'■i..i-r^ Cornell University Library HG 230.G73 International trade under depreciated pa 3 1924 013 818 293 ^mt dialh^t of ^Agriculture ^ Jkt (fornell Utitwerattg ICthrartj THE QUARTERLY JOURNAL OF ECONOMICS Vol. XXXVI FEBRUARY, 1922^ No. 2. CONTENTS FAea I. AGRICULTURE IN EASTERN EUROPE E. Dana Durand 169 Uy An extension of value THEoky - David Friday 197 /Jn. INTERNATIONAL TRADE UNDER DEPRECIATED PAPER. ^*"""*'**''^HE UNITED STATES, 1862-79. - F. b.Graham 220 IV. ENFORCED PAR REMITTANCE UNDER THE FEDERAL RESERVE SYSTEM - - - CoUm E. Wame 274 V. THE RENT OF MINERAL LANDS Jphn E. Orchard 290 REVIEWS: Datnlrls' The Monefaoy Sy^em of Greece ^ Eugen P. Schwiedland 319 Sharfman's American Railroad Problem . i \ Harry Gunnison Brown 323 NOTipS AND MEMORANDA: The Chief Problem of Economic Thieoiy Bohert Li^rmnn 336 The Early Use of the Term Industrial Revolution , . /Afi^na Bezansoa 343 A Crisis in Deposit Guaranty in the State of Washington Howard H. fijwJoft •; 360, CAMBRIDGE, MASS., U.S.A. HARVARD UNIVERSITY PRJBJiS / LONDON: HUMPHREY MILFCJl^ MAR OXFOBD tjHlVBBSITT PBBSS^ > 1922 \ ^ The Quarterly Journal of Economics Published by Harvard University Books, periodlcals,-«nd manuscript to be addressed, EDITORS of QUARTERLT JOURNAL OF ECONOMICS, Cambridge, Mass. Business letters to be addressed, HARVARD UNIVERSlTT PRESS, Randall Hall, Cambridge, Mass. Subscription, $6.00 a year. Editor F. W. TAUSSIG Associate Editors T. N. CARVER E. E. DAY W; Z. RIPLEY A. A. YOUNG C. J. BULLOCK W, M, PERSONS CONTENTS FOR AUGUST, 1921 L GEHERATING cycles ItEFLECTED IN A CENTDK7 OF PRICES Heniy LndweU Moors n. FUNDAMEHTAL PROBLEMS OF FEDERAL mCOMB TAXATION Thomas S. Adami m. THE MEASUREMENT OF CHANGES OF THE GENERAL PRICE LEVEL . ^ Allyn A. Tounc IV. RECIPROCITY WITH CANADA. THE CANADIAN VIEWPODtT H. S. Patton REVIEW: , Beer's History of British Saclallsm ., . Herbert Feta NOTES AND MEMORANDA : Vicissitudes In the Shlppliig Trade, 1870-1920 .... B. S. Gregf The Literature of the Sales Tax K. M. WlUlamson CONTENTS FOR NOVEMBER, 1921 L THE ORIGIN OF THE EIGHT-TEAR GENERATING CYCLE Henry LudweU Moore n. TEE RAILROADS UNDER GOVERNMENT OPERATION. n. FROM JANUARY 1, 1919 TO MARCH 1, 1920. . . William J. Cnnnbigham m. THE TECHNOLOGICAL INTERPRETATION OF HISTORY . Alvln H. Hansen IV, A STATISTICAL TEST OF THE SUCCESS OF CONSOLIDA- TIONS ., ...'... A.S. Dewinc V. THE DOMESTIC AND FOREIGN WOOL MANUFACTURES AND THE TARIFF PROBLEM ,. . Arthur H. Cols REVIEWS: Charles Rlst on Germany's War Finances N . . . . Joseph S. Davla Cassel's Theoretlsche Sozlalokonomle Fhmk H. Knight VOTES AND MEMORANDA: Promotion from Without . . ^ Anna Bezansoa The Nebraska Deposit Guaranty Fund Thornton Cooks COPTRIGHI, 1912, BY Harvard Ukivbhsity. (2iitorloyeeB. How does the per capita income of U. S. compare with that in other countries. 29 tables — 31 charts — Index. 152 Pages — Cloth — Text- edition, $1.25. JOHN MAYNARD KEYNES' A REVISION OF THE TREATY A sequel to ike Economic Consequences of Peace which was trans- lated into nine languages and influenced world opinion and policies. His new book is a thoiijghlful and brilliant account of the events of the last two years. Mr. Keynes writes incisively and clearly of the situation as it is today and jsresents definite suggestions for the settlement of the world-wide economic and financial tur- moil that has followed the war. Probable price, S2.00. J WHAT ITEXT IN EUROPE? Frank A. Vanderlip Author of What Happened to Eiuope and formerly president of the National City Bank. A profoimdlj^ interesting account of their time can be hired out. Even where the big land owner is not an expert AGRICULTURE IN EASTERN EUROPE 191 farmer he is likely to cultivate his land somewhat better than the peasant. He can afford better machinery and enough draft animals for deeper plowing. He is not hampered by small fields or by the necessity of con- sulting his neighbors as to what he shall plant. In many parts of Russia, before the war, the owners of the big estates gave but little attention to them. They spent their time in Moscow or Petrograd. They had so much land that they could live extravagantly without good management. Even so, prewar statistics show yields per acre for the large estates greater, in every section of Russia, than those of peasant farms, the difference in most cases being from 10 to 20 per cent. The average output per man employed on the large estates exceeded that on peasant farms by a still greater margin. The estate owner maintains only enough labor to handle the land. A good deal of the time of the peasant is wasted because he has not land, machinery, or animals to bal- ance properly his own labor. Far greater, however, was the superiority of large- scale farming in the cases where the owner put real energy and intelligence into the operation. Especially among the Poles a very considerable proportion of the big proprietors were good farmers, who gave personal attention to their estates, living on them all the year or at least during the crop season. Many of them studied advanced agricultural methods in schools of their own country or of Germany and western Europe. They not only used good machinery, equipment and live stock, but were often highly expert in the rotation of crops, selection of seed, drainage and use of fertilizers. The greatest degree of efficiency was attained in Posen and West Prussia — those parts of Germany which have now gone to Poland. Here, of course, German influence entered. Poles, however, owned more of the big proper- 192 QUARTERLY JOURNAL OF ECONOMICS ties than Germans did, and in many cases operated them quite as well as their Teutonic neighbors. The only country for which postwar statistics of crop yields for large and small properties separately are available is Poland. Despite the fact that the war tended to reduce the eflBciency of the former more than that of the latter, the ofl&cial figures for 1921 show yields of the principal crops considerably higher for large estates than for peasant farms. The difference ranges in the various sections from about 5 to 25 per cent, averaging about 10 per cent. Notwithstanding the superiority, and in some cases the very decided superiority, of large-scale farming in eastern Europe over peasant farming, the big estate now seems doomed. It is difficult for an American not to sympathize with the peasants in their demand that the great landed properties be broken up. In most cases, the big properties have not been built up by the efficiency of their owners but are inheritances from the time when might gave right, when the peasant was a serf with no political rights, with hardly anything he could call his own. Were land abundant the peasant might have less ground for looking covetously at the holdings of the noble. With land hunger ever predom- inant in his consciousness his attitude is but natural. The gain, or at least the immediate gain, to the peas- ant from the breaking up of the large estates is not likely to be so great as he fondly hopes. In the first place, the proportion of the arable land held by such estates is not so high as is frequently supposed. In Poland, for example, while approximately 40 per cent of the total land area was owned before the war by the big proprietors, their holdings included only about 25 per cent of the total arable land. Figures for Russia and other countries of eastern Europe were not very far AGRICULTURE IN EASTERN EUROPE 193 different. The greater part of the forests, apart from those owned by the state, belonged to the nobility. Forests constituted a very large fraction of their land, while the peasant holdings consisted mostly of cul- tivated lands and pastures. In the second place, the land-owning peasant — especially the "little lander," to use a Pohsh phrase — who looks for increase of his holdings by the dividing of the big estates, is apt to underestimate the amount of land which must go to the landless peasants who are now hired as laborers. Altho, as already stated, there was on the large properties more land per man employed than on the peasant farms, nevertheless the laborers on the estates would neces- sarily take up a large fraction of their area. Finally, in those parts of eastern Europe which have suffered the greatest losses of machinery and live stock, the peasant is likely to find it difficult at first to cultivate much additional land. Of course, it is hoped that this con- dition will be merely temporary. It is noteworthy, how- ever, that the eagerness of the peasants in Poland to push through immediately the partition of the big estates has been decidedly dampened by the high cost of equipping additional land. The end of the big land holdings in Russia came quickly, rudely and without system. With the out- break of revolution the peasants simply seized the land, appropriated the neighboring estates and divided them among the landless and land-holding peasants according to the will of the group or perhaps in certain cases ac- cording to the right of strength. They did not wait for formal methods, for laws and decrees and officials from Moscow. The question of compensation to the owners was not raised. The central Bolshevik goverimient at Moscow had the theory that the big estates should be made into communal farms, but the peasants did not 194 QUARTERLY JOURNAL OF ECONOMICS fall in with that way of thinking. A limited number of communal farms were put in operation, but their efficiency proved very low and many of them have since ceased to operate. If general political conditions in Russia once become stable it is quite possible that efforts may be made to distribute more fairly among the peasants the land formerly held by the big owners. Probably the practice of periodical redistribution will gradually cease. As nearly as can be ascertained from the very inadequate information coming out of Russia, the practice has begun to wane since the revolution. The peasants have pretty generally set their hearts on per- manent ownership of the land they till. It is to be hoped also that the general upheaval may ultimately result in a thoro-going regrouping of the land holdings such that each peasant wUl get his land in a single piece. Comparatively little has thus far been done in this direction since the war. In Poland a law providing in principle for the break- ing up of the big estates was passed in 1919, but the de- tailed measures necessary for carrying out the change, especially as regards compensation of owners and fi- nancing of purchases by the peasants, have not yet been fully worked out. A certain number of estates, which belonged to the former Russian government and which were taken over by the Polish government, have been parceled out, and also a small number of estates of private owners which were found to be neglected or inefiiciently cultivated. Agricultural and economic ex- perts in Poland have hoped that in connection with the division of the large estates a regrouping of the scat- tered peasant holdiags could be brought about. As a condition of receiving part of a large property, the peas- ant might be required to give up all or most of his scat- tered strips to his neighbors, so that in the end he would AGRICULTURE IN EASTERN EUROPE 195 possess a somewhat greater amount of land than before and have it in one piece. It is perhaps partly by reason of the fact that the peasants realized the desirability of accompUshing this regrouping at the same time with the partitioning of the big estates that the latter itself has gone so slowly. It is evident that a scientific and just rearrangement of a multitude of land holdings is a task requiring much time and skill. In Roumania, a law providing for the parcelation of large properties was enacted very soon after the armis- tice, and it has already been carried out to a much greater extent than in Poland. In Roumania, however, the former owners are permitted to retain larger tracts than is proposed in Poland. It is difficult to get accurate information as to the effects of the redistribution of land in Roumania. Government regulation of prices and of grain export, and disorganization of the railroads, have tended to restrict agricultural production, and among the complex factors affecting the situation the influence of the change in land ownership can hardly be traced. In fact, throughout eastern Europe there are so many abnormal conditions of political and economic life that one can scarcely expect to be able to diemonstrate the good or evil effects of the so-called agrarian reform for a long time to come. One is forced to fall back chiefly on general reasoning and psychology. One would nat- urally expect that the immediate effect of a parcelation of the big estates among the peasants would be a dim- inution of production. Apart from the fact that the peasants in general are less efficient farmers than the large proprietors and that small holdings lack certain advantages in methods that the large holdings enjoy, the process of distribution, especially if carried out rapidly, must involve in itself a certain amount of dis- organization. During it there are likely to be lands left 196 QUARTERLY JOURNAL OF ECONOMICS unused for a time; even crops already planted may fail to be harvested. On the other hand it is quite possible that the ultimate effect of the parceling of the big estates, especially when combined with an increase in political power for the peasant class, may prove benefi- cial to production. Even a small increase in the amount of land he holds might be expected to put new life and hope into the peasant's mind. Whereas with ten acres he could never hope to make progress, to raise his stand- ard of living, to find means to educate his family, with twelve acres he may see the possibility of getting ahead in Ufe. He may feel a new ambition. He may work harder than before. He may give more thought to methods of farming, and venture new experiments. When this direct effect of larger peasant holdings is combined with the influence of the possession of new political power by the peasants, to which allusion has already been made, it may readily make in the course of time for a very real improvement in the agricultural methods of the masses of eastern Europe — an improve- ment more than sufficient to offset the loss of the expert direction of the big estates and of the advantages of large-scale production. E. Dana Durand. Depabtment of Commebce Washington, D.C. (RecenUy Adviser to the Polish Food Ministry) AN EXTENSION OF VALUE THEORY SUMMARY Value theory moribund today, 198. — Renascence of value theory probable, 199. — Cassel's proposal, 200. — Future trend of price theory, 201. — Types of pecuniary values other than price, 203. — Actuarial valuation, 204. — Valuation under right of eminent domain, 207. — Valuation for purposes of rate-making, 208. — These valuations not special cases of price, 209. — Institutional nature of pecuniary valua- tion, 212. — The market has no monopoly of field of value, 217. — All valuation purposive, 219. Never in the history of industrial society was value a subject of more vital interest than it is today. For a quarter of a century we have had a movement in prices which has emphasized anew the importance of the gen- eral principles underlying the causes of their rise and fall. Simultaneously the ever-growing technological and legal complexity of the industrial world has given rise to a number of new problems calling for pecuniary valua- tion. We have witnessed an industrial revolution during the last forty years. The consequences of that revolu- tion for productive output, for capital accmnulation, and for the development of new institutions, are just begtoning to dawn upon us. One of its manifestations touches the field of value and valuation. The develop- ment of public control in the sense which that term connotes today, the taxation of income, the growth of the institution of accounting, the development of mod- em management both in the financial conduct of the corporation and in the supervision and direction of in- dustrial plants, have brought into being a set of condi- tions which call for pecuniary valuation. 197 198 QUARTERLY JOURNAL OP ECONOMICS Yet the theory of value which has occupied the cen- tral place in economics since the days of Adam Smith is moribund. It is no longer an infectious subject, and a full decade has elapsed since any formal treatise on value has appeared in America. The distrust of the body of doctrine which has constituted traditional value theory during the last thirty years is not limited to stu- dents and to bumptious young economists who are in- dulging their hypercritical propensities. The latest European work on general economic theory begins with this unqualified declaration. "In my economic studies I long ago reached the conclusion that all the old value theory, so-called, with its endless terminological contro- versies and its fruitless scholasticism, is superfluous ballast of which economic theory must rid itself." ^ Such an utterance from a scholar of Cassel's standing commands respect. What he means by this terse and well-poised statement is that the controversies over marginal utility and its relation to value were futile. Economists have made an excursion into a land which gave promise but which has turned out to be barren of positive results — unless the proof that the land is barren and that it is useless to spend further time upon it be taken as an accompUshment worth while. In the eyes of the faithful even the forty years during which the children of Israel wandered in the wilderness were well spent. Itwas half a century after Adam Smith before Ricardo revived the theory of value. The result was a body of literature which is still the solid core of EngUsh eco- nomic theory. Another fifty years elapsed before Jevons, in 1871, introduced the doctrine that marginal utility is the final determinant of value. This movement intrigued the minds of two generations of thinkers. 1. Casael, Tbeoretifiche Sozialdkonomie, p. v. AN EXTENSION OF VALUE THEORY 199 There is reason to believe that our times will again see a renascence of value theory. It is the purpose of this article to set forth the grounds for that behef, and to indicate the direction which the new development wiU probably take. The first task of any theory of value is to formulate a set of generalizations intended to explain the causes of the rise and fall of prices. It should furnish, too, a set of fundamental generaUzations concerning the na- ture of value and the valuation process which could serve as a guide to those who are confronted with prob- lems of pecuniary valuation which arise outside the market. This task value theory has hitherto neglected almost entirely. Finally, a comprehensive theory of value should furnish a touchstone for present-day insti- tutions and their fitness to realize an ideal industrial program. The first of these three propositions with respect to the scope of value theory will be all but universally accepted by economists, altho the definiteness of the task has been somewhat befogged by the course of eco- nomic doctrine during the last thirty years. The second proposition would be less readily accepted. This is due in part to a failure to comprehend its meaning arising out of the economist's neglect of all phases of pecuniary valuation except price. When the economist thinks of value theory as extending beyond the problem of ex- plainiag price fluctuations, he usually has in mind the third task, which deals with the ethical implications of economic valuation. The value theory of the last thirty years has done Uttle to illmninate either the causes of price fluctuations, the fitness of our economic institu- tions to serve ideal ends or the nature of pecuniary valuation in institutions other than the market. Some economists have proposed to remedy the situa- 200 QUARTERLY JOURNAL OF ECONOMICS tion by ridding economics of the problem of value en- tirely. They suggest that we abandon the term and confine ourselves to price without further concern about value. They have in mind the first task of value theory set forth above, and insist that we will make more prog- ress toward formulating a set of relevant laws of price if we rid the science of the whole problem of value by burying it. This is the purport of the quotation from Cassel which appears at the beginning of this article. He had expressed himself to the same effect in an earher work. "It may indeed be said that the vagueness of the term 'value' has induced people to speak on general questions of economic theory in a most careless manner; and from the confusion thus caused the science has greatly suffered. "The most radical and effective cure for this evil would of course be to do away with the whole theory of value. Fortunately this is quite possible. There is, in fact, no reason at all why we should commence the study of economics by a separate theory of value." " Professor Cassel here proposes to rejuvenate value theory by limiting it to price theory. By this delimita- tion the attention of economists will be directed away from the whole welter of controversy which grew out of the attempt to base value upon the utilitarian theory of conduct. In this manner he expects to direct the atten- tion of economists to the institution through whose oper- ation values come into being and by whose processes pecuniary value in the sense of price is determined. He realizes that it is only by returning to a study of the market and its processes that we can make price theory helpful and relevant. Many economists are in full accord with this point of view as regards the reformation of price theory. The 2. Cassel, The Nature and Necessity of Interest, pp. 68, 69. AN EXTENSION OF VALUE THEORY 201 sooner we turn from the controversies of the old value theory and apply ourselves to a study of markets and market technique, the better will it be for price theory. Prices are the grist which markets grind; they are rela- tive to market processes. Markets are institutions of great variety and complexity, with no such simple mech- anism as was assumed by the traditional value theory. Not until we reahze this and address ourselves to a study of their technique and the actual course of causation upon the various markets will we make any further ad- vance in price theory. The positive results which may be expected from such an attack are well illustrated by Cassel's treatment of the problem of the rate of interest. By attacking inter- est as a price problem he succeeded in discussing the whole subject within the short range of ninety pages despite the fact that he was still preoccupied with prov- ing to the socialists that we could never have a society in which interest would not exist. All that is needed to make his work in that field complete is to extend the study of the forces which determine the market rate to all the markets for capital. Cassel discusses only the factors which govern the rate of interest on money lent for long periods, such as first mortgage loans on real property. If we had similar studies of the forces which govern the rate for call loans, for ordinary bank loans, for one to five-year notes, and for long-term bonds, we should have all that the economist needs to know about the rate of interest. With this example before us we need to make similar investigations of the various types of markets for com- modities and services. When we have acquainted our- selves with the different sorts of markets which exist today and with their varying technique, we may be able to make significant groupings and classifications of those 202 QUARTERLY JOURNAL OF ECONOMICS markets. Such a study should give us helpful generaliza- tions or laws concerning the causes which underlie the rise and the fall of prices in each of these groups. It should yield others concerning the cause of price move- ments in all markets. It is safe to prophesy that there will be small place in the literature which grows out of these investigations for the subject-matter and the ter- minology of the older controversies over value theory. So much concerning the price theory of the future is pretty clearly established in the minds of economists. There will be great activity in the field during the next decade. The concrete studies in the technique of mar- kets must furnish the facts out of which the laws of a more adequate theory of prices will be formulated. It is not necessary, then, to elaborate the statement that value theory in the sense of price theory will be re- juvenated in the near future. But economic conduct is not motivated by price alone. Neither is the problem of price the whole of the field of valuation. "That Industrial Revolution," as Marshall puts it, "which has far outdone the changes of a century ago in both rapidity and breadth of move- ment" has made value a term of many meanings, even in the pecuniary field. An adequate theory of value for modern economics must extend beyond the reahn of price and include all the problems of pecuniary valua- tion which our industrial process presents. These values are not special cases of price. They are ofttimes neces- sitated by the inadequacy of price to serve as a basis of rational conduct. They arise out of a type of situation analogous to that which occasions the more famiUar types of economic valuation. The problem of economic valuation grows out of the fact that a complete comprehension of the physical qualities of material objects is oftentimes not adequate AN EXTENSION OF VALUE THEORY 203 to warrant overt conduct, but must be supplemented and reconstructed from the economic point of view before the individual is free to proceed with the rational ordering of his conduct.' The capacity of a material object to satisfy an end which appears in the form of a felt want is utility. One may have complete knowledge of the various ends which material objects can satisfy. But that does not yet warrant him in proceeding to overt conduct if such useful objects are scarce. Before one can proceed to use these objects they must be eval- uated. When such evaluations are made by individuals they result in the subjective values of the Austrian School. When they are made on the market and come to expression in terms of a standard quantitative unit, they constitute price. The price, or market value, is something different from and objective to the utiUties of the physical object. Just so a knowledge of price is oftentimes inadequate to warrant economic conduct. When this situation arises, resort must be had to other and further methods of pecuniary valuation. The market, with its scale of prices, does not always give the information which is needed as a basis for rational economic conduct. All such valuations outside the market which come to ex- pression in money terms are pecuniary valuations which He beyond the sphere of price. The very fact that mar- ket value is the phenomenon which occasions the neces- sity for these further valuations proves that they are independent. Prices are merely the problem phenom- enon which these other phases of pecuniary valuation attempt to resolve for their own ends with their own technique. The pecuniary valuations other than price are inde- pendent values just as the economic values of useful 3. Cf . Valuation as a Logical Frocese, by H. W. Stuart; Studies in Logical Theory, by John Dewey, p. 231. 204 QUARTERLY JOURNAL OF ECONOMICS physical objects are of a different nature from their utiUties, their fitness to satisfy wants. The value of the objects is something different from their utiUties, even tho there would be no occasion to value them were it not that they had utilities. Just so the evaluations which are necessitated by the fact that commodities have market values present the necessity for valuations which are themselves not market values. The mere fact that they would not exist if there were no markets in no wise makes them identical with market values. When- ever any set of objective facts, whether they be facts relating to physical property or facts relating to price, is insufficient to warrant overt action, the necessity for further evaluation arises. Two illustrations will serve to clarify this. The bond market offers the investor a bond bearing 4 per cent interest due in twenty years at $78, and a bond bearing 5 per cent interest due in twenty-five years at $86. The security of the two bonds, both as to principal and income, is equally good. In fact they are issued under the same mortgage and have equal rights against both property and income of the issuing corporation. The mere existence of these two prices does not warrant the investment in either one indifferently. It is necessary to know which of these bonds has the greater value. If one is willing to invest in a bond of this type at 6 per cent, an actuarial valuation will show that the 6 per cent bond is actually worth $10.25 more than the 4 per cent one. The difference in their market values is $8. The investor will, therefore, purchase the 5 per cent tond. At the market price the 4 per cent bond yields 5| per cent, while the 5 per cent bond yields almost 61 per cent. They would sell at $76.89 and $87.14 respec- tively if both sold to yield exactly 6 per cent. A similar quandary is presented by the presence of AN EXTENSION OF VALUE THEORY 205 two machines or other units of productive plant, which serve precisely the same physical end but have different market values. A manager has an electric generator whose second-hand market value exceeds the cost of removal by $50,000. The market offers a generator of improved type with exactly the same capacity at a cost of $250,000. Is he warranted in replacing the old generator with a new one? The answer to that question depends upon a further pecuniary valuation of the relative economic efficiency of the two generators. If the difference in their value is more than $200,000 (the difference in their market values) the manager is warranted in discarding the old generator and purchasing a new one; if it is less than this amount he will retain his old machine. The difference in the value of the two machines considered as productive units may be $300,000, or it may be only $50,000. There is no certainty that it will be equal to the difference in their market values. The market value results from the operation of all the conditions which present themselves upon the market for electric genera- tors; the manager's valuation results from a considera- tion of the factors which determine the relative economic value of the two units in the particular industrial or- ganization which he is supervising and directing. Knowl- edge of market values is one of the facts which he must have in planning a rational course of procedure, but the market does not give him a set of values which are adeqviate to warrant that procedure without further and independent valuations. The last example falls within the general field of de- preciation. The problem of valuation presented by de- preciation of plant and equipment is raised perhaps most directly in connection with the determination of income. It is a sound principle of income determination 206 QUARTERLY JOURNAL OF ECONOMICS that no income arises until full provision has been made out of the gross revenues for maintaining the capital in- tact; in other words, until full provision has been made for depreciation of plant and equipment. Depreciation is universally defined as lessening in value. Yet nowhere have the accoimtants, who are the technical experts in the matter of income procedure, accepted market value as a criterion of the lessening in value of plant. They have developed their own methods of valuation, and these methods have attained to objectivity and to independent vaUdity. They are becoming an institu- tion of valuation. This particular phase of the value problem will be taken up for separate and complete discussion later. Even in the taking of private property under the right of eminent domain the property is not subjected to the test of the market by being offered and sold for whatever price it will fetch. Its full and just value, which must serve as a basis for compensation to the owner, is deter- mined by a judicial procedure according to rules, prin- ciples, and precedents which have been developed over some centuries by a gradual process of evolution. The value finally arrived at is binding and is in every way objective. It is not market value; at best it is a hjrpo- thetical market value. There are at least four groups of these pecuniary val- uations outside the market which are not cases of price, but are independent values. 1. Valuations of property for the purpose of exercis- ing public control over prices, as in public utiUty rates. The valuation of property for purposes of capitaUzation is an analogous case. 2. Valuation of property for purposes of administer- ing the principles of justice and equity which control the rights of property and of contract. AN EXTENSION OF VALUE THEORY 207 3. Valuations of property for purposes of taxation. These may be either in the nature of the valuation which shall serve as a direct basis for the tax levy; or they may arise incident to the determination of income when taxes are spread on the basis of income. 4. Valuations of property which arise in connection with industrial and financial management. These are necessitated by the fact that the valuations of the mar- ket are not adequate for the rational direction of indus- trial and financial conduct, if this is to be carried through most economically and efficiently. Perhaps these four groups could be subsumed un- der two heads. The first three groups present valua- tions which are necessitated by the general problem of public control. They come to expression as findings of a judicial or administrative body and as such have bind- ing force. The last group is concerned with those prob- lems of valuation that arise in private industry in its pursuit of profit. In addition to these there is the problem of imputa- tion or allocation of values, revenues, and expenses, which cuts across this classification and may arise in connection with any of these groups. Not only must courts and commissions find a fair value for purposes of rate-making, but they must frequently divide that value between the property used for interstate business and that used for intrastate business. Oftentimes they are also called upon to further subdivide either the inter- or intrastate property as between that which is used for carrying freight and that used for carrying passengers. Likewise for purposes of taxation not only must the as- sessing authorities find, in the case of an electric light and power company whose hydroelectric plants are lo- cated in one part of a state and whose product is con- sumed in the manufacturing towns in another part, the 208 QUARTERLY JOURNAL OF ECONOMICS fair cash value of that property for purposes of taxa- tion; but they must parcel that value out between the various political units in which the physical property of the company is situated. The imputation of investment to various productive activities is the most difficult task presented by cost accounting. Revenues, as well as expenses and values, present the necessity for apportionment. When a state levies taxes upon the gross earnings of a railroad which operates through half a dozen states; when the rights of the stockholders of a lessor road to receive rental depend upon the gross earnings of a portion of the road, while the great mass of traffic is joint to the lessor and lessee roads ■ — in short, whenever the physical plant is a unit which renders an indivisible service, while the owner- ship or political jurisdiction is divided, this problem of imputing revenues, expenses, and values presents itself as a value problem. That is to say it presents a situation in which a knowledge of the physical factors or of the economic factors pertaining to the situation as a whole is not an adequate basis for practical conduct. Before the judicial body or the manager is prepared to decree action there must be a further judgment process which shall issue in a conclusion expressed in quantitative pe- cuniary terms. Valuation for purposes of rate-making would perhaps strike the general economist as having most clearly at- tained to definite institutional standing. It possesses a literature, a technique, a set of principles having the force of precedent, and judicial or administrative bodies which consider themselves bound by these principles and which have power to enforce these valuations upon in- dustrial society. A certain valuation engineer put the thing naively but in most illuminating fashion when he said that upon entering the valuation section of the In- AN EXTENSION OF VALUE THEORY 209 terstate Commerce Commission he had sought to inform himself regarding the problem of value by reading every available thing that the economists had written upon the subject. After completing this laudable un- dertaking he remarked that he knew nothing about value when he began, and not very much when he had finished, but he was certain that the value about which the economist was talking was not what he and his col- leagues were seeking in the valuation of the railroads of the United States. When a public utility commission is seeking a fair value upon which it may base rates, it is not looking for a price. It does not ask itself what this property is actu- ally selling for upon the market. As one commission puts it in a decision involving rates: "When we speak of ' fair value ' in a rate-making case, we find we must of necessity acquire an entirely new and distinct concep- tion of this term 'value.' It is not a composite of all other values. Nor is it of necessity merely a modifica- tion of any of the foregoing conceptions of value, any more than a newly discovered star in the firmament is a composite of all other stars in the firmament, or a modi- fication of any one of the same. But it is an entirely new and distinct 'value.' It may in some respects partake of the characteristics of some other values or of all other values, but nevertheless it is a conception of value for a different purpose, and is as readily susceptible of ascer- tainment independently of any other particular value, as such other particular value is susceptible of ascertain- ment independently of it." * This commission is clear as to the distinctive charac- ter of the value problem with which it is confronted in a rate case. It would surely differ from one writer 4. Decision of Public Service Commifision of Maryland in the Matter of the Chesa- peake & Potomac Telephone Co., of Baltimore, p. 22 (by Towers, Chairman, opinion filed March 8, 1918). 210 QUARTERLY JOURNAL OF ECONOMICS who asserts that "to ascertain what the word 'value' means, we must do what we should do with any other word under any other circumstances, that is, go to the dictionaries." This body realizes that the control of rates and the method of valuation suited to function for that purpose is a thing apart whose definition has in all hkeUhood not gotten into the standard dictionaries. It would certainly not accept the definition compounded by the above-mentioned writer from the dictionary. "Value," he says, "will be taken in its established sense as meaning the importance of the thing in question, measured by the amount of other commodities (com- monly represented by money) for which it can be ex- changed in open market, or the price equivalent to its intrinsic worth, which shall be a real equivalent." This conunission realizes that there is no such thing as "in- trinsic worth"; there is only the power to evoke a cer- tain price upon the market or the power to evoke a certain expression of pecuniary value from some other institution like a court or a commission. The notion that properties contain a value which is the same in all institutions is the source of much of the confusion which now characterizes valuation for pur- poses of rate-making. Commissions in such valuations do not seek an absolute quality of the property which may be denominated its value; they are rather imposing upon the property a fair value which shall express in pecuniary terms all the equitable considerations bearing upon the determination of the mutual rights of pubUc and owner. In arriving at that value the courts and commissions make use of certain market facts, both past and present, but what they are seeking is not a market value, but something different. It is Uke market value in that it is formulated to reahze a purpose in the nature of an end to be attained, just as the market seeks AN EXTENSION OF VALUE THEORY 211 an adjustment of supply and demand. But it is a thing sui generis. It has no meaning nor can it be understood except in terms of the purposes of public regulation and in terms of the technique which has been developed for arriving at a pecuniary value which shall serve that purpose. The conflicting theories concerning the proper method for arriving at fair value vary just because the purposes which the evaluators have in mind are different. If those who are charged with makipg these valuations, both for the public and for the company, told us with frankness what they are seeking to accomplish thei^ processes of valuation wovild be more intelhgible. The extreme proponents of the companies usually seek a theory of valuation which keeps public utility investment and promotion within the field of business enterprise. What the extremists on the public side desire is a pajmaent for the service which shall in no wise exceed what would have to be paid under a socialist regime which was as efficient in operation as is private management. These men would base value upon investment, and would allow no increment for the increases in land values, for changes in the price level, or for any other cause. They would remove the ownership of public utilities entirely from the field of business enterprise. They would make it merely a sound investment and nothing more. It is no part of this discussion to indicate which of these two groups is right; that is largely a matter of sound pubUc policy. One of the groups is trying to in- vest public utility property with all the functions which private property in any business enjoys. The other group is trying to divest property in pubUc utiUties of a large part of the function which private property in other productive plants enjoys. The difficulty in pre- scribing an adequate and satisfactory method of valu- 212 QUARTERLY JOURNAL OF ECONOMICS ation which is acceptable to the courts is that they have not yet decided just what Umitations are to be placed upon the right of private property in plants devoted to the rendering of public utihty services. Each of these separate phases of pecuniary valuation has a distinct function in industrial process. If the economist would understand the workings of industrial society he must master the nature and technique of the processes by which these values are created. He will never understand completely the part that value plays in industrial process until he analyzes these other values as well as price. The consideration of these various manifestations of value has brought into prominence two characteristics of the problem of valuation which deserve further con- sideration. It is clear that all valuation is purposive; and that pecuniary values derive their sanction from their fitness to function in the realization of ends. Each type of value is mediated by the end which occasioned the judgment process by which it was created. It is equally clear that all pecuniary values which are not mere subjective valuations of the individual, but which attain to social validity, are institutional products. It is doubtful whether there are any objective values which are not institutional in their origin. The purposive nature of the valuation process is beautifully illustrated by the mathematical formula em- ployed in the determination of the present value of a series of future incomes. The mathematics of valuation has become an institution, and actuaries form an organ- ized profession skilled in its use. A valuation derived through the use of this formula can be sustained in any court by the testimony of professional actuaries who are institutionally accredited. It is always an interesting exercise to set students AN EXTENSION OF VALUE THEORY 213 the task of explaining why the value of an annuity of $802 for twenty years is $10,000 on a 5 per cent basis; and why it declines in values $302 in the first year, $469 in the tenth year, and $764 in the last year of its life. Their answer will probably be that the formula gives a value of $10,000 at the begiiming of the series and that it shows a decUne in value of $302 in the first year, $469 in the tenth, and $764 in the last year. But that merely assumes that the mathematician of valuation has an- swered the problem and embodied his answer in the formula. We are seeking the principle which underlies and validates that formula. The reason why $10,000 is the value of the annuity is that this figure will enable the purchaser of the an- nuity to acciunulate his original investment out of the $16,040 paid him during the twenty years and to receive in each year an additional amount which is exactly 5 per cent of the remaining value. In the first year, for example, the owner regards $500 or 5 per cent of $10,000 as income. This leaves $302 as a return of his invest- ment; the value of his annuity at the end of that year has decreased by this amovint. The second year he counts $484, or 5 per cent of the remaining value, as income while the other $318 is con- sidered return of investment and decline in value. And so he proceeds throughout the twenty years. At the beginning of the tenth year the value is $6665 and he considers $333 of the $802 which he receives as income and $469 as decline in value. His revaluation from year to year is obviously directed to the end of maintaining a uniform percentage between that portion of the $802 which is to be considered in- come and the remaining value of the annuity. It is just this uniform ratio of 5 per cent which the mathema- tician of valuation aims to attain with his formula. 214 QUARTERLY JOURNAL OF ECONOMICS Starting with the twenty annual incomes of $802 and the 5 per cent ratio he arrives at an original value and a succession of declines in value for the various years which maintains this ratio. This is more clearly illustrated if the series of in- comes is not uniform. A series beginning with $1,000 and gradually decreasing by $25 each year to $525 in the twentieth year will also have a present value of exactly $10,000. The application of the formula to this case will show a uniform decline in. value of $500 per year throughout and not a gradually increasing amount, as in the case of the annuity of $802. The difference in the rate at which the value of these two annuities declines is arranged to secure a uniform per cent of income upon the remaining value in each year. The purposiveness of this procedure is still more strikingly illustrated if we assume a series similar except that the income falls to $200 in the tenth year, and is somewhat larger in each of the other years. This series would also have a value of $10,000 at the beginning. Its decline during the first year would be somewhat more than $500, as it would in every other year, except the tenth. In that year the application of the formula of valuation would result in an increase or appreciation in value of about $100. Obviously the value of the armuity is increased in this year when the income is smaller than usual in order to preserve the income at 5 per cent of the remaining value, even in that year. Had the payment in the tenth year been unusually large, say $1500, and that in each of the other years cor- respondingly smaller the formula would give a decline in value of almost $1200 in that year and so would have reduced the amount remaining as income to about $300, or 5 per cent on the remaining value. Clearly the whole procedure is purposive, and the AN EXTENSION OF VALUE THEORY 215 formula is merely a sjrmbolic representation of the process of valuation which is necessary to realize that purpose. If the purchaser changes his decision and con- cludes that he will divide the payment into two portions, one of which represents return of principal, while the other is at all times 6 per cent of the remaining value of the annuity, its value will become less than $10,000. The decrease in value is directly due to the fact that the purchaser has substituted a new end for the former one; every modification of his end means a change in the value of his means. The discussion of valuation for rate-making at a previous point in this paper indicated the purposive nature of that procedure. Likewise, in valuing property for purposes of taxation the object sought in fixing the assessed value which forms the basis of the levy is the just distribution of the burden of supporting govern- ment. Even where the tax purports to be upon the value of the property, the assessing body will commonly take congizance of its power to produce income. Thus the Pere Marquette Railroad has been for years assessed at thirty million doUars, despite the fact that its prop- erty was valued by the State Railroad Commission at over fifty miUions, and that the same conamission ap- proved an issue of securities at the reorganization of the properties amounting to over $100,000,000. Since all values are relative to and mediated by some purpose, it is entirely natural that value should have become a term of many meanings. The notion of an absolute value still persists, especially among lawyers and engineers. Among the lawyers this no longer takes the crude form of a supposed "intrinsic value" which inheres in the object as do physical quaUties, but rather of an attribute which property derives from some insti- tution of pecuniary valuation which has the force of 216 QUARTERLY JOURNAL OF ECONOMICS precedent. Most commonly the value to which the lawyer appeals is market value. Sometimes it is a value arrived at by the procedure which has been prescribed by the courts when property is taken under the right of eminent domain. It foUows from this analysis of the nature of value and the processes of valuation that this attitude is logi- cally unsound. There may be many pecuniary values for the same object. These may aU be vaUd, each within the jurisdiction of the institution which made it. It foUows, too, that no adequate understanding of the processes of valuation and of the causes for changes in value can be had without taking into the reckoning the technique of valuation which has come to be institution- ally recognized. As Professor Charles H. Cooley says/ "It would be as reasonable to attempt to explain the theology of St. Thomas Aquinas, or the institutes of Calvin, by the immediate working of rehgious instinct as to explain the market values of the present time by the immediateworking of natural wants." Likewise, this would be just as reasonable as to attempt to explain the nature of fair value for pm-poses of rate-making by refer- ence to the definitions of value found in economic trea- tises which limited their concern with value to the field of market price. It foUows also that the market has not now, nor has it ever had, a monopoly of pecuniary valuation. The fact that the market was the first institution which made pecuniary valuations; and that the courts cast the problem of rendering just compensation to an owner whose property was taken by the state under the right of eminent domain in hypothetical market terms does not limit the term value to the result of market opera- tions. The concept of o market value is itself an ab- 5. Cooley, "Institutional Nature of Pecuniary Valuation," p. 543, Anxerican Journal of Sociology, January, 1913. AN EXTENSION OF VALUE THEORY 217 straction. The valuations of the market are no more absolute and have no greater validity than those which result from the workings of any other institution of pecuniary valuation. And since the market itself devel- oped and attained to influence and recognition only by an historical process of evolution, it is legitimate in no more fundamental sense than are other institutions of valuation which grew up later, or still others yet to come. At any time too, functions which have been left to the market hitherto may be transferred to other in- stitutions of pecuniary valuation. The market does not, of necessity, serve satisfactorily all the ends whose attainment we now leave to its func- tioning. Particularly must we scrutinize with the greatest care the assumption so complacently made by many economists that a set of market prices which brings about a proper coordination of the factors of production effects an ideal distribution of product. In adjusting production to demand the market places at the disposal of some of the owners of the factors an amount of eco- nomic power to command product which is greater than necessary to evoke the productive contribution and which is not in harmony with our ideal system of distri- bution. It is quite conceivable that we may establish other institutions of valuation which shall correct the workings of the market in such manner as to bring our total industrial process into closer conformity with what we consider a just distribution of income. A tax on dif- ferential profits like our excess profits tax is just such an institution. There is no reason for expecting that a set of values which is adequate and satisfactory for the motivation of production shall likewise be adequate and satisfactory for effecting a fair distribution of the product. Perhaps the impUcations of this theory of value are 218 QUARTERLY JOURNAL OF ECONOMICS more significant for the problems of imputation than for any other single set of problems. Take the cormnon case of imputing the value of property used in transport- ing freight and passengers to these two classes of service. Pretty much all the discussions of the lawyers and of their experts, the engineers and the operating men, con- sist of an attempt to base the imputation of values, as well as common expenses, upon some physical factors, such as train miles, or car miles, or tons of passengers and freight transported. They attempt to base their allocations upon factors which are objectively given in the form of physical data which can be quantitatively determined. If what is here said is true, the procedure should rather be to look forward to the end which is to be attained in this imputation. Then the imputation which will finally be made will be the one which serves to accomplish that end. There will still be limiting physical factors, because the end must inevitably be conceived and worked out in terms of the available means. But where the physical means allow a wide latitude as regards possible ends, the very heart of the valuation becomes the clearly attained consciousness of the desired end. As a matter of fact the imputation is, in the last analysis, made on this basis anyhow; but a deal of time and energy is wasted and a great mass of verbiage which darkens counsel by words without wis- dom is injected into the discussion by a failure to realize the fundamental nature of the value problem. Some men realize this perfectly, as witness the follow- ing statement of a practical railroad man. "These computations, then, consist of two processes. One is allo- cation, which is the ascertainment of facts; the other is apportionment, which is the determination of poUcy. . . . In determining the propriety of proposed bases of ap- portionment we must have an eye, not only to the facts AN EXTENSION OF VALUE THEORY 219 studied, but to the purpose of the study. It is possible, and indeed probable, that if two cost studies are made of the same traflSc on the same railroad at the same time, one for one purpose and the other for another, different bases of apportionment of the same joint expenses should be used." * Finally, this point of view concerning the fundamental nature of value gives us a touchstone for the values created by the workings of the institutions of pecuniary valuation. The student was never quite satisfied with the statement that value was price. To him value al- ways seemed something more fimdamental, something which furnished a criterion for passing judgment upon prices. Once we recognize that all valuation is purposive we have a test for the vaUdity and sufficiency of any institution of pecuniary valuation like the market or the court sitting in a rate case. If the values which re- sult from the working of these institutions function perfectly to realize the end which they are intended to serve they are true values. If not, the institutions which created them must be modified or supplemented by new ones. Thus far the economist has held aloof from this field because the problems have not fallen within the bounds of traditional value theory. As a result both the pubUc and the economist have suffered loss. He is better equipped and can bring to bear upon these problems more that is relevant, both as to point of view and method, than the people who are essaying to solve them today. If he brings to bear upon them his understand- ing of economic relations and his method of analysis, we are certain to have a renascence of value theory. Davjd Friday. G. Allen d. Olmstead, Annale American Academy, vol. 63, pp. 218, 219. INTERNATIONAL TRADE UNDER DEPRECI- ATED PAPER. THE UNITED STATES, 1862-79 SUMMARY I. The greenback currency period affords a favorable opportunity for a statistical investigation of international trade under depreciated paper. — This investigation to be correlated with recently advanced theory, 221. — II. The international account of the United States from 1862 to 1879, 230. — III. Contrast of changes in the value of gold in the United States with contemporaneous changes in foreign countries, 235. — Dependence of these changes on international loans, 241. — IV. Fluctuations in the merchandise balance and the relation of these to loans and the value of gold, 245. — V. Comparative prices of export, import and domestic commodities and their relation to fluctuations in the value of gold, 249. — Contrast with English prices, 258. — VI. Com- parison of wages in industries affected by movements in the value of gold with those xmaffected by such movements, 265. — VTI. Conclvision, 272. I. The Problem This article presents the results of a statistical study of prices in the United States in the greenback period, 1862-79. The purpose of the study was to subject to an inductive test the theory of international trade under depreciated paper advanced by Professor Taussig in the issue of this Journal for May, 1917. ^ In developing his theory Professor Taussig assumed hypothetical conditions such as were actually reaUzed to a very con- siderable degree in the international trade of the United States from 1862 to 1879, when the inconvertible green- backs were the basis of our monetary system. A favor- able opportunity was thus presented for submitting the 1. "International Trade Under Depreciated Paper. A Contribution to Theory," Quarterly Journal of Economics, vol. xxid, No. 3, pp. 380 et seq. 220 INTERNATIONAL TRADE 221 theory to the test of historical data. The price statistics available for the study were good, and were gathered in convenient form in Wesley C. Mitchell's book on Gold, Wages, and Prices Under the Greenback Standard. Other necessary statistics were derived from the Reports on Commerce and Navigation and the reports of the Secretary of the Treasury for the period covered by the study. The problem is this : by what means and in what man- ner is equilibrium of payments maintained in the course of international trade between countries one of which is on an inconvertible paper monetary basis; or, having been disturbed, by what means and in what manner is equilibrium again restored? In such a case equilibrium cannot be established by the flow of gold hither and yon in the way made familiar by the classical theory of inter- national trade. Professor Taussig suggests that under inconvertible paper it is attained by a shifting in the commodity side of the price equation in lieu of a shifting in the money side. The ultimate adjustment is reached through a series of transitional price changes, affecting in contrasting ways export, import and domestic com- modities, and operating to increase or decrease the ag- gregate of commodities exchanged within the country, and as a consequence, lowering or raising the whole price level to a point which will maintain equilibrium. The method and sequence of events leading up to this consummation may perhaps best be illustrated by means of the example used in the original exposition. Assume that the trade between two countries. Great Britain and the United States, is simple (that is, a trade in commod- ity merchandise only) and is at equilibrium, the specie value of the imports balancing the specie value of the exports; that Great Britain has a gold monetary stand-^ ard while the United States is using an inconvertible 222 QUARTERLY JOURNAL OF ECONOMICS paper currency; that the premium on gold in the United States measures the real depreciation of its paper as shown by the advance in general prices beyond the level at which they would be under a gold standard; that a settled state of trade exists; that this settled state is then disturbed through heavy and continuous borrowing by the United States in Great Britain. The train of effects to be expected upon this disturb- ance would be, in the United States, as follows: A. Immediate effects: (1) Increased demand for New York exchange in Lon- don, increased supply of sterling exchange in New York. (2) Fall in sterling exchange in New York. (3) Fall in the specie premium in the United States. Sterling exchange is, in the circumstances, equivalent to gold, and sterling exchange and the gold premium will fluctuate together. (4) Fall in the (paper) prices of exported commodities. The prices of these commodities are set in foreign mar- kets in gold. The premium on gold having fallen the (paper) prices of exports must fall with it. (5) Lowered cost (in U. S. paper) of imported com- modities. These are bought in foreign markets for gold (or its equivalent) and it takes less of the paper ciurrency than formerly to buy the same amount of gold and there- fore of imported commodities. (6) Fall of the specie premium as compared with the general price level. In the stage of equilibrium assumed at the outset, the specie premium would have been in accord with the real depreciation of the currency which, in fact, it measured. It is now less. The prices (in paper) of exported commodities have also fallen as com- pared with the general price level. The same is true of the prices (paper) paid for imported commodities. INTERNATIONAL TRADE 223 B. Transitional effects: (1) Exporting industries are unprosperous : exports tend to decline as a consequence of lower sale prices (paper). (2) Importing industries are prosperous : imports tend to increase as a consequence of lower cost prices (paper). (3) Export trades tend to cultivate the home market, more domestic commodities are made and a larger share of exportable commodities is used and bought at home: import trades develop and more imported commodities come in. The upshot is an increase in the total volume of commodities bought and sold in the United States. C. Ultimate effects: (1) A fall in general prices in the United States. The volume of conunodities has increased, the money supply (assuming that there have been no new issues of paper) is unchanged: general prices will therefore fall. Even tho the paper money has increased in voliune, there will be a fall in general prices relative to the price of gold. (2) A gain to the people of the United States through lower prices of both domestic and imported goods, money incomes remaining the same throughout. The course and causes of equihbrating movements with one of the countries on an inconvertible paper monetary basis are distinctly different from those which would obtain if both countries were on a gold basis; the ultimate effects, while different in form, are in substance very much the same. The resemblances and differences will be evident on a comparison of the sequences of events to be expected under a gold and under a paper regime respectively, a comparison presented in parallel columns herewith. 224 QUARTERLY JOURNAL OF ECONOMICS Sequence of events in the United States when — Both countries are on a gold basis (1) Sterling exchange falls in New York: New York ex- change rises in London. (2) Influx of gold from Great Britain. (3) General prices rise, while they fall in Great Britain. (4) Exports decrease: imports (4) increase. (5) Equilibrium restored: Gen- (5) eral prices higher (if it is assumed that the import of gold has been proportion- ately greater than the conse- quent increase in the impor- tation of commodities). (6) Money incomes higher, (6) prices of imported goods lower. The people of the U. S. gain as buyers of im- ported commodities. The terms of international trade have shifted in their favor. The U. S. is on an inconvertible paper basis (1) Sterling exchange falls in New York: New York ex- change rises in London. (2) The gold premium (in terms of United States currency) falls as compared with the general price level. (3) FaU in the (paper) prices ob- tained for exports: imports obtained more cheaply (in United States currency). Exports decrease: imports increase. Equilibrium restored (with exchange on a new level). General prices lower (if it is assumed that there have been no new issues of paper money). Money incomes the same; general prices lower. The people of the United States gain as buyers of both im- ported and domestic com- modities. The terms of inter- national trade have shifted in their favor. With both countries on a gold basis, adjustment to- w^ard an equilibrium of the international account is reached by a movement of gold affecting all prices; when one country is on an inconvertible paper basis this adjustment takes place, independently of any gold movement, by means of a price adjustment effected by a change in the commodity rather than in the money side of the price equation, this change itself being brought about by movements in foreign exchange which INTERNATIONAL TRADE 225 affect the prices of export, import, and domestic com- modities in different ways. Many of the conditions assumed in the exposition of the theory were actually present in the period from 1862 to 1879. Thus Great Britain was throughout the period upon a gold basis while the United States was using inconvertible paper money. From 1863 to 1874 the United States borrowed heavily and continuously in Great Britain. Other conditions of the hypothesis were largely realized by 1866, when the disturbances caused by the Civil War began to subside. The premium on gold, which during the war had been greater than the general advance in prices, fell rapidly, and late in 1865 reached the level of general prices and measured fairly the real depreciation of the currency. The liquidation brought about by the war tended to simplify interna- tional trade and to reduce the complexities which ac- company credit operations, so that a state of external trade as "settled" as is ever likely to occur under mod- ern conditions was probably realized in the year or two succeeding the signing of peace in 1865. External trade at this time was simple, composed largely of merchan- dise (including gold and silver, which are "merchandise " to a country with an inconvertible paper monetary system), while exports and imports approximately balanced each other. The transactions which come under the head of merchandise amounted, in specie values, in the year ending June 30, 1865, to $265,000,000 of imports and $245,000,000 of exports; while for 1866 the figures are $477,000,000 and $450,000,000 respec- tively. For the whole period 1862-79, the items of impor- tance for the present purpose entering into the inter- national account of the United States may be grouped as follows: (1) commodity exports and imports; (2) 226 QUARTERLY JOURNAL OF ECONOMICS gold and silver coin and bullion movements; (3) freight payments; (4) sales of ships; (5) loans; (6) interest pay- ments and repayment of loans. Such items as rents, wages, profits, expenditures of tourists, remittances to relatives, the capital of immigrants, insurance, and services of various sorts, proved on investigation either to be offset by counterclaims of the same sort or to offset each other, or were so small as to be negligible. Of the six enumerated important factors in the situation, the fifth, loans, was introduced during the period studied, and eventually in such volume as to dominate the situation. With no other factor can one correlate the shifts in the balance of merchandise (including gold and silver) from a slight annual excess of exports prior to and during the early years of the war, to a very considerable annual excess of imports in the decade 1864 to 1873 (one year excepted), and back again to a large annual excess of ex- ports from 1873 onward. On the other hand the trade movement does correlate closely with this factor of loans. Borrowing on a large scale was initiated in 1863 and severely checked after the panic of 1873. The period as a whole thus presents for consideration and compari- son two contrasting situations, in one of which a new factor, borrowing, causes a disturbance of a preexisting equiUbrium, sets in motion equilibrating forces, and is suddenly interrupted to bring about the converse situa- tion, in which the equilibrating forces are evoked by the practical cessation of the borrowing as contrasted with its initiation. The new situation may, therefore, be expected to show the reverse movement to that which appeared in the preceding stage. If it be found that the actual results in the former of the two situations are such as the theory would lead us to expect, such evi- dence of the validity of the theory as this affords will be immensely strengthened if the results are neutralized INTERNATIONAL TRADE 227 or reversed in the latter. Our problem is to present and compare with theoretical expectation these actual re- sults, the whole situation being brought always to the factor of loans as the touchstone. A further word of explanation is desirable concerning the differences between the short-range and long-range phenomena. In the period from 1863 to 1873 the imme- diate, the transitional, and the ultimate effects of bor- rowing were being worked out synchronously. On the other hand, the cessation of borrowing and the increas- ing scale of repa3maent of loans from 1874 to 1878 were evoking, synchronously, just the converse immediate, transitional and ultimate effects. Moreover these sev- eral effects in either period tend in some degree to neutralize each other. Thus the short-range effect of a large new loan placed by the United States in Great Britain is (by its influence upon the exchanges and its tendency to depress the gold premium in the United States) to make imports cheap (in terms of paper currency), and so stimulate imports from Great Britain into the United States; but the long- range effect of increased imports from Great Britain into the United States is to raise prices in Great Britain and to lower them in the United States, and so set up a counter tendency in the movement of merchandise. The immediate effect of the loan is, again, to lower in the United States the (paper) prices of export commodi- ties, since their price is set in the foreign market in gold and the same amount of gold will be represented by a smaller amount of the paper currency than before the fall in the gold premium. The (paper) prices to con- sumers of commodities imported into the United States will, as shown above, also fall as a result of the loans, tho less quickly than will the prices of export commodities. The reason for this laggard fall in the prices of imports 228 QUARTERLY JOURNAL OF ECONOMICS is that while imports are obtained at immediately cheaper prices by importers, it takes time for competi- tion to work out its effects in lower prices to consumers,^ and so the paper prices of import commodities will not respond as rapidly to a change in the gold premium as will those of export commodities, which are affected immediately. The (paper) prices of import and export commodities having fallen, the prices of domestic coromodities will be relatively high. This will hold during the short-range and early transitional periods. But the ultimate effect in the United States is a lowering of all prices, and the prices of domestic commodities, which have been hitherto relatively high, will now tend to faU at a more rapid rate than the prices of export and import com- modities, and this effect may even appear as a rise in the prices of the latter. When, then, borrowing is continued over a long period, the long-range or ultimate effects of the borrow- ing of former years are working themselves out at the same time as are the short-range effects of borrowing operations only shortly before consummated, and these effects tend to neutralize each other. It is always a question which is the dominant factor. But long-range or ultimate tendencies are disturbed by so many newly- arising phenomena of every sort that their effects can seldom be traced with precision, and the attempt to do so is almost certain to be unsuccessful. On the other hand, short-range effects offer a much more hopeful field, since cause and effect can be more accurately asso- ciated and the influence of disturbing factors can be more readily obviated in a short than in a long period. Whenever, in the period here studied, the scale of bor- rowings is increased largely, the short-range effects may be expected to dominate the situation for the time being; INTERNATIONAL TRADE 229 whenever borrowings are maintained at an unacceler- ated rate the long-range effects are Ukely to come strongly into play, more especially as the immediate effects of increasing interest pajonents tend to neutral- ize the short-range effects of the borrowing operations in the same manner as do the ultimate effects of these borrowings. When borrowing ceases, and especially when repay- ment begins, exactly the reverse processes of course tend to establish themselves. It is unnecessary to trace these in exact detail, one simply needs to substitute the effect opposite to that already presented here. In such a period as that of 1862-79 short-range effects might be expected to be prominent, and ordinarily pre- dominant, since these years were broken in such a way as to present a pecuharly favorable opportunity for the operation of short-range tendencies. Borrowing began on a large scale in 1863 and was maintained for about five years at about the same rate. In 1868-69 it was very largely increased, so that just when the long-range effects might be expected to become dominant short- range effects were given a new impetus. In 1873 oc- curred a panic, a complete shift in the merchandise balance of the United States, and the relative cessation of borrowing. This just reversed former conditions and again gave predominant importance to short-range effects. Thus throughout the whole period the long- range effects would probably just be beginning to dominate the situation at the end of each of the three stages 1863-68, 1868-73, 1873-78, when their influence would be overthrown by the phenomena of the period succeeding them, whereas transitional effects would be the dominating factor practically throughout, being gradually modified and counteracted, as each period wore on, by the functioning of the long-range forces. 230 QUARTERLY JOURNAL OF ECONOMICS For this reason attention has been largely concentrated on transitional effects. Ultimate effects will be noted only on those dates at the close of the stages above in- dicated when they may be expected to be dominant. II. The Trade Balance, 1862-79 Interpretation of the international trade situation from 1862 to 1879 requires first a knowledge of what that situation was. The table on page 231 presents this situation in the form of an international balance sheet, showing merchandise exports and imports, gold and silver coin and bullion movements, freights payable and receivable, sales of ships, net interest payments and re- payment of loans. These, as has been pointed out, are the significant items for the period studied. No data exist adequate to permit of even a reasonable conjecture on the quantitative importance of other items; but since such evidence as is available goes to show that the debits and credits of these items of minor importance approxi- mately balanced each other, it seemed best to omit them altogether. The balance sheet shows: (1) An approximate balance of total debits and credits, independently ascertained, for the whole period 1860-78. This goes to show that any items omitted were of negligible importance. (2) After the war years, a tendency appears toward the extinction of a debit or credit balance running a year or two, by a balance of the opposite complexion, lasting for a similar short period only. This means that unsecured credits for any lengthy period were not granted by either party to the international exchange. (1) and (2) together are evidence of the effectiveness of the equilibrating forces. INTERNATIONAL TRADE 231 o K Ij o H H 't^'-ro'" 1-ItH • • 00 t- t- 1> t- IN ■* >-H IN ■* lO (N C^ *-1 1-H tH tH »— t Oio-*eo ■ i-iooeomi •t~00OCQ : ■*"ooin'>o QOI>000-*tOe005000StOr-(05aiCO(M05-*00 oo>i-i5oeTti'*tDooeowou3co >OCOOeOt~003>0'-ll>-'-lO!t~05IN(MTtlTt<10 t*IOt*COeO(M10 0»Oi-lt^rHt*t^OOTHOOt^O U3lO«D0500O00>O05'-lt^00r-l'*e-lCO(NIMlMeO"*-*m>'3>OlOtOCD ino50tDt^(Na2coa5(N'-irHeO'-i(MOiOect~ COlOC^COOSt^»OOOOOOeOCDt^OOS05 05U^CO u5 o i-H^iM m o> i>_oo ■*_t>-_io os_oo eo_co rH i> o_con^■*mmcol-t~cDcococD^~ OO OOOCO-^lO OOO oo tH -^Jl CO OS i-H . .OOO ; o o ; ; : ; : -ctH^iN "-"^os^oo ; . o o_o__ • lata i>>oco~-^'~e'Or-l-N>ni-I^IMi-(OIN'*COCDO Oi-H"^'-'coi-f*coco»OT-*o-^ooeoosi-<»0'cj< •^■*COMOOTHe0'-HO(Ni-IO»t~ eo"eo".-H"TtH~'*"i>'N"o"-*~o"o"co'"-ciri>ro'oo"c0-*"300000t-0!OCOO'<*OcOrHt~ ioco»Hoo.-H*-(or^oooi-tt^*^ooioocot^co lo CO ■* "O i-H 00 1> o__'-<_oo 'aH_c<)_t>_Ti<__'^_^05_05_i> Tt<_ oo'ccTccroi'co'orcrc^f'^orcd'T-rco't-rorrcrirfood" e©'*i-l i-H i-l(N 1-1 1-1 N (N >-< (N N (N rH ■* CO CDOCOlCt*iOCi4<'*i-ICDC0O>0(N0>C0OO'*C0>O CO CO CO CO 1* t^ oo_i> ■*_>n O5_c^_io i-i_-*_o_i>_co_'io'o'cD"crcvfcri^t^ U30000-*'-HCOC0ai>Oi-lCO(NlN'*CDCOCOlOC0 cocsi-iNco(N'*eoeOTt<'i*'ocot»oo COCDCDCOCDCOCOCOCDCOt^t^t^t^t^t^t^t^t^ 00000000000000000000000000000000000000 OS OS o_ 00 OS o iH OS n" 00 o o" s 3 S .3 alls £ sn -S o _ - "^ a .§ 'a s g o ■" ■g a -3 3 *-" CO H *H .9 a 'S " 'ft o -a g £'S n oQ S S § 3 o 3 o «> MO 3 W s *-< rH gw ^ ^ M 3 d IS I 1 o e "s A 1 -^ -d o ^ ^ CO ' g g s - a g s 32 a g Pi M • O " •s § » 01 O C d (a C .2 ■» 3 J, o g 5 i ° s s .S ■" ■g|a V g q IS fe ■o -a w H 4> o M S g"l "* .5 00 ei a § U Pi "Off a a • .2 " a a neOU5(MMOOOOtOtDOO oiosoooooooorH'-iooooai • 000 •03 1> s.'o.sa ?a5 "to- S-Sgo ;S go, lis- rS-S-S l!> I ij all a S-&H o.S§ ll-s ■IN •05IM(M •■* ; CO to pi ; r-i CDTHC000OO0505lt3COO0)0303OOOO0>0>0300 ■ 0» -t^i-l :o :-^td ■ IN 05 ■ 00 ■N :c3 ■ ■* :c<5 ■ 0005 • ■© •oicoooeq -to itdco ; !c<3 It-ioodto :i> co'*-*'*ooe-io6t-:iot^c«3odc>t^ost~«Di>Oi-ieo 050300*-.i>.i>.i>eeii>not» eO(NCOe005IN[~Oail^'*OOIN05lOOOOO co>rfcot-^c5Qdo5eO'«t'>- i-HTfO>OT) Ci|COT)HiO(Ot^OOO»0>HINC<5Tt(U5«Ot-00 «OtO5D, a 1 -S '-S -a 3 " a » » -g 1 S o S £ S 3 'B d^ 8.& II ^?^ g.S5 I E-i •» •° ° . ^ § » s b << a 1.2 S5 S o s; s „ >> & s o s s ° 1-5 I •s „ a° ■ ■ ■" a* O ■-- OS Dl O S o > 9 O OD o ?; a 8 Mb s ? 2 p5 m « ^ o Pi g C8 SS 3 T3 ■I i-i »ii 8^ S ■a a a "S 5 "^ s .a o 111 240 QUARTERLY JOURNAL OF ECONOMICS Summing this up, it appears that there was a relative depreciation in the United States in both years as com- pared with England and Germany. (4) In 1871 there is an appreciation in the United States and a depreciation in England and Germany. (5) In 1872 depreciation is shown in all three coun- tries. This depreciation was more pronounced abroad than at home — a relative appreciation in the United States. (6) From 1873 to 1878 gold shows a general tendency toward appreciation in all three countries, with the ex- ception of the year 1877. This appreciation is in general more marked in the United States than in England and Germany — a relative appreciation in the United States. (7) Gold was depressed in value in the United States as compared with Germany from 1866 to 1874 (inclu- sive) (cf. columns 3 and 9), and elevated from 1875 to 1878. As compared with England (columns 3 and 6) gold was depressed in value in the United States through- out, but shows a relative rise from 1875 onward. (8) From 1869 to 1873 the movement of the value of gold in the United States and in England is usually in opposite directions, appreciation in the one country being matched by depreciation in the other and vice versa. Thus in 1869 and 1870 gold depreciates in the United States, while it remains stationary and then ap- preciates in England; in 1871 it appreciates in the United States and depreciates in England; in 1872 there is a mutual depreciation, but considerably more prom- inent in England than in the United States; in 1873 an appreciation in the United States with a stationary status in England. (9) In this period, 1869-73, the movement of the value of gold in Germany approximates its movement in Eng- land, and, as in England, shows an inverse movement to INTERNATIONAL TRADE QAl that in the United States. In one year indeed, 1869, the movement of the value of gold in Germany corresponds to that in the United States, while there was no change at all in its value in England in this year; but in 1873, when gold likewise did not change in value in England, the movement in Germany was in the opposite direction to that in the United States. The movement of gold values in Germany shows as strong a tendency opposite to that prevailing in the United States as does the move- ment in England at the same time. Recall now the theory here applicable. The price of gold in the paper basis country will reflect changes in the general situation much more quickly than will the prices of commodities. In studying movements in the value of gold we may, therefore, expect to find effects following quickly upon causes, much more quickly than in the less sensitive merchandise market. Our theory has it that the depreciation in the value of gold which is the im- mediate effect of heavy borrowing will be followed by a train of consequences (increased commodity imports, de- creased conunodity exports, and so on) which will have as its own effect an appreciation in the value of gold. Borrowing operations of intermittent character would, therefore, be expected to result first in a depreciation of the value of gold and then in an appreciation. As regards continuous, unaccelerated borrowing, equiUb- rium of payments and equilibriimi in the exchanges having been established on the basis of a certain con- stant annual value of loans placed, gold after its initial depreciation will tend (as a result of the operation of the long-range forces) again to appreciate, provided that the only new borrowing is that which is normal to the new equilibrium. In order that gold should depreciate further after it has reached its level under the new equilibrium, the scale of borrowing must be increased. 242 QUARTERLY JOURNAL OF ECONOMICS The actual movement of the premium on gold sup- ports the theoretical expectation. The war years are of little significance, the premium on gold being largely dependent upon the degree of confidence which was felt in the success of the North. Things did not settle down till 1867. Refer now to Table B and note how the de- preciation and appreciation of gold values corresponds with the flotation of loans by the United States in the London market as shown in the balance sheet on page 231. Gold appreciated in value in 1867 and 1868 when the long-range effects of the loans inaugurated in and continued since 1863 would be expected to be dominant, the borrowing in 1867 and 1868 being no more than was normal to the new equilibrimn. A great increase in the scale of borrowing operations in 1869 and 1870 is re- flected, as the theory would expect, in a depreciation in the value of gold in the United States. Borrowing fell off very considerably in 1871 and correspondingly gold appreciated in value in the United States. In 1872 and 1873 loans floated by the United States in Europe increased somewhat in each year, tho not greatly. In 1872 gold depreciated in the United States absolutely but not relatively and in 1873 it appreciated both rela- tively and absolutely. This last is contrary to the theo- retical expectation, tho it is to be said that the increase in borrowing was not great, and the relative apprecia- tion sUght, so that the operation of the long-range tendencies making for appreciation may perhaps be presimied to have more than compensated the sUght depreciation which would be anticipated from the sUghtly increased borrowing. In the period 1867-73 then, our theory on the whole receives confirmation, for not only does the movement in the value of gold in the United States conform in the main to expectation, but in the same period an inverse INTERNATIONAL TRADE 243 movement tends to manifest itself in corresponding years in England and Germany. Consider now the period 1874-78. In 1874 the theoretical expectation of a relative appreciation in the United States following a decline in borrowing is dis- appointed. There is an absolute appreciation, but this absolute appreciation is more than matched in England and Germany. The years 1876 and 1876 show both an absolute appreciation in the United States and an ap- preciation relative to England and Germany, thus conforming to theoretical anticipation; for these years marked respectively the cessation of borrowing and the beginning of repayment. The same relative situation continues in 1877 as between the United States and England (tho not Germany). This corresponds with re- payments of loans on an increasing scale. A high appre- ciation in all three countries is shown in 1878, tho the movement is not as great in the United States as in the European countries, evidence that the long-range forces, as expected at this date, have once again become predominant. Summing up, it may fairly be said that throughout the period 1867-78 there is a close correspondence between the fluctuations in the value of gold and the amount of borrowing and of repaying by the United States in the Em-opean loan market. The loans were apparently a dominating factor in the exchanges, and through the exchanges in determining the value of gold. A major cycle involving depression in the relative value of gold from 1866 to 1873 in the United States as compared with England and Germany, followed by a rising relative value from 1875 to 1878 corresponds with a period of heavy borrowing from 1866 to 1873 and a succeeding period of dwindUng loans and the beginning of repay- ments from 1874 to 1878. This major cycle is marked by 244 QUARTERLY JOURNAL OF ECONOMICS minor fluctuations pretty closely adhering to theoretical expectation, the minor movements in the value of gold in the United States not only corresponding in this way to the demands of theory, but also showing a definite inverse trend to the synchronous movements in Eng- land and Germany — strong evidence that the borrow- ing and lending operations were the cause of the fluctuations. It should be borne in mind that it is the value of gold in terms of commodities, and not in terms of greenbacks which is shown in column 3 of Table B. Fluctuations in the gold value of the greenback* are therefore irrel- evant, except for short periods, during which adjust- ment of greenback commodity prices to the gold value of the money unit is proceeding. These periods of adjust- ment may indeed be quite adequate to account for such discrepancies as appear between the facts and theo- retical expectation, but the discrepancies will then be due not to the change in the gold value of the currency, but to the fact that such a change, tho followed by a corresponding change in commodity prices, nevertheless takes time to work out its effects. Disregarding this tardiness of adjustment in the United States, which so far as it was effective tended to defeat theoretical ex- pectation, columns 3, 6, and 9 present a fair comparison of the value of gold in terms of commodities in the United States, England, and Germany respectively. Gold fluctuated in value in all three countries but it is the relative not the absolute movement which is significant. 4. The total money in circulation in the United States {of which the major part was inconvertible paper) fluctuated but slightly in the period 1865-78. In 1865 total money in the United States (including gold and silver coin, bullion in the Treasury, United States notes and national and other bank notes) was $770,398,000. From that time till 1869 there was a slow decline to $716,471,000, then an upward movement terminating in 1874 at $806,024,000. A new decline then sets in which goes to $763,053,000 in 1877 when the tide turns once again toward recovery (Reports of the Comptroller of the Currency). INTERNATIONAL TRADE 245 Finally it will be noted that when in 1867, after the vicissitudes of the war years had passed, and gold had, so to speak, found its level in the United States, albeit for some years a depressed level, the fluctuations in its value (in terms of commodities) in this country were on the whole no greater than in England, and that its value was more stable in Germany than in either the United States or England. This latter fact constitutes further evidence of the effect on the value of gold of the lending operations, for in these operations Germany played a small part, and the value of gold in Germany was there- fore affected but indirectly in the course of Germany's trade with the United States and England; whereas its value in England and the United States was affected by the loans directly and with much greater force. So much with regard to the test of the first stage in the causal sequence laid down in the theory — the movement in the value of gold consequent upon a dis- turbance in the equilibrium of the international account through the introduction and withdrawal of large loans. Let us now turn to the effect of these loans, operating presumably through fluctuations in the value of gold, upon the course of international merchandise transac- tions. IV. Fluctuations in the Movement of Mekchandise Previous to the Civil War the normal equilibrium had been one in which merchandise exports (including gold and silver coin and bulUon) exceeded imports by an average of $20,000,000 yearly. This was the case in the six years previous to June 30, 1860. In the six years following, the average was $24,000,000 yearly the other way. In 1867 the excess of imports mounted to $60,000,000. It would seem that this last effect must 246 QUARTERLY JOURNAL OF ECONOMICS be attributed to the loans which were then being placed by the United States in the European market. The $20,000,000 normal excess of exports prior to 1860 would go to pay other items in the international account on which the United States was in those years a debtor. In addition to the falling behind in commodity exports in the six years 1861-66 the earnings of the merchant marine of the United States fell off very greatly. The sale of ships in the war years temporarily sufficed to offset this decline in freight earnings, but the normal excess of $20,000,000 in exports was wiped out by bor- rowings. The $60,000,000 excess of miports in 1867, following the depreciation in the value of gold (that is, high gold prices) in the United States in 1866, was succeeded by an excess of exports in 1868 of $4,000,000. Reference to page 239 will show an appreciation in the value of gold in the United States in 1867 and 1868. It appears that in 1868 the long-range effects of the borrowing of the preceding years were becoming dominant over the im- mediate effect of new loans: that is to say, the increased supply of goods due to large imports, the money sup- ply meanwhile remaining stationary, was lowering all prices in the United States and thus tending to increase exports; while the diminished supply of goods (due to large exports) and an increased monetary supply (due to imports of gold) were raising prices in Great Britain and tending to decrease exports from that country to this. In 1869, when borrowing by the United States began on a new and greatly increased scale, the immediate effects of this new borrowing became dominant over the long-range effects of the former loans. Imports in the year ending June 30, 1869 exceeded exports by $94,- 000,000. The fall which, as we have seen, took place in INTERNATIONAL TRADE 247 the value of gold in consequence of these loans would lower the yield on such commodities as were dependent upon the value of gold, that is the exports, and so would tend to restrict them; while the rise in the value of gold in Great Britain would lower the prices of imports from that country and so tend to encourage them. Gold con- tinued to rise in value in Great Britain in 1870 and to fall in the United States, and merchandise imports into the United States for the year ending June 30, 1871 greatly exceeded merchandise exports, tho the export of gold from the United States was large enough almost to effect a balance. This export amounted to nearly $100,- 000,000 and is easily explained by the relatively high value of gold in Great Britain, or, to put it in another way, its cheapness in the United States. In the year ending June 30, 1872 merchandise im- ports into the United States exceeded merchandise exports by about $182,000,000, loans continuing mean- while to be placed in large volume; and again in 1873 merchandise imports showed an excess over exports of $120,000,000. As has been pointed out, the apprecia- tion in the value of gold in the United States which oc- curred in 1871 and 1872 was contrary to the expectation of theory. It is interesting to note that the merchandise movement did not follow the vagary in gold. After 1873 the check on borrowing was so stringent as to constitute a relative, and about 1875, an absolute cessa- tion; in the latter year repayments began to outrun new loans. Reference to Table B will show an apprecia- tion in gold in the United States in the years 1873-77. A corresponding cessation of the excess of merchandise imports over exports takes place at the same time. Thus for the year ending June 30, 1874, merchandise exports exceed imports by $19,000,000 and tho in 1875 a slight reversion causes an excess of imports of the same 248 QUARTERLY JOURNAL OF ECONOMICS amount, in the years ending June 30, 1876, 1877, 1878, excesses of merchandise exports of $80,000,000, $151,- 000,000, and $258,000,000 appear, completely reversing conditions in the early seventies. Accompanying this reversal in merchandise account there was a correspond- ing reversal in financial account, the large loans of the early period changing to large repayments in the later. All this is in accord with our theory. But whether the loans were the cause of the movement of merchandise or the movement of merchandise was the cause of the loans, which in the latter view would be considered to have been floated for the purpose of extinguishing a merchan- dise debit already created, is yet to be determined. So far two results have appeared: (1) that the heavy borrowing of the late sixties and early seventies tended to depress the premium on gold in the United States, and the cessation of these loans and their repayment to elevate that premium; and (2) that there was a cor- respondence between the flotation of loans and the course of international merchandise transactions. It remains to show the relation of cause and effect between (1) and (2) ; to show how the depression in the premium on gold as a result of the loans acted upon prices in such a way as to stimulate imports into the United States and check exports from the United States, and thus to effect a balance; to show the converse tendency pro- duced by the cessation of borrowing and the repayment of the loans; and how the change in the course of trade, thus brought about, itself affected prices in such a way as to establish a new equilibrium. This involves an in- vestigation of price phenomena, which will be under- taken in the section to follow. INTERNATIONAL TRADE 249 V. Pkices A. Price Changes in the United States The precise object of the inquiry on the course of prices will be to see if any significant differences can be traced between the price movements of conamodities exported by the United States, commodities imported into the United States, and commodities both produced and consmned in the United States; differences between these three groups being considered with regard to the course of international trade and an adjustment of equilibrimn.^ Of the 153 available series of wholesale price quota- tions by quarters from 1860 to 1880 many are for slightly different forms of the same commodity or for closely related commodities; thus there are three series for flaxseed, five for starch, etc. Professor Mitchell has grouped into a single series the prices of all such closely related commodities and has reduced the 153 series to 92. These 92 series have been here divided into the three classes just mentioned: (o) export commodities, which comprise all those commodities exported by the United States on a scale sufficient to cause their price to be determined in a foreign market; (b) import commod- ities, which comprise all those commodities the import of which was great enough to be the determining factor in their prices; (c) domestic commodities, which com- prise all those commodities the production and con- sumption of which was carried on almost exclusively at home. Some of the commodities for which price quota- tions are available, could not well be placed in any one of the three categories. Such were lumber and hides, both 5. Figures for prices in the United States still have been obtained from Professor Mitchell's study. They have been rearranged for the purpose of the present investi- gation. 250 QUARTERLY JOURNAL OF ECONOMICS imported and exported, and for the present purpose neither fish, flesh, nor fowl. They have therefore been omitted. Of the 92 series, 74 were reasonably amenable to our classification. Export commodities constitute 18 series; import commodities, 14 series; domestic com- modities, 42 series. Prices in 1860 are taken as the standard (100) be- cause an average for the decade or quinquenniad pre- ceding 1862 was not possible, since the data available in many cases do not run previous to 1860; and it was not desirable to take the year 1861, since it was one of marked business depression. 1860 was a normal year, and therefore the prices of that year are taken as giving the best available standard.^ All prices are relative to the price for the given commodity in 1860. Before giving in tabular form the results which come from the regrouping of the price statistics available, let us direct attention once more to the trends that theory would lead us to expect in prices in the United States. They are as follows. 1. Transitional effects. In Period A, 1866-74 (the period of heavy loans to the United States by Europe). (1) Low (paper) prices of export commodities. (2) Gradually falUng (paper) prices of import com- modities. (3) Relatively high (paper) prices of domestic com- modities. In Period B, 1874-78 (the period of the cessation of loans floated in Europe by the United States and their partial repajrment). (1) High (paper) prices of export commodities. 6. With regard to commodities subject to seasonal fluctuations in prices the average of quarterly quotations for 1860 serves as a base. For the rest the price on January, 1S60, is usually taken, the for various reasons some other month of 1860 might have been selected as more representative. INTERNATIONAL TRADE 251 (2) Gradually rising (paper) prices of import com- modities. (3) Relatively low (paper) prices of domestic com- modities. 2. Long-range effects. Period A. Relatively low prices in the United States, as compared with other countries, for all com- modities. Period B. Relatively high prices in the United States, as compared with other countries, for all com- modities. The transitional price movements of Period A — low paper prices of export commodities, gradually fall- ing paper prices of import commodities and, as com- pared with export and import, high paper prices of domestic commodities — will in Period B tend to be reversed toward high paper prices of export commod- ities, gradually rising paper prices for import com- modities and, as compared with export and import, low paper prices for domestic commodities. Owing to the vicissitudes in the commercial and financial situation at this time, the long-range effects can scarcely ever be expected to be dominant. They will be operative, and will tend, as have been shown, to neutralize the transitional effects. But the changes in fundamental conditions which occur here at intervals of a few years only will make the transitional effects conspicuous, the long-range effects not having time to dominate the situation before a new disturbing influence appears. One word further, in explanation of the theoretical expectation with regard to the prices of export and im- port commodities. The premium on gold having fallen, the (paper) prices received for export commodities im- mediately fall, since the price of these commodities is set 252 QUARTERLY JOURNAL OF ECONOMICS in gold in a foreign market. This fall in the paper price received for exports will tend, it is true, to diminish supply and so cause an upward movement in their prices thereafter. But the competition from other countries supplying the same market will tend to keep the gold price at its former level and thus the paper price low. So far, however, as foreign competition is not operative, there will be a gradual rise in the gold prices of these commodities to a point where the paper price into which the gold price is translated bears the same relation to the paper prices of other commodities as before the decline in the gold premium. As for imports, they are obtained for the same gold price as before the fall in the gold premium and therefore cost less in paper. Since there is no change in the conditions of demand, they can be sold at the same paper price as formerly and importers will for a time get abnormal gains. Competi- tion will however tend to bring their paper prices down. Thus a depreciation in gold will cause the paper prices of exports to fall immediately, after which they may very gradually tend to rise; while imports on the other hand, unaffected immediately, begin quickly to fall in their paper prices and will fall till their paper prices bear the same relation to the paper prices of other commodities as before the fall in the gold premium. A decline in the gold premium, then, will cause the paper prices of ex- ports to fall below the paper prices of commodities in general, the paper prices of import commodities will follow this decline with a lag, the prices of export com- modities meanwhile tending slightly to recover. Con- ditions are of course just reversed when the premium on gold rises. The table and chart which follow present by quarters, for 1866-78, the arithmetic mean of wholesale prices in general (92 commodities); the arithmetic mean of INTERNATIONAL TRADE 253 Abxthmetic Means of pRices of Export, Import, Dohebtic and General CoMMODiTXEa Date Arithmetic Arithmetic Arithmetic Arithmetic mean of all mean of 18 mean of 14 mean of 42 commodities export import domestic (92 articles) commodities commodities commodities 199' 188 177 192 186' 175 170 177 191' 181 176 181 188' 180 175 178 179' 169 163 178 175' 171 165 171 170 157 159 171 172 163 166 173 171 162 154 177 176 178 161 178 165 165 159 169 166 163 169 169 165 167 164 172 165 167 163 168 158' 160 159 161 157 153 159 159 152 150 155 153 146 146 153 145 145 142 151 143 143 138 151 143 142 139 142 148 140 136 137 143 137 129 134 143 139 132 137 145 141 136 130 148 145 145 136 147 139 133 140 143 143 133 138 148 142 132 134 148 144 141 132 147 140 132 130 143 140 130 130 146 140 133 122 146 141 144 126 141 138 138 127 137 138 146 122 133 138 141 121 137 132 135 124 130 129 131 116 128 127 133 114 124 122 127 112 121 122 132 110 118 118 119 115 112 117' 115 114 114 121 124 118 117 118 121 125 111 114 115 125 107 110 112 113 105 107 108 105 103 105 104 109 99 99 93 107 94 102 93 109 100 1866 January " April. . . July... " October 1867 January April... July... " October 1868 January AprU. . . July... " October , 1869 January April. . . July.... *• October , 1870 January " April . . . July.... " October . 1871 January " April... July.... " October . 1872 January * April. . . July.... " October . 1873 January April... July.... " October . 1874 January ** April . . . " July October. 1875 January " April. . . July.... " October . 1876 January " April. . . July.... " October . 1877 January April... July.... * October . 1878 January « April... July.... ' October . 7. In these quarters, chiefly in the years 1866 and 1867, the figures of average general prices for the ninety-two commodities will be found to be higher than the average prices of any of the groups of export, import or domestic commodities; and in one case, July, 1869, they are lower. This is because the three segregated groups together comprise only seventy-four of the ninety-two commodities. The influence of the eighteen omitted commodities accounts for the apparent error. _ These eighteen commodities, while in- capable of being considered domestic commodities pure and simple, are nevertheless of much greater significance in domestic than in foreign trade. If included as domestic commodities they would, in seven of the total of eight cases where the discrepancy occurs, have occasioned changes which would have emphasized the results expected by theory. In one case their inclusion would have had the opposite effect. 254 QUARTERLY JOURNAL OF ECONOMICS INTERNATIONAL TRADE 255 wholesale prices of 18 export commodities; the arith- metic mean of wholesale prices of 14 import commod- ities; and the arithmetic mean of wholesale prices of 42 domestic commodities. The significant movements shown in these figures are the following: (1) From the first quarter of 1866 to the first quarter of 1874 (inclusive) the average price of domestic com- modities is only twice (October, 1866 and April, 1870, and here the maximum difference is two points) lower than that of export commodities, and from the latter date to the second quarter of 1878 they are never once higher. In three instances, July, 1866, April, 1867, and April, 1868, the average of both types of commodities is the same. The greatest difference between the average prices of the two types is 21 points in October, 1872. (2) From the first quarter of 1866 to the second quar- ter of 1876 (inclusive) the average price of domestic commodities is never once lower than the average price of import commodities except for all four quarters of the year 1870; and from the second quarter of 1876 to the cqncluding quarter of the period studied, 1878, they are never once higher. Note here how the prices of import commodities follow those of export commodities with a lag. The response of import to export movements is not immediate, but a general sympathy is evident. Export conunodity prices respond quickly to the changed con- ditions after 1873, import commodities slowly. (3) From the first quarter of 1866 till the first quarter of 1874 the average price of export commodities is never higher than the average of general prices (all commod- ities) except in April, 1868, and for the first three quar- ters of 1869 (the maximiun difference in any one of these exceptional cases is two points); and from the second quarter of 1874 till the first quarter of 1878 it 256 QUARTERLY JOURNAL OF ECONOMICS is never lower except in October, 1876, when it falls below the average of general prices by two points. (4) From the first quarter of 1866 to the second quar- ter of 1877 the average prices of import commodities are never higher than the average of general prices (all commodities) except in October, 1868, July and October, 1869 and all four quarters of 1870; and from the second quarter of 1877 to the end of 1878 they are never lower, except in January of the latter year. Here again the lag in the price movement of imports is evident. The revo- lution in trade after the panic of 1873 does not work out its full effect on import prices till 1876 or 1877. (5) From the third quarter of 1867 to the second quarter of 1874 (inclusive) the average price of domestic commodities is never lower than the average of general prices (all commodities) except in April and July, 1870, and is usually four to six points higher. From July, 1874 onward it is never once higher and is usually four to six points lower. (6) On the curtailment and practical cessation of bor- rowing by the United States, beginning with 1874, ex- port prices responded almost unmediately, shifting permanently in 1874 from a status consistently below the averages of domestic and of general prices to one consistently above it. Import prices responded also, but more slowly, and tho showing an absolute rise in April and July, 1874, while domestic and general prices were falling, and with some checks a relative rise thereafter, it was not until July, 1876 that they became absolutely higher than the prices of domestic conamodities, and not until April, 1877 that they became absolutely higher than the average price of all commodities. (7) While the average prices of export commodities are generally higher absolutely in the first years of large borrowing (the years immediately after the war) than INTERNATIONAL TRADE '2m the average prices of import commodities, yet there is a sharper fall in the prices of exports in these years than in those of imports. In October, 1866, the prices of export and import commodities respectively were 179 and 175, by October, 1867, 163 and 165, and by October, 1868, 163 and 169. (8) After the panic of 1873 and the cessation of bor- rowing export prices rise rapidly and then gradually fall, while import prices remain fairly constant with a tend- ency in 1876 and 1877 to increase. B. Interpretation of American Prices All of these results are in correspondence with the theoretical expectation. Loans, as has been pointed out, were severely curtailed by the panic of September, 1873. The complete shift in the relations of export and import prices to those of domestic commodities took place al- most immediately, by April, 1874. Previous to that date, during the period of heavy loans floated by the United States in Great Britain, export and import com- modity prices, were, consistently with theory, almost without exception lower than domestic commodity prices; after that date and the relative cessation of borrowing, they were, again consistently with theory, almost without exception relatively, and for the most part absolutely, higher. Import prices, both during the period of large borrowing and after its cessation, as theory would expect, responded more slowly than export prices to the changes caused by the introduction of the loans into the international account and by their ab- straction from it. The most striking exception is the year 1870, when import price figiures rise above the prices of domestic commodities in all four quarters. It is possible that the 258 QUARTERLY JOURNAL OF ECONOMICS Franco-Prussian War, by setting up a large demand for English exports (i. e., American imports) may account in some measure for this phenomenon. It will be noted that the April quotations of exports tend to be the highest of the four quarters — a natural result of the fact that the exports were predominantly agricultural products and the April quarter would show an advance in prices over that of any other of the three. On this ground it would be more just to take the yearly average than quarterly prices. If this were done, several of the cases in which fact and theory do not correspond, few as these are, would be removed and a still more ideal correlation would appear. €. Comparison between Price Movements in the United States and in England The course of prices in England, so far as they were a,ffected by the movements in exchange on the United States, ought to show a tendency contrary to that which appears in the United States. It is not to be expected that English prices would respond readily to the fluctua- tions in New York exchange, since Great Britain was on a gold basis and the movements of American exchange would affect only a portion of her total foreign trade. Nevertheless Great Britain's trade with the United States was a considerable fraction of her total foreign commerce. Since exports to, and imports from, the United States would be affected by movements in the rate of exchange, it is to be expected that a price move- ment would develop in England opposite to that appear- ing at the same time in the United States, exports and imports contrasting with domestic commodities but in the converse direction. No such complete quotations of English as of Ameri- INTERNATIONAL TRADE 259 can prices are available. But a series of prices,' de- rived from the Aldrich Report gives quotations for com- modities, twelve of which may be classed as domestic, twenty-six as import, and five export. The last group is obviously too narrow for any significant inferences and there have been added to it the prices of fourteen other export commodities derived from a supplement to Soetbeer's Hamburg prices in the Aldrich Report, pur- porting to be the London prices of the English exports mentioned. Prices are given by years only. Taking 1873 as the year of the shift, and drawing at that year the line of separation of Period A from Period B, the theory would expect the following: In Period A (United States borrowing). Transitional effects. (1) High Prices of Exports. Exporters to the United States will be able to obtain for a time practi- cally the same paper prices as before the dis- turbance of equilibrium and these translated into gold, which has depreciated, will yield more than formerly. As competition develops among the exporters these prices will tend to drop. (2) Rising Prices of Imports. The gold obtained by American sellers for their products when trans- lated into paper yields less than before the de- preciation of gold, and unless the British buyers can import from some other country the sellers will gradually be able to raise their prices. Ultimate effect. A General Rise in Prices. There will be less goods and an increased amount of money as a result of the shift in the play of international de- mand consequent upon the change in price levels. This general rise in prices will appear as a relative 8. Part I, pp. 24S et seq. 260 QUARTERLY JOURNAL OF ECONOMICS rise in the prices of domestic commodities, ex- ports and imports already having risen in price. In Period B (United States ceases borrowing). Transitional effects. (1) Low Prices of Exports. The paper prices obtained for exports to the United States (the market which sets the price) will, owing to the apprecia- tion of gold, yield less than formerly. These prices will gradually tend to rise as the supply is curtailed owing to the low prices obtainable. (2) Falling Prices of Imports. Due to competition among sellers in the United States, who as an immediate effect of the appreciation of gold, have on its translation into paper, obtained high prices for their products. Ultimate effect. A General Fall in Prices. There will be more goods and less money as a result of the shift in the play of international demand consequent upon the change in price levels. This general fall in prices will appear as a relative fall in the prices of domestic commodities, exports and imports al- ready having fallen. The arithmetic means of the nineteen export, twenty- six import and twelve domestic commodities, for which English quotations are available, are given on page 261. The following results may be noted: In Period A (1866-73). (1) Export prices exceed in every year both import and domestic commodity prices. (2) In 1866-70 import prices are higher than domes- tic commodity prices. In 1871-73, however, they are lower. (3) From 1866 to 1871 the prices of export com- modities fall relatively to both import and domestic commodities. INTERNATIONAL TRADE Prices in England 261 Arithinetic Arithmetic Arithmetic Sauerbeck's » index no. all commodities Date average of 19 export commodities average of 26 import commodities average of 12 domestic commodities 1866 124 110 102 106.5 1867 118 106 104 103.9 1868 113 106 103 103.1 1869 114 105 100 101.9 1870 111 103 98 100.3 1871 111 103 104 102.6 1872 126 106 111 112.5 1873 130 103 119 116.6 1874 122 98 110 107.0 1875 116 91 109 100.3 1876 110 90 109 97.5 1877 105 94 107 97.4 1878 100 86 105 91.2 (4) In 1870-73 general prices rise. In Period B (1874-78). (1) Export prices fall relatively to domestic prices throughout, but are not lower absolutely till 1877. (2) Import prices are lower than domestic prices throughout the period and show, moreover, a relative fall as compared with the prices of domestic commodities. (3) General prices fall. These results are in close consonance with the expec- tation of the theory. The interpretation of them is: Period A. (1) The high prices of export commodities are in accordance with the theory as to the immediate effects of borrowing operations, to which export com- modities most quickly respond. (2) Import prices are higher than domestic prices till 1871 when the long-range effects tending to raise all 9. Aldrich Report, Fart I, p. 255. 262 QUARTERLY JOURNAL OP ECONOMICS prices, cause a relative fall in imports as compared with domestic commodities. (3) The tendency of export prices throughout the transitional period to drop from the high level which is the immediate effect of the borrowing operations is here clearly shown. Short-range effects again become dom- inant after 1871 as a result of the great new lending operations inaugurated in 1869 and 1870, and prices of export commodities show once more both an absolute and relative appreciation. (4) The general rise 1870-73 illustrates further the long-range tendency. Period B. Results (1), (2), (3) are all in consonance with the expectation of theory. The revolution in inter- national finance which began in 1874 is accompanied here as elsewhere by a revolution in prices strictly cor- roborative of theory. The course of the price phenomena, in England and in the United States ought to be in opposite directions. The following tabular comparison of the arithmetic average prices in the two countries shows how well the theory is verified. Period A (1866 to end of 1873) United States (paper standard) Great Britain (gold standard) (1) Export commodity prices (1) Export commodity prices never above domestic com- never below domestic com- modity prices except in two modity prices. quarters, October, 1866, and April, 1870. (2) Import commodity prices (2) Import commodity prices never above domestic com- are above domestic com- modity prices except in modity prices until 1870 — 1870.> but not thereafter." (3) General prices falling. (3) General prices rising. 1. Foeeibly explained as the effect of the Franco-Pnusisn War. INTERNATIONAL TRADE 263 Period B (1874-81) United States (paper standard) Great Britain (gold standard) (1) Export commodity prices (1) Export commodity prices rise relatively to domestic fall relatively to domestic commodity prices, and from commodity prices, and after April, 1874 to April, 1878 1877 the former are abso- the former are never below lutely lower than the latter, the latter. (2) Import commodity prices (2) Import commodity prices rise after 1874 relatively to fall after 1874 relatively to domestic conmiodity prices domestic commodity prices and after October, 1876 are and after that date are never lower than these lat- never higher than these lat- ter, ter. (3) General prices faJl. (This is (3) General prices fall, contrary to theory but is probably due to the rapid appreciation of the paper money owing to the prospect of early redemption in gold.) The contrast in the price movements in the United States and England, the movement in both countries being in confirmation of the theory, furnishes corrobora- tive evidence too strong to be accepted as mere coin- cidence. The price movement in one country at one time might be in correspondence with theory, tho due to quite extraneous causes; but it is not within the bounds of any probability that in different countries there should be an opposite tendency in prices at the same time, that the conditions should be reversed in both countries at the same time, that all the expectations of theory should be confirmed under these conditions, and the theory yet be wide of the mark. The opposite tendencies of prices in the United States and England in the period studied would hardly have been possible if both countries had been under a gold regime. For gold would then have moved freely, and freely entered the circulation of both countries, and the 264 QUARTERLY JOURNAL OF ECONOMICS prices of transportable commodities could not have varied greatly in the two countries as compared with their prices before the gold movement took place. Moreover, with both countries under a gold regime, when equilibrium had been disturbed and gold had flowed to country A from country B, exports of A would tend to rise in price, owing to the increased stock of gold in A, while imports from B would tend to fall in price, owing to the decreased stock of gold in B; that is, the movement of export and import prices in A (and in B, too) would be divergent. But in the present case the movement of export and import prices has been in the same direction (tho in different degrees), since both ex- ports and imports are paid for in gold and rise or fall in their paper prices with the appreciation or depreciation of gold. The contrast is then, not between exports and imports — their prices move together — but between export and import commodities on the one side and domestic commodities on the other. With both countries under a gold regime, when ex- changes had been disturbed sufficiently to induce a flow of gold from one country to the other, the price level would be changed, no doubt unevenly, but in no such way as to make a classification along lines of export, im- port, and domestic commodities likely to produce any significant results. The adjustment to equiUbriima would be reached by a movement in general prices which would tend to carry every price in either country in the same direction. With one country upon a paper basis the readjust- ment is effected through the exchanges solely, at least so far as the paper-using country is concerned, since for it, the movement of gold cannot affect prices. And it is effected by a movement of prices which discriminates between classes of commodities. The prices of commodi- INTERNATIONAL TRADE 265 ties which enter into international trade are affected first and foremost, and the course of the trade itself is con- trolled thereby. This direct effect upon the prices of commodities which enter into international trade, with no direct effect upon other commodities, is a more efficient regulator of international trade toward an equilibrium than the irregular and widely distributed movement of prices to be expected with both countries under a gold regime could possibly be, and so a quicker adjustment is likely to be reached in the international trade of a country which is on a paper than in that of one on a gold basis, assuming, of course, that no new disturbing factor enters the situation. VI. Wages One further aspect of the subject remains to be treated. This is the effect of the shifts in prices upon the production of commodities. It is an essential part of the theory that, under the conditions assimied, the move- ments in prices in the paper-using country tend to divert production from an industry producing a commodity for export to one producing a commodity consumed at home, or vice versa; that export industries will become relatively unprosperous when the course of international trade and the movement of the exchanges causes a de- preciation in gold, and relatively prosperous when gold appreciates. Thus in Period A (1866-74) the theory would expect exporting industries to be unprosperous as compared with industries producing commodities for home con- sumption. A movement of capital and labor out of ex- port industries will set in, while industries producing commodities for domestic consimiption will receive accessions of labor and capital. This movement will 266 QUARTERLY JOURNAL OF ECONOMICS continue until the expectation of profit is as great in the one type of industry as in the other. So the theory would lead us to expect relatively unprosperous export- ing industries in Period A; and in Period B when bor- rowing had ceased, and gold was, as a consequence, appreciating relatively to the prices of commodities in general, a prosperous status for export industries as compared with industries producing commodities for domestic consumption. Probably the best test of the relative prosperity of industries lies in the movement of wages. Tho wages move less freely than prices — wages show some meas- ure of retardation — yet where an industry is pros- perous the pressure for an increase of wages is almost certain to be effective in raising them. On the other hand, where an industry is unprosperous, the resistance to such pressure will be indefinitely greater and wages either will fall or, if they rise, will rise to a less degree than in the prosperous industries. It is true that the prosperity or depression of an in- dustry will find its reflection in profits as well as in wages, or perhaps, indeed, earUer in profits than in wages. Nevertheless relative wages are the better ma- terial for a test of the comparative prosperity of indus- tries for two reasons. (1) Wages for any given sort of labor are uniform throughout the industry, whereas the profits of the various firms which compose the industry will vary from nothing to all to an indefinitely great amount. Hence "normal" profit for the industry at the given time is practically impossible to determine. (2) There are no statistics of profits at this period which are of any value. Taking relative wages then, as the best test of the comparative prosperity of industries, statistics of wages have been computed from the series of wage schedules INTERNATIONAL TRADE 267 given in Mitchell's Gold, Wages, and Prices. Pro- fessor Mitchell drew on two sources for these data: (1) the compilation of the Bureau of Labor for the Senate Committee which prepared the Aldrich Report in 1892, and (2) the compilation roade between 1880 and 1882 by Mr. Joseph D. Weeks for the Tenth Census. These sources, treated separately by Professor Mitchell, may be made to supplement one another for the present purpose. The Aldrich Report gives wage data in twenty-one industries, but of these, twelve industries are so meagerly represented that Professor Mitchell re- gards the data as too scanty to promise significant results. From the Aldrich Report statistics the present study takes into consideration only eight industries, omitting, in addition to Professor Mitchell's twelve, that of cotton ginghams, which seemed to offer nothing very different from cotton textiles at large. The Weeks Report covers thirty industries in all, in nine of which there are sufficient data to give significant figures of rela- tive wages. Two of these, cotton textiles and woolen textiles, correspond to industries also covered by the statistics given in the Aldrich Report, the other eight being represented in that report either inadequately or not at all. Of the two wage series which occur in both reports those of the Weeks Report have been preferred since they are based on much more comprehensive data. There are then six industries represented from the Aid- rich Report and nine from the Weeks Report, fifteen in all, as follows: Building Trades, Carriages, City Public Works, Cotton Textiles, Furniture, Glass, Illu- minating Gas, Metals, Paper, Pottery, Railroads, Saw- mills, Stone, Tanneries, and Woolen Textiles. 268 QUARTERLY JOURNAL OF ECONOMICS These industries are divided into two classes: Class A — Industries producing for the domestic market, including the Building Trades, Carriages, City- Public Works, Illuminating Gas, Railroads, Saw-mills, and Stone. Class B — Industries producing for export, or indus- tries subject to competition from abroad, and there- fore having the prices of their products in large degree determined by the value of gold in terms of paper. This group includes Cotton Textiles, Furniture, Glass, Metals, Paper, Pottery, Tanneries, and Woolen Tex- tiles. To this group has been added Farm Labor, for which the wages rates, tho not so fuU as those of the manufacturing industries here given, are yet of such significance for the present inquiry that they ought to be included. In forming the tables of the mean wage in each in- dustry, the wages for the several occupations in each industry are averaged, the wage in 1860 in all cases being taken as the base = 100. Arithmetic means of wages grouped into the two classes indicated above are: Relative Wages ' Year Claes A industries (producing com- modities consumed at home and not subject to foreign competition) Class B industries (producing com- modities for export or subject to foreign competition) Year Class A industries Class B industries 1866 165 160 1873 182 153 1867 171 151 1874 177 151 1868 174 151 1875 168 148 1869 180 152 1876 160 144 1870 181 154 1877 147 141 1871 182 152 1878 142 137 1872 183 154 2. In paper money. INTERNATIONAL TRADE 269 The appended chart shows clearly the difference of movement in the two classes. 190 160 170 160 150 140 130 Class A. Wages in industries producing witliout foreign competition for the home market. Arithmetic average. CiiAss B. Wages in industries producing for foreign market, or subject to foreign competition in the home market. Arithmetic average. •«••' ••*••• '....' *•** *'« ..^,_ JW "^ 1666 1667 ISee 1869 1670 1671 1672 1673 1674 1675 1876 1S77 ©76 We may note: (1) in the period 1866-73 wages are consistently higher in Class A industries than in Class B, and they rise from an average of 165 in 1866 to 183 in 1872, or a maximum spread of 18 points. Wages also rise in Class B industries, but very slightly, the maxi- mum spread being only 4 points from a minimima of 150 in 1866 to a maximum of 154 in 1872. This indicates for this period a high and an increasing degree of prosperity in Class A industries as compared with industries in Class B, and is therefore in (jonformity with the expec- tation of theory. (2) In the period 1874-78 wages fall in both Class A and Class B industries, but the relative decline in Class A is much greater than in Class B; the fall in Class A is from 182 at the end of 1873 to 142 at the end of 1878, or 40 points, while in Class B it is from 153 to 137, or 16 points, indicating a relative prosperity in Class B industries. Contrasting Class A with Class B industries, the ex- cess in the wage level in Class A industries year by year is as follows: 270 QUARTERLY JOURNAL OF ECONOMICS Year Year 1866 .... 15 1873 ... 29 1867 .... 20 1874 . .. 26 1868 .... 23 1875 ... 20 1869 . ... 28 1876 ... 16 1870 .... 27 1877 ... 6 1871 .... 30 1878 ... 5 1872 , ... 29 The rising prosperity of Class A industries in the period 1866-73 and their declining prosperity in the period 1874-78 is clearly evident. Turning now to individual industries, the table on page 271 presents the arithmetic mean of wages in each separate industry. Wages rise highest in Period A in the Illuminating Gas, Saw mill, Stone, City Public Works, and Building industries, while they are lowest in the Farming, Woolen Textiles, and Metal industries. The former industries are all in Class A, the latter all in Class B. Every one of the Class A industries, except Carriages, shows wage levels surpassing that of any industry in Class B, and most of the Class A industry wages are consistently higher than those of Class B by a very con- siderable amount. In Period B, wages in the Pottery and Glass industriies, both of Class B, surpass those of any Class A industry except Illuminating Gas, and wages in the Class B industries. Tanneries, Cotton Textiles, and Furniture surpass those of any Class A industries except Illuminating Gas and Saw mills. Farm labor and Furniture industry wages, however, remain low throughout. On the whole these results offer strong evidence of the relative prosperity in Period A of the industries producing for home consumption and their relative unprosperity in Period B. The theory thus receives further confirmation. The industries most affected by the fall in the gold premium consequent INTERNATIONAL TRADE 271 II itllllllltllitilitiJilllli ■3 1 lOuD ioioioif3<©coS»oiou3ioSScoiOiO>3ThTt<3cocoeoeo Wool- en tex- tiles II il2222S22§§S3 II U3W3U3COCoScDCDCDCDCO<00 1 ococoeooOTt<(NtOTjimcOiO>OiOOiO>OU5U5-*Ttl Arith- metio av. class B lOlOlOiOIOiomiCO-^-rJ^TPCO ^ 00 00 00 00 00 00 00 00 oo oo oo oo oo is ri ^ ^ ^ ^ ^-i ^^ ^^ ^^' ^^ ^^ ^^ ^ rA ^#H ^^ ^ 1 t>m(OcDI>t^05OOOCl005Q0O00O50000tf>tOtOT((T)le0Mt0 '^ M 0000lOOCDi-ltON(»00 oooooooooooooooo5ooaio>050(NOi-HOOQOOit>obtoiou5 Hi PI iNi-HTna5o>0'00sinoou5oocOOOOt^OOCDt~oooot-.-Hi>-*0505 Arith- metic av. class A ix 00000000000000000000000000 * o .a 8 S-2 . * M^ W5 <8''^ •l-s |.s „-;gi 51111? ••sitSs ^H C*^ tt) s as|:S"-5S ■3ao 3Z ® jS'^ a^ Ss b o 0) a g s fe g jpg'SSa .a.3 a &-s5« °.al "i'S-s *ja Si-g 0)5.9 ;i.!F 272 QUARTERLY JOURNAL OF ECONOMICS upon the large loans placed in Europe in the late sixties and early seventies show by their wage level a relatively adverse position at that time, while in the period when loans ceased and gold as a result appreciated, their rela- tive wage level rises, indicating their prosperity. VII. Summary To conclude, the large borrowing operations of the United States inaugurated in the later sixties appeared as an important factor in disturbance of the normal course of trade. The theory here under scrutiny alleges that loans will affect the exchanges, and through them, the gold premimn, as the first step in the adjustment process. Hence the movement of the gold premium in the United States was inquired into and contrasted with the value of gold in England and Germany. It appears in the main that the premium on gold in the United States was depressed and elevated according to the ex- pectation of theory. It appears also that an interesting and significant contrast developed between the move- ment of the value of gold in the United States on the one hand, and in England and Germany on the other; a con- trast corroborative of the theory. The next consideration was that of the movement of trade, and it was found that trade followed the loans, the United States importing largely, pursuant to the placing of loans, and showing an excess of exports when the loans ceased to be floated. How these trade phenomena were brought about was then tested by an investigation of price movements along the lines suggested by the theory, which was again confirmed by the fluctuations in the prices of export, import and domestic commodities in the manner pre- INTERNATIONAL TRADE 273 dieted, the contrast between prices in England and the United States being specially noteworthy. Further confirmation was given by the results of the inquiry into wages. These were high in those industries which the theory would expect to be prosperous, and low in those which it would expect to find in an adverse situation. On the whole the theory receives substantial verification. F. D. Graham. Princeton, N.J. ENFORCED PAR REMITTANCE UNDER THE FEDERAL RESERVE SYSTEM SUMMARY Introductory. The early development of collections, 275. — The effect of the Federal Reserve Act, 276. — The par remittance plan of 1916, 277. — The Hardwick Amendment and its interpretation by the Federal Reserve Board, 281. — The development of opposition, 283. — The outlook for the future, 286. Another chapter in check collection is rapidly near- ing completion. By its decision of May 16, 1921 in the case of the American Bank and Trust Company versus the Federal Reserve Bank of Atlanta, the Supreme Court has pointed the way to the close of a noteworthy experiment in banking collection systems. Starting from the vague provisions of the Federal Re- serve Act, unchecked by bankers' protests, state laws, or Congressional acts, the Federal Reserve Board since its inauguration in 1914 had almost succeeded in trans- forming the clearing and collection system of the coun- try. However a group of southern bankers, embittered by what they believed to be domination by the reserve banks, brought the federal reserve collection pohcies before the courts; resulting in a decision which doubtless will renew the irregularity in the basis of collections. A large share of the responsibility for this failure may be laid to the inclusion of "par collection" in the plan; contemplating an interference with the "sacred right of profit" of country banks. "Par collection" is the ob- taining of remittance on checks from a drawee bank at face value. This was proposed as a remedy for the "kiting" of checks as well as a stimulus to their usage. 274 ENFORCED PAR REMITTANCE 275 With the idea of establishing a collection system of this type, the federal reserve banks demanded that every check sent by them to drawee banks be settled for at face value, the customary charge for remittance — "exchange" — being eUminated. However, as a bank's obUgation is to pay demand orders on itself only over its own counter the question which the opposition brought before the Supreme Court was: Has a federal reserve bank the legal right to compel par payment of a check in another city? The collection problem has long been troublesome to all concerned — the customer of a bank wanting par credit on all checks which he deposits, the banker in turn himself desiring the same from correspondents. As there is definitely a cost to be met in handling checks due to the loss of interest while uncollected as well as to expenses incurred in obtaining remittance, someone has to meet the bill. In some cases it has been the banker, in others the customer. When immediate credit is given on an uncollected check, no exchange being charged, a loan without in- terest is made by the bank to the customer. In order to offset the cost thus incurred it became customary among banks to open correspondent accounts with each other under arrangements whereby par collection of checks could be obtained in return for the leaving of substantial balances. Since the larger city banks were especially fitted for the handling of such accounts they took over the problem of obtaining remittance on the checks of country banks. However, in paying checks drawn upon themselves the latter were inclined to deduct a charge varying from one-tenth of one per cent to one-half of one per cent for the service of remitting. City banks were not usually 276 QUARTERLY JOURNAL OF ECONOMICS able to claim this source of income, the difficulty being not in any different rights or obligations but that most demand orders came in over their own counter for payment. By many it was believed that the passing of the Fed- eral Reserve Act late in 1913 would put an end to these irregularities and establish for the country one complete and adequate collection system. For instance, Repre- sentative Glass in 1914 stated that the effort to eliminate exchange charges had been resisted "with utmost per- tinacity" but that Congress by the act had eliminated the wastefulness incident to many independent collec- tion organizations, and had torn down the "toll gates upon the highway of conamerce." * What the act contained was a provision allowing the Federal Reserve Board to form a collection system for member and federal reserve banks; the reserve banks to receive checks at par from member banks and charge them for services rendered in clearing or collecting. Member banks were in turn allowed to charge federal reserve banks an amount at least equal to the costs of collection and remittance of checks sent by the latter. The Federal Reserve Board was thus given wide powers in prescribing the details of the collection system to be established, being limited only by the fact that checks must be received by reserve banks at par and that a member bank might not be prohibited from "charging its actual expense incurred in collecting and remitting funds." ^ The Board proceeded cautiously however, in order, as stated in the first Report, to gain "the harmonious cooperation of banks involved." ' After a number of conferences and the consideration of several plans, it was decided to experiment, beginning 1. Report of the American Bankers Afisociation, 1914, p. 117. 2. Federal Reserve Act as approved December 23, 1913, Section 16. 3. Federal Reserve Board, Report, 1915, p. 14. ENFORCED PAR REMITTANCE 277 December, 1914 in two districts, St. Louis and Kansas City, with a system of enforced par clearing; the Board having concluded it inexpedient to force an undesired measure upon all member banks at the same time. The experiment under trial made a federal reserve bank a clearing center for its district, immediately charging the account of a bank at par for checks drawn upon it, and crediting it at par for remittances.^ Much dissension arose under this system due to its compulsory nature, so that on June 15, 1915 it gave way to a voluntary plan of the same type;= the Federal Re- serve Board believing that a more favorable attitude would be attained if the pressure of participants alone forced reluctant banks to cooperate. Member banks, however, did not respond with the alacrity that was desired, only 25 per cent having joined in the first month. Consequently the federal reserve banks were in doubt as to the best method of procedure; the ma- jority thought a mandatory system necessary. A committee of federal reserve agents, formed to consider the subject of collections, came to the con- clusion in October, 1915 that the problem was one of reserves rather than of transit faciUties, recognizing that httle could be done in the estabhshment of a collec- tion system until the reserves had been transferred to federal reserve banks from reserve agents, thus ending the tangle of reciprocal collection arrangements. In June, 1916, as a result of the findings of the Comxoittee, a plan was adopted, effective July 15, 1916. In general the proAdsions then outhned are still in effect and form the center of the present controversy. 4. No charge was made by the federal reserve banks for their services. 5. This was adopted in all districts except Kansas City, where the compulsory system still prevailed. 278 QUARTERLY JOURNAL OF ECONOMICS Perhaps the most important recommendation of the Committee was to begin a system of deferred credit by which checks would become available as reserve at fed- eral reserve banks in accordance with a schedule on which was figured the average time necessary in obtain- ing collection from a particular locaUty. The member bank depositing checks would thus wait until the drawee bank had time to receive, examine, and remit before credit would be given on the deposit.* The plan further provided that: (o) the sending of checks by member banks to federal reserve banks be voluntary, (b) all members be compelled to pay without deduction checks drawn on them sent by the federal reserve bank of their district, (c) all members be al- lowed to deposit such checks as could be collected at par, (d) the expense of transmission of funds be borne by federal reserve banks. The hope that fifteen thousand banks would be in- cluded on the collection list was very nearly reaUzed, for 14,656 joined the first month, followed by consistent gains. As there were at this time less than eight thou- sand members of the federal reserve system, about one- half of those on the "par list" were non-member banks. In influencing the latter to remit at par, use was made of two effective devices: (o) presentation by institutions in the locaUty of the drawee bank, (b) tendering of checks for cash payment over the counter of the drawee bank by employees of a reserve bank. Indeed, par re- mittance by mail was not usually attained through any desire on the part of a non-member bank to secure the advantages coming from affiUation with a unified col- lection plan. Non-members failed to look upon the 6. It ie worthy of note that at this time the Federal Reserve Board abandoned its par collection plan, in that postage or express was allowed to be deducted fiom remittances, and in addition a deferred payment obtained by the reserve banks. The subsequent plan may more accurately be described as a par remittance system. ENFORCED PAR REMITTANCE 279 curtailment of their exchange profit as "slow educa- tion" — the term employed by federal reserve officials. So it was that federal reserve banks employed in- stitutions and individuals as means of forcing par pay- ment. Most important as collection agencies were banks and express companies, altho the services of both were rendered incomplete since they did not have offices in every city or town where a non-par remitting bank was located. However the use of banks had the added ad- vantage of being both inexpensive to the federal re- serve bank and serviceable to the agent bank; the latter being able to obtain the usage of the proceeds of checks during the time elapsing between par payment, ob- tained over the counter of the non-member, and the charging of the draft in settlement against the reserve city account of the agent bank. But the final and sup- posedly clinching method of pressure was direct presen- tation by travehng agents hired by a federal reserve bank, payment to be accepted in currency only. The expense involved in such presentation, however, ren- dered it expedient only when others failed or were im- possible of application. The call for cash over the counter of a bank made it exceedingly difficult to keep an adequate amount on hand to meet all the demand obligations that the federal reserve bank might tender, especially if several days elapsed between days of pres- entation. The earUer method of pasmaent had been by exchange on a reserve city resulting in the keeping of a considerable balance with reserve agents. This balance, however, was not available to meet a current demand for cash. Consequently, an objecting non-member would have to withdraw cash in order to protect itself from embarrassment, thus foregoing interest that would have been received on a reserve city account. One by one the non-members gave in, preferring to 280 QUARTERLY JOURNAL OF ECONOMICS lose the exchange profit which they had previously de- ducted from remittances rather than suffer the incon- venience and expense caused by direct presentation. As would be expected, the federal reserve system was none too popular among non-member banks; this resent- ment being voiced in resolutions of bankers' associa- tions, bills presented to Congress, state laws, and newspaper articles as well as injunctions. Member banks were also for the most part only too glad to co- operate in the movement to have the federal reserve collection policies changed, for many of them too were suffering a loss of exchange. Within four months after the formation of the en- forced par remittance program of the Federal Reserve Board, the American Bankers' Association in its 1916 meeting went on record almost unanimously in opposi- tion and formed a committee to urge upon Congress and the Reserve Board the necessity of "reasonable charges." As a result of the protests. Senator Hardwick on May 9, 1917 offered a "rider" to the bill then under consideration in the Senate to amend the Federal Re- serve Act, legalizing exchange charges to the amount of one-tenth of one per cent. After considerable discussion, the bill as amended was passed by a scant margin. The Senate and House bills as passed not being identical, a conference committee was appointed to secure uni- formity. Before this committee had acted, the House hearing of the Senate's action in adding the Hardwick Amendment, voted at the suggestion of Representative McFadden to instruct its conferees to "agree in sub- stance" with the Hardwick Amendment. While the matter was under consideration in the committee, how- ever, much pressure on the part of credit men's asso- ciations, wholesale and retail merchants, city bankers, ENFORCED PAR REMITTANCE 281 and federal reserve banks was brought to bear against this amendment. Even President Wilson wrote asking that this section be removed from the bill. Consequently the committee,^ despite the instructions to include the Hardwick Amendment in the Conference Bill, amended it to read: "That nothing in this or any other section of the Act shall be construed as prohibit- ing a member or non-member bank from making rea- sonable charges, to be determined and regulated by the Federal Reserve Board, but in no case to exceed ten cents per $100 or fraction thereof, based upon the total of checks and drafts presented at any one time, for collec- tion or payment of checks and remission therefor by exchange or otherwise; but no such charges shall be made against the federal reserve banks." This report coming before the Senate met with imme- diate opposition. Senator Hardwick insisting that the substance of the section had been completely altered. Senator Owen, however, speaking for the committee, claimed that the measure could in no way affect the actions of non-member banks, who were the chief objec- tors to the passing of the conference bill. The result was that the Senate acted favorably upon the Report and on Jime 14th it came before the House. There again the committee received severe criticism for adding words to nullify the Hardwick Amendment, agreed upon by both the House and the Senate. The measure was however passed, the President signing it on June 21st. From that date, the federal reserve banks began, even more extensively, the move to establish a "uni- versal par collection list" : one that would include both member and non-member banks. Failing to accept the interpretation of Congress on the Hardwick Amend- 7. It is interesting to note that five out of the six members of the Conference Com- mittee had previously gone on record in opposition to exchange charges. 282 QUARTERLY JOURNAL OF ECONOMICS ment, the Board looked upon it as "a mandatory requirement that non-member as well as member banks shall remit absolutely at par,"* later stating the reason for this interpretation to be that "the federal reserve banks are affording all member banks certain reciprocal advantages in the collection and clearance of checks and because the federal reserve banks are obligated to re- ceive checks at par, they may properly expect remission on the same basis." » Meanwhile the Attorney General had ruled that federal reserve banks might not pay exchange.^ But, instead of failing to accept checks drawn upon non-member banks known to be in the habit of deducting exchange charges, the federal re- serve banks chose to put into effect a poUcy designed to make them pay remittance letters at par. So despite the opinion of the Attorney General and the intent of Congress that the provisions of the Amend- ment of June 21, 1917 did not apply to state banks not connected with the federal reserve system as members or depositors, the reserve banks set out to make every state an "all par state." Their position is well stated by a committee of federal reserve agents: "The banks and the public need a system that is able to collect all items. The par collection system is not a local or selfish undertaking for the benefit of member banks, but is a national enterprise for the convenience of the pubhc, and the promotion of commerce, and concentrated and persistent efforts will be made to make the par list complete." ^ The success of these attempts is testified to by the fact that from July, 1917 the nimiber of non-member 8. Federal Reserve Bulletin, 1917, p. 501. 9. Ibid., p. 662. 1. See letter of Attorney General, Keport of Federal Reserve Board, 1918, p. 76. 2. Report of Federal Reserve Board, 1918, pp. 75, 76. ENFORCED PAR REMITTANCE 283 banks remitting at par underwent a steady increase until in January, 1921 over 91 per cent were on the "par list" ; the remainder being small unaflBliated state banks in the South, where the federal reserve banks were only just beginning their "educational process." But this result was not amicably attained. Bankers' associations were ever willing to condemn the federal reserve action, altho few cared to carry the protest into court. As the reserve banks started their program in the South, opposition took the definite forms of: (a) an at- tempt by legal process to restrain the federal reserve banks from collecting at par, (6) the influencing of state legislatures to pass laws upholding exchange charges on remittances, (c) the attempt to obtain a change in the national statutes, definitely legalizing exchange, (d) the bringing of pressure to bear on the Federal Reserve Board and banks to obtain a reversal of their policy. The legal battle came as a result of the ill-fated cam- paign of the Federal Reserve Bank of Atlanta to enforce par remittance. Governor Wellborn of this reserve bank had in December, 1919 set out to put all non- member banks in the Atlanta District on the "par Ust," a step already accomplished in the majority of the dis- tricts. Unfortunately for the reserve bank there was included in his letter to non-members asking for par remittance the statement that he "would very much regret to adopt other methods of collection that would prove embarrassing, annoying, and expensive" to banks not cooperating. In response, a number of banks headed by the American Bank and Trust Company filed a bill in equity in the Fulton County Court of Georgia "denying the right of the Reserve Bank to as- siune jurisdiction over them and coerce their action." 284 QUARTERLY JOURNAL OF ECONOMICS As relief, an injunction was asked permanently restrain- ing the Federal Reserve Bank from collecting checks drawn on the plaintiffs except "in the usual and ordi- nary channel of collecting checks through correspondent banks or clearing houses." The case was removed to the United States District Court for the Northern District of Georgia upon the motion of the defendant, the Federal Reserve Bank of Atlanta, where it was heard on its merits; a restraining order being granted the plaintiffs pending the hearing. At this hearing, it was alleged that the methods which the Federal Reserve Bank of Atlanta intended to put into use were "tyrannical and ultra vires the charter of the Reserve Bank" and employed to make the country banks render a valuable service without compensation. In defense, the Federal Reserve Bank asserted its unqualified right to collect by any method checks backed by sufficient funds; it being the contract of the drawee bank to pay on demand. Since federal reserve banks were by their charter (the Federal Reserve Act) prohibited from making payments to remitting banks for services, the Atlanta Federal Reserve Bank was dis- abled from collecting through the regular channel of correspondence or clearing as long as a bank insisted on deducting the cost of remittance. Thus they main- tained that they were forced to adopt other methods of obtaining collection. The result was that on April 3, 1920, the United States District Court for the Northern District of Georgia affirmed the right of the Federal Reserve Bank to obtain collection by agents. This decision was affirmed by the United States Circuit Court of Appeals, Fifth Circuit, to which it was appealed. When, however, the matter came before the Supreme Court of the United States the decrees of the lower courts were reversed; the higher ENFORCED PAR REMITTANCE 285 court holding that if the plaintiffs could establish the purpose of the Reserve Bank to be to break down the business of the former as now conducted, a permanent restraining order should be granted. On this question of fact the case is now in the Northern District Court of Georgia where doubtless the plaintiffs will be successful, as they have the written statement of the Governor of the Federal Reserve Bank of Atlanta that failure to co- operate with the federal reserve system would cause annoyance, embarrassment and expense. Destined probably to less success than litigation is the effort to obtain effective authorization of exchange charges by state legislatures. The difficulty is not that state legislatures are unwilling to pass bills to secure this end, but that the laws enacted are either discriminatory as between persons, or attempt to make checks legal tender for some purposes, resulting in unconstitu- tionaUty. Within thirteen months, laws for the purpose of allowing exchange charges went into effect in eight states: Mississippi, Louisiana, South Dakota, Georgia, Alabama, North Carolina, Tennessee, and Florida. A test case is now before the Superior Court of Union County, North Carohna, where a decision will be handed down on the constitutionality of the North Carolina law. Altho any verdict on the Georgia case will not settle the point at issue in the North Carolina dispute, it will doubtless be true that if a final judgment is given on the former favorable to the non-member bankers, proceedings will stop in North Carolina. Foremost among those urging the continuation of exchange charges is the National and State Bankers' Protective Association, formed in February, 1920 to unify the action of those opposing par remittance. Largely through their efforts the exchange laws of the various states were passed and pressure brought to bear 286 QUARTERLY JOURNAL OF ECONOMICS upon Congress and the Federal Reserve Board. Con- gress, however, failed to act favorably upon the bills and resolutions presented to it, and the Federal Reserve Board took the matter none too seriously; Governor Harding of the Board stating that "a diversion of this sort is entertaining in a way, because it diverts our mind from the serious problems that are ahead of us." ^ The Association nevertheless succeeded in bringing the issues clearly into view for the first time. Today the dream of universal par remittance is fad- ing. The peak of the "par list " was reached the first of last year, and the number is slowly being diminished as banks take advantage of rights granted them under in- junctions. Not yet, however, has the struggle been terminated. Both sides await the decision of the Su- preme Court on the question of fact in the Georgia case. Altho it has indicated a stand in favor of non-member banks, this is not conceded by federal reserve oflacials. However, if the non-member banks gain a favorable decision it is probable that member banks will be ac- corded the same rights through an amendment of the Federal Reserve Act, since the Board has pledged itself to equaUty on this question. The close of the contest has not been reached but the way is indicated toward a re- turn to the irregularities of the collection system of ten years past. If, then, the federal reserve collection policies are about to be terminated, there seems no substitute plan adequate to the need. Congress cannot greatly help for its mandates can apply only to member banks, out- numbered two to one by non-member institutions. So the prospect of a unified collection system seems even as dark as in the days when the Owen-Glass Bill was in the 3. Hearing on H. Res. 476, Rules Committee, 66 Cong., p. 56. ENFORCED PAR REMITTANCE 287 period of formation. There are, however, possibilities in the present situation. If the Federal Reserve Board is able and willing to modify its collection program to act in the capacity of a unified agency, collecting under an arrangement agreeable to most banks, much benefit will inure to banks and to commerce. Such a plan might provide that: (a) it be entered into by all member or non-member banks desiring affilia- tion; (6) each bank be permitted to deduct an agreed per cent (i. e., one-eighth of one per cent) from all remit- tance letters for exchange, nothing to be allowed as at present for postage or express on remittances;* (c) federal reserve banks accept checks on deposit in either of two ways: (1) for credit to the amount of the face of the check, this to be deferred for the average period neces- sary to secure remittance, (2) for immediate credit, exchange to be charged based on the amount of the check and the number of days necessary for collection; (d) the federal reserve banks assess a service charge against each bank collecting through the system, based upon the total of checks sent each month to the reserve banks, covering costs incurred in collection, including adequate compensation for the services of the reserve banks. The more obvious advantages of this arrangement lie in the decreasing through quick collection of the large uncollected funds accounts — the float — and in the forming of centers where checks may be discounted for immediate credit. Equally important, however, is the bringing together of member and non-member banks on a cooperative rather than a compulsory basis of "slow 4. It might well be urged that if a uniform rate were fixed, applicable to all banks, injuBtice would be worked on those at a distance from a reserve city. Perhaps a service charge varying with the location of a bank would be the remedy. For other suggestions see letter of the Comndttee of Five of the American Bankers Assn. to the Federal Beaerve Board, March 12, 1918. 288 QUARTERLY JOURNAL OF ECONOMICS education." Admittedly much dissension would follow the adoption of this plan — especially after the recent coercion — but it would in all probability secure the support of the American Bankers' Associasion, giving it a fair chance of success. The greatest difficulty, however, lies in the matter of reserves, for state and federal laws offer a variety of reserve requirements, serving to render difficult a sound collection basis. State banks hesitate to forego the in- terest and low exchange charges as well as credit on the legal reserve received from an account in a reserve city, and the banks holding such accounts regret the possible loss of a profitable connection. One escape from this lack of uniformity is for state banks to join the federal reserve system. Over 20 per cent of those ehgible for charters have already taken this step. However, largely because of the severity of membership require- ments, only one-quarter of the non-member banks of the country are eligible. If the largest obstacle to an increasing membership — the capitaUzation required — is lowered, the country will have no less sound banking. A large share of the solution of the exchange problem, however, lies in the hands of the individual banker and the public. If both would recognize that a check drawn upon another city is not worth par, but is a loan until collection is obtained by the one advancing funds, much light would be thrown upon the collection problem. In the South and West especially it has been customary to deduct exchange largely from remittances and accept deposits of checks at par; the opposite being more nearly true of the other banks of the country. Banks aim to break even at least on exchange. In whatever form it be paid, whether by deduction from remittances, payment upon deposit, or by compensating balances, the charge still remains. Assuredly, the amount of the charge ENFORCED PAR REMITTANCE 289 should be made the subject of a comprehensive regula- tion, but this does not deny its justice. Indeed both bankers and the public join in the bene- fits which would accrue from a unified collection system. Such a system may be obtaiaed, if at all, by the coopera- tive effort of bankers under a plan which would not compel the performance of the remittance service at a loss, as did the par remittance program. Colston E. Warne. UNIVEBSITT op PrrTSBTJHGH. THE RENT OF MINERAL LANDS SUMMARY I. Present disagreement on analysis of mine royalties, 290. — Ricardo's analysis, 291. — Modem writers: Taussig, Marshall, 292. — Limitation of Ricardian theory to settled countries and established industries, 293. — Rent of mineral land and agricultural land dis- tinguished, 294. — Analysis of royalties in practice, 296. — II. Proof of the theory. Differences in royalties due to quality of coal, 297; to date of lease, location, fertility of mines, 299. — Relation of thickness to value of seam, 300. — The no-rent mine, 301. — Mine royalties in Prance, England, the United States, 302. — Graphic representation, 308. — Extensive and intensive margins; diminishing returns, 311. — III. NationaUzation. Possible division of royalties if mines are purchased; if confiscated, 312. — Possible results under government operation, under lease to private operators, imder free mining, 313. — Effect of nationalization on price of coal; on wages, 314. — Conclusion, 317. Since the days of Ricardo most economists have con- tented themselves with a discussion of the doctrine of rent only as it appUes to agricultural land or urban land. If mineral or forest land has been mentioned, it has usually been dismissed with a brief paragraph or two based largely on generahzations and not on facts. So unsatisfactory has the treatment been that today — after a himdred and twenty-five years of discussion of the rent theory — there is no generally accepted analysis of the return on mines. Many modern economists and writers do not mention the subject; those who do, are not agreed in their statement of the theory. One group, represented by Professor Taussig, maintains that mine royalties are closely analogous to the rent of agricultural 290 THE RENT OF MINERAL LANDS 291 land. Another group, including chiefly the mineral owners of England, maintains that they are not rent at all but a consideration for the mineral removed from the deposit. Still another group, represented by Professor Marshall, maintains that mine royalties are both rent and compensation for the mineral. Ricardo did not hestitate to extend his doctrine of rent to all classes of land, yet he understood the modifi- cations that must be made before it could be applied to mineral lands. His two chapters on rent in the Prin- ciples should be studied together. In Chapter II he stated that "the compensation given for the mine or quarry is paid for the value of the coal or stone which can be removed from them and has no connection with the original and indestructible powers." ^ Yet in Chapter III he said that "there are mines of various qualities, affording very different results, with equal quantities of labor. . . . The retiim for capital from the poorest mine paying no rent, would regulate the rent of all the other productive mines. This mine is supposed to yield the usual profits of stock. All that the other mines produce more than this, will necessarily be paid to the owners for rent." ^ The apparent inconsistency may be easily explained. In Chapter III, which is entitled "The Rent of Mine^," Ricardo was concerned only with the retiu'n on mines due to their original and indestructible qualities. He was assuming (tho he failed to make clear the assump- tion) that the compensation paid for the mineral re- moved, mentioned in Chapter II, had already been deducted. Ricardo undoubtedly believed that mine royalties had a dual character — that they were partly a payment for minerals removed and partly a differen- 1. Ricardo, Principles of Political Economy (Gonner edition), p. 45. 2. Ibid., p. 62. 292 QUARTERLY JOURNAL OF ECONOMICS tial return due to the superior location or the greater fertility of particular mines. Professor Taussig is of the opinion that the rent of mines, particularly in old countries, is closely analogous to the rent of agricultural land and follows the same economic laws. He doubts whether any surplus exists in new countries or in the naining of those minerals for which the risks of prospecting and exploitation are so great that the large profits on a few mines no more than offset the losses on the others. Mining for gold or cop- per is particularly risky. He remarks : ' ' Where royalties are paid in well explored countries on minerals whose quahties and value are reasonably well known, they are simply rent. Such seems to be the case with royalties on English coal mines." * But Professor Taussig does not agree with Ricardo's contention that a part of the royalty is compensation for the mineral removed. "The fact that a store is physically limited does not enable its owner to secure a price. Sand and clay are thus limited ; but the available quantity is so abundant that a clay pit or sand deposit is worth nothing unless it has an advan- tage of situation. It may be doubted whether any payment at all, royalty or what not, can be secured by the owner of the poorest mine, assimaing he has done nothing to develop it. Deposits of this sort are at the margin of utihzation and at the margin there is no sur- plus of any sort. . . . Rent proper shows the same sort of development on mines as on other natural agents." * Professor Marshall takes the same position as did Ricardo. He believes that mine royalties are both com- pensation for the mineral removed and economic rent. "■A royalty is not a rent, tho often so called. For, except when mines, quarries, etc., are practically inexhaustible, 3, F. W. Taussig, Principles of Economics, vol. ii, p, 96. 4. Ibid. THE RENT OF MINERAL LANDS 293 the excess of their income over their direct outgoings has to be regarded, in part at least, as the price got by the sale of stored up goods — stored up by nature in- deed, but now treated as private property." * I agree with Professor Taussig that there is probably no surplus from mines in new lands. The large profits no more than offset the risks and dangers of exploration and the many losses that occur. It is a generally ac- cepted beUef that the total expended in the search for gold far exceeds the product from gold mining. But this sort of situation is not peculiar to mines. The same statement is probably equally true of agricultural land in a newly settled country. During the last century mil- lions of acres of land were given away by the United States government in Nebraska, Kansas, and other middle western and western states, or the land was sold at a few cents an acre. During the Ufetime of the original settlers that land sold for $50 an acre or even more. But how much of that increase in value was sur- plus or unearned increment and how much of it was necessary to compensate the homesteaders for the risks and dangers of pioneering? How much of it was neces- sary to offset the losses in regions where the increase in land values did not occur? It is estimated that in one period of drought a quarter of a million of people were driven out of western Kansas alone. The Ricardian rule of rent cannot be applied without qualifications to either agricultural or mineral land in a new country. In its unqualified form it fits conditions in a settled country such as England and in formulating the doctrine Ricardo had the farm lands of England in mind. After the simple statement of the rule is under- stood it may then be extended to other lands where the land question is more complicated than in England. To 5. Marshall, Principles of Economica, p. 438. 294 QUARTERLY JOURNAL OF ECONOMICS get a similar statement of the theory as applied ta mineral land we will do well to first examine the nature of mine royalties in a long-established country such as England and in a long-established mineral industry such as coal mining. In a country that has been well ex- plored and prospected by geologists Uttle uncertainty remains regarding the extent and nature of the mineral deposits — particularly those of greatest economic im- portance, namely coal and iron. Even in the United States, a comparatively new country, the goverrunent has about completed the mapping and valuation of the coal lands of the pubUc domain. In order to avoid un- necessary compUcations in making a typical statement of the theory I shall confine my discussion largely to the coal mines of England. I am inclined to accept Ricardo's analysis of mine royalties. They are made up of two elements governed by entirely different economic laws. First there is a part representing "the diminution in value of the mine re- garded as a source of wealth in the future which is caused by taking the ton out of nature's storehouse," as Professor Marshall expresses it. It is not rent. It is a consideration for the sale outright of the mineral re- moved just as tho the owner of a large farm had sold a cottage site. It is principal, not income. Then there is another part of the payment that arises because of the superiority of a given mine over the marginal mine. It is income. It is rent in the strict economic sense and is governed by the Ricardian doctrine. That mine royalties are of the nature of economic rent is recognized by Professor Taussig, but he does not believe that any payment is made for the mineral re- moved. Mine royalties in his view are analogous to the rent of agricultural land. But obviously there is a dif- ference. The owner of a farm expects his land to be THE RENT OF MINERAL LANDS 295 returned at the expiration of the lease in as good con- dition as when first rented. There should be no de- terioration in fertility. Careful farming may even improve the land and a wise farmer will prefer to allow his land to be worked, under best farming methods, rent free rather than allow it to he idle. The situation is not the same for mineral land. Its yield is drawn from a store that cannot be replenished. The coal removed from the seam cannot be replaced either for this genera- tion or for a later one. Every ton extracted decreases the stored up treasure by that much and the deposit is certainly less valuable than before the coal was removed. The mine that has been worked cannot be returned to the owner unchanged at the end of the lease. It is true that there are coal deposits so situated or with seams lying at such great depths that no one will pay a royalty on them. Perhaps they can be worked profitably if no royalty is paid, and the owner may work them himself, but he will not permit anyone else to work them without some compensation. He gains nothing; he loses an asset that may bring in an iacome for himself or his heirs with a change in market condi- tions. Not only would there be the exhaustion of a store that might some day prove valuable, but the open- ing of a mine does not improve what the Scotch call the amenities of the neighborhood. The owner of the sur- face may be compensated for the damage done to that surface through subsidence, but there can be no com- pensation for the marring of the beauty of the locality with an ugly mine mouth, a black coal tipple, or. a dump heap. As a witness before the British Coal Industries Commission aptly expressed it: "A colliery chimney is not an attraction to an estate; it may be as tall as Nel- son's Monument, but it behaves somewhat differently."^ 6. Coal Industries CommiBsion Report (1919), vol. i, p. 315. 296 QUARTERLY JOURNAL OF ECONOMICS Not only may the surface be damaged by subsidence but the construction of a network of underground workings may result in such a lowering of the water table that the land will yield much less in grass or grain. The owner of the coal land will surely demand payment for the coal removed if he permits the deposit to be worked. That payment has been called the minimum royalty, but I prefer to call it the marginal royalty since the term minimtim royalty is also applied to the fixed rent per acre that is sometimes paid on coal land. The mine commanding only the marginal royalty is the marginal mine. The dual character oj mine royalties is recognized in practice by mine operators. The late Dr. Rossiter W. Raymond, a distinguished American mining engineer, then secretary of the American Institute of Mining Engineers, summarized the American position as fol- lows in his testimony before the British Royal Commis- sion on Mining Royalties appointed in 1889: "With us the royalty always settles itself according to special advantages. The lowest royalty is the royalty that must be paid, or else the landowner would not care to let the mine be worked. On top of that, you have all those higher royalties coming in to represent special natural advantages." ' Before a more recent British coal com- mission, Mr. T. H. Bailey, a mining engineer of Bir- mingham, stated that "strictly speaking, royalties are partly rent or income, and partly capitaUzation of assets." ' True, a group of writers made up largely of British mineral land owners and their representatives main- tains that a royalty is a payment for the mineral re- 7. Third Report, Eoyal Commission on Mining Royalties, British Sessional Papers, 1890-91, vol. di, p. 10. 8. British Coal Industries Commission Report (1919), vol. ii, p. 691. THE RENT OF MINERAL LANDS 297 moved and nothing more. They do not agree with Ricardo, or Marshall, or Taussig in the application of the Ricardian rent doctrine. They fail to take into consideration the "special natural advantages" men- tioned by Dr. Raymond. They state, for example, that "in all cases the colliery proprietor (if not himself the owner of the coal) pays a royalty, i. e., a purchase price for unsevered coal," ° or that "a royalty is payment of purchase of coal," ^ or again that "this royalty, or sum, is often referred to as rent, but is in fact a pajntnent out and out for the coal worked which disappears from the mine." ^ Such a position is difficult to defend. If mine royalties are solely a payment for the mineral obtained from the mines how can the differences in the royalties paid on mines in the same neighborhood — even sit- uated side by side — producing coal of exactly the same quality be accounted for? or the fact that mines in dif- ferent parts of the country coirunand different royalties? Only by the Ricardian doctrine can these differences be explained. II Mine royalties may differ because of a difference in the quality of the coal. In the United States royalties as high as 50 cents per ton are paid on anthracite coal and 10 cents or less on some grades of bituminous. But this difference does not necessarily represent any surplus. It may be due to a difference in the marginal royalty. The two grades of coal have different values. They bring different prices in the markiet. The owner of the anthracite deposit will demand a higher marginal 9. Britieh Coal Industries Commission Report (1919), vol. i, p. 300; testimony of Henry Louis, Professor of Mining, University of Durham. 1. Ibid. 2. Ibid., p. 312, testimony of R. F. Pawsey, secretary of Mineral Owners AsBOoistion 4>t Great Britain. 298 QUARTERLY JOURNAL OF ECONOMICS royalty than the owner of the bituminous deposit since a more valuable product is being taken from his land. A true surplus arises only when a given amount of labor and capital is able to obtain a greater tormage of coal in one mine than in the other. Accordingly in making comparisons I shall assume that the coal or mineral ob- tained from the mines compared is of the same quality and that the mines are in direct competition. Mine royalties may differ because leases have been made at different times. In a lease made in a boom year a higher royalty may be exacted than in a lease made in a year of general industrial depression. I there- fore assimae that the leases on the mines compared have been made at the same time and under identical con- ditions. Mine royalties may differ because of what Ricardo called the original and indestructible powers of the land — what Professor Ely calls the inseparable con- ditions of the land. These powers or conditions are both extrinsic and intrinsic. The extrinsic powers include transportation and market; the intrinsic, thickness of seam, depth, angle of seam, faulting, nature of roof, and the Uke. "The workabiUty of any coal will ultimately be determined by two offsetting factors — (1) its char- acter and heat-giving quality, whence comes its value, and (2) its accessibiUty, quantity, thickness, depth, value, and other conditions that affect the cost of its extraction." ' One of the indestructible powers of all land, mineral or agricultural, is location. As with agricultural land, the location of a miue near a market will cause it to yield a surplus over a mine less favorably located and subject to high transportation charges. Mines located 3. Bulletin 537, "The Classification of Public Lands," U. S. Geological Suivey (1913), p. 67. THE RENT OF MINERAL LANDS 299 near industrial or shipping centers command higher royalties than those more distantly located. In the islands north of Alaska there are large deposits of coal but they are so far removed from market that not only do they pay no royalties but they are still untouched by the hand of man. In West Virginia within 200 miles of Fairmont there are large areas of coal land, owned by the Baltimore and Ohio Railroad, sitiiated so far from a railroad that they are still undeveloped. The United States Geological Survey in its classification and valua- tion of government coal lands places on lands more than 15 miles from a completed railroad a value one-half of the amount which would be fixed if they were less than 15 miles from a railroad.^ Two mines situated side by side and producing the same grade of coal may command different royalties because of differences in intrinsic factors. Their seams may lie at different depths or angles. The seams of one may be thicker or contain less slate than the seams of the other, or they may be less faulted or broken. The ma- terial of the roof of one mine may be stronger making necessary less timbering. To describe all these points of superiority that one mine may have over another a term ordinarily applied to agricultural land may be used: one mine is more fertile than the other. Because of its greater fertihty a smaller quantity of labor and capital is required to extract a ton of coal. The owner of the more fertile mine can demand a higher royalty than the owner of the less fertile mine just as the owner of the more fertile farm demands a higher rent than the owner of the less fertile farm. In Kentucky the usual royalty on coal from seams 3 to 4 feet thick is 8 cents per ton, from seams 4 to 5 feet thick, 10 cents, and from seams 5 4. Bulletin 424, U. S. Geological Suivey (1910), p. 41. 300 QUARTERLY JOURNAL OF ECONOMICS to 6 feet thick, 12 cents.^ The difference in royalty is a surplus and is economic rent. Before the British Com- mission on Mine Royalties already cited Sir Lowthian Bell, President of the Cleveland Mine Owners' Associa.- tion, stated that: "The royalty dues paid in Cleveland for ironstone are about 6 pence per ton. In Lincolnshire or Northamptonshire they are sometimes double this sum because instead of expensive shafts and machinery being required, the mineral lies near the surface with a covering of greater or less thickness of sand or rock." • TABLE I' Thickness of Average cost Approximate combination cost Value by bed in feet Anthracite xa vers ion 1 2 3 4 5 10 1.00 1.00 1.00 1.00 9 1.01 1.03 1.02 .97 8 1.045 1.076 1.05 .95 7 1.10 1.126 1.10 .91 6 1.18 1.20 1.20 .83 5 1.35 1.30 1.33 .75 4 1.65 1.45-1.55 1.50 .66 3 2.13 2.00 2.00 .50 2 3.36 3.00 3.00 .33 Table I is an adaptation of a table published by the United States Geological Survey showing the relation of thickness to the value of a bed of coal. It is used by the Survey in determining the value of coal beds under government land. In the first column is given the thick- ness of the seams in feet, ranging from 2 feet to 10 feet. A seam with a thickness of 10 feet is taken as a standard 5. Bulletin 424, U. S. Geological Survey (1910), p. 10. 6. First Report, Royal Commission on Mining Royalties, British Sessional Papers, 1890, vol. ravi, p. 149. 7. Adapted from table, U. S. Geological Survey, Bulletin 537 (1913), p. 84. THE RENT OF MINERAL LANDS 301 and in columns 2 and 3 the cost of working such a seam is unity or 1.00. The costs of working the thinner seams is expressed in terms of the cost of the thicker seam. A seam of anthracite 2 feet thick costs 3.36 times as much to work as a seam 10 feet thick. Column 4 is an approxi- mate combination of the average cost of working an- thracite and bituminous coal. Column 5 shows the relative value of the seams and is obtained by iaverting the cost of extraction, or in other words by dividing 1.00 by the figures in column 4. A seam 5 feet thick has a value 75 per cent of the value of a seam 10 feet thick^ and a seam 2 feet thick is valued at only 33 per cent of the value of the 10-foot seam. The Ricardian theory of rent involves the concept of no-rent land, or land that produces only enough to pay the costs of production. Similarly there must be a no- rent mine or a marginal mine. Economists have been misled in their efforts to find that no-rent mine. They have perceived that all mines, even the poorest, yield some royalty, but they have not understood that the royalty on the poorest mine is not economic rent but compensation for the mineral removed. The mines pay- ing such royalty are the no-rent mines. They are the marginal mines. England's position as a manufacturing and commer- cial nation may be said to rest upon a foundation of coal and iron, and the English have always shown a keen interest in their deposits of those two important min- erals, especially since Jevons in his book op The Coal Question pointed out that the deposits were not inex- haustible. Some thirty years ago a royal conmiission was appointed to investigate the effect of royalties upon the mining industry. In their voluminous report are many bits of evidence that prove the correctness of the present analysis of mine royalties. In more recent years 302 QUARTERLY JOURNAL OF ECONOMICS other commissions have been appointed to study various coal problems, notably the Coal Industries Commission of 1919. Tho the later commissions have given some attention to the nature of mine royalties they have brought to Ught very Uttle information not already published by the earUer commission. The investigation of the Royalty Commission of 1889-93 was not Umited to the EngUsh mining industry, it included a study of the mining laws of the leading mining countries of the world. One of the laws reported on was the important French mining law of 1810 which provides, among other things, for a proportional royalty to be paid by the mine operators to the owners of the surface. Table II shows the usual royalties paid at the time of the investigation (1890) in the basin of the Loire. Table II.' — Mine Royalties in Basin of Loire (1890) Thickness of seam D^th of seam A B C D 2 meters and over lto2 meteis itol meter Less than i meter I. In pits 50 meters deep II. ' " 50 to 100 m. deep III. " " 100 « 150 " " IV. ' • 150 " 200 " " V. " « 200 "250 « " VI. « • 250 ° 300 ' " VII. « "beyond 300 « " 1/6 of y'd 1/8 1/10 ■' 1/12 « 1/14 " 1/16 « 1/20 « 1/9 of y'd 1/12 « 1/15 " 1/18 « 1/21 « 1/24 « 1/30 ' 1/12 of y'd 1/16 « 1/20 " 1/24 « 1/28 « 1/32 « 1/40 " 1/24 of y'd 1/32 « 1/40 ' 1/48 ' 1/56 « 1/64 « 1/80 " The French law recognizes that mines differ in fertihty and establishes a differential based upon both thickness and depth of seam. The marginal mine is the mine with the deepest and thinnest seams that can be worked at the market price for coal. If the demand for coal is such 8. Adapted from Final Report, Royal Commission on Mining Royalties. British Sessional Papers, 1893, vol, rii, p. <34. THE RENT OF MINERAL LANDS 303 that mines more than 275 meters deep or with seams less than f meters thick cannot be worked profitably, the mines at those limits are the marginal mines and the marginal royalty is -g\ of the yield as shown by Group VI, column C of the table. A mine 75 meters deep and with seams 2| meters thick would command a royalty of I of the yield. The marginal royalty would be -^^ of the yield, the remainder — | minus -^^ or /^ of the yield — would be economic rent. The French law of 1810 may not express the true dififerential between the various grades of mines but it does recognize that such a differential exists and that even the poorest mine worked pays some royalty. The marginal royalty, pro- vided for imder the French law, must not be confused with payment for damage to the surface which is covered by an entirely different provision. FiQUKB 1. Area represented = 2000-3000 acres. Figure 1 is a diagram of the various small holdings in a coal field attached to a large colUery in Durham, Eng- land. Each of the plots has a different owner; all are leased to the operator of the colliery. The shafts for the field are located in plot A and all the coal leaves the ground there. Wayleave charges and easement rents must be paid to the owners of the plots through which coal is carried on its way to the shaft and a shaft rent 304 QUARTERLY JOURNAL OF ECONOMICS must also be paid to the owner of A. In other words the plots at a distance from A are at a disadvantage and their costs of production are greater than those of A. Plot A should therefore command the highest royalty, the differential being economic rent. Table III shows the royalties, easement rents, etc., paid by the various holdings in 1889. Table III." — Royalties, Easement Rents, etc., paid in 1889 in Coal Field shown in Figure 1 Royalties reference letter Royalty tonnage rent on coals worked Other royalty proprietors charging easement rents Easement^ rents per ton Total of mine and easement rent per ton Date of leases B pence 4.22 4.25 5.33 4.29 3.61 3.79 3.75 3.82 4.00 4.00 -A - A HCA CA GHCA HCA CA GHCA DHCA DHCA pence 1.85 1.85 2.65 1.94 3.17 2.55 1.96 2.86 3.04 3.04 pence 6.07 6.10 7.88 6.23 6.78 6.34 5.70 6.68 7.04 7.04 1849 C 1856 D 1864 E 1853 F 1843 G 1880 H 1873 K 1865 L 1886 M 1878 Av. exclusive of A 4.11 2.48 6.69 A 5.00 5.00 1847 It will be noted that the highest royalty per ton is paid on holding D — not on holding A — tho D must also pay easement charges to the owners of H, C, and A. This apparent contradiction of the rent theory may be accounted for by the fact that the leases for A and D were not made under identical conditions but in dif- 9. First Report, Royal Commission on Mining Royalties, British Sessional Papers, 1890, vol. Hctvi, pp. 32, 146. 1. An easement rent is a sum paid for moving coal across another's land. THE BENT OF MINERAL LANDS 305 ferent years — A in 1847 and D in 1864. It will also be noted in the fifth column of the table that after the ease- ment and other charges have been added to the royalties the total charge per ton for all holdings is practically the same. Inconsistencies are probably due to the making of the leases in different years. In the diagram Mine K appears to have the least favored situation as it is located farthest from A and coal must cross G, H, C, and A to reach the shaft. The table shows that K receives a royalty lower than the royalty of any other holding except F, G, and H. The mine galleries have apparently been so constructed that coal from F and G must follow almost the same route as coal from K and must pay the same charges. Neither the diagram nor the table gives any explanation for the low royalty of plot H. Perhaps it can be accounted for by the panic of 1873, the date of the lease, or perhaps in this holding the operator has secured most of the eco- nomic rent for himself. Holdings A, B, C, D, E, L, and M, bring to their owners a surplus above the returns on the marginal mine, or economic rent. Figure 2 is a diagram of another colUery with hold- ings in Durham. Holding A, in which the shaft for the field is sunk has the most advantageous position. Hold- ings C and E are the marginal holdings for the field and pay the lowest royalties. As shown in Table IV the marginal royalty for the field is 3 pence. Holdings A, B, and D yield an economic rent. Table IV.' — Royalties Paid on Holdings in Dubham Coal Fields Plot A — 6 pence per ton it Tl A It U tt u p q « « « « J) 4 " ^ Sometimes the change in manufactures is distinguished from the change in commerce — as "Les revolutions re- ligieuses, pohtiques et industrielles." * Comte would have included the significant broadening of ideas as a "revolution morale." * Marx and Engels were therefore taking advantage of a formula in general use in France and adjoining countries in the early twenties — a formula which did not cease to be used throughout the sixties and seventies.* Picard attempts to date the revolution in England by events in France. Translated freely his statement is: at the time when France finished her political revolution, a "revolution industrielle " had come in England by the use of steam as the principal power for manufacture and by prodigious improvement in machines to spin cotton.' The same writer dates the revolu- tion in France from 1815 to 1830.8 Since my study covers intensively only the years 1820-40, I have not attempted to determine the usage earlier than the twenties. Darnis in 1844, writing of the expositions, makes a reference to the early period of some interest. He would seem to suggest that the idea of associating the change in industry with the poUtical changes brought about by the Revolution came very early. It dates in his opinion from the time of the 1. Guilbert, Histoire des villes de France (1844), vol. i, p. 392. 2. Ibid., p. 398. 3. The famoiis Bowring report refers to the Jacquard loom as "quietly revolutioniz- ing the trade both of St. Etienne and Lyons." Br. Pari, papers, 1835, vol. xxxvl, p. 45. 4. Guilbert, vol. i, p. 398. 5. Comte, Systdme de politique positive, Paris, 1824, p. 69. 6. Legrand uses the term as follows: "On vous a dit que les chemins de fer produir- aient une revolution commerciale et industrielle." Arch. Pari., June 19, 1837, vol. 113, p. 29. 7. Picard, St. Quentin (1867), vol. ii, p. 6. 8. Ibid., p. 121. "De 1815 a 1830, la France devint de plus en plus une nation in- dustrielle et I'un des r&ultats de cette revolution eoonomique fut de donner i, la classe laborieuse une importance toute nouvelle." 346 QUARTERLY JOURNAL OF ECONOMICS first exposition in 1798. This exposition was planned to cele- brate the anniversary of a revolution which had proclaimed freedom of work and opened new pathways to the genius of man. After the campaign in Italy, many were looking about for a fitting plan of a national celebration of the anniversary of the Republic. Some suggested a fair, others a horse race, still others an exposition of painting, sculpture and engrav- ing. Frangois de Neufchateau, Minister of the Interior, in a speech at the Champ de Mars suggested an industrial exposi- tion. The idea, Darnis assures us, was received with much enthusiasm.' In this same year Bonaparte placed the desig- nation "Member of the Institute" before his title of General. Was this a recognition of the importance of industry? It was so meant. The Minister of the Interior considered the first exposition — a really feeble affair — the initial step in a campaign disastrous to English industry. He is quoted as having wiitten to the Departments "nos manufactiu-es sont les arsenaux d'ou doivent sortir les armes les plus funestes a la puissance britannique." ' One need not read beyond Chaptal to find a carefully quoted use of the word "revolution" in 1806, to describe the change going on in industry. Before 1790 all the manu- factm-ers of Elboeuf had made one kind of woolens, at a uni- form price. Moreover, so long as yarn was uneven it was impossible to dye merinos in lighter shades. Better spinning and dyeing made possible a great variety of fabrics. On December 27, 1806, the Chamber of Elboeuf proposed regu- lating the style and types of goods, tho they recognized that "cette revolution a 6te utile k I'industrie."^ Chaptal refers to the transition in similar terms: "Les machines qui rempla- cent aujourd'hui la main de I'homme dans presque toutes les operations de I'industrie manufacturiere ont op^r^ une grande revolution dans les arts." ' It is certain that the comparison of the industrial changes with the pohtical changes of the revolution was specifically 9. Annuaire de reconomie politique, Paris, 1844, p. 220. 1. Ibid., pp. 222, 223. 2. Chaptal, vol. ii, p. 289. 3. Ibid., p. 29. NOTES AND MEMORANDA 347 made many times later. Nothing could be more concrete than the words employed in a tariff discussion in the Chamber of Deputies in 1836. Lamartine says, "c'est une revolution tout entiSre, c'est le 1789 du commerce et de I'industrie." * To Bulwer the rush of new opinions was most stirring. He felt that "the spirit and intellect of the country received a fresh birth, and at the same time a fresh race was born — a race that had neither the ideas, the wants nor the history of its predecessors. This was the real revolution." ' In fact the far- reaching effect of the French revolution upon social and in- dustrial life was a favorite theme of philosophers from the time of Condorcet.* Comte, the pupil of St. Simon, could not, as he did not, neglect to stress its significance. Writers use the term revolution to describe any marked change in the conduct of an industry, whether it was "I'inven- tion de la machine k vapeur qui op^re une revolution dans les proced6s de I'industrie et dans le syst^me de la navigation," ' or the use of steam in navigation which ought to produce "une veritable revolution dans les relations sociales." * In 1810 the introduction of carding and spinning in the ar- rondissement of Vire reduced the number of workers em- ployed on these operations by more than three-fourths. These mechanical changes brought about "une revolution generale dans le cardage et la filature de la laine." • In the same valley the paper industry "a subi toute une revolution par I'introduction des mecaniques k papier."^ For the wine industry, Pataille speaking on the budget July 15, 1829 feared the vineyards on the hills would be displaced and forced into the river valley. He refers to such a possible change as "cette grande revolution." ^ i. Arch. Pari., AprU 14, 1836, p. 48. 5. Bulwer, France, Social, Literary, Political (1834), vol. ii, p. 39. 6. Note his famous contraBt in 1804 of the social effects of the American and French revolutions. Condorcet, De TEsprit Humain, p. 28. 7. Report on mines by Coiint d'Argout, Arch. Pari., March 31, 1837, p. 262. 8. Arch. Pari., May 12, 1835, p. 705. 9. Annuaire Normand, 1837, p. 185. 1. Ibid., 1849, p. 357. 2. Le Moniteur Unlversel, July 15, 1829, p. 1272. 348 QUARTERLY JOURNAL OF ECONOMICS In the early part of the nineteenth century, France led the world in the application of chemical science to industry. Scientists were retained as technical officials in many com- paratively small plants. BerthoUet credited the great prog- ress in French manufactures to the technical knowledge of experts who directed the practice of artisans. He wrote: "Une heureuse revolution s'est op^r^e k cet egard parmi nous; ce n'est plus a des ouvriers ignorans que sont confines nos fabriques; on trouve dans la plupart des hommes trds- 6clair6s, des physiciens tr^s-instruits, et c'est k eux qu'il faut s'adresser si Ton vent provoquer les progr^s des arts utiles." ' The brilliant discovery of the Prussian chemist Margraaf, who found sugar crystals in the fiber of beets, was heralded as having made "une revolution dans les rapports commer- ciaux des deux mondes." ^ J. B. Say had referred to foreign commerce, which "a subi une nouvelle revolution par 1 'inven- tion des machines k filer le coton." ° The changes in the sugar industry fascinated contemporary writers. It would be easy to give numerous quotations of extravagant statements con- cerning the effect of the growth of sugar beets as well as of the process of refining. The domestic sugar industry modified colonial policy, affected agriculturists, interested shippers, to say nothing of the group of refiners who clamored for protec- tion or the consumers who now and then had an advocate for no protection. Especially notable was the increase in the consinnption of sugar. Speaking on this subject one of the deputies vividly set forth what would have been the astonish- ment of Louis XIV had he known the amounts of imports of cotton, sugar, and tea into England and France. The deputy added "c'est une revolution veritable dans les con- sommations du monde." ^ More important than the date of use is the meaning at- tached to the term. One must not take too seriously the actual changes which led to the large phrases of enthusiasts. 3. BerthoUet, C. L. and A. B., Elementa de I'art de la Teinture, 2d edition, 1804, Introd. 4. Arch. Pari., July 6, 1837, p. 43. 5. Say, J. B., Cours complet d'economie politique, Ed. II, p. 406. 6. Arch. Pari., March 23, 1837, p. 567. NOTES AND MEMORANDA 349 Apparently French industry could withstand a great deal of "revolution." The best estimate at the end of the twenties gives only 29 per cent of the working populati6hi6f the Midi engaged in industry,' and even in the north of France but 38 per cent.'' And quotations compiled in a scrappy way do not do justice to the authors cited. French writers knew that their country was too short of investment capital to develop large-scale industry rapidly. Discussion of the real signifi- cance of the term must be part of a description of the industry of the period. To that I hope to turn as the conclusion to a study of which this is in some sort an introduction. Anna Bezanson. Univehbitt op Pennsylvania. , . 7. Dupin, Forces productivea et conamerciales d« la France, 1827, vol. ii, p. 260. 350 QUARTERLY JOURNAL OF ECONOMICS A CRISIS IN DEPOSIT GUARANTY IN THE STATE OF WASHINGTON In a recent issue of this Journal Mr. Thornton Cooke pointed out the danger confronting the Nebraska fund for the guaranty of bank deposits, because of the comparatively small reserve and the large amount at risk in certain large banks. The state of Washington at the present time fur- nishes an extreme illustration of the danger involved in the unscientific concentration of risk which may occur under a voluntary system of deposit guaranty. During four years following the establishment of the Washington system no failures had occurred among member banks. But on July 1, 1921 the largest bank of the system, the Scandinavian Ameri- can Bank of Seattle, closed its doors. The available fund is entirely inadequate to meet the claims of depositors. While the fate of the existing system is yet undetermined, it seems probable that it will break down entirely. In 1917 the legislature passed a voluntary deposit guaranty law. The fund, created by the original law to consist of one- half of one per cent of the average annual deposits eligible to guaranty, was not withdrawn from the banks but was simply charged to the guaranty fund on the books of the bank. It was not charged, however, against the income of the year when credited, nor was there any statutory provision for amortizing this expense over a period of years. As will be shown later, this means a very heavy concentration of ex- pense in any year when losses necessitate an assessment upon the fund. In order to secure payment of assessments the 1917 law required member banks to deposit securities in trust with the Guaranty Fund Board amounting to one per cent of the eligible deposits. During the 1921 session of the legislature some important changes were made. The guaranty fund, so-called, was in- creased to one per cent of eligible deposits but remained merely a book transaction between the member bank and the NOTES AND MEMORANDA 351 Board. The deposited securities were returned to member banks. Assessments against the guaranty fund constituted a first lien against the assets of the member banks. A second fund was created known as the contingent fund, to be accu- mulated by annual assessments not to exceed one-tenth of one per cent of average deposits in the member banks. Actual cash payments of this amount were to be made to the Guar- anty Fund Board. The expenses of the Board — a nominal amount, since no salaries are paid — were to be drawn from this fund. Income derived from the investment of the con- tingent fund was to accrue to the benefit thereof. It was hoped by the 1921 amendments to build up a more substantial fund than could be accumulated under the original law. It is clear, however, that at the rate of one-tenth of one per cent per year, thirty years would be required to accumulate a three per cent fund if no losses occurred and if the income from investments equaled the expenses of the Board. The report of the Bank Commissioner covering the year 1920 contains the last published statement of the guaranty fund banks, as of November 15, 1920. At that time 116 banks and 4 branch banks were members of the guaranty fund. The law provides that public deposits may be secured either under the guaranty fund or by the deposit of collateral or surety bonds. It is not possible, therefore, from the pub- lished statement to determine the exact amount of eligible deposits in the member banks. Roughly it amounted to $65,000,000. The amount credited to the Guaranty Fund Board was $320,908, presumably one-half of one per cent of the eligible deposits at the time of last adjustment of the fund.* With two outstanding exceptions the members of the system were relatively small banks. The largest bank in the system was the Scandinavian American Bank of Seattle with total deposits November 15, 1920 of $15,834,624. The Spokane and Eastern Trust Company of Spokane, with deposits of $11,399,486, was the only other bank having deposits of over two millions.^ 1. Fourteenth Annual Report of the Bank Commission, p. 25. 2. Fourteenth Annual Report of the Bank Commission, pp. 37-51. 352 QUARTERLY JOURNAL OF ECONOMICS The failure of the Scandinavian American Bank of Seattle, which occurred July 1, 1921, was the result of overexpansion of loans during the administration of a former president; the failure of the Scandinavian American Bank of Tacoma in January, 1921, a bank which had originally been established as a branch of the Seattle bank and which had been closely affiliated with it until recent years; and the depreciation of assets due to the general shrinkage of property values. Early in 1920 a new administration having the full confidence of banking and business interests was placed in control. An earnest effort was made to clear up the doubtful assets of the bank and improve its financial position. Under the direction of the Federal Reserve Bank of San Francisco, of which the Scandinavian American Bank of Seattle was a member, and of the state banking department, an assessment of 100 per cent was levied upon the stockholders, bringing in $1,000,000 in cash. Under the adverse financial condition prevailing these strenuous efforts proved unavaihng. Still further en- deavors at rehabilitation were then made, one of which in- volved postponement of part of their claims by the larger depositors (over $100 each) and failed because of their unwill- ingness to accede. During the time when it seemed possible to effect some plan of reorganization the Guaranty Board postponed levying an assessment upon the member banks. Finally the Board felt that a call must be made immediately for the payments for the benefit of the guaranty fund. On December 7, an assess- ment of one-half of one per cent, the maximum amount which banks may be assessed per annimi, was levied. At the same time the member banks were asked to turn over the one per cent already credited to the fund upon their own books. In other words, banks were asked to pay at once 1^ per cent on their eligible deposits. There was available in the guaranty fund about $500,000. A levy of one-tenth of one per cent had been made earlier for the contingent fund, which should add about $40,000 to $50,000 more; the one-half of one per cent assessment may be expected to bring in about a quarter of a million. A large NOTES AND MEMORANDA 353 proportion of this total of about three-fourths of a million, as the writer learns from the officials has been collected in cash by the Secretary of the Guaranty Fund Board. The burden of this IcA^y upon the member banks can only be realized when it is recalled that the fund had never been charged against income in previous years, except by a very few banks. The result is that I5 per cent of the deposits must be withdrawn from the current year's income. In the typical bank, deposits are approximately ten times capital. Accord- ingly this levy is equivalent to about fifteen per cent upon the capital stock of member banks. Some of these banks, espe- cially in the agricultural districts, are already hard pressed by the adverse financial conditions. To them the new load be- comes almost unbearable. The law contains a section providing for voluntary with- drawal of member banks. In order to avoid the burden of further assessments, banks have been fiocking out of the system in recent weeks. The second largest bank of the sys- tem — the Spokane and Eastern Trust Company — had filed notice of withdrawal in March, 1921; but during the period when reorganization of the Scandinavian American seemed possible, there were few withdrawals. When that failed, there appears to have been a concerted movement to get out. It was announced on December 30 that all but seven of the 120 banks had withdrawn. The liability of the withdrawing banks for further assess- ments can only be determined when the Supreme Court of the state makes its interpretation of the law. The language of the pertinent section does not make it clear whether banks can be required to pay assessments beyond one year from date of their withdrawal. The opinion of some who were instru- mental in drafting the law is that the intent of the legislators was to make member banks fully liable for losses due to faOures occurring while they retained membership in the fund. On the other hand, others in an equally good position to know maintain that a limited liability was certainly con- templated, and that there was no intention to hold a member bank liable for an indefinite number of annual assessments 354 QUARTERLY JOURNAL OF ECONOMICS after it had withdrawn. The decision of the court cannot be given for months, possibly years. Meantime the special deputy supervisor in charge of liqui- dating the defunct bank is making collections upon loans and other assets and turning the proceeds over to the treas- urer of the guaranty fund. Under date of December 19, 1921 a letter was sent to all creditors of the bank enclosing warrants for the full amount of the approved claims. There was also a check for twenty per cent of the warrant signed by the secre- tary of the guaranty fund. The amount of this dividend is endorsed upon the warrant. Under the terms of the law warrants should bear interest at the rate of five per cent per annum from date until redeemed, but the warrants which have been issued do not contain any interest clause. Guaranteed claims have been approved amounting to $7,889,770. The book value of assets on December 19, was $9,890,624, but it is impossible to say at this time what can be realized upon them. Unpaid assessments upon capital stock amounted to $991,347, part of which, or all, may prove uncollectible. Action has been brought against some stock- holders for their unpaid assessments.' Suits are also pending on many of the slow loans. A committee of Seattle bankers made a careful appraisal of the assets of the Scandinavian American at the time of closing, and reported as follows: A. Reasonable banking assets $6,409,773.38 B. Assets which, while too slow to classify as desirable bank resources, would still prove collectible 2,325,482.71 C Assets of doubtful collectibility 3,043,801.14 D. Assets which seem probably bad 1,855,321.70 It was conceded that there would be substantial recoveries in class C. It will be long before the final settlement is effected. Pres- ent indications are that the existing system of deposit guar- anty is at an end, as member banks have practically all withdrawn and the heavy losses entailed by the experience 3. Stockholders have refused to pay on the ground that they were assessed 100 per cent in 1920. On December 30, 1921, Judge J. T. Ronald of the Superior Court of King County rendered a decision to the effect that they are liable for another 100 per cent assessment on their stock. An appeal to the Supreme Court is anticipated before actual payments are made. NOTES AND MEMORANDA 355 make it doubtful whether a voluntary system can ever suc- ceed in Washington. The fate of the depositors is also undetermined. There is a considerable feeling that the state, by allowing the member banks to advertise their deposits as guaranteed, assumed a moral, altho not legal, obligation to see that they are paid in full. The deposits of the Scandinavian American were pri- marily savings accounts. Approximately 21,000 depositors had claims against the institution when it failed. Of these only a negligible number were in a position to recover by off- setting deposits against loans made to the bank. A few who would otherwise have had the right to offset lost it because their paper had been rediscounted with the Federal Reserve Bank. Of the $2,304,000 of rediscounts at the time of failure, only $8,787 remained uncollected December 19, 1921. Altho the depositors have not been benefited by these collections, it is evident that the losses to the Federal Reserve Bank will be negligible. An interesting by-product of this failure was a great in- crease in postal savings deposits. It was officially reported that $1,302,070 was added to the postal savings at the Seattle Post Office during July. On the whole, however, confidence in the banks of the community was not seriously impaired. The fact that deposits were guaranteed cannot be held responsible for the reckless banking which wrecked the Scan- dinavian American Bank. Its bad administration began years before its admission to the guaranty fund. Doubt- less, however, its membership in the fund gave many de- positors a false sense of security. If the opinion of Mr. Cooke proves true that "still more states will be led by the present bank casualties to adopt the plan," the Washington situation should be studied with care to see what lessons may be learned. The guaranty principle is " insurance and nothing else." * As such it demands a scientific distribution of risk. Whether a feasible plan of underwriting large risks can be devised is not clear. The 4. Robb, The Guaranty of Bank Deposits, p. 200. 356 QUARTERLY JOURNAL OF ECONOMICS Scandinavian American failure was the largest ever ex- perienced in Washington. To throw the burden of its losses on about 120 small banks clearly threatened ruin to these — a possibility that should have been foreseen. That it was not foreseen is conclusive evidence that greater care must be exercised in devising state systems. HowABD H. Pkeston. University of Washington, Seattle, Washington. BOOKS RECEIVED Bastiat, Frederic. Economic Sophisms. New York: G. P. Putnam's Sons. 1922. pp. 330. $1.75. (Translated by Patrick James Stirling.) Boimiatian, Mentor. Les Crises Economiques. Paris: Marcel Giard. 1922. pp. 385. 25 fr. (Traduit du Russe par J. Bernard.) British Association, Committee on Currency and the Gold Standard. Monetary Pohcy. London: P. S. King & Son. 1921. pp. 75. 2s. 6d. Browne, Waldo R. What 's What in the Labor Movement. New York: B. W. Huebsch, Inc. 1921. pp. 577. $4.00. Carnegie Endowment for International Peace. Proceedings of the Hague Peace Conference. Translation of OflScial Texts. New York: Oxford University Press. 1921. pp. 1162. (Conference of 1907. Vol. III.) Comstock, Alzada. State Taxation of Personal Incomes. New York: Longmans, Green & Co. 1921. pp. 246. (Columbia University Studies.) Feis, Herbert. The Settlement of Wage Disputes. New York: Mac- millan Co. 1921. pp. 289. $2.25. Friedman, Elisha M. International Finance and Its Reorganization. New York: E. P. Dutton & Co. 1921. pp. 702. $7.00. Gamble, Sidney D. Peking: A Social Survey. New York: George H. Doran Co. 1921. pp. 538. $5.00. Gregory, J. E. G. TariJBfs: A Study in Method. London: Charles Griffin & Co. 1921. pp. 518. 25s. Jones, EUot. The Trust Problem in the United States. New York: Macmillan Co. 1921. pp. 598. Kniffin, William H. American Banking Practice. New York: McGraw- Hill Book Co. 1921. pp. 389. $3.50. Knight, Frank H. Risk, Uncertainty and Profit. Boston: Houghton Mifflin Co. 1921. pp. 381. $3.00. Lee, Mabel Ping-Hua. The Economic History of China with Special Reference to Agriculture. New York: Longmans, Green & Co. 1921. pp. 461. (Columbia University Studies.) Leith, C. K. The Economic Aspects of Geology. New York: Henry Holt & Co. 1921. pp. 457. Lowe, BouteUe Ellsworth. The International Protection of Labor. New York: Macmillan. 1921. pp. 439. Mitchell, Wesley C, and others of the staff of the National Bureau of Economic Research. Income in the United States. New York: Harcourt, Brace & Co. 1921. pp. 162. $1.25. (Text edition.) Mukerjee, Radhakamal. Principles of Comparative Economics. Lon- don: P. S. King & Son. 1921. pp. 336. 15s. National Industrial Conference Board. Changes in the Cost of Living. New York: The Century Co. 1921. pp. 25. 75 cents. (Research Report No. 39.) . . Family Budgets of American Wage-Earners. New York: The Century Co. 1921. pp. 97. $1.00. (Research Report, No. 41.) 357 358 QUARTERLY JOURNAL OF ECONOMICS . The Metric versus the English System of Weights and Measures- New York: The Century Co. 1921. pp. 261. (Research Report No. 42.) Oldershaw, L. Analysis of MiU's Principles of Political Economy. Ox- ford: Basil Blackwell. 1921. pp. 143. 4s. 6d. (Second edition, revised.) Orwin, C. S. Farming Costs. Oxford: Clarendon Press. 1921. pp. 141. Roscher, WUhelm. Eoonomie IndustrieUe. (Tome II.) Paris: Marcel Giard. 1921. pp. 497. 22 fr. (8^ edition, revue et augmentfe par Wilhelm Stieda.) Rowe, L. S. The Federal System of the Argentine Republic. Washing- ton: Carnegie Institution. 1921. pp. 161. Revue de M6taphysique et Morale. Problfimes Actuels de 1' Eco- nomique. Paris: Colin. 20 fr. (A series of important papers in a special number of this Review, by March, Barone, Hawtrey, Gide, Rist and others, on Statistical Method, Exchange, Production, Consumption, Factors of Production.) Scrugham, Mary. The Peaceable Americans of 1860-61. New York: Longmans, Green & Co. 1921. pp. 125. (Columbia University Studies.) S6e, Henri. Esquisse d'une Histoire du Regime Agraire en Europe aux XVIIIeetXIXeSiecles. Paris: Marcel Giard. 1921. pp. 276. 15 /r. Seligman, E. R. A. Essays in Taxation. New York: MacmiUan. 1921. pp. 806. (Ninth edition.) Simkhovitch, V. G. Toward the Understanding of Jesus and other Historical Essays. New York: MacmiUan Co. 1922. pp. 165. (Including essays on Rome's Fall Reconsidered and on Hay and its History.) Spencer, William H. Law and Business. (Vol. II.) Chicago: Univer- sity of Chicago Press. 1921. pp. 670. S4.50 (A three-volume work.) Taylor, F. M. Principles of Economics. New York: Ronald Press. 1921. pp. 677. Tosdal, Harry R. Problems in Sales Management. New York: A. W. Shaw Co. 1921. pp. 637. Turner, John Roscoe. The Ricardian Rent Theory. New York: New York University Press. 1921. pp. 221. $4.00. Turpin, Hector. Le Probldme International Du Chomage. Paris: Giard & Cie. 1921. pp. 116. Vanlande, Ren6. Avec le G&6ral Niessel en Prusse et en Lithuanie. Paris: Charles-LavauzeUe & Cie. 1922. pp. 184. Van Metre, Thurman W. Economic History of the United States. New York: Holt & Co. 1921. pp. 672. $3.25. Woods, K. S. The Rural Industries around Oxford. Oxford: Clarendon Press. 1921. pp. 180. JUST PUBLISHED Business Administration BY LEON CARROLL MARSHALL Professor of Political Economy Dean of the School of Commerce and Administration University of Chicago MANAGING any business presents three problems: (i) The estab- Kshment of policies — with the setting of goals; (2) The planning and setting up of an organization to carry out these policies — to arrive at the goals; (3) The operating or running of the organization itself — the routine. In his book Professor Marshall takes up these problems and dis- cusses them at length. That he is capable of handling them effectively and authoritatively is readily recognized by those who know his ex- perience and teaching abiUty. A few of his many positions and activi- ties of recent years are as follows: Dean of the School of Commerce and Administration, University of Chicago, since 1909; appointed Chief of the Section on Industrial Services, Council of National De- fense, in 1917; Secretary of the Advisory Council of the Department of Labor; Director of Industrial Relations, Emergency Fleet Cor- poration; Economic Adviser, War Policies Board, in 1918; author of other economic texts; and frequent contributor to economic journals. TABLE OF CONTENTS I. The Field of Business Administration II. A Sample Business Problem — Plant Location III. The Administration of Personnel IV. The Administration of Market Problems V. The Administration of Finance VI. The Administration of Production VII. The Administration of Risk-Bearing VIII. The Form of the Business Unit IX. Basic Features of Administration X. 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