as their returns will also be lowered, no advantage will be obtained by any producer, except the producer of gold; whose returns from his mine, not depending on price, will be the same as before, and, his expenses being less, he will obtain extra profits, and will be stimulated to increase his production. E converso, if the metal is below its natural value; since this is as much as to say that prices are high, and the money expenses of all producers unusually great; for this, however, all other producers will be compensated by increased money returns; the miner alone will extract from his mine no more metal than before, while his expenses will be greater: his profits, therefore, being diminished or annihilated, he will diminish his production, if not abandon his employment.

In this manner it is that the value of money is made to conform to the cost of production of the metal of which it is made. It may be well, however, to repeat (what has been said before) that the adjustment takes a long time to effect, in the case of a commodity so generally desired and at the same time so durable as the precious metals. Being so largely used, not only as money but for plate and ornament, there is at all times a very large quantity of these metals in existence: while they are so slowly worn out that a comparatively small annual production is sufficient to keep up the supply, and to make any addition to it which may be required by the increase of goods to be circulated, or by the increased demand for gold and silver articles by wealthy consumers. Even if this small annual supply were stopped entirely, [pg 306] it would require many years to reduce the quantity so much as to make any very material difference in prices. The quantity may be increased much more rapidly than it can be diminished; but the increase must be very great before it can make itself much felt over such a mass of the precious metals as exists in the whole commercial world. And hence the effects of all changes in the conditions of production of the precious metals are at first, and continue to be for many years, questions of quantity only, with little reference to cost of production. More especially is this the case when, as at the present time, many new sources of supply have been simultaneously opened, most of them practicable by labor alone, without any capital in advance beyond a pickaxe and a week's food, and when the operations are as yet wholly experimental, the comparative permanent productiveness of the different sources being entirely unascertained.

For the facts in regard to the production of the precious metals, see the investigation by Dr. Adolf Soetbeer,230 from which Chart IX has been taken. It is worthy of careful study. The figures in each period, at the top of the respective spaces, give the average annual production during those years. The last period has been added by me from figures taken from the reports of the Director of the United States Mint. Other accessible sources, for the production of the precious metals, are the tables in the appendices to the Report of the Committee to the House of Commons on the Depreciation of Silver (1876); the French official Procès-Verbaux of the International Monetary Conference of 1881, which give Soetbeer's figures to a later date than his publication above mentioned; the various papers in the British parliamentary documents; and the reports of the director of our mint. Since 1850 more gold has been produced than in the whole period preceding, from 1492 to 1850. Previous to 1849 the annual average product of gold, out of the total product of both gold and silver, was thirty-six per cent; for the twenty-six years ending in 1875, it has been seventy and one half per cent. The result has been a rise in gold prices certainly down to 1862,231 as shown by the following chart. [pg 308] It will be observed how much higher the prices rose during the depression after 1858 than it was during a period of similar conditions after 1848. The result, it may be said, was predicted by Chevalier.232

Chart IX.

Chart showing the Production of the Precious Metals, according to Value, from 1493 to 1879.

1493-1520$2,115,000$4,045,500 $6,160,500
1521-15444,059,0004,994,000 9,053,000
1545-156014,022,0005,935,500 19,957,500
1561-158013,477,5004,770,750 18,248,250
1581-160018,850,5005,147,500 23,998,000
1601-162019,030,5005,942,750 24,973,250
1621-164017,712,0005,789,250 23,501,250
1641-166016,483,5006,117,000 22,600,500
1661-168015,165,0006,458,750 21,623,750
1681-170015,385,5007,508,500 22,894,000
1701-172016,002,0008,942,000 24,944,000
1721-174019,404,00013,308,250 32,712,250
1741-176023,991,50017,165,500 41,157,000
1761-178029,373,25014,441,750 43,815,000
1781-180039,557,75012,408,500 51,966,250
1801-181040,236,75012,400,000 52,636,750
1811-182024,334,7507,983,000 32,317,750
1821-183020,725,2509,915,750 30,641,000
1831-184026,840,25014,151,500 40,991,750
1841-185035,118,75038,194,250 73,313,000
1851-185539,875,250137,766,750 177,642,000
1856-186040,724,500143,725,250 184,449,750
1861-186549,551,750129,123,250 178,675,000
1866-187060,258,750133,850,000 194,108,750
1871-187588,624,000119,045,750 207,669,750
1876-1879110,575,000119,710,000 230,285,000

Illustration: Rise of Average Gold Prices.
Chart showing rise of average gold prices after the gold discoveries of 1849 to 1862.

The fall of prices from 1873 to 1879, owing to the commercial panic in the former year, however, is regarded, somewhat unjustly, in my opinion, as an evidence of an appreciation of gold. Mr. Giffen's paper in the Statistical Journal, vol. xlii, is the basis on which Mr. Goschen founded an argument in the Journal of the Institute of Bankers (London), May, 1883, and which attracted considerable attention. On the other side, see Bourne, Statistical Journal, vol. xlii. The claim that the value of gold has risen seems particularly hasty, especially when we consider that after the panics of 1857 and 1866 the value of money rose, for reasons not affecting gold, respectively fifteen and twenty-five per cent.

The very thing for which the precious metals are most recommended for use as the materials of money—their durability—is also the very thing which has, for all practical purposes, excepted them from the law of cost of production, and caused [pg 309] their value to depend practically upon the law of demand and supply. Their durability is the reason of the vast accumulations in existence, and this it is which makes the annual product very small in relation to the whole existing supply, and so prevents its value from conforming, except after a long term of years, to the cost of production of the annual supply.

§ 3. This law, how related to the principle laid down in the preceding chapter.

Since, however, the value of money really conforms, like that of other things, though more slowly, to its cost of production, some political economists have objected altogether to the statement that the value of money depends on its quantity combined with the rapidity of circulation, which, they think, is assuming a law for money that does not exist for any other commodity, when the truth is that it is governed by the very same laws. To this we may answer, in the first place, that the statement in question assumes no peculiar law. It is simply the law of demand and supply, which is acknowledged to be applicable to all commodities, and which, in the case of money, as of most other things, is controlled, but not set aside, by the law of cost of production, since cost of production would have no effect on value if it could have none on supply. But, secondly, there really is, in one respect, a closer connection between the value of money and its quantity than between the values of other things and their quantity. The value of other things conforms to the changes in the cost of production, without requiring, as a condition, that there should be any actual alteration of the supply: the potential alteration is sufficient; and, if there even be an actual alteration, it is but a temporary one, except in so far as the altered value may make a difference in the demand, and so require an increase or diminution of supply, as a consequence, not a cause, of the alteration in value. Now, this is also true of gold and silver, considered as articles of expenditure for ornament and luxury; but it is not true of money. If the permanent cost of production of gold were reduced one fourth, it might happen that there would not be more of it bought for plate, gilding, or jewelry, than before; and if so, though the value would fall, the quantity extracted from the mines for these [pg 310] purposes would be no greater than previously. Not so with the portion used as money: that portion could not fall in value one fourth unless actually increased one fourth; for, at prices one fourth higher, one fourth more money would be required to make the accustomed purchases; and, if this were not forthcoming, some of the commodities would be without purchasers, and prices could not be kept up. Alterations, therefore, in the cost of production of the precious metals do not act upon the value of money except just in proportion as they increase or diminish its quantity; which can not be said of any other commodity. It would, therefore, I conceive, be an error, both scientifically and practically, to discard the proposition which asserts a connection between the value of money and its quantity.

There are cases, however, in which the potential change of the precious metals affects their value as money in the same way that it affects the value of other things. Such a case was the change in the value of silver in 1876. The usual causes assigned for that serious fall in value were the greatly increased production from the mines of Nevada; the demonetization of silver by Germany; and the decreased demand for export to India. It is true that the exports of silver from England to India fell off from about $32,000,000 in 1871-1872 to about $23,000,000 in 1874-1875; but none of the increased Nevada silver was exported from the United States to London, nor had Germany put more than $30,000,000 of her silver on the market;233 and yet the price of silver so fell that the depreciation amounted to 20-¼ per cent as compared with the average price between 1867 and 1872. The change in value, however, took place without any corresponding change in the actual quantity in circulation. The relation between prices and the quantities of the precious metals is, therefore, not so exact, certainly as regards silver, as Mr. Mill would have us believe; and thus their values conform more nearly to the general law of Demand and Supply in the same way that it affects things other than money.

It is evident, however, that the cost of production, in the long run, regulates the quantity; and that every country (temporary fluctuation excepted) will possess, and have in [pg 311] circulation, just that quantity of money which will perform all the exchanges required of it, consistently with maintaining a value conformable to its cost of production. The prices of things will, on the average, be such that money will exchange for its own cost in all other goods: and, precisely because the quantity can not be prevented from affecting the value, the quantity itself will (by a sort of self-acting machinery) be kept at the amount consistent with that standard of prices—at the amount necessary for performing, at those prices, all the business required of it.

[pg 312]

Chapter VII. Of A Double Standard And Subsidiary Coins.

§ 1. Objections to a Double Standard.

Though the qualities necessary to fit any commodity for being used as money are rarely united in any considerable perfection, there are two commodities which possess them in an eminent and nearly an equal degree—the two precious metals, as they are called—gold and silver. Some nations have accordingly attempted to compose their circulating medium of these two metals indiscriminately.

There is an obvious convenience in making use of the more costly metal for larger payments, and the cheaper one for smaller; and the only question relates to the mode in which this can best be done. The mode most frequently adopted has been to establish between the two metals a fixed proportion [to decide by law, for example, that sixteen grains of silver should be equivalent to one grain of gold]; and it being left free to every one who has a [dollar] to pay, either to pay it in the one metal or in the other.

If [their] natural or cost values always continued to bear the same ratio to one another, the arrangement would be unobjectionable. This, however, is far from being the fact. Gold and silver, though the least variable in value of all commodities, are not invariable, and do not always vary simultaneously. Silver, for example, was lowered in permanent value more than gold by the discovery of the American mines; and those small variations of value which take place occasionally do not affect both metals alike. Suppose such a variation to take place—the value of the two metals relatively to one another no longer agreeing with their rated [pg 313] proportion—one or other of them will now be rated below its bullion value, and there will be a profit to be made by melting it.

Suppose, for example, that gold rises in value relatively to silver, so that the quantity of gold in a sovereign is now worth more than the quantity of silver in twenty shillings. Two consequences will ensue. No debtor will any longer find it his interest to pay in gold. He will always pay in silver, because twenty shillings are a legal tender for a debt of one pound, and he can procure silver convertible into twenty shillings for less gold than that contained in a sovereign. The other consequence will be that, unless a sovereign can be sold for more than twenty shillings, all the sovereigns will be melted, since as bullion they will purchase a greater number of shillings than they exchange for as coin. The converse of all this would happen if silver, instead of gold, were the metal which had risen in comparative value. A sovereign would not now be worth so much as twenty shillings, and whoever had a pound to pay would prefer paying it by a sovereign; while the silver coins would be collected for the purpose of being melted, and sold as bullion for gold at their real value—that is, above the legal valuation. The money of the community, therefore, would never really consist of both metals, but of the one only which, at the particular time, best suited the interest of debtors; and the standard of the currency would be constantly liable to change from the one metal to the other, at a loss, on each change, of the expense of coinage on the metal which fell out of use.

This is the operation by which is carried into effect the law of Sir Thomas Gresham (a merchant of the time of Elizabeth) to the purport that money of less value drives out money of more value, where both are legal payments among individuals. A celebrated instance is that where the clipped coins of England were received by the state on equal terms with new and perfect coin before 1695. They hanged men and women, but they did not prevent the operation of Gresham's law and the disappearance of the perfect coins. When the state refused the clipped coins at legal value, by no longer receiving them in payment [pg 314] of taxes, the trouble ceased.234 Jevons gives a striking illustration of the same law: At the time of the treaty of 1858 between Great Britain, the United States, and Japan, which partially opened up the last country to European traders, a very curious system of currency existed in Japan. The most valuable Japanese coin was the kobang, consisting of a thin oval disk of gold about two inches long, and one and a quarter inch wide, weighing two hundred grains, and ornamented in a very primitive manner. It was passing current in the towns of Japan for four silver itzebus, but was worth in English money about 18s. 5d., whereas the silver itzebu was equal only to about 1s. 4d. [four itzebus being worth in English money 5s. 4d.]. The earliest European traders enjoyed a rare opportunity for making profit. By buying up the kobangs at the native rating they trebled their money, until the natives, perceiving what was being done, withdrew from circulation the remainder of the gold.235

It appears, therefore, that the value of money is liable to more frequent fluctuations when both metals are a legal tender at a fixed valuation than when the exclusive standard of the currency is either gold or silver. Instead of being only affected by variations in the cost of production of one metal, it is subject to derangement from those of two. The particular kind of variation to which a currency is rendered more liable by having two legal standards is a fall of value, or what is commonly called a depreciation, since practically that one of the two metals will always be the standard of which the real has fallen below the rated value. If the tendency of the metals be to rise in value, all payments will be made in the one which has risen least; and, if to fall, then in that which has fallen most.

While liable to more frequent fluctuations, prices do not follow the extreme fluctuations of both metals, as some suppose, and as is shown by the following diagram.236 A represents the line of the value of gold, and B of silver, relatively to some third commodity represented by the horizontal line. Superposing these curves, C would show the line of extreme variations, while since prices would follow the metal which falls in [pg 315] value, D would show the actual course of variations. While the fluctuations are more frequent in D, they are less extreme than in C.

Chart showing the line of prices under a double standard.

§ 2. The use of the two metals as money, and the management of Subsidiary Coins.

The plan of a double standard is still occasionally brought forward by here and there a writer or orator as a great improvement in currency.

It is probable that, with most of its adherents, its chief merit is its tendency to a sort of depreciation, there being at all times abundance of supporters for any mode, either open or covert, of lowering the standard. [But] the advantage without the disadvantages of a double standard seems to be best obtained by those nations with whom one only of the two metals is a legal tender, but the other also is coined, and allowed to pass for whatever value the market assigns to it.

When this plan is adopted, it is naturally the more costly metal which is left to be bought and sold as an article of commerce. But nations which, like England, adopt the more costly of the two as their standard, resort to a different expedient for retaining them both in circulation, namely (1), to make silver a legal tender, but only for small payments. In England no one can be compelled to receive silver in payment for a larger amount than forty shillings. With this regulation there is necessarily combined another, namely (2), that silver coin should be rated, in comparison with gold, somewhat above its intrinsic value; that there should not [pg 316] be, in twenty shillings, as much silver as is worth a sovereign; for, if there were, a very slight turn of the market in its favor would make it worth more than a sovereign, and it would be profitable to melt the silver coin. The overvaluation of the silver coin creates an inducement to buy silver and send it to the mint to be coined, since it is given back at a higher value than properly belongs to it; this, however, has been guarded against (3) by limiting the quantity of the silver coinage, which is not left, like that of gold, to the discretion of individuals, but is determined by the Government, and restricted to the amount supposed to be required for small payments. The only precaution necessary is, not to put so high a valuation upon the silver as to hold out a strong temptation to private coining.

§ 3. The experience of the United States with a double standard from 1792 to 1883.

The experience of the United States with a double standard, extending as it does from 1792 to 1873 without a break, and from 1878 to the present time, is a most valuable source of instruction in regard to the practical working of bimetallism. While we have nominally had a double standard, in reality we have either had one alone, or been in a transition from one to the other standard; and the history of our coinage strikingly illustrates the truth that the natural values of the two metals, in spite of all legislation, so vary relatively to each other that a constant ratio can not be maintained for any length of time; and that the poor money drives out the good, according to Gresham's statement. For clearness, the period may be divided, in accordance with the changes of legislation, into four divisions:

I. 1792-1834. Transition from gold to silver.

II. 1834-1853. Transition from silver to gold.

III. 1853-1878. Single gold currency (except 1862-1879, the paper period).

IV. 1878-1884. Transition from gold to silver.

I. With the establishment of the mint, Hamilton agreed upon the use of both gold and silver in our money, at a ratio of 15 to 1: that is, that the amount of pure silver in a dollar should be fifteen times the weight of gold in a dollar. So, while the various Spanish dollars then in circulation in the United States seemed to contain on the average about 371-¼ grains of pure silver, and since Hamilton believed the relative market value of gold and silver to be about 1 to 15, he put 1/15 of 371-¼ grains, or 24-¾ grains of pure gold, into the gold dollar. It was the best possible example of the bimetallic [pg 317] system to be found, and the mint ratio was intended to conform to the market ratio. If this conformity could have been maintained, there would have been no disturbance. But a cause was already in operation affecting the supply of one of the metals—silver—wholly independent of legislation, and without correspondingly affecting gold.

Two periods of production of silver, in which the production of silver was great relatively to gold, stand out prominently in the history of that metal. (1) One was the enormous yield from the mines of the New World, continuing from 1545 to about 1640, and (2) the only other period of great production at all comparable with it (that is, as regards the production of silver relatively to gold) was that lasting from 1780 to 1820, due to the richness of the Mexican silver-mines. The first period of ninety-five years was longer than the second, which was only forty years; yet while about forty-seven times as much silver as gold was produced on an average during the first period, the average annual amount of silver produced relatively to gold was probably a little greater from 1780 to 1820. The effect of the first period in lowering the relation of silver to gold is well recognized in the history of the precious metals (see Chart X for the fall in the value of silver relatively to gold); that the effect of the second period on the value of silver has not been greater than was actually caused—it has not been small—is explicable only by the laws of the value of money. If you let the same amount of water into a small reservoir which you let into a large one, the level of the former will be raised more than the level of the latter. The great production of the first period was added to a very small existing stock of silver; that of the second period was added to a stock increased by the great previous production just mentioned. The smallness of the annual product relatively to the total quantity existing in the world requires some time, even for a production of silver forty-seven times greater than the gold production, to take its effect on the value of the total silver stock in existence. The effect of this process was beginning to be felt soon after the United States decided on a double standard. For this reason the value of silver was declining about 1800, and, although the annual silver product fell off seriously after 1820, the value of silver continued to decline even after that time, because the increased production, dating back to 1780, was just beginning to make itself felt. Thus we have the phenomenon—which seems very difficult for some persons to understand—of a falling off in the annual production of silver, accompanied by a decrease in its value relatively to gold.

This diminishing value of silver began to affect the coinage of the United States as early as 1811, and by 1820 the [pg 319] disappearance of gold was everywhere commented upon. The process by which this result is produced is a simple one, and is adopted as soon as a margin of profit is seen arising from a divergence between the mint and market ratios. In 1820 the market ratio of gold to silver was 1 to 15.7—that is, the amount of gold in a dollar (24-¾ grains) would exchange for 15.7 times as many grains of silver in the market, in the form of bullion; while at the mint, in the form of coin, it would exchange for only 15 times as many grains of silver. A broker having 1,000 gold dollars could buy with them in the market silver bullion enough (1,000 × 15.7 grains) to have coined, when presented at the mint, 1,000 dollars in silver pieces, and yet have left over as a profit by the operation 700 grains of silver. So long as this can be done, silver (the cheapest money) will be presented at the mint, and gold (the dearest money) will become an article of merchandise too valuable to be used as money when the cheaper silver is legally as good. The best money, therefore, disappears from circulation, as it did in the United States before 1820, owing to the fall in the value of silver. It is to be said, that it has been seriously urged by some writers that silver did not fall, but that gold rose, in value, owing to the demand of England for resumption in 1819.237 Chronology kills this view; for the change in the value of silver began too early to have been due to English measures, even if conclusive reasons have not been given above why silver should naturally have fallen in value.

Chart X. Chart showing the Changes in the Relative Values of Gold and Silver from 1501 to 1880. From 1501 to 1680 a space is allotted to each 20 years; from 1681 to 1871, to each 10 years; from 1876 to 1880, to each year.

II. The change in the relative values of gold and silver finally forced the United States to change their mint ratio in 1834. Two courses were open to us: (1) either to increase the quantity of silver in the dollar until the dollar of silver was intrinsically worth the gold in the gold dollar; or (2) debase the gold dollar-piece until it was reduced in value proportionate to the depreciation of silver since 1792. The latter expedient, without any seeming regard to the effect on contracts and the integrity of our monetary standard, was adopted: 6.589 per cent was taken out of the gold dollar, leaving it containing 23.22 grains of pure gold; and as the silver dollar remained unchanged (371-¼ grains) the mint ratio established was 1 to 15.988, or, as commonly stated, 1 to 16. Did this correspond with the market ratio then existing? No. Having seen the former steady fall in silver, and believing that it would continue, Congress hoped to anticipate any further fall by making the mint ratio of gold to silver a little larger than the market ratio. This was done by establishing the mint ratio of 1 to 15.988, while the market ratio in 1834 was 1 to 15.73. Here, [pg 320] again, appeared the difficulty arising from the attempt to balance a ratio on a movable fulcrum. It will be seen that the act of 1834 set at work forces for another change in the coinage—forces of a similar kind, but working in exactly the opposite direction to those previous to 1834. A dollar of gold coin would now exchange for more grains of silver at the mint (15.98) than it would in the form of bullion in the market (15.73). Therefore it would be more profitable to put gold into coin than exchange it as bullion. Gold was sent to the mint, while silver began to be withdrawn from circulation, silver now being more valuable as bullion than as coin. By 1840 a silver dollar was worth 102 cents in gold.238 This movement, which was displacing silver with gold, received a surprising and unexpected impetus by the gold discoveries of California and Australia in 1849, before mentioned, and made gold less valuable relatively to silver, by lowering the value of gold. Here, again, was another natural cause, independent of legislation, and not to be foreseen, altering the value of one of the precious metals, and in exactly the opposite direction from that in the previous period, when silver was lowered by the increase from the Mexican mines. In 1853 a silver dollar was worth 104 cents in gold (i.e., of a gold dollar containing 23.22 grains); but, some years before, all silver dollars had disappeared from use, and only gold was in circulation. For a large part of this period we had in reality a single standard of gold, the other metal not being able to stay in the currency.

III. After our previous experience, the impossibility of retaining both metals in the coinage together, on equal terms, now came to be generally recognized, and was accepted by Congress in the legislation of 1853. This act made no further changes intended to adapt the mint to the market ratios, but remained satisfied with the gold circulation. But hitherto no regard had been paid to the principles on which a subsidiary coinage is based, as explained by Mr. Mill in the last section (§ 2). The act of 1853, while acquiescing in the single gold standard, had for its purpose the readjustment of the subsidiary coins, which, together with silver dollar-pieces, had all gone out of circulation. Before this, two halves, four quarters, or ten dimes contained the same quantity of pure silver as the dollar-piece (371-¼ grains); therefore, when it became profitable to withdraw the dollar-pieces and substitute gold, it gave exactly the same profit to withdraw two halves or four quarters in silver. For this reason all the subsidiary silver had gone out of circulation, and there was no small change in the country. The legislation of 1853 rectified this error: (1) [pg 321] by reducing the quantity of pure silver in a dollar's worth of subsidiary coin to 345.6 grains. By making so much less an amount of silver equal to a dollar of small coins, it was more valuable in that shape than as bullion, and there was no reason for melting it, or withdrawing it (since even if gold and silver changed considerably in their relative values, 345.6 grains of silver could not easily rise sufficiently to become equal in value to a gold dollar, when 371-¼ grains were worth only 104 cents of the gold dollar); (2) this over-valuation of silver in subsidiary coin would cause a great flow of silver to the mint, since silver would be more valuable in subsidiary coin than as bullion; but this was prevented by the provision (section 4 of the act of 1853) that the amount or the small coinage should be limited according to the discretion of the Secretary of the Treasury; and, (3) in order that the overvalued small coinage might not be used for purposes other than for effecting change, its legal-tender power was restricted to payments not exceeding five dollars. This system, a single gold standard for large, and silver for small, payments, continued without question, and with great convenience, until the days of the war, when paper money (1862-1879) drove out (by its cheapness, again) both gold and silver. Paper was far cheaper than the cheapest of the two metals.

Relative values of gold and silver, by months, in 1876.

The mere fact that the silver dollar-piece had not circulated since even long before 1853 led the authorities to drop out the provisions for the coinage of silver dollars and in 1873 remove it from the list of legal coins (at the ratio of 1 to 15.98, [pg 322] the obsolete ratio fixed as far back as 1834). This is what is known as the demonetization of silver. It had no effect on the circulation of silver dollars, since none were in use, and had not been for more than twenty-five years. There had been no desire up to this time to use silver, since it was more expensive than gold; indeed, it is somewhat humiliating to our sense of national honor to reflect that it was not until silver fell so surprisingly in value (in 1876) that the agitation for its use in the coinage arose. When a silver dollar was worth 104 cents, no one wanted it as a means of liquidating debts; when it came to be worth 86 cents, it was capable of serving debtors even better than the then appreciating greenbacks. Thus, while from 1853 (and even before) we had legally two standards, of both gold and silver, but really only one, that of gold, from 1873 to 1878 we had both legally and really only one standard, that of gold.

It might be here added, that I have spoken of the silver dollar as containing 371-¼ grains of pure silver. Of course, alloy is mixed with the pure silver, sufficient, in 1792, to make the original dollar weigh 416 grains in all, its standard weight. In 1837 the amount of alloy was changed from 1/12 to 1/10 of the standard weight, which (as the 371-¼ grains of pure silver were unchanged) gave the total weight of the dollar as 412-½ grains, whence the familiar name assigned to this piece. In 1873, moreover, the mint was permitted to put its stamp and devices—to what was not money at all, but a coined ingot—on 378 grains of pure silver (420 grains, standard), known as the trade-dollar. It was intended by this means to make United States silver more serviceable in the Asiatic trade. Oriental nations care almost exclusively for silver in payments. The Mexican silver dollar contained 377-¼ grains of pure silver; the Japanese yen, 374-4/10; and the United States dollar, 371-¼. By making the trade-dollar slightly heavier than any coin used in the Eastern world, it would give our silver a new market; and the United States Government was simply asked to certify to the fineness and weight by coining it, provided the owners of silver paid the expenses of coinage. Inadvertently the trade-dollar was included in the list of coins in the act of 1873 which were legal tender for payments of five dollars, but, when this was discovered, it was repealed in 1876. So that the trade-dollar was not a legal coin, in any sense (although it contained more silver than the 412-½-grains dollar). They ceased to be coined in 1878, to which time there had been made $35,959,360.

IV. In February, 1878, an indiscreet and unreasonable movement induced Congress to authorize the recoinage of the silver dollar-piece at the obsolete ratio of 1834 (1 to 15.98), while the [pg 323] market ratio was 1 to 17.87. So extraordinary a reversal of all sound principles and such blindness to our previous experience could be explained only by a desire to force this country to use a silver coinage only, and had its origin with the owners of silver-mines, aided by the desires of debtors for a cheap unit in which to absolve themselves from their indebtedness. There was no pretense of setting up a double standard about it; for it was evident to the most ignorant that so great a disproportion between the mint and market ratios must inevitably lead to the disappearance of gold entirely. This would happen, if owners could bring their silver freely, in any amounts, to the mint for coinage (Free Coinage), and so exchange silver against gold coin for the purpose of withdrawing gold, since gold would exchange for less as coin than as bullion. This immediate result was prevented by a provision in the law, which prevented the free coinage of silver, and required the Government itself to buy silver and coin at least $2,000,000 in silver each month. This retarded, but will not ultimately prevent, the change from the present gold to a single silver standard. At the rate of $24,000,000 a year, it is only a question of time when the Treasury will be obliged to pay out, for its regular disbursements on the public debt, silver in such amounts as will drive gold out of circulation. In February, 1884, it was feared that this was already at hand, and was practically reached in the August following. Unless a repeal of the law is reached very soon, the uncomfortable spectacle will be seen of a gradual disarrangement of prices, and consequently of trade, arising from a change of the standard.

In order that the alternate movements of silver and gold to the mint for coinage may be seen, there is appended a statement of the coinage239 during the above periods, which well shows the effects of Gresham's law.

Ratio in the mint and in the market. Period.Gold coinage. Silver dollars coined.
1:15 (silver lower in market)1792-1834 $11,825,890$36,275,077
1:15.98 (gold lower in market)1834-1853 224,965,73042,936,294
1:15.98 (gold lower in market)1853-1873 544,864,9215,538,948
Single gold standard.1873-1878 166,253,816........
1:15.98 (silver lower, but no free coinage)1878-1883 354,019,865147,255,899

From this it will be seen that there has been an enforced coinage by the Treasury, of almost twice as many silver dollars [pg 324] since 1878 as were coined in all the history of the mint before, since the establishment of the Government.

It may, perhaps, be asked why the silver dollar of 412-½ grains, being worth intrinsically only from 86 to 89 cents, does not depreciate to that value. The Government buys the silver, owns the coin, and holds all that it can not induce the public to receive voluntarily; so that but a part of the total coinage is out of the Treasury. And most of the coins issued are returned for deposit and silver certificates received in return. There being no free coinage, and no greater amount in circulation than satisfies the demand for change, instead of small bills, the dollar-pieces will circulate at their full value, on the principle of subsidiary coin, even though overvalued. And the silver certificates practically go through a process of constant redemption by being received for customs dues equally with gold. When they become too great in quantity to be needed for such purposes, then we may look for the depreciation with good reason.240

There are, then, the following kinds of legal tender in the United States in 1884: (1) Gold coins (if not below tolerance); (2) the silver dollar of 412-½ grains; (3) United States notes (except for customs and interest on the public debt); (4) subsidiary silver coinage, to the amount of five dollars; and (5) minor coins, to the amount of twenty-five cents.

The question of a double standard has provoked no little vehement discussion and has called forth a considerable literature since the fall of silver in 1876. A body of opinion exists, best represented in this country by F. A. Walker and S. D. Horton, that the relative values of gold and silver may be kept unchanged, in spite of all natural causes, by the force of law, which, provided that enough countries join in the plan, shall fix the ratio of exchange in the coinage for all great commercial countries, and by this means keep the coinage ratio equivalent to the bullion ratio. The difficulty with this scheme, even if it were wholly sufficient, has thus far been in the obstacles to international agreement. After several international monetary conferences, in 1867, 1878, and 1881, the project seems now to have been practically abandoned by all except the most sanguine. (For a fuller list of authorities on bimetallism, see Appendix I.)

[pg 325]

Chapter VIII. Of Credit, As A Substitute For Money.

§ 1. Credit not a creation but a Transfer of the means of Production.

Credit has a great, but not, as many people seem to suppose, a magical power; it can not make something out of nothing. How often is an extension of credit talked of as equivalent to a creation of capital, or as if credit actually were capital! It seems strange that there should be any need to point out that, credit being only permission to use the capital of another person, the means of production can not be increased by it, but only transferred. If the borrower's means of production and of employing labor are increased by the credit given him, the lender's are as much diminished. The same sum can not be used as capital both by the owner and also by the person to whom it is lent; it can not supply its entire value in wages, tools, and materials, to two sets of laborers at once. It is true that the capital which A has borrowed from B, and makes use of in his business, still forms a part of the wealth of B for other purposes; he can enter into arrangements in reliance on it, and can borrow, when needful, an equivalent sum on the security of it; so that to a superficial eye it might seem as if both B and A had the use of it at once. But the smallest consideration will show that, when B has parted with his capital to A, the use of it as capital rests with A alone, and that B has no other service from it than in so far as his ultimate claim upon it serves him to obtain the use of another capital from a third person, C.

§ 2. In what manner it assists Production.

But, though credit is never anything more than a transfer of capital from hand to hand, it is generally, and [pg 326] naturally, a transfer to hands more competent to employ the capital efficiently in production. If there were no such thing as credit, or if, from general insecurity and want of confidence, it were scantily practiced, many persons who possess more or less of capital, but who from their occupations, or for want of the necessary skill and knowledge, can not personally superintend its employment, would derive no benefit from it: their funds would either lie idle, or would be, perhaps, wasted and annihilated in unskillful attempts to make them yield a profit. All this capital is now lent at interest, and made available for production. Capital thus circumstanced forms a large portion of the productive resources of any commercial country, and is naturally attracted to those producers or traders who, being in the greatest business, have the means of employing it to most advantage, because such are both the most desirous to obtain it and able to give the best security. Although, therefore, the productive funds of the country are not increased by credit, they are called into a more complete state of productive activity. As the confidence on which credit is grounded extends itself, means are developed by which even the smallest portions of capital, the sums which each person keeps by him to meet contingencies, are made available for productive uses. The principal instruments for this purpose are banks of deposit. Where these do not exist, a prudent person must keep a sufficient sum unemployed in his own possession to meet every demand which he has even a slight reason for thinking himself liable to. When the practice, however, has grown up of keeping this reserve not in his own custody, but with a banker, many small sums, previously lying idle, become aggregated in the banker's hands; and the banker, being taught by experience what proportion of the amount is likely to be wanted in a given time, and knowing that, if one depositor happens to require more than the average, another will require less, is able to lend the remainder, that is, the far greater part, to producers and dealers: thereby adding the amount, not indeed to the capital in existence, [pg 327] but to that in employment, and making a corresponding addition to the aggregate production of the community.

While credit is thus indispensable for rendering the whole capital of the country productive, it is also a means by which the industrial talent of the country is turned to better account for purposes of production. Many a person who has either no capital of his own, or very little, but who has qualifications for business which are known and appreciated by some possessors of capital, is enabled to obtain either advances in money, or, more frequently, goods on credit, by which his industrial capacities are made instrumental to the increase of the public wealth.

Such are, in the most general point of view, the uses of credit to the productive resources of the world. But these considerations only apply to the credit given to the industrious classes—to producers and dealers. Credit given by dealers to unproductive consumers is never an addition, but always a detriment, to the sources of public wealth. It makes over in temporary use, not the capital of the unproductive classes to the productive, but that of the productive to the unproductive.

§ 3. Function of Credit in economizing the use of Money.

But a more intricate portion of the theory of Credit is its influence on prices; the chief cause of most of the mercantile phenomena which perplex observers. In a state of commerce in which much credit is habitually given, general prices at any moment depend much more upon the state of credit than upon the quantity of money. For credit, though it is not productive power, is purchasing power; and a person who, having credit, avails himself of it in the purchase of goods, creates just as much demand for the goods, and tends quite as much to raise their price, as if he made an equal amount of purchases with ready money.

The credit which we are now called upon to consider, as a distinct purchasing power, independent of money, is of course not credit in its simplest form, that of money lent by one person to another, and paid directly into his hands; for, when the borrower expends this in purchases, he makes the [pg 328] purchases with money, not credit, and exerts no purchasing power over and above that conferred by the money. The forms of credit which create purchasing power are those in which no money passes at the time, and very often none passes at all, the transaction being included with a mass of other transactions in an account, and nothing paid but a balance. This takes place in a variety of ways, which we shall proceed to examine, beginning, as is our custom, with the simplest.

First: Suppose A and B to be two dealers, who have transactions with each other both as buyers and as sellers. A buys from B on credit. B does the like with respect to A. At the end of the year, the sum of A's debts to B is set against the sum of B's debts to A, and it is ascertained to which side a balance is due. This balance, which may be less than the amount of many of the transactions singly, and is necessarily less than the sum of the transactions, is all that is paid in money; and perhaps even this is not paid, but carried over in an account current to the next year. A single payment of a hundred pounds may in this manner suffice to liquidate a long series of transactions, some of them to the value of thousands.

But, secondly: The debts of A to B may be paid without the intervention of money, even though there be no reciprocal debts of B to A. A may satisfy B by making over to him a debt due to himself from a third person, C. This is conveniently done by means of a written instrument, called a bill of exchange, which is, in fact, a transferable order by a creditor upon his debtor, and when accepted by the debtor, that is, authenticated by his signature, becomes an acknowledgment of debt.

§ 4. Bills of Exchange.

Bills of exchange were first introduced to save the expense and risk of transporting the precious metals from place to place.

The trade between New York and Liverpool affords a constant illustration of the uses of a bill of exchange. Suppose that A in New York ships a cargo of wheat, worth $100,000, or [pg 329] £20,000, to B in Liverpool; also suppose that C in Liverpool (independently of the negotiations of A and B) ships, about the same time, a cargo of steel rails to D in New York, also worth £20,000. Without the use of bills of exchange, B would have been obliged to send £20,000 in gold across the Atlantic, and so would D, at the risk of loss to both. By the device of bills of exchange the goods are really bartered against each other, and all transmission of money saved.


A has money due to him in Liverpool, and he sells his claim to this money to any one who wants to make a payment in Liverpool. Going to his banker (the middle-man between exporters and importers and the one who deals in such bills) he finds there D, inquiring for some one who has a claim to money in Liverpool, since D owes C in Liverpool for his cargo of steel rails. A makes out a paper title to the £20,000 which B owes him (i.e., a bill of exchange) and by selling it to D gets immediately his £20,000 there in New York. The form in which this is done is as follows:

New York, January 1, 1884.

At sight [or sixty days after date] of this first bill of exchange (second and third unpaid), pay to the order of D [the importer of steel rails] £20,000, value received, and charge the same to the account of

[Signed] A [exporter of wheat].
To B [buyer of wheat],
Liverpool, Eng.

D has now paid $100,000, or £20,000, to A for a title to money across the Atlantic in Liverpool, and with this title he can pay his debt to C for the rails. D indorses the bill of exchange, as follows:

Pay to the order of C [the seller of steel rails], Liverpool, value in account. D [importer of steel rails].

To B [the buyer of wheat].

By this means D transfers his title to the £20,000 to C, sends the bill across by mail (“first” in one steamer, “second” in another, to insure certain transmission) to C, who then calls upon B to pay him the £20,000 instead of B sending it across the Atlantic to A; and all four persons have made their payments the more safely by the use of this convenient device. This is the simplest form of the transaction, and it does not change the principle on which it is based, when, as is the case, a banker buys the bills of A, and sells the bills to D—since A typifies all exporters and D all importers.

[pg 330]

Bills of exchange having been found convenient as means of paying debts at distant places without the expense of transporting the precious metals, their use was afterward greatly extended from another motive. It is usual in every trade to give a certain length of credit for goods bought: three months, six months, a year, even two years, according to the convenience or custom of the particular trade. A dealer who has sold goods, for which he is to be paid in six months, but who desires to receive payment sooner, draws a bill on his debtor payable in six months, and gets the bill discounted by a banker or other money-lender, that is, transfers the bill to him, receiving the amount, minus interest for the time it has still to run. It has become one of the chief functions of bills of exchange to serve as a means by which a debt due from one person can thus be made available for obtaining credit from another.

Bills of exchange are drawn between the various cities of the United States. In the West, the factor who is purchasing grain or wool for a New York firm draws on his New York correspondents, and this bill (usually certified to by the bill of lading) is presented for discount at the Western banks; and, if there are many bills, funds are possibly sent westward to meet these demands. But the purchases of the West in New York will serve, even if a little later in time, somewhat to offset this drain; and the funds will again move eastward, as goods move westward, practically bartered against each other by the use of bills. There is, however, less movement of funds of late, now that Western cities have accumulated more capital of their own.

The notes given in consequence of a real sale of goods can not be considered as on that account certainly representing any actual property. Suppose that A sells £100 worth of goods to B at six months' credit, and takes a bill at six months for it; and that B, within a month after, sells the same goods, at a like credit, to C, taking a like bill; and again, that C, after another month, sells them to D, taking a like bill, and so on. There may then, at the end of six months, be six bills of £100 each existing at the same time, and every one of these may possibly have been discounted. [pg 331] Of all these bills, then, only one represents any actual property.

The extent of a man's actual sales forms some limit to the amount of his real notes; and, as it is highly desirable in commerce that credit should be dealt out to all persons in some sort of regular and due proportion, the measure of a man's actual sales, certified by the appearance of his bills drawn in virtue of those sales, is some rule in the case, though a very imperfect one in many respects. When a bill drawn upon one person is paid to another (or even to the same person) in discharge of a debt or a pecuniary claim, it does something for which, if the bill did not exist, money would be required: it performs the functions of currency. This is a use to which bills of exchange are often applied.

Many bills, both domestic and foreign, are at last presented for payment quite covered with indorsements, each of which represents either a fresh discounting, or a pecuniary transaction in which the bill has performed the functions of money.

§ 5. Promissory Notes.

A third form in which credit is employed as a substitute for currency is that of promissory notes.

The difference between a bill of exchange and a promissory note is, that the former is an order for the payment of money, while the latter is a promise to pay money. In a note the promissor is primarily liable; in a bill the drawer becomes liable only after an ineffectual resort to the drawee.

In the United States a Western merchant who buys $1,000 worth of cotton goods, for instance, of a Boston commission-house on credit, customarily gives his note for the amount, and this note is put upon the market, or presented at a bank for discount. This plan, however, puts all risk upon the one who discounted the note. In the United States such promissory notes are the forms of credit most used between merchants and buyers. The custom, however, is quite different in England and Germany (and generally, it is stated, on the Continent), where bills of exchange are employed in cases where we use a promissory note. A house in London sells $1,000 worth of cotton goods to A, in Carlisle, on a credit of sixty days, draws a bill of exchange on A, which is a demand upon A to pay in a given time (e.g., sixty days), and if accepted by him is a legal obligation. The London house takes this bill (perhaps adding its own [pg 332] firm name as indorsers to the paper), and presents it for discount at a London bank. This now explains why it is that, when a particular industry is prosperous and many goods are sold, there is more paper offered for discount at the banks (cf. p. 222), and why capital flows readily in that direction.

It is chiefly in the latter form [promissory notes] that it has become, in commercial countries, an express occupation to issue such substitutes for money. Dealers in money wish to lend, not their capital merely, but their credit, and not only such portion of their credit as consists of funds actually deposited with them, but their power of obtaining credit from the public generally, so far as they think they can safely employ it. This is done in a very convenient manner by lending their own promissory notes payable to bearer on demand—the borrower being willing to accept these as so much money, because the credit of the lender makes other people willingly receive them on the same footing, in purchases or other payments. These notes, therefore, perform all the functions of currency, and render an equivalent amount of money, which was previously in circulation, unnecessary. As, however, being payable on demand, they may be at any time returned on the issuer, and money demanded for them, he must, on pain of bankruptcy, keep by him as much money as will enable him to meet any claims of that sort which can be expected to occur within the time necessary for providing himself with more; and prudence also requires that he should not attempt to issue notes beyond the amount which experience shows can remain in circulation without being presented for payment.

The convenience of this mode of (as it were) coining credit having once been discovered, governments have availed themselves of the same expedient, and have issued their own promissory notes in payment of their expenses; a resource the more useful, because it is the only mode in which they are able to borrow money without paying interest.

§ 6. Deposits and Checks.

A fourth mode of making credit answer the purposes of money, by which, when carried far enough, money [pg 333] may be very completely superseded, consists in making payments by checks. The custom of keeping the spare cash reserved for immediate use, or against contingent demands, in the hands of a banker, and making all payments, except small ones, by orders on bankers, is in this country spreading to a continually larger portion of the public. If the person making the payment and the person receiving it keep their money with the same banker, the payment takes place without any intervention of money, by the mere transfer of its amount in the banker's books from the credit of the payer to that of the receiver. If all persons in [New York] kept their cash at the same banker's, and made all their payments by means of checks, no money would be required or used for any transactions beginning and terminating in [New York]. This ideal limit is almost attained, in fact, so far as regards transactions between [wholesale] dealers. It is chiefly in the retail transactions between dealers and consumers, and in the payment of wages, that money or bank-notes now pass, and then only when the amounts are small. As for the merchants and larger dealers, they habitually make all payments in the course of their business by checks. They do not, however, all deal with the same banker, and, when A gives a check to B, B usually pays it not into the same but into some other bank. But the convenience of business has given birth to an arrangement which makes all the banking-houses of [a] city, for certain purposes, virtually one establishment. A banker does not send the checks which are paid into his banking-house to the banks on which they are drawn, and demand money for them. There is a building called the Clearing-House, to which every [member of the association] sends, each afternoon, all the checks on other bankers which he has received during the day, and they are there exchanged for the checks on him which have come into the hands of other bankers, the balances only being paid in money; or even these not in money, but in checks.

A clearing-house is simply a circular railing containing as many openings as there are banks in the association; a clerk [pg 334] from each bank presents, in the form of a bundle of checks, at his opening, all the claims of his bank against all others, and notes the total amount; a clerk inside takes the checks, distributes each check to the clerk of the bank against whom it is drawn, and all that are left at his opening constitute the total demands of all the other banks against itself; and this sum total is set off against the given bank's demands upon the others. The difference, for or against the bank, as the case may be, may then be settled by a check.241

The total amount of exchanges made through the New York Clearing-House in 1883 was $40,293,165,258 (or about twenty-five times the total of our national debt in that year), and the balances paid in money were only 3.9 per cent of the exchanges.242 For valuable explanations on this subject, consult Jevons, Money and the Mechanism of Exchange, Chapters XIX-XXIII. The explanation of the functions of a bank, Chapter XX, is very good.

[pg 335]

Chapter IX. Influence Of Credit On Prices.

§ 1. What acts on prices is Credit, in whatever shape given.

Having now formed a general idea of the modes in which credit is made available as a substitute for money, we have to consider in what manner the use of these substitutes affects the value of money, or, what is equivalent, the prices of commodities. It is hardly necessary to say that the permanent value of money—the natural and average prices of commodities—are not in question here. These are determined by the cost of producing or of obtaining the precious metals. An ounce of gold or silver will in the long run exchange for as much of every other commodity as can be produced or imported at the same cost with itself. And an order, or note of hand, or bill payable at sight, for an ounce of gold, while the credit of the giver is unimpaired, is worth neither more nor less than the gold itself.

It is not, however, with ultimate or average, but with immediate and temporary prices that we are now concerned. These, as we have seen, may deviate very widely from the standard of cost of production. Among other causes of fluctuation, one we have found to be the quantity of money in circulation. Other things being the same, an increase of the money in circulation raises prices; a diminution lowers them. If more money is thrown into circulation than the quantity which can circulate at a value conformable to its cost of production, the value of money, so long as the excess lasts, will remain below the standard of cost of production, and general prices will be sustained above the natural rate.

But we have now found that there are other things, such [pg 336] as bank-notes, bills of exchange, and checks, which circulate as money, and perform all the functions of it, and the question arises, Do these various substitutes operate on prices in the same manner as money itself? I apprehend that bank-notes, bills, or checks, as such, do not act on prices at all. What does act on prices is Credit, in whatever shape given, and whether it gives rise to any transferable instruments capable of passing into circulation or not.

§ 2. Credit a purchasing Power, similar to Money.

Money acts upon prices in no other way than by being tendered in exchange for commodities. The demand which influences the prices of commodities consists of the money offered for them. Money not in circulation has no effect on prices.

In the case, however, of payment by checks, the purchases are, at any rate, made, though not with the money in the buyer's possession, yet with money to which he has a right. But he may make purchases with money which he only expects to have, or even only pretends to expect. He may obtain goods in return for his acceptances payable at a future time, or on his note of hand, or on a simple book-credit—that is, on a mere promise to pay. All these purchases have exactly the same effect on price as if they were made with ready money. The amount of purchasing power which a person can exercise is composed of all the money in his possession or due to him, and of all his credit. For exercising the whole of this power he finds a sufficient motive only under peculiar circumstances, but he always possesses it; and the portion of it which he at any time does exercise is the measure of the effect which he produces on price.

Suppose that, in the expectation that some commodity will rise in price, he determines not only to invest in it all his ready money, but to take up on credit, from the producers or importers, as much of it as their opinion of his resources will enable him to obtain. Every one must see that by thus acting he produces a greater effect on price than if he limited his purchases to the money he has actually [pg 337] in hand. He creates a demand for the article to the full amount of his money and credit taken together, and raises the price proportionally to both. And this effect is produced, though none of the written instruments called substitutes for currency may be called into existence; though the transaction may give rise to no bill of exchange, nor to the issue of a single bank-note. The buyer, instead of taking a mere book-credit, might have given a bill for the amount, or might have paid for the goods with bank-notes borrowed for that purpose from a banker, thus making the purchase not on his own credit with the seller, but on the banker's credit with the seller, and his own with the banker. Had he done so, he would have produced as great an effect on price as by a simple purchase to the same amount on a book-credit, but no greater effect. The credit itself, not the form and mode in which it is given, is the operating cause.

§ 3. Great extensions and contractions of Credit. Phenomena of a commercial crisis analyzed.

The inclination of the mercantile public to increase their demand for commodities by making use of all or much of their credit as a purchasing power depends on their expectation of profit. When there is a general impression that the price of some commodity is likely to rise from an extra demand, a short crop, obstructions to importation, or any other cause, there is a disposition among dealers to increase their stocks in order to profit by the expected rise. This disposition tends in itself to produce the effect which it looks forward to—a rise of price; and, if the rise is considerable and progressive, other speculators are attracted, who, so long as the price has not begun to fall, are willing to believe that it will continue rising. These, by further purchases, produce a further advance, and thus a rise of price, for which there were originally some rational grounds, is often heightened by merely speculative purchases, until it greatly exceeds what the original grounds will justify. After a time this begins to be perceived, the price ceases to rise, and the holders, thinking it time to realize their gains, are anxious to sell. Then the price begins to decline, the holders rush into the market to avoid a still greater loss, and, [pg 338] few being willing to buy in a falling market, the price falls much more suddenly than it rose. Those who have bought at a higher price than reasonable calculation justified, and who have been overtaken by the revulsion before they had realized, are losers in proportion to the greatness of the fall and to the quantity of the commodity which they hold, or have bound themselves to pay for.

This is the ideal extreme case of what is called a commercial crisis. There is said to be a commercial crisis when a great number of merchants and traders at once either have, or apprehend that they shall have, a difficulty in meeting their engagements. The most usual cause of this general embarrassment is the recoil of prices after they have been raised by a spirit of speculation, intense in degree, and extending to many commodities. When, after such a rise, the reaction comes and prices begin to fall, though at first perhaps only through the desire of the holders to realize, speculative purchases cease; but, were this all, prices would only fall to the level from which they rose, or to that which is justified by the state of the consumption and of the supply. They fall, however, much lower; for as, when prices were rising, and everybody apparently making a fortune, it was easy to obtain almost any amount of credit, so now, when everybody seems to be losing, and many fail entirely, it is with difficulty that firms of known solidity can obtain even the credit to which they are accustomed, and which it is the greatest inconvenience to them to be without, because all dealers have engagements to fulfill, and, nobody feeling sure that the portion of his means which he has intrusted to others will be available in time, no one likes to part with ready money, or to postpone his claim to it. To these rational considerations there is superadded, in extreme cases, a panic as unreasoning as the previous over-confidence; money is borrowed for short periods at almost any rate of interest, and sales of goods for immediate payment are made at almost any sacrifice. Thus general prices, during a commercial revulsion, fall as much below the usual level as [pg 339] during the previous period of speculation they have risen above it; the fall, as well as the rise, originating not in anything affecting money, but in the state of credit.

Professor Jevons seriously advanced a theory that, inasmuch as the harvests of the world were the causes of good or bad trade, and that their deficiency would regularly be followed by commercial distress, then a periodic cause of bad harvests, if found, would explain the constant recurrence of commercial crises. This cause he claimed to have found in the sun-spots, which periodically deprive the crops of that source of growth which is usually furnished by the sun when no spots appear.243 It has not received general acceptance.

In the United States financial disasters have occurred in 1814, 1819, 1825, 1837-1839, 1857, and 1873. Those of 1837 and 1873 seem to have been the most serious in their effects; but this field, so far as scientific study is concerned, has not been fully worked, and much remains to be learned about these crises in the United States. The crisis of 1873 was due to excessive railway-building. It was testified244 concerning the New York banks in 1873 that their capital needed for legitimate purposes was practically lent out on certain iron rails, railroad-ties, bridges, and rolling-stock, called railroads, many of them laid down in places where these materials were practically useless.

Under the effects due to swift communication by steam, but especially to the electric telegraph, modern credit is a very different thing from what it was fifty years ago. Now, a shock on the Bourse at Vienna is felt the same day at Paris, London, and New York. A commercial crisis in one great money-center is felt at every other point in the world which has business connections with it. Moreover, as Cherbuliez245 says: A country is more subject to crises the more advanced is its economical development. There are certain maladies which attack only grown-up persons who have reached a certain degree of vigor and maturity.

§ 4. Influence of the different forms of Credit on Prices.

It does not, indeed, follow that credit will be more used because it can be. When the state of trade holds out no particular temptation to make large purchases on credit, dealers will use only a small portion of the credit-power, and it will depend only on convenience whether the portion [pg 340] which they use will be taken in one form or in another. One single exertion of the credit-power in the form of (1) book-credit, is only the foundation of a single purchase; but, if (2) a bill is drawn, that same portion of credit may serve for as many purchases as the number of times the bill changes hands; while (3) every bank-note issued renders the credit of the banker a purchasing power to that amount in the hands of all the successive holders, without impairing any power they may possess of effecting purchases on their own credit. Credit, in short, has exactly the same purchasing power with money; and as money tells upon prices not simply in proportion to its amount, but to its amount multiplied by the number of times it changes hands, so also does credit; and credit transferable from hand to hand is in that proportion more potent than credit which only performs one purchase.

There is a form of credit transactions (4) by checks on bankers, and transfers in a banker's books, which is exactly parallel in every respect to bank-notes, giving equal facilities to an extension of credit, and capable of acting on prices quite as powerfully. A bank, instead of lending its notes to a merchant or dealer, might open an account with him, and credit the account with the sum it had agreed to advance, on an understanding that he should not draw out that sum in any other mode than by drawing checks against it in favor of those to whom he had occasion to make payments. These checks might possibly even pass from hand to hand like bank-notes; more commonly, however, the receiver would pay them into the hands of his own banker, and when he wanted the money would draw a fresh check against it; and hence an objector may urge that as the original check would very soon be presented for payment, when it must be paid either in notes or in coin, notes or coin to an equal amount must be provided as the ultimate means of liquidation. It is not so, however. The person to whom the check is transferred may perhaps deal with the same banker, and the check may return to the very bank on which it was drawn.

[pg 341]

This is very often the case in country districts; if so, no payment will be called for, but a simple transfer in the banker's books will settle the transaction. If the check is paid into a different bank, it will not be presented for payment, but liquidated by set-off against other checks; and, in a state of circumstances favorable to a general extension of banking credits, a banker who has granted more credit, and has therefore more checks drawn on him, will also have more checks on other bankers paid to him, and will only have to provide notes or cash for the payment of balances; for which purpose the ordinary reserve of prudent bankers, one third of their liabilities, will abundantly suffice.

§ 5. On what the use of Credit depends.

The credit given to any one by those with whom he deals does not depend on the quantity of bank-notes or coin in circulation at the time, but on their opinion of his solvency. If any consideration of a more general character enters into their calculation, it is only in a time of pressure on the loan market, when they are not certain of being themselves able to obtain the credit on which they have been accustomed to rely; and even then, what they look to is the general state of the loan market, and not (preconceived theory apart) the amount of bank-notes. So far, as to the willingness to give credit. And the willingness of a dealer to use his credit depends on his expectations of gain, that is, on his opinion of the probable future price of his commodity; an opinion grounded either on the rise or fall already going on, or on his prospective judgment respecting the supply and the rate of consumption. When a dealer extends his purchases beyond his immediate means of payment, engaging to pay at a specified time, he does so in the expectation either that the transaction will have terminated favorably before that time arrives, or that he shall then be in possession of sufficient funds from the proceeds of his other transactions. The fulfillment of these expectations depends upon prices, but not specially upon the amount of bank-notes. It is obvious, however, that prices do not depend on money, but on purchases. Money left with a banker, and not drawn [pg 342] against, or drawn against for other purposes than buying commodities, has no effect on prices, any more than credit which is not used. Credit which is used to purchase commodities affects prices in the same manner as money. Money and credit are thus exactly on a par in their effect on prices.

It is often seen, in our large cities, that money is very plentiful, but no one seems to wish its use (that is, no one with safe securities). Inability to find investments and to find industries in which the rate of profit is satisfactory—all of which depends on the business character and activity of the people—will prevent credit from being used, no matter how many bank-notes, or greenbacks, or how much gold there is in the country. It is impossible to make people invest, simply by increasing the number of counters by which commodities are exchanged against each other; that is, by increasing the money. The reason why more credit is wanted is because men see that increased production is possible of a kind that will find other commodities ready to be offered (i.e., demand) in exchange for that production. Normal credit, therefore, on a healthy basis, increases and slackens with the activity or dullness of trade. Speculation, or the wild extension of credit, on the other hand, is apt to be begotten by a plethora of money, which has induced low rates for loans, and moves with the uncertain waves of popular impression. By normal credit we mean that the wealth represented by the credit is really at the disposal of the borrowers; in a crisis, the quantity of wealth supposed to be represented by credit is very much greater than that at the disposal of the lenders.246

§ 6. What is essential to the idea of Money?

There has been a great amount of discussion and argument on the question whether several of these forms of credit, and in particular whether bank-notes, ought to be considered as money. It seems to be an essential part of the idea of money that it be legal tender. An inconvertible paper which is legal tender is universally admitted to be money; in the French language the phrase papier-monnaie actually means inconvertibility, convertible notes being merely billets à porteur. An instrument which would be deprived of all value by the insolvency of a corporation can not be money in any sense in which money is opposed to credit. It either is not money, or it is money and credit too.

[pg 343]
It would seem, from all study of the essentials of money (Book III, Chapter IV), that the necessary part of the idea of money is that it should have value in itself. No one parts with valuable commodities for a medium of exchange which does not possess value; and we have seen that Legislatures can not control the natural value of even the precious metals by giving them legal-tender power. Much less could it be done for paper money. Paper, therefore, may, as an instrument of credit, be a substitute for money; but, in accordance with the above test, it can not properly be considered as money in the full sense. Of course, paper money, checks, etc., perform some of the functions of money equally well with the precious metals. F. A. Walker holds that anything is money which performs money-work; but he excludes checks from his catalogue of things which may serve as money. It is practically of little importance, however, what we include under money, so long as its functions are well understood; it is merely a question of nomenclature, and need not disturb us.
[pg 344]

Chapter X. Of An Inconvertible Paper Currency.

§ 1. What determines the value of an inconvertible paper money?

After experience had shown that pieces of paper, of no intrinsic value, by merely bearing upon them the written profession of being equivalent to a certain number of francs, dollars, or pounds, could be made to circulate as such, and to produce all the benefit to the issuers which could have been produced by the coins which they purported to represent, governments began to think that it would be a happy device if they could appropriate to themselves this benefit, free from the condition to which individuals issuing such paper substitutes for money were subject, of giving, when required, for the sign, the thing signified. They determined to try whether they could not emancipate themselves from this unpleasant obligation, and make a piece of paper issued by them pass for a pound, by merely calling it a pound, and consenting to receive it in payment of the taxes.

In the case supposed, the functions of money are performed by a thing which derives its power of performing them solely from convention; but convention is quite sufficient to confer the power; since nothing more is needful to make a person accept anything as money, and even at any arbitrary value, than the persuasion that it will be taken from him on the same terms by others. The only question is, what determines the value of such a currency, since it can not be, as in the case of gold and silver (or paper exchangeable for them at pleasure), the cost of production.

[pg 345]

We have seen, however, that even in the case of metallic currency, the immediate agency in determining its value is its quantity. If the quantity, instead of depending on the ordinary mercantile motives of profit and loss, could be arbitrarily fixed by authority, the value would depend on the fiat of that authority, not on cost of production. The quantity of a paper currency not convertible into the metals at the option of the holder can be arbitrarily fixed, especially if the issuer is the sovereign power of the state. The value, therefore, of such a currency is entirely arbitrary.

The value of paper money is, of course, primarily and mainly dependent on the quantity issued. The general level of value depends on the quantity; but we also find that deviations from this general level, in the direction of further depreciation than could be due to quantity alone, is caused by any event which shakes the confidence of any one that he may get the existing value for his paper. The convention by which real value (the essential idea of money) was associated with this paper in the minds of all is thereby broken. Fiat money—that is, a piece of paper, not containing a promise to pay a dollar, but a simple declaration that this is a dollar—therefore, separates the paper from any connection with value. And yet we see that fiat money has some, although a fluctuating, value at certain times: if the State receives it for taxes, if it is a legal acquittal of obligations, then, to that extent, a certain quantity of it is given a value equal to the wealth represented by the taxes, or the debts. Jevons remarks on this point247 that, if the quantity of notes issued was kept within such moderate limits that any one wishing to realize the metallic value of the notes could find some one wanting to pay taxes, and therefore willing to give coin for notes, stability of value might be secured. If there is more in circulation than performs these functions, it will depreciate in the proportion of the quantity to the extent of the uses assigned to it; so that the relation of quantity to uses is the only thing which can give value to fiat money, but beyond a certain point in the issues other forces than mere quantity begin to affect the value. Although the paper is not even a promise to pay value, the form of expression on its face, or the term used as its designation, generally tends, under the force of convention and habit, to give a popular value to paper.

[pg 346]

Although the State may not promise to pay a dollar, yet, wherever such paper money carries any purchasing power with it (which has very seldom happened, and then only for short periods), it will be found that there is a vague popular understanding that the State intends, at some time or other, to redeem the notes with value in coin to some amount. In the early cases of irredeemable money in our colonies, the income of taxes, or similar resources, were promised as a means of redemption. To some—although a slight—extent, the idea of value was associated with such paper. The actual quantity issued did not measure the depreciation. The paper did depreciate with increased issues. But only in so far as the increased issues proved to the community that there was less and less possibility of ever receiving value for them did they depreciate. In other words, we come to the familiar experience, known to many, of a paper money depending for its value on the opinions of men in the country. This was partially true, even of our own greenbacks, which were not fiat money, but promises to pay (although not then redeemable), as may be seen by the movement of the line in Chart XII (p. 359), which represents the fluctuations of our paper money during the civil war. The upward movement of the line, which indicates the premium on gold during our late war, of course represents correspondingly the depreciation of the paper. Every victory or defeat of the Union arms raised or lowered the premium on gold; it was the register of the opinion of the people as to the value to be associated with the paper. The second and third resorts to issues of greenbacks were regarded as confessions of financial distress; it was this which produced the effect on their value. It was not only the quantity but also that which caused the issue of the quantity. It is, of course, clear that the value of a paper money like the greenbacks, which were the promises to pay of a rich country, would bear a definite relation to the actual quantity issued; and this is to be seen by the generally higher level of the line on the chart, showing a steadily diminishing purchasing power as the issues increased. But the thing which weighed largely in people's minds was the possibility of ultimate redemption; and the premium on gold was practically a register of the betting on this possibility. In 1878, when Secretary Sherman's reserve was seen to be increasing to an effective amount, and when it became evident that he would have the means (i.e., the value represented by all the paper that was likely to be presented) to resume on the day set, January 1, 1879, the premium gradually faded away. The general shifting of the level to a lower stage in this later period was not due to any decrease in the quantity outstanding, because the contraction had been stopped in 1868, and that consequent on the resumption act in May, 1878.

[pg 347]

Suppose that, in a country of which the currency is wholly metallic, a paper currency is suddenly issued, to the amount of half the metallic circulation; not by a banking establishment, or in the form of loans, but by the Government, in payment of salaries and purchase of commodities. The currency being suddenly increased by one half, all prices will rise, and, among the rest, the prices of all things made of gold and silver. An ounce of manufactured gold will become more valuable than an ounce of gold coin, by more than that customary difference which compensates for the value of the workmanship; and it will be profitable to melt the coin for the purpose of being manufactured, until as much has been taken from the currency by the subtraction of gold as had been added to it by the issue of paper. Then prices will relapse to what they were at first, and there will be nothing changed, except that a paper currency has been substituted for half of the metallic currency which existed before. Suppose, now, a second emission of paper; the same series of effects will be renewed; and so on, until the whole of the metallic money has disappeared [see Chart No. XIV, Chap. XV, for the exportation of gold from the United States after the issue of our paper money in 1862]: that is, if paper be issued of as low a denomination as the lowest coin; if not, as much will remain as convenience requires for the smaller payments. The addition made to the quantity of gold and silver disposable for ornamental purposes will somewhat reduce, for a time, the value of the article; and as long as this is the case, even though paper has been issued to the original amount of the metallic circulation, as much coin will remain in circulation along with it as will keep the value of the currency down to the reduced value of the metallic material; but the value having fallen below the cost of production, a stoppage or diminution of the supply from the mines will enable the surplus to be carried off by the ordinary agents of destruction, after which the metals and the currency will recover their natural value. We are here supposing, as we [pg 348] have supposed throughout, that the country has mines of its own, and no commercial intercourse with other countries; for, in a country having foreign trade, the coin which is rendered superfluous by an issue of paper is carried off by a much prompter method.

Mr. Mill's statement, that, if paper be not issued of as low a denomination as the lowest coin, as much will remain as convenience requires for the smaller payments, will not hold true. During our recent experiment of depreciated paper, the depreciation was such as to drive out the subsidiary silver coins, by July, 1862, and we were forced to supply their place by a fractional paper currency. By an amendment inserted June 17, 1862, into the act authorizing a second issue of $150,000,000 of greenbacks, it was ordered that no note shall be issued for the fractional part of a dollar, and not more than $35,000,000 shall be of lower denominations than five dollars (act, finally passed July 11, 1862). Although there were no fractional notes, yet one-dollar notes drove out subsidiary silver, simply because the paper had depreciated to a value below that of the 345.6 grains of silver in two halves or four quarters of a dollar. By July 2d the disappearance of small coin was distinctly noted. Let the value of gold be represented by 100; and a dollar of small silver coin (345.6 grains), relatively to a gold dollar, by 96. Now, if paper depreciates to 90, relatively to gold, it will drive out the subsidiary silver at 96, in accordance with Gresham's law.

Up to this point the effects of a paper currency are substantially the same, whether it is convertible into specie or not. It is when the metals have been completely superseded and driven from circulation that the difference between convertible and inconvertible paper begins to be operative. When the gold or silver has all gone from circulation, and an equal amount of paper has taken its place, suppose that a still further issue is superadded. The same series of phenomena recommences: prices rise, among the rest the prices of gold and silver articles, and it becomes an object, as before, to procure coin, in order to convert it into bullion. There is no longer any coin in circulation; but, if the paper currency is convertible, coin may still be obtained from the issuers in exchange for notes. All additional notes, therefore, which are attempted to be forced into circulation [pg 349] after the metals have been completely superseded, will return upon the issuers in exchange for coin; and they will not be able to maintain in circulation such a quantity of convertible paper as to sink its value below the metal which it represents. It is not so, however, with an inconvertible currency. To the increase of that (if permitted by law) there is no check. The issuers may add to it indefinitely, lowering its value and raising prices in proportion; they may, in other words, depreciate the currency without limit.

Such a power, in whomsoever vested, is an intolerable evil. All variations in the value of the circulating medium are mischievous: they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious. The person who buys for himself, or gives to another, an annuity of one [hundred dollars], does not know whether it will be equivalent to [two hundred or to fifty dollars] a few years hence. Great as this evil would be if it depended only on accident, it is still greater when placed at the arbitrary disposal of an individual or a body of individuals, who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes, and who have at any rate a strong interest in issuing as much as possible, each issue being in itself a source of profit—not to add, that the issuers may have, and, in the case of a government paper, always have, a direct interest in lowering the value of the currency, because it is the medium in which their own debts are computed.

The United States Supreme Court had decided in December, 1870, by the second legal-tender decision, that the issue of greenbacks (inconvertible from 1862 to 1879) was constitutional during a time of war; but it was thought that the reissue of these notes since the war, when no war emergency could be pleaded, was unconstitutional. This view, however, was met by the unfortunate decision of the Supreme Court, delivered by Justice Gray, March, 1884, which announced the doctrine that the expediency of an issue of legal-tender paper money was to be determined solely by Congress; and that, if Congress judged the issue expedient, it was within the limits of those provisions [pg 350] of the Constitution (section 8), which gave Congress the means to do whatever was necessary and proper to carry out the powers expressly granted to it. Nothing now can prevent Congress, should it choose to do so, from issuing paper money of any description whatever, even if of absolutely no value. The disaster that might be brought upon the country by a rising tide of repudiation among debtors, taking its effect through a facile and plastic Congress (as in the case of the silver coinage in 1878), is appalling to reflect upon.

§ 2. If regulated by the price of Bullion, as inconvertible Currency might be safe, but not Expedient.

In order that the value of the currency may be secure from being altered by design, and may be as little as possible liable to fluctuation from accident, the articles least liable of all known commodities to vary in their value, the precious metals, have been made in all civilized countries the standard of value for the circulating medium; and no paper currency ought to exist of which the value can not be made to conform to theirs. Nor has this fundamental maxim ever been entirely lost sight of, even by the governments which have most abused the power of creating inconvertible paper. If they have not (as they generally have) professed an intention of paying in specie at some indefinite future time, they have at least, by giving to their paper issues the names of their coins, made a virtual, though generally a false, profession of intending to keep them at a value corresponding to that of the coins. This is not impracticable, even with an inconvertible paper. There is not, indeed, the self-acting check which convertibility brings with it. But there is a clear and unequivocal indication by which to judge whether the currency is depreciated, and to what extent. That indication is the price of the precious metals. When holders of paper can not demand coin to be converted into bullion, and when there is none left in circulation, bullion rises and falls in price like other things; and if it is above the mint price—if an ounce of gold, which would be coined into the equivalent of [$18.60], is sold for [$20 or $25] in paper—the value of the currency has sunk just that much below what the value of a metallic currency would be. If, therefore, the issue of inconvertible paper were subjected to [pg 351] strict rules, one rule being that, whenever bullion rose above the mint price, the issues should be contracted until the market price of bullion and the mint price were again in accordance, such a currency would not be subject to any of the evils usually deemed inherent in an inconvertible paper.

But, also, such a system of currency would have no advantages sufficient to recommend it to adoption. An inconvertible currency, regulated by the price of bullion, would conform exactly, in all its variations, to a convertible one; and the only advantage gained would be that of exemption from the necessity of keeping any reserve of the precious metals, which is not a very important consideration, especially as a government, so long as its good faith is not suspected, need not keep so large a reserve as private issuers, being not so liable to great and sudden demands, since there never can be any real doubt of its solvency.

The United States since 1879 finds that a reserve of from $130,000,000 to $140,000,000 is a sufficient reserve for outstanding notes to the amount of $346,000,000, and greenbacks are now at a par with gold.

Against this small advantage is to be set, in the first place, the possibility of fraudulent tampering with the price of bullion for the sake of acting on the currency, in the manner of the fictitious sales of corn, to influence the averages, so much and so justly complained of while the corn laws were in force. But a still stronger consideration is the importance of adhering to a simple principle, intelligible to the most untaught capacity. Everybody can understand convertibility; every one sees that what can be at any moment exchanged for five [dollars] is worth five [dollars]. Regulation by the price of bullion is a more complex idea, and does not recommend itself through the same familiar associations. There would be nothing like the same confidence, by the public generally, in an inconvertible currency so regulated, as in a convertible one: and the most instructed person might reasonably doubt whether such a rule would be [pg 352] as likely to be inflexibly adhered to. The grounds of the rule not being so well understood by the public, opinion would probably not enforce it with as much rigidity, and, in any circumstances of difficulty, would be likely to turn against it; while to the Government itself a suspension of convertibility would appear a much stronger and more extreme measure than a relaxation of what might possibly be considered a somewhat artificial rule. There is therefore a great preponderance of reasons in favor of a convertible, in preference to even the best regulated inconvertible, currency. The temptation to over-issue, in certain financial emergencies, is so strong, that nothing is admissible which can tend, in however slight a degree, to weaken the barriers that restrain it.

The French Government, in the Franco-Prussian War (1870), issued inconvertible paper on this plan, as explained by Mr. Mill; but, acting through the Bank of France, they conducted their issues so successfully that the notes never depreciated more than about one half of one per cent. But this was a very rare management of inconvertible paper, since the issues were actually limited as the price of gold in paper rose above par.

§ 3. Examination of the doctrine that an inconvertible Current is safe, if representing actual Property.

Projectors every now and then start up, with plans for curing all the economical evils of society by means of an unlimited issue of inconvertible paper. There is, in truth, a great charm in the idea. To be able to pay off the national debt, defray the expenses of government without taxation, and, in fine, to make the fortunes of the whole community, is a brilliant prospect, when once a man is capable of believing that printing a few characters on bits of paper will do it. The philosopher's stone could not be expected to do more.248

As these projects, however often slain, always resuscitate, it is not superfluous to examine one or two of the fallacies [pg 353] by which the schemers impose upon themselves. One of the commonest is, that a paper currency can not be issued in excess so long as every note issued represents property, or has a foundation of actual property to rest on. These phrases, of representing and resting, seldom convey any distinct or well-defined idea; when they do, their meaning is no more than this—that the issuers of the paper must have property, either of their own, or intrusted to them, to the value of all the notes they issue, though for what purpose does not very clearly appear; for, if the property can not be claimed in exchange for the notes, it is difficult to divine in what manner its mere existence can serve to uphold their value. I presume, however, it is intended as a guarantee that the holders would be finally reimbursed, in case any untoward event should cause the whole concern to be wound up. On this theory there have been many schemes for “coining the whole land of the country into money” and the like.

In so far as this notion has any connection at all with reason, it seems to originate in confounding two entirely distinct evils, to which a paper currency is liable. One is, the insolvency of the issuers; which, if the paper is grounded on their credit—if it makes any promise of payment in cash, either on demand or at any future time—of course deprives the paper of any value which it derives from the promise. To this evil paper credit is equally liable, however moderately used; and against it, a proviso that all issues should be “founded on property,” as for instance that notes should only be issued on the security of some valuable thing, expressly pledged for their redemption, would really be efficacious as a precaution. But the theory takes no account of another evil, which is incident to the notes of the most solvent firm, company, or government; that of being depreciated in value from being issued in excessive quantity. The assignats, during the French Revolution, were an example of a currency grounded on these principles. The assignats “represented” an immense amount of highly valuable property, [pg 354] namely, the lands of the crown, the church, the monasteries, and the emigrants; amounting possibly to half the territory of France. They were, in fact, orders or assignments on this mass of land. The revolutionary government had the idea of “coining” these lands into money; but, to do them justice, they did not originally contemplate the immense multiplication of issues to which they were eventually driven by the failure of all other financial resources. They imagined that the assignats would come rapidly back to the issuers in exchange for land, and that they should be able to reissue them continually until the lands were all disposed of, without having at any time more than a very moderate quantity in circulation. Their hope was frustrated: the land did not sell so quickly as they expected; buyers were not inclined to invest their money in possessions which were likely to be resumed without compensation if the revolution succumbed; the bits of paper which represented land, bec