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PRINCIPLES 
 
 OF 
 
 THE NEW ECONOMICS 
 
CROWELL'S 
 SOCIAL SCIENCE SERIES 
 
 EDITED BY 
 
 SEBA ELDRIDGE 
 Department of Sociology, University of Kansas 
 
 Principles of the New Economics 
 
 By Lionel D. Edie, Colgate University 
 
 An Introduction to the Study of Labor Problems 
 
 By Gordon S. Watkins, University of Illinois 
 
 IN PREPARATION 
 
 History of Socialism 
 
 By Harry W. Laidler 
 
 International Government 
 
 By Jessie Wallace Hughan 
 
 The Nature of Culture 
 
 By Clark Wissler 
 
 Principles of Public Finance 
 
 By Jens Jensen 
 
 THOMAS Y. CROWELL COMPANY 
 
PRINCIPLES 
 
 OF THE 
 
 NEW ECONOMICS 
 
 BY 
 
 LIONEL D. EDIE 
 
 ASSOCIATE PBOrESSOE OF HISTOET AND POLITICS 
 
 DIVISION OF CUEEENT INDUSTEIAL PEOBLEMS 
 
 COLGATE UNIVEESITT 
 
 CROWELL'8 SOCIAL SCIWffCE SERIES 
 
 EDITED BY 
 
 SEBA ELDRIDGE 
 University of Kansas 
 
 NEW YORK 
 
 THOMAS Y. CROWELL COMPANY 
 
 PUBLISHERS 
 
 ^■i 
 
COPYKIGHT, 1922, 
 
 Br THOMAS Y. CROWELL COMPAIOC 
 
 Third Printing 
 
 Printed in the United States of America 
 
DEDICATED TO MY WIBT! 
 
 MARIE BRUCE EDIE 
 
EDITOR'S NOTE 
 
 There is an increasing recognition of the necessity of 
 approaching economic topics and problems from the psycho- 
 logical and historical viewpoints, as well as from the stand- 
 point of the classical economists; and also of taking into 
 account the far-reaching effects on economic processes pro- 
 duced by the industrial applications of modern science. 
 Indeed, it is safe to say that our economic system can 
 scarcely be comprehended unless it is viewed as an organi- 
 zation, on a grand scale, of historical, mental and physical 
 factors as these are prepared or revealed by scientific in- 
 quiry. Professor Edie's book offers an admirable intro- 
 duction to economics considered as a realistic description of 
 the economic system produced by these groups of factors. 
 
 S. E. 
 
PREFACE 
 
 The primary purpose of this volume is to integrate the 
 varied developments of recent years in economic thinking, 
 and to relate them to the body of economic ideas which have 
 been evolved through a long history of economic reflection. 
 A number of departures from the orthodox economic doc- 
 trines prevalent at the close of the last century have led to 
 the development of several important schools of new eco- 
 nomic thought. Each separate school has departed from 
 the worn and beaten paths of economic theory in ways dis- 
 tinct and peculiar to itself, and each represents an inde- 
 pendent and original direction of economic interpretation. 
 In the early stages of such a movement in economic think- 
 ing, it is natural for both the adherents and critics of each 
 branch of the movement to interest themselves in the unique 
 and imusual features of the new doctrines of each inde- 
 pendent branch. The stage has been reached, however, 
 when it is of deep importance that the several divergent 
 tendencies in economic interpretation should be integrated 
 in their fundamental relations, The attempt at such an 
 integration takes full cognizance of the many contradic- 
 tions and inconsistencies between the various branches of 
 thought, but it also acknowledges fully the many basic ways 
 in which the various branches are supplementary and co- 
 ordinate. The guiding principle of this volume is that the 
 true value of all the independent developments in recent 
 economic thought is realized not merely from a view of 
 each branch of thought by itself, but more completely from 
 a view of the composite evolution in economic thinking. 
 The recent pluralistic progress in economic thinking has a 
 fundamental unity. 
 
 vii 
 
viii Preface 
 
 Some of the outstanding branches of economic thinking 
 may be mentioned for the sake of illustrating the scope of 
 this undertaking. There has appeared within the last few 
 years a powerful psychological school of economic thinkers, 
 whose distinctive characteristic is not that they have intro- 
 duced psychology into economic theory, for earlier schools 
 of value theorists made that introduction some time ago; 
 but that they have introduced a new type of psychol- 
 ogy into economic thinking, — ^the scientific psychology 
 which has made its monumental discoveries and progress 
 during the last two decades or so. This scientific psychol- 
 ogy has, as John Dewey observes, displaced the exploded 
 psychology of the nineteenth century, and has brought out 
 the advances embodied in modern social psychology, com- 
 parative psychology, behavioristic psychology, normal and 
 abnormal psychology, and numerous other special fields of 
 modern psychological research and discovery. The psycho- 
 logical developments in economic thinking are at bottom 
 in thorough harmony with what has been called "institu- 
 tional economies." Moreover, these schools of modern eco- 
 nomic thought integrate in fundamental ways with descrip- 
 tive economics, with functional economies, with social 
 economics, with price economies, with dynamic economics, 
 or with welfare economics. The paramount and striking 
 feature of these several branches of economic thought is the 
 fact that in their general bearing and broad scope they 
 represent a great forward movement in the interpretation 
 of the economic phases of life. 
 
 It should not be assumed that a recognition of recent 
 advances in economic theory implies a repudiation of old 
 economic theory. The old economic theory, it is true, is 
 charged with many fallacies, but at heart its principles 
 were enduring. Probably the chief cause of uneasiness in 
 fields of economic thought has been the feeling that former 
 economic theory was inadequate. Many of its doctrines are 
 essential, but are too limited to account fully for economic 
 
Preface ix 
 
 life. Hence, the present integration of recent tendencies in 
 economic thinking has an ungrudging tolerance for a large 
 part of previous economic thinking. The spirit of this 
 study is not to cut loose from the orthodox theory of the 
 recent past, but to associate the new with the old in their 
 rightful relationships. 
 
 This process of integrating the new and relating it to the 
 old necessarily involves much comparison and contrast of 
 economic doctrines. The literature of the field presents an 
 endless amount of controversy and dispute. However, the 
 method of the present volume is not to controvert, to dis- 
 pute or to argue, but rather to make as direct and clear a 
 statement as possible of the integrated and related bodies of 
 interpretation. No attempt is made to explain the ways 
 and processes by which the present organization of thought 
 has been arrived at, for the simple reason that such an 
 explanation would involve a volume of controversy. Nor is 
 the discussion contained in these chapters framed for the 
 purpose of convincing professional economists of the de- 
 fensibility of the author's views. The positive endeavor is 
 to state the body of thought in a form which can be readily 
 understood by a university student or by a general reader 
 of good intelligence. It is hoped that such a statement of 
 the body of thought will be convincing to economists, and 
 the writer prefers to let the plain statement of the ease do 
 what convincing it will, rather than to confuse the state- 
 ment by entering constant anticipations of objections and 
 criticisms. The method is expository and non-controversial. 
 
 In the course of the work of constructing the book, deeply 
 appreciated help has been received, either in the form of 
 critical suggestions about the organization of the thought 
 or of sympathetic reading of parts of the manuscript, from 
 Dr. Leon C. Marshall, Dean of the School of Commerce and 
 Administration, of the University of Chicago; Dr. Elmer 
 Burritt Bryan, President of Ohio University ; Mr. Ordway 
 Tead, Bureau of Industrial Research of New York City; 
 
X Preface 
 
 Dr. H. G. Good, Associate Professor of Psychology and 
 Education, of Colgate University; Professor J. M. Short- 
 liffe, head of the Department of Economics, of Colgate 
 University; Professor E. "W. Smith, head of the Depart- 
 ment of Rhetoric ; Dr. F. H. Allen, head of the Department 
 of History and Polities; Associate Professor C. E. Gates, 
 Associate Professor C. A. Kallgren, and Mr. R. M. Gidney, 
 Controller at Large, Federal Reserve Bank of New York. 
 The author is, of course, solely responsible for the contents 
 of the volume. 
 
 Cordial appreciation is also due many friends and stu- 
 dents who have aided in many ways in carrying on the work. 
 
 I am especially glad to enter here a full recognition of the 
 partnership of my wife in all phases of the undertaking. 
 Her thoughtful and patient collaboration is embodied in 
 each page of the volume. 
 
 Lionel Danfoeth Edib. 
 
 March 21 ,1922. 
 
CONTENTS 
 
 PART I— ECONOMIC PSYCHOLOGY 
 
 CHAPTER VAGI 
 
 I. The Significance or Pstcholgqt in Economics . . 1 
 
 II. Economic Expbession of Instincts 8 
 
 The Instinct of Workmanship — The Instinct of Posses- 
 sion — Disposition to Self-Assertion — ^Instinct of Sub- 
 missiveness — The Parental Instinct — Sex Instinct — The 
 Gregarious Tendency — Instinct of Flight and Fear — 
 Pugnacity and Rivalry — Some Instincts of Minor Sig- 
 nificance — Hunting — The Housing Instinct — The In- 
 stinct of Migration — The Instinct of Play — Disposition 
 to Mental Activity. 
 
 III. The Obganization of Human Natube 39 
 
 Habit — Imitation, Sympathy, Suggestion — Inequalities 
 
 of Human Equipment. 
 
 IV. Human Adaptation to Economic Envieonment . . 52 
 Discipline — Elimination — Sublimation — Rational- 
 ization — Revolt. 
 
 PAST II— ECONOMIC INSTITUTIONS 
 
 AND FUNCTIONS 
 
 V. The Mechanical and Scientific Basis of Economics 72 
 Machinery — Transportation — Chemistry — (Jeology 
 — Electricity — The Science of Economic Organization — 
 Psychology of Industrial Engineering. 
 
 VI. Labor: Its Pabt in Pboduction 99 
 
 The Job — Hours of Work — ^Wages — Standard of Living 
 — ^Incentives — Bargaining Power — Custom and Habit — 
 Wages and Labor EfBciency — Power — ^Environment — 
 The Mind of the Worker — Immigration — Population 
 — Economic Significance of the National Character. 
 
xii Contents 
 
 CHATTEK FACB 
 
 VII. Capital: The Rights and Duties of Ownebship . . 176 
 Statistics of Wealth and Income — Interpretation of the 
 Facts — Property a Group of Eights — Ownership as a 
 Corporate Phenomenon — The Principles of Minimum 
 and Surplus — ^Inequalities Due to Unequal Privileges — 
 Monopoly Privileges a Cause of Inequalities — Unfore- 
 seen Chance as a Cause of Inequalities. 
 
 VIII. Management: Its Technique and Responsibilities . 236 
 Classification of Types of Management — The Mechanism 
 of Corporation Management — Technique of Executive 
 Direction — Business Combination and Concentration of 
 Management — Reasons for the Combination Movement 
 — Successes and Failures in Combination. 
 
 IX. Markets : Their Principles and Strategy . . . 279 
 The Cost of Production Theory of Prices — Supply and 
 Demand — The Analysis and Creation of Demand — Ad- 
 vertising — Sales Management — Guidance of the Ratio 
 Between Supply and Demand — ^Variations from the 
 General Principles of the Market — Market Mechanism 
 Geographically Considered — Market Mechanism Func- 
 tionally Considered — Price Movements in Various 
 Stages of the Market Process — Price Policies — Below 
 the Market Level — Above the Market Level — Business 
 Combinations and Price Policies — ^Monopoly Price and 
 What the TraflBc Will Bear — Monopolies and the Steady- 
 ing of Prices — Price Discrimination — The Science of 
 Spending Money — Technology for Guidance of Con- 
 sumption. 
 
 X Monet and Credit: Their Services and Dangers . . 366 
 Forms of Money — Banking and Commercial Credit 
 — Forms of Loans — Discounts — The Network of Finan- 
 cial Institutions — Savings Banks — Trust Companies — 
 Foreign Investment Banking — Other Financial Organi- 
 zations — Federal Reserve System— Centralization — ^Note 
 Issue — Deposit Currency — Reserves — Clearance and 
 Other Functions — International Banking and Credit 
 — The Principles of Foreign Exchange — The Dangers of 
 the Credit System — Business Cycles — Psychological 
 Foundations of the Credit System. 
 
Contents xiii 
 
 PAET in— ECONOMIC ADAPTATION 
 
 CHAPTER PAGE 
 
 XI. Public Contbol 453 
 
 General Regulation of Business — Governmental Control 
 of Labor — Reform — Public Opinion and Public Control. 
 
 XII. Economic Radicalism 487 
 
 General Characteristics of Radicalism — Particular 
 Types of Radicalism — Economic Analysis of Socialistic 
 Proposals. 
 
 XIII. Economic Demoobact 499 
 
 Fundamental Conceptions — Democracy a Process of 
 Growth — Works Councils — Labor Unions. 
 
 INDEX 521 
 
PAET I 
 ECONOMIC PSTCHOLOGT 
 
 CHAPTER I 
 THE SIGNIFICANCE OF PSYCHOLOGY IN ECONOMICS 
 
 Economics is the science of human nature in its relations 
 to the ordinary business of life. It involves a threefold 
 analysis, — first, of the motives and satisfactions of men in 
 their dealings with wealth; second, of the processes and 
 organization by which wealth is controlled; third, of the 
 forces and directions of improvement and change. Thus 
 economics has a human factor, an organization factor, and 
 a progress factor. Economics is the science of aU three 
 as a unit and to study any one exclusively is to secure only 
 a partial analysis of the science.^ 
 
 The human side of economies is approached chiefly by 
 psychology. Men are the vital part of the economic order. 
 It is men who invent machinery and make scientific dis- 
 coveries. It is men who operate machines and guide the 
 process. It is men who compete for the ownership of 
 property and who manage the economic system from top 
 to bottom. It is men who bring about progress in the 
 countless parts of the system. It is to satisfy the needs 
 and wants of men that all economic activity is carried on. 
 The human factor of economics is fundamental, and the 
 science of this human factor is economic psychology. 
 
 Psychology approaches the problem by a study of the 
 primary motives of conduct. Psychology attempts answers 
 
 1 See Alfred Marshall, 'Trinciples of Economics," p. 1. Seventh 
 edition. 
 
2 The Significance of Psychology in Economics 
 
 to the questions, — Why do men behave in the business 
 world as they do? Do these forms of behavior make for 
 the proper amount of satisfaction and welfare? What 
 other forms of behavior are possible and practicable? 
 What are the chief motives which urge men forward in 
 their whole dealing with these questions of wealth? 
 
 Men are bundles of tendencies to act. Whether in the 
 banker 's ofBce, or around the table of the board of directors, 
 or on the salesman's route, or at the worker's machine, men 
 are aggregates of urges to act in certain directions. In 
 technical psychological terms, these tendencies are instinc- 
 tive tendencies. For purposes of economic thinking they 
 are as well termed dispositions, or urges, or motives, or 
 drives.^ A comprehensive definition of them is given by 
 McDougall as follows: "The human mind has certain in- 
 nate or inherited tendencies which are the essential springs 
 or motive powers of all thought and action, whether indi- 
 vidual or collective, and are the bases from which the 
 character and will of individuals and of nations are grad- 
 ually developed under the guidance of the intellectual 
 faculties. . . . Directly or indirectly the instincts are the 
 prime movers of all human activity; by the conative or 
 impulsive force of some instinct (or of some habit derived 
 from an instinct), every train of thought however cold and 
 passionless it may seem, is borne along toward its end, and 
 every bodily action is initiated and sustained. The instinc- 
 tive impulses determine the ends of all activities and sup- 
 ply the driving power by which all mental activities are 
 sustained. . . . Take away these instinctive dispositions 
 with their powerful impulses, and the organism would 
 become incapable of activity of any kind; it would lie 
 inert and motionless like a wonderful clockwork whose 
 mainspring had been removed or a steam engine whose 
 
 1 For discussion of definitions of instinct, see McDougall, "Social 
 Psychology," pp. 23-29; 0. Tead, "Instincts in Industry," p. 5; T. 
 Ve'blen. "Instinct of Workmanship," Chapter I; G. Wallas, "The 
 Great Society," Chapter 1; M. Parmelee, "Science of Human Be- 
 havior," Chapters XI, XII, XIII; B. Thorndike, "Original Nature 
 of Man," pp. 1-5 ; J. B. Watson, "Psychology from the Standpoint of 
 a Behaviorist," pp. 231-240, 261; H. C. Link, "Instinct and Value, 
 American Journal of Psychology, Jan., 1922, pp. 1-17. 
 
The Significance of Psychology in Economics 3 
 
 fires had been -withdrawn. These impulses are the mental 
 forces that maintain and shape all the life of individuals 
 and societies."^ 
 
 These impulsive forces cannot be classified in any hard 
 and fast, absolute divisions. Indeed, such a cut and dried 
 classification is unnecessary; as will appear from the fol- 
 lowing list of some of the paramount tendencies. There 
 is an urge to self-assertion toward leadership, mastery, 
 power, which makes men move heaven and earth to sit 
 on a coveted board of directors and map out the policies 
 of corporations. There is an instinct of possession or 
 acquisition which drives men to the collection of great 
 blocks of real estate or of multimillionaire fortunes. There 
 is an instinct of workmanship or constructiveness, which 
 determines whether production shall be 50 per cent, or 
 100 per cent, of its possibilities, and which virtually 
 compels men of great genius to build up the large business 
 organizations of the modern day for the sheer joy of 
 achievement. There is a parental instinct which underlies 
 kindliness, sympathy, sacrifice and service, wherever it 
 appears in the economic world, whether strictly within 
 one's own immediate family or through the community at 
 large. There is a sex instinct which is utilized effectively 
 in a large part of advertising display, and which makes 
 the proper entertainment of workers while off the job a 
 highly important business problem. There is a herd in- 
 stinct under whose force a rumor of pessimism may aid in 
 dragging the financial community to a temporary or pro- 
 longed state of depression, which may influence in vital 
 ways the formation of labor unions, or which may deter- 
 mine degrees of congestion of population in large indus- 
 trial centers. There is an instinct of submission which 
 may lead a corporation manager to prefer the status of a 
 subsidiary in a large amalgamation to the status of an in- 
 dependent cut-throat competitor, or which may determine 
 the attitude of workers toward movements for industrial 
 democracy. There is an instinct of pugnacity which flashes 
 out from time to time in strikes or in the bitter struggles 
 1 "Introduction to Social Psychology," p. 45. 
 
4 The Significance of Psychology in Economics 
 
 of commercial competition. There is an instinct of curi- 
 osity or thought which inspires the inventiveness of men, 
 concentrates their mental powers on the possibilities of 
 an ever better science of organization, and encourages 
 countless endeavors at increased efficiency. There is a dis- 
 position to fear which worries the business man with the 
 dread of bankruptcy and strikes into the heart of the 
 laborer the terrors of unemployment. 
 
 It is not meant to give the impression that this sort of 
 classification is all in all. The significance of the list is 
 that it brings within small compass some of the para- 
 mount dispositions of men in so far as those dispositions 
 affect their economic conduct. From other standpoints, 
 other groupings might be of greater practical value, but 
 from the economic standpoint, the most useful procedure 
 is to draw from psychology those parts which have most 
 value for the study of economics. In the economic world, 
 therefore, it is indispensable to recognize that men move 
 and work and plan and achieve in response to certain 
 primary springs of action, — ^such as the desire for power, 
 or ownership, or achievement, or parental satisfaction, or 
 sex contentment, or herd unity, or submission, or pug- 
 nacity, or thought. 
 
 With this brief picture of some of the predominant ten- 
 dencies in mind, some important characteristics of their 
 activity can be pointed out with greater definiteness. First 
 of all they are born into the human being. Through 
 hundreds of generations they have been built into the life 
 blood of the human race. They are hereditary tenden- 
 cies in human nature, passed on from generation to gen- 
 eration, primitive, ineradicable, inescapable, the stufE of 
 which human nature is made. They are all part and 
 parcel of man's inheritance, his racial birthright, and in 
 their applications to his modern economic life, this origin, 
 with all that it implies of vitality and power, needs to be 
 held vividly in mind. 
 
 A second important characteristic of these tendencies 
 is their dynamic quality. They push and urge and drive 
 men from within. There is something compelling about 
 
The Significance of Psychology in Economics 5 
 
 them. They do not make for quiet, but for change. They 
 are the restless qualities, the forces behind initiative. They 
 are motives to behavior, sources of animation, filled with 
 purpose and desire and aspiration. From the town loafer 
 to the captain of industry, they are drives toward be- 
 havior. Under their urge, growth, life, change is the key- 
 note of the economic world. They are the incentives 
 behind the hundreds of thousands of inventions of industry, 
 behind the explorations which have opened the world to 
 commerce, behind the gigantic business combinations and 
 the myriads of lesser enterprises, — ^behind the whole eco- 
 nomic organization. 
 
 A third important feature is their pliability. At birth, 
 they are general tendencies, indefinite urges, broad forces. 
 By development and experience the tendency to self-asser- 
 tion may lead to the struggle for power as a labor leader 
 or as a corporation president. Environment, family, school, 
 reading all serve from early life to mold and shape and 
 fashion a particular tendency in certain ways. Every out- 
 side influence counts in the application of the basic ten- 
 dencies to the channels of life. A man born with a dom- 
 inant love of power will weld all these outside influences 
 into the real metal of his nature, and whether in states- 
 manship or finance or education or labor, will be a leader 
 under the domination of the original tendency to power. 
 So with all the instincts. At birth they are "unlearned 
 tendencies." Childhood and the experiences of adult years 
 color and shape them, but they are still true to their 
 essence. 
 
 A fourth important feature is their interplay. One 
 separate tendency does not commonly hold exclusive sway. 
 Parental love, possessiveness, self-assertiveness may, for 
 example, combine in any proportion among themselves, or 
 with any of the other tendencies to produce behavior. 
 But in most of the affairs of industry, some one tendency 
 or small group of tendencies is paramount in the policies 
 of the individual, the class, or the nation. Different in- 
 stincts may leap into the ascendency at different times. 
 Pugnacity may master the man to-day and fear to-morrow. 
 
6 The Significance of Psychology in Economics 
 
 There is interaction, combination, succession, waxing and 
 waning, fitting the demands of the hour, rising to the 
 occasion. 
 
 Finally, the instinctive dispositions involve the phases 
 described by McDougall as follows: "Every instance of 
 instinctive behavior involves a knowing of some thing or 
 object, a feeling in regard to it, and a striving towards 
 or away from that object. . . . We may then define an 
 instinct as an inherited or innate psycho-physical disposi- 
 tion which determines its possessor to perceive, and to pay 
 attention to objects of a certain class, to experience an 
 emotional excitement of a particular quality upon per- 
 ceiving such an object, and to act in regard to it in a par- 
 ticular manner, or, at least, to experience an impulse to 
 such action. ' ' ^ For the biologist or physiologist or pure 
 psychologist, it is often desirable to analyze and dissect 
 the instinctive tendencies and concentrate attention upon 
 their unit elements. But for purposes of economic psychol- 
 ogy it is commonly more serviceable to think in terms of 
 the whole disposition. We perceive danger, experience 
 the emotion of fear and the impulse to escape. They are 
 separate phases of a whole process, a total instinctive 
 tendency. The usefulness of this conception is apparent 
 from a more detailed definition of emotion. Angell ex- 
 plains that "All the more profound types of human emo- 
 tions are based upon the life of instinct." Sherrington 
 remarks of emotion, "If developed in intensity, it impels 
 toward vigorous movement," and Cannon writes, "That 
 the major emotions have an energizing effect has been com- 
 monly recognized." The important conception therefore 
 is the whole process, perceptual, emotional and energizing 
 or impulsive, because the whole process is the determining 
 factor in social and economic behavior. 
 
 Considered in these ways, economic psychology is not one 
 of the exact sciences. It is true, of course, that certain 
 phases of psychological study can be reduced to exact 
 measurement, such, for example, as intelligence tests, ad- 
 vertising tests, fatigue studies, etc. However, in its gen- 
 1 Social Psychology, pp. 27, 30. 
 
The Significance of Psychology in Economics 7 
 
 eral aspects, it has to proceed -without the units of measure- 
 ment which prevail in physics or electricity or chemistry. 
 There are no calories or meters or volts or grams in human 
 dispositions. The dispositions are incapable of measure- 
 ment by any form of yard stick or weighing scale. Motives 
 and tendencies are always matters of more or less. The 
 combinations of instincts allow for infinite variation. 
 Mathematical exactitude is not the exclusive mental power 
 in psychological thinking; an important power is judg- 
 ment. Economic psychology is not for this reason any less 
 e science. The test of a human science is not whether it 
 is amenable to statistical computation ; the test is whether it 
 marshals knowledge and experience to effective and ser- 
 viceable ends. Economic psychology endeavors to come 
 up to that fundamental test. In this respect psychology 
 works with essentially the same technique as is employed 
 in most of the phases of economic thinking and of social 
 science thinking generally. 
 
CHAPTBE II 
 
 ECONOMIC EXPRESSION OP INSTINCTS 
 
 The Instinct of Workmanship 
 
 Men have an innate desire for constructive effort. They 
 are disposed toward making something, building some- 
 thing, fashioning something. Veblen has said, "Chief 
 among those dispositions that conduce directly to the mate- 
 rial well-being of the race and therefore to its biological 
 success, is perhaps the instinctive bias here spoken of as 
 the instinct of workmanship." And James in a forceful 
 chapter on the psychology of instincts declares, ' ' Construc- 
 tiveness is as genuine and irresistible an instinct in man 
 as in the bee or the beaver. ' ' In explaining the paramount 
 motive in his gigantic industrial achievements, Charles 
 Schwab states, "Why do I work? What do I work for? 
 ... I work just for the pleasure I find in work, the satis- 
 faction there is in developing things, in creating." 
 
 It is not implied that this constructive motive is isolated 
 from other motives in the lives of successful business men. 
 The fundamental impression should be that with a sub- 
 stantial group of business leaders, an enjoyment of con- 
 structive achievement is a dominating motive. Such men 
 are not animated solely or even primarily by the lure of 
 a fortune, but by the lure of great creative achievement. 
 This impulse is particularly outstanding in the engineer- 
 ing feats of recent years, such as the erection of large 
 bridges, the digging of tunnels, the building of sky- 
 scrapers. Where this creative incentive is uppermost the 
 achievements resulting usually have a high social value. 
 The creative incentive is directed toward ends more ser- 
 viceable to the community than are the incentives of pure 
 profit and possession, and the tendency to consider business 
 
 8 
 
Economic EiCpression of Instincts 9 
 
 as one of the professions is a sign that more and more men 
 endowed with the creative incentive will play a leading 
 part in the business world. Managerial positions are de- 
 manding in larger and larger proportions trained en- 
 gineers whose chief ambition is not mere size of salary, 
 but size of achievement. An economic society in which 
 men imbued with this motive come to the top obviously 
 has high social advantages. 
 
 But what of the rank and file? Does an instinct of 
 constructiveness exist in a coal miner or a machine feeder ? 
 Probably most business men have believed at one time or 
 another that the great bulk of laborers are utterly lacking 
 in creative ambition and are dominated by an innate lazi- 
 ness, a native disposition to soldier on the job. In spite 
 of a widespread impression of this sort there have de- 
 veloped in the industrial world hundreds of plant organi- 
 zations where the laborers speed up production spontane- 
 ously, enjoying the effort, displaying keen enthusiasm and 
 a real instinct of workmanship. "What has often been 
 thought to be a disposition to loaf is found to be, on the con- 
 trary, a lack of opportunity for expression of a dormant 
 impulse to create and construct. 
 
 Modern machine industry not only fails to present an. 
 opportunity for creative expression but positively stifles 
 inclinations in that direction. To quote Herbert Hoover, 
 "With the high specialization and intense repetition in 
 labor in industrial processes there has been a loss of crea- 
 tive interest."^ And from a business viewpoint, John D. 
 Rockefeller, Jr., states, "What joy can there be in life, 
 what interest can a man take in his work, what enthusi- 
 asm can he be expected to develop on behalf of his em- 
 ployer, when he is regarded as a number on a payroll, a 
 cog in a wheel, a mere 'hand'?"^ In the same vein an 
 industrial engineer of wide experience writes, "If we take 
 the standard of production as one hundred, I can say that 
 it is impossible to force a man much above fifty and even 
 then after a few days he will become rebellious and lag 
 
 1 Industrial Management, May, 1920, p. 346. 
 2/6id., Nov., 1919, p. 404. 
 
10 Economic Expression of Instincts 
 
 and the quality of the work will suffer. But if the creative 
 power of that man be stimulated, he can almost constantly 
 touch one hundred, apparently without the slightest 
 effort."^ 
 
 Recent experience in industrial effort is sufficient to in- 
 dicate that production is doomed to remain at low levels, 
 labor unrest is inevitable, human satisfaction in workman- 
 ship is out of the question, high economic standards are 
 hopeless unless industrial organization devises ways and 
 means for bringing out this potential energy of the worker. 
 A due expression of the instinct of workmanship, both in 
 employers and in employees, has profoundest bearings 
 upon wealth production. 
 
 The Instinct of Possession 
 
 Ownership, like construetiveness, satisfies a natural 
 craving. Men instinctively seek to acquire objects of which 
 they can say, "These are mine." 
 
 For a large class of people this impulse is paramount. 
 To possess more and ever more brings to them the great 
 joy of living. They are insatiable; they never possess 
 enough. The possession of money, or the property or 
 goods which it represents, gives a real relish to life, and 
 they acquire purely for the sensation of possessing on a 
 gigantic scale. This motive has amassed many of the 
 multimillionaire fortunes of the present day and has 
 driven men on to the accumulation of properties vastly 
 beyond the point where the properties could do them 
 any personal good. 
 
 Men animated primarily by acquisitiveness are found 
 remarking, "I'm not in business for my health," or "I'm 
 after my pile and I'm going to get it," or "I admit I'm 
 after the Almighty Dollar. Business is business." Men 
 in whom this impulse is supreme have frequently been 
 notorious for lack of a high social and ethical sense. "When 
 carried to extremes under its spell some captains of in- 
 dustry have discredited themselves in the public esteem. 
 But it has proved one of the most irresistible of human 
 
 1 W. R. Bassett, "When the Workmen Help You Manage," p. 254. 
 
Economic Expression of Instincts 11 
 
 motives and has fired men of great genius to mighty ac- 
 complishments, sometimes good, sometimes otherwise. 
 
 The wage worker too has a possessive disposition. In 
 the eyes of the employer the wage worker often appears 
 to be animated almost solely by avarice for higher wages. 
 There are many obstacles however to the worker's expres- 
 sion of such an instinct. The worker has, of course, no 
 claim to possession of the machine which he operates, or 
 of the raw material which he handles, or of the finished 
 product which he turns out. He has no possessive title to 
 his job ; his employer has the right to hire and fire at will. 
 If he lives in a tenement district or a company town he 
 owns nothing in the form of a house, a garden, or a 
 lawn. One thing he does own, however, and that is his 
 labor. This he possesses and aims to sell under as good a 
 bargain as he can strike. Here his impulse of possession 
 often comes into vehement play. Demands for wage in- 
 creases come in rapid succession. A great labor leader has 
 offered to digest the aims of labor under three headings, 
 "More, more, more." Laborers assert, "We're not in 
 for a boom unless it booms us. ' ' Wage incentives, bonuses, 
 piece-rates, rewards, are the ceaseless efforts of progressive 
 employers to control and harness the workers' acquisitive 
 nature. 
 
 Farseeing employers have in some instances endeavored 
 to link the possessive instincts of the workers with the best 
 interests of the business by such devices as stock ownership, 
 profit-sharing and thrift plans. It is anticipated, for in- 
 stance, that ownership of a few shares of common stock 
 with attendant dividends, will stimulate feelings of owner- 
 ship which will identify the workers' interests with the in- 
 terests of stock holders generally. The response to this 
 sort of stimulus is still of doubtful force. 
 
 Not all business men, however, or all laborers are dom- 
 inated by the love of possession. A recent observer has 
 ventured to write, "The real news about business, it seems 
 to me, is that it is being administered by men who are not 
 profiteers. The managers are on salary, divorced from 
 ownership . . . the motive of profit is not their personal 
 
12 Economic Expression of Instincts 
 
 motive. ' ' ^ Managers are on the increase whose paramount 
 motives are similar to those of the soldier or the doctor or 
 the teacher or the engineer, — non-possessive. Moreover, the 
 frequent accusation that all labor wants is more wages 
 fails to take into account the workers' non-financial in- 
 stincts. After all, the latter group of instincts is funda- 
 mental in the worker's life. To quote again Mr. Rocke- 
 feller, Jr., "A man who recently devoted some months to 
 studying the industrial problem and who came in con- 
 tact with thousands of workmen in various industries 
 throughout the country has said that it was obvious to him 
 from the outset that the working men were seeking for 
 something which at first he thought to be higher wages. 
 As his touch with them extended, he came to the con- 
 clusion, however, that not higher wages but recognition 
 as men was what they really sought."^ President "Wilson's 
 Second Industrial Conference reported, "It cannot be 
 denied that unrest in our industrial community is charac- 
 terized more than ever before by the purposes and desires 
 that go beyond the demand for higher wages and shorter 
 hours. ' ' 
 
 It is obvious that with both employers and employees, 
 even where money-getting appears the chief aim in life, 
 the money itself may be but a means to an end. The real 
 end and aim may be creating a new invention, attaining a 
 position of power or prestige or making possible a higher 
 standard of living for one's family. All of the satisfac- 
 tions of life are given a price value. In order to satisfy 
 the non-possessive desires men have to acquire money. The 
 end and aim of economic endeavor in such cases is not 
 acquisition merely for the sake of acquisition. The real 
 end and aim is to satisfy non-financial wants and am- 
 bitions. 
 
 But after all allowances have been made for these ex- 
 ceptions and qualifications the fact remains that the pos- 
 sessive instinct has a driving dynamic power in the eco- 
 nomic world. A sheer delight in the collection of a huge 
 
 1 W. Lippmann, "Drift and Mastery," p. 45. 
 ^Industrial Management, Nov., 1919, p. 404. 
 
Economic E oppression of Instincts 13 
 
 fortune has impelled men to tireless business effort and 
 has molded and directed perhaps more than any other 
 single motive the economic system that now prevails. The 
 possibility of its modification or partial displacement by 
 other instincts has momentous significance for the economic 
 community in the future. 
 
 Disposition to Self-Assertion 
 
 In the field of labor leadership it is common to find 
 personalities who are moved not primarily by acqusitive- 
 ness but by an intense impulse of self-assertion and mas- 
 tery. The prevalence of such an instinct in varying de- 
 grees of intensity is conspicuous in all business circles. 
 Self-assertive managers are fond of the warning, "This 
 is my business, I will run it as I please." Out of des- 
 perate rivalries, weathering of financial depressions, cut- 
 throat competition, the most self-assertive men are apt to 
 emerge triumphant, and to wield the power, mastery and 
 leadership that they have won. The consciousness of such 
 power brings to thousands of great captains of industry 
 the sweetest satisfaction which life affords and to attain 
 to the heights of it, they give lifetimes of hazard, worry 
 and exhausting toil. The ambition to win admission to an 
 inner circle of financiers, to be quoted in affairs of great 
 moment in the daily press, to be sought out for advice on 
 legislative or international policies, to affect Presidential 
 campaigns, to hold high ofSce on commercial committees, 
 to swing a backing of 100,000 union men, in short, to ex- 
 ercise power in the tide of human affairs, is one of man's 
 most potent incentives to mighty deeds. 
 
 For some people it is sufficient satisfaction merely to 
 hold the power. They prefer to be confidential adviser 
 to the president of the concern, to direct silently and un- 
 seen the major affairs of the board of directors. They are 
 satisfied to boss behind the scenes, to pull quietly the 
 strings for other men to jump. They enjoy the power for 
 its own sake, without ostentation or show or publicity. 
 
 But more frequently the self-assertive character yields 
 to the thrill of prestige and fame. He wants to be known 
 
14s Economic Expression of Instincts 
 
 as the great railroad genius. He -wants his position to be 
 heralded as great. He wants other big men to know that 
 he is big and he wants little men to recognize his superi- 
 ority. To him power without fame is nothing ; power with 
 fame is everything. Publicity gives the finshing touches 
 to self-assertiveness. 
 
 As with business leaders so with labor leaders there 
 are different types. The walking delegate is in disrepute 
 because of his extreme self-assertiveness. He has on vari- 
 ous occasions swaggered into a shop, peremptorily ordered 
 a strike and laid down an ultimatum, just to let every- 
 body know who is boss around the works. His excessive 
 craving for "showing off" his power, his extreme desire 
 for ostentation and display, has made him a feared and 
 hated figure in the industrial world. There are just as 
 many labor leaders of another type who have built up 
 reputations for sober and conservative use of the enormous 
 powers in their hands, with little care for fame and 
 publicity. 
 
 The ordinary laborer has this same impulse to self- 
 assertiveness, even though often not in so powerful a 
 degree, and his insistence on expressing the impulse is the 
 direct cause of much economic difficulty. The status of 
 labor as a mere "hand," a commodity to be bought and 
 sold like coal or pig iron, has been challenged by workers 
 demanding a new status of recognition and power. The 
 demand for a voice in those industrial issues which affect 
 the welfare of labor, the movement for employee repre- 
 sentation and the assertiveness of modern labor unions are 
 traceable to an instinctive desire to have some real control 
 over one's own work and life. The great obstacle to suc- 
 cessful welfare work is the fact that the laborer has little 
 or no voice in directing the welfare policies. The use 
 of shop committees, employee representation and "indus- 
 trial democracy" plans is an endeavor on the part of busi- 
 ness men to harness this instinct of self-assertion and self- 
 control to the interest of the business. Ideas of coopera- 
 tion, or partnership, or even of a share in management 
 between laborer and employer are a product of this deep- 
 
Economic Expression of Instincts 15 
 
 seated human tendency. The worker craves the satisfac- 
 tion of a degree of power and independence in his job 
 and far-sighted employers are endeavoring to invent safe 
 and sound ways and means to bind this outburst of human 
 feeling to the practical necessities of successful business. 
 
 Most laborers too are highly susceptible to appeals of 
 display and show in their self-assertiveness. "Pace set- 
 ters" and "speeders" gloat over their superior skill and 
 efficiency, and as a guard against their spurts of extreme 
 energy labor unions have widely established a standard. 
 This standard is supposed to be the pace that a man can 
 follow safely for a lifetime. Rivalry and competition be- 
 tween individuals and departments is a means of firing 
 their self-assertive impulses by the prospect of display. 
 Prizes for machine operatives, photos of the fastest rivet- 
 ers, posting of the relative rating of girls at telephone 
 switchboards, all are utilized to draw upon the vanity of 
 the worker and secure maximum self-assertion along pro- 
 ductive lines. 
 
 Thus the self-assertive impulses ofEer potential sources 
 of rich energy for economic activity. Self-expression, 
 mastery, leadership, power, display, fame, — all these alter 
 the courses and consequences of the economic order, and 
 lie at the center of economic science. 
 
 Instinct of Submissiveness 
 
 In contrast with the self-assertive impulses must be con- 
 sidered the submissive impulses. Many men enjoy inertia, 
 indifference, apathy, lethargy. The line of least resistance 
 is to let well enough alone, accept things as they are and 
 be content. To turn over the worries and risks and prob- 
 lems to strong leadership is satisfjdng. The slave often 
 preferred his slavery to the responsibilities of freedom, and 
 the worker often prefers unconditional acquiescence in all 
 the mandates of the shop, be they harsh, or pleasant, to the 
 responsibilities of some form of industrial citizenship. The 
 agitator encounters at every turn the willingness of his 
 audience to bow to the inevitableness of things as they 
 are. The labor union organizer is lucky to be able to get 
 
16 Economic Expression of Instincts 
 
 even a minority in the industry to sign np, pay dues, at- 
 tend meetings and shape policies ; the rest find it too much 
 trouble. 
 
 In national and state political conventions, it is notori- 
 ous that time and again the slate is "doped out" by a 
 boss or inside party leader; and the convention, relieved 
 of the awful puzzle, receives the announcement with as 
 great applause and hurrah as if it had shouldered the 
 burden itself. The doctrine of non-resistance or pacifism 
 applied to industrial life meets the impulses of hundreds of 
 thousands in the rank and file. Roosevelt's warning not 
 to "Chinafy" the U. S. was an effort to bring home to 
 a people in a political way the lesson of the fruits of sub- 
 missiveness, and the lesson is fully applicable to industrial 
 affairs. The success of an open or a closed shop cam- 
 paign must depend eventually upon the balance which is 
 struck between the self-assertive and the submissive in- 
 stincts of the parties concerned. A campaign in a particu- 
 lar industry "to smash the union" stakes everything upon 
 the belief that a certain amount of submissiveness of the 
 workers can be counted upon. The corporation president 
 who claims that his workers can bring any grievance or 
 suggestion to the superintendent or to himself personally 
 does not take into account the feelings of inferiority and 
 self-effacement in the laborer at the prospect of such an 
 interview. But submissiveness is not by any means always 
 forced upon the worker; it is as often the course of his 
 own choice. It satisfies a real instinctive desire, a vital 
 trait of human nature, and is just as much innate as any 
 of the other major instinctive dispositions. 
 
 The Parental Instinct 
 
 That the parent feels an instinctive love for the child 
 is too obvious to need argument. The love of the mother 
 is commonly more intense than the love of the father, but 
 with both, the affection between parent and child is one of 
 the most vivid experiences of life and exercises momentous 
 influences in the organization of society. The desire of a 
 father to be with his children, to play and romp or to 
 
Economic Expression of Instincts 17 
 
 read and spin stories or merely to watch their antics, leads 
 to a demand for a shorter work day with more leisure for 
 home enjoyments. The desire to clothe and house and 
 feed the laborer's family leads to demands for the where- 
 withal in the form of increased wages. The desire to 
 improve the family standards may lead the mother to take 
 a factory job to increase thereby the family income ; or 
 conversely may lead her to insist on remaining at home 
 to rear and traia the children by her own direct care 
 and supervision. Actions which superficially look sordid 
 and greedy and selfish in labor groups are often domi- 
 nated by underlying motives of parental solicitude, and 
 to cope with these situations, an understanding of the 
 underlying motives is the height of necessity. 
 
 Intimately allied with the parental regard for one's im- 
 mediate kith and kin, is an original disposition to kindli- 
 ness toward one's fellowmen generally. Wallas says, "My 
 opinion is that a certain degree of Love is stimulated by 
 our perception of other human beings, both generally and 
 particularly when we feel that it is within our power to 
 injure or benefit them," and further he finds among men 
 an "original Love and Pity for their feUow human be- 
 ings as such." ^ And Thomdike writes that one aspect of 
 original kindliness "is the positive satisfyingness of wit- 
 nessiag behavior characteristic of welfare in our fel- 
 lows. . . . The happy behavior of others is pleasant, as 
 flowers and sunshine and food are. ' ' ^ 
 
 This original trait finds expression in those features of 
 modem economic life which bear such names as sacrifice, 
 reform, altruism, public spirit, welfare, humanitarian mo- 
 tives, philanthropy, uplift, charity, service, the common 
 good, etc. Those people who are steadily trying to "mix 
 religion with business" are merely bringing to bear the 
 
 1 "The Great Society," pp. 143, 147. 
 
 2 Thomdike, "Original Nature of Man." "Whether this last issue 
 {i.e., kindliness) is a consequence of the original bonds described 
 under the instinct of motherly behavior or is a somewhat indepen- 
 dent and differentlj specialized Icindliness, is of little importance for 
 our purpose. The former is the likelier. . . ." p. 103. 
 
18 Economic Expression of Instincts 
 
 impulses which underlie such great parental conceptions 
 as the Fatherhood of God and the Brotherhood of Man. 
 
 These religious ideas are parental metaphors, and 
 are the stimuli for incentives to economic good will. Cer- 
 tain individuals are endowed with exceptionally power- 
 ful instinctive energies in this direction and commonly 
 become the so-called Public Spirited leaders of their 
 times. Our complex economic society is vitally de- 
 pendent upon men of this caliber rising to positions of 
 power and prominence from time to time. Personalities 
 of this type take out some of the sordid and materialistic 
 features of economic activity, and manage to radiate among 
 others the contagion of their genuine love for their fellow 
 men. 
 
 The awakening of these kindly dispositions is the only 
 means toward achieving amelioration of some of the black 
 pains of the economic community. To quote Tansley, ' ' The 
 instinct of human tenderness is the hope of the world. '"^ 
 The American people, by responding to appeals for charity 
 during and immediately following the "World War, are 
 reported to have saved the lives of 15,000,000 children 
 across the Atlantic. Similar human impulses have brought 
 into being, especially during the last ten years, a flood of 
 child labor laws, minimum wage laws, eight hour laws, 
 workmen's insurance laws, old age laws, maternity protec- 
 tion laws, factory sanitation laws. Prohibitionist orators 
 saturated the public imagination with mental pictures of 
 the wrecked home, the beaten wife, and the degraded 
 child, and the constitutional amendment was thereby as- 
 sured. Leaders in the woman suffrage movement inces- 
 santly appealed to the women of America to use the ballot 
 to put the protection of the law over their sisters in in- 
 dustry and their children on the streets and to put some- 
 thing of the gentleness and tenderness of the mother's 
 spirit into politics and economics. An aroused public con- 
 science is intolerant of the sweatshop, and resents the high 
 death rate of infants among the lowest paid workers' 
 families in congested industrial centers. Wherever suf- 
 1 "The New Psychology," p. 267. 
 
Economic Expression of Instincts 19 
 
 fering and distress and pain are found, there tends to arise 
 a general social kindliness and pity, and if the emotions 
 are aroused intensely enough, reform is forthwith achieved. 
 In a recent effort to organize the steel workers, union 
 delegates spread throughout the steel districts photographs 
 of a woman alleged to have been murdered by agents of 
 the company, and thereby made a powerful appeal to the 
 general parental sympathy of the whole labor group. 
 
 Another outgrowth of this general disposition to care 
 for other people's welfare is the solicitude for the welfare 
 of the succeeding generation. The conservation of natural 
 resources makes an appeal directly to an instinctive de- 
 sire to protect and conserve the welfare of ' ' our children 's 
 children." Population questions, immigration regulations, 
 warnings of race suicide, all are settled in light of an 
 instinctive concern for a happy and comfortable posterity. 
 Even the arguments deciding the relative amounts of reve- 
 nue to be raised by loans and by taxation during the war 
 were constantly guided by a spontaneous feeling that we 
 must not hand on to the next generation any larger burden 
 than might be absolutely necessary. This sense of social 
 responsibility for the economic and human welfare of gen- 
 erations yet to come is a constant, steadying influence in 
 shaping the direction of economic movements. 
 
 In a broad and comprehensive way, this original disposi- 
 tion of kindliness is the same force which is often called 
 service. And service is commonly contrasted with selfish- 
 ness. Progressive and radical movements, in varying de- 
 grees of course, throw out the challenge to what is called 
 capitalism to establish a new motive of service in economic 
 life. This challenge claims that economics today is pri- 
 marily animated by private, non-humanitarian, unsaeri- 
 ficial motives. It claims that it must be animated by new, 
 public, social, humanitarian motives. The retort often 
 flies back, that human nature cannot be changed. Out of 
 such a mental battle, there emerges this much that ought 
 to be obvious, namely, that the economic order at present 
 needs more of the public motive, and will suffer bitter at- 
 tacks unless this motive is forthcoming, — but that any sud- 
 
20 Economic Expression of Instincts 
 
 den shift to an economic society which depended abso- 
 lutely or even primarily upon altruistic motives for its 
 driving force would be ill fated. Economics must become 
 more humanitarian, but the process must come by a grad- 
 ual fusion of newly stimulated instincts with the old. To 
 grasp this balancing and proportioning of private and 
 public motives is a first essential in any attempt to under- 
 stand the science of economics. 
 
 Sex Instinct 
 
 Discussing the sex instinct, McDougall remarks, "It is 
 unnecessary to say anything of the great strength of its 
 impulse or of the violence of the emotional excitement that 
 accompanies its exercise." Probably the paramount eco- 
 nomic implications of the sex instinct arise not so much from 
 the expression of the instinct as from its repression. The 
 consequences for economics of this repression will be taken 
 up in a following chapter. 
 
 Some branches of business depend to a very substantial 
 extent upon a carefully planned excitement of this im- 
 pulse. Advertising, for example, creates a demand for 
 many lines of cosmetics, candies, silks, clothing, etc., by in- 
 genuous forms of sex appeal. The method of appeal is 
 based upon the desire to be attractive to the opposite sex; 
 hence any means of securing beauty or becoming attractive 
 is in high demand. By different and well-known means 
 a good proportion of the moving picture industry stakes its 
 success upon the sex appeal. "The dress models of the 
 wholesale clothing shops of New York are undoubtedly 
 an enormously important and determining factor in the sale 
 of women's dresses." ^ Good looking waitresses in restau- 
 rants, pretty sales girls at store counters, attractive girls 
 on magazine covers, aU enter into the strategy of sales- 
 manship. Consumers' motives in buying are thus very fre- 
 quently influenced, even though unconsciously, by this sex 
 impulse. 
 
 Personnel administration encounters certain sex prob- 
 lems. Girl operators of machines are often unwilling to 
 1 Ordway Tead, "Instincts in Industry," p. 30. 
 
Economic Expression of Instincts 21 
 
 wear safe clothing or head dress while at the machines be- 
 cause they hate the looks of "safety first" styles. Whether 
 to allow men and women to work in the same or separate 
 machine rooms, how to maintain due protection and inde- 
 pendence for women working under men bosses, how to 
 keep the office girls from spending too many hours of the 
 day before the mirror, are aU personnel problems with a 
 sex basis. Taken all in all, however, the direct expression 
 of the sex instinct has only minor relations to economic 
 life ; the instinct 's greatest bearing on economics arises from 
 nervous consequences of its repression. 
 
 The Gregarious Tendency 
 
 Thorndike remarks: "Man responds to the absence of 
 human beings by discomfort and to their presence by posi- 
 tive satisfaction." This gregarious tendency exercises a 
 deep influence in economic groupings and over the chief 
 policies which they carry out. Men incline to huddle to- 
 gether, to think and act as a herd, to work and fight by 
 groups. To mix with other people, to be one with them, 
 to feel their presence, brings a contagious pleasurable sen- 
 sation, and men's economic actions seek the maximum of 
 this positive gregarious satisfaction. 
 
 For one thing, the congestion of population in urban 
 centers has causes directly traceable to this human ten- 
 dency. The 1920 census reveals the fact that approximately 
 one-half of the population of the country is now huddled 
 inside the cities and towns with populations above 2500. 
 A fundamental reason for this concentration of people is 
 given by McDougall as follows: "It is the crowd in the 
 towns, the vast human herd, that exerts a baneful attrac- 
 tion on those outside it. . . . As in the case of the animals, 
 the larger the aggregation the greater is its power of attrac- 
 tion; hence in spite of high rents, high rates, dirt, disease, 
 congestion of traffic, ugliness, squalor, and sooty air, the 
 large towns continue to grow at an increasing rate, while 
 the small towns diminish and the country villages are 
 threatened with extinction. ' ' ^ 
 
 I McDougall, "Social Psychology," p. 302. 
 
22 Economic Expression of Instincts 
 
 Because of the potency of this instinct we are faced 
 with problems of housing, of city transportation, of food 
 and fuel supplies, of location of industries, of organization 
 of markets, of immigrant quarters, of Americanization, of 
 adequate farm labor, of "back to the land" movements, of 
 class struggle, of economic organization, and of large scale 
 economic activity in general. 
 
 "It is, however, sensitiveness to the behavior of the 
 herd which has the most important effects upon the struc- 
 ture of the mind of the gregarious animal. ... To know 
 that he is doing what would arouse the disapproval 
 of the herd will bring to the individual the same pro- 
 found sense of discomfort which would accompany ac- 
 tual physical separation, while to know that he is doing 
 what the herd would approve will give him the sense of 
 rightness, of gusto, and of stimulus which would accom- 
 pany physical presence in the herd and response to its 
 mandate. . . . He is more sensitive to the herd than to 
 any other influence. " ^ In thus emphasizing the grega- 
 rious factor in mental life and behavior generally, Trotter 
 indicates an explanation of some of the most widespread 
 economic phenomena. Approved industrial morale exists 
 where every worker is so thoroughly sensitive to the voice 
 of the factory herd that he conforms wholeheartedly 
 to the established rules, regulations, standards and ideas 
 of the plant. Attacks by radicals, Reds or agitators upon 
 the sensitiveness of this unit herd are resented bitterly. 
 
 In time of strike, the herd is on the aggressive; it must 
 "hang together or hang separately." Men by the thou- 
 sands throw their lot in with the striking crowd, scarcely 
 knowing the aims of the strike, but feeling the urge to 
 stand by their labor herd. Employers, in similar form, rally 
 to the colors of a leader who throws down a challenge on 
 the open shop or some other great economic issue, because 
 they are sensitive to the influence of the dominant note 
 of the employing group. 
 
 This is an age of great associations of labor and capital. 
 
 1 Trotter, "Instinct of the Herd in Peace and War," pp. 32, 40, 114 
 133. 
 
Economic Expression of Instincts 23 
 
 Employers' Associations, Chambers of Commerce, Engi- 
 neering Societies, Rotary Clubs, Manufacturers' Associa- 
 tions in a great variety of forms spring from the impulses 
 of men to defend their rights in unison, to protect their 
 interests by group action. Laborers, through local branches, 
 international unions, and huge federations, struggle for 
 •what they conceive to be their rights, even their self- 
 preservation, by throwing their resources under the con- 
 trol of the herd, and vrorking and fighting with a class 
 consciousness. The shop committees, for instance, insist 
 that the natural, logical and useful labor unit is the local 
 shop or plant; whereas, in sharp contrast, the trade union 
 insists that the right labor herd is all men following a 
 certain craft ; and again in further contrast the industrial 
 union insists that the only adequate labor herd is one based 
 tipon all men in a given line of industry the country over. 
 How best to apply the gregarious bond to economic life 
 is therefore one of the salient problems of the present day. 
 
 Moreover much of statesmanship is concerned with the 
 economic loyalties of men to different groups. The class 
 consciousness of labor in extreme forms found in the social- 
 ist pleas for the Internationale, the World Brotherhood, 
 the World Revolution, etc., is one thing; the patriotic 
 allegiance to the nation as sovereign is another; the sup- 
 port of an international League of Nations or world gov- 
 ernment of some sort is still another thing. The distribu- 
 tion of gregarious feeling within these three circles ob- 
 viously conditions world polities, national strength, inter- 
 national commerce, economic rivalries, and peace and war. 
 
 James remarks, "The same acts performed with a crowd 
 seem to mean vastly more than when performed alone." 
 Men experience comfort and pleasure from being in an 
 audience, or on a parade, or ait a banquet with their fel- 
 lows. Labor organizers get a mass meeting and harangue 
 the crowd until they are swept into the union ranks. The 
 spirit of the mob bursts out in terrific applause at the 
 words of the speaker, whereas if the words were imparted 
 to the individual on the street they would seem stupidly 
 commonplace. The lynching party reveals the staid, re- 
 
24s Economic E depression of Instincts 
 
 speeted citizen furiously dragging and kicking the victim 
 and feverishly tying the noose, and the strikers' mob com- 
 mits acts of violence which individuals could never be 
 persuaded to commit. 
 
 The factory system, and the use of machinery and sci- 
 ence have made modern economic life almost entirely a 
 social affair. The directions of gregarious expression, the 
 limits of herd organization, the centers of group loyalty, 
 the possibilities of morale are fundamental economic issues. 
 How to control men in the mass becomes a paramount 
 economic problem. 
 
 Instinct of Flight and Fear 
 
 In McDougall's analysis, "The instinct to flee from 
 danger is necessary for the survival of almost all species 
 of animals and in most of the higher lanimals the instinct 
 is one of the most powerful. . . . Fear, whether its 
 impulse be to flight or to concealment, is characterized 
 by the fact that its excitement, more than that of 
 any other instinct, tends to bring to an end at once all 
 other mental activity, riveting the attention upon its 
 object to the exclusion of all others; owing, probably, to 
 this extreme concentration of attention, as weU as to the 
 violence of the emotion, the excitement of this instinct 
 makes a deep and lasting impression on the mind. . . . 
 Pear, once aroused, haunts the mind; it comes back alike 
 in dreams and waking life, bringing with it vivid memo- 
 ries of the terrifying impression. ' '^ 
 
 Instead of fears of the jungle, modern business supplies 
 to all classes of the community economic fears which are 
 almost equally compelling. Especially in periods of busi- 
 ness depression is fear and emotion of great force. Work- 
 ers by the millions are seized by the fear of losing their 
 jobs, with the prospect which that entails of lost income, 
 privation, worry and distress. Under the spell of such a 
 fear, workers are said during the depression period to 
 have a great spurt of workmanlike efficiency in the hope 
 that a partial shut-down of the plant will find them picked 
 1 "Social Psychology," pp. 51, 57. 
 
Economic Expression of Instincts 25 
 
 for their superior efficiency to remain on tlie job. In 
 describing these fears, Steinmetz writes, ' ' Over most of the 
 workers hangs throughout all their life the fear of unem- 
 ployment, the fear of sickness, the fear of old age. . . . 
 It is these three great fears which distinguish the majority 
 from the minority and make the former dissatisfied with 
 society."^ In normal times many employes build the 
 morale of their men on the fear-emotion by giving every- 
 one to understand that a man is waiting at the factory 
 gates to take his place if he fails to measure up to the 
 employer's mark. For such a policy, a liberal supply of 
 immigrants and a constant oversupply of labor are in- 
 dispensable. 
 
 Fear of the rival who is trying to steal a market from 
 his competitors, fear of bankruptcy, fear of laborers 
 threatening a strike, — these grip the business man from 
 time to time. He may seek flight by retiring from business, 
 or he may brave it out by submissiveness, or in extreme 
 cases seek escape by the route of suicide, or he may be 
 carried along through a strike, or be pushed into bank- 
 ruptcy. 
 
 Such periods leave indelible imprints on the memories of 
 the victims. They are the mountain peaks of life and 
 men ponder, puzzle and wonder about them at great length 
 after they are past. Fear and flight smack of the primi- 
 tive, of life and death, of struggles for existence, and 
 arouse the whole nature to extremes of vivid experience. 
 Insurance devices of many sorts have been devised to 
 take out of industrial activity some of the more dangerous 
 forms of fear, and to avert some of its distressing con- 
 sequences. The immense growth of both workers' and em- 
 ployers' insurance in recent years is an indication of the 
 desire of men to diminish and control the element of 
 fear in economic life. The excessive economic fears of the 
 laboring groups are dangerous factors in industrial life 
 for they are active causes of industrial nervousness, dis- 
 content and unrest. A sound industrial morale is jeopard- 
 ized by an extreme discipline of fear, and pioneer indus- 
 1 "America and the New Epoch," p. 51. 
 
26 Economic Expression of Instincts 
 
 trial managers are undoubtedly trying gradually to reduce 
 the fear element in discipline to safer levels and to sub- 
 stitute appeals to other human instincts, such as construc- 
 tiveness or self-expression. 
 
 Pugnacity and Rivalry 
 
 James remarks: "Fear is a reaction aroused by the same 
 objects that arouse ferocity. We both fear and wish to 
 kill anything that may kill us. " ^ In the presence of danger 
 a man may seek safety by flight, or he may squarely fight 
 the danger off. The frightened animal, when the chase 
 has brought it to bay, will turn and fight madly for its 
 life. To flee or to fight is the pair of alternatives. The 
 manufacturer whose existence is threatened by a trust or 
 monopoly may sell out or retire, or he may devote his whole 
 energy to a bitter, desperate struggle to maintain his inde- 
 pendence regardless of all the tactics used to crush him. 
 In the latter event, as James further points out, ' ' In many 
 respects, man is the most ruthlessly ferocious of beasts." 
 
 His fighting spirit is aroused when any of his other in- 
 stincts are thwarted. To obstruct his creativeness or self- 
 assertiveness or possessiveness fires him to a belligerent 
 mood. Obstacles which cross the pathway of sex or gre- 
 gariousness or submissiveness bring forth aggravation, and 
 the will to brook no opposition. Balk the man in any of 
 his motives, and pugnacity and anger begin to warm his 
 blood. As Wallas remarks, "Obstructed sex love, for in- 
 stance, normally produces a violent outbreak of Pugnac- 
 ity."^ That is to say, pugnacity acts not so much as a 
 separate instinct by itself, but is the reaction when any of 
 the other instincts are denied an adequate expression. 
 
 As a matter of fact, this thwarting, balking, and repress- 
 ing is exactly what the economic environment accomplishes. 
 In one way and another and at one time and another the 
 economic environment checkmates and foils all of the great 
 human motives and desires. Some of these instincts de- 
 serve to be thwarted for the safety of society, but the 
 thwarting of others is dehumanizing for the individual 
 
 1 "Psychology," Vol. II, pp. 409-415. 
 
 2 "The Great Society," p. 54. 
 
Economic Expression of Instincts 27 
 
 and dangerous for the community at large. The conse- 
 quence, speaking in the broadest way, is a widespread con- 
 dition of antagonism, pugnacity and unrest. The repressed 
 instincts produce a state of nervous tension amounting to 
 hostility. Hence it happens that most wars, be they 
 industrial or international, are struggles for freedom, i.e., 
 struggles to remove the obstruction, to hurl aside the thwart- 
 ing force, to throw off the repressing environment. Pug- 
 nacity and anger strive to hew and slash their way through 
 to escape and liberty. 
 
 For example, the activities of unions thwart the self- 
 assertive dispositions of employers and, angered by such 
 opposition, employers decide it is time to "go to the mat" 
 with labor and fight it out. , Vice versa, the orders and man- 
 dates of an autocratic employer may so cross the self-assert- 
 ive spirit of his workers that, furious at his domineering 
 policies, they will walk out on a strike which requires grim 
 and enduring pugnacity. So the man intimidated from 
 joining a union by the likelihood of losing his job is in no 
 peaceful frame of mind; and the business man who finds 
 his chance to reap a fine profit blocked by the cunning of 
 a rival, nurses his aroused pugnacity by the planning 
 of sweet revenge. The instinct of construetiveness, when 
 balked by the installation of automatic machinery, sets the 
 worker on edge with hostility and he looks upon himself 
 as an "iron slave" to the machine. Unrest saturates the 
 economic world, — arising from a maelstrom of stifled de- 
 sires and subdued motives. 
 
 In spite of all theories of partnership and good will, 
 there remains all too great an abundance of antagonism 
 and warlikeness in the economic arena, and will remain 
 until the economic environment calls forth a more bal- 
 anced and healthy expression of the instincts which when 
 balked are potent with pugnacity. There is no more fun- 
 damental law in all economies than the law that antagonism 
 may be alleviated not by attempting to abolish the pug- 
 nacious instinct but by providing wholesome expression 
 for all the great instincts of the human being. 
 
 Intimately allied with the pugnacious feeling is the 
 
28 Economic Expression of Instincts 
 
 spirit of rivalry. Keen competition between business rivals, 
 intense effort to win promotion, determination to excel one's 
 fellows, whether employers or employees, are forms of pug- 
 nacious energy turned in the direction of useful rivalry. 
 These forms of rivalry furnish a civilized outlet for much 
 of man's warlike energies, and sustain in large measure 
 the vigor and hardihood of economic endeavor. 
 
 Some Instincts of Minor Economic Significance 
 
 Hunting, housing, migration and play are human ten- 
 dencies which, although not as important as others that 
 have been considered in shaping economic conduct, are 
 nevertheless influential in many lines of endeavor. 
 
 Hunting 
 
 Parmelee observes: "Indeed it has become true in our 
 modern civilized society that some impulses now find their 
 expression for most individuals only in the form of play. 
 For example, few people to-day need to hunt for purposes of 
 securing subsistence .... but many indulge in hunting 
 for purposes of play. ' '^ 
 
 But the most important diversion of this instinct, which 
 in his early history kept man from starvation and death, 
 is pointed out by Thorndike as follows : ' ' The older indulge 
 the propensity at great cost of time and money in hunting 
 beasts, or at still greater cost of manhood in hounding 
 Quakers, abolitionists, Jews, Chinamen, scabs, prophets, 
 or suffragettes of the non-militant variety. Teasing, bully- 
 ing, cruelty, are thus in part the result of one of nature's 
 means of providing self and family with food: and what 
 grew up as a pillar of human support has become so ex- 
 travagant a luxury as to be almost a vice." ^ The popular 
 pastime of "heresy hunting" is one of the more recent reve- 
 lations of the impulse. Hunting down union agitators by a 
 force of detectives and spies has appealed to a considerable 
 number of business leaders. The hunting instinct, merged 
 with the instinct of pugnacity and rivalry, led men into the 
 
 1 "Science of Human Behavior," p. 250. 
 
 2 "Original Kature of Man," p. 53. 
 
Economic Expression of Instincts 29 
 
 struggles of cut-throat competition with such primordial 
 intensity that it became necessary to place drastic limita- 
 tion upon the code of hunting and fighting practices in the 
 form of a long catalogue of forms of ' ' unfair competition. ' ' 
 Raiding the Reds, ferreting out the socialists, hounding the 
 pacifists, and stalking the "scabs," are all modern twists 
 given to the original hunting impulse. Just as the fruits 
 of the parental instinct were seen to be for the most part 
 social comfort, kindness, and progress, so, in contrast, the 
 fruits of the hunting instinct in modem economic life are 
 in the nature of social torments, harryings and persecutions. 
 
 The Homing Instinct 
 
 The problem of high rents, of housing workers, of build- 
 ing new homes arises not merely from the necessity of 
 protection from climate and the elements but from a true 
 instinct of shelter and habitation. This has been admirably 
 described by James as follows, ' ' There can be no doubt that 
 the instinct to seek a sheltered nook, open only on one side, 
 into which he may retire and be safe, is in man quite as 
 specific as the instinct of birds to build a nest. . . . The 
 first habitations were caves and leafy grottoes, bettered by 
 the hands : and we see children to-day, when playing in wild 
 places, take the greatest delight in discovering and appro- 
 priating such retreats and 'playing house' there. "^ The 
 'economic system to-day finds it difficult to serve this in- 
 stinct adequately, — for example, it is estimated that there 
 is an urgent need for fully a million new homes. How to 
 catch up in the national building program is an urgent 
 economic problem, and it is being pressed for solution by 
 the deep human impulse to have a suitable cover and retreat 
 for social and physical comfort. 
 
 The Instinct of Migration 
 
 Under conditions favorable to the exercise of the impulse, 
 
 many men take delight in continually moving from place 
 
 to place. Habits, customs, traditions, bonds of a thousand 
 
 sorts to the local community are of no avail against the 
 
 1 "Psychology," Vol. I, p. 400. 
 
30 Economic Expressidn of Instincts 
 
 "roving" disposition. Many of the serious problems of 
 labor turnover consist in finding strong means of satisfy- 
 ing impulses related to adventuresomeness. The laborer 
 who is here two weeks, a hundred miles farther on the 
 next two weeks, and so on, usually is acting under an effec- 
 tive stimulus to his instinctive wanderlust. A close connec- 
 tion exists between this love of being on the go and a delight 
 in the physical and mental activity called forth by ever 
 new and curiosity-provoking experiences. Exploration 
 satisfies curiosity. The appetite for newness inspires rest- 
 lessness. Many an employer chafes at the experience of 
 remaining in one line of business long at a time; he seeks 
 new business fields to explore. Millions of employees each 
 year change their jobs under the spell of what may lie 
 beyond, — a process which, as will be pointed out more fully 
 in a later chapter, entails a heavy waste and disruption in 
 the economic organization. 
 
 The Instinct of Play 
 
 Play, in the form of games, amusement, entertainments, 
 exercise, motoring, etc., is the business man's method of 
 recreating his nervous force from day to day, and main- 
 taining a state of bodily and mental vigor. Personal effi- 
 ciency, clearness of mind, and the power to see hard business 
 ventures through without suffering a nervous breakdown, — 
 all depend upon whether the individual has discovered the 
 art of relaxing his jaded nerves, and of draining the fatigue 
 products out of his system by the proper amount of play 
 and recreation. 
 
 The most effective forms of play are undoubtedly those 
 which involve considerable bodily activity and a real degree 
 of skill. Baseball, golf, tennis, football, etc., have the 
 maximum recreational value. But with the advancing com- 
 plications of the economic system, great difficulties to di- 
 rect participation by everybody in such sports have arisen. 
 The modern man has to enjoy his sport largely from the 
 grandstand and the bleachers as an excited onlooker, and 
 probably he enjoys himself more from the thrills of the 
 crowd spirit, from the high pitches of the mob emotion. 
 
Economic Expression of Instincts 31 
 
 than from the mere sportsmanship of the play itself. The 
 recreational value of this sort of play has obvious limita^ 
 tions. 
 
 The need of the worker for recreation is no less impera- 
 tive. However, he finds participation directly in the skilled 
 sports practically impossible. He becomes an onlooker, 
 and takes his play by proxy. Often he seeks relief from the 
 tedium of his life through thoroughly unwholesome ex- 
 pedients. "Drinking and the new sedative pleasures of 
 smoking and saloon card-games are the vices of a faulty 
 economic system. . . . They are irrational and extravagant, 
 for they sate appetite and deaden acute pain, without re- 
 newing force or directing vigor toward the days work."^ 
 Men crowd to amusement parks, beaches, lakes, etc., for the 
 sake of the shute-the-shute, or the ocean wave, or the scenic 
 railway. 
 
 Patten explains, "We experience a bodily refreshment, 
 a brightening of blood and tissue, as we watch the supple- 
 ness of a dancer, the posturing of acrobats, and the beautiful 
 delicacies of wire walkers. We are attracted by danger, 
 and the unguarded trapeze yields us a pleasant qualm. 
 We enjoy the mock perils of the scenic railway and the 
 real risks of the popular 'loops' and 'chutes,' and say 
 that they have given us new sensations that are, in fact, 
 as old as society itself. . . . Amusement is stronger than 
 vice and can stifle the lust of it. It is a base of economic 
 efficiency upon which depends the progress of multitudes." ^ 
 Pioneer corporations, being farsighted enough to perceive 
 these economic bearings of play, are utilizing regular va- 
 cations for their employees, are conceding more time for 
 leisure aftei working hours, are installing company moving 
 pictures, glee clubs, orchestras, baseball teams, etc. Play 
 can serve to eliminate much friction and many ugly moods, 
 to improve the tone of the factory morale, and to put the 
 life of both employer and employee on a higher plane of 
 economic efficiency.* 
 
 1 S. N. Patten, "The New Basis of Civilization," p. 123. 
 ^lUd., pp. 135-143. 
 
 sSee G. T. W. Patrick, "Psychology of Relaxation," especially 
 Chap. II. 
 
32 Economic Expression of Instincts 
 
 Disposition to Mental Activity 
 
 ' ' May we not complete the list by adding the instincts of 
 thought, reason, intelligence?"^ writes C. S. Myers and 
 again states : ' ' There is not one nervous apparatus for in- 
 stinct and another for intelligence. "We ought to speak not 
 of instinct and intelligence, but of instinct-intelligence, 
 treating the two as one indivisible mental function. ' '^ The 
 economic man is not a purely rational creature, with the 
 power of detached and aloof thought utterly free from any 
 instinctive drive; on the contrary, when he thinks most, 
 then are most operative in him the energies of an innate 
 disposition to curiosity and creativeness of the mind. So 
 Wallas has argued that ' ' Thought is a true natural disposi- 
 tion. Under appropriate conditions, that is to say, we are 
 naturally disposed to enter into a state of reverie, during 
 which our ideas are so combined and arranged as to produce 
 new mental results."^ And Thomdike emphasizes, "In- 
 tellect is of the same flesh and blood with all the instincts, 
 a brother whose superiority lies in his power to appreciate, 
 harmonize, use and save them all.''* The remark of James 
 Harvey Robinson is significant, "A creature which lacked 
 curiosity and had no tendency to fumble could never have 
 developed civilization and human intelligence."^ 
 
 The economic student must come to look upon his fellow- 
 men engaged in all the different activities of making and 
 spending money not as pure rationalists calculating ways 
 and means for overcoming instincts and emotions, but as 
 men who are expressing all their instincts in greatly vary- 
 ing degrees and with all sorts of intensities. To think is 
 not to combat or mortify instinct, but is to give vent to the 
 highest and most useful forms of instinctive energy which 
 human nature is heir to. 
 
 Moreover all of the other instincts tend to set in 
 motion the intellectual energies. The engineers who un- 
 
 1 British Journal of Psychology, III, 215. 
 
 2 lUd., Ill, 267. 
 
 3 "The Great Society," p. 176. 
 
 4 "Original Nature of Man," p. 310. 
 ^Harper's, Sept., 1920, p. 489. 
 
Economic Expression of Instincts 33 
 
 der the urge of the instinct of eonstruetiveness set about 
 the erection of a railroad bridge across Great Salt Lake 
 found a delight in the scientific investigations and ex- 
 periments and the mental concentration on ways and 
 means of securing stable foundations in spite of the lake 
 muds. The instinct of pugnacity gives rise to intense 
 thought on the strategy for winning a strike. The self- 
 assertive captain of industry is given to constant de- 
 liberations on how to realize his power. And so each of 
 the instincts serves to set ofE the energies of the mental 
 organism, and to provoke severe, prolonged, profound 
 thought. 
 
 As a consequence of this intimate relation between 
 thought and all the other dispositions, it occurs that 
 thought is continually influenced, shaped, and often dom- 
 inated by each and all of the tendencies of human na- 
 ture. The public-spirited bank president thinks in terms 
 of social responsibility, whereas the profiteering president 
 thinks exclusively in terms of private gain. The worker 
 subject to the spell of economic fears thinks in terms of 
 a class philosophy which promises to alleviate his fears. 
 In general, those opinions of which we are surest are the 
 ones which are most dominated by the instincts. To quote 
 Trotter, "As a matter of fact, it is just those fundamental 
 propositions which owe their origin to instinct which ap- 
 pear to the subject the most obvious, the most axiomatic, 
 and the least liable to doubt by any one but an eccentric or 
 a mad man. When, therefore, we find ourselves enter- 
 taining an opinion about the basis of which there is a 
 quality of feeling which tells us that to inquire into it 
 would be absurd, obviously unnecessary, unprofitable, un- 
 desirable, bad form, or wicked, we may know that opinion 
 is a non-rational one, and probably, therefore, founded 
 upon inadequate evidence." ^ In other words, just when we 
 feel most certain of our opinion, we are apt to be most 
 the victim of our instinctive nature. 
 
 Among opinions carrying this feeling of certitude are 
 those common convictions about the divine right to strike, 
 
 1 Trotter, "Instincts of the Herd in Peace and War," pp. 44, 96. 
 
34 Economic Expression of Instincts 
 
 or the rights of private property, or the so-called "Ameri- 
 can" or open shop, or the doctrines of economic radicalism, 
 or conceptions of freedom of contract, or of the sanctity of 
 the courts, and so on. About these matters most people 
 have settled and emphatic opinions, and any question about 
 them is a question about something, to quote James, ' ' need- 
 ing no proof but its own evidence." And James further 
 explains, "And we may conclude that to the animal which 
 obeys it, every impulse and every step of every instinct 
 shines with its own sufficient light, and seems at the mo- 
 ment the only eternally right and proper thing to do."* 
 Consequently, our convictions about economic fundamen- 
 tals ought not to be treated as if they were uniformly 
 the outcome of uninfluenced rationalism, but should be 
 recognized for the instinctive products which in so large a 
 degree they really are. The play of economic forces makes 
 for a constant flux and evolution in the economic organ- 
 ization, all of which creates in many and diverse ways a 
 new status for property, a new status for labor, and a 
 new status for consumers generally. Each alteration of 
 status requires changed opinions and new forms of thought. 
 Because so many of the old convictions are primarily in- 
 stinctive, it is extremely difiicult for men deliberately and 
 rationally to adapt their minds swiftly enough to };he 
 new facts of the economic environment. Instinctive opin- 
 ion, engendered as it is in large degree by the suggestibility 
 of the herd and fixed as it is by mental habit, finds great 
 difficulty in making adjustments to new inventions, new 
 industrial relations, new economic facts. 
 
 But this is only one-half of the story, for just as truly 
 does thought in turn influence and control the impulses 
 struggling for release. Every time that sex, pugnacity, 
 fear, kindliness and the other tendencies find expression, 
 the experience takes on a more or less intelligent sig^ 
 nificance, and by the gradual exercise and growth of all 
 the dispositions, experience builds up an accumulation of 
 ideas, solutions, convictions and thoughts which stand 
 ready thereafter to guide the instincts. So Parmelee finds, 
 1 James, "Psychology," Vol. II, SST". 
 
Economic Ewpression of Instincts 35 
 
 "Intelligent behavior is therefore made up of tropic, re- 
 flex, and instinctive actions which have been confined in 
 new ways as a result of experience so as to constitute new 
 forms of behavior." ^ More explicitly, Dewey shows that 
 "Intellect ... is the sum total of impulses, habits, emo- 
 tions, records and discoveries which forecast what is de- 
 sirable and undesirable in future possibilities, and which 
 contrive ingeniously in behalf of imagined good. Faith in 
 the power of intelligence to imagine a future which is the 
 projection of the desirable in the present, and to invent 
 the instrumentalities of its realization, is our salvation."^ 
 
 In no part of the life of society do the non-rational pas- 
 sions of men threaten the harmony and efficiency that is 
 desirable more than in the economic sphere. Rivalries, 
 class consciousness, cut-throat competition, depression and 
 prosperity, these and a hundred other common features of 
 the economic order reveal instinct which has not come 
 properly under the control of this power "to contrive in- 
 geniously in behalf of imagined good." In fact, a non- 
 intelligent control of sex leads to vice, of possessiveness 
 leads to profiteering, of kindliness leads to bankruptcy, of 
 pugnacity leads to war, of self-assertiveness leads to 
 autocracy, of submissiveness leads to pacifism, of hunting 
 leads to cruelty. "Thought," says Dewey, "affords the 
 sole method of escape from purely impulsive or purely 
 routine action. A being without capacity for thought is 
 moved only by instincts and appetites, as these are called 
 forth by outward conditions and by the inner state of the 
 organism."^ And he adds, referring to instinctive ten- 
 dencies, "Most of them are of little use till they are in- 
 telligently combined and directed." 
 
 The controversy between those who maintain that man 
 is almost wholly rational and those who maintain him to 
 be an irrational animal seldom leads to useful conclusions. 
 In the economic world, high instinctive energy gives in- 
 itiative, ambition, aggressiveness, determination, success, 
 
 1 Parmelee, "Science of Human Behavior," p. 258. 
 
 2 Dewey, "Creative Intelligence," p. 69. 
 
 3 Dewey, "How We Think," p. 15. 
 
36 Economic Expression of Instincts 
 
 and these harnessed by keen intellectual guidance, make 
 for economic progress. It would of course be an untrue 
 claim that the unsuccessful groups in industry and com- 
 merce are always the irrational ones, and that the success- 
 ful groups are always most plentifully endowed with 
 powers of reason. Success usually indicates high intelli- 
 gence along some specific line, such as engineering or 
 finance. The same brainy engineer may be a most irra- 
 tional being in his dealings with labor, in his notions of 
 property rights, and in his whole economic philosophy. 
 And the uncanny financial genius may hold convictions 
 about democracy which are blindly impulsive and would 
 not stand cool rational analysis for a minute. Business 
 has come to be so completely a matter of applied science 
 and technical organization that none but the quick and 
 efficient of mind can hope to play a leading part in it. 
 Successful groups indicate a superior intelligence in 
 handling technical problems, but may just as commonly 
 indicate blind instinctive fumbling in all the more social 
 problems arising from economic activity. 
 
 Executives everywhere complain of the scarcity of lead- 
 ers who can handle large groups of men effectively. "When 
 the successful man has to handle impulses, instincts, moods, 
 prejudices and emotions in the mass, he is playing with 
 fire. It is difficult for him to be patient, to size up human 
 nature, to enthuse and inspire, to create morale, to secure 
 loyalty, to settle differences. These problems tend to in- 
 flame instinctive opinions in his own mind, and are the 
 most aggravating materials to handle in a calm, intelligent 
 fashion. Leaders of labor unions as well as managers of 
 workers on the executive staff of the corporation face here 
 a most provoking problem. It is the center of most of 
 the irrationalities of the industrial world. 
 
 As a matter of careful observation, therefore, it would 
 appear to be a fair conclusion that economic success, and 
 intiilligence along technical lines, go hand in hand. But 
 this observation would be a futile one if side by side with 
 it were not placed the equally important observation that 
 such successful men may be dominated in many of their 
 
Economic Expression of Instincts 37 
 
 fields of interest by the clearest kind of instinctive irra- 
 tionality. Management has its incompetency and irration- 
 ality no less than labor, and it is a question later to be 
 considered whether a large part of the incompetencies of 
 labor are not due to the fact that management has allowed 
 itself to defend policies from blindly instinctive motives 
 rather than from impartial analysis of the economic situa- 
 tion. 
 
 There is one field of intelligence which has been de- 
 veloping mightily of late years and which holds out the 
 promise of a more intelligent treatment of economic 
 questions on everybody's part, — ^that is, applied and ab- 
 stract science. Scientific management, efficiency, physi- 
 cal and chemical research, industrial laboratories, psycho- 
 logical experimentation, — all these are being brought to 
 bear scientifically upon the harassing problems of the times. 
 Of profound significance was the recent statement by the 
 President of the American Institute of Electrical Engi- 
 neers, "What is true of the electrical art is also true of 
 all the other arts and applied sciences. They are all based 
 upon fundamental discoveries made by workers in pure 
 science who were seeking only to discover the laws of 
 nature and extend the realm of human Knowledge."^ 
 
 And of greater hope for the future in the control of 
 scientific thought over groping instinct is the situation 
 described by the President of the American Psychological 
 Association in 1919 as follows: 
 
 "It has been estimated that during the nineteenth cen- 
 tury the power of the human race to produce food, cloth- 
 ing and shelter was doubled by the application of increased 
 knowledge to the material elements of the universe. All 
 the significant advances in knowledge of the material 
 world were brought about by possibly a few thousand 
 progressive minds devoted to that study. ... It is quite 
 probable that the productive power of the human race 
 is being doubled again during the present century. . . . 
 Such an increase in the efficiency of the race will probably 
 be due to the advance in our knowledge of personnel rather 
 lYerkea' "New World of Science," p. xiii. 
 
38 Economic Expression of Instincts 
 
 than to further increase in our knowledge of the material 
 universe." In short, the economic order is able to go 
 through another drastic transformation because it happily 
 possesses a number of minds animated by intense instinc- 
 tive energy, working out along scientific lines. The instinct 
 of thought is pushing the whole thing along. 
 
CHAPTER III 
 
 THE ORGANIZATION OF HUMAN NATUEE 
 
 The great fact of human nature is not separated, im- 
 conneeted tendencies but the whole man, — all of the origi- 
 nal tendencies organized into a grand total, a unity. The 
 instincts are not single, separated, isolated strands; they 
 are integrated into a solid, organic whole. 
 
 It has been necessary for purposes of description and 
 analysis to take up different dispositions one by one. There 
 is danger that this unavoidable method of presentation 
 will give the impression that the dispositions can be over- 
 simplified. Nothing could be further from the intent of 
 the account; nothing could be further from the truth. 
 As Thorndike has most emphatically urged, "The original 
 tendencies of man, however, rarely act one at a time in iso- 
 lation from one another. ... On the contrary they coop- 
 erate in multitudinous combinations. . . . Original nature 
 is not a set of perfectly independent mechanisms any more 
 than it is a hodge-podge for chance. It is a factory or 
 hierarchy of mechanisms, with very many components, of 
 which many cooperate in response to any one situation. ' '^ 
 
 For example, a banker decides to organize a syndicate to 
 finance a $100,000,000 corporation. His motives are 
 a complex organization of, say, a desire for gain, a desire 
 for power, a creative imagination, a spirit of rivalry, a 
 sense of public responsibility. The whole genius of the 
 captain of finance is evoked and all the motive powers of 
 all his dispositions become welded together in establish- 
 ing the new corporation on a solid financial foundation. 
 This unifying process of mind is aptly described by 
 McDougall when he writes, "The various instincts become 
 organized in systems, and, with the development of self- 
 1 Thorndike, "Original Nature of Man," pp. 10, 196. 
 39 
 
40 TJie Organization of Human Nature 
 
 consciousness, all these become organized and duly subor- 
 dinated within the one all-comprehensive system which is 
 the character of the individual man." 
 
 The "economic man" is this blended, integrated, or- 
 ganized array of original human tendencies. He is not an 
 oversimplified helter-skelter of nicely separated tendencies 
 but the whole man so well described by Angell in the fol- 
 lowing words, "Instincts .... are the basic activities of 
 mind .... In a general way it may be said that all the 
 common and persistent human interests, all the funda- 
 mental forms of human desire, all the more profound types 
 of human emotions are based upon the life of instinct. . . . 
 However divergent, then, the sources from which o^xp 
 native impulses flow, modern psychology teaches without 
 reservation that our volitional life, our conduct and our 
 character are built up around these factors as a center. ' ' ^ 
 
 And yet, even though the economic man be so complex 
 and multitudinous a composite of tendencies, we need 
 not feel thwarted and confounded in attempting to under- 
 stand his economic behavior. The truth of the matter is 
 that the study of this instinctive nature of man gives the 
 very key to economic behavior which best fits the problem. 
 For in and through the unified group there run commonly 
 certain master impulses which predominate, and these 
 guide the economic conduct of the life. These ruling pas- 
 sions deserve to rivet the attention of the student of econo- 
 mic behavior, for they are the best clues to predicting and 
 controlling human nature in the economic field. As ob- 
 served by Woodworth, "Some tendencies and interests are 
 stronger than others in the individual, and a well-integrat- 
 ed personality is organized about its master motives, these 
 acting as selective agencies with respect to other ten- 
 dencies."^ 
 
 Instead of the fictitious banker assumed above, a real 
 case may well be taken for purposes of illustration, Mr. 
 Harriman, the railroad banker and builder. In him the 
 master impulses were love of power and of constructive 
 
 1 Angell, "Chapters from Modern Psychology," p. 28. 
 
 2 Woodworth, "Dynamic Psychology," p. 12P. 
 
The Organization of Human Nature 41 
 
 achievement. When some of his associates implored him 
 to be more diplomatic and gentle, and less forceful and 
 combative in carrying out his ruling impulses, his answer 
 was: 
 
 "You may be right that these things could be so accom- 
 plished, but not by me. I can work only in my own way. I 
 cannot make myself different, nor act in a way foreign to 
 me. They will have to take me as I am, or drop me. 
 This is not arrogance on my part. I simply cannot achieve 
 anything if I try to compromise with my nature and to 
 follow the notions of others."^ 
 
 By what method then are these driving forces of human 
 nature organized into an integrated whole? By what 
 process does the fusion and blending take place? How are 
 the multitudinous combinations made into the sum and 
 substance of the character and personality of the economic 
 man? 
 
 The answer is to be found in observation of the forms 
 which instinct expression takes. Bach of the specific in- 
 stincts tends to find expression along certain well recog- 
 nized lines. Each instinct does not fly off into wild, 
 haphazard, totally unpredictable expressions. It tends on 
 the contrary to work out along fairly uniform, general 
 lines. Bach specific instinct has general tendencies which 
 determine how it shall work into the whole fabric of char- 
 acter. These general directions and tendencies of the 
 specific instincts may be called : habit, imitation, sympathy, 
 and suggestion. 
 
 Habit 
 
 From the moment the infant first grasps for plajH;hings, 
 through the stage when the boy hoards marbles, down to 
 the days of the acquisitive real estate dealer who gets pos- 
 session of a thousand city lots, the instinct of possession is 
 settling into habitual modes of expression. All of the 
 instincts tend to find habitual forms of outlet. The thou- 
 sand and one little details of everyday life and the mighty 
 concepts of industrial strategy all serve to organize the 
 iKahn, "Our Economic and other Problems," pp. 1-22. 
 
42 The Organization of Human Nature 
 
 instincts along certain fairly definite channels. In Thorn- 
 dike's words, "In the last resort all habits are formed in 
 the service of instincts, and the great majority of human 
 instincts function by being modified through training."^ 
 
 Those experiences which show a smooth working out of 
 the instinctive energies, which bring a sense of satisfaction 
 to the individual, which indicate that a particular form of 
 expression of the instincts actually serves and fits life, — 
 those experiences are the ones which tend to be conserved 
 in the character of the ir dividual. Under a similar emer- 
 gency next time, the same instinct will tend to work out 
 along the same channels. " It is undoubtedly the tendency 
 of all living organisms to perform an action more easily 
 on repetition. After this ease has been gained, the act 
 is spoken of as a habit. ' '^ 
 
 Moreover, once the channel has become fairly well fixed 
 and ingrained, the conscious mind will not thereafter have 
 to direct the right expression. Automatically, habitually, 
 unthinkingly, the human nature will take care of itself. 
 The instincts will function quietly and serviceably of their 
 own accord, and the thinking mind will be freed from the 
 necessity of deciding each trivial movement and response 
 in the daily round of duties. The thinking mind will be 
 freed to concentrate upon those higher, more enormous, 
 more far-reaching problems which require constant origi- 
 nality for their solution. Thus human nature comes to 
 be in a large degree a bundle of habits formed in the service 
 of a bundle of instincts. 
 
 Habit, therefore, tends to bring about a degree of uni- 
 formity and sameness in human nature. It tends to bring 
 about settled and stable modes of business. In McDou- 
 gall's words, "In short, the formation of habits by the 
 individuals of each generation is an essential condition of 
 the perpetuation of custom, and custom is the principal 
 condition of all social organization."^ So habit facilitates 
 the established process of economics, and serves to link 
 
 1 Thorndike, "Original Nature of Man," p. 198. 
 
 2 Parmelee, "Science of Human Behavior," p. 254. 
 sMcDougall, "Social Psychology," p. 355. 
 
The Organization of Human Nature 43 
 
 the instincts in stabilized and settled ways to the methods 
 of the economic order. The instincts of curiosity and 
 thought fall under the regime of habit and we become 
 accustomed to think along fixed and stable lines. The more 
 securely thought becomes thus habitualized, the more diffi- 
 cult become change, progress, and improvement in eco- 
 nomic processes. In the field of thought, therefore, habit 
 makes for a defense of things as they are. In organizing 
 man's instinctive nature, habit becomes the ally of the 
 status quo and the foe of whatever is new and different. 
 So James remarks, "Habit is thus the enormous flywheel 
 of society, its most precious conservative agent." New 
 economic processes, new economic ideas, new economic in- 
 stitutions involve not only the breaking of old habits, but 
 the laborious and difficult task of forming new ones in 
 their place. 
 
 Imitation, Sympathy, Suggestion 
 
 Imitation, sympathy and suggestion are three different, 
 yet related, phases of instinctive response. Imitation re- 
 fers particularly to the tendency to copy actions of a social 
 group; sympathy, to the tendency to experience the emo- 
 tions of the group; suggestion, to the tendency to accept 
 without criticism the ideas and opinions of the group. Each 
 of the instincts, in .seeking expression, tends to follow 
 along the lines of behavioristic, emotional and intellectual 
 unity of the group. With due allowance for individuality, 
 originality and independence of character, these tenden- 
 cies to act as others act, feel as others feel and believe 
 as others believe serve to organize the several instinctive 
 energies into a social whole which is fairly normal, typical 
 and standard. 
 
 Owing to their natural imitativeness, men can accept 
 and assimilate the economic practices and customs of their 
 day and age, and behave toward the economic environment 
 with a high degree of sameness. As Parmelee points out, 
 ''Imitation causes uniformity of behavior and concerted 
 action, and is therefore an important force for association. 
 It is an effective mode of transmitting habits and other 
 
44 The Organization of Human Nature 
 
 ways of doing things from one generation to another."^ 
 Hence imitation, like habit, serves to mould the instincts 
 into a support of the established economic order of things. 
 It thereby insures that the status quo in economic life shall 
 die hard and innovation come slow. But it is equally true 
 that imitation may be made the ally of economic progress. 
 McDougall well says, "It is only by imitation that any 
 improvement conceived by any mind endowed with that 
 rarest of all things, a spark of originality, can become em- 
 bodied in the tradition of his society. "^ The rank and file 
 of business men adopt new inventions by gradual imi- 
 tation of a certain few adventuresome pioneers who first 
 try the inventions out and prove them to be a success. 
 The masses learn the virtue of thrift when they observe 
 certain leaders who command great prestige setting the 
 good example. New practices become established by get- 
 ting a few prominent authorities and leaders to champion 
 them; the rank and file imitate. In brief, although imita- 
 tion commonly plays a conservative role in the economic 
 order, it nevertheless is potentially a fundamental force 
 for economic progress. 
 
 The tendency of sympathy to organize the emotional 
 phase of response is clearly stated by Woodworth, "What 
 is certainly true ... is that we have a liking to have 
 others feel as we do and to feel as others do."^ Economic 
 life teems with vivid emotions of fear, anger, elation, de- 
 pression, tenderness, admiration, anxiety, jealousy,^the 
 emotions of our companions and contemporaries, our own 
 emotions, at times ours because theirs, at times theirs be- 
 cause ours. The craving on the part of the corporation 
 president for loyalty among his working staff is a craving 
 for emotional solidarity. The yearning on the part of ag- 
 grieved laborers to get the whole labor force aroused over 
 their fear or hatred is a yearning to share their emotions 
 with their crowd. The feeling among all sorts of economic 
 groups that "We must stick together" is the result of this 
 
 1 Parmelee, "Science of Human Behavior," p. 407. 
 
 2 McDougall, "Social Paychology," p. 335. 
 
 8 Woodworth, "Dynamic Psychology," p. 189, 
 
The Orgamzation of Human Nature 45 
 
 "internal process whieli," according to McDougall, "leads 
 to the stimulation in one person of an emotion already ex- 
 perienced by another." Broadly speaking, this sympathe- 
 tic tendency does not make either for organized conserva- 
 tive or progressive results, so much as for unity of feeling, 
 solidarity of spirit, group morale in whatever economic cir- 
 cle or faction or clique happens to be involved. 
 
 Suggestion is a tendency to accept opinions which 
 are generally held by one's fellowmen. Trotter speaks 
 of suggestion as "the desire for identification with the 
 herd in matters of opinion. In the individual mind 
 there will be an unanalysable dislike of the novel in action 
 or thought. It will be 'wrong,' 'wicked,' 'foolish,' 'un- 
 desirable,' or as we say 'bad form.' ..." Accordingly 
 trains of thought set up by almost any stimulus lead into 
 fields of opinion which the best authorities accept, which 
 a financial expert or a labor leader approve of, which a 
 great scientist expounds, and a ready suggestibility in the 
 minds of the masses of people brings a quick and natural 
 wide-spread adoption of the orthodox opinion. A sub- 
 stantial proportion of the convictions firmly held by the 
 average man are thus built up without the process of rea- 
 soning or logic. It is enough that the opinions are popu- 
 lar, or held by a leader who has his confidence. The 
 fundamental ideas about freedom of contract, economic 
 rights, advantages of socialism or capitalism are built up 
 among the general run of common folk by this tendency to 
 ■accept the suggestion of the herd to which they belong. 
 Just as the sympathetic tendency serves to organize a 
 unity of feeling in economic groups, so the suggestive ten- 
 dency serves to organize human nature around a unity of 
 thought and conviction. 
 
 With habit playing a conservative role, and imitation 
 potentially either conservative or progressive, and sympa- 
 thy and suggestibility making for unity in feeling and 
 thought, it will be obvious that these four factors exercise 
 a major influence in organizing all of the dispositions into 
 human nature and human behavior. Emphasis then is 
 rightly placed upon the compounding and combining of 
 
46 The Organization of Human Nature 
 
 the several dispositions, rather than upon their isolation 
 and exclusiveness. 
 
 In this upbuilding of character, the organization of 
 instincts, emotions, impulses and ideas into the finished 
 product of human nature is the work of experience. The 
 particular form of combination in each individual is 
 conditioned by his original nature plus nurture. The 
 original tendencies are given by heredity, and all sub- 
 sequent modification is acquired in the life of the indi- 
 vidual. This process of modification tends to attach the 
 several primary forces of human nature to certain objects, 
 institutions, personal titles, and causes in the outside vrorld. 
 In consequence, whenever the outside factor is present as 
 a stimulus, or when the memory or idea of it is brought 
 to mind, it tends to call into force the corresponding group 
 of instincts, emotions, habits, etc., which have been built 
 up by experience around it. 
 
 So a worker becomes attached to a particular machine 
 which he has operated for thirty years, and this machine 
 stands for a vast background of industrial episodes and 
 experiences. Another worker has skill in a particular 
 branch of building, and this skill as practised for a life- 
 time is the central organizing feature of his eco- 
 nomic experiences. Another worker has spent his best 
 days striving to install a union in his plant, and this labor 
 cause becomes the systematizing force in his mental equip- 
 ment. A financier finds that his profession of banking has 
 correlated and unified a vast collection of experiences 
 about itself as a center. 
 
 But it is not to be intimated in the least that all such 
 organization takes place about a single object or cause. 
 Each individual has a number of environmental factors 
 which are pivotal for his character formation. The finan- 
 cier will find certain moods and wishes flocking to his mind 
 at the mention of the word, socialist ; another group at the 
 mention of the words, labor union; another group at the 
 mention of the name of a great rival financier. In each 
 individual character, these outside factors will connote 
 great chunks of experience. Stimulated by them, the man 
 
The Organization of Human Nature 47 
 
 "will feel a certain series of emotions or compound emotions 
 made up from a scattered mass; he will feel certain ten- 
 dencies to action; lie will be wishing that he could cope 
 with each pivotal object in certain instinctive ways; he 
 will find certain ideas, opinions, beliefs, hovering around 
 the particular suggestion which the object offers. Some of 
 these pivotal groupings will be of greater, some of lesser 
 importance. But aU serve to occupy their due relative 
 importance in organizing the hates and fears and hopes 
 and loves and convictions of the man into a completed 
 whole. 
 
 The personality of the man becomes branded by the out- 
 standing interests which he thus acquires by experience. 
 The man becomes a great "Roosevelt-man," or is marked 
 by the influence of some financial magnate, corporation 
 executive, reform leader, or labor chief. He becomes a 
 peculiar type of captain of industry or industrial engineer. 
 He becomes a liberal, a conservative, or a radical. He 
 is stamped with certain characteristic qualities, modes 
 of behavior, emotional responses. In short, there become 
 certain strategic centers in his human nature about which 
 all his mental possessions are organized. These centers 
 correspond to certain features of his environment, econo- 
 mic or otherwise, and the key to the man's character lies 
 there. Such strategic centers vary greatly. They may be 
 an occupation, an institution, a profession, a machine, a 
 personality, a great cause, a political party. When groups 
 of men come to develop among themselves similar interests, 
 with a common strategic center for their instincts, emotions 
 and thoughts, they become a nation and the name of their 
 country becomes the rallying point for their human nature ; 
 or they become a class and the name of their class is the 
 hub of the psychological wheel, or they become the human 
 part of an institution and the name of the institution 
 serves to bring about the concentrations of their life ex- 
 perience. Thus the organization of human nature is a 
 biological process in which the inner nature, and the out- 
 side object acting as stimulus, cooperate to create the 
 finished product of the human personality. 
 
48 The Organization of Human Nature 
 
 This conception of economic psychology puts man at 
 the center of economies. It is dynamic in its outlook and 
 conceives economics as a human or social science. It 
 views man not as an inert, indifferent mass, nor yet as a 
 purely rational, calculating being, but as a dynamic or- 
 ganism, moved by inherited instinctive tendencies, ener- 
 gized from within, with innate dispositions to create new 
 things by the work of his hands, to assert his powers among 
 his fellowmen, to acquire some portion of the wealth of the 
 community, to render some service to his community, to 
 be curious and thoughtful about perplexing problems, to 
 express at one time and another and in one way and an- 
 other his original instinctive nature through his economic 
 environment. In a word it is a blending together of the 
 inseparable sciences of dynamic psychology and social 
 economics. 
 
 Inequalities of Human Equipment 
 
 The originail equipment of instinctive tendencies and 
 capacities differs very greatly between individuals. The 
 dynamic drive of instincts varies in intensity from indi- 
 vidual to individual, and the strength of emotions and 
 impulses shows endless variations. Some men are born 
 with a gift of human equipment which qualifies them for 
 lives of great achievement and successful leadership; 
 whereas others are bom with so limited a human equip- 
 ment that they are qualified to perform only the least 
 difficult of tasks. At no point do these inequalities of 
 human power appear in more striking extremes than in the 
 instinctive tendencies to use the mental powers. The glar- 
 ing inequalities of intelligence are susceptible of a fairly 
 accurate degree of measurement through intelligence tests. 
 It is more difficult to subject instincts, emotions and im- 
 pulses to quantitative measurement, but it may safely be 
 assumed that the inequalities of the other human tendencies 
 and powers are no less extreme or widespread than are 
 those of the tendency and power to think. 
 
 The technique of mental measurement made its greatest 
 advances during the war, in the army mental tests of the 
 
The Orgamzation of Human Nature 49 
 
 drafted personnel. Over one million, seven hundred thou- 
 sand men in the army were put through these tests, and 
 their mental levels were recorded and classified. The 
 draft troops were representative of all classes and strata 
 of people and it may be assumed therefore that the find- 
 ings for this group represent with approximate accuracy the 
 findings that would be arrived at if it were possible to 
 apply the test to every individual in the country. It 
 should be borne in mind, too, that intelligence tests are not 
 tests of memory, or of knowledge, or of feeling, but of 
 the power of the mind to think. 
 
 The plain facts revealed by these comprehensive tests 
 are briefly as follows : About 10 per cent, of the population 
 of the country is of very inferior intelligence. The best 
 of this group are unable to get beyond the third or fourth 
 grade in school, no matter how long they attend, and the 
 others are either on the border line of mental deficiency 
 or are feeble-minded. Their mental level is comparable 
 to that of a child of ten years or less. More striking than 
 these facts are the numbers of those individuals in the 
 country whose mental level is comparable to that of a 
 child twelve years of age or less. Forty-five per cent, of 
 the population are limited in intelligence to that level. 
 Seventy per cent, of the population register an intelligence 
 equivalent only to an age of fourteen years or less. At 
 the top of the rating scale are a group of people of very 
 superior intelligence amounting to four and one-half 
 per cent, of the total population. And just below this 
 grade of intelligence are a group whose mental level makes 
 them average college material, amounting to nine per cent. 
 of the population. The sharp contrast between the two 
 extremes of very superior and very inferior intelligence, 
 and the enormous proportion, nearly one-half, of the total 
 population, showing only a very moderate intelligence, give 
 a fairly definite basis for a conception of the great ine- 
 qualities of intelligence. 
 
 The upper grades of intelligence furnish the leadership 
 of society. From these grades come the great statesmen, 
 educators, officers, lawyers, doctors and business executives. 
 
50 The Organizaiiu'ii uj JxumamnLsnwwre 
 
 To the extent that these groups of high native mentality 
 are elevated to positions of power and responsibility, there 
 is some assurance of efficiency in economic and social or- 
 ganizations. The grossest incompetencies occur, however, 
 when individuals of low mental ability have power and 
 responsibility thrust upon them. Democracy requires that 
 the influence of these men in the highest levels of intelli- 
 gence shall be paramount, for the influence of the lower 
 levels is characterized primarily by non-rational tenden- 
 cies. The lowest 10 per cent, in the army were deemed 
 unfit to send over seas. They are scarcely able to behave 
 with the minimum of self-guidance necessary to get along 
 in industry under favor.able circumstances; and under 
 unfavorable circumstances, they become the glaring mis- 
 fits and frequent tragedies of the industrial system. Just 
 above this lowest ten per cent, is a group of fifteen per cent, 
 of the population slightly but not much better off. This 
 group includes many foreigners and many who are illiter- 
 ate. They are weak in initiative and show very little 
 resourcefulness. To get along in their jobs successfully 
 they requirs close supervision by men who understand 
 sympathetically their limitations. The grades just above 
 this level suffer from similar limitations and handicaps in 
 diminishing degrees. Industry abounds with individuals 
 who cannot restrain themselves from outbursts of temper 
 or ^rom irrational obstinacies; vnth individuals who re- 
 peatedly make mistakes and who require an unusual 
 amount of training before they can perform their work 
 habitually and well; with individuals who are unable to 
 think their way out of difficulties, but who blunder and 
 fumble through, at great distress to themselves and their 
 families and at great waste to society. The science of per- 
 sonnel administration is a serious attempt to understand 
 and control the great inequalities of intelligence for the 
 better comfort of the individuals and the greater efficiency 
 of economic society. 
 
 These facts indicate how misleading it is to make sweep- 
 ing references to "the people" or the "masses" as if they 
 were all on a dead level and all alike. Difference, not uni- 
 
The Organization of Human Nature 51 
 
 formity, is the cardinal feature of the human equipment, 
 and the inequalities of intelligence between various mental 
 levels give the real character of the human nature which 
 is of interest to economics. The inequalities of intelli- 
 gence are matched by the inequalities of all the instinctive 
 tendencies. The entire human equipment of each indi- 
 vidual qualifies that individual to cope with a certain 
 amount of responsibility and no more, and the prime 
 task of economic democracy is to adapt the distribution of 
 power and responsibility in economic life to the unequal 
 distribution of human equipment.^ 
 
 1 See H. H. Goddard's "Hitman Efficiency and Levels of Intelli- 
 gence," McDougall's "Is America Safe for Democracy?"; "Personnel 
 System of the United States Army," 1919, Vol. I; L. W. Stern, "The 
 Psychological Methods of Testing Intelligence." 
 
CHAPTER IV 
 
 HUMAN ADAPTATION TO ECONOMIC ENVIRONMENT 
 
 We are encircled by an economic environment. It is 
 made up in part of pig iron, India rubber, wheat, automatic 
 machines, elevators and an endless host of material things. 
 It is made up in part of a technical science of molding and 
 refining metals, of arranging dynamos, machines, fur- 
 naces, railroads for productive purposes. It is made up 
 in part of an institutional organization, involving relations 
 between owners and non-owners of property, involving 
 rights and duties of property or labor, involving customs, 
 traditions, ideals, laws, principles. In the maelstrom of 
 this environment we carry on our "wealth getting and 
 wealth using activities." Here human nature meets eco- 
 nomic environment, merges with it, absorbs it, destroys 
 and recreates it, or succumbs to it. "Man's impulses and 
 thoughts and acts result from the impact of his nature 
 upon the environment into which he is bom." 
 
 In this impact with economic surroundings, human na- 
 ture undergoes a constant process of internal conflict. 
 Contradictory impulses steadily appear. The man desires 
 to play but decides to finish a report instead ; his desire for 
 possession must compromise with calls for philanthropy; 
 his family instincts must not lead to undue promotion of 
 inefficient relatives; his anger toward labor leaders must 
 be controlled by his calmer judgment, and this control 
 is in turn affected by influences arising from his creative 
 ambitions or profit motives, or his love of power. Some 
 tendencies have to be eliminated altogether, some selected 
 for expression, some modified or redirected. The fact of 
 conflict between the great instinctive tendencies however 
 is constant, and the consequences of this conflict and the 
 
 52 
 
Human Adaptation to Economic Environment 53 
 
 processes of its control introduce the next step in analyz- 
 ing economic behavior. 
 
 The outcome of the conflict is adaptation of man's origi- 
 nal nature to his economic environment. This adaptation is 
 in the nature of a compromise between expression and re- 
 pression of instinctive tendencies. In the economic en- 
 vironment men's ambitions find the widest opportunities 
 for expression. There are the great financial achievements 
 of constructive genius, the huge fortunes of successful 
 wealth seekers, the concentrations of economic power in the 
 hands of leaders of labor or capital, the bitter wars and 
 friendly rivalries of industry. The native dispositions find 
 remarkable opportunity for expression in every phase of 
 wealth relations. But at the same time, repression is uni- 
 versal. The economic environment is stubborn in demand- 
 ing that a worker shall repress all instincts which might lead 
 him to run a machine in other than the one right way ; or 
 that a labor union shall obey an injunction restraining its 
 ambitions ; or that managers of corporations shall curb their 
 self-assertive longings in obedience to the rules against un- 
 fair competition. Thus the economic world insistently re- 
 buffs a host of cravings and propensities, and obdurately re- 
 quires their repression throughout society. The balance 
 struck between expression and repression constitutes adapta- 
 tion of human nature to economic circumstances. 
 
 Growing out of these two phases of adaptation are two 
 great schools of economic viewpoint and thought. Those 
 men, whether corporation executives, labor organizers, re- 
 formers or detached economic scientists, whose attention is 
 glued chiefly to the splendid opportunities for economic ex- 
 pression of human desires are wont to insist that if human 
 desires do not harmonize with the environment, the human 
 desires ought to undergo a change. To men of this outlook, 
 human nature is wrong ; the system is right. Keep the sys- 
 tem; change human nature to fit the system. Men are be- 
 lieved to need a new spirit of good-will, or to require a 
 change of heart. The old system will work all right if only 
 people will approach it in the right mood. All the normal 
 and right expressions of instinct can be given in the order 
 
54 Human Adaptation to Economic Environment 
 
 as it is. If the times seem out of joint, the fault is in our- 
 selves. Education to a new viewpoint is thought necessary ; 
 training in self-control is thought the sufficient recourse; 
 anything to alter human nature. 
 
 Simultaneously, another group of men in all ranks and 
 classes of the business world rivet their observation upon the 
 overbearing proportion of repressions in economic life. To 
 them, the economic environment needs drastic alteration to 
 the end that it may relieve human nature of its worst re- 
 pressions and furnish a more generous outlet for the instinc- 
 tive tendencies. The system is wrong; it outrages human 
 nature. The laws affecting economic enterprise are unwise ; 
 they cramp the free assertion of men's spirits. The insti- 
 tution needs overhauling, customs need reforming, organiza- 
 tion and process need transformation the better to give 
 opportunities for human nature to express itself. If only 
 an amendment to the constitution can be passed, or a new 
 system of labor administration be introduced, or a new type 
 of management installed, in short, if only the system can be 
 altered, human nature will be freed from stifling repressions, 
 and all will be well. 
 
 The different viewpoints have each their share of service- 
 ability. Their difference arises from over emphasizing one 
 phase of the process of adaptation. Each over simplifies 
 the problem. A sense of balance and proportion observes 
 that some improvements are of one type, some of another, 
 and most involve both. Human nature needs refinement, 
 control, redirection; system needs constant readjustment. 
 Adaptation involves an equilibrium between expression and 
 repression of the instinctive tendencies. 
 
 This process of adaptation takes place in a wide variety 
 of ways. As a means of describing them in a serviceable 
 and comprehensive form, the following classification will ho 
 followed: discipline, elimination, sublimation, rationaliza- 
 tion, revolt. 
 
 Discipline 
 
 Discipline is a common means of adapting human nature 
 to the economic task of making and spending money. The 
 
Human Adaptation to Economic Environment 55 
 
 fundamental necessity for discipline is so ably stated by 
 Thomdike that he may be quoted at length: "The life 
 to which original nature adapts man is probably far more 
 like the life of the wolf or the ape, than like the life that 
 now is, as a result of human art, habit and reasoning, per- 
 petuating themselves in language, tools, buildings, books, 
 and customs. . . . The original tendencies of man have 
 not been right, are not right, and probably never will be 
 right. By them alone few of the best wants in human life 
 would have been felt, and fewer still satisfied. . . . Man 
 is now as civilized, rational and humane as he is because 
 man in the past has changed things into shapes more satis- 
 fying, and changed parts of his own nature into traits more 
 satisfying to man as a whole. Man is thus eternally alter- 
 ing himself to suit himself. His nature is not right in his 
 own eyes. Only one thing in it, indeed, is unreservedly 
 good, the power to make it better." This mastery of original 
 interests requires to "put the useful ones to work and guard 
 against the dangerous ones. . . . The native impulses and 
 cravings of man have to be tamed and enlightened by the 
 customs, arts and sciences of civilized life, but every item of 
 these arts and sciences was first created by forces within 
 man's own nature. Instincts may be trusted to form de- 
 sirable habits only under a strong social pressure whereby 
 the wants of one are accommodated to the wants of all. ' ' '• 
 
 The economic system as it now stands has to its credit a 
 high degree of success in this disciplinary control of human 
 impulses. The credit system, the market system, the pro- 
 duction system, the management system, the ownership sys- 
 tem all operate to bring human nature under control and to 
 harness the great urges of men to economic accomplishments. 
 What often seems harsh and exacting ia these economic 
 processes is often a necessary and inescapable yielding of 
 certain untamed impulses. As T. N. Carver insists, "Human 
 nature is, within limits, adaptable and can without harm 
 adjust itself to many non-psychological conditions whenever 
 there is a mechanical or economic advantage in doing so. 
 . . . Shall we school and discipline ourselves into conform- 
 
 1 Thomdike, "Original Nature of Man," pp. 280, 281, 296, 311. 
 
56 Human Adaptation to Economic Environment 
 
 ity with, the conditions of successful living, or shall we f oUow 
 our own proclivities and insist that it is an unjust world 
 that does not bestow success upon us? . . . The progres- 
 sive parts of the world, that is, those parts where industry- 
 has been efScient enough, and governments liberal enough to 
 permit considerable numbers of people to make a living, 
 have all followed the stony road of self-discipline. . . . 
 Those individuals who cannot readily discipline themselves 
 or conform their behavior to the mechanical or economic 
 necessities of a situation, or who suffer serious harm from 
 such conformity, tend to be weeded out, while those to whom 
 the self-discipline whiehi proves to be mechanically or 
 economically advantageous is easy and harmless, will tend 
 to survive."^ 
 
 This power of adaptation of human nature to the in- 
 exorable and inviolable requirements of the economic order 
 is fundamental in economic psychology. Human nature 
 cannot be given free reign, and allowed to carouse and 
 rebel and romp whithersoever "the wind listeth." For 
 "the capitalistic system has evolved and survived," to quote 
 John E. Commons, ' ' out of experiments and in spite of con- 
 tinuous protests and opposition. And, I take it, one reason 
 is that it is a system of repression of natural instincts, a 
 system of discipline, regimentation, submission to foremen, 
 superintendents, executives, over whom the employees have 
 little or no control. . . It is the business of management 
 
 to sustain the credit system by restraining the instincts of 
 labor." 2 
 
 Elimination 
 
 Elimination of dangerous impulses is an auxiliary to dis- 
 cipline. Much of the impulsive nature behind hates, jeal- 
 ousies, cruelties, persecutions, vices, fightings, stealings, 
 slaveries and inertias has to be stamped out with a heavy 
 hand. One form of elimination is mere atrophy through dis- 
 use. The mild, docile, obedient, orderly loyal worker is 
 apt to be one in whom combativeness and pugnacity have 
 
 1 Quarterly Journal of Economics, Vol. 35, pp. 144-146. 
 
 2 American Economic Review, Vol. 9, p. 312. 
 
Human Adaptation to Economic Environment 57 
 
 died a natural death over a period of one or two score 
 years. Self-assertion may under similar lack of stimulus 
 wither up and lose its force in the worker's motivation. 
 Another form of elimination is to make the consequences of 
 the instinctive expression so unpleasant and painful that it 
 will thereby tend to be eliminated. The instinct of creative- 
 ness and originality in workmanship may lead to such great 
 distraction of attention from the exact operation of the ma- 
 chine that the operator becomes a nuisance and loses his 
 job, and thereby learns to abolish his eraftsmanlike long- 
 ings. The instinct of pugnacity and rivalry between busi- 
 ness men may lead to such damaging results as to lead to 
 combination of business units and the consequent substitu- 
 tion of co-operation for cut-throat rivalry. 
 
 The economic population is replete with characters who 
 have forgotten how to play, or who have lost the parental 
 tendencies, or who have mortified the love of riches, or who 
 are incapable of resentment and wrath, or who have given 
 up the exercise of thought, or who know not the meaning of 
 human tenderness. In the process of eliminating the dan- 
 gerous and harmful, it is inevitable that much which is 
 valuable in character should also be east out. But a civil- 
 ized and safe economic institution of necessity strikes out 
 some of the more brutish and incompatible primitive ten- 
 dencies. Human nature allows thereby a wise and useful 
 adaptation to economic obligation, and by permitting the 
 atrophy or stifling of non-civilizable urges enables men to 
 subordinate their worst nature and capitalize their best 
 nature in economic endeavor. 
 
 Sublimation 
 
 Sublimation is a method of devoting instincts which are, 
 so to speak, "loaded with dynamite" to useful ends. Instead 
 of annihilating the more dangerous energies of human 
 nature, we may turn them into great and good expressions. 
 Freudian psychology has stressed heavily the energy of the 
 sex instinct in character formation and has emphasized the 
 possibilities of sublimating the sex energies in high and use- 
 ful non-Sextial forms. Withoiut debating at all the extremes 
 
58 Human Adaptation to Economic Environment 
 
 of many of the Freudian doctrines, we may safely accept the 
 fundamental proposition that "Sexual desire relinquishes 
 either its goal of partial gratification of desire, or the goal 
 of desire toward reproduction, and adopts another aim, 
 genetically related to the abandoned one, save that it is no 
 longer sexual but must be termed social." And again 
 Freud states of the sexual impulses, "They are diverted 
 from their sexual goals and directed to ends socially higher 
 and no longer sexual. ' ' ^ 
 
 Parker has shown that among the few millions of casual 
 and migratory laborers, fully 90% are unmarried and 
 have no normal sex life ; that this sex repression contributes 
 to unrest, discontent, and labor difficulties generally; and 
 that the thwarted energies may find a moral equivalent 
 in forms of self-expression if opportunity is provided dur- 
 ing work and leisure hours.^ Eoss finds that "industrial- 
 ism holds apart the sexes" and that consequently the 
 ' ' sex instincts are needlessly thwarted or perverted. ' ' ^ 
 And Lippmann's illuminating study of the Chicago Vice 
 Commission Report leads to his plea to "see sex as an in- 
 stinct which can be transmuted, and turned into one of the 
 values of life." "What is needed is civilized means of 
 "transmuting the sex impulse into art, into social endeavor, 
 into religion." The full economic bearing is further sug- 
 gested by Lippmann's broad proposition that, "No one 
 can doubt that to abolish prostitution means to abolish the 
 slum and the dirty alley, to stop overwork, underpay, the 
 sweating and the torturing monotony of business, to breathe 
 a new life into education, ventilate society with frankness, 
 and fill life with play and art, with games, with passions 
 which hold and suffuse the imagination." Psychology re- 
 veals that the task of sound business statesmanship is to 
 work out moral equivalents for the sex energies of the 
 workers. "Without such equivalent expressions, the power- 
 ful sex energies are almost sure to play havoc from time 
 to time with economic harmony and efficiency.* 
 
 1 Freud, S., "Introduction to Psychoanalysis," pp. 8, 300. 
 
 2 C. H. Parker, "The Casual Laborer," Chapters U-III, 
 
 3 Ross, E. A., "Principles of Sociology," p. 50. 
 
 4 See W. Lippmann, "Preface to Politics." 
 
Human Adaptation to Economic Environment 59 
 
 William James has made an historic eontribution to the 
 understanding of the pugnacious and emulative instincts in 
 his essay on "The Moral Equivalent of War." The neces- 
 sity is not merely for a moral equivalent of war between 
 nations, but for a moral equivalent of the equally damaging 
 war between classes within nations. Economic foresight 
 comes to consist more and more of devising methods of find- 
 ing productive expressions of the energies which underlie 
 military and industrial war. History teaches the futility of 
 attempts to abolish the instincts and energies which give 
 rise to war, but psychology teaches the soundness of efforts 
 to give men the thrill and glory and hardihood and zest 
 of combativeness in the larena of economies. Rivalry with 
 one's fellow workers, keen exertion to win promotion, a 
 clear vision of increasing efficiency in work, a sense of 
 pride and mastery — accomplishment — all these are capable 
 of drawing upon the instinctive energies that are potential 
 for war. They offer what Wallas calls the ' ' nervous tonic ' ' 
 for belligerency. They are the background of the assertion 
 by R. B. Wolf, based upon wide experience as an industrial 
 engineer, that "The present labor unrest is the natural 
 result of diverting the creative instinct of the work- 
 man from constructive to destructive channels. . . . 
 Just so long as the majority of workmen are using their 
 brains merely to direct their bodies and are doing work 
 which requires little or no thought, just so long shall we 
 have industrial unrest." 
 
 Lippmann lays down the significant assumption that 
 "every lust is capable of some civilized expression. . . . 
 Behind evil there is power. . . . Training and opportunity 
 decide in the main how men's lusts shall emerge. Left 
 to themselves, or ignorantly tabooed, they break forth in 
 some barbaric or morbid form. Only by supplying our 
 passions with civilized interests can we escape their de- 
 structive force. ' ' ^ 
 
 This principle of substitute expression of instinct ener- 
 gies is accepted from the physiological and psychological 
 standpoint by W. B. Cannon, who writes, in reference to 
 1 "Preface to Politica," pp. 50-51. 
 
60 Human Adaptation to Economic Environment 
 
 the instinct to fight, "What is needed is not a suppression 
 of these capacities to feel and act, but their diversion into 
 other channels where they may have satisfactory expres- 
 sion." In addition to the moral equivalents, Cannon finds 
 physical equivalents for warlike energies in the form of 
 games and sports. His conclusion is, "In competitive 
 sports the elemental factors are retained — man is pitted 
 against man, and all the resources of the body are sum- 
 moned in the eager struggle for victory. And because, 
 under such circumstances, the same physiological altera- 
 tions occur that occur in anticipation of mortal combat, the 
 belligerent emotions and instincts, so far as their bodily 
 manifestations are concerned, are thereby given complete 
 satisfaction. ' ' ^ 
 
 Rationalization. 
 
 There is another way by which the instinct tendencies 
 can settle the conflict and deal with the repressive agencies ; 
 they may carry out the tendency in such disguised and 
 camouflaged form that the repressing agency does not de- 
 tect the real incompatibility. In brief, we go ahead and 
 do what we feel we want to do, and then justify the deed 
 with excuses that seem perfectly plausible to everybody 
 and even to ourselves. So our thinking becomes an effort to 
 find plausible reasons for what we want to do and think 
 and feel and be. 
 
 Per example, owing to the herd instincts and the general 
 tendencies of imitation, suggestion, etc.. Trotter declares 
 that the "belief of affirmations sanctioned by the herd 
 is a normal mechanism of the human mind, and goes on 
 however much such affirmations may be opposed by evi- 
 dence" and furthermore, that "reasons cannot enforce 
 belief against herd suggestion." So economic beliefs that 
 can be paraded under the name of loyalty, or American- 
 ism, secure the adherence of masses of people through 
 first exciting instinctive herd emotions and later attaching 
 thereto a plausible moral. Thus we have the chief labor 
 leaders arguing against the chief business men on the open 
 
 1 "Bodily Changes in Pain, Hunger, Fear and Eage," pp. 291, 297. 
 
Human Adaptation to Economic Environment 61 
 
 or the closed shop, the labor chiefs pleading for "Ameri- 
 can freedom for the working man," the business chief 
 pleading for "the American or open shop." Both are 
 instinctive emotional appeals first and rational justifica- 
 tions afterwards. 
 
 It is natural for men to consider an unpleasant idea 
 ridiculous, and arguments are easily marshalled against 
 an odious proposition. "Society thus brands what is un- 
 pleasant as untrue. ' '^ New ideas are apt to be unpleasant 
 ideas, because they disrupt habitual modes of thought. 
 "The result is," according to Robinson, "that most of 
 our so-called reasoning consists in finding arguments for 
 going on believing as we do." The editor of a business 
 magazine or of a labor periodical may stretch and strain 
 his logic mercilessly and go around Robin Hood's barn 
 many times before he finds ample justification for the 
 latest move of his group, but he is always able to assign 
 a reason, even though to one not captivated by the same 
 emotions, it may seem often a very absurd one. When we 
 "get down on" a President of the country or the President 
 of a bank, all of his deeds are apt to look black and false. 
 
 It is not important that such beliefs be logical — ^the im- 
 portant fact is that they square with the psychological 
 demands from within. An interesting observation made by 
 Martin in "The Behavior of Crowds" shows how the wish of 
 the radical leads to a philosophy of revolution in which the 
 economic order is seen as a collection of forces which are 
 steadily, irresistibly rolling forward to the day when they 
 will culminate in revolution, — a philosophy admirably 
 fashioned to please and satisfy the wish and longing un- 
 derneath. In a multitude of mental conflicts the will has 
 decided before thinking has even gotten under way. The 
 reasoned justification is an afterthought. 
 
 Our own failure is rationalized by placing the blame on 
 someone else. So an inferiority, a weakness, an inefficiency 
 may be reasoned away by ascribing the fault to the be- 
 havior of others. As White states,^ ' ' The man who is f ail- 
 
 1 Freud'a "Introduction to Psychoanalysis," p. 9. 
 
 2 "Mental Hygiene," p. 59. 
 
62 Human Adaptation to Economic Environment 
 
 ing in mental efficiency believes that other members of 
 the office force are putting up jobs on him, annoying him, 
 interfering with him in all sorts of ways so he cannot 
 do his work." 
 
 The foreman who exults in power excuses petty tyran- 
 nies over his workmen on the ground that they are unruly, 
 or insolent, or need discipline, his real reason being his de- 
 light in self-assertiveness. The bad workman finds fault 
 with his machinery, or his boss or the factory system, 
 his real trouble being his own industrial inefficiency, 
 which he would be ashamed to confess, even to himself. 
 The engineer, having failed in getting his task done or the 
 advertising manager, having failed to sell the goods, attrib- 
 utes the failure to the impossibility of the task. • "It is 
 recorded that Lord Kitchener, when a subordinate during 
 the South African "War began to explain a failure to obey 
 orders, said 'Your reasons for not doing it are the best 
 I have ever heard; now go and do it.' " The executive 
 whose self-assertive instincts make him determined to "run 
 his business as he pleases" surrounds his determination by 
 a host of excellent reasons for maintaining industrial 
 ■autocracy. The profiteer, the labor autocrat, the conserva- 
 tive, the liberal, all too often resolve their mental conflict 
 by doing what their instinctive nature wants to do and then 
 finding good and sufficient reasons for their wilfulness. 
 
 Most motives that are selfish, or licentious, or unsocial, 
 or shameful, tend to become sugar-coated with altruis- 
 tic-sounding explanations and righteous justifications. A 
 man who foresees depression, and fears to suffer the loss 
 of having a large stock of goods on hand, suddenly cuts 
 prices somewhat in order to sell out in time and takes 
 credit to himself as being the great foe of profiteers. An- 
 other sees workmen's insurance coming and takes up a 
 "safety first" crusade to save himself insurance costs, 
 meantime complimenting himself on his humanitarian 
 business policies. A worker who dreads to lose his job 
 welcomes a philosophy of industry which approves restric- 
 tion of production. The conflict of instinct motives be- 
 comes solved by doing what men feel impelled to do by 
 
Human Adaptation to Economic Environment 63 
 
 their instinctive energies and thereupon contriving plaus- 
 ible reasons. All this is not necessarily in the nature of 
 hypocrisy but is the natural, unconscious way of avoiding 
 psychic revolt and maintaining mental harmony, peace 
 and consistency. 
 
 Revolt 
 
 The hereditary endowment of instincts of many hundreds 
 of thousands of economic workers is so defective or near 
 defective that even under the most favorable environmen- 
 tal conditions, their adaptation to life's economic needs is 
 next to impossible. It is estimated that this class of defec- 
 tives numbers upwards of 10,000,000 individuals in the 
 United States. When these people find themselves in an 
 environment which is not simple and easy to cope with, 
 but severely complex and difficult, their mental machinery 
 suffers breakdown. In addition to these groups who are 
 weakly equipped mentally to begin with, there are other 
 large groups who, though normally set up by nature, never- 
 theless suffer nervous maladjustment and mental disorder 
 when they are obliged to cope with the harsher sections of 
 the economic environment. These disrupting features of 
 the economic order, by thwarting certain instinctive en- 
 ergies and suppressing normal cravings, are direct causes 
 of widespread industrial revolt, mania, psychosis, sulki- 
 ness, viciousness, and neurosis generally. Such environ- 
 mental factors appear under such terms as "unemploy- 
 ment," "bad housing," "immigrant congestion," "hire 
 and fire," "automaton," "poverty," "foreman's ty- 
 ranny," "unsanitary factory conditions," "industrial ac- 
 cidents," "industrial autocracy," "overwork," "monot- 
 ony," "fatigue," "bankruptcy," "lockouts and strikes." 
 
 To understand the origin of such psychic failures, the 
 concept of the unconscious comes into play. What we are 
 aware of at any one moment, or in any one day is at 
 most only a very small portion of all the experiences packed 
 away in our mental storehouse. Below the level of the 
 conscious is the unconscious. Part of i' is past recall; part 
 domes batik by an eiff ort df recoUectidn. Here exist dynamic 
 
64 Human Adaptation to Economc Environment 
 
 energies of the instincts, craving outlets which environ- 
 ment denies. This conflict of nervous energies gives rise 
 to inner states of mental and organic tension. Wallas ex- 
 plains that "If we balk any one of our main dispositions, 
 Curiosity, Property, Trial and Error, Sex, and the rest, we 
 produce in ourselves a state of nervous strain. ' ' ^ 
 
 Sciences of psychoanalysis, psychiatry, psycopathology 
 and psychotherapy have developed to diagnose and remedy 
 the states of conflict and strain. Although still in their 
 initial stages and subject to much controversy these studies 
 of mental disorders contain some; fundamental, and gen- 
 erally accepted assumptions which are highly serviceable in 
 any attempt at understanding economic behavior. The 
 genius of Freud gave these studies their great impetus. 
 However, Freud's extreme emphasis upon the sex energies, 
 suppressed as they are by the taboos and revulsions of social 
 standards, and his attributing of virtually all neurotic dis- 
 ease to this sex repression is generally conceded to be too 
 narrow an application of fundamental human processes. 
 Jung extended the doctrines to the ego-energies, the life 
 impulses as well as to sex, and asserted that nervous de- 
 rangment ensued not merely from sex repression, but from 
 denial of the "energy of life" which manifests itself in 
 "growth, development, hunger, and all the human activi- 
 ties and interests."^ Rivers relates the successful results 
 in treating breakdowns in military life among British sol- 
 diers, by applying the essential Freudian methods to the 
 so-called "danger instincts," i.e., flight, pugnacity, etc.^ 
 Certain American students have found that any of the 
 primary emotions — love, hate, hunger, shame, sorrow, fear, 
 disgust — may cause a neurosis under appropriate condi- 
 tions of repression.* 
 
 Trotter has pointed out in comprehensive terms that 
 the conception of mental conflict is the central feature of 
 this whole system of analysis, and he insists that "Of its 
 
 1 "The Great Society," p. 65. 
 
 2 Jung, "Psychology of the Unconscious," p. xxvi. 
 
 3 W. H. River's "Instinct and the Unconscious." 
 
 4 See E. J. Kempf, "Psychopathology." 
 
Hvrnian Adaptation to Economic Environment 65 
 
 importance and validity there can be no doubt." ^ He finds 
 that the repressive factor in this conflict has the impulsive 
 energy which comes from the instincts of the herd, and 
 that the whole social and economic environment, by set- 
 ting up taboos and standards and laws which the social 
 instincts accept and enforce, creates the conflict that leads 
 on to the mental derangements which are so widespread. 
 Repression, conflict, derangement are the cause to effect 
 links in the chain. 
 
 A condensed application of these basic principles is at- 
 tempted by Parker in the following form: "The monotony, 
 indignity, dirt, and sexual apologies of, for instance, the 
 unskilled worker's life bring their definite fixations, their 
 definite irrational inferiority obsessions. The balked la- 
 borer here follows one of the two described lines of conduct : 
 
 First, either weakens, becomes inefficient, drifts away, 
 loses interest in the quality of his work, drinks, deserts 
 his family, or, 
 
 Secondly, he indulges in a true type inferiority com- 
 pensation and in order to dignify himself, to eliminate for 
 himself his inferiority in his own eyes, he strikes or brings 
 on a strike, he commits violence or he stays on the job and 
 injures machinery, or mutilates the materials; he is fit 
 food for dynamite conspiracies. He is ready to make 
 sabotage a part of his regular habit scheme. ... If one 
 leaves the strata of unskilled labor and investigates the 
 higher economic classes he finds parallel conditions."^ 
 
 A sweeping survey of the many business geniuses suf- 
 fering from neurasthenia, of the frenzied and distracted 
 efforts of executives to adjust their mental powers to kalei- 
 doscopic changes in business affairs, of the tortuous 
 struggles of labor leaders to maintain themselves in power, 
 and of the rebellious, sullen attitudes of irascible laborers, 
 indicates -the profoundly significant economic consequences 
 of repression, confiict, and derangement. 
 
 No small portion of this revolt psychosis arises from the 
 all too abundant stimulus of the danger and anxiety in- 
 
 1 "Instinct of the Herd in Peace and War," p. 79. 
 
 2 "Casual Lattdrer," p. 49. 
 
66 Human Adaptation to Economic Environtfieni 
 
 stincts and emotions in the economic struggle. The worries 
 and fears of the laborer are matched by the worries and 
 fears of everybody else in the economic groups. If it is 
 not the fear of unemployment, or underpayment, or acci- 
 dent, or discrimination, or petty foreman's tyranny, it is 
 the fear of bankruptcy, failure, loss of position or of 
 promotion, rivalry, competition. In the economic struggle 
 for survival, anxiety states and distress forebodings hem 
 in the participants. Cannon has proved by extensive labo- 
 ratory experiments that where the normal instinctive life 
 is held in subjection by these fears, "the emotional ac- 
 complishments — such as the satisfaction of food and of 
 sexual affection, the feeling of self-pride, and the tender 
 love of a parent — are whirled suddenly into anger." AH 
 of the energy that would normally flow into thought, 
 creativeness, self-expression, public-spiritedness, and their 
 like is arrested and redirected by an overlord in human 
 nature, — by the danger and distress mechanisms. This 
 recentering of energy involves far-reaching bodily changes, 
 such as interference with healthy digestive processes, the 
 shifting of blood from the abdominal organs to the lungs, 
 the heart, the central nervous system, the increased force 
 of heart action, the mobilization of blood sugar, the secre- 
 tion of special glands such as the adrenal. The normal 
 self-control and rational influence over conduct becomes 
 minimized, and militant behavior comes to the front. 
 Where the anxiety states are not so violent, but none the 
 less real, the behavior reaction is likely to be seen in inertia, 
 discouragement, depression, loss of interest, malice, surli- 
 ness, or alcoholic indulgence. 
 
 Cannon's work points in the same direction as that of 
 Crile. Crile writes, "It is obvious, therefore, that the 
 absence of worry and fear may aid in stopping the body 
 wide activations which lead to an organic breakdown. . . . 
 The effect of fear, grief, worry and jealousy on the physical 
 body is seen in the changes in the cells of the brain, the 
 adrenals and the liver, and in the numerous resultant dis- 
 eases and disabilities. Against man's inhumanity to man, 
 religibns and philosophies have been evolved, each of which 
 
Human Adaptation to Economic Environment 67 
 
 aids in proportion to its power to substitute altruism for 
 selfishness, to substitute faith for fear. . . . The mere 
 knowledge, the mere conviction, that excessive anger, work, 
 jealousy, envy, worry or grief cause physical damage as 
 serious as that produced by infections or crushing blows 
 will constitute a powerful protection to man. ' ' ^ 
 
 Such is the conclusion drawn from elaborate biological, 
 physiological, and psychological investigation. It points in 
 the direction of the studies of the more careful of the psy- 
 choanalysts, namely, the repressions of the economic en- 
 vironment with its herd taboos and fears and compulsions, 
 the consequent conflicts of great human impulses, both con- 
 scious and unconscious in their workings, and the final 
 inner derangements, manias, irascibilities, neuroses, and 
 aberrations. In a word, psychic revolt and mental disease 
 are the finished product of man's futile attempts to adapt 
 his human nature to certain repressive features of his 
 economic environment. 
 
 Two ways of escape from the difficulty present them- 
 selves: change the economic environment, or educate and 
 change human nature. Any particular economic problem 
 has to be solved on its individual peculiarities, but such a 
 solution will be some varying combination of these two 
 lines of procedure. Keller has warned that "We get the 
 idea that man does not adapt to environment, but adapts 
 the environment to himself and his needs. But we learn 
 no power over nature till we learn natural laws, to con- 
 form and adapt ourselves to them. . . . Our lordship over 
 nature consists in the adroitness with which we learn to 
 conform."^ The ability to discipline one's instincts and 
 emotions, to eliminate the injurious tendencies, to subli- 
 mate the potentially dangerous energies of the mind, and 
 to avert the calamity of psychic revolt is an indication of 
 the efficiency and success of men in their economic pur- 
 suits. But many features of the environment make smooth 
 adaptation next to impossible, and even when possible, 
 humanly damaging. Such dark and pernicious elements 
 
 i"Man, an Adaptive Mechanism," pp. 12, 377. 
 2 A. G. Keller, "Societal Evolution," p. 22. 
 
68 Human Adaptation to Economic Environment 
 
 need eradication, tlie environment itself needs alteration. 
 Both processes enter into any rational and healthful ad- 
 justment between men and their work. 
 
 The remedial treatment of human nature is a proc- 
 ess of revelation. Men need to be shown wherein their 
 repressions and maladjustments have gotten the better of 
 them. The nature of the conflict, the repressive force and 
 the inner craving, the meaning of a healthy adaptation, — 
 all these need to be revealed to those suffering from the 
 psychic distresses of the economic order. It is this pro- 
 cedure which Holt summarizes in his book, ' ' The Freudian 
 Wish," in his plea for "a more complete discrimination of 
 the elements in the situation to be reacted upon, to resolve 
 every situation rather than do violence to it by a summary 
 Yes or No." ^ , 
 
 The human maladjustments are so frequent and so 
 damaging that economic activity has created a press- 
 ing need for a science of mental hygiene in industry. 
 Industry abounds with mental diseases, nervous derange- 
 ments, psychic revolts. Misfits and misfortunes harass the 
 productive processes. Psychological smash-up occurs at 
 every hand. False ideas launch men on fatal ambitions, 
 and abnormal habits and defective inborn traits encumber 
 their life experiences with distress and tragedy. A science 
 of mental hygiene would offer a hope of understanding 
 such mental liabilities as are suggested in the following list 
 mentioned by Dr. E. E. Southard, "queer guys, eccen- 
 trics, disturbers, queruleous persons, unreliable and un- 
 stable fellows, misfits, the irritable, the sullen, socially dis- 
 gruntled, unsociable, negative, conscientious, litigious, 
 bear-a-grudge, peculiar, glad-hand, gossipy, roving, rest- 
 less, malicious, lying, swindling, sex pervert, false accusa- 
 tor, abnormal suggestibility, and mental twist types. ' ' ^ 
 Southard's opinion appears well founded when he urges 
 that mental hygiene is indispensable if there is ever to be 
 an adequate analysis and effective control of these patholog- 
 ical or near-pathological groups. 
 
 1 Holt, "The Freudian Wish," pp. 134-135. 
 
 2 Industrial Management, Vol. 59, pp. 100-106. 
 
Human Adaptation to Economic Environment 69 
 
 The conception of economics as a human science does 
 not militate against a careful study of the laws and prin- 
 ciples "which traditionally enter into economic thinking. It 
 is indispensable to maintain conceptions of land, labor and 
 capital as more or less abstract factors in production. It 
 is indispensable to think of the law of demand and supply, 
 the principles of exchange, the processes of distribution, the 
 theories of value and price, and the statistics of output and 
 trade. Economics is indissolubly related to all these gen- 
 eralizations and interpretations. But economics which ends 
 there, ends too soon. All this is essential but it is not enough. 
 Economics is equally a science of the imponderables of 
 human nature, — of the motives, emotions, thoughts and 
 satisfactions of men engaged in earning and spending an 
 income. The ambitions or lack of ambitions of the men 
 who work at machines, the degree of dullness or imagina- 
 tion in the mind of common labor, the extent to which the 
 distribution of comfort and well-being coincides with the 
 distribution of income, the human qualities which distin- 
 guish what some term the successful from the unsuccess- 
 ful classes, — ^these and the vast outlay of invisible human 
 realities to which they may be expanded are an integral 
 part of any completed economic thought. Laws, principles, 
 statistics all require the vitalizing outlook of the psy- 
 chology of men. 
 
 Which is the more important? As well might the ques- 
 tion arise. Which is greater, the life of the plant, or the sun- 
 shine and the soil! There is no rank of precedence, — ^they 
 are a unit. Man is at the center of economics, — a human 
 factor, — and it is for him, and by him, and through him 
 that all economic control over nature proceeds. Economies 
 is not mainly the science of things ; it is the science of life. 
 It concerns the realization of human energies, and at the 
 basis of all economic behavior lies instinctive nature. 
 
 The chapters thus far have attempted to explain in very 
 condensed form the chief psychological conceptions that 
 have value in such an analysis of economics. The remain- 
 der of the book is an application of them to the more out- 
 standing economic processes of the present day. 
 
70 Human Adaptation to Economic Environment 
 
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Human Adaptation to Economic Environment 71 
 
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PAET n 
 
 ECONOMIC INSTITUTIONS AND 
 FUNCTIONS 
 
 CHAPTER V 
 
 THE MECHANICAL AND SCIENTIFIC BASIS OF ECONOMICS 
 
 Machines and science are the means by which men deal 
 with wealth. The processes of manufacture, the scale of 
 production, the method of transportation, the demands for 
 credit, all spring from the state of the mechanical and 
 physical sciences. Advances in these sciences determine 
 the amount of wealth available for use, the forms which 
 it takes, the happiness of men in fitting wealth for con- 
 sumption, in fact, all that goes into the make-up of economic 
 life. 
 
 Even the simplest processes of machine operation are 
 so much a matter of scientific calculation that the work- 
 er's common sense cannot be trusted as a guide to effi- 
 cient or reasonably intelligent operation. Specialists and 
 experts, by long study, experiment, and statistical com- 
 putation, are needed to determine the right and effective 
 way of making each minute maneuver. But each single 
 maneuver has meaning and use only in so far as it is 
 properly related and co-ordinated with a hundred or a thou- 
 sand other maneuvers by hundreds or thousands of other 
 workers, in many separate and scattered plants, often 
 located in several countries thousands of miles apart. This 
 vast ramification and interdependence requires the most 
 elaborate form of scientific calculation, Observation and 
 
 72 
 
Scientific Basis of Economics 73 
 
 forecast, for if one link in the process is cut, tlie entire 
 chain is broken and the economic process is at a stand- 
 still. Whether a man shall produce more or less, or whether 
 he shall produce at all, hangs upon an infinitely complicated 
 network of factors, machines, processes, and materials. A 
 failure to make the right adjustment at any part of the 
 process entails waste, idleness, anxiety, distress.^ 
 
 The paramount significance of the mechanical equip- 
 ment is that it serves to increase the output from a given 
 amount of labor. Owing to the use of machinery, the aver- 
 age worker produces today more than two and one-half -/^ 
 times as much as in 1850.^ The worker to-day has produc- 
 tive equipment four times as valuable per capita as that 
 of his father working back in 1850. This increased invest- 
 ment in productive capital, by giving the worker a superior 
 mechanical and scientific equipment, has nearly trebled his 
 productive capacity. As King summarizes it, "Evidently 
 the popular impression is true that, as far as dwelling, 
 vehicles, clothing, etc., are concerned, we live in a state of 
 luxury that our fathers knew not of . " 
 
 Of course not all of this increased production is avail- 
 able for consumption. A great part of production is ma- 
 chinery and materials to be used for further production. 
 By no means is all of the output in the nature of clothing 
 or food or furniture or drugs. In large part it is new 
 buildings, new transportation facilities, new machinery, 
 and new equipment for carrying on all the processes of 
 economic life.^ Since the depression of 1893-1896, we have 
 invested as much capital in manufacturing, railroads, 
 public utilities and mines as we had invested in those in- 
 dustries in all our previous history.* Some conception of 
 the magnitude of this class of goods will be gained from 
 the estimate that in 1913, the new productive capital turned 
 out was about $6,500,000,000, in 1918, $22,000,000,000, and 
 in 1919, $15,000,000,000. Goods to these amounts were our 
 
 1 See T. Veblen, "Theory of Business Enterprise," Chapter I. 
 
 2 King, "Wealth and Income of People of United States," p. 43. 
 
 3 Friday, "Profits, Wages, and Prices," p. 78. 
 * Friday, idem, p. 91. 
 
74 Scientific Basis of Economics 
 
 national excess of production above consumption. The 
 excess each year over consumption is in turn devoted to 
 more production, and to that extent serves to make possible 
 an increase in the productive capacity of the -worker. 
 
 On the average between one-seventh and one-fifth of 
 the total product goes to the making of these non-consum- 
 able goods. Any notion of productive efficiency due to 
 mechanical and material equipment must take this non- 
 consumable portion of the full national product into ac- 
 count. With due allowance for this factor, it is estimated 
 that the net efficiency of the laborer in making consum- 
 able goods has been at least doubled. Progress in the 
 future depends upon improvements in this mechanical, ma- 
 terial and scientific factor. Only by this means is it pos- 
 sible substantially to increase the output from a given 
 amount of labor, and to increase to the maximum the avail- 
 able wealth for human consumption. 
 
 Power 
 
 Virtually all economic endeavor nowadays involves in 
 some way the use of natural power. Non-human power 
 turns the wheels of the economic world. The history of 
 human progress is the story of the development of power 
 and its application to man's use. Only a half century 
 ago, the total horse-power used to drive manufacturing 
 machinery was only slightly above two million. In 1914 
 it was over twenty-two million. Of this vast amount of 
 harnessed power, about 70 per cent, is steam power, 
 about 3 per cent, water power, about 4.5 per cent, power 
 from the internal combustion engine, and about 20 per 
 cent, electric power.^ Obviously, the great bulk of power 
 in manufacturing is still derived from the steam, engine, 
 with electric power second in importance. Since 1904, 
 the machine power used in this country by the average 
 industrial worker has increased from two and one-half 
 horse-power to more than three and one-half horse-power. 
 The effect is apparent, for example, in the coal mining 
 industry. Owing in large part to his greater use of mining 
 1 "Abstract of Census of Manufactures," 1914, p. 492. 
 
Scientific Basis of Economics 75 
 
 machinery, the American miner digs out two to three times 
 as much coal as the miner in English fields.^ Steam, our 
 main form of power, has been in turn dependent upon 
 supplies of cheap coal and "we are nationally what we 
 are to-day because always we could get plenty of cheap 
 coal." 2 
 
 About two-thirds of all coal mined is used for generation 
 of power. And so abundant have been our coal supplies 
 that the most profligate waste has prevailed in its utiliza- 
 tion. On the average only 6 to 15 per cent, of the fuel 
 energy is actually realized in power. The amount of wast- 
 age is staggering and an awakening to the need of conser- 
 vation is one of the most pressing economic needs of the 
 time. 
 
 Scientists are of the opinion that if the recent past has 
 been the age of coal and steam, the future will be an age 
 of electricity. Already the hydro-electric power in use is 
 equivalent to the energy of 40,000,000 tons of coal. And 
 each year the electric power created directly by burning 
 coal consumes 30,000,000 tons of that fuel. The most 
 abundant future source of electric power is water power. 
 This potential energy is at hand for the harnessing. "It 
 is estimated that the water power readily available in the 
 U. S., if converted into electric energy, is more than capable 
 of turning every industrial wheel and illuminating every 
 street and building throughout the Republic."^ Electric 
 power has already been utilized in hoisting machines, 
 cranes, conveyors and trucks, in transportation by railroad, 
 surface cars, and subways, in mining pumps, ventilators, 
 crushers, etc., in refining steel and iron, welding and cut- 
 ting metals, in textile, flour and paper mills, and factories 
 of almost every variety. It is displacing coal because it is 
 cheaper, cleaner, less bulky, more easily transported, and 
 more easily handled. In manufacturing lines, it is for the 
 most part utilized through the individual motor attached 
 
 1 "Report of United States Bureau of Mines," 1920, "Monthly 
 Labor Bulletin," Vol. XI, pp. 118-130. 
 
 2 S. Crowther, World's Work, December, 1920, p. 173. 
 
 3W. N. Polakov, "Industrial Management," September, 1920, p. 
 
76 Scientific Basis of Economics 
 
 to the individual machine. Congress in 1920 passed legis- 
 lation which makes it possible for private corporations to 
 secure federal grants for the conversion of water power 
 into electrical energy. This law makes possible the utiliza- 
 tion of the vast potential electric resources of the country. 
 
 The use of electric power releases coal for fuel and by- 
 products. The fuel gain is important from the stand- 
 point of conservation; the by-products gain is important 
 for industrial processes and for consumption purposes. 
 More than one thousand coal by-products are in use. Il- 
 luminating gas, ammonium sulphate, benzol, coal tar, dyes, 
 photograph developers, flavors, perfumes, tanning mate- 
 rials, medicinals, explosives, are only a few of these by-pro- 
 ducts. They are indispensable in a large number of the 
 most important industries of the country. To use the 
 words of a power and fuel engineer, "One thing is clear, 
 in the economic conditions now arising, the principle of 
 electricity as a commodity, the principle of common public 
 carrier applied to the transmission of power, and the prin- 
 ciple of multiple production for the utilization of sources 
 of energy will be the most important, if not the basic, eco- 
 nomic force in the life of the people. ' ' ^ 
 
 The internal combustion engine, by utilizing gasoline as 
 a source of energy, has had far-reaching effects upon the 
 tides of business enterprise. If it had done nothing more 
 than make possible the automobile, its accomplishment 
 would have stood as a fundamental contribution to 
 economic life in modern times. In terms of capital in- 
 vested, of workers employed, of profits and wages paid, and 
 of volume of product, the automobile industry has become 
 one of the major industries of the country. It has set men 
 scouring the world for new sources of petroleum, has cov- 
 ered the country with a network of good roads, has estab- 
 lished a demand for the basic raw materials, and has 
 drained the credit supply in financial centers. The inven- 
 tion of the Diesel engine, based upon the internal combus- 
 tion of oil, has practically revolutionized the methods of 
 
 iW. N. Polakov, "Industrial Management," September, 1920, p. 
 239. 
 
Scientific Basis of Economics 77 
 
 water transportation, because of the advantages of oil over 
 coal as fuel for shipping purposes. 
 
 In its various forms, natural power has been man's con- 
 stant and indispensable aid in developing resources, pro- 
 ducing wealth, and making possible the intricate economic 
 structure of modern times. 
 
 Machinery 
 
 Power combines with machinery to give the economic 
 organization its technical character. Most men who work, 
 work at a machine. It may be a machine to generate power, 
 or a machine to lift material, or a machine to fashion a 
 finished product, or a machine to make another machine, 
 or a machine to transport men or material or machines a 
 distance of ten feet or ten thousand miles. Prom start to 
 finish the economic process rests upon the machine tech- 
 nique. 
 
 The outstanding quality of the machine is that it enables 
 the laborer, by the use of power, to multiply his produc- 
 tive efficiency. In this respect the machine is a labor saver. 
 One man with a machine and power is equal as a producer 
 to from a few to a small army of men working with bare 
 hands or with plain tools. 
 
 The greatest increase of efficiency is attained through the 
 principle of automatic machinery. An excellent example 
 is the weaving loom. Years ago one woman tended one 
 or two slowly moving looms. Now one woman may tend 
 anywhere from 12 to 36 looms at the same time, with the 
 result that her record of production for the day is increased 
 75 times or even more. One girl in charge of 1000 spindles 
 spins from 10,000 to 12,000 times the length of cotton yarn 
 her grandmother could turn out from her spinning wheel. 
 In one type of mill, the machine makes 82,000 yards per 
 hour as against 75 yards as the record of the old spinning 
 wheel. In the needle trades, a girl operator sits at a power 
 sewing machine carrying 12 needles instead of one, setting 
 almost 4000 stitches a minute. ^ A milling machine en- 
 ables an operator to drill several holes at one stroke of a 
 1 Goldmark, "Fatigue and Efficiency," pp. 10, 57. 
 
78 Scientific Basis of Economics 
 
 lever; other machines cut several chunks from the metal 
 plate at one fall of the multiple blades. The automatic 
 machine in its most perfected forms increases the produc- 
 tive power of the operator on the average from 75 to 
 100 times.^ 
 
 During the last fifteen or twenty years, tMs principle 
 of automatic machinery has been applied in some degree 
 to practically all of the important production processes. 
 The automatic principle is the transfer of human skill and 
 intelligence from the man to the machine. Steel fingers, 
 wheels, levers and releases perform the motions of crafts- 
 manship,- — the duty of the laborer being reduced to the 
 minimum of simplicity and taking such forms in the high- 
 est types of machinery, as merely feeding the raw material 
 into the mouth of the machine and taking the finished 
 product away from the outlet.^ Typical of these automatic 
 devices are molding, screw and grinding machines, turret 
 lathes, and pneumatic hammers. 
 
 A recent investigator has found that as a consequence 
 of the rapid development of automobile manufacturing, 
 "in approximately the decade 1904 to 1914, the automatic 
 tool developed into a production power of the highest im- 
 portance. In the making of motor ears it became and has 
 remained indispensable. Nor is its principle to-day less 
 indispensable in the making of thousands of other articles 
 of common necessity and use."^ Most package goods, 
 bottled goods, and canned goods rely upon automatic proc- 
 esses. The president of a large chain of retail stores, doing 
 business in all these lines, and both manufacturing and 
 selling 5000 different kinds of articles, depends upon 
 "standardization, in which lies the future of large volume 
 business. . . . The way to manufacture most cheaply is to 
 establish a separate department for each article and to 
 put it through in continuous repetitive process with a mini- 
 mum of human handling. " * In other words, the secret of 
 such manufacturing is the automatic machine. 
 
 'i^ Scientific American Supplement, 85:278. 
 
 2 E. F. Lloyd, Journal of Political Economy, 27:457. 
 
 3 lUd. 
 
 i System, Vol. 39, p. 355. 
 
Scientific Basis of Economics 79 
 
 This automatic process necessitates breaking up the man- 
 ufacturing of an article into a score, or into hundreds, 
 of minute, separate stages. Bach stage requires a distinct 
 sort of automatic machine treatment. The treatment of each 
 stage is standardized and in this form can be repeated mil- 
 lions of times without variation. For example in the can- 
 ning process the cans are filled automatically by one 
 machine. An automatic capper hermetically seals the cans. 
 The cans are carried from filler to capper by an automatic 
 conveyor. ' ' The capping girl sits close to the red hot seal- 
 ing irons, dropping a cap on each can as it is carried swiftly 
 by."^ "Without touch or aid of human hand, an auto- 
 matic machine produces complete one-dram bottles at the 
 rate of 165 per minute."^ Of the 30 operations required in 
 the manufacture of farm machines, one operation requires 
 a man to feed sheets of metal into a machine which cuts 
 them into a particular form at the rate of 20,000 per day."^ 
 The automatic switchboard is fast eliminating the tele- 
 phone "central." Automatic machinery has displaced 
 human effort in many parts of office practice, — in typing, 
 sorting, scaling, classifying, filing, addressing, computing 
 figures and keeping records. The "Webb press for news- 
 paper printing turns huge cylinders of paper into finished 
 news sheets at the rate of 288,000 eight-page papers per 
 hour. Ten operatives are required to handle the gigantic 
 contrivance, but the increase of production per worker over 
 that of the operator of Benjamin Franklin's printing press 
 is about 8,000 times.* The achievements of the automatic 
 machine are often uncanny in their imitation on a grand 
 scale of the skill of the human hand and brain. They are 
 the typical mechanical facts of the present economic age 
 and they are daily being extended in new and ingenious 
 ways to all branches of industrial production. They 
 represent standard quality of products, vastly increased 
 quantity of output, and large scale production at minimum 
 cost. This development is nowhere better represented than 
 
 1 Goldmark, "Fatigue and Efficiency," p. 61. 
 
 2 United States Tariff Commission Report, 1918. 
 
 3 C. H. Parker, Atlantic Monthly, Vol. 125, pp. 12-22. 
 * Scientific Manufacturer's Supplement. 85:278. 
 
80 Scientific Basis of Economics 
 
 in the steel industry, wliere "the pig casting machines, 
 the open hearth charging machines, not to mention the 
 blast furnace, skip hoist, the electric crane, and the me- 
 chanically operated rolling mills have revolutionized the 
 industry. For the most part the steel -worker of to-day 
 is simply moving levers, or watching and waiting while the 
 heat and machinery do the work."^ 
 
 The automatic principle is capable of all degrees of 
 application. Some machines which require real skill and 
 mechanical training are commonly called "semi-auto- 
 matic." Others reduce the automatic principle to a mini- 
 mum, and rely primarily upon a high-grade vocational 
 training. In certain operations the hand tool is still neces- 
 sary. But the automatic principle runs through most 
 mechanical processes in some form or other. The original 
 industrial revolution was attributed to the invention of 
 machinery and the use of power; the automatic machine 
 of the last twenty years or so is working out what amounts 
 to a second industrial revolution. It bids fair to increase 
 the productive power of the nation above its record of 
 twenty years ago by a much larger ratio than the original 
 industrial revolution did over its preceding stage. 
 
 Transportation 
 
 Just as power and machinery are indispensable in the 
 economic order, so a third factor, transportation, may claim 
 indispensability. Machinery and power have to be con- 
 centrated in small circles of industrial activity. Then the 
 output has to be distributed on a nation-wide or world- 
 wide scale. In a general way, this importance of transpor- 
 tation is obvious and axiomatic. 
 
 But transportation has become an economic problem of 
 the first magnitude. Transportation by railroad has been 
 strained to the breaking point.^ In spite of 230,000 miles 
 of railroad track, bearing 2,500,000 freight cars, and 30,- 
 000 freight locomotives, railroad transportation, at times 
 of great business activity, comes perilously near to break- 
 
 1 Industrial Management, January 1, 1921, p. 63. H. B. Drury, 
 Three Shift Systeim, address before Taylor Society. 
 
 2 Scientific American, October 30, 1920, p. 440. 
 
Scientific Basis of Economics 81 
 
 down. Upwards of one-tliird of all freight carried is coal. 
 To reduce this huge burden, electricity is being called to 
 the rescue. A super-power zone is likely to be developed 
 within the next few years in the general Boston to Wash- 
 ington district. In a district here comprising about two 
 per cent, of the area of the country, a large part of all 
 industrial activity is centered. By huge central stations, 
 coal energy at the mouth of the mine can be converted 
 into electric energy and transmitted, free from any freight 
 problem, for manufacturing uses, or electric locomotive 
 uses, thereby relieving the railroads from the equivalent 
 load of coal freight. The harnessing of water power by 
 electric generators will serve yet further to solve the prob- 
 lem. Into the heart of the problem, too, comes the motor 
 truck, often carrying its load in "fleets," and growing in 
 importance and use with amazing rapidity. Ocean trans- 
 portation creates the merchant marine problem for both 
 economists and statesmen to face, and the prospect of re- 
 ducing costs of shipping by substituting oil for coal as 
 driving energy has caused a sharp rivalry among the great 
 world powers to discover and possess the world's future 
 resources of oil. 
 
 The cheapest and most efSeient form of transportation 
 of petroleum has proved to be pipe lines. Such lines make 
 possible the pumping of oil from the Oklahoma oil wells to 
 the New Jersey refineries of the Standard Oil Company. A 
 grand total of approximately 34,000 mUes of pipe lines 
 provides the network for oil transportation over the 
 country. 
 
 With the developments of automatic and standardized 
 production in manufacturing processes, a new science of 
 intra-factory transportation has grown up. "In the aver- 
 age plant to-day from the time raw materials leave the 
 storehouse until they reach the finished product they are 
 actually being worked on less than one-third of the time, 
 while in certain industries the ratio is as low as one-sixth." ^ 
 This idleness occurs in the interval required to pass the 
 
 1 W. F. Merrill, "Industrial Management," LXI, pp. 261-265, April, 
 1921, 
 
82 Scientific Basis of Economics 
 
 material from machine to machine. Under a scientific 
 routing of the production, and an ordering of the processes 
 in natural sequence, the material is carried by conveyors, 
 belts, trolleys and trucks so that the intervals between ma- 
 chine operations are reduced to a minimum. Gaps, pauses, 
 delays, waits are eliminated. The material leaves the 
 storehouse and is transported mechanically to and from 
 each machine or workman in order of sequence. Lifting 
 and hauling by hand is done away with. Each specialized 
 machine operator performs his unit function with the ma- 
 terial as it passes his hands ; the next piece is automatically 
 at hand on the conveyor. Automobile manufacturing was 
 one of the first lines of industry to perfect the science, but 
 it has been taken up widely, and such industries as grocery 
 food products manufacturing, meat packing, mail order 
 handling, sheet metal products manufacturing, and boot 
 and shoe manufacturing take advantage of its methods. In 
 the last named industry, conveying has cut the time inter- 
 val of manufacture from raw material to finished product 
 from eighteen to less than five days. In textile mills, the 
 process of manufacture begins at the top story of the fac- 
 tory, and the product follows down from stage to stage, in 
 a continuous flow from machine to machine and floor to 
 floor, without any carrying by hand. The economy in 
 floor space, in time saved, in labor saved, is of the highest 
 significance for productive efiiciency. 
 
 A branch of this transportation problem has been the 
 problem of loading and unloading at terminals. A great 
 part of the life of a freight car is spent in idleness, wait- 
 ing to be loaded or unloaded, and mechanical facilities 
 for handling material at terminals reduces such periods 
 of idleness. A single city is said to have released 66,000 
 freight cars formerly used in local transfer and switching 
 service by utilizing, on a large scale, electric cranes, mo- 
 tor trucks, and conveyors. The loading of ships has at- 
 tained marvels of efficiency by mechanical contrivances in 
 the form of conveyors, hoisters, cranes, etc. Quick han- 
 dling of material has become a primary necessity in effi- 
 cient use of transport facilities. 
 
Scientific Basis of Economics 83 
 
 The demands for transportation of people are met for 
 the most part by three great types of machinery : the rail- 
 road is of course the standard means of long distance con- 
 veyance ; for local travel, subways, elevated and surface ear 
 lines are the chief reliance; and the past twenty years 
 has put America on wheels with the automobile. The aero- 
 plane is of value within limits, but has not yet justified 
 itself for wide-scale commercial uses. The correlation of 
 all these travel services affects in substantial ways the lines 
 of economic endeavor, the fields of new investment, and 
 the future labor question. 
 
 In a broad way, it may be said therefore that the trans- 
 portation tendency of the time is to utilize oil and electric 
 substitutes for coal in transportation, to utilize equip- 
 ment fully by increasing loading and unloading efficiency, 
 and to flood the country with the automobile. 
 
 Chemistry ^ 
 
 The science of chemistry has become, along with the sci- 
 ences of power, of machinery, and of transportation, one 
 of the indispensables in economic organization. The im- 
 portance of chemistry was beginning to be apparent be- 
 fore the World War, but it took the demands of the war 
 period to demonstrate beyond question the imperative im- 
 portance of the science in modern economic technique. 
 Most concerns now make use of chemical tests to determine 
 the quality of the material which enters into the productive 
 process. Steel, coal, copper, paint, wood, in fact almost 
 every commodity must, measure up to certain chemical 
 standards. Only by that means can the manufacturer be 
 sure of the standard quality of his finished product. The 
 chemical laboratory has become a necessary part of the 
 strategy of production. Some of the laboratories are of 
 such size and importance that they employ several hundred 
 chemists. Any conception of the industrial technique 
 
 1 For many of the judgments expressed on Chemistry, the author is 
 indebted to information and suggestions given by W. H. Nichols, 
 President of the Eighth International Congress of Applied Chem- 
 istry and Chairman of the Allied Chemical and Dye Company, and 
 by B. C. Hesse, Secretary of the Eighth International Congress. 
 
84 Scientific Basis of Economics 
 
 would be incomplete without an idea of the significance 
 of economic chemistry. 
 
 The war cut American manufacturers off from their 
 European source of dye supplies and forced American 
 chemists to work out processes by which America could in 
 large measure manufacture her own supply. "American 
 industries employing over two million men and women and 
 producing over three billion dollars' worth of product a 
 year are dependent upon dyes."^ Among such industries 
 are textile manufacturing, leather manufacturing, paper 
 making, paint and ink production. The dyes are a chemi- 
 cal by-product of the coal tar industry. The chemistry of 
 coal tar dyes is, therefore, an indispensable requisite in a 
 large proportion of our needful activities in peace and in 
 war. Artificial daylight as the outcome of the chemical 
 combination of gases and a simultaneous electrical process 
 promises to supply all the properties of daylight. Such an 
 achievement will have many important consequences. It 
 will make work more safe, will relieve the strain on work- 
 ers ' eyes, will reduce the amount of spoiled product, will 
 improve the quality of workmanship, and will increase 
 production. In industries requiring night work or the 
 three shift system, the service of chemically produced light 
 will obviously be of highest importance. 
 
 Synthetic ammonia and nitric acid derive their nitrogen 
 from the atmosphere. Before the war America drew her 
 nitrogen from the nitrate beds of Chile, but the war forced 
 American chemists to produce nitrogen within her own 
 borders. The nitrogen products are the source of fertiliz- 
 ers for agriculture, of explosives for mining, constructioii 
 work, and war needs. They are necessary in the manu- 
 facture of a number of important products used in every- 
 day economic life. 
 
 In the manufacture of steel, chemistry has revolution- 
 ized the productive process. The open hearth process of 
 steel manufacture has gradually superseded the Bessemer 
 process by virtue of the chemical advantage of different 
 alloys. The open hearth process uses a high grade of 
 iSlosson, "Creative Chemistry," p. 83. 
 
Scientific Basis of Economics 85 
 
 ferromanganese, whereas the Bessemer process uses a low 
 grade manganese alloy.^ In the manufacture of high speed 
 tools, such as lathes, milling cutters, reamers, hack-saws, 
 etc, tungsten alloys are employed. It was Andrew Car- 
 negie who declared that chemistry "was the agency, above 
 all others, most needful in the manufacture of iron and 
 steel." 
 
 The oil industry owes its existence to chemistry. Crude 
 oil is not used much directly, but after a refining process 
 in which chemical science plays a controlling part the 
 crude oil becomes converted into a wide variety of valuable 
 materials. Such materials include local anesthetics, gaso- 
 line for internal combustion engines, naphthas, kerosenes 
 for light and for farm fuels, lubricating oils and greases, 
 waxes, and paraffines, surgical dressings, petroleum coke 
 for battery carbons, road oils to lay the dust, asphalts for 
 paving, and fuel oils used to generate manufacturing and 
 transportation power.^ 
 
 Copper has become indispensable since the electrical in- 
 dustry was established. Most of the copper now produced 
 is used in that industry.^ The electrolytic refining of cop- 
 per is an electro-chemical process and is responsible for the 
 development of the copper industry, and indirectly, by 
 making possible large supplies of copper wire and other 
 copper electrical equipment, for the momentous develop- 
 ment in electrical engineering. 
 
 The rubber industry has become an enterprise of the 
 first magnitude and the process of conversion from the 
 raw material to the finished rubber is dependent upon 
 chemical guidance. America's automobile industry is 
 made possible by the chemistry of rubber. The vulcaniza- 
 tion process is a tribute to chemical science. Synthetic 
 rubbers are a scientific realization, but as yet are not con- 
 sidered as cheap or as good as natural rubber. 
 
 Practically every industry in the country requires the 
 use of sulphur in some form. About two hundred separate 
 
 iSee Eipley, "Trusts, Pools and Corporations," pp. 154-158. 
 
 2 "United States Geological Survey, World Atlas of Commercial 
 Geography," Part I, 1921, p. 17. 
 
 » "World Atlas of Commercial Geography," Part I, 1921, p. 39. 
 
86 Scientific Basis of Economics 
 
 plants in the United States are engaged in the manufac- 
 ture of sulphuric acid. "Hundreds of thousands of tons 
 of sulphuric acid is consumed every year in making fer- 
 tilizers and tens of thousands of tons in refining petroleum, 
 in pickling and galvanizing steel, and in making chemicals 
 and drugs. " ^ If there is any one chemical element which 
 holds industry at its mercy more than any other, it is 
 sulphuric acid. 
 
 "Dishes and utensils of platinum are absolutely neces- 
 sary in aU chemical laboratories, and upon their laborato- 
 ries all great industries are dependent for guidance."^ 
 
 It is undesirable to go into exhaustive details on the 
 economic uses of chemistry. The science plays a neces- 
 sary part in the manufacture of perfumes and flavors; 
 cellulose is a chemical product, valuable in the manufac- 
 ture of paper goods, laces, cloths, etc. Chemistry distills 
 wood into crude alcohol. It lies behind the production 
 of gums and resins. The enumeration could be extended 
 indefinitely. 
 
 One of the most significant contributions of chemical 
 science to production has been in the utilization of by- 
 products and waste materials. The immense importance 
 of by-products in the coal industry has already been men- 
 tioned. It has been reported that the utilization of wastes 
 in the meat packing industries is the means by which those 
 industries maie substantial profits. Eadium has been 
 manufactured out of materials that were formerly con- 
 sidered useless junk. Slosson claims that two-thirds of 
 the cotton crop is cotton seed. Formerly it was thrown 
 away. Chemical discoveries have made possible the utili- 
 zation of the seed for human and animal foods, for oil and 
 lard compounds, for fertilizers, and for many other pur- 
 poses. 
 
 The scientific technique of production is clearly depen- 
 dent upon the discoveries of chemistry. There seems little 
 doubt but that chemistry has a yet more important con- 
 
 1 "World Atlas of Commercial Geography," Part I, 1921, p. 57. 
 Also see United States (Jeological Survey Bulletin, No. 666, p. 19 
 
 2 Bulletin, No. 666, p. 35. 
 
Scientific Basis of Economics 87 
 
 tribution to make in the future. The possibilities of 
 cheapening the cost of production, of inventing new goods 
 for the satisfaction of human wants, and of increasing and 
 improving the country's output are wrapped up in large 
 measure with the future of chemical science. 
 
 Geology 
 
 The development of national resources is indebted to 
 the science of geology.^ Formerly, the location of indus- 
 tries was decided in very large measure by the proximity of 
 raw materials and markets, but in various lines of in- 
 dustry to-day, "a New England workshop may draw its 
 materials from the five continents and ship its products 
 around the world. ... It is no longer enough for us 
 to make an inventory of the mineral wealth of the United 
 States; we must supplement that inventory by a broad 
 understanding of world demand and supply. . . . Knowl- 
 edge of what the world contains is plainly the best basis for 
 discussing public policy and planning private business."^ 
 
 Economic geology furnishes surveys of the location of 
 the earth's resources and estimates of their amount and 
 value. By scientific analysis of rock formations and care- 
 ful calculation of underground resources, geology supplies 
 the business executive with invaluable information in the 
 planning of business undertakings. To know where beds 
 of iron ore of various grades exist and approximately their 
 underground area, to have a map of the resources of differ- 
 ent grades of coal, to have world diagrams of the important 
 oil supplies, to have knowledge of the countries containing 
 the future supplies of silver, gold and other precious 
 minerals, — these are a few illustrations of the fundamental 
 value of geological information in economic calculations. 
 
 A more specific illustration of the usefulness of geological 
 science in economic planning is contained in the geology 
 of oil. Petroleum has become the "preferred fuel of the 
 twentieth century." Fuel oil and gasoline are now com- 
 
 1 G. 0. Smith, "The Strategy of Minerals." 
 
 2 "United States (jeological Survey, World Atlas of Commercial 
 Geography," Part 1, 1921, Introduction. 
 
88 Scientific Basis of Economics 
 
 mercial necessities and national leadership on the sea and 
 in the air has come to depend absolutely upon the pos- 
 session of adequate supplies of these two commodities. 
 Petroleum supplies have been explored and surveyed all 
 over the world. The findings of the geologists indicate 
 that the world's supply of petroleum during the next dec- 
 ade will come mainly from South American countries 
 that border the Caribbean Sea, from Mexico and from 
 Mesopotamia and Persia. International rivalries for con- 
 trol of these sources are conspicuous in political and econo- 
 mic statesmanship among the Great Powers. Knowledge 
 of the probable duration and capacity of the richest oil 
 wells is indispensable in all such deliberations. 
 
 Economics is thus obliged to take into its reckoning the 
 findings of geological scientists, and their discoveries are 
 an integral part of the mechanical and scientific technique 
 of modern industry. 
 
 Electricity 
 
 Many of the contributions of electrical science have al- 
 ready been mentioned in this chapter. Electrical engineer- 
 ing has reshaped many manufacturing processes, and has 
 made possible new production achievements which were 
 considered impossible less than a generation ago. 
 
 Electricity has come into almost universal use for light- 
 ing purposes. Electric lighting has come to be a science 
 in itself. The flaming arc light, the electric mercury 
 lamp, the incandescent bulb, and the ordinary electric arc 
 are the most important forms. By proper adaptation of 
 these forms to the particular needs of factories, offices, 
 streets and households, the engineers are able to furnish' 
 reasonable comfort, safety and efficiency. 
 
 The value of electricity for power has in part been re- 
 ferred to previously. Electric cranes for hoisting ma- 
 terials, electric trucks, electric mining machinery, electric 
 ventilators, electric locomotives, electric railways, electric 
 automatic machines, — these are a few of the more impor- 
 tant power adaptations. It is estimated that between the 
 years 1914 and 1919 the amount of electrical energy sold 
 
Scientific Basis of Economics 89 
 
 for power consiunption in the country nearly trebled. Al- 
 ready there are over one million industrial motors served 
 by central power stations. One of the largest automobile 
 manufacturing plants has found it advisable to install in 
 all new construction an iridividual motor for each machine. 
 "The increased cost of energy, belting and shafting, the 
 need of better factory lighting, the advantage of having 
 better working conditions and the responsibility imposed 
 on manufacturers by workmen's compensation laws are 
 among the chief reasons which led to the almost universal 
 adoption of individual drive by this company." For both 
 manufacturing and transportation purposes, electric power 
 has rapidly increased in application during the last ten 
 years. Its possibilities for the future are of primary sig- 
 nificance. 
 
 Electric heating is of increasing use in manufacturing 
 processes. The electric furnace for manufacturing steel, 
 especially the high grade steel products, is a practicable 
 realization. Electric welding has been widely adopted. 
 Electric treatment in the refining process of a number of 
 minerals has proved its value. 
 
 Electric contrivances for home convenience and domestic 
 work-saving have been the object of a great deal of in- 
 ventiveness. Electric cookers, washets, ironers; electric 
 vacuum sweepers and cleaners, — ^these with a long list of 
 other inventions, have stimulated large and growing manu- 
 facturing enterprises in the electrical field. 
 
 Electric communication is of the utmost utility in the 
 present delicate and intricate economic organization. The 
 ability to flash news from continent to continent determines 
 huge financial investments and the ability of the chief ex- 
 ecutives of the large scale combinations of plants to keep 
 in touch with the activities of all subsidiary branches and 
 to direct their affairs smoothly and efficiently rests upon 
 the telephone and telegraph. A strike of telegraph and 
 telephone operators would be virtually as serious for the 
 country as a strike of the railroad workers themselves. 
 There are over thirteen million telephone stations in the 
 United States, 
 
90 Scientific Basis of Economics 
 
 Many large corporations have found electricity of such 
 importance that they have established laboratories for elec- 
 trical research. A conspicuous example is the American 
 Telephone and Telegraph Company whose laboratories en- 
 gage thirteen hundred scientists ■ and engineers to devote 
 their time exclusively to research and development in the 
 telephone art. 
 
 The financial consequences of the rise of electrical in- 
 dustries are considerable. The total output of all electrical 
 materials in 1920 is estimated at about $2,000,000,000. 
 Moreover, it seems a reliable estimate that by 1930 the 
 electrical industries will require upwards of $10,000,000,- 
 000 for new capital in the form of new plants and manu- 
 facturing facilities. In its various relations, therefore, 
 electricity has come to occupy an indispensable position in 
 the technique of the industrial process. 
 
 The Science of Economic Organization 
 
 So numberless are the factors in the mechanical tech- 
 nique, so various are they in their bearing upon different 
 parts of the economic process, so indispensable are they 
 to the operation of the system, and so interdependent are 
 all of their functions in the scheme of things, that a 
 science of organi2;ation has become imperative. Justice 
 Louis Brandeis of the United States Supreme Court has 
 observed that, "The field of knowledge requisite to the 
 more successful conduct of business has been greatly widened 
 by the application to industry not only of chemical, 
 mechanical, and electrical science, but also the new science 
 of management; by the increasing difficulties involved in 
 adjusting the relations of labor to capital ; by the necessary 
 intertwining of social with industrial problems; by the 
 ever-extending scope of state and federal regulation of 
 business. . . . This new development is tending to make 
 business an applied science. ' ' ^ 
 
 This applied science has a number of important branches. 
 John Dewey states, "The most important occupations 
 of to-day represent and depend upon applied mathe- 
 1 "Business a Profession," pp. 2-3. 
 
Scientific Basis of Economics 91 
 
 matics, physics and chemistry." The whole science of or- 
 ganization in the strictest sense involves the correlation 
 and administration of countless mechanical and human 
 factors. The engineer is the typical scientific expert in 
 the field. There are in the United States, it is estimated, 
 upwards of 200,000 engineers of one kind and another as- 
 sociated in engineering societies. Twenty-one major socie- 
 ties are united in The Federated American Engineering 
 Societies, and utilize their central association for the pur- 
 pose of advancing the sciences of technical engineering. 
 Typical of the branch societies are the mechanical, the 
 electrical, the mining, the chemical and the industrial 
 engineers. 
 
 A capital illustration of the possibilities of engineering 
 science is found in the achievements of F. W. Taylor in 
 improving the art of cutting metals. He carried on up- 
 wards of 50,000 experiments over a period of twenty-six 
 years. The real problem was "how to remove chips from 
 a casting or a forging, and how to make the piece smooth 
 and true in the shortest time." The experiments 
 developed twelve variables which involved a very in- 
 tricate mathematical solution. These variables related 
 to (1) the hardness of the metal, (2) the chemical composi- 
 tion, (3) the thickness of the shaving of metal, (4) the 
 shape of the cutting edge, (5) the use of a cooling stream 
 of water on the cutting tool, (6) the depth of the cut, 
 (7) the duration of the cutting process, (8) the lip and 
 clearance angles of the tool, (9) the elasticity of the work 
 and of the tool, (10) the diameter of the material being cut, 
 (11) the pressure of the chip or shaving on the cutting 
 edge, (12) the pulling power and the speed and feed 
 changes of the machine. An expert mathematician might 
 be able to solve a single problem of variables in from two 
 to six hours. This would take too long for practical pur- 
 poses and, of course, the average worker would be any- 
 thing but an expert mathematician. A way of simplifying 
 the mathematical calculation was sought, so that the aver- 
 age workman could adjust the speed and feed of his 
 machine quickly and accurately. The whole problem was 
 
92 Scientific Basis of Economics 
 
 from time to time presented by Taylor to one after another 
 of the noted mathematicians of the country. The mathe- 
 maticians declared the problem hopeless of solution, but 
 finally some experts under Taylor's supervision discovered 
 the principle of the slide rule. "By means of this slide 
 rule, one of these intricate problems can be solved in less 
 than a half minute by any good mechanic, whether he 
 understands anything about mathematics or not, thus mak- 
 ing available for everyday, practical use the years of ex- 
 perimenting on the art of cutting metals." Thereafter, 
 "with the aid of a slide rule ... it was possible for the 
 scientifically equipped man, who had never before seen 
 these particular jobs, and who had never worked on this 
 machine, to do work from two and one-half to nine times 
 as fast as it had been done before by a good mechanic who 
 had spent his whole time for some ten or twelve years in 
 doing this very work upon this particular machine."^ 
 
 Technical engineering is obviously necessary for the ef- 
 fective co-ordination of all the factors of mechanical and 
 applied science. The multitudinous details have to be 
 related, the machines properly arranged, inventions and 
 discoveries adequately sought for, the power facilities effi- 
 ciently connected, the mechanical equipment suitably in- 
 stalled, and all brought into a single clock-work of efficient 
 functioning. 
 
 Another branch of the applied science of management 
 is human engineering. The task of fitting men to machine 
 work, of securing interest in work and developing morale 
 and loyalty, of stimulating motives and making the ma- 
 chine technique develop rather than retard the human 
 personality, — the whole task of handling men in their in- 
 dustrial pursuits has evoked the science of industrial, or 
 human, relations. It is here that the principles of psychol- 
 ogy become of primary value, for the problem is essentially 
 one of understanding human behavior, and directing human 
 conduct. 
 
 A further branch includes all the other activities of 
 management which fit the technology of the productive 
 
 iF. W. Taylor, "Principles of Scientific Management," pp. 99-113. 
 
Scientific Basis of Economics 93 
 
 equipment and the behavior of the human equipment into 
 the price system of the economic order. The ownership of 
 the mechanical equipment, the methods of remunerating 
 the human equipment, the structure and operation of the 
 market in all of its ramifications of buying and selling, 
 the maintenance of the credit system of banking and in- 
 vestment, the adjustments of international commerce and 
 finance, — ^all of these must be statistically measured, 
 charted, judged, forecasted, recorded, and related. The 
 interconnections of all the parts, the indispensable adjust- 
 ments from the beginning to the end of the whole process, 
 the co-ordination of methods and the formulation of har- 
 monious principles, require the most careful application of 
 ecientific methods to the general unifying problem of man- 
 agement. The mechanical and scientific basis of modem 
 production would result in utmost chaos were it not for 
 the steady unifying power of the applied science of maneige- 
 ment which holds all parts of the technological universe in 
 their proper courses. 
 
 Psychology of Engineers and Inventors 
 
 The motives of the men who have created the mechanical 
 inventions and made the scientific discoveries which under- 
 lie the whole technology of the economic system are for 
 the most part of a distinct type. The paramount motives 
 of inventors and scientists differ in no small degree from 
 the paramount motives of the owners of the economic 
 equipment. In the former, the constructive impulse, the 
 creative bent, the instinct of curiosity are particularly 
 strong. Unflagging scientific curiosity impels men to 
 protracted and exhaustive research until a new scientific 
 law is discovered, or a new chemical element revealed, 
 or a new electrical principle arrived at. The motives un- 
 derlying discovery and invention are comprehensively 
 stated by a vice president of the American Telephone and 
 Telegraph Company as follows: "Pure scientific research 
 is conducted with a philosophic purpose, for the discovery 
 of truth, and for the advancement of learning. . . . The 
 work of the pure scientists is conducted without any utili- 
 
i94 Scientific Basis of Economics 
 
 tarian motive, for as Huxley says, 'that wMch stirs their 
 pulses is the love of knowledge and the joy of discovery 
 of the causes of things .... the supreme delight of ex- 
 tending the realm of law and order ever farther toward the 
 unattainable goals of the infinitely great and the infinitely 
 small, between which our little race of life is run.' The 
 pure scientists are the advance guard of civilization. By 
 their discoveries, they furnish to the engineer and indus- 
 trial chemist and other applied scientists the raw material 
 to be elaborated into manifold agencies for the ameliora- 
 tion of the condition of mankind. ... I do not say this 
 because a new incentive is necessary for the pure scientist, 
 for in him there must be something of the divine spark and 
 for him there is no higher motive than the search for the 
 truth itself."^ A National Research Council has been 
 formed in the United States for the sake of organizing 
 and promoting research along scientific lines. Through the 
 systematized effort of this scientific body and through the 
 individual investigations scattered over the country, the 
 technology of the productive system is steadily improved 
 and enlarged. The solution of problems of efficiency, 
 safety, health, and wealth rests in fundamental ways upon 
 the progress thus achieved in industrial and scientific re- 
 search.^ 
 
 A preponderant creative impulse is likewise obvious in 
 the lives of the general run of inventors. In an original 
 study of the psychology of inventors, F. W. Taussig re- 
 marks, "One thing stands out conspicuously: the race 
 of contrivers and inventors does obey an inborn and ir- 
 resistible impulse. Schemes and experiments begin in 
 childhood, and persist so long as life and strength hold. 
 It matters not whether a fortune is made or pecuniary dis- 
 tress is chronic : there is increasing interest in new dodges, 
 unceasing trial of new devices. ... It would seem that no 
 satisfaction from pecuniary success or worldly recognition 
 equals the absorbed interest of trial, experiment, novel 
 
 1 J. J. Carty, Bulletin No. 8, National Eesearch Council, February 
 6, 1920, p. 5. 
 
 2 Yerkes, "The New World of Science," pp. xii-xiii. 
 
Scientific Basis of Economics 95 
 
 problems, happy solutions."^ Inventiveness is not, how- 
 ever, an unmixed motive. It is intertwined with others 
 in a wide variety of combinations, depending upon the 
 individual instinctive equipment and upon the experience 
 of the personality. The desire for public service, for the 
 general welfare, for the national defense, frequently is 
 prominently mixed with inventiveness. The desire for 
 profit from the invention is usually present and often plays 
 a vital part in directing the course of the inventive in- 
 stincts. It is a common matter for the inventor to give his 
 time and energy to that problem which promises the larg- 
 est money reward. Patent rights are jealously guarded. 
 Yet the inventor is notoriously lacking in business sagacity, 
 and is the easy victim of unscrupulous contractors. The 
 illustrations are frequent where the inventor is persuaded 
 to. sell his invention for a fraction of its real value. Busi- 
 ness ventures by professional inventors suffer an abnor- 
 mally high degree of failures. The hope of pecuniary 
 gain is indispensable to call forth the most effective 
 inventiveness of men in the present economic organization. 
 But underneath, the major, propelling instinctive factor 
 is the pure love of making something new. That class of 
 men who have given society its stock of mechanical inven- 
 tions and processes, prove the power and vigor of the 
 motive of creativeness. 
 
 The motives in those classes of engineers which control 
 and manage and direot the whole mechanical and scientific 
 technique exhibit essentially the same combination of in- 
 stinctive dispositions. Engineers are not indifferent to 
 high salaries, and generally speaking, seek for the position 
 which offers the highest pecuniary reward. Nor are they 
 indifferent to considerations of the welfare of the country, 
 and the means of promoting it. But the pivotal instinctive 
 energies which have been most conspicuous among the en- 
 gineers of all classes are those of constructive achieve- 
 ment, productive efficiency, and advance in scientific 
 management. The psychology of this group is reflected in 
 a declaration of principles made by the leading industrial 
 1 F. W. Taussig, "Inventors and Money Makers," pp. 21-22, 48-54. 
 
96 Scientific Basis of Economics 
 
 engineers of the United States in 1919. This declaration 
 reads in part as follows : "The prevalent unrest in industry- 
 results from a system which permits the acquisition of 
 wealth for which no adequate service has been rendered 
 and tolerates special privilege with the resulting exploita- 
 tion of men, women and children. 
 
 "Great powers have been used arbitrarily and auto- 
 cratically to exact unmerited profit or compensation by 
 both capital and labor. This policy of exacting profit 
 rather than rendering service has wasted enormous stores 
 of human and natural resources and has put in places of 
 authority those who seek selfish advantage regardless of the 
 interests of the community. "^ The conduct of the en- 
 gineers as a class demonstrates the practicability in 
 economic affairs of drawing upon the instincts of con- 
 structiveness, achievement, public service, and economic 
 usefulness. "Wherever pecuniary motives come sharply in 
 conflict with these motives, they have been curbed to a 
 striking degree by the profession of engineering. "Wher- 
 ever pecuniary motives could go hand in hand with these 
 other motives, the combination has been made, with a gain 
 in intensity and in scope of achievement. 
 
 The possibility of an overhauling of economic motives is 
 thus seen to be one not altogether theoretical and specula- 
 tive. At the basis of the economic order rests the 
 mechanical and scientific technique. It has been invented, 
 step by step, and is steadily organized and managed by 
 types of men in whom motives of constructiveness, curios- 
 ity, achievement and usefulness are primary. The careful 
 observation of the distinguished English economist, Alfred 
 Marshall, is that "it is true that the best energies of the 
 ablest inventors and organizers of improved methods and 
 appliances are stimulated by a noble emulation more than 
 by any love of wealth for its own sake,"" 
 
 Those people who are accustomed to insist that unre- 
 stricted and unlimited profit-making is the alpha and 
 omega of business psychology, and who prophesy with em- 
 
 ''■ Industrial Management, November, 1919, Vol. LVTII, p. 419. 
 2 "Principles of Economics," 1916 edition, p. 14. 
 
Scientific Basis of Economics 97 
 
 phatic certainty that any attempt to mold economic in- 
 stitutions and social standards in forms calculated to put 
 motives of constructive achievement to the front is a 
 move toward making business motives anemic and effete, 
 face some basic facts in the psychology of inventors and 
 engineers which do not square with their theories. En- 
 gineers, administrators, organizers, inventors are a liv- 
 ing demonstration of the virility and vigor of men act- 
 ing under a high degree of constructive and creative 
 motivation, and there seems no doubt that executives 
 and managers of busmess establishments are undergoing 
 a gradual evolution of a similar sort in their motivation. 
 The forceful words of C. H. Cooley are directly to the 
 point: "One of the main forces in keeping economic 
 motive on a low moral level has been the doctrine that 
 selfishness is all we need or can hope to have in this phase 
 of life. Economists have too commonly taught that if 
 each man seeks his private interest the good of society 
 will take care of itself, and the somewhat anarchic con- 
 ditions of the time have discouraged a better theory. In 
 this way we have been confined in a pernicious state of 
 belief and practice, for which discontent, inefficiency, and 
 revolt are the natural penalty. A social system based on 
 this doctrine deserves to fail. ... It is false even as 
 economics, and we shall never have an efficient system until 
 we have one that appeals to the imagination, the loyalty, 
 and the self-expression of the men who serve it. . . . There 
 is a trend throughout society to substitute higher motives 
 for lower, and this is not only because the former are 
 more agreeable, but because they are more effectual."^ 
 
 Certainly nothing could be of deeper significance for the 
 future of economic welfare than a gradual evolution of 
 general business instincts and motives along the lines pre- 
 valent in the men who invent and administer the techni- 
 cal foundations of all economic life, — the engineers, scien- 
 tists and inventors. Among these men, non-pecuniary 
 motives are for the most part in the ascendency, and bring 
 about the solidly constructive accomplishments of the 
 1 "Social Process," pp. 132, 135, 136. • 
 
98 Scientific Basis of Economics 
 
 mechanics and science of production. Pecuniary motives 
 are present and mix constantly, but the other motives are 
 also fundamental. Their practicability is thereby demon- 
 strated. 
 
 EEFERENCES 
 
 BoGART, E. L.: Economic History of the United States, pp. 356- 
 
 400 
 Callender, G. S. : Economic History of the United States, pp. 
 
 471-487 
 MacVey: Modern Industrialism, pp. 3-19; 133-156 
 Veblen, T.: Theory of Business Enterprise, Chapter I. 
 Abstract of Census of MANUPACTtmiNG, 1914 
 Report of United States Bureau of Mines, 1920 
 POLAKOV, W. N.: Industrial Management, Sept., 1920, pp. 234- 
 
 239 
 Scientific American Supplement, 85: 278 
 Goldmark: Fatigue and Efficiency 
 
 Lloyd, E. F.: Journal of Political Economy, Vol. 27, p. 457 
 United States Tariff Commission Report, 1918 
 Parker, C. H. : Atlantic Monthly, Vol. 125, pp. 12-22 
 Drury, H. B.: Three Shift System, Industrial Management, 
 
 Jan. 1, 1921, p. 63 
 Marshall, L. C: Readings in Industrial Society, pp. 417-467 
 Merrill, W. F.: Industrial Management, Vol. 6, pp. 261-265 
 Slosson: Creative Chemistry 
 United States Geological Survey, World Atlas of Commercial 
 
 Geography, Part I, 1921 
 United States Geological Survey, Bulletin No. 66 
 Taylor, F. W.: Principles of Scientific Management 
 Carty, J. J.: Research Council, Bulletin No. 8, 1920 
 Yerkes: The New World of Science 
 Taussig, F. W. : Inventors and Money Makers 
 Marshall and Lyon: Our Economic Organization, Chapters 6, 
 
 8-14, 23-25 
 Thompson, Holland: The Age of Invention 
 Marsh: The Evolution of Automatic Machinery 
 Marshall, A.: Industry and Trade, Books I and II 
 Reitell, Chas. : Journal of Political Economy, Vol. 26, p. 274 ff. 
 Friedman, E.: American Problems of Reconstruction, pp. 89- 
 
 150 
 Lippincott: Economic Development of the United States 
 Adams, H. C: Description of Industry 
 Keir, M. : Manufacturing Industries in the United States 
 Fiske, B. a.: Invention: The Master Key to Progress 
 
CHAPTBE VI 
 LABOR: ITS PART IN PRODUCTION 
 
 The objective of labor activity in industry is the pro- 
 duction of goods or the rendering of services. The goods 
 may be intended either for immediate consumption or for 
 the production of other goods, and the services may vary 
 from those rendered by a domestic servant to those ren- 
 dered by a factory workman. ^ 
 
 The chief factors in production are land, labor, capital 
 and management. The distinguishing function of labor is 
 the operation of machinery, and the handling of material. 
 This function of labor is performed under the direction and 
 guidance of management. The material and machinery 
 are the capital which is ultimately under the control of 
 the owners. Labor's part in production is distinctly con- 
 fined to the following out of plans, methods, and processes 
 under the guidance of powers higher up. It is not labor's 
 function to decide whether new machinery shall be in- 
 stalled, or who shall own the machinery, or where the ma- 
 terial shall come from or to whom the finished product 
 shall be sold. Labor feeds raw material into the machine, 
 lifts the levers and fingers the controls, takes the product 
 away from the machine and either by hand or by the 
 manipulation of further machinery transports the machine- 
 made product to places where it can be used. 
 
 This restriction of labor 's function was carried to an ex- 
 treme in what has come to be known as Scientific Manage- 
 ment. To quote F. W. Taylor, ' ' In almost all the mechanic 
 
 1 "Labor" has come, by general usage, to mean productive effort 
 which involves a substantial amount of manual and muscular energy. 
 This usage of the term does not imply that the mental energy 
 expended by management is not labor ; nor does it imply that laborers 
 are lacking in mental capacity. The generally accepted meaning of 
 the term is the one in use in the analysis of this chapter. 
 
 99 
 
100 Labor: Its Part in Production 
 
 arts, the science which underlies each act of each work- 
 man is so great and amounts to so much that the work- 
 man who is best suited to actually doing the work is in- 
 capable of fully understanding this science without the 
 guidance and help of those who are working with him or 
 over him, either through lack of education or through in- 
 sufficient mental capacity." In the carrying out of this 
 -division of function, the part of management is to plan, 
 to invent, to conceive new ways of doing things, to plot 
 new arrangements of machinery, to devise the science of 
 production from beginning to end. At the same time, the 
 part of labor is unquestioning acceptance of the technology 
 worked out by management. Labor's part is primarily 
 muscular and only secondarily mental. Labor's part is to 
 use the fingers, the hands, the arms, the eyes, the ears, in 
 lifting, watching, pushing, pulling, carrying and hand- 
 ling. In many economic processes, this division o^* function 
 is carried to such an extreme that the imagination and 
 thought of labor is not only unnecessary but is apt to in- 
 terfere with the efficient operation of the machine. In 
 other processes, the mental tax upon the laborer is still 
 considerable, but even in these cases, the broader, the more 
 fundamental features of the science of production are de- 
 signed and laid down for him by engineers and managers. 
 
 The mechanical processes which labor carries through 
 involve endless repetition. The operation of the automa- 
 tic machine requires that the laborer shall touch the same 
 lever in the same way, at the same speed, several thousand 
 times per day. Where the machinery has not become com- 
 pletely automatic, the repetitive motions which the laborer 
 performs are the chief features of his part of the oper- 
 ation. The inevitable consequence of repetition is monpt- 
 ony. The incessant performance of the same motion day 
 in and day out, thousands and tens of thousands of times, 
 leaves scant room for variety, newness, imagination, or 
 originality. The work becomes irksome, fatiguing, xmin- 
 teresting, monotonous. ^ 
 
 iSee S. H. Slichter, "The Turnover of Factory Labor," pp. l88- 
 191. 
 
Labor: Its Part in Production 101 
 
 This depressing monotony is not, however, the outcome 
 of all automatic inventions. The best cure for monotony 
 and dullness is often not less machinery but more machin- 
 ery. The processes of production which involve great mus- 
 cular exertion under high temperature, or in an atmosphere 
 saturated with obnoxious gases, can be reduced to auto- 
 matic treatment with great advantage to the laborer. A 
 careful investigation of steel manufacturing processes has 
 shown that, formerly, men were on the twelve-hour day, 
 but worked only six or seven hours of that period. During 
 the remainder of the period the workers were waiting for 
 various processes to be finished. Now, with machinery and 
 science in control of the blast furnaces and the conveying 
 operations, the hard, gruelling labor is reduced to a mini- 
 mum and men are responsible for watching and guiding, 
 by the manipulation of levers and the pushing of electric 
 buttons, vast and important processes in the making of 
 steel. The observations of T. N. Carver led to the con- 
 elusion that the automatic machinery for the manufacture 
 of shoes imposes less monotony and drudgery upon the ma- 
 chine operative than was formerly experienced by the old- 
 fashioned cobbler laboriously making a single pair of shoes. 
 With adequate regard for such facts, it remains true, 
 however, that the general consequence of the automatic 
 mechanical principle has been a marked increase in monot- 
 ony for laborers. 
 
 Much of the mechanical process when carried on auto- 
 matically makes unnecessary a high degree of skill or in- 
 genuity on the part of the operative. The wide studies of 
 E. F. Hoxie disclosed that "the workman no longer knows 
 his trade as he did under the handicraft system. Modern 
 capitalistic and machine industry has progressively special- 
 ized him . . . till now the average workman knows only 
 one or a few minute processes connected with any enter- 
 prise and has no means of broadening his knowledge." 
 In cases where this tendency reaches its more extreme de- 
 velopment, the worker's duty in standing at the machine 
 is so simplified that even the most ignorant workers can- 
 not err. Such machines are termed "fool proof." Recog- 
 
102 Labor: Its Part in Production 
 
 nizing this fact, some scientific managers have claimed that 
 many operations can be performed most efficiently by 
 workers who in their temperament and intelligence most 
 nearly resemble the ox or the guerilla. It has been found 
 that for many processes the mentally dull, — even the men- 
 tally deficient— are the best operatives. It has been 
 estimated that perhaps fully one-half of the industrial proc- 
 esses can be carried through effectively by those who have 
 had no vocational training. The human consequences are 
 suggested by C. H. Cooley as follows: "Men, women, 
 children find themselves required to work at tasks, usually 
 Uninteresting and often exhausting, amidst dreary sur- 
 roundings, and under such relations to the work as a whole 
 that their imagination and loyalty are little, if at all, 
 aroused. Such a life either atrophies the larger impulses of 
 human nature or represses them to such a degree that they 
 break out from time to time in gross and degrading forms 
 of expression." 
 
 Out of this situation has developed a tendency for 
 American workmen to avoid wherever possible the un- 
 skilled, untrained, ignorant functions. These have come 
 more and more to be assumed by immigrant workers. A 
 line of cleavage has grown up, roughly and approximately 
 speaking, between American skilled workmen and immi- 
 grant unskilled workmen. A class feeling has grown up 
 between the two groups. The skilled workman looks with a 
 certain amount of condescension upon the lower ranks of 
 common unskilled labor. The skilled worker is proud of 
 the fact that he is not on the low plane which requires no 
 distinct amount of mental capacity. As Hoxie explains, 
 "The skilled workers in general have no love for the un- 
 skilled; the successful for the unsuccessful." 
 
 The function of labor is for the most part being per- 
 formed very greatly to the dissatisfaction of the managers 
 of industry. Productive efficiency is frequently only a 
 fraction of its possibilities. The workers lack interest, lack 
 enthusiasm, and in consequence often not only are indif- 
 ferent to the efficiency of production, but deliberately 
 soldier on the job. One great problem of production at the 
 
Labor: Its Part in Production 103 
 
 present time is to enlist tlie constructive instincts of labor- 
 ers in their work. This outstanding problem of production 
 is not the invention of new machines but the invention 
 of new ways and means for drawing out the creative inter- 
 est of the workers. Without such a creative interest, pro- 
 duction is predestined to remain at absurdly low levels. 
 
 A wide variety of devices are being resorted to by pro- 
 gressive managers as a means of arousing the instinct of 
 workmanship. Inventors are being called upon to take 
 into account the human factor in the construction of new 
 machinery. Engineers are giving attention to methods of 
 organizing the production processes which will harmonize 
 with the interest of the workers. "When laborers are found 
 to "go stale" at certain machines, or to suffer excessive 
 depression or fatigue, they are moved around the plant 
 to machines of different types in order to have variety. 
 Progress charts are posted in order to give the laborers 
 a clear picture of the amount of work which each man is 
 doing in comparison with his fellow laborers, also to give 
 each man a chance to compare his output to-day with that 
 of the year previous. Managers in progressive plants call 
 for suggestions from the workers about economy, better 
 arrangement of machines, new inventions, and desirable 
 working conditions. Joint conferences are held to discuss 
 with the laborers policies for the improvement of workman- 
 ship and means for inspiring creative interest in the shop. 
 A pride in work is secured by placing emphasis upon the 
 quality of the output rather than upon the quantity alone. 
 Rivalry between individual workers, between gangs, and be- 
 tween whole departments of the plant is employed to 
 stimulate the imagination and enthusiasm of the workers. 
 All in all, the end and aim is to put into the worker's life 
 a content of thinking, planning, suggesting and under- 
 standing. 
 
 The last thirty years has witnessed a remarkable de- 
 velopment of mechanical invention and of the application of 
 science to economic methods. In the course of this develop- 
 ment a point has been reached at which the human nature 
 of the workers finds it difficult to make an efficient adapta- 
 
104 Labor: Its Part in Production 
 
 tion to the economic process. Eegardless of what outside 
 inventors and scientists have sometimes considered labor 
 ought to do, his bundle of instinctive tendencies has made 
 him the human being that he is, often unreasonable, often 
 unmechanical and unautomatic, often brilliant, often child- 
 ish, often uncontrollable. The question, How much will 
 a worker produce ? is met by the apt remark, As much as he 
 wants to. Economic science faces the task of leading and 
 inspiring, not driving and threatening labor. There is 
 already sufficient experience to indicate that this problem 
 is not a matter of mawkish sentimentalism or Utopian 
 dreaming but is a practical possibility of human engineer- 
 ing. It means putting man and all of his instinctive ten- 
 dencies at the beginning and end of thought about the 
 laborer 's part in production, and it necessitates readjusting 
 machine and management to fit the human nature of the 
 workman. 
 
 The Job 
 
 Labor's opportunity to carry out its part in production 
 constitutes the job. The opportunity to work and thereby 
 to earn a living is indispensable to the laborer's life. In its 
 present form the job is an opportunity which may be given 
 to the laborer or taken away by powers utterly beyond his 
 control. The laborer has no right to a job. There is no 
 established legal responsibility on the part of anybody to 
 guarantee the laborer a steady job. The employer may give 
 or withhold as he sees fit. The employer retains the right 
 to hire and fire for reasons good and sufficient in his 
 own eyes. The opportunity to carry out labor's function is 
 therefore a precarious one, and is created or destroyed by 
 powers of management above and beyond his influence or 
 control. 
 
 To lose his job is likely to bring distress and fear to the 
 worker and his family. Both he and his dependents face 
 the demands of the landlord, starvation, and the keenest of 
 social dreads and anxieties until a new job can be found. 
 This may take weeks or months. In the meantime the 
 state of mind and body of the worker tends toward de- 
 
Labor: Its Part in Production 105 
 
 moralization. As stated in detail by Lescohier, unsteady 
 employmeijt "undermines Ms physique; deadens his mind; 
 ■weakens his ambition ; destroys his capacity for continuous, 
 sustained endeavor; induces a liking for idleness and self- 
 indulgence; saps self-respect and the sense of responsi- 
 bility; impairs technical skill; weakens nerve and will 
 power ; creates a tendency to blame others for his failures ; 
 saps his courage; prevents thrift and hope of family ad- 
 vancement; destroys a workman's feeling that he is tak- 
 ing good care of his family; sends him to work worried 
 and underfed ; plunges him in debt. ' ' ^ 
 
 The loss of a job may be the fault of the worker himself, 
 or on the other hand, may arise from causes completely 
 beyond his control. In the average industry, approxi- 
 mately one-half of the causes of a change of employment 
 lie within the volition of the worker himself. Among such 
 causes for the laborer's voluntarily leaving his job are fits 
 of temper, mean and disagreeable foremen, unsatisfactory 
 wages, excessive hours, no prospect of advancement, the 
 wanderlust, bad housing accommodations, poor health, 
 and attractive opportunities elsewhere. "The other half 
 of the changes of employment are due to the volition of 
 the employer. Of this half the larger proportion of changes 
 are in the form of lay-offs due to industrial depression, 
 seasonal shut-downs, bankruptcy, new mechanical inven- 
 tions. The smaller proportion are in the form of dis- 
 charges due to inefficiency, unreliability, insubordination, 
 agitation, union afSliation, etc. The causes for the worker's 
 withdrawing from a job, or for his being dropped from a 
 company payroll are obviously in a very large measure 
 psychological. Dissatisfaction, temperament, instinctive 
 ambitions, and all the moods and impulses of both worker 
 and employer enter into the unsteadiness of work. With 
 surprising frequency, the shift of employment has no trace- 
 able connection with careful, deliberate, rational calcula- 
 tion but is due to outbursts of instinctive passions, or to the 
 domination of fixed prejudices. In many cases the work- 
 er's quitting of the job is an act without foresight, or re- 
 i"The Labor Market," p. 107. 
 
106 Labor: Its Part in Production 
 
 gard for distressing consequences to follow. There is a 
 large group of workers whose mental equipment does not 
 enable them to protect themselves from the rashness of 
 blind quitting. As pointed out by Dr. H. M. Adler, ' ' There 
 are individuals in a. community who for a variety of rea- 
 sons are not able to regulate their conduct on the basis of 
 experience. ' ' 
 
 The amount of turnover of labor varies greatly from com- 
 pany to company, but in the aggregate attains alarm- 
 ing proportions. It has been estimated that on an average, 
 in order to maintain 1,000 constantly at work it is 
 customary to employ one thousand new men during the 
 year to replace 1,000 old ones. In other words, the aver- 
 age rate of turnover is about 100 per cent. However 
 there are some plants in which the turnover runs as low 
 as 10 to 20 per cent, and others in which it ranges from 300 
 to 600 per cent. Taking industry as a whole, government 
 investigations form the basis for the estimate that to keep 
 five million workers fully employed throughout the year 
 1914, there were about four million accessions and four 
 and a half million separations, or a total of more than eight 
 million workers changing jobs that year. 
 
 A true picture of employment, therefore, presents a 
 stream of constant come and go, incessant hiring and firing. 
 This extreme flux and change affects most severely about 
 one-half the workers. The other half endeavors to stick 
 to the job. For the latter employment is something steady 
 and permanent. They stay with the same company for as 
 large a portion of their lifetime as economic conditions 
 will permit. The high rate of turnover occurs because of 
 the extreme fluctuations occurring among the other half of 
 the workers. For them a job is an affair of a few weeks 
 or a few months. Due to their own unfitness they are 
 fired, or due to their discontent at conditions within the 
 plant the job becomes irksome almost as soon as it is taken. 
 This half of the laboring population is on the march from 
 plant to plant a large share of the time. For them em- 
 ployment is an unstable, uncertain, fickle, temporary af- 
 filiation. 
 
Labor: Its Part in Production 107 
 
 The cost of labor turnover is immense. The cost to the 
 employer in terms of dollars and cents ranges from $25 to 
 $200 or more per employee. For employees the loss of 
 earnings during unemployment, the expense and difficulty 
 of obtaining new jobs, the low wages while learning a 
 new job, the greater exposure to accident in unfamiliar 
 work, the cost of moving the worker's family, the loss of 
 skill by the shift of occupation, and the demoralization 
 and discouragement from idleness are tremendous. 
 
 Attempts to reduce labor turnover have been frequent 
 during the last decade. It was formerly supposed that the 
 ready mobility of labor was thoroughly useful because it 
 evened up the supply and demand of workers in various 
 communities and served to adjust the labor market to 
 business requirements the country over. In recent years, 
 however, this mobility of labor has come to be looked 
 upon as an undesirable burden to both the employer and 
 the employee. At first, employers sought to reduce turn- 
 over by special devices contrived almost exclusively with 
 eyes centered upon the turnover problem. Gradually this 
 viewpoint has been abandoned and in its place has arisen 
 the belief that turnover is an index of the whole policy of 
 labor management of the corporation. No single trick or 
 device has magic powers to reduce turnover. All phases of 
 the corporation policy need to be placed upon a sound 
 footing, and thereafter turnover will take care of itself. 
 There are certain phases of corporation policy which have 
 more importance in reducing turnover than others. To 
 quote Slichter, ' ' The foremost important features of a job 
 to the average factory workman are : 
 
 1. The wages. 
 
 2. Its steadiness. 
 
 3. Its psychical and nervous demands upon him, 
 
 4. The hours. 
 
 As these four overshadow all other features of the job 
 in importance to the workman, making the work attractive 
 in these four respects must necessarily form the founda- 
 tion of attempts to reduce the turnover. . . . Men will not 
 
108 Labor: Its Part in Production 
 
 remain at work because of incidental attractions when 
 matters of fundamental importance are unsatisfactory." ^ 
 Under favorable conditions turnover can be reduced, so 
 most authorities agree, to approximately a 20 per cent. 
 basis.2 
 
 The unsteadiness of the job has the most intimate bear- 
 ing upon industrial morale and upon the degree of loyalty 
 existing between the employer and the employee. Unsteadi- 
 ness of employment operates as a direct cause of disloyalty 
 to the company. The worker feels that wages, hours, and 
 working conditions are so unsatisfactory that he is ready 
 at any moment to leave the job. If he does not leave on 
 his own accord a foreman or superintendent may fire him 
 for reasons good or bad. Under these conditions he be- 
 comes the victim of a weak, and often vicious industrial 
 morale. It is next to impossible to feel loyal to the com- 
 pany because he receives too many indications that the em- 
 ployer feels no sense of loyalty to him. The employer 
 stands ready to close down his factory when business con- 
 ditions are poor regardless of the discomfiture among his 
 workers, and with that understanding in the worker's 
 mind, it is but natural for his instinctive tendencies to 
 react in terms of resentment. 
 
 Among a very large group of employers, this state of un- 
 certainty and unsteadiness of employment is looked upon 
 as a valuable weapon over the employees. If the worker can 
 be kept in a state of fear and dread of being fired, it is 
 thought that he will be spurred to efficiency and obedience. 
 The right of firing, with loss of pay, is supposed to be es- 
 sential in order that men may have an incentive to work 
 thoroughly. The knowledge that a line of applicants is 
 standing at the factory gate eagerly asking for jobs is con- 
 ceived as an intimidating force. The discipline of fear is 
 hung over the workers' heads. The attempt to appeal to 
 the emotions of fear and to establish industrial discipline 
 upon the instinctive tendencies which connect themselves 
 with worry, anxiety, privation and distress is, however, 
 
 i"'nie Turnover of Factory Labor," p. 251. 
 sLescohier, "The Labor Market," p. 116. 
 
Labor: Its Part in Production 109 
 
 definitely repudiated by the more progressive business men. 
 Fear may drive men to work, but work done under such 
 compulsion has neither the spirit nor the efficiency which 
 is possible of realization when other motives are brought 
 out. As Cooley remarks, "Fear is a poor motive, because it 
 does not evoke those energies which are bound up with am- 
 bition, sympathy, social imagination and hope." To quote 
 F. J. Miller in a presidential address to the American 
 Society of Mechanical Engineers, "The old driver method 
 of management will no longer do. . . . The workers of 
 every country have acquired a new status. . Realizing the 
 great difference between a body of employees all enthusias- 
 tically co-operating, and a body of employees rendering 
 only such service as they think necessary to hold their jobs, 
 these men [engineers] are giving this problem their best 
 attention." 
 
 The fear discipline holds the mass of workers to a low 
 margin of safety. At any minute they are in danger of 
 losing the opportunity to work, and with that they lose 
 the opportunity to livelihood and safety. This condition 
 maintains what has been called "a pain and deficit 
 economy," that is, an economy in which the worker is 
 always on the verge of unemployment and privation. The 
 never-ending uncertainty under the fear regime brings a 
 heavy human cost. It means that workers have at pain- 
 fully frequent intervals to "turn to new occupations, form 
 new habits, and think new thoughts." As Cooley finds, 
 "the principle that human character deteriorates under 
 irregular and uncertain employment is an old one and, I 
 believe, undisputed."^ 
 
 In the job is wrapped up all that means most in the life 
 of the working man. It is his opportunity to be a useful 
 member of society. It is his opportunity to carry out the 
 instinctive and mental energies which make him a human 
 being. For him it contains the means to all that life holds 
 worth while. It is, in short, for the worker the very life 
 of life. The fear discipline which is associated with un- 
 restricted right to hire and fire and with irresponsible 
 I Cooley, "Social Process," p. 184, 
 
110 Labor: Its Part in Prodiiction 
 
 power to intimidate and coerce men by threats of unem- 
 ployment strikes at the heart of the worker's life. Pro- 
 gressive employers have discovered that the fear discipline 
 can be moderated with immense human gain to the work- 
 ers and with a corresponding benefit to the employers in 
 terms of productive efficiency and sound industrial morale. 
 
 Hours of Work 
 
 The hours of work are affected by two primary economic 
 factors: first, hours should not exceed the maximum con- 
 sistent with the health and welfare of the workers ; second, 
 within this limitation, hours should not fall below the 
 minimum consistent with high production. The first factor 
 is chiefly a question of the length of time a worker can 
 stay at his task without suffering injurious fatigue, and, 
 at the same time, of the length of working day which will 
 allow him enough leisure to take advantage of the en- 
 joyments and recreations and duties of a wholesome life. 
 It is a human factor pure and simple. The second factor 
 is chiefly a question of securing the length of work day 
 which will maintain the worker in sufficient health and 
 morale to make possible a maximum of efficiency in pro- 
 duction. 
 
 The exact prevalence of the eight hour day is not known, 
 but that it has had a steady and rapid growth during the 
 last five or ten years is beyond question. It seems clear 
 that in spite of the rapid spread of the movement, a ma- 
 jority of American wage earners are still outside the scope 
 of the eight hour limit. From 1915 to 1919, the number 
 of workers newly brought within the scope of the eight 
 hour day was approximately three and one-half millions. 
 During the war and after, the authority of governmental 
 boards and commissions, both state and federal, and the 
 approval of the President of the country was given to the 
 principle of the eight hour day for most industries. This 
 amounts ordinarily to the forty-eight hour week. 
 
 The principle is to be conceived as a flexible one. The 
 length of day for each industry is a matter for scientific 
 determination in that industry. A careful scientific study 
 
Labor: Its Part in Production 111 
 
 of fatigue, monotony, productive efiSciency and otlier re- 
 lated factors is necessary to determine in any specific in- 
 dustry the most effective length of working day and week. 
 Even though the normal for most industries has been ap- 
 proved as the forty-eight hour week, nevertheless there are 
 others in which the forty-four hour week has been found 
 better, and still others in which a fifty-four hour week has 
 been found the most advantageous. 
 
 The scientific determination of the length of work day 
 for each industry requires also the consideration of over- 
 time. Not infrequently the eight hour base is set as a 
 standard from which to figure wages, whereas the actual 
 length of work day involves overtime at extra pay. Such 
 a situation has prevailed on many railroads, at the wish 
 of the workers themselves, because of the extra earn- 
 ings made possible for them. In frequent cases the over- 
 time is exacted by the employer against the wishes of the 
 workers, because of his desire thereby to increase output 
 for the time being. The whole problem of overtime is a 
 proper matter for scientific determination within each in- 
 dustry. It is a problem which deserves treatment by other 
 means than guesswork or the whims or prejudices of either 
 employer or employee. 
 
 The steel industry has been one of the most offending in- 
 dustries in resisting a reduced working day. However, 
 a number of individual plants have eliminated the 12 or 
 14 hour day with its frequent shift necessitating 24 hours 
 of continuous labor, and their action has proved the 
 shortening of hours practicable from a production stand- 
 point. Under the new schedule, the three shift system, 
 of eight hours each, has been tried out successfully. The 
 largest steel company, the United States Steel Corpora- 
 tion, announced in 1921 its approval of the reduced hours 
 policy and its determination to put the new policy into 
 effect. For other industries problems of night work, of 
 the seven day week and of the hours of women and children 
 remain to be settled by the same method of scientific 
 analysis. 
 
 Long working hours have been objectionable because of 
 
112 Labor: Its Part in Production 
 
 their harmful effects upon the mental and physical health 
 of the worker. Long hours under modern conditions of 
 production generally result in injurious fatigue. "The 
 problem of hours has undergone a fundamental change 
 through the introduction of large scale factory production 
 and the growing concentration of our population in cities. 
 Men and women can work relatively long hours at work 
 which is interesting, which calls upon their various ener- 
 gies, which gives some opportunity for creative self-expres- 
 sion. Work which is repetitive, monotonous and con- 
 ducted under the confining indoor conditions of even the 
 best industrial plant, especially where the plant is located 
 at a distance from the homes of the workers, makes much 
 more exacting physical and nervous demands. ' ' ^ The pro- 
 ductive process imposes upon the delicate, nervous and 
 physical mechanism of the human operator a speed of 
 motion, a monotony of operation, a distraction of noise, an 
 imminence of industrial accident, a fear of bosses and a 
 lack of interest, all of which accelerate the accumulation of 
 waste products in the body, the exhaustion of vital energy, 
 the straining of the nervous organism and the tension of 
 the mental powers. 
 
 Tests applied to many industries have demonstrated 
 that fatigue is a cause of increased accidents. The dullness 
 of mind, the tiredness of nerve, destroys the alertness and 
 quickness of reaction which is necessary for a "safety 
 first" operation of many types of machines.^ Moreover 
 fatigue makes the worker excessively liable to nervous 
 breakdown, to morbidity and moodiness, and predisposes 
 his bodily constitution to an easy contraction of serious 
 diseases. 
 
 In addition, fatigue brings the worker to such a de- 
 pressed physical and mental state that it is difficult for 
 him to enjoy the leisure hours at the end of the day's toil. 
 When he is too tired to play, too deadened to read, too 
 fagged out to benefit from recreation, his leisure hours lose 
 a large part of the value which they should contain. 
 
 1 President's Second Industrial Conference Report, 1920. 
 
 2 See Goldmark, "Fatigue and Efficiency." 
 
Labor: Its Part in Production 113 
 
 Fatigue unfits the worker to enjoy leisure and to do justice 
 to his responsibilities of citizenship. 
 
 The comment of Dr. F. S. Lee carefully appraises the 
 experience of recent years. He declares, "If a man is 
 worked beyond his physiological limit, he is incapacitated 
 for his duties to his family and to society. The history of 
 labor has demonstrated this abundantly, and the experi- 
 ence of reducing the hours of labor has almost universally 
 been followed by marked moral and social improvement, 
 such as is shown by decrease in intemperance and crime, 
 improvement in living conditions, greater efforts toward 
 education, greater intelligence and greater industrial ef- 
 ficiency — all this in contradiction, not only to the vivid 
 predictions of disaster pronounced by active and un- 
 principled opponents of the change, but to the fears of those 
 who were well meaning but timid. ' '^ 
 
 The effect of fatigue upon productive efficiency is to di- 
 minish it. The British Health of Munition "Workers Com- 
 mittee found that for women engaged in certain forms of 
 lathe work a "fifty hour week yields as good an out- 
 put as a sixty-six hour week and a considerable better one 
 than a seventy-five hour week. ' ' ^ Investigations of cotton 
 manufacturing indicate that between fifty and fifty-six 
 hours per week secure the maximum efficiency in that in- 
 dustry. The most productive length of working day is 
 therefore a matter of scientific ascertainment. In some in- 
 dustries the 54-hour week has evoked maximum produc- 
 tion; in others, the 44-hour week.^ The twelve hour day 
 has, practically without exception, been found subversive 
 of maximum production. Insistence must be made that 
 not guesswork, nor sentiment, is adequate to decide for any 
 particular branch of work what is the most effective work- 
 ing period. Scientific measurement is the only adequate 
 means of finding the proper period. 
 
 1- Science, 44:733. Also see Goldmark, "Fatigue and EfBciency," 
 pp. 279-283. 
 
 2 "Ministry of Munitions, Health of Munitions Workers Committee, 
 1918," p. 35. 
 
 3 See Brooks, "Labor and the New Social Order," p. 250. Also 
 Goldmark, "Fatigue and Efiaciency," p. 174. 
 
114 Labor: Its Part in Production 
 
 The relation between shortened hours and increased ef- 
 ficiency is summarized by H. B. Drury, after a careful 
 study of the experience of several American steel com- 
 panies on long and short Vork periods. His conclusion is, 
 ' ' The mere change from twelve to eight hours in an indus- 
 try where everything centers around huge machines and 
 furnaces is simply an opening of the door for greater 
 efficiency, not a consummation of it. What is necessary if 
 the industry is really to get what it should out of the 
 shorter day is a thorough-going reorganization. The occu- 
 pation must be changed, the spirit of the men, the type 
 of foremen. What the introduction of the three shift 
 system does is simply to open up a new country. . . . 
 But to harness this new energy, as to develop a new coun- 
 try, will take time. ' ' 
 
 The progress of fatigue elimination has come about by 
 a number of different avenues. The pressure of labor 
 unions for the eight-hour day by collective bargaining was 
 the original stimulus behind the movement. State legis- 
 lation has fixed hour limits for women and children very 
 widely, but only in comparatively few cases for men. The 
 eight-hour day was determined for the railroads by Con- 
 gressional statute in 1916 and in 1921 more definitely 
 applied by the Federal Railroad Labor Board. The ex- 
 treme hazards of the mining industries have led most of 
 the states in which mining is an important industry to 
 limit working hours to eight in one day. In a number of 
 cases the voluntary action of the employer has led to the 
 reduced length of working day. Scientific management 
 and personnel administration has given valuable study to 
 the problem and much encouragement to the movement. 
 At the same time, rest periods have been interspersed in 
 the day's work as a means of preventing undue fatigue 
 and maintaining maximum efficiency. ' The adequate 
 length of meal times, the regulation of night work, the 
 granting of Saturday half -holidays and of legal holidays, 
 the allowance of one day's rest in seven, and the assurance 
 of annual vacations have all come into being in a great 
 many industries under the stimulus of the same agencies as 
 
Labor: Its Part in Production 115 
 
 brought about the reduction of tbe length of the working 
 day.^ 
 
 Of course, the mere fact that the worker is granted 
 more leisure does not insure that he will make wise use 
 of it. As a matter of fact, an alarming proportion of the 
 people who have received the opportunities that go with 
 more leisure have made abominable use of the opportuni- 
 ties. During leisure hours, the worker is a consumer, and 
 the art of consuming wisely has not been properly de- 
 veloped in economic society. The education of consumers 
 to a wholesome use of leisure time, and to a proper stand- 
 ard of spending income is imperative, if the shortening 
 of the work day is to be a safe social achievement. This 
 matter is treated more in detail in later pages. 
 
 The net outcome of the whole movement may be stated 
 in terms of a reduction of the human cost of industry 
 without a reduction in productive efficiency. J. A. Hob- 
 son writes, "The first plea for a shorter work day is one 
 which our analysis has made self-evident. It will greatly 
 reduce the human cost of production in most processes. 
 For, as we recognize, the strain of muscular and nervous 
 fatigue, both conscious and unconscious, gathers force and 
 grows with great rapidity during the later hours of the 
 work day." Less fatigue and more leisure means an en- 
 hanced amount of human development. It means an op- 
 portunity for the enjoyment of a sound family life, and for 
 the development instead of the discouragement of per- 
 sonality. It means a higher capacity for thought, an ex- 
 pansion of curiosity, and a lifting of imagination. To 
 recognize these human values is not to undermine econo- 
 mics with vapid sentimentalism. An economic order exists 
 for the use and service of the members who work in it, 
 great and small, wise and foolish. Unless it serves to bring 
 men nearer to a realization of their best selves, it is dan- 
 gerously defective. It must be positive and actually have 
 a dynamic urge in the direction of less exhaustion and more 
 
 1 See Commons and Andrews, "Principles of Labor Legislation," 
 1920, pp. 221-224, and Spaeth, Industrial Management, February, 
 1920, p. 121. 
 
116 Labor: Its Part in Production 
 
 exhilaration; it must not be negative and impose undue 
 hardships which tend to make it difficult to move forward. 
 When this idea has been incorporated in the technological 
 organization of industry it has generally been proved that 
 the human principle is at the same time the true efficiency 
 principle. Human considerations and efficiency considera- 
 tions are in thorough harmony. A redistribution of leis- 
 ure, of rest, of health, of imaginative power, of social 
 enjoyment is the outcome and this outcome is sound 
 economics. 
 
 Wages 
 
 Labor's reward is given in the form of a wage. The 
 wage is simply a money payment in return for the perform- 
 ance of labor's function. The amount of this payment in 
 terms of dollars and cents is the nominal wage; the pur- 
 chasing power of this payment in terms of food, clothing, 
 housing, etc., is the real wage. Obviously real wages are 
 the important factor from labor's standpoint because a 
 high wage which is more than offset by high prices does 
 not mean a high purchasing power. The real wage arises 
 from the ratio between the price paid for labor and the 
 price which labor in turn is obliged to pay for all the neces- 
 sities and comforts of life. 
 
 In technical calculations and in engineering plans, labor 
 is of necessity measured in abstract units, under such 
 phrases as "per man hour," and "unit labor cost." From 
 other standpoints, labor is not an abstract conception or a 
 theoretical idea, but a group of human beings with human 
 personalities and human necessities. Labor is capable of 
 hope and ambition, pain and distress, feelings and ideas. 
 Moreover, wages themselves in the real sense of the term 
 are not an abstract sum. They represent food for the 
 satisfaction of human hunger, clothes for the comfort and 
 gratification of the human body, a home, children, educa- 
 tion. As abstractions, labor and wages tend to lead the 
 mind away from the warm and human realities of labor's 
 part in production and it is necessary to fill the terms with 
 a genuine human content. 
 
Labor: Its Part in Production 117 
 
 Economic speculation about the laws of wages has 
 evolved various theories, each stressing some particular 
 factor in the wide range of forces which influence the final 
 sum going to labor. One notable wage theory is the sub- 
 sistence theory emphasizing the so-called iron law of wages. 
 The essence of the theory is that wages tend to reach *he 
 lowest level upon which it is possible for labor to exist, 
 and that any effort on labor's part to raise wages by arti- 
 ficial means, such as union organization, is balked by an 
 iron law of economics. The theory does not take fully into 
 account the fact that the level of subsistence is capable of 
 being raised if the productive efBeiency of labor can be 
 substantially increased. The level of subsistence has 
 doubled or trebled in the most advanced countries during 
 the last two or three generations because machinery and 
 science and capital have multiplied the productive effl- 
 ciency of the average worker. Productive efBeiency has 
 increased more rapidly than has population, with the re- 
 sult that the standard of living and the standard of sub- 
 sistence have been raised. 
 
 Another conspicuous theory is the wages fund theory by 
 which certain economists teach that out of the total fund 
 of production arbitrary and unchangeable economic laws 
 lay aside a certain fund of wages which is the inevitable 
 amount available as labor's share in production. If labor 
 in one section forces wages up, the artificial excess which 
 is thereby squeezed out of the total fund means that labor 
 in another section will have its wages reduced by a corre- 
 sponding amount. The exact and strict form of statement 
 of the theory is too narrow to find application in actual 
 economic life. The theory does not take into account the 
 possibility of increasing production by the invention of 
 methods of wage payment as incentives to efficiency, nor 
 does it take into account the pressure which can be brought 
 to bear by organized labor or reform legislation. The 
 wages fund has been highly variable, the chief limita- 
 tion upon it being that beyond a certain point wages will 
 encroach upon the returns to management and ownership 
 
118 Labor: Its Part in Production 
 
 so greatly as to discourage them from undertaking their 
 part in production. 
 
 A third theory is the commodity theory of wages. Ac- 
 cording to its teachings wages are subject to all of the 
 market laws of supply and demand. The price paid to 
 la^r is fixed in the same way as the price paid for pig 
 iron or coal. A large supply of labor relative to the de- 
 mand leads to a low wage and a low supply of labor rela- 
 tive to demand leads to a high wage. Labor is looked 
 upon as a thing to be bought and sold in the same fashion 
 as any other commodity. Labor has long smarted at the 
 humiliating inference of the theory, and organized labor 
 in 1916 secured the passage of a law through Congress de- 
 claring that labor should henceforth not be considered a 
 commodity or an article of commerce. Experience since 
 that time has indicated that the passage of a congressional 
 statute does not alter the attitude of employers towards 
 employees, nor prevent them from still hiring labor at as 
 low a figure as the market will bear. A number of fea- 
 tures of the commodity theory are important. It con- 
 eiders labor as a collection of individual units, but fails to 
 consider the changed marketing power of labor as an or- 
 ganized group. A million men in the labor market as 
 individuals might find their wages fixed by arbitrary forces 
 of supply and demand, but the same million laborers or- 
 ganized into a powerful labor union might be able, as 
 experience has abundantly shown, to raise the wage level 
 considerably above the old market figure. In practice the 
 effort of employers to consider labor as an article of com- 
 merce has amounted to an attempt for the most part to 
 secure the maximum of work for the minimum of wages. 
 Labor has widely matched the attitude of the employers 
 by determination to give the minimum of work for the 
 maximum of wages. The laborer when looked upon as a 
 commodity has come to feel that so far as wages are con- 
 cerned he "gets what he can," whereas the employer has 
 come to feel that the laborer after all "gets just what he 
 deserves." The commodity theory of labor, therefore, 
 leads to unwholesome and embittered feelings in the in- 
 
Labor: Its Part in Production 119 
 
 dustrial world. It takes little account of the need of the 
 workers to live, and reckons as of little importance the 
 higher elements in the human factor of industry. 
 
 A fourth theory is the productivity theory, by which it 
 is held that ' ' competition secures for the laborer just what 
 he produces." If the wage is low, that of itself, so the 
 theory runs, is an indication that the productive efficiency 
 of the worker is low. In criticism of this theory, it may be 
 pointed out that although it is true that wages cannot ex- 
 ceed the productive power of labor, nevertheless it is at the 
 same time true that there is no way of measuring the pro- 
 ductive power of labor. All efforts to determine the 
 proportionate parts which the electrician, the telephone 
 girl, the janitor, the machine, operator, the industrial en- 
 gineer, and the salesman contribute to the finished pair of 
 shoes are obviously futile. Moreover, even where rough 
 approximations are estimated of the part played by each 
 member of the productive organization, it remains true that 
 the employer need not pay in full the estimated share of 
 each. As a matter of fact, the general tendency on the 
 part of employers is to make as low an estimate as possible 
 of the share of labor in the productive process and there- 
 after to pay out in the form of wages a sum as far below this 
 estimate as conditions will permit. A further feature of 
 the productivity theory is important, namely, that if the 
 share which labor receives for its productivity encroaches 
 too much upon the share assigned to management and 
 ownership, these latter factors will withdraw from the 
 productive process. It will not be worth their while to 
 continue. The limit to which each of the factors can go in 
 exacting its share is the point at which any other factor's 
 share becomes so small that that factor is driven out of 
 business organization. 
 
 Obviously there are important respects in which each of 
 these theories coincide with the economic facts of the mod- 
 ern day, and other equally important respects in which 
 these theories give a grossly inadequate interpretation of 
 the facts of the case. It is therefore much more service- 
 able and accurate to conceive of a 'pluralistic theory of 
 
120 Labor: Its Part in Production 
 
 wages and to interpret them as the resultant of a very 
 wide variety of influences. For purposes of clearness 
 and convenience these influences may be grouped under 
 the following headings: standard of living, incentives, 
 bargaining power, habit and custom. 
 
 Standard of Living 
 
 The standard of living as a basis of wage determina- 
 tion is a comparatively new principle in economic life 
 and is not yet universally accepted. The older concep- 
 tion was that industry made possible the payment of 
 only a limited wage, and it was not the fault of the em- 
 ployer if this amount was so low as to make it scarcely 
 possible for the laborer to live, even in the dirtiest and 
 meanest fashion. The business acknowledged no re- 
 sponsibility for paying a wage which made certain a 
 fixed standard of living among the workers. But dur- 
 ing the last half generation, the principle has been 
 winning increasing acceptance that the industry owes the 
 workers a good standard of living. An industry which can- 
 not afford to pay a wage adequate for such a standard is 
 parasitical on society and cannot justify itself. Although 
 the new idea is still short of realization in many lines of 
 industry, nevertheless there is a steady tendency toward 
 its wider acknowledgment. 
 
 War time government boards did much to strengthen 
 the movement, acting under the conviction that the stand- 
 ard of living as a wage principle has both an humanitarian 
 and an efficiency justification. Felix Frankfurter, as 
 chairman of the United States "War Labor Policies Board, 
 asserted: "The lesson of the war is that the adoption of 
 so-called industrial standards, involving also standards of 
 distribution of the product in the form of wages, results 
 in a higher and more continuous output. 
 
 ' ' As to wages, the general level has increased during the 
 war. That is partly the reflex of economic conditions ir- 
 relevant to the discussion, but there was also a conscious 
 effort to raise submerged standards of existence for work- 
 ers." Moreover this standard is not the income for the 
 
Labor: Its Part in Prodiiction 121 
 
 individual, but for the faimly, "since the family is the 
 unit of industrial work. ' ' ^ 
 
 The living wage allows for a wide range of interpreta- 
 tion. The truest conception of the principle is briefly 
 stated by Frank P. "Walsh, joint chairman of the National 
 War Labor Board in the following form: "Nowi that 
 term is one having different meanings to different per- 
 sons. The living wage suggests, perhaps, that amount of 
 wage which will keep life in the human body. That is, 
 of course, not what we understand by it. It has a definite 
 meaning in the world of industry and in the literature of 
 modern economics. It means the amount of wage upon 
 which a worker and his family may be able to subsist in 
 health and with reasonable comforts. ' ' ^ The range of ex- 
 penditures covered by the living wage comprehends such 
 items as food, housing, clothing, fuel, light, carfare, health, 
 insurance, and sundry minor factors. The minimum which 
 an American worker needs in order to be able to keep him- 
 self and his family in a state of reasonable comfort and 
 health is the living wage. To insure vitality, health and 
 vigor is not merely good ethics; it is good business. The 
 American standard of living is higher than that of many 
 other countries, and this fact of itself aeoounts in consider- 
 able measure for the relatively high efficiency of the 
 American worker. 
 
 The exact amount of wage which is necessary to meet 
 such a minimum requirement is difficult to state for the 
 simple reason that price levels are constantly fluctuating 
 and with their changes, the purchasing power of wages 
 fluctuates accordingly. The essential question is not: 
 How much is the wage figure but rather how much will the 
 wage buy? Before the war, the consensus of a number of 
 careful wage and cost of living investigations was that for 
 the family of the common laborer, an income of less than 
 $850 does not permit the maintenance of a decent Ameri- 
 can standard of living. This figure, as in the case of 
 those mentioned later, applies to a family of five members. 
 This is taken in wage studies as "the average family." 
 
 1 Survey, Dec. 7, 1918. ^Idem. 
 
122 Labor: Its Part in Production 
 
 Similar studies made during the year 1918 indicated that 
 the minimum of subsistence at that time ranged between 
 $1,400 and $1,500. W. F. Ogburn states, "Such a 
 standard of living corresponds approximately with that 
 of common or unskilled labor, and is what is generally 
 referred to as a living wage." Fluctuations of prices 
 and wages subsequent to 1918 must be taken into ac- 
 count in estimating the present minimum of subsistence 
 wage figure. The most comprehensive and reliable wage 
 and cost of living investigations in this country are those 
 made by the United States Bureau of Labor Statistics, 
 under the direction of Royal Meeker. The method of 
 the Bureau's investigations is stated as follows, "It will 
 become more and more essential as time passes that the 
 decision of all questions involving the economic well- 
 being of the laboring classes should rest, not on guess- 
 work or on ex-parte statements, whether of employers or 
 employees, but on the accurate, reliable and strictly im- 
 partial results of investigations such as the industrial sur- 
 vey."^ In 1919, Mr. Meeker stated the findings arrived 
 at by the government investigations as follows: "Ameri- 
 can families on the average are not fully nourished until 
 their yearly income reaches $1,800. . . . The average in- 
 come and the modal income both fall well below $1,600. . . . 
 [These figures] do not mean that our working population is 
 dying of slow starvation ; nothing of the sort. But they do 
 indicate that the workers of America are obliged to live on 
 a diet too restricted and monotonous for the maintenance of 
 as high a degree of efficiency and health as ought to be 
 maintained as a reasonable minimum. ' ' ^ This finding is 
 substantiated by the bulk of reputable authorities in the 
 field, and may safely be taken as the impartial, scientific 
 facts of the case.^ 
 
 For purposes of full clearness, it is necessary to 
 relate the so-called living wage level to two other levels of 
 
 1 Bulletin 265, United States Bureau of Labor, "Survey of Selected 
 Industries in 1919," p. 24. 
 
 2 Monthly Labor Review, Volume IX, pp. 7-13. 
 
 3 See P. Douglas and F. Lamberton, Americiin Economic Review, 
 Vol. XI, pp. 409-426. 
 
Labor: Its Part in Production 123 
 
 wage and life, — ^what may be called the poverty level and 
 what may be called the comfort level. The poverty level 
 is a demoralizing and devitalizing level. "Families liv- 
 ing at this level receive charity in the form of gifts or 
 free medical service or in other ways. Or if they do not 
 do this they attempt to live on a level so low as to weaken 
 them eventually to such an extent that disease inevitably 
 overtakes them. ' ' Further, Parmelee, after an extended sur- 
 vey of the statistics and records bearing on the problem, 
 concludes, "In view of the above facts, as well as various 
 others that might be cited, it seems reasonable to assume 
 that the number of persons in this country receiving charit- 
 able aid ranges from five to ten per cent., varying some- 
 what according to economic and other social conditions. ' ' ^ 
 Within the poverty level should be included those whose 
 incomes are so low that although they do not resort to 
 charity for subsistence, nevertheless exist under conditions 
 which involve degeneration and distress. As Parmelee 
 states, "We have plenty of evidence that the number of 
 those who do not even reach the lower minimum standard 
 of living is very great, probably exceeding ten per cent, of 
 the population."^ 
 
 For a group of several millions of people in the United 
 States poverty of a sort which is devitalizing is a haunting 
 fact. As a statement of plain scientific findings, the fol- 
 lowing words by Hollander are directly to the point: 
 "There are great bodies of people in country and in city 
 who from birth have less than enough food, clothing, and 
 shelter; who from childhood must toil long and hard to 
 secure even that insufficient amount ; who can benefit little 
 from the world's advance in material comfort and in 
 spiritual beauty, because their bodies are undernourished, 
 their minds are overstrained and their souls deadened by 
 bitter struggle and want. These are the real poor of every 
 community — ^the masses who, not lacking in industry and 
 thrift, are yet never really able to earn enough for decent 
 
 1 "Poverty and Social Progress," p. 103. 
 
 2 Hid., p. 106. 
 
124 Labor: Its Part in Prodtiction 
 
 existence and who toil on in constant fear that bare neces- 
 sities may fail. ' ' ^ 
 
 The ordinary working of competitive wage forces has 
 not averted the menace of this poverty line. From a 
 social and economic standpoint, the degeneracy and devital- 
 ization which goes on steadily within these classes is a 
 national liability of the severest sort. Economic science 
 can find no sound laws or principles which deserve to 
 stand in the way of eliminating the poverty line. Supply 
 and demand, the wages fund, productivity, — any and all 
 of the wage theories present no reasons w^hy the poverty 
 line is an inevitability. There is nothing unscientific in 
 insisting that economics must concern itself with sentiment 
 as well as with dollars and cents. The poverty depths are 
 a challenge to the industrial order, and economic science 
 must accept the poverty problem as a primary instead of 
 a secondary one. 
 
 The dehumanizing consequences of poverty are not a 
 matter of guesswork but of scientific ascertainment. The 
 death rate due to Hhe vicissitudes of poverty is approxi- 
 mately double that prevailing among the classes who have 
 higher incomes. The infant mortality rates among these 
 impoverished groups is more than double that of the nor- 
 mal well-to-do groups in America. Perhaps even worse 
 is the fact that the number of days of sickness in propor- 
 tion to the number of days of health is between fifty and 
 one hundred per cent, greater among the laboring than 
 among the professional classes. The defective wages 
 mean unfit diet, tenement crowding, scanty clothing, in- 
 adequate mental care, frequent disease, an enfeebled 
 physique and a harassed and haunted mind. From a 
 strictly scientific standpoint, economies is compelled to de- 
 liver a most scathing denunciation of the toleration of the 
 poverty levels in American society.^ 
 
 A third level has been mentioned : the minimum comfort 
 level. This level necessitates an income from $300 to $400 
 
 1 "The Abolition of Poverty," pp. 4-5. 
 
 2 Hayes, "Introduction to Study of Sociology," pp. 98-99. 
 
Labor: Its Part in Production 125 
 
 ■above the living wage level. An income within the com- 
 fort range would allow for a positive measure of cultural 
 development. It would make possible more reading, a 
 better utilization of leisure hours, better educational op- 
 portunities for children, more valuable forms of recreation. 
 All in all it would be a positive instead of negative 
 influence and would tend to elevate the worker and his 
 family morally, mentally and physically instead of handi- 
 cap him in all these ways. The minimum comfort level 
 rests upon the encouragement of higher standards of 
 living and puts a premium upon the development of per- 
 sonality and the upbuilding of character. It frankly 
 concedes that such a human development is a distinct eco- 
 nomic asset and that the distribution of the national product 
 should more and more be controlled and organized toward 
 that end. 
 
 No treatment of this subject would be accurate which 
 failed to give full recognition to facts of excessive wages 
 in some occupations and the extravagance and prodigality 
 of numbers of wage earners. Here and there, powerful 
 trade unions have exacted wage scales quite out of pro- 
 portion to the normal, and certain employers, such for 
 example as Henry Ford, have voluntarily given workers 
 wages and bonuses decidedly above the average. Some of 
 these extraordinarily high earnings are put to good use while 
 others find their way into channels of conspicuous waste 
 and extrav^ance. Moreover, the average family income 
 does not give a clue to the extent by which certain fami- 
 lies exceed the average and others fall short of it. Childless 
 families might obtain from a certain income all the needs 
 and comforts of life while the same income for families 
 with a large number of children would necessitate the 
 strictest economy amounting to privation, but for unmar- 
 ried individuals without any dependents would allow for 
 real prodigality and extravagance. When the family in- 
 come is not derived solely from the earnings of the head 
 of the household, but from other sources, such as from 
 roomers or boarders, or from jobs held by sons or daugh- 
 ters or wife, the total family fund is likely to be adequate 
 
126 Labor: Its Part in Production 
 
 and to allow for some flourish, and luxury. Well paid in- 
 dividuals who have no one to support but themselves are 
 for the most part the ones who flaunt silks and furs and 
 fineries, and there are just enough of these individuals to 
 make much show and create vivid impressions in the public 
 mind. Methods of wage payment, as thus far contrived, do 
 not give full recognition to these variants, but deal on the 
 basis of averages. The wage groups, when brought side by 
 side, in their general proportions, stand about as follows : a 
 topmost layer of workers enjoy extraordinary incomes 
 which allow for some degree of extravagance; a bottom 
 layer of several millions of people are within the poverty 
 line; the great run of unskilled labor barely comes into 
 the minimum of subsistence level; and the group within 
 the minimum comfort level, although possessed of many 
 examples, nevertheless relatively to the other groups, is 
 decidedly small.^ 
 
 The status of the principle of the standard of living as 
 a wage base is therefore far from satisfactory realization. 
 As will be pointed out more fully in a later chapter, fed- 
 eral and state governmental endorsement of the principle 
 has given it strength, and conspicuous progressive em- 
 ployers have lent the weight of their authority to it. The 
 responsibility of each industry for the payment of a rea- 
 sonable living wage is safely on its way to general recog- 
 nition. It sets the base below which the worker's income 
 must not be allowed to fall. Above that base rate is room 
 for the play of other factors of many kinds, a number of 
 which are mentioned in the sections immediately follow- 
 ing. The emphasis is unreservedly upon the human 
 necessity of a living wage as a primary force. To quote 
 the report of Ex-President Wilson's Second Industrial 
 Conference in 1920, "Considered from the standpoint of 
 public interest it is fundamental that the basic wages of 
 all employees should be adequate to maintain the employee 
 and his family in reasonable comfort, and with adequate 
 opportunity for the education of his children. When the 
 wages of any group fall below this standard for any length 
 
 1 See A. Epstein, "Facing Old Age," Chapter on "American Wages." 
 
Labor: Its Part in Production 127 
 
 of time, the situation becomes dangerous to the well-being 
 of the state. No country that seeks to protect its citizens 
 from the unnecessary ravages of disease, degeneration and 
 dangerous discontent, can eonsistently let the unhampered 
 play of opposing forces result in the suppression of wages 
 below a decent subsistence level. Above that point there 
 may well be a fair field for the play of competition in 
 determining the compensation for special ability, for spe- 
 cial strength or special risk (where risk is unavoidable), 
 but below that point the matter becomes one of which the 
 state for the sake of its own preservation must take ac- 
 count." 
 
 Incentives 
 
 The psychology of incentives underlies the invention of a 
 number of widespread wage policies. The possessive in- 
 stincts of the workers are stimulated by devices for gradu- 
 ating wages in proportion to the effort of the worker. The 
 piece rate method of payment rewards labor in proportion 
 to the number of pieces of product turned out. The bonus 
 method of payment starts with a base rate of pay for a 
 given task, and adds to this base rate an increase in some 
 ratio to the excess of production above the standard task. 
 The setting of the standard task involves time study of 
 the separate stages of the manufacturing process and a 
 careful estimate of the amount of work which a normal 
 laborer ought to turn out in a certain period of time. The 
 bonus constitutes a reward for speeding up and for turn- 
 ing out a product above the normal. The United States 
 Bureau of Labor reported in 1904 that the average in- 
 crease in production where piece rates are in vogue ranges 
 around twenty-five per cent. Experiments with the bonus 
 system have often increased efficiency from 100 to several 
 hundred per cent. General experience would indi- 
 cate that when rightly applied these two forms of finan- 
 cial incentive are effective in securing an increased pro- 
 duction. 
 
 A financial incentive for regularity of attendance and 
 for promptness has been effectively used, taking the form 
 
128 Labor: Its Part in Production 
 
 of premiums in money. An increase in wage or a bonus 
 award for long service with the company serves in 
 many cases as an incentive to loyalty and a better spirit 
 of workmanship. Many concerns have found it useful 
 to introduce financial incentives for quality of workman- 
 ship and experience has often shown that where a pre- 
 mium is paid for workmanship which involves a minimum 
 of spoiled product, there results not only a genuine pride 
 of workmanship but an actual increase in the quantity of 
 output as well. Many concerns find it advantageous to 
 pay high wages as a deliberate policy, because the high 
 iates are conducive to labor's loyalty and interest in 
 work. Such concerns find that the greater efficiency of 
 labor under high wages actually reduces the labor cost in 
 production. 
 
 The strategy of using financial incentives has frequently 
 taken the form of supplementing the wage income with 
 special money returns. Profit sharing is an attempt to 
 assign the workers a fraction of the net profits of the 
 concern at certain periods. Although in carefully regu- 
 lated experiments profit sharing has met with favorable 
 results, nevertheless, it has led to an alarming number of 
 failures and especially when it has been looked to as 
 a substitute for a system of wage payment which the 
 laborer could consider sound, it both has failed as a stimu- 
 lant and has served to excite discontent and a feeling of in- 
 justice among the workers. Many concerns encourage 
 their employees to buy shares of common stock, the under- 
 lying reason being the desire to stimulate a loyalty to the 
 concern by virtue of the fact that the worker receives 
 dividends from time to time, and any form of labor unrest 
 which might interfere with regular dividends would be 
 repugnant to the worker owning the stock. Of this policy 
 it may briefly be said that the financial incentive often 
 serves a good purpose, but cannot be depended upon to 
 secure the loyalty of the worker unless all of the other 
 essential wage and working conditions are sound and satis- 
 factory. Welfare work has often been inaugurated for 
 genuine philanthropic purposes, and often for purposes 
 
Labor: Its Part in Production 129 
 
 of soothing and pacifying labor with attractive surface 
 comforts without supplying the more fundamental necessi- 
 ties which the laborer requires. Where the welfare work 
 has come from the top down, and has not been devised by 
 the joint wisdom of labor and capital, it has commonly 
 given to labor the impression that it is a paternalistic 
 program. Moreover, labor has figured that it is a paternal- 
 ism at its own expense. Labor would prefer to have the 
 cost of welfare work given in the form of an increased wage. 
 Another type of supplementary remuneration is found in 
 various thrift and insurance devices, often regulated in 
 amount by the length of time the worker has been with the 
 company, or by some act on the worker's part which is 
 useful to employer and employee. All of these forms of 
 incentives, supplementing the wage payment, therefore, 
 may, when rightly handled, serve a good purpose by in- 
 creasing the stake of the worker in the company. But 
 most emphatically it must be remembered that they are not 
 a substitute for a sound wage policy and that the prerequi- 
 site to all of them is a satisfactory and scientific wage 
 schedule. 
 
 Bargaining Power 
 
 A third group of wage influences is found in the rela- 
 tive bargaining power of employer and employee. The 
 worker hEis something to sell, — his labor. The employer is 
 in the market to buy labor. The worker as seller wants 
 as high a price for his labor as possible ; the employer wants 
 to buy at a "bargain price." The laborer finds that if he 
 refuses to work at the price offered, another man is stand- 
 ing ready to take the job at the figure set, and glad to get 
 the chance. As an individual, his bargaining power is 
 weaker than that of the employer. 
 
 A group of individuals, finding this weakness, determine 
 to band themselves into a labor organization and to sell 
 their labor collectively. Their bargaining power there- 
 upon increases by virtue of the fact that if they threaten 
 to refuse to sell their labor a& a group because the wage 
 offered is too low, the employer faces the prospect of being 
 
130 Labor: Its Part in Production 
 
 unable to carry on his business and fulfill his contracts. 
 The theory of collective bargaining power rests upon a 
 basis of historical facts, briefly stated by J. H. Hollander 
 as follows, "This much, however, can safely be set forth: 
 in those trades where an efficiently organized, intelligently 
 directed trade unionism prevails, wages have either risen 
 higher than they otherwise would have or have suffered 
 less reductions than would otherwise have occurred. ' ' ^ 
 
 However, scarcely one-half of the industrial wage earn- 
 ers of the United States are organized. Hence for the sub- 
 stantial portion of workers, the individual is still at the 
 mercy of his inferior bargaining power. Obviously the forces 
 of supply and demand operate with particular strength 
 where individual bargaining prevails. Under collective 
 bargaining, the workers hold the power to withdraw their 
 labor from the plant en masse and under this threat the 
 employer is pressed into the payment of an increased 
 wage. The effectiveness of the potential threat varies 
 greatly from employer to employer depending upon his 
 temperament, or the state of his business, or the degree of 
 his backing by other employers. If by temperament he 
 is strongly self-assertive and intolerant of interference, he 
 may fight it out with labor, even to the point of a protracted 
 strike or lockout. If the state of the business is poor, if 
 profits are low, and depression or loss stares him in the 
 face, so that wage increases would ruin the business, he 
 may use these facts to dissuade labor from exercising its 
 collective bargaining power unreasonably. If other em- 
 ployers are behind him, through employers' organizations 
 of one sort and another, his relative bargaining power may 
 be so enhanced as to offset labor's collective strength. But 
 after due allowance has been made for these influences, 
 the fact remains that labor's bargaining power tends to 
 become greater when used collectively, and wages tend 
 to be forced to higher levels. 
 
 Under collective bargaining, the labor cost to the em- 
 ployer is frequently, though not always, by any means, 
 considerably increased. Labor cost inclines to go up not 
 1 Abolition of Poverty," p. 55. 
 
Labor: Its Part in Production 131 
 
 merely because a higher wage sum is paid out, but also^ be- 
 cause the efficiency of the worker is sometimes severely re- 
 stricted by the collective bargaining group. For example, 
 in many cases bricklayers' unions have not merely pushed 
 wages up but have laid down a maximum number of bricks 
 which the worker is allowed to lay in one day. This maxi- 
 mum is decidedly low in comparison with the possible 
 efficiency of the bricklayer. Wherever restriction of pro- 
 duction is practiced at the same time that collective bar- 
 gaining is used to push wages up the labor cost becomes 
 abnormally great, and in the long run workers as well 
 as employers are grossly injured. Collective bargaining 
 used in such forms ultimately defeats its own purposes. 
 The use of collective power to restrict production deserves 
 sharp condemnation, for it is a source of loss to the 
 nation and of waste and damage to both employer and 
 employee. 
 
 Yet mere condemnation of restriction of production will 
 certainly not eliminate the fault. Restriction of produc- 
 tion is the instinctive response of the worker to a number 
 of painful facts in his industrial experience. One cardinal 
 fact of this type is unemployment. The millions of work- 
 ers who constantly stand in fear of irregular employ- 
 ment, seasonal fluctuations, or periodical depressions are 
 responding in the natural psychological manner when they 
 seek to make the job last as long as possible. The job in 
 hand is an immediate source of income; if it is lost, the 
 hunt may be long and discouraging before a new one is 
 found. It is inevitable that the worker should "make 
 work" out of a present job if he expects to be laid off 
 when it is finished. As long as the fear of unemployment 
 is a dynamic force in the worker's experience, no amount of 
 education, propaganda or condemnation can be expected to 
 abolish his impulse to make his work last as long as possi- 
 ble. Many other facts serve as causes in the "make work" 
 tactics of labor. The unsatisfied instinct of workmanship, 
 the stifled desire for self-assertiveness, the constantly 
 curbed possessive impulses, the thwarted desire to act as 
 a group, the general repressiveness of the economic en- 
 
132 Labor: Its Part in Production 
 
 vironment over the instinctive demands of human nature, 
 — all establish a psychological foundation for restriction of 
 production. Frequently, the concrete forms of restriction 
 are catalogued and written into a collective bargain be- 
 tween a union and an employer. More often, the forms 
 of restriction are unorganized and untabulated; they are 
 simply the spontaneous resistance of human nature to an 
 economic environment which has not been scientifically 
 adapted to human nature. Collective bargaining through 
 unions is not, as a rule, the cause of restriction of produc- 
 tion; the basic cause is in the maladaptation between the 
 economic organization and human nature. 
 
 Collective bargaining power, when not perverted to harm- 
 ful ends, is a real safeguard to the laborer. Without it, he 
 is at the mercy of forces which frequently are not con- 
 siderate enough of his needs and welfare. "Without it he 
 has no guarantee that his wages will come up to the sum 
 which his productivity warrants; no guarantee that he 
 can rise above the bare subsistence level, no guarantee that 
 his share of the total fund of production will be equitably 
 £'-?ertained ; no guarantee that unlimited supply and de- 
 mand forces will not drive his wage down to harsh and 
 intolerable levels. His group bargaining is his great safe- 
 guard against unfair, inadequate or unscrupulous wage 
 determination. However, the power which, when rightly 
 used, is a safeguard of labor's legitimate interests, is, when 
 used by unscrupulous or extremist leaders, capable of 
 menacing the legitimate interests of the employer. The 
 bargaining power of the employer is his safeguard against 
 the excessive or unreasonable demands of labor, and this 
 power often can be acquired only by the organization of 
 several employers to cope with the organization of laborers. 
 Organized bargaining power on both sides has been re- 
 sorted to as the only practical safeguard against excesses 
 by either side. This sets up a kind of balance of indus- 
 trial power, and is not unlike the principle of the balance of 
 power in international relations. It leads to a feverish 
 effort to build greater and greater power on both sides, 
 much as, internationally, the balance of power system leads 
 
Labor: Its Part in Production 133 
 
 to a feverish competition to build armaments on an ever 
 greater scale. Collective bargaining is usually militant and 
 threatening in its attitude, and involves a veiled threat 
 of strike or lockout unless demands are met. It lacks a 
 basis of confidence and co-operation between employer and 
 employee. It is not an ideal form of industrial relation- 
 ship, and probably not the ultimate form, but it occupies 
 a very prominent place in the present stage of the evolu- 
 tion of industrial relations and plays a large part in deter- 
 mining the wage scales in present-day industry. 
 
 Custom and Habit 
 
 Habit and custom suggest a fourth group of wage fixing 
 influences. Lines of work which custom accepts as carry- 
 ing prestige and social esteem often command a relatively 
 low wage. Examples would be found in the "white-col- 
 lared" clerical workers, or in the teaching profession. 
 Again, the customary standards of one locality often keep 
 wages higher (or lower, as the ease may be) than those of a 
 neighboring locality. Variation of wages as between dif- 
 ferent trades and occupations is in a large number of cases 
 explainable by the custom and tradition of the lines of work 
 involved. A Massachusetts Wage Commission has asserted 
 that "wages among the unorganized and lower grades of 
 labor are mainly the result of tradition and of slight com- 
 petition. ' ' 1 Employers who were habituated to the under 
 payment of sweated trades were sure that wages could not 
 possibly be increased above the customary scale until the 
 minimum wage laws came into play, defying custom, yet 
 not ruining the business. Habit and custom operate in and 
 through all other wage influences. Orthodox ideas of wage 
 figures "which the business wiU bear" established notions 
 of what constitutes "a fair day's pay for a full day's 
 work," and current attempts to "adjust wages to pre-war 
 levels" all illustrate the scope and force of custom in the 
 setting up the wage scale. 
 
 The groupings of wage influences which have been made 
 
 I "Report of the Commission of the Minimum Wage Boards," 
 January, 1912, p. 18. 
 
134/ Labor: Its Part in Production 
 
 ;Hn( 
 
 nder the headings of standards of living, incentives, bar- 
 gaining power, and habit and custom are not exhaustive in 
 their scope, nor do they exclude the influences mentioned 
 under the various theories of wages outlined at the begin- 
 ning of the wages section. The primary gain from these 
 groupings is to indicate that no one fixed, absolute prin- 
 ciple is adequate to explain wages, and that the most ade- 
 quate theory of wage standards is one which makes room 
 for a combination of numerous and variable factors. 
 
 To seareh for any one principle or law which will ac- 
 count in full for the determination of wages is not only 
 futile, but is a tendency to depart from the real facts of 
 the industrial world. A large variety of factors are con- 
 stantly in play, each exercising widely differing degrees of 
 influence in different trades, occupations, and communities. 
 Wages are the resultant of the multiplicity of forces. In 
 actual bargaining there is a high degree of guesswork in 
 ascertaining the proportionate influence of each factor. 
 Much of the guesswork is capable of elimination by a 
 frank recognition of the facts of the worker's life and an 
 effort at scientific measurement along lines already sug- 
 gested. A wage theory should be realistic, should fit the 
 facts of economic life. The most realistic method of wage 
 settlement is not a conception of some one wage law into 
 which wage facts of all sorts and- varieties must be made 
 to fit, as into a straight jacket. The truly realistic key is 
 a conception of the full list of wage forces, playing widely 
 varying parts from instance to instance, combining in new 
 and original forms, requiring in each individual case an 
 estimate of its peculiar and unique grouping of all the 
 forces in operation, and taking on new and differing de- 
 grees of influence in national and international wage levels 
 at various historical stages. At the same time, this plural- 
 istic or group theory of wages has the distinct advantage 
 of being genuinely serviceable because it keeps close to the 
 evolutionary and dynamic facts of economic life. 
 
 The basis of this theory of wages in actual economic con- 
 ditions is admirably stated by one of the most influential 
 labor boards in this country, the Railroad Labor Board, in a 
 
Labor: Its Part in Production 135 
 
 decision in 1920 on the wage rates of approximately 2,000,- 
 000 railway employees : ' ' The board has been unable to find 
 any formula which applied to the facts would work out 
 just and reasonable wages for the many thousands of posi- 
 tions involved in this dispute. The determination of such 
 wages is necessarily a matter of estimate and judgment 
 in view of all the conditions, a matter on which individuals 
 will differ widely as their information or lack of it, their 
 interest, situation or bias may influence them. ' ' ^ The 
 Transportation Act passed by Congress in 1920 laid down 
 as a guide in determining what wages would be "just and 
 reasonable" the following major considerations: 
 
 (1) The scale of wages paid for similar kinds of work 
 in other industries; 
 
 (2) The relation between wages and the cost of living; 
 
 (3) The hazards of the employment; 
 
 (4) The training and skill required ; 
 
 (5) The degree of responsibility; 
 
 (6) The character and regularity of the employment; 
 and 
 
 (7) Inequalities of increases in wages or of treatment, 
 the result of previous wage orders or adjustments. 
 
 Wages and Labor Efficiency 
 
 Any considerable increase in the real wages of the masses 
 of people depends upon an increase in the total productivity 
 of the country. Labor may make gains here and there in 
 squeezing out of the present fund of production some of 
 the excessive gains which go to profiteers, but any sub- 
 stantial progress in the form of more of the necessaries, 
 comforts and luxuries of life is conditioned upon an ad- 
 vance in the productive efficiency of the whole people. On 
 this point, the careful statistical studies of W. I. King are 
 authoritative. His conclusions are stated as follows.^ 
 "Thus it would seem improbable that, with our present 
 national productive power, any feasible system of dis- 
 tribution could increase the average wage earner's income 
 
 1 Monthly Labor Bulletin, Volume XI., p. 101. 
 
 2 "Wealth and Income of the People of the United States.-" 
 
136 Labor: Its Part in Production 
 
 in purchasing power by more than one-fourth and this is 
 an extreme rather than a moderate estimate. While such 
 a change might or might not be desirable, it would, at 
 least, work no startling revolution in the condition of the 
 employees of the United States. The grim fact remains 
 that the quantity of goods turned out absolutely limits 
 the income of labor and that no reform will bring univer- 
 sal prosperity which is not based fundamentally upon in- 
 creasing the national income." King's findings were based 
 upon pre-war figures. A post-war investigation has been 
 made by David Friday, in which the observation is es- 
 sentially the same. ' ' The practical conclusion that follows 
 from all this is that the source of real wages must be 
 found in production and not in a redistribution of the 
 product of industry. 
 
 "Those who had hoped to augment the laborer's real 
 wages by making short shrift of the whole matter and 
 adding to the laborer's wages what the entrepreneur now 
 receives as profits, will be disappointed by this analysis of 
 the situation. . . . 
 
 "That a 20 per cent, increase in productive output is 
 possible was demonstrated during the war. That the co- 
 operation of labor is necessary to any such program is 
 obvious. But the possibility of that co-operation was also 
 demonstrated. Given an aim that appealed to the imagina- 
 tion, that made labor an integral part of the body politic, 
 it demonstrated its willingness to co-operate. But there 
 had to be a worthwhile end, and there had to be recog- 
 nition of labor as a factor equal to the other partners in 
 the industrial life of the nation. ' ' ^ 
 
 In other words, even though labor should plunge en- 
 thusiastically into the task of increasing production in a 
 measurable degree labor might have no assurance that a 
 
 1 "Profits, Wages and Prices," p. 236. See, however, above, page 
 131, for an analysis of the basic causes of restriction of production. 
 It is necessary to realize clearly that the rational correctness of this 
 finding cannot be expected to insure a transformation in labor 
 behavior. Labor attitudes toward maximum production are the 
 outcome of every instinctive and impulsive industrial influence as 
 well as of appeals to reason. 
 
Labor: Its Part in Production 137 
 
 due proportionate share of the increase would be forth- 
 coming in the form of wages. Labor has had ample bitter 
 experience in the past to satisfy its mind that there are 
 altogether too many employers who would pounce upon 
 labor's increased productivity, and endeavor to retain the 
 lion's share of the increase. The only safeguard against 
 this encroachment which has thus far proved reliable 
 enough to command the widespread confidence of labor is 
 collective bargaining through a powerful, organized labor 
 group. The indispensable understanding in labor's mind 
 before any material increase of total production may be 
 looked for, must be that labor shall receive a just and 
 proportionate share of the increase. Unless labor can be 
 reasonably assured of this outcome, labor cannot be ex- 
 pected to take part in the ideal of greatly heightened out- 
 put. Many individual plants have experimented with such 
 assurances, and have increased production in many cases 
 by surprising amounts, but only because the individual em- 
 ployer has been progressive enough to comprehend labor's 
 point of view, and to offer assurances fitting the individual 
 plant, which convinced labor that wages would constitute 
 a fair and proper share of the increased product. The: 
 number of employers, however, who are unable because 
 of traditional ways of thinking, to give labor such an as- 
 surance is so great that on a national scale, the laborer 
 declines to trust to their beneficence to dole out what labor 
 would consider a fair share of the increased product. For 
 the general run of laborers, dealing with a large proportion 
 of employers, the only satisfactory assurance lies in labor's, 
 power to claim a fair share of the increase, through agencies, 
 of collective bargaining. Even though this agency may 
 often make exaggerated demands, and appear obstinate 
 and headstrong and unreasonable in its claims, neverthe- 
 less the only sure recourse of labor is collective bargain- 
 ing either in the form of works councils or labor unions. 
 Democratic action in government or industry has graven 
 faults, but the central necessity for the group method 
 exists in industry as well as in polities, and the besetting 
 sins of collective bargaining groups must be alleviated by 
 
138 Labor: Its Part in Production 
 
 a more co-operative attitude on the part of labor, capital 
 and the public. 
 
 Fully aware of these phases of labor psychology, Friday 
 further concludes: "We have learned that it is possible 
 to produce enough so that every class may have a decent 
 standard of living. "With this result realized, poverty will 
 be abolished. This attainment is one of which nations 
 have dreamed for centuries. No nation has been within 
 striking distance of its realization before. If any national 
 leader or any group can be found with the imagination and 
 the courage to appeal to America on the basis of this 
 motive, and with an adequate program, we shall see the 
 most promising and worthwhile political and industrial ex- 
 periment which we have tried in our national career. ' '^ 
 
 Power 
 
 It is true that labor's part in production is concerned 
 with questions of function, of the job, of wages, of hours. 
 But it is of deeper significance that all of these separate 
 demands and individual movements are bound up with a 
 central, pivotal movement, — one which comprehends the 
 various individual claims, and integrates the thought and 
 action of labor into a concentrated purpose. That con- 
 centrated purpose is a new status in industry. The new 
 status occupies the forefront of opinion and feeling among 
 the laborers of the country. 
 
 The transition to the modern industrial organization, 
 which began in serious proportions during the middle of 
 the nineteenth century, gave to the worker a status of ob- 
 vious inferiority. He became a hired hand in the factory 
 and railroad and mine, with no material control over the 
 working conditions which decided the destiny of his life. 
 The regime of machine production denied to the worker a 
 share in the control of the raw product, or of the machinery 
 for production, or of the rewards for work, or of the amount 
 of work to be done per day, or of the conditions under 
 which work had to be done. The labor problem now is at 
 bottom an effort to win a share of control in all these 
 1 "Profits, Wages and Prices," p. 251. 
 
Labor: Its Part in Production. 139 
 
 matters which directly affect the worker's life. It has 
 been said that "The root evil of the present industrial 
 order is that it affords to the ordinary worker in industry 
 no means of expression and no chance of responsibility 
 or active citizenship." The labor movement is primarily 
 committed to the removal of this root evil, and to the 
 substitution of a status of influence, responsibility, and 
 expression. 
 
 The World War served to accelerate the movement. The 
 worker was definitely told that he counted and counted 
 vitally in winning the war. The workshop was painted 
 as the second line of defense, and no less in importance than 
 the front line trench. The worker was told that the war 
 was a struggle to make the "world safe for democracy." 
 In his mind and his experience, the world often nearly 
 coincided with his workshop, and to him, therefore, the 
 slogan meant that the war was to make "industry safe 
 for democracy." Such hopes stimulated the worker's 
 instinctive dispositions of self-assertion and self-expres- 
 sion, and set loose a tide of human energy in the direction 
 of more control over the machine regime. Bx-Secretary 
 of Labor Wilson hinted at the phenomenon in these words : 
 "Both sides must realize that money and hours are but in- 
 cidents in the fight. . . . The real thing which is being 
 fought over by employers and wage workers is self-respect. 
 The employer feels that he cannot give up for fear of los- 
 ing his self-respect and prestige; while the wage workers 
 feel that they cannot give up for fear of losing their self- 
 respect. . . . When employers will give as much thought to 
 studying the sentiments which control life as to studying 
 materials, machinery, law, and other factors, then we shall 
 be on the road to industrial peace." 
 
 This inner change which is affecting society goes to the 
 heart of the matter. Surface demands for new wages, 
 new hours, new treatment are concrete signs of the funda- 
 mental thing itself, — a new assertion of the worker's 
 thought and power. In this respect there has been an 
 institutional and spiritual change going on in social and 
 industrial life. The mechanical f9.cts of the working world 
 
140 Labor: Its Part in Production 
 
 have in great measure outrun the traditional ideas, prin- 
 ciples, and organization for their direction and control. 
 The facts of automatic machines, uninteresting toil, fatigue, 
 long hours, bossy foremen, unreliable wages, advertised 
 profits, — ^these are no longer taken care of by the tradi- 
 tional ideas of individual action, unrestricted managerial 
 power, unbridled freedom of contract, individual bargain- 
 ing, non-consultation between employer and employee, and 
 "business is business." At least, they are not cared for to 
 the satisfaction of the worker. Out of this maladjustment 
 between the mechanical facts and the traditional principles 
 of industrial government has grown a vivid awakening of 
 instinctive energies. They are energies which crystallize 
 into new principles of industrial control, — of industrial self- 
 control. The outcome of the experience has been the formu- 
 lation of a new status for the worker. The newly projected 
 ideas call for group action, modified managerial power, 
 collective freedom of contract, organized bargaining, joint 
 conference between employer and employee, and "business 
 is self-expression." Whatever individuals may think of 
 the soundness or viciousness of the new conceptions, they 
 are in our midst at any rate, and are the real influences 
 to be reckoned with in any serious reflection upon labor's 
 part in production. 
 
 A great obstacle in the path of these instinctive aspira- 
 tions for a new labor status is the defects, excesses, and 
 abuses in labor organizations themselves. Their frequent 
 abuses of power; their strikes in defiance of the public 
 need; their walking delegates, union organizers and union 
 leaders often lacking in self -discipline and in a due regard 
 for the legitimate interests of employers and the public; 
 their occasional acts of violence; their reluctance to sur- 
 render policies for restricting production; their tendency 
 to harass business with a flood of limitations, regulations 
 and by-laws; their rash demands from time to time in col- 
 lective bargaining conferences; their occasional repudia- 
 tion of contracts with employers, — all need to be brought 
 under control before the public or employers will be will- 
 ing to trust, labor with, the e.ovet.ed. status of power. All 
 
Labor: Its Part in Production 141 
 
 of the excuses and explanations for such abuses which can 
 be conceiYed of by the best labor minds are practically 
 futile as a means of convincing the rest of the economic or- 
 ganization that a new status of labor power is safe. The 
 highest ambitions of labor will certainly be opposed and 
 thwarted in countless ways by the public as well as employ- 
 ers, until labor accepts seriously the obligation to eliminate 
 the excesses and abuses, which are now all too prevalent 
 in labor organizations.^ 
 
 Environment 
 
 The environment of the laborer comprises all the sur- 
 rounding influences upon his body and mind. Within the 
 economic environment the worker spends from one-third 
 to one-half of his waking life. The influence of this en- 
 vironment upon his moods, his bodily health, and his human 
 well-being is profound. Good wages without a favorable 
 environment are futile. Reduced hours in unsanitary sur- 
 roundings are of little avail. More stable employment if 
 the employment conditions are unsafe for life and limb is 
 without real gain. 
 
 What is involved in environment? What is at stake? 
 For one thing, the safety of the worker. In a recent ad- 
 dress, the President of the American Society of Safety 
 Engineers put the ease comprehensively: 
 
 "There are killed accidentally in the United States each 
 year about 70,000 people, or nearly 20,000 more than the 
 total battle deaths and subsequent deaths from wounds 
 in our army during the entire European War. 
 
 ' ' Of the wage earners in this country, over 700,000 each 
 year lose members of their body or are so seriously injured 
 by accidents as to be incapacitated for an average of four 
 weeks each. 
 
 "The total economic waste from casualties in the United 
 States amounts to probably $800,000,000 per year, with un- 
 told privation and suffering entailed. 
 
 1 See below, Part III, Economic Adaptation, for a detailed con- 
 sideration of the dangers and benefits of the relative conceptions 
 and of the policies and practices of capital and labor growing out 
 of them. 
 
142 Labor: Its Part in Production 
 
 "About 90 per cent, of this yearly casualty expense, or 
 $720,000,000 is caused by accidents that are preventable 
 by engineering provisions. It is not claimed that even a 
 large portion of the total casualties are preventable by en- 
 gineering provisions — only 7 per cent. ; but it is this 7 per 
 cent, which is preventable by engineering provision that 
 causes the $720,000,000 casualty expense." 
 
 With the development of high power and high speed ma- 
 chinery, the network of electric currents, complicated 
 chemical processes, the use of compressed air, the presence 
 of dangerous gases, acids and dusts in productive proc- 
 esses, extremes of temperature and humidity, improper 
 ventilation and unsanitary surroundings, night work and 
 inadequate lighting, — with all these accompaniments of the 
 modem economic process, the hazards and risks to the 
 worker have mounted high. The highest death toll is ex- 
 acted in the mining industry, with railroading, electric light 
 and power industries ranking in close proximity. 
 
 For the most part, a remedy for such hazards has come 
 through legislation, state and national. Labor unions have 
 brought pressure to bear, and a Safety First movement 
 voluntarily adopted by employers has accomplished much. 
 However, it remains true that for a considerable portion 
 of industrial establishments, considerations of safety and 
 health have proved to have only a secondary appeal. For 
 that portion, legislative compulsion is the only adequate 
 guarantee of even minimum safety and health conditions. 
 
 Many pioneer employers have gone far beyond consid- 
 erations of mere safety and health and have set about 
 making the working environment positively attractive, 
 comfortable, stimulating. The plants are surrounded with 
 well-kept lawns or beautiful parks. Landscape and build- 
 ing architecture become an economic art. Carefully painted 
 interiors, neatness and cleanliness in the care of build- 
 ings and the arrangement and upkeep of machinery, abun- 
 dant window space, scientific shading and illumination, a 
 medical staff with doctors, dentists and psychiatrists, 
 hospital and dispensary facilities, playgrounds, gardens, 
 rest rooms, libraries, company stores, gymnasiums, night 
 
Labor: Its Part in Production 143 
 
 schools, even universities, — ^these are a few of the improve- 
 ments of environment which, all or in part, are taken up 
 already by an imposing list of companies.^ The plan in 
 such companies is linked with considerations of productive 
 efficiency, workers' comfort, plant morale and loyalty, and 
 a general spirit of happiness, prosperity and contentment 
 in the whole working program. The gap between such best 
 kept plants and the worst kept plants is startling and sug- 
 gestive. 
 
 An important consequence of an environment of this im- 
 proved type lies in the fact that it offsets in a real measure 
 the monotonous and fatiguing effects of the production 
 process. The handling of repetitive machinery may be 
 made less monotonous by surrounding the operator with 
 pleasant and stimulating factory accommodations. The 
 fatiguing tendencies of the length of the work day are in a 
 measurable way reduced by clean, artistic, healthy work- 
 rooms. The spirit of the worker cannot rise above the 
 tone of the plant yards, the lighting system, the mechanical 
 arrangements. But if the laborer has a pleasant place to 
 work in, his spirit, interest, morale and efficiency tend to 
 improve. This outcome is broadly stated by R. A. Spaeth in 
 these words : ' ' When working conditions are standardized 
 and we have the best of light and heat and ventilation; 
 when all workers, men and women, have recess periods 
 and properly adjusted, comfortable chairs ; when plants are 
 equipped with cafeteria in which workers buy an occa- 
 sional plate of soup instead of the more popular pie and 
 ice cream; when the labor unions and managers alike in- 
 sist upon physical examination of all employees; when job 
 analysis and tests for physical, physiological and psycho- 
 logical fitness once get on speaking terms ; when the indus- 
 trial engineer stops fooling himself by comparing task 
 setting with astro-physics and appreciates that his open 
 sesame is not the stop-watch but the square-deal — then 
 
 1 Corporations ■which have tried out these constructive devices are 
 such as the National Lamp Works, the National Cash Register 
 Company, the Goodyear Tire and Eubher Company, the Endicott 
 Johnson Company, the Eastman Kodak Company and the Proctor 
 & Gamble Company. 
 
144! Labor: Its Part in Production 
 
 and not till then, will the question of fatigue no longer 
 be of such moment as it is generally considered. ' '^ 
 
 In the broadest sense of the word, the economic environ- 
 ment covers pretty much the entire content of the work- 
 er's experience while he is on the job. For this reason, 
 the environment serves as a stimulus to a wide variety of 
 instincts in the worker's makeup. The financial instincts 
 which are encouraged by various devices have already been 
 mentioned under the section on wages and financial in- 
 centives. It is necessary now to consider some of the 
 non-financial incentives which enter into the worker's in- 
 stinctive behavior. The following list of non-financial in- 
 centives is by no means complete, but should be suggestive : 
 
 1. An incentive to devotion to the laborer's duties is 
 found in giving the laborer information about the pro- 
 ductive process. Standing at his one machine, making but 
 one isolated, unrelated part of the finished product, the 
 worker attaches little significance to his operations. What 
 is it all about ? He does not know. But along comes an in- 
 dustrial engineer to draw up diagrams and charts which 
 present vividly and clearly to the worker the part which 
 his individual touch plays in the formation of the finished 
 article. Perhaps a moving picture of the whole manu- 
 facturing process is made and presented to an audience of 
 workers. Talks by executives are used to explain the 
 scheme of manufacture. The worker is thus able to dis- 
 cover the ultimate meaning and significance of his work. 
 ' ' Interest in a thing may be developed by means of extend- 
 ing information about it. . . . In applying this in indus- 
 try, one would tell the employees many things about the 
 business, soaking them in facts to the point of saturation. 
 ... To inculcate a deep affection and loyalty toward the 
 firm, give information about its beginnings and growth."^ 
 
 From a thoroughly practical viewpoint as an indus- 
 trial engineer, C. E. Knoeppel states, "Wherever far- 
 sighted executives have widened the vision of their work- 
 
 i Industrial Management, May, 1920, p. 411. 
 
 2 H. D. Kitson, Journal of Political Economy, Volume 28, pp. 
 332-336. 
 
Labor: Its Part in Production 145 
 
 men by explaining the relation of their work to the whole 
 plant, a better and more nearly normal relationship has 
 followed. "1 
 
 2. Another incentive has been discovered in the practice 
 of frankness with the workers about the hitherto concealed 
 facts of the business. Government representatives enlisted 
 the support of the I. W. W. lumbermen of the Northwest 
 during the War by having the owners open their books 
 and show the costs and profits of the business. A number 
 of concerns voluntarily take leaders of the workers into 
 their confidence on the ups and downs of the business, and 
 this factor of candid consultation, and frank give and take 
 of information about the profit and loss phases of the 
 company policy establishes a mutual confidence and under- 
 standing which serves as a powerful incentive to loyalty 
 and interest on the part of the worker. 
 
 3. Incentives are possible only when the worker feels 
 that his new interest in the enterprise will not be ex- 
 ploited to the undue selfish advantage of the employer. As 
 is pointed out by Tead and Metcalf , ' ' There is, finally, the 
 fear of exploitation if interest in work is pushed to a point 
 where the employer gets a much larger proportionate re- 
 turn for increased product than the worker. . . . The 
 arousing of interest is not synonymous with efforts to ' speed 
 up' production, to cut wage rates, to increase profits. At 
 that moment when workers feel they are being tricked into 
 interest in work in order that their employer may get added 
 returns, the game will be up with the employer." One of 
 the surest ways in which the impression of trickery can 
 be given is the all too prevalent device of cutting piece 
 rates when an increase of production takes place. If the 
 worker is satisfied that a proper share of the increased 
 output will come his way, there is something to fire his 
 imagination. The integrity and squareness of the employer 
 is of itself a genuine non-financial incentive. 
 
 4. Stability of employment is a loyalty incentive when 
 the worker sees that the employer is concerned with his 
 interest to the extent of making every effort to eliminate 
 
 1 The Nation's Business, April, 1921, p. 17. 
 
146 Labor: Its Part in Production 
 
 seasonal shut-downs, and to keep going, even if only on 
 part time, when business is slow. The worker has a reason 
 for a reciprocal attitude toward the employer. Loyalty to 
 the worker in the form of maintaining a steady job be- 
 gets loyalty to the employer in the form of interest in the 
 job. To secure this incentive, management must convince 
 the worker that it is doing its best to give him an unin- 
 terrupted chance to earn a living. 
 
 5. Kivalry is stimulated by posting the records of pro- 
 duction for individuals and for groups. When men can 
 see their efficiency rated side by side with that of their 
 fellow workers, it becomes a matter of pride to come near 
 the head of the list. Moreover records which indicate the 
 quality of the finished product and the amount of spoiled 
 goods tend to foster a real pride of craftsmanship. An- 
 other form of record gives the worker his comparative 
 efficiency to-day and a year ago to-day, with the result 
 that he tends to take pride in progress in his skiU. 
 
 6. Fitting the worker to the job by intelligence tests, 
 ability tests, job specifications studies, and efficiency rat- 
 ings, makes possible a harmony between the human factor 
 and the machine factor, which tends to heighten interest 
 in the job. In the first flush of enthusiasm for psychological 
 tests, experts overestimated their value considerably. Their 
 usefulness is thus far confined to certain highly specialized 
 tasks, such as clerical work, inspection tasks, salesman- 
 ship, and tasks where acuteness of hearing or vision are of 
 vital importance. The tests themselves, such as the Binet, 
 the army, and special industrial forms, are in a far from 
 completed shape for fuU industrial applications. The 
 correlation between tests and subsequent showings of effi- 
 ciency indicate that the tests are not a sufe indication of 
 trade ability, but at most point to a probable efficiency or 
 inefficiency. Hence they have to be used with wide leeway 
 for judgment and common sense on the part of the em- 
 ployer. Then effective use requires administrators who 
 have had special psychological training.^ Purely psycho- 
 logical tests need to be supplemented by physical, medical 
 
 iH. D. Kitson, School Revieiv, Volume XXIV, No. 3, March, 1916. 
 
Labor: Its Part in Production 147 
 
 and physiological tests to discover the endurance of the 
 worker under the working conditions of the occupation in 
 which he is to be placed.^ 
 
 7. Transfer and promotion are practicable aids to sound 
 labor incentives. Henry Ford states that the repetitive 
 machinery of automobile manufacturing would drive the 
 workers crazy unless they were given variety at right in- 
 tervals by transfer from one type of machine to another, or 
 from one department to another. Transfer thus serves to 
 alleviate monotony. Again, if a worker is found inefficient 
 at one type of work, the scientific "^solution is proving to be 
 to try the man out at other types until he gets the right 
 sort of task for his peculiar nature. If he is at odds with 
 the foreman of one department he may be transferred to 
 another foreman. These policies secure the confidence of 
 the worker and are a substitute for a former policy of 
 discharge the instant the man proved incompetent. At 
 each job held, efiSeiency reports may be made, based on 
 piece-rate records, quality of work, judgment of foremen 
 and superintendents, character traits, attitude toward 
 work, etc. These ratings can be used from time to time 
 as the basis of promotions.^ "Many organizations lose a 
 considerable degree of the enthusiasm and zeal they might 
 command by failing to make it apparent that they will 
 recognize merit and advance the ambitious. . . . Any trans- 
 fer or promotion plan which is to be permanently sound 
 should, therefore, meet this test : Does the plan stimulate 
 and draw out the desire of people to be creative, to be in- 
 terested in their own activity, to excel, to win approval, to 
 develop in power of self-expression V ^ 
 
 8. A great number of employers have set up organ- 
 ization machinery which invites and encourages the sug- 
 gestions, viewpoints, and opinions of workers. The de- 
 vices of labor representation are various in kind, but in 
 all their variety, are based upon the value of evoking the 
 mental activity of the workers. Joint conference, consulta- 
 
 iR. W. Kelley, "Hiring the Worker," pp. 91-97. 
 
 2 lUd., Chapter VIII. 
 
 3 Tead and Metealf, "Personnel Administration," pp. 228-235. See 
 also, R. A. Spaeth, Industrial Management, March, 1920, pp. 213-217. 
 
148 Labor: Its Part in Production 
 
 tion, discussion, all serve to clear up misunderstandings, 
 to create a new feeling of dignity and self-respect on the 
 part of the worker, to develop a sense of responsibility and 
 self-control, and most important of all, to build up a feel- 
 ing that the interests of the worker are one with the in- 
 terests of the employer. 
 
 9. The morale of the workers has been elevated by the 
 improvement of the environment of the workers. Attrac- 
 tive homes, hospital care, recreational facilities, pleasant 
 factory conditions have their psychological reactions upon 
 all the instincts of the worker. By encouraging a psycho- 
 logically abundant life, the worker develops a higher per- 
 sonality and simultaneously proves a steadier and higher 
 material efficiency. 
 
 10. ' ' Men must get the feel that they are working for , 
 efficient managers if they are going to be interested in 
 increasing production. ' ' ^ 
 
 Especially must the workers feel that the management 
 is intelligently and scientifically handling the personnel side 
 of the; organization. To quote Meyer Bloomfield, "When 
 everything that present-day science can suggest in the way 
 of improving technical efficiency in systems of cost keeping, 
 equipment, machinery, and material has been adopted, the 
 biggest of all industrial problems remains to be faced. 
 
 "As we have seen, this is the problem of handling men. 
 Every awakened employer knows that managing employees, 
 selecting, assigning, directing, supervising and developing 
 them, is the one phase of management which is most diffi- 
 cult and complicated. ' ' ^ 
 
 To perform this important function, a new profession 
 has come into being within the last few years, that of em- 
 ployment management or personnel administration. The 
 manager of this department of the business conceives of the 
 human factor as a problem calling for scientific analysis of 
 every phase of the employment relationship. The conse- 
 quent good-will and mutual understanding are the results 
 of the incentives aroused in the laborer 's mind. 
 
 1 Survey, March 5, 1921, p. 817. 
 2Kelley, "Hiring the Worker," p. 9. 
 
Labor: Its Part in Production 149 
 
 This list does not in any sense exhaust the non-posses- 
 sive incentives possible in the processes of production. 
 They illustrate a number of the possibilities. There are 
 so many things which count in the worker's life besides the 
 amount of his income that economic principles based upon 
 the assumption that the laborer is a one-motive being, — and 
 that motive purely mercenary, — have gone far astray. The 
 non-possessive instincts, when properly called out, build up 
 a better balanced life for the worker and supply the em- 
 ployer with a producer whose heart is in his work. 
 
 The Mind of the Worker 
 
 The following description of labor's ideas is only a de- 
 scription, not an argument. The purpose is to picture the 
 ideas as accurately as possible without condemnation or 
 approval. Moreover it would be false to claim that any 
 single set of ideas prevails uniformly throughout the labor 
 group. However, after full allowance has been made for 
 the variations of opinion and extremes of radicalism and 
 conservatism which exist throughout the labor world, there 
 is obvious a strong degree of likemindedness among the 
 workers. This likemindedness is particularly impressive 
 in that section of the labor group which is dynamic, — 
 that section which believes in change for the better and 
 which in one degree and another is constantly bringing 
 pressure to bear in favor of economic change.^ 
 
 First of all, in labor's mind, management is inefficient. 
 The notion that management has any magic capacity for 
 high efficiency is rudely dismissed. In all but exceptional 
 factories the workers see in the course of the everyday 
 tasks constant illustrations of management's blunders. 
 They see no small number of ways in which machinery 
 could be better arranged, delays avoided, waste elimi- 
 nated, good-will stimulated, and better production se- 
 cured. In the past, labor's suggestions and ideas on such 
 matters have too often been spurned by management. "An 
 employer will tell you in one breath that he will stand no 
 
 1 See Samuel Gompers's "Labor and the Common Welfare," also 
 "Labor and the Employer," 
 
150 Labor: Its Part in Production 
 
 interference with, 'his' business, and in the next that his 
 employees take no interest in that business. Of course they 
 don't. They haven't any interest. They are unconsulted 
 outsiders. , . . What incentive have wage earners to take 
 a personal interest in the problems of industry, when no- 
 body asks their advice, and everybody resents it?" In 
 many of the afEairs of labor, the foreman stands in the 
 laborer's eyes for the whole of management. The foreman 
 is management's immediate representative on the ground. 
 "At any rate, the worker is not to be blamed if he con- 
 siders his driving foreman, or that grouchy gate police- 
 man, or that mean-minded paymaster, or his pompous clerk 
 quite as fully and as properly a representative of the 
 company's real purposes as the solicitous employment 
 manager or the friendly nurse. ' '^ The workers see no rea- 
 son why the management should not supply "better jobs 
 and steadier jobs, less tiring jobs, jobs whose human service 
 is better understood, jobs with a better chance to enjoy the 
 satisfactions of their doing, without these being lessened by 
 a grasping foreman representing an unknown employer.'" 
 The foreman, the boss, the paymaster, all stand for the 
 management in the eyes of the laborer, and their arbitrari- 
 ness, or unreasonableness, or blindness, or incapacity, or 
 stupidity represent the qualities of the management. Fur- 
 ther than this, labor nurses the idea that management is 
 guilty of one great inefficiency which is almost criminal, 
 namely, the inefficiency represented in unstable employ- 
 ment. That management should boast of marvelous skill 
 and efficiency and at the same time be unable to avert 
 shut-downs, seasonal tie-ups, periods of depression, indus- 
 trial breakdowns following overproduction appears to 
 labor to be proof of inexcusable incompetency. Labor be- 
 lieves that such phenomena appear largely because of 
 management's consideration of "profits first." In this 
 attitude, labor is encouraged by industrial engineers 
 and experts, whose constant complaint is that a large part 
 of production is not more than fifty per cent, efficient. 
 
 1 Whiting Williams, "What's on the Worker's Mind!" p. 290. 
 
 2 76id., p. 317. 
 
Labor: Its Part in Production 151 
 
 There is consequently a strong effort on the part of labor 
 to ally itself with the engineers and their philosophy. 
 Thus, growing out of experiences year in and year out, 
 labor has come to feel that management has no monopoly 
 upon the knowledge of productive efficiency and that in 
 many problems of the workshop labor is as wise as manage- 
 ment. Reverence and awe for management as a genius 
 of masterful efficiency has been shattered. 
 
 Secondly, in labor's mind the owners of property are 
 to a large extent engaged in the game of getting something 
 for nothing. Labor does not entertain the socialist doc- 
 trine that ownership is not entitled to an income. Labor's 
 idea is that a large part of the income which ownership 
 actually wins is undeserved, unearned, and excessive. The 
 great prominence given to the facts of profiteering in recent 
 years has accentuated this impression. Moreover, labor 
 believes that this profit motive of property owners, being 
 carried to an extreme, is the cause of a large proportion of 
 industrial woes. As things stand, labor conceives that in- 
 dustrial organization is for profit instead of for use, for 
 dividends instead of for production or service. "There is 
 a general conviction among thoughtful workers that the 
 present world works badly; that unemployment, poverty, 
 ignorance, social injustice are things which intelligent con- 
 trol and ordinary good human intentions could prevent if 
 only there was a will and the desire that they h/e pre- 
 vented."^ The owners are thought to have a primary con- 
 sideration constantly for profits and only a secondary, a 
 remotely secondary consideration for labor's best interests. 
 The owners are charged with admitting only a minimum 
 obligation or responsibility to labor. In turn, labor feels 
 no strong sense of obligation or responsibility to owners. 
 The weak loyalty of labor toward the owners is more than 
 matched, so labor thinks, by the disloyalty of owners 
 toward labor. It is an apt figure of speech that the cor- 
 poration has no soul. The legal precept fits the moral fact 
 of the ease, in labor's eyes. The assumption which has 
 been traditional since the days of Adam Smith that the 
 1 F. Tannenbaum, Jf eio Republic, Vol. XXIII, p. 172. 
 
152 Labor: Its Part in Production 
 
 incidental by-product of profit seeking is always some 
 good for tlie community finds no credence. Labor has 
 seen too many examples to the contrary. Moreover, 
 ownership need not boast that profits are a reward for 
 managerial ability. Labor asks, ' ' Do managers receive the 
 profits?" Obviously not. Managers receive a salary. 
 With all these notions, the awe of property dies. Rev- 
 erence for ownership as something sacred and religious 
 passes out. "Certain ideas one believes to be knit into 
 the fiber of the people. Suddenly they fall away— out- 
 worn shells. . . . Reverence for the gentry, for the privi- 
 leged, for the idle, has withered. With the idea gone, the 
 institutions built upon it go. . . . In my opinion, this 
 change is the most profound in its grip on instinct, the 
 most far-reaching in its consequences of any. All other 
 changes wait on that, and follow from that.''^ The in- 
 stincts of labor refuse to pay homage to the acquisitiveness 
 of property. The spirit of the workers ceases to be afraid 
 of the inalienable and immutable principles of profit mak- 
 ing. "A growing proportion of mankind believes that 
 industry should be managed primarily for those who work, 
 not for those who own. " ^ It is natural under the circum- 
 stances that labor should get the notion that the owners of 
 the property are unsympathetic. To believe that the busi- 
 ness is a partnership between labor and capital is difficult, 
 and the outcome of the whole matter is that "those who 
 work are fighting those who own. The workers no longer 
 think that the shareholders are wiser than they." Labor's 
 ideas are by no means complimentary to capital owners. 
 They are exceedingly harsh and critical, and all the more 
 so, because of the instinctive drive behind them. 
 
 In the third place, labor thinks of the market, the whole 
 organization of buying and selling commodities, as some- 
 thing rigged and manipulated by obscure strategists. In 
 selling his labor as an individual to an employer a laborer 
 feels that he is at a disadvantage ; and as a consumer in a 
 grocery store or butcher shop, he gathers about the same 
 
 1 Arthur Gleason, "What the Workers Want," p. 251. 
 
 2 See R. H. Tawney, "The Acquisitive Society." 
 
Labor: Its Part in Production 153 
 
 impression. He conceives a long line of superfluous middle- 
 men, an army of price boosters, cliques of hoarders, and 
 parties to price agreements; and matched against the wits 
 of such an array of market manipulators, he feels helpless 
 and inadequate. In his mind the whole process is not 
 maintained primarily for the sake of serving the labor con- 
 sumer but for the sake of lining the pockets of acquisitive 
 dealers. However unfair such a conception may appear to 
 some outsiders, it is beyond dispute that such a conception 
 is M'idely held among laborers. 
 
 In the fourth place, labor conceives of finance as some 
 secret, far-reaching process of scheming. The institutions 
 of banking, speculation, exchange, credit, and Wall Street 
 appear as a conspiracy of interlocking directorates, secret 
 understandings, and mysterious quiet powers which hold 
 a whiphand over the whole productive organization. The 
 railroad brotherhoods brought charges that a gigantic con- 
 spiracy of big banks deliberately fostered the post-war 
 business depression for the sake of drawing the teeth out 
 of labor's war-gained powers. The House of Morgan is 
 a by-word for the subtle and dangerous. Labor believes 
 that it detects financiers as the powers behind the throne 
 in most big labor controversies. Strikes in the steel, coal, 
 and railroad industries have shown up, so labor is con- 
 vinced, the big bankers interested in those industries as the 
 real antagonists. The craft and strategy which labor at- 
 tempts to overcome, has its source in the shrewdness and 
 sagacity of these silent financial directors of the industrial 
 life of the nation. This is not to deny that the lending of 
 money, and the protection of deposits is an important 
 economic service. Labor simply asserts that the terms 
 upon which the service is rendered bodes labor no good 
 and unduly restricts and shackles productive enterprise. 
 
 Fifth, labor believes that the law is not on its side. It 
 believes that the law has all too often been unfair. In- 
 junctions, court decisions, restraints from picketing, and 
 from boycotting, assessment of damages, limitations of 
 rights, — ^these are but a few of the methods of the law 
 which give labor an unfortunate position. "From time 
 
154 Labor: Its Part in Production 
 
 to time, American workingmen have also raised their 
 voices, but ineffectually, in favor of the simplification of 
 our legal system. They have protested against the legal 
 technicality which American lawyer legislators have de- 
 lighted in inserting into the statutes and the rules govern- 
 ing court procedure. They have also protested against 
 the einphasis which the legal mind places upon precedent, 
 because precedent is necessarily a handicap upon any class 
 struggling upward toward a plane of equality with other 
 classes."! Moreover the favorite doctrines of the law such 
 as the natural and inalienable rights of private property, 
 individual liberty, free contract, and free competition, run 
 at cross-purposes with the instinctive desires of labor. 
 If the labor movement means anything, it means a denial 
 that private property has rights which are superior to 
 personal rights, and that private property is above and 
 beyond restriction and restraint. It means, too, that indi- 
 vidual liberty for an employee is a mockery and that unless 
 the doctrines of individual liberty are supplemented by 
 new doctrines of group liberty and unless the individual 
 biUs of rights can be supplemented by group bills of rights, 
 the word liberty cannot mean much to labor. In labor's 
 mind freedom of contract means the freedom of the 
 employer to pay as low a wage as possible and exact as 
 high a working output as possible. The law is not con- 
 cerned with the problem of whether such freedom of con- 
 tract results in inadequate wages or excessive fatigue. So 
 long as freedom of contract exists the law does not worry 
 greatly about the consequences. Hence, the law in labor's 
 mind has not been brought up to date. The courts stand 
 as a bulwark for the protection of property rights, but 
 in labor's eyes are exasperatingly indifferent to the human 
 rights of labor. The sacred prestige of the law comes into 
 serious question. The necessities of the worker who spends 
 his eight or ten hours at a machine are direct, simple, and 
 clear. The laborer feels them often blindly, instinctively. 
 He knows the consequences of monotony and of fatigue, of 
 wage rates and bad foremanship, of industrial peace and 
 1 F. T. Carlton, "Organized Labor in American History," p. 200. 
 
Labor: Its Part in Production 155 
 
 industrial war. They are close realities which fire primi- 
 tive instincts and set off rugged impulses. Traditional 
 rights, legal conceptions, court doctrines which thwart 
 these direct and simple instinctive necessities crumple in 
 the conflict. The mechanistic facts of the shop brush 
 aside the elaborate legal taboos and roughly tear down the 
 shrines of judicial idols which fitted the facts of life a 
 century ago but which so far as the laborer can see are 
 grossly out of joint with the facts of life to-day.i 
 
 As a sixth consideration, labor does not feel that the 
 public is £in active ally. As an impartial arbiter of clashes 
 of opinion, and of industrial struggles, the public seems pri- 
 marily interested in getting the trouble settled at any cost. 
 Industrial peace at any price is the foremost consideration 
 and if it is necessary that justice to labor be sacrificed some- 
 what the public is not greatly alarmed at the sacrifice. 
 Labor conceives that the public is more interested in peace 
 than in a square deal to labor. Moreover, by the very na- 
 ture of things the labor movement feels on the aggressive, 
 whereas employers are on the defensive. In most cases 
 of antagonism the sympathy of the onlooker instinctively 
 goes out to the defender. In industrial affairs, labor, be- 
 ing on the aggressive, makes the attack, and for obvious 
 psychological reasons, thereby tends to alienate the sym- 
 pathy of the "long-suffering public." Labor therefore 
 considers itself justified in pushing ahead even though it 
 may necessitate some jostling of the complacent public. 
 Labor's justification for its militancy and aggressiveness 
 is the natural instinctive outcome of its feeling that it is 
 an oppressed class. Labor sees it a duty to shake things 
 loose and win progress in spite of the lethargy and inertia 
 of the public. In this effort labor finds itself at a disad- 
 vantage because the information upon which public opinion 
 is based comes from newspapers which to labor's mind do 
 not present labor's side of the case fairly. Labor thinks 
 it has no way of getting its case outlined clearly in the 
 eyes of the public, and consequently the voice of the public 
 
 1 See E. F. Hoxie, "Trade Unionism in the United States," Chap. 
 IX, also T. Veblen, "Theory of Business Enterprise," pp. 328, 342, 
 
156 Labor: Its Part in Production 
 
 is far from the voice of God. This set of ideas is of 
 course not a matter of wilful disrespect, but is an instinc- 
 tive rationalization with antecedents in the hard-felt inter- 
 ests and impulses of the workers. 
 
 "What, then, is labor's opinion of itself? For one thing, 
 labor feels that it is doing as well as it should be expected 
 to do under the circumstances. Granting abuses here and 
 there, and bad leaders occasionally, labor nevertheless con- 
 siders that it is doing as well as any incipient democracy 
 has done in days gone by. But more than this, labor feels 
 that heaven helps those who help themselves. Economic 
 salvation lies in self-assertion. Self-help is to be found 
 in self-determination. It is a duty to be discontented with 
 conditions which are inimical to the highest progress. 
 Complacency and contentment are for the soft and indo- 
 lent. It is a crime to be a slacker and refuse to face the 
 responsibility of winning a better status for the labor group. 
 In carrying out this militant attitude what does it mat- 
 ter if real pressure comes from among the minority of the 
 labor group? Progress has always come from the work 
 of an active minority. A fearless and determined group 
 must push forward toward a new status for labor. Only 
 by such pressure can labor be lifted out of its present 
 status of material and psychological oppression to a status 
 of responsibility and influence. It would be a misinter- 
 pretation of the facts of the case to insinuate that labor, 
 in reasoning along such lines, is wily, vicious, or insincere. 
 Labor is gripped with just as much genuine earnestness and 
 spontaneity as any other economic group. The ideology of 
 labor on all such matters is the natural and honest psycho- 
 logical outcome of the conflict between cold economic facts 
 and instinctive human reactions. 
 
 Labor's ideas are, therefore, a great dynamic force in the 
 economic situation. The original instincts of human na- 
 ture direct the course of labor's mind. Much of the 
 mental framework of the labor group appears oftentimes 
 to be almost a mass of blind instincts which have not yet 
 been carefully thought over. "That complex of impres- 
 sions, thwartings, and desires, warm and human, is wait- 
 
Labor: Its Part in Production 157 
 
 lag to be sharpened and shaped into orderly thoughts and 
 then into a program of action. . . . The great instinctive 
 movement of the workers is pushing on. ' ' The unanalyzed de- 
 sires are none the less of immeasurable significance. General 
 Smuts has remarked that "old ideals of wealth, of prop- 
 erty, of class and social relations, of international relations, 
 of moral and spiritual values, are rapidly changing. The 
 old political formulas sound hollow; the old landmarks by 
 which we used to steer are disappearing beneath a great 
 flood. "^ In the words of R. F. Hoxie, "The unionists do 
 not usually independently understand the theory of their 
 own demands, or their constructive program. They feel." 
 It is, therefore, a great instinctive mass movement which 
 must be seen beneath the ideas of the labor mind. With- 
 out a frank conception of this peculiar dynamic condition 
 of the labor mind no one is in a position to comprehend at 
 all accurately the economic causes of labor's attitude toward 
 its part in the whole productive organization. 
 
 Immigration 
 
 The causes and consequences of immigration are of such 
 a nature that they have a direct bearing upon economic 
 principles. 
 
 The motives to immigration are very largely economic 
 motives. The efforts of shipowners, of employers in this 
 country, of agents seeking an opportunity for making a 
 profit upon immigrants, of landowners looking for immi- 
 grant buyers, have probably been responsible for fully one- 
 half of the immigration to American shores. At the pres- 
 ent time, organized labor is urging that immigration be 
 practically prohibited, whereas simultaneously a large 
 group of organized employers are anxious that such re- 
 strictions as are placed upon immigration shall allow con- 
 siderable leeway for the admission of alien labor for their 
 plants. 
 
 Distinct types of immigrants have responded to the condi- 
 tions. The large majority of immigrants seeking to come 
 are from countries of southeastern Europe. Approxi- 
 1 Gleason, "What the Workers Want," p. 270. 
 
158 Labor: Its Part in Production 
 
 mately three-fourths of these classes are unskilled laborers, 
 "There can be no doubt that the important cause of the 
 increase of immigration in the last twenty-five years has 
 been the necessity for more crude labor to work in con- 
 junction with our labor-saving machinery and expanding 
 capital in the development and utilization of our national 
 resources. " ^ It is rare to find a native-bom American 
 employed at unskilled work in a big industrial plant in 
 America.^ Aside from their lack of skill, these immigrants 
 are, in alarming numbers, incompatible with Americans in 
 intellectual equipment, and in standards of life. B. A. 
 Boss describes the type by stating: "The plain truth is 
 that rarely does an immigrant bring in his intellectual 
 baggage anything of use to us."^ The type, moreover, is 
 one which does not acquire a liking for life in America. 
 Statistical records indicate that approximately one-half 
 of all immigrants return to their native lands. 
 
 The economic effects of this type of immigration are 
 manifold. One of its most important effects is seen in the 
 state of the labor market and the instability of employ- 
 ment. The tendency has been for the supply of labor to be 
 so greatly enhanced by immigration that there has usually 
 been an excess of laborers above the actual demand in 
 American industries. The records indicate that from one 
 million to six million workers are idle in the United States 
 all the time. A flood of unskilled laborers always coming 
 into American industries has severely influenced the re- 
 lations of supply and demand in affecting the wage rates. 
 Often the fact that a group of alien workers could be 
 promptly secured to displace union members or agitators 
 or strikers has enabled employers to maintain a firm and 
 rigid discipline in their shops. Moreover the tendency of 
 immigration to gather momentum during a period of 
 American prosperity, and for this momentum to continue 
 well into a period of depression, has served to intensify the 
 unemployment disorders during periods of industrial 
 
 1 D. D. Lescohier, "The Labor Market," p. 8. 
 
 2 W. R. Bassett, "When the Workmen Help You Manage," p. 11. 
 
 3 E. A. Ross, "The Old World in the New," pp. 279, 285. 
 
Labor: Its Part in Production 159 
 
 crisis. Again, the possibility of falling back upon a reserve 
 sbpply of immigrants has made employers feel frequently 
 that the stabilization of employment is unnecessary. ' ' With 
 the possibility of falling back upon immigrants, business 
 does not plan ahead, spread out, and dovetail its work so as 
 to utilize to best advantage the workers already here."^ 
 The urgency for stabilization of employment is great. At 
 present the tendency is for employment bureaus managed 
 by aliens to serve as the medium between the man out of 
 work and the job looking for a worker. "So far as the im- 
 migrant is concerned, the private employment agency of his 
 own racial group is still the chief means by which he secures 
 work."^ A system of American employment agencies, 
 either public or private, or both, appears to be indispensable 
 if the labor market is ever to be organized to the advan- 
 tage of both the employer and the immigrant. The inade- 
 quate and unscientific distribution of immigrant labor re- 
 sults in harmful congestion of immigrants in city districts 
 and in certain industries. It also leaves room for much 
 exploitation of the immigrants by unscrupulous racial em- 
 ployment bureaus and necessitates much distress and dis- 
 couragement among the immigrants during the periods of 
 unemployment. The situation also has the effect of disap- 
 pointing the alien in his anticipations of American life, 
 and is an un-Americanizing influence. 
 
 All in all, the American workers have suffered greatly 
 from the competition of crude immigrant labor. The 
 forms of this suffering are briefly stated by J. W. Jenks 
 and J. H. Hammond as follows, "The principal evils which 
 have resulted from the great influx into the United States 
 from southern and western Europe have been : 
 
 1. To keep down the wages of native Americans and 
 of the northern and western European immigrants. 
 
 2. To retard improvement in the general working condi- 
 tions of labor, especially in mining and manufactures. 
 
 3. To flood the country with laborers, illiterate in En- 
 glish, and, therefore, difficult to develop in efSciency, to 
 
 1 J. R. Commons, "Races and Immigrants in America," p. xxvi. 
 
 2 F. Kelldr, "Immigration and the Future," p. 164. 
 
160 Labor: Its Part in Production 
 
 elevate to the American standard of living, and to assimi- 
 late into our social and political system."^ 
 
 These effects are brought about in part by the excessive 
 numbers of immigrants, but more fundamentally by their 
 low standards of living and their willingness to work cheap. 
 As observed by H. P. Fairchild, "It is not because he has 
 had to compete with more laborers, so much as with cheaper 
 laborers, that the American workman has failed to secure 
 a higher remuneration for his services."^ 
 
 The economic effects of immigration are particularly con- 
 spicuous in certain industries which ' ' are almost wholly de- 
 pendent upon immigrant labor, as it is impossible to secure 
 for them a native supply at any price. ' ' ^ Such industries 
 for instance are iron and coal, lumbering, track and road 
 building, construction, housing, leather manufacturing, 
 meat packing, and clothing manufacturing. 
 
 A further consequence of immigration is seen in the un- 
 der-development of agriculture and the comparative over- 
 development of manufacturing. ' ' The food products of the 
 country do not keep up with population, but the manufac- 
 tures exceed the growth of population. Eecent immigrants 
 from South and Bast Europe go mainly into manufac- 
 tures. America is becoming a food importing and a manu- 
 facture exporting country. . . . Farmers cannot get labor- 
 ers on account of the competition of manufacturers."* 
 
 The immigrant of the pre-war days was criticised for be- 
 ing too docile; labor leaders berated him for refusing to join 
 unions or to fight for better industrial conditions; econo- 
 mists and publicists condemned him for accepting wages too 
 low for Americans and for acquiescing in an inferior and 
 degrading standard of living. But the post-war immigrant 
 is criticised for not being docile enough. If he comes from 
 northern or western Europe, he is likely to be impregnated 
 with trade union or syndicalist ideas; if he comes from 
 southern or eastern Europe, he is likely to be permeated 
 "with socialistic or communistic doctrines. The new immi- 
 
 1 "Great American Issues," p. 132. 
 
 2 "Immigration," p. 303. 
 
 s F. Kellor, "Immigration and the Future," p. 157. 
 
 4 Commons, "Eaces and Immigrants in America," p. xxvii. 
 
Labor: Its Part in Production 161 
 
 grant, with his new psychological background, is more 
 amenable to unionization, more alert to demand better living 
 standards, quicker to resist the industrial status quo. 
 
 Three major types of economic policy toward aliens 
 have developed: Americanization, unionization and re- 
 striction. During and immediately following the war the 
 immigrant, particularly the group from enemy countries, 
 was looked upon with suspicion and intolerance. The im- 
 migrant was considered a dormant Bolshevist; and raids, 
 arrests, deportations, and persecutions were not at all un- 
 common. The result was a forceful suppression of the 
 more conspicuous trouble makers; but at the same time 
 there was aroused considerable resentment and disappoint- 
 ment in the minds of a great number of ordinary immi- 
 grants. 
 
 The fundamentals of Americanization lie in the basic 
 working conditions of the immigrants in America. If wages 
 are sound, if the hours of work are right, if the discipline 
 by the boss and the foreman is fair and human, if the 
 working surroundings are wholesome, — then and then 
 only is genuine Americanization a practicability. As J. 
 R. Commons has emphasized, — "More than any other class 
 in the community, it is the employers who determine the 
 progress of the foreigner and his children toward Ameri- 
 canization. They control his waking hours, his conditions 
 of living, and his chances of advancement." 
 
 With these fundamentals go certain supplementary 
 Americanizing policies. Many plants have installed En- 
 glish language classes, night schools for study of social and 
 historical subjects, Americanization committees, classes for 
 vocational training, etc. Many have required workmen to 
 have at least their first papers toward naturalization. 
 Others, when the post-war period of depression came, 
 adopted the policy of "Pire the alien first." In some 
 plants, the reduction of illiteracy was attempted. Work- 
 ers who cannot understand English are under a severe 
 economic handicap from the employer's standpoint. Their 
 efiicieney is limited because they confuse instructions and 
 muddle orders. Approximately one-fifth of the total for- 
 
162 Labor: Its Part in Production 
 
 eign-born population in America cannot read or speak En- 
 glish. It was reported that approximately one-fourth of 
 all men in draft ages were unable in war service to inter- 
 pret orders intelligently. Language education obviously 
 is reflected in economic efSciency. 
 
 The immigrant is a remarkable saver. He practices 
 thrift much more rigidly than the native American. But 
 at present, his savings go back to his home country, or are 
 deposited with a racial bank which caters to his particular 
 needs, or go to the brokers in foreign securities. Ameri- 
 can banks are indifferent to these savings because they 
 come in too small amounts. It scarcely pays to bother with 
 minute deposits. Hence the property stake of the immi- 
 grant is in fields which unite his interests with foreign 
 financial facilities. "Nothing less than a system for reach- 
 ing and safeguarding these savings for investments will 
 bring about assimilation through the poeketbook, and 
 American banks should be prepared to undertake the 
 project."^ Also, the immigrant from time to time needs 
 credit to buy a home, to set himself up in business, to tide 
 himself over a period of unemployment. At present he 
 turns to a local racial leader, an immigrant bank, his con- 
 sul, a loan shark or a pawnshop. All such roads lead 
 away from a primary property stake in America. Insur- 
 ance of immigrants indicates a similar situation. Besides, 
 American stores have not found it attractive to cater to 
 immigrant buyers, the consequence being apparent in the 
 custom of buying at racial stores. The alien can scarcely 
 get the spirit of an American standard of living when the 
 market in which he buys his food and clothes resembles so 
 greatly the shops and stores of the old country. Economic 
 Americanization in all these respects is necessary if the 
 country is to direct and control the primary interests of the 
 immigrant workers. 
 
 Americanization policies are deeply influenced by the re- 
 lations of labor unions with immigrants. "Labor unions 
 which numbered scarcely 1,000,000 members in 1900, in- 
 creased to nearly 5,000,000 in 1920. A large part of the 
 I F. Kellor, "Immigration and the Future," p. 155. 
 
Labor: Its Part in Production 163 
 
 increase came from recent immigrants. . . . Tlie major- 
 ity of unionists are immigrants and children of immigrants 
 from countries that know little of unionism. . , . When 
 once moved by the spirit of unionism, the immigrants from 
 low standard countries are the most dangerous and de- 
 termined of unionists. . . . Their resentment toward em- 
 ployers who have kept them apart, their devotion to their 
 newfound brothers, are terrible and pathetic. With their 
 emotional temperament, unionism becomes not merely a 
 fight for wages but a religious crusade. It is in the nature 
 of retribution that, after bringing to this country all the 
 industrial races of Europe and Asia in the effort to break 
 down labor organizations, these races should so soon have 
 wiped out race antagonism and, joining together in the 
 most powerful of labor unions, have wrenched from their 
 employers the greatest advances in wages. "^ The immi- 
 grant unionists tend more strongly, as a general matter, 
 toward radical unionism than native American unionists. 
 Thus, the coal miners, the garment workers, the longshore- 
 men are the basis of three strong labor unions composed 
 preponderantly of immigrants, and their economic demands 
 are in a larger measure socialistic than are those of most 
 unions where native American membership prevails. 
 
 The union exercises a powerful influence over the immi- 
 grant's conception of America. To quote again from Com- 
 mons, ' ' The effort of organized labor to organize the unskilled 
 and the immigrant is the largest and most significant fact 
 of the labor movement. . . . For it is not too much to say 
 that the only effective Americanizing force for the south- 
 eastern European is the labor union." Employee repre- 
 sentation with or without the union has, however, in some 
 cases accomplished much the same purpose, but only in 
 those industries where the employers have an exceptionally 
 enlightened conception of the Americanizing influence 
 which group self-expression by the immigrants exerts. 
 To make this self-expression as safe and sane as possible 
 and to provide a wholesome and American form of ex- 
 
 1 J. E. Commons, "Races and Immigrants in America," pp. xx, 
 153-154. 
 
164 Labor: Its Part in Production 
 
 pression of the human impulses behind it is a sound psy- 
 chological attitude. The attempt in not a few quarters to 
 stamp out the impulses and forbid self-expression is a di- 
 rect and virtually irresistible cause of those mental con- 
 flicts and psychological upheavals which underlie indus- 
 trial disorders. Expression, discipline and sublimation of 
 these strong instincts of the immigrants is the sound psy- 
 chological and economic procedure; suppression and psy- 
 chic revolt are fraught with disorder and disaster. 
 
 Society as a whole accepts the social and economic re- 
 sponsibility of protecting itself from excessive invasions by 
 undesirable aliens. Laws forbidding the admission of 
 anarchists, diseased, insane, etc., have been an established 
 part of American policy. The literacy test was adopted 
 in 1917, and serves as a roughly approximate quality test. 
 In 1921, a quantity test, limiting the annual immigration 
 by any one race to three per cent, of those in the United 
 States by the census of 1910, became the law of the land. 
 The pressure steadily increases to evolve more accurate 
 quality tests for immigrants. The development of tests for 
 measuring the levels of intelligence in the Army during the 
 "World War, and the development of similar tests for in- 
 dustrial needs, and for schools and colleges, holds out the 
 tangible prospect of tests of a like nature for immigrants. 
 Such tests would eliminate those of inferior, abnormal, 
 delinquent, or neurotic mental equipment, and thereby sup- 
 ply the Americanization agencies with a higher grade of 
 human material for their efforts. 
 
 Population 
 
 The classic principles of Malthus relative to population 
 deserve to be the starting point in considering the popula- 
 tion problem. Malthus held that there is a "constant 
 tendency in all animated life to increase beyond the nour- 
 ishment prepared for it. . . . The ultimate check to popu- 
 lation appears then to be a want of food arising necessarily 
 from the different ratios according to which population 
 and food increase." He claimed that if the standard of 
 living were raised, thereupon population would be encour- 
 
Labor: Its Part in Production 165 
 
 aged to increase so mucli the faster, until the increased 
 means of subsistence would be exhausted, and men would 
 be back again at the minimum levels of existence. He 
 conceived of two great checks upon population, positive 
 and negative. Positive checks were in the form of starva- 
 tion, pestilence, war, disease ; negative checks in the form of 
 wilful limitation of the birth rate. He entertained but 
 small hopes of the negative checks ever becoming influen- 
 tial enough to pull men up to higher standards of life. 
 
 In spite of the Malthusian pessimism, the standard of liv- 
 ing has been raised. While even the poorest laborers are 
 better off than the lowest ranks were a century ago, the 
 better classes of labor, in comparison with their great 
 grandfathers, are immersed in luxury. The theory did riot 
 give full justice to two factors which have subsequently 
 played a large part in the population increase ; one, the in- 
 creased productivity of the modem economic system; the 
 other, the decreased birth rate following upon an improved 
 living standard. The industrial revolution, the machine 
 method of production, the factory system, the increase of 
 capital all served to increase the productive efficiency of 
 the population so materially as to more than offset the in- 
 crease in human numbers. In regard to the second factor, 
 history has found that the higher the standard of living, 
 the lower the birth rate and the lower the death rate ; the 
 lower the standard of living, the higher the birth and death 
 rates. 
 
 The former factor has established what S. N. Patten calls 
 "the new basis of civilization." He asserts "the potent 
 basic fact of a civilization whose bounds are indefinitely 
 widened because the unskilled laborer need no longer be held 
 to the plane of sheer animal terror by uncertainty of food 
 and employment. Artificial culture and experimental sci- 
 ence have already fundamentally altered the elemental rela- 
 tions existing two hundred years ago between population 
 and environment. . . . Our social inheritances come from 
 two radically different forces that have been acting upon 
 us from the first. One springs from universal deficit — ^the 
 poverty of the early world; the other emerges from the 
 
166 Labor: Its Part in Production 
 
 later store of goods whieli build the social surplus. . . . 
 Abolish poverty, transform deficit into surplus, fill depletion 
 with energy, and the ascribed heredity of the poor will 
 vanish with its causes. . . . Disease, oppression, irregular 
 work, premature old age, and race hatreds characterized 
 the vanishing age of deficit; plenty of food, shelter, capi- 
 tal, and mobility of men and goods define the age of sur- 
 plus in which we act. Where food and capital are, there is 
 work, and where there is steady work, progress comes even 
 while wages remain low. The quantities of food and of 
 capital will increase more rapidly than they have clone, 
 while the birth rate touches a lower figure in every 
 census. ' ' ^ 
 
 "With this material advance has come a psychological 
 development especially noticeable in the most favored 
 classes of society. The family instincts may be said to be 
 the positive forces tending toward an increasing birth rate. 
 But as advances in income are made, people see the oppor- 
 tunity of satisfying a wide variety of wants, ambitions, 
 and desires. The family instincts tend to bring parental 
 responsibilities and obligations; the other instincts can be 
 expressed with a minimum of responsibility and obligation, 
 — they lead to simpler, easier life enjoyments. Moreover, 
 the increase in education, social communication, and intel- 
 ligence brings about a wider and wider dissemination of the 
 means of wilful prevention of birth increase. Also, there 
 is an instinctive social revulsion which leads those in pos- 
 session of the knowledge of preventive checks to prohibit 
 by law and social taboo any formal spreading of the knowl- 
 edge among the rank and file. The knowledge of preven- 
 tive checks comes, therefore, largely for instinctive reasons, 
 to be a kind of monopoly in the hands of the more well- 
 to-do classes. As a consequence, among these classes the 
 birth rate is controlled without any material repression of 
 the sex instincts. Economic advantage and this psycho- 
 logical development have gone hand in hand. 
 
 The families of higher education and income are already 
 guilty of race suicide. If the replenishment of population 
 
 1 Patten, "The New Basis of Civilization," pp. 25, 34, 43, 186. 
 
Labor: Its Part in Production- 167 
 
 were dependent upon them, it would not be accomplished. 
 In the more highly cultured New England districts, the 
 size of families is so limited that the population either has 
 ceased to increase or is actually on the decline. At the 
 other extreme, the inferior native or foreign stock mul- 
 tiplies rapidly. "Writing of Great Britain, William Me- 
 Dougall states, "In our own country one-quarter of the 
 people of each generation become the parents of about 
 one-half of the population of the succeeding generation. 
 There can be no doubt that, among this quarter of th6 
 population the parental, and probably also the reproduc- 
 tive, instinct, is on the average stronger than in the re- 
 maining three-quarters who produce the other half of the 
 next generation."^ In other words "the present state of 
 the law, of public opinion, and of our economic system is 
 tending to degrade the quality of the race by making the 
 worst half of the population the parents of more than half 
 of the next generation. ' ' ^ 
 
 In analyzing the situation, H. G. Wells draws a picture 
 which is comprehensive: "Travel, leisure, freedom, com- 
 fort, property and increased ability for business competi- 
 tion are the rewards of abstinence from parentage, and 
 even the disapproval of President Roosevelt and the pride 
 of offspring are insufficient counterweights to these in- 
 ducements. Large families disappear from the States, 
 and more and more and more, couples are childless. Those 
 who have children restrict their number in order to afford 
 those they have some reasonable advantage in life. " ' In 
 order to remedy the faulty inheritance of the population 
 from these causes, the science of eugenics has come into 
 play. Given its initial impetus by Sir Francis Galton 
 about a generation ago, it has come to exercise a deep in- 
 fluence upon social and economic thinking. The chief 
 objective of the science is to improve the quality of the 
 race by discouraging the birth rate among the unfit groups 
 and encouraging it among the more developed classes. 
 
 1 "Introduction to Social Psychology," p. 279. 
 
 2 Bertrand Ruaaell, "Why Men Fight," p. 213. 
 
 3 "Social Forces in England and America," p. 374. 
 
168 Labor: Its Part in Production 
 
 The goal of a study of population problems from the 
 economic standpoint may be stated in the form of two 
 standards, — the quality standard and quantity standard. 
 The quantity standard refers to the "best proportion be- 
 tween the numbers of inhabitants and the area and resources 
 of a land, judged with reference to the abiding welfare of 
 the great mass of the people of the nation. " ^ If the quan- 
 tity standard be judged from a pecuniary viewpoint it is 
 proper to state that, "It should, therefore, be the aim of 
 every nation to keep its population at that number which is 
 bound to result in the greatest amount of real income to 
 the average citizen."^ It would appear that for the United 
 States the quantity limit has been approximately reached 
 unless there develops an increase in the per capita produc- 
 tivity of economic goods, For fifteen years before the war 
 the real income of the wage-earning classes had certainly 
 not increased and probably had slightly decreased. The 
 increase in real income achieved during the war was made 
 possible by an increase in national production of approxi- 
 mately 15 per cent. However, the depression following the 
 war has seen production suffer a deep slump, throwing up- 
 wards of five millions of workers out of jobs and income, 
 and tending to put the real incomes of large groups of un- 
 skilled labor on approximately the pre-war levels. 
 
 The quality standard looks to the type of character and 
 the hereditary vigor of the population which exists, and in- 
 sists that a controlling principle of population shall be the 
 attainment of a superior racial stock. "The wise ambi- 
 tion for a people is to maintain its life at a higher physical 
 and psychic level rather than to increase the number of its 
 members at the expense of degrading its life below an ac- 
 cepted standard. The fact that a people increases but 
 slowly in numbers may be an evidence not of degeneracy 
 but of enJightenment and prudence."^ John Stuart Mill 
 referred to the phrase "the stationary standard" as a possi- 
 ble ideal. That is to say, it may be desirable for a nation 
 
 1 F. A. Fetter, American Economic Review, Vol. Ill, Sup., p. 6. 
 
 2 W. I. King, "Wealth and Income of the People of the United 
 States," p. 240. 
 
 3 E. C. Hayes, "Introduction to Sociology," p. 44. 
 
Labor: Its Part in Production 169 
 
 to limit its population so that the numbers neither increase 
 nor decrease, because a persistent increase under conditions 
 of limited economic support would inevitably lead to a de- 
 terioration in the quality of the population. 
 
 The 1920 census for the United States registers a popula- 
 tion of approximately one hundred and five million. The in- 
 crease during the last decade was at the rate of 14.9 per 
 cent., or a rate of increase only two-thirds that of the previ- 
 ous decade and less than one-half that of the last decade be- 
 fore the Civil War. Part of this lowered rate of increase of 
 the last few years is due to the falling off of immigration dur- 
 ing the war, and to war mortality. However, looked at 
 over a broad space of time, it indicates something of much 
 greater significance, namely, a tendency of the rate of in- 
 crease steadily to diminish during the last century. If this 
 tendency is not checked it will be only a comparatively 
 short time before the population will have become station- 
 ary or have begun to decline. In other words, America is 
 moving toward a position which Prance has already 
 reached and which England has approximated. 
 
 Of the American population, 51.9 per cent, are living 
 in cities or towns of more than 2500 inhabitants. The 
 American people steadily congest more and more in urban 
 communities partly because of the herd instincts which 
 bring genuine pleasure from close contact with one's fel- 
 lows and partly because of the economic necessities of the 
 factory regime. This increasing urban life has well known 
 influences in the quality and character of large groups 
 of the population. 
 
 Any conception of preventive checks upon the popula- 
 tion to keep it within the quality and quantity standards 
 must take into account the fundamental relation of the family 
 to the birth rate. In France it is a matter of family pru- 
 dence to limit the family to a size making possible full edu- 
 cational and financial advantages to a few children. In 
 England, and to an increasing extent in America, family 
 prudence is working in the same direction. To quote H. 
 Bosanquet, ' ' Finally we come to the most important econo- 
 mic function of the family, perhaps the most important 
 
170 Labor: Its Part in Production 
 
 purely eeonomie function which exists at all, since it con- 
 trols directly and finally the prosperity and the ruin of 
 nations. In the family, and the family alone, are com- 
 bined the forces which determine the quantity of popula- 
 tion with the forces which determine its quality ; and with- 
 out this combination the decay of the people is inevitable. 
 . . . Where the quality is right no necessary limit is at 
 present within view ; where the quality is wrong, each one is 
 too many."^ 
 
 Any factor which tends to undermine the economic 
 standards of the family immediately menaces the quality 
 of the population. Where an unnecessary accident rate 
 throws the burden of earning the family income upon 
 the mother or the children, or where unemployment re- 
 quires a partial reliance upon the aid of charity, or where 
 low wages or excessive hours or any other economic force 
 lowers the vitality of any members of the family, the 
 quality of the population suffers. In their more extreme 
 forms, each of these factors leads to positive degeneracy 
 and racial deterioration. The family has in the past been 
 left to cope with these problems upon a laissez-faire basis. 
 A large number of children have been commonly looked 
 upon as a drastic financial hardship for the family, yet the 
 community has recognized no responsibility for coming 
 to the financial rescue of overburdened families. The 
 new tendency, although as yet but mildly developed, is in 
 the direction of making the cost of children a partial 
 charge upon the community. The payment of maternity 
 benefits, the provision of health compensation and other 
 forms of insurance under social control, the insistence upon 
 rest periods and vacations for women, the allowance of 
 income tax exemptions in proportion to the number of 
 children, the segregation of hereditary defectives at state 
 expense, are a few of the manifestations of this tendency. 
 
 Moreover the economic status of families and children is 
 
 affected by religious convictions. Catholic families are 
 
 inclined to be larger than non-Catholic because of the 
 
 religious tenets against restricting the birth rate. McDou- 
 
 1 "The Family," p. 232. 
 
Labor: Its Part in Production 171 
 
 gall concludes, "That where religious and other sanctions 
 give adequate support to the family instincts, no serious 
 diminution of fertility occurs." Eoosevelt made urgent 
 appeals against race suicide by insisting that it must come 
 to be a proud family duty among the well-to-do classes 
 to possess a generous number of children. What Eoose- 
 velt tried to make a matter of civic pride, Galton declared 
 could be given the force of a religious idea. Then a 
 family would suffer a loss of prestige in the community 
 unless it was doing its share of the replenishment of the 
 race. It would meet with social condemnation to be respon- 
 sible as a family for any tendency towards race suicide. 
 Obviously, therefore, the per capita income of the country 
 and the quality and quantity of the population all head 
 up in the family ideals which are generally accepted. 
 
 Economic Significance of the National Character 
 
 All of the previous considerations in regard to alien stock 
 on American soil and the quality and quantity of the national 
 population have the profoundest bearing upon the econo- 
 mic and social progress, or decline, of the national life. If 
 the preponderance of the population increase comes from 
 the classes with the weakest biological inheritance and with 
 the least favorable family and social environment, the 
 national character is menaced at its vital centers. In the 
 competitive race between nations for social and economic 
 survival, and in the incessant rivalry of nations for posi- 
 tions of influence and prestige, no one can doubt that the 
 ultimate superiority is held only by nations whose blood is 
 the most virile. Where classes of population which rise 
 to positions of economic success shrink from the obliga- 
 tions of parenthood, the inheritance of a nation is jeopar- 
 dized, and America is in the initial stages of that pre- 
 carious position at the present day. Certainly the situation 
 is one which offers a challenge to Americans to make 
 new adaptations between their family and social standards 
 and their economic circumstances; and to reconstruct their 
 ideals and traditions for the avowed purpose of preserving 
 the highest quality of the national character. 
 
172 Labor: Its Part in Production 
 
 REFERENCES 
 
 Leverhulme: The Six-Hour Day 
 
 Penty, a. J.: Old Worlds for New 
 
 Beyee and Others: Workingmen's Standard of Living in Philai 
 delphia 
 
 More: Wage Earners' Budgets 
 
 Mitchell, John: Organized Labor 
 
 Groat: Organized Labor in America 
 
 Hollander and Barnett: Studies in American Trade Unionism 
 
 Interchurch Report on the Steel Strike of 1919 
 
 Withers, H. : Poverty and Waste 
 
 Tryon: Household Manufacture in the United States 
 
 Redfield: The New Industrial Day 
 
 Frank, G.: Politics of Industry 
 
 Gantt, H. L.: Organizing for Work 
 
 Gilbreth: The Psychology of Management 
 
 Wera: Human Engineering 
 
 Rubinow, I. M.: Recent Trend of Real Wages, American Eco- 
 nomic Review, Vol. IV, pp. 793-817 
 
 Fairchild, H. p.: Standard of Living, American Economic Re- 
 view, Vol. VI, p. 9 
 
 Jones, F. W.: Real Wages in Recent Years, American Eco- 
 nomic Review, Vol. 7, p. 319 
 
 Taussig, F. W.: Minimum Wages for Women, Quarterly Jour- 
 nal of Economics, Vol. 30, p. 411 
 
 Adams and Sumner: Labor Problems 
 
 Devine, E. T. : Misery and Its Causes 
 
 Hunter, R.: Poverty 
 
 Streightoff, F. H.: The Standard of Living 
 
 HoxiE, R. F.: Trade Unionism in the United States, Scientific 
 Management and Labor 
 
 Bassett, W. R.: When the Workmen Help You Manage 
 
 Ross, E. a.: The Old World and the New 
 
 Commons, J. R.: Races and Immigrants in America 
 
 Kellor, F.: Immigration and the Future 
 
 Jenks and Hammond: Great American Issues 
 
 Wells, H. G.: Social Forces in England and America 
 
 Carver, T. N. : Essays in Social Justice 
 
 Ward, H. F.: The New Social Order 
 
 Fairchild, H. P.: Immigration 
 
 Bogardus : Americanization 
 
 Drachsler: Democracy and Assimilation 
 
 Davis: Immigration and Americanization 
 
 Jenks and Lauck: The Immigration Problem 
 
 Ely, R. T.: The Evolution of Industrial Society 
 
 Ryan, J. A.: Distributive Justice 
 
Labor: Its Part in Production 173 
 
 Bloomfield, D.: Modern Industrial Movements; Employment 
 Management; Modern Labor Problems 
 
 Bloomfield, M.: Management and Men 
 
 Toynbee: The Industrial Revolution 
 
 Wright: The Industrial Evolution of the United States 
 
 Commons, J. R.: Labor and Administration 
 
 Baker, R. S.: The New Industrial Unrest 
 
 Cohen: Law and Order in Industry 
 
 Cole, G. D. H.: Labor in the Commonwealth; The World of 
 Labor 
 
 GOMPERS, S.: Labor and the Common Welfare; Labor and the 
 Employer 
 
 Taylor, F. W.: Scientific Management; Shop Management 
 
 Slighter, S. H.: The Turnover of Factory Labor, pp. 185-195 
 
 Beissenden and Frankel: Labor Turnover; Political Science 
 Quarterly, Dec, 1920, p. 579 
 
 Lescohier: The Labor Market 
 
 Report of Ex-President Wilson's Second Industrial Conference, 
 1920 
 
 Muscio, B.: Lectures on Industrial Psychology 
 
 Link: Applications of Psychology to Industry 
 
 Goldmark: Fatigue and Industry 
 
 Report of British Ministry of Munitions, Health of Munition 
 Workers' Committee, 1918 
 
 Commons and Andrews: Principles of Labor Legislation 
 
 Ogburn: a Living Wage, Annals of the American Academy of 
 Political Science, Vols. 78-81, pp. 114-116 
 
 Bulletin 265, United States Bureau of Labor Survey of Selected 
 Industries, 1919 
 
 Monthly Labor Review, Vol. 9, pp. 1-13 
 
 Parmeleb: Poverty and Social Progress 
 
 Hollander: The Abolition of Poverty 
 
 Hayes: Introduction to the Study of Sociology 
 
 Friday, David: Profits, Wages and Prices 
 
 Monthly Labor Review, Vol. 11, p. 101 flf. 
 
 King, W. I.: Wealth and Income of the People of the United 
 States 
 
 KiTSON, H. D.: Journal of Political Economy, pp. 330-338 
 
 Kelley, R. W.: Hiring the Worker 
 
 Tead and Metcalf: Personnel Administration 
 
 Williams, Whiting: What's on the Worker's Mind? 
 
 Gleason, Arthur: What the Workers Want 
 
 Tawney, R. a.: The Acquisitive Society 
 
 Caelton, p. T.: Organized Labor in American History; His- 
 tory and Problems of Organized Labor 
 
 Problems of Population and Parenthood: Second Report Na- 
 tional Birthrate Commission of Great Britain, 1918-1920 
 
174 Labor: Its Part in Production 
 
 Marshall, L. C: Readings in Industrial Society, Chapter 9 
 
 Hobson: Work and Wealth 
 
 Clay, Henry: Economics for the General Reader, Chapters 16- 
 
 17 
 Commons, J. R.: Industrial Government; Trade Unionism and 
 
 Labor Problems; History of Labor in the United States 
 Ryan: A Living Wage 
 Bevebidge, W. H.: Unemployment 
 
CHAPTER VII 
 
 CAPITAL: THE EIGHTS AND DUTIES OF OWNERSHIP 
 
 The distinguishing features of economic wealth are own- 
 ership and utility. Goods or services become economic 
 wealth when they are of use to someone and when some- 
 one claims the rights of ownership over them. The user 
 or the owner may be an individual, a social group, or a 
 political body. The title of ownership consists of the power 
 and right of any agent, private or public, to withhold 
 goods or services from use by others. It is the power to 
 withhold land from the person who wants to build a house 
 or factory. It is the power to withhold food or clothing 
 from the prospective consumer. It is the power to with- 
 hold water from the city dweller or to withhold the means 
 of transportation from the man who wants to travel. Such 
 goods or services are withheld upon a condition, — that con- 
 dition being the ability and the willingness of the person 
 who desires the goods or services to give a certain payment. 
 Air, sunlight, dirt, the ocean, or rainfall do not reckon 
 in the category of economic wealth because no one has the 
 power to withhold such objects from the use of anybody 
 else. 
 
 They do not come into the classification of wealth be- 
 cause, no matter how useful they may be, nobody can 
 hold ownership over them. Nobody can keep them from 
 common use on condition that the would-be user offers cer- 
 tain terms of payment. Only goods which are limited in 
 quantity, are capable of being owned. An element of 
 scarcity in any good makes that good of the type which 
 can be owned advantageously. Economic wealth arises 
 
 175 
 
176 Capital 
 
 whenever any one acquires the power to withhold goods 
 or services from the use of those who need or want them. ^ 
 
 The distribution of this power to withhold is the distri- 
 bution of ownership. A large part of economics is con- 
 cerned with problems centering around the means by which 
 this power to withhold is acquired, the reasons why some 
 have much of it and others have little, the methods by 
 which the power to withhold is exercised, and the possi- 
 bility of its control by social agencies. These problems 
 are fundamental in economic studies, and a discussion of 
 their various phases is of the utmost importance. 
 
 What are the forms of the goods and services of the 
 economic community? The question makes necessary some 
 classification of goods and services. There is, for example, 
 land, the income from land being known as rent. There 
 are also, material goods, such as machinery and buildings 
 used for production, the income from them being known 
 as interest or profits. There are, thirdly, material goods 
 such as bread and butter or shoes and stockings to be used 
 for consumption, the income from them giving rise to profits. 
 There are finally labor, services, work, the income from 
 them being known as wages, salaries or fees. 
 
 In their entirety, these goods and services constitute a 
 stock on hand, a collection and accumulation, and the term 
 wealth is often used by economists as covering this total 
 stock in existence at any one time. There is, however, a 
 second use of the term, in which reference is had to the 
 income accruing to men over a stated period of time. What 
 is an individual's wealth? From the former point of 
 view, it is all the goods and services which remain in his 
 possession as a result of his total accumulations to date. 
 From the latter point of view it is his income, from what- 
 ever source, for a day, a month, or a year. 
 
 Under the modern economic regime, wealth, in which- 
 ever light it may be viewed, is measured by a price. Which 
 
 1 See Alfred Marshall, "Principles of Economics," pp. 54-62; E. 
 Cannan, "Wealth," pp. 1-39; W. I. King, "Wealth and Income of 
 People of United States," pp. 5-15; Carver, "Distribution of Wealth," 
 Chapter III. 
 
Capital 177 
 
 is the greater object of wealtli, a suit of clothes or an auto- 
 mobile? The price attached to each one is a sign of its 
 relative wealth. So all goods and services come to be 
 spoken of in terms of money. Land, labor, machinery, 
 food, all are tagged with a price. The price system is all 
 inclusive in the economic system, and nothing that counts 
 as wealth escapes the tag of price. A good or service with- 
 out a price sign is unintelligible to the economic system. 
 The total possessions of an individual, or his income, or 
 his services are translated into a price and are qualified 
 to figure in the economic regime only when they have re- 
 ceived that brand.^ "What is a man worth? One hundred 
 thousand dollars, perhaps. That is, the goods and services 
 which he has title to are rated in the price regime at that 
 figure. The extent and degree of a man's power to with- 
 hold anything from the use of others is indicated by the 
 amount of the price attached to that power. 
 
 As a basis for understanding the significance of some 
 general principles, certain facts of ownership and wealth 
 are necessary at the outset. These facts fall roughly into 
 the following main classes : 
 
 1. The total stock of wealth of the nation. 
 
 2. The annual income of the nation. 
 
 3. The proportion of the annual income consumed to 
 that saved to be used for further production. 
 
 4. The pj-oportions of the income of all classes for ser- 
 vices rendered and for possession of property. 
 
 5. The relative fractions of the national income going 
 to wages, rent, interest and profit. 
 
 6. The inequalities of property ownership between in- 
 dividual persons. 
 
 7. The inequalities of income between individual per- 
 sons. 
 
 After these facts are in mind, it will be possible to ex- 
 plain some of the forces and influences which make them 
 what they are. 
 
 1. The total stock of wealth of the nation in 1904 was 
 approximately $107,000,000,000. Subsequent capital ac- 
 
 iH. J. Davenport, "Economics of Enterprise," Chapters II-III. 
 
178 Capital 
 
 cumulation througli the excess of production above con- 
 sumption had brought the total up to about $187,000,- 
 000,000 in 1912. "When measurement is made by the 
 changed price levels, following the war, the national wealth 
 would have been in June, 1920, about $400,000,000,000. 
 The decline of price levels since that date would again alter 
 the price index of the national wealth. Obviously, the 
 fluctuations in price levels do not mean that the national 
 wealth is fluctuating in like manner. The money stand- 
 ard of measurement changes, but the wealth does not un- 
 dergo corresponding ups and downs. The wealth itself, 
 in terms of coal and iron, food and cotton and wool, gold 
 and silver, automobiles and land, factories and machinery, 
 carries a fluctuating money price, but the actual goods do 
 not fluctuate in like proportions. This unstable relation- 
 ship between prices and the goods themselves makes the 
 method of measuring wealth in money units somewhat un- 
 satisfactory, and yet money is the only common unit of 
 measurement of all forms of economic wealth. Moreover, 
 when the money measure of wealth is understood for the 
 thing it is, — a fluctuating measure, — it allows a fairly ac- 
 curate impression of the volume of the nation's wealth. 
 The figures which have been given here should be taken as 
 rough approximations. No official estimate of the nation's 
 wealth has been made since 1912 and consequently these 
 figures represent non-official calculations. The purpose is 
 simply to give a mass impression of the nation's total 
 economic wealth.^ 
 
 2. The annual income of the nation. The income of 
 the nation in any single year is a matter different from 
 the total accumulation of wealth at the time. The nation's 
 annual income in 1913 is estimated at about $34,400,000,- 
 000. By 1918 the income was estimated at approximately 
 $61,000,000,000. After the proper discount is made for 
 differences in price levels for the two years, the 1918 income 
 represents an increase of physical output, an increase in 
 
 iSee "Wealth, Debt and Taxation," 191.3, United States Census; 
 Sir Edgar Crammond, Bankers Institute, London, 1920; Sir Josiah 
 Stamp, Journal of the Royal Statistical Society, July, 1919. 
 
Capital 179 
 
 volume of production, of from 10 to 15 per cent, over the 
 1913 level. Moreover, the annual income of the nation 
 prior to 1913 had been steadily mounting. The average 
 income per capita in 1913 was practically double the 
 figure for 1880. The gain in actual volume of production 
 during the war period has not been maintained during the 
 post-war period, due in part to labor inefficiency, to aban- 
 donment of war emergency motives and organization, and 
 to business depression. The annual income for 1920 has 
 been estimated, in the price levels of that year, at ap- 
 proximately $65,000,000,000.^ 
 
 When a. view is taken of annual income over a period of 
 several decades, it is found that since 1850 the income in 
 terms of actual purchasing power has more than trebled. 
 This enormous increase in annual income is attributable 
 primarily to the advent of the revolutionary improvements, 
 in machinery and scientific production. "With the utiliza- 
 tion of natural power, the application of electrical energy, 
 the countless inventions of mechanical devices, the erection 
 of factory equipment, the development of natural resources 
 and the advances made in a million ways in all the in- 
 dustrial arts and sciences, the productive capacity of the 
 individual worker has grown steadily. No one familiar 
 with the state of the industrial arts and sciences would 
 intimate that this development has reached its limit. On 
 the contrary the future appears to be filled with possibili- 
 ties of discovery and invention of incalculable importance. 
 
 Of course the mere increase in the total volume of an- 
 nual income is no guaranty that the new total will be 
 well distributed. Unless the greater volume is wisely 
 divided among all groups, so as to make constantly for a 
 higher degree of common welfare, the new volume could 
 scarcely justify itself. But assuming a wise distribution, 
 
 1 For income data, see National Bureau of Economic Research, 
 "Income of the United States," pp. 64-66, 79, Chapters II, IV; King, 
 "Wealth and Income of the United States," p. 129, Chapter VI; 
 Kemmerer, "High Prices and Deflation," Chapter I; W. W. Stewart, 
 Economic Review, Vol. XI, pp. 57-82 ; E. E. Day, 'Review of Economic 
 Statistics, September-December, 1920 ; D. Friday, Journal of Political 
 Economy, Vol. 26, pp. 952-969; Vol. 27, pp. 117-126. 
 
180 Capital 
 
 the foundation for a rising standard of living for every- 
 body and a general human and material advance rests 
 in the increased producing capacity of the country due 
 to the development of the mechanical and scientific basis 
 of modern industry. 
 
 3. The proportions of the national income saved and 
 consumed. The national income may roughly be divided 
 into a portion calculated for immediate consumption and 
 a portion set aside, and saved as a means to further 
 production. In the one class would belong the food 
 of the family table, the overalls and the evening gowns 
 of the various classes, the shoes and hats, the houses and 
 automobiles, — anything and everything that is used up at 
 the time by the consumers of the country. In the latter 
 class would belong the factory buildings, the research lab- 
 oratories, the machines and work benches, the trucks and 
 railroad equipment, — the entire outfit of productive capi- 
 tal which is utilized to maintain the production of the 
 country from year to year. In the year 1910, from 6.5 
 to 10 per cent, of the income was saved, the balance con- 
 sumed. In the year 1913, about 20 per cent, of the income 
 was saved, and about 80 per cent, consumed. In the ab- 
 normal war year, 1918, about 30 per cent, was saved and 
 about 70 per cent, consumed. The normal peace time sa- 
 vings range within the percentages for 1910 and 1913. J. 
 A. Hobson has estimated that in England the average an- 
 nual savings amount to about three-twentieths of the total 
 annual income. Obviously, the great bulk of the nation's 
 income goes into consumption. But it is out of the saved 
 fraction of the income that the productive equipment of 
 the country is built up and expanded. If the propor- 
 tion saved becomes too small, the future productive equip- 
 ment of the country is dwarfed, and the basis for the 
 annual income of the next generation is undermined. Sav- 
 ing is an imperative economic virtue under the present 
 economic regime. A nation which launches into an orgy 
 of expenditure for goods to satisfy the needs of the mo- 
 ment, and forgets thrift and saving, may enjoy itself for 
 the time being, but foresight and precaution call for a high 
 
Capital 181 
 
 ratio of saving out of the nation's income. An abundant 
 amount of productive capital in the country is the only- 
 means by which the high national income can be main- 
 tained year in and year out.^ 
 
 4. The proportions of national income for service and 
 for ownership. From another important standpoint, the 
 national income divides itself into two classes: one, that 
 going as a reward for work performed and services ren- 
 dered by human activity ; the other, that going to the hold- 
 ers of property by virtue of their claim of ownership. 
 "Work and property are the two great categories upon 
 which, in approaching the problem of distribution, we 
 should concentrate our attention."^ The former category 
 covers wages, salaries, fees, etc., reward for effort expended, 
 mental or manual or both. The latter covers interest, 
 dividends, or rent, — that is, reward because the owner of 
 property has loaned or invested his savings. Generally, 
 the two classes are fairly distinct. The owner of bonds 
 to the amount of $1,000,000 draws an interest of perhaps 
 5 per cent., the interest being a reward for ownership. 
 The wage worker in the factory where the million dollars 
 is invested draws a wage of perhaps $1200, the wage being 
 a reward for effort of hand and brain. The president of 
 the company draws a salary of perhaps $50,000 as a reward 
 for his services as an executive. He may at the same time 
 own bonds or stock in the company upon which he receives 
 property income in interest or dividends. The president 
 of the concern in that case receives both an effort income 
 and a property income. However the two sources of in- 
 come distribution remain distinct. They are separate 
 shares of the income of the individual, and in the aggre- 
 gate stand out as separate shares of the total national in- 
 come. 
 
 The statistics of the case are too incomplete to allow a 
 precise estimate of the ratio between the two shares, but 
 approximations are possible and for all general purposes 
 
 1 See D. Friday, "Profits, Wages and Prices," Chapter V; also in 
 The New RepuUic, Vol. XXIX, pp. 64-67; King, op. cit., 132-137. 
 
 2 H. G. Dalton, "The Inequality of Incomes," p. 175. 
 
182' Capital 
 
 these approximations are highly useful. Hugh Dalton has 
 estimated the relative shares received for property and 
 for effort in the following amounts : ^ 
 
 Share of Property Share of Effort 
 per cent per cent 
 
 United Kingdom 32 68 
 
 United States 29 71 
 
 France 39 61 
 
 Italy 26 74 
 
 The share of property ranges therefore in the vicinity of 
 30 per cent, of the total income fund.^ This ratio however 
 fluctuates a great deal with different years. During the 
 years 1916 and 1917 the share of the annual income which 
 went in the form of wages and salaries was comparatively 
 low. It amounted probably to less than % of the total. 
 But in the following two years, the share of wages and 
 salaries mounted high, rising to approximately % of the 
 total income. The variations arise from fluctuations in 
 price levels, in the system of taxation, in labor efficiency, 
 and in wage rates.^ The essential concept is the fairly 
 stable ratio between incomes for doing and incomes for own- 
 ing. The incomes for doing amount to more than double 
 the incomes for owning. 
 
 The justification for this ratio, the good or harm com- 
 ing from it, and the causes perpetuating it, give rise to 
 intricate and difficult questions. They are best approached 
 by viewing ownership as an institution. An analysis of 
 the institution of ownership and private property will 
 therefore be made in the latter portion of this section.* 
 
 5. The proportions of income going to wages, interest, 
 rent, profits, etc. The fractions of the total income as- 
 signable to each of these factors are of necessity approxi- 
 mations. They can lay no claim to close accuracy, and yet 
 they have a very real value in that they give a rough pic- 
 ture of the stream of income. This picture is essential for 
 
 1 Op. cit., p. 209. 
 
 2 National Bureau of Economic Research, Income of the United 
 States, pp. 97-108, 145. 
 
 3 David Friday, "Profits, Wages and Prices," pp. 124-125, 130. 
 iSee below, pp. 193-215. 
 
Capital 183 
 
 a genuine conception of the working of the economic sys- 
 tem. Eent claims approximately 8 per cent, of the total 
 income. The share of rent has remained fairly constant 
 since 1850. This 8 per cent, represents the income for 
 ownership, which flows to those who have the title of 
 possession to the land of the country. It is primarily an 
 income for owning rather than for doing. 
 
 Profits claimed in 19J0 about 27.5 per eent. of the total 
 income. Profits in this sense of the term refers partly 
 to income for effort, skill of management, service rendered, 
 etc., but chiefly to income for ownership. Although the 
 major part of profits represents income for ownership, 
 nevertheless the ratio between the two is not a matter of 
 exact statistical record up to the present time. Profits is 
 therefore loosely used in this estimate. In 1918, the in- 
 dividuals and corporations reporting to the Bureau of In- 
 ternal Revenue indicated that the total of business profits 
 for the year was $14,500,000,000, or about 21 per cent, of 
 the total income for the year. ^ 
 
 Interest claims from 5 to 9 per eent. of the product, 
 varying with the year in question. Interest as here used 
 covers the return on bonds and notes, but not the dividends 
 on stocks. Interest, like rent and a part of profits, is a 
 reward for ownership. It is paid to the owner of property 
 or the holder of credit as a property income rather than 
 as an income for effort and workmanship.^ 
 
 There is nothing invidious in pointing out the relation 
 between these factors of income for owning rather than 
 for doing. The function of ownership is indispensable in 
 the economic process under a private property regime, 
 and there is nothing derogatory in income based upon that 
 function. Owning is however a distinctly different function 
 from doing, and the clear separation of the two bases of 
 income is of real importance. 
 
 6. Personal inequalities of property ownership. In the 
 United States, 1 per cent, of the population owns approx- 
 
 1 David Friday, American Economic Review, Sup., March, 1920, 
 p. 22. 
 
 2 On above data, see King, op. cit., pp. 158-160; Bowley, "Division 
 of the Product of Industry," pp. 42-45. 
 
184 Capital 
 
 imately one-half of the total wealth of the country. Own- 
 ership is largely concentrated in the hands of a few. ^ In 
 the more advanced industrial countries, a large majority 
 of the population is virtually propertyless. Three-fifths 
 of the population in such countries as the United States, 
 the United Kingdom, France and Prussia are without own- 
 ership of any considerable property. It has been estimated 
 that in New York City, as much as two-thirds of the popu- 
 lation are without any registered property.^ In these 
 modern industrial communities, the richest 2 per cent, 
 of the people own considerably more than all the rest 
 of the people taken together. This extreme inequality of 
 ownership indicates in a modern democracy two classes, 
 side by side, the one loaded with enormous possessions, the 
 other destitute of any property save the more immediate 
 necessities of life. ^ In the large industrial centers, prob- 
 ably 90 per cent, of the wage workers are propertyless. 
 Only a negligible few wage earners in New York City 
 own their own homes. * 
 
 The middle classes, comprising about one-third of the 
 population, own about one-third of the property of the 
 country. Clearly, the extremes of concentration take place 
 in those limited circles occupied by the very well to do. 
 Their stack of property mounts to the sky while the pile 
 of the great mass of wage workers is of pigmy propor- 
 tions. 
 
 It folijws, therefore, that the great bulk of the income 
 for owning rather than doing goes to a very small frac- 
 tion of the population. The giant's share of property in- 
 come goes to the richest 1 or 2 per cent, of the population. 
 The income of the lower two-thirds of the population is 
 almost exclusively an income for physical and mental ef- 
 fort. They receive virtually no income for owning, for 
 they own virtually nothing. Property income centers in 
 
 1 R. T. Ely, "Property and Contract in their Relations to Wealth," 
 p. 319. 
 
 2Ihid., pp. 318-319. 
 
 3 W. I. King, "Wealth and Income of People of United States " 
 p. 96. 
 
 4R. Hunter, "Poverty," pp. 42-43. 
 
Capital 185 
 
 the property owners. This contrast is most violently 
 marked when the largest single fortune in the United 
 States is compared with the propertyless condition of the 
 mass of the population. This fortune was estimated in 
 1915 at about $1,000,000,000, and is equivalent to the wealth 
 of 2,500,000 of those classed as, in the lower levels of 
 society.^ 
 
 The causes of these inequalities and their effects upon 
 society require an analysis of private property as an institu- 
 tion. The institution provides an organization of econ- 
 omic forces of which this gross inequality is the natural out- 
 come. Any other outcome would involve an alteration of 
 some characteristics of the institution. This institutional 
 analysis will be undertaken later in this chapter. 
 
 7. Personal inequalities of income. In the United 
 Kingdom, pre-war estimates put one-half of the total in- 
 come of the nation in the hands of about 12 per cent, 
 of the people, and, what is more striking, one-third of the 
 total income in the hands of about 3 per cent, of the popu- 
 lation. ^ In the United States, that richest 1 per cent, 
 of the population which owns about one-half the wealth 
 receives approximately 15 per cent, of the income. This 
 brings the facts to the point where it is apparent that the 
 inequalities of income are not so great as the inequalities 
 of ownership. The total income of the masses of workers 
 is not reckoned upon any property basis, but upon a wage 
 or salary basis. "The working man, commonly, receives 
 more income in a year than the total value of his pos- 
 session while the rich man's income, being composed largely 
 of rent, interest, and dividends, will, ordinarily, constitute 
 but three to ten per cent, of his wealth. ' '* But this is not to 
 imply that the inequalities of income are not carried to 
 startling extremes. Indeed, if the greater inequalities of 
 ownership were not already in mind, these inequalities 
 of income would seem staggering enough in themselves. The 
 richest fifth of the families in the United States claims 
 
 1 Federal Commission on Industrial Relations, Vol. I, pp. 32-34. 
 
 2 Sir L. C. Money, "Riches and Poverty," Chaptfer III. 
 
 3 W. I. King, op. (At., p. 231. 
 
186 Capital 
 
 about half the income.^ To put the facts of income and 
 ownership side by side, it may be stated that one-half of 
 the income goes to the richest fifth of the people whereas 
 one-half of the wealth is owned by one one-hundredth of 
 the people.^ 
 
 The full effect of the war period upon inequalities of in- 
 come has not yet been measured. One impressive fact 
 is the number of incomes of $50,000 or over. They were 
 estimated at about 27,000 in 1917 and 21,000 in 1918. In 
 1917 there were 141 individuals whose annual income was 
 one million dollars or over. In 1918, there were 67 people 
 listed in the same class. At the other end of the scale there 
 were over 85 per cent, of the population gainfully em- 
 ployed whose incomes did not mount high enough to list 
 them in the $2,000 per annum class. The incomes of the 
 largest property owners make up a huge share of the total 
 income of the nation, and the inequalities between these 
 two great groups of the population are enormous.'' 
 
 Any attempt to understand the problem of ownership, 
 wealth and income must begin with a vivid conception of 
 these inequalities. The extremes of income, the violent con- 
 trasts between the most well-to-do and the least well-to-do 
 are the center of the picture of income distribution. 
 
 In the higher income classes, the ratio between income 
 for owning and income for doing is also significant. Ap- 
 proximately one-half of the incomes between $3000 and 
 $4000 arises from personal services, the other half from 
 ownership. When incomes reach the $10,000 figure, the 
 share due to personal service is reduced to one-fourth, 
 whereas the share due to owning rises to about three- 
 fourths. "When incomes reach the figure which ranks the 
 individuals as millionaires, the share due to personal ser- 
 vices falls to about 14 per cent. When incomes pass 
 the $1,000,000 mark annually, the share for personal ser- 
 vices declines to a trifle over 4 per cent. Obviously, the 
 
 1 King, op. cit., p. 235. 
 
 2 On above data, see National Bureau of Economic Research, op. 
 cit., pp. 108-143, 147. 
 
 3 See Statistics of Income, 1918, United States Bureau of Internal 
 Revenue. 
 
Capital 187 
 
 higher the income, the lower the proportion due to per- 
 sonal services, and the greater the proportion due to owner- 
 ship.^ 
 
 The statistics of wealth, income and ownership are of 
 importance because they give a quantitative conception of 
 the actual facts. By setting the various phases of the in- 
 stitution of wealth and ownership in their right proportions, 
 the statistics supply the economic observer with fairly ac- 
 curate mental pictures of the relative size and strength of 
 the several factors entering into thought on the broad 
 problems of wealth. 
 
 Interpretation of the Facts 
 
 An interpretation of these facts may well begin with 
 the first two groups in the classification, namely, the total 
 stock of wealth and the total income of the nation. The 
 significance of wealth and income for a nation is con- 
 ditioned by a number of fundamental factors. Wealth and 
 income are greatest for a nation which is abundantly en- 
 dowed with natural resources. A nation which is defi- 
 cient in such basic natural resources as coal and iron is 
 severely restricted in its volume of wealth. "Wealth and 
 income tend to be greatest where the agricultural soil is 
 fertile and large in area ; where mineral supplies are of high 
 quality, easy of access, and vast in quantity ; where rivers, 
 lakes and sea coast are favorable for commerce, and where 
 the topography of the country is favorable to elaborate 
 transportation systems. These qualifications do not insure 
 a high national income ; they merely offer a possible founda- 
 tion for national prosperity. The qualities of the national 
 population determine the extent to which material resources 
 will be converted into national prosperity. That people 
 which contains men of strong initiative, leaders who are 
 willing to take great risks in the development of the coun- 
 try's supplies of materials, organizers who have an instinc- 
 tive drive toward organizing all of the factors of production 
 and distribution, and individuals who have the ability and 
 genius to become great captains of industry — will con- 
 1 D. Friday, Journal of Political Economy, Vol. 26, p. 962. 
 
188 Capital 
 
 vert most completely the raw resources of a country into 
 national prosperity. Moreover the character of the labor- 
 ing population will condition the use made of a founda- 
 tion of rich resources. A labor population which is of 
 relatively high intelligence, which has physical stamina 
 and vigorous instincts, which has aptitudes for craftsman- 
 ship or adaptability to the discipline of mechanical indus- 
 trial processes, — is favorable to a successful utilization of 
 the raw resources of the country. In a broader way, the 
 whole social system of a country conditions the relations 
 between national resources and national prosperity. The 
 extent to which class lines are drawn in the social structure, 
 the moral and social standards of the upper and lower 
 levels of population, the effect of customs of consumption 
 upon the character and ideals of a people, the personality of 
 the average citizen in his social surroundings, — all these in- 
 fluence the volume of income and of wealth, and determine 
 what their component elements shall be. The broad truth 
 of the matter is that the entire economic structure of each 
 generation, its technological development, its manner of in- 
 dustrial organization, and its social institutions generally, 
 shape the economic energies of the nation, and determine 
 what kind of product shall be prized in the nation, how 
 much of it shall be desired, and how much of it can be 
 actually produced. 
 
 The wealth of the country has been spoken of thus far 
 mainly as an accumulation of goods and commodities. 
 This conception of wealth is true to the facts of the case, 
 but it needs a further interpretation in order to make clear 
 its primary meaning from the human standpoint. The 
 goods in and of themselves would be worthless unless they 
 contributed to the satisfaction of the needs and wants 
 of men. Hence, the stream of commodities belonging to a 
 people constitutes also a stream of satisfactions of human 
 wants. This latter stream is properly conceived as a stream 
 of welfare. When wealth is viewed as a stream of wel- 
 fare, it should be viewed from the standpoint of producers 
 as well as consumers. For instance, clothing of excellent 
 quality may bring real welfare to the consumer who wears 
 
Capital 189 
 
 it; but if the producer of the clothing worked in a sweat- 
 shop at inadequate wages and under conditions which 
 harmed him, body and soul, then the clothing is a form 
 /of wealth which represents welfare to consumers only, 
 and not to producers. Therefore a huge national income 
 which entailed human damage to those engaged in produc- 
 ing it would represent a very low stream of producer 's wel- 
 fare. It would not merely bring producer's degradation 
 instead of producer's welfare, but it would so affect the 
 producer that when he assumed his role as a consumer, 
 he would be disqualified mentally and physically from that 
 standard of enjoyment and satisfaction which brings con- 
 sumer's welfare. Hence wealth may be viewed as welfare 
 to the extent that it constitutes a stream of welfare to men 
 in their dual role of producers and consumers. Wealth 
 which represents welfare to those who make it and welfare 
 to those who consume it, is the only form of wealth which 
 nations can afford to be proud of.^ A view of wealth as 
 both producer's and consumer's welfare is therefore neces- 
 sary. 
 
 In interpreting the third classification, the proportions 
 of income consumed and saved, the virtue of thrift comes 
 into prominence. The material progress of a nation is ac- 
 complished because there is an excess of production above 
 consumption, and the excess takes the form of new mechan- 
 ical equipment, improved transportation facilities, and 
 economic capital of all sorts suited for carrying on future 
 productive activity. A nation which consumes imme- 
 diately all or nearly all that it produces, is rushing to- 
 ward the day when its machinery will be worn out, its 
 railroads depreciated, its buildings crumbling, with little 
 or no new equipment to replace the old. The technical 
 equipment of a modem economic society increases in pro- 
 portion to the extent to which people save part of their 
 income and invest it in some form of capital that will aid 
 in carrying on production. National power and prestige 
 
 1 For an excellent and elaborate discussion of consumer's welfare, 
 see A. C. Pigou, "Wealth and Welfare," and of producer's welfare, 
 Bee J. A. Hobsou, "Work and Wealth, A Human Valuation." 
 
190 Capital 
 
 in the present world situation depends in fundamental re- 
 spects upon the willingness of the nation to set aside part 
 of its earnings for the uses of the future. The nations 
 which can, by wise saving, increase the amount of efficient 
 machinery per capita, and the amount of horsepower, de- 
 rived from steam, electric, water or other power sources, 
 that is at the aid of each worker, and the supply of other 
 necessary capital, has laid the foundations for an increase 
 of production for the nation and an increase of income for 
 Uhe average individual. Increase of capital equipment mul- 
 tiplies the productive efficiency of the individual worker 
 and of the nation, and the rate of increase is measured by 
 the rate of national saving, i.e., the' annual excess of produc- 
 tion over consumption. 
 
 Two sources of savings command prior attention: the 
 incomes of individuals, and the incomes of corporations. 
 Individual thrift is a virtue for rich and poor alike. Of 
 course, it is a virtue which is the easier practiced the 
 greater the individual's income. A person with large in- 
 come may make large savings with comparative ease, while 
 a person with a living wage senses a real sacrifice for each 
 dollar saved. For the latter person as for the former, 
 the savings represent a source of personal gain and per- 
 sonal security. The savings of the wage earner may draw 
 interest in a savings bank or elsewhere, and are available 
 for some possible future emergency when the worker has 
 lost his job, or has to meet a doctor's bill, or has to cope 
 with some other urgent need. The savings of the person of 
 large income contribute to the accumulation of a personal 
 fortune, with all that a fortune means in the form of 
 power, prestige and economic freedom and security. At 
 the same time that saving results in personal gain, it also 
 results in national gain, for it swells the amount of the 
 total fund of savings and thereby increases the productive 
 equipment and economic efficiency of the country as a 
 whole. Thrift, therefore, benefits both the individual and 
 the nation. 
 
 Although thrift is, by every rule of logic, a real public 
 and private virtue, nevertheless it is a virtue which the 
 
Capital 191 
 
 individual finds it exceedingly difficult to practice. The 
 difficulty arises from the psychology of the situation. In- 
 come spent immediately buys immediate welfare, im- 
 mediate enjoyment, immediate satisfaction, whereas income 
 saved represents postponed welfare, and postponed en- 
 joyment. The temptations to satisfy the individual's 
 immediate cravings are so universal, and so allur- 
 ing that it is vastly easier to spend income and satisfy 
 the cravings than to deny the immediate temptations to 
 enjoyment and comfort and to dwell with sweet satisfac- 
 tion upon the logical virtues of frugality. Frugality it- 
 self must be made to satisfy such primary instincts as 
 the motive to care for one's family in the future, or the 
 motive to win prestige and power through large economic 
 possessions, or the motive to imitate others in following a 
 social custom which makes economy more a source of social 
 distinction, and extravagance less so, than at present. But 
 the organization of motives of frugality moves slowly, and 
 against heavy psychological obstacles ; and in spite of much 
 preaching and propaganda in favor of thrift, the amount of 
 saving among the bulk of the population, particularly the 
 laboring classes, remains discouragingly small. The psychol- 
 ogy of the situation will be clarified somewhat by a com- 
 parison vsdth the psychology of persuading labor union 
 members to pay their dues. Labor unions widely insist in 
 their collective bargaining agreements, upon what is known 
 as the "check-off" system. That is, unions demand that 
 union dues be deducted from wages before the wages are 
 paid. They desire the employer to ' ' check-off" from the pay- 
 roll the amount of the union assessment, because if the 
 union has to collect from each individual member, the task 
 is fraught with enormous difficulties. The union members 
 spend their money for purposes which bring immediate en- 
 joyment, and faithful, painful saving to meet union dues 
 is a most strenuous virtue. Saving is hard, spending is 
 easy. This brief summary of the psychology of the matter 
 applies in real measure to incomes which are large enough 
 to meet generously the individual's needs and extrava- 
 gances; it applies with great foree to incomes which are 
 
192' Capital 
 
 so small as to meet only scantily tlie individual's major 
 wants. In fact, for the lower income groups, it might well 
 be said that saving is extremely hard while spending is 
 virtually imperative. Cost of living studies on a large 
 scale have demonstrated that most working-class families 
 spend practically all their income.^ 
 
 As a result of these various factors, the great bulk of in- 
 dividual saving is done by the so-called middle classes, 
 by the salaried classes and by the property-owning classes. 
 Until recently, it was assumed that the savings made by 
 individuals of these classes varied in proportion to the in- 
 terest rate, but recent studies and observations point to the 
 opinion that interest rates have a minor influence upon the 
 volume of individual savings.^ Saving which involves real 
 abstinence and sacrifice is not due to acquisitive motives to 
 secure high interest, but rather to motives to secure family 
 protection, economic security, social prestige, or busi- 
 ness power. This is not to deny some influence to interest 
 rates, and it certainly deserves to be pointed out that with- 
 out interest rates the fund of individual savings would be 
 inadequate to meet the nation's needs for capital. It is, 
 however, a false theory of interest rates to contend that the 
 individual saver is motivated primarily by acquisitive in- 
 stincts. The motives to saving in the average individual 
 are many and complicated, and the possessive motive, stim- 
 ulated by interest rates, does not hold a dominant position 
 in his group of motives. 
 
 The other source of savings is corporation income. Busi- 
 ness men discovered that individual savings would not be 
 adequate to finance economic activity and expansion, and 
 cast their glance around for a source of savings which would 
 supplement individual thrift. They discovered a source of 
 savings in corporation income. The net income of a cor- 
 poration is rarely paid out in full in the form of profits or 
 dividends. A substantial portion of the earnings available 
 for dividends are not paid out, but are retained in the cor- 
 poration. These retained earnings are then used to invest 
 
 1 Royal Meeker, MontMy Lahor Review, Vol. IX, pp. 1-5. 
 
 2 For detailed observation see below, p. 447. 
 
Capital 193 
 
 in new buildings, new equipment, new capital of any sort. 
 Or they may remain as a surplus fund and be invested in 
 bonds or stocks of other corporations. In either case, they 
 are savings out of the corporate income, devoted to the 
 maintenance and increase of productive capital, Suppose 
 the funds which are saved in this way were either paid out 
 in dividends, or were reduced by charging consumers lower 
 prices for goods. The result would be that the recipients 
 of the dividends and the consumers who benefited by 
 lowered prices, would spend a good share of their gains for 
 direct consumption; they would save only a fraction of the 
 gains. On this understanding of the situation, corpora- 
 tions have seen fit to adopt very widely the practice of 
 tapping income at the source and of "checking-off" savings 
 before dividends are paid.^ 
 
 An interpretation of the fourth classification, the propor- 
 tions of income for effort and for ownership, necessitates 
 a broad analysis of the general institution of ownership 
 and property out of which come naturally, steadily, and 
 persistently such results. Merely to look about over the 
 maze of facts gives no clue to the natural causes of those 
 facts. The imperative key to the situation lies in some dis- 
 covery of why these facts of wealth and property have conie 
 to be what they are, why they tend to maintain themselves 
 to-day, and whether by the nature of the case they should 
 always retain their present origins and consequences. The 
 only key which appears to give this clue is a conception 
 of ownership of property as a social institution. As 
 C. H. Cooley has insisted, ownership and distribution 
 are "essentially a historical and institutional phenomenon, 
 economic technique being for the most part only a mecha- 
 nism through which social organization expresses itself," 
 and "pecuniary valuation is a social institution no less than 
 the state or the church."^ 
 
 An institution is a group of human tendencies and habits 
 working out through an organized structure.* It is the 
 
 1 For further details, see below, pp. 449-450. 
 
 2 "Social Process," pp. 302, 308. 
 
 3 W. G. Sumner, "Folkways," p. S3. 
 
194 Capital 
 
 product of history. It has antecedents reaching back 
 through generations, and is always in a state of flux and 
 change. It is what it is to-day because it was something 
 else yesterday, something less satisfying yesterday. It 
 will be something different in days ahead because it 
 is not fully satisfying to-day. An institution is on 
 the march from yesterday forward to to-morrrow. It is 
 dynamic. It grows, develops, moves. This is not to deny 
 that there are always forces at work trying to keep the in- 
 stitution static, trying to preserve the status quo, trying to 
 hold things as they are. But this is only the conservative 
 side of growth. It combines with another side, — restless, 
 forward-looking, dynamic. The two at their best balance 
 in wholesome, gradual, safe advance; at their worst they 
 fight it out. 
 
 If we view the church as an institution, at its beginning, 
 then during the Middle Ages, through the Eeformation, 
 through the refuge of persecuted groups in the early Amer- 
 ican colonies, on through the last century of development 
 in America, and finally in its present form, we have a 
 fairly clear picture of the dynamic character of the church 
 as an institution. Creeds, dogmas, rituals, teachings, the- 
 ologies, interpretations, beliefs, constantly moving forward, 
 appear simultaneously with organization, denominational 
 structure, practice, custom, tradition and innovation.^ It 
 is so with the institution of property. Every little while 
 a student of economic life throws out the declaration that 
 "We are living in a new economic world. "^ In other 
 words, the institution is growing. 
 
 Obviously then, the institution of property as it exists to- 
 day is not fixed and static in all its detail and method. In- 
 stitutions have much the same restless qualities as life. In 
 fact, property is nothing unless a way of life. To view 
 property as a static order is to miss the true dynamic nature 
 of property. This emphasis is carefully stated by de 
 Tocqueville in these words, "I am tempted to believe that 
 what we call necessary institutions are often no more than 
 
 iRoss, "Principles of Sociology," p. 489. 
 2E. T. Ely, "Property and Contract," p. 34. 
 
Capital 195 
 
 institutions to which we have grown accustomed, and that 
 in matters of social constitution the field of possibilities is 
 much more extensive than men living in their various 
 societies are ready to imagine. '"^ 
 
 The study of ownership and property as a great social 
 institution will be considered under the following divi- 
 sions : 
 
 1. The instinctive basis of the institution. 
 
 2. Property a group of rights. 
 
 3. Ownership as a corporate phenomenon. 
 
 The instinctive basis of the institution of property. The 
 whole institution of property would not exercise so domi- 
 nant an influence upon the wealth activities of men if it 
 were not grounded in powerful traits of human nature. 
 Property stimulates and satisfies some of the deepest in- 
 stinctive energies of men. 
 
 Of high rank among these instinctive energies is the ac- 
 quisitive bent of human nature. The impulse to posses- 
 sion is a dynamic human fact behind property. The ca- 
 pable organizer, the brilliant manager, the business man 
 of whatever sort, is expected to understand as a matter of 
 course that the stimulus which will call forth his best ef- 
 fort is the unlimited acquisition of wealth. Indeed the 
 profit motive is often advertised as in the nature of things 
 the only motive which can inspire the truly great captains 
 of industry to direct the affairs of wealth. Obviously, the 
 profit motive has the advantage that it works. Even 
 though it may stress the self-interest of the individual to 
 an extreme, even though it seems often to subordinate 
 broader social considerations, it certainly works. That is, 
 it calls forth, strenuous effort, it sets men on fire with en- 
 ergy, it commands the keenest brains. It works in the 
 direction in which it is intended to work, — the amassing of 
 profit and property. 
 
 There is another direction in which it works only indif- 
 ferently. The incidental by-product is looked upon as 
 socially good. At any rate, when men set out to acquire 
 large property, the pathway to acquisition is supposed to be 
 1 "Recollections of de Tocqueville," p. 101. 
 
196 Capital 
 
 paved witli economic welfare for the country. Adam Smith 
 taught that while seeking his own self-interest, the prop- 
 erty-holder would be led as by an invisible hand to serve 
 the common good. The theory in this respect has not al- 
 ways worked out well. The prevailing opinion among en- 
 gineers seems to be that profit seeking hinders production 
 and subordinates the real usefulness of the economic or- 
 der. For instance, H. L. Gantt writes, "The aim of our 
 efficiency has not been to produce goods, but to harvest dol- 
 lars. If we could harvest more dollars by producing fewer 
 goods, we produced the fewer goods. If it happened that 
 we could harvest more dollars by producing more goods, 
 we made an attempt to produce more goods: but the pro- 
 duction of goods was always secondary to the securing of 
 dollars."^ When men become part of an institution which 
 impresses upon people that what matters most to a man is 
 the amount of property he owns, he is bound to make other 
 things secondary. Even though the acquisitive motive 
 builds railroads, extends banks, develops mines, and or- 
 ganizes factories, and by and through them millions of peo- 
 ple get their living, nevertheless the sore spots of the social 
 world and the bad fortune of human groups is also an out- 
 put of the acquisitive motive. Without losing its drive, the 
 profit motive can combine more and more with motives of 
 achievement or of public spiritedness. 
 
 Another motive is important, the "will to power." In 
 the modern institution of wealth, the surest road to power is 
 the gaining of property. Property is power. Large property 
 gives prestige and influence with other property-holders; 
 it causes one's counsel to be listened to; and it gives the 
 ability to use financial force to put through new business 
 engagements. The instinct of domination ranks side by 
 side with the instinct of acquisition. "In the modern 
 world, power is realized more and more through property." 
 Hence this driving trait of human nature reinforces the 
 profit motive, and both combine in stimulating economic 
 activity which drastically stresses self-interest and individ- 
 ualistic gain. 
 
 iH. L. Gantt, "Organizing for Work," p. 24. 
 
Capital 197 
 
 Moreover, property means eeonomie freedom. "For 
 man, at all events, his property is above all something that 
 he can rely upon as a permanent home, permanent means of 
 subsistence or enjoyment. Property is thus an integral ele- 
 ment in an ordered life of purposeful activity. It is, at 
 bottom for the same reason, an integral element in a free 
 life. . . . Some measure of property appears in short to 
 be the essential basis of liberty."^ One who lacks prop- 
 erty is always on the verge of trouble and distress. He 
 has nothing to fall back upon in case of illness or accident. 
 He cannot travel, he cannot enjoy the best amusements, 
 he cannot have the best education for his family. He can- 
 not take part in the game of business. He is severely limit- 
 ed in his life activities. "Without a certain amount 
 of accumulated wealth, a man is largely a slave to his im- 
 mediate environment." The facts of wealth which have 
 already been given show that for the majority of men this 
 enslavement to immediate environment is a painful fact. 
 They lack the accumulated property which gives indepen- 
 dence from the misfortunes and vicissitudes of life among 
 the non-propertied levels of society. To win property is 
 to win economic freedom. The most nagging worries of 
 life drop out. Security is attained. The instinctive revolt 
 against restraint and confinement is successful; and the 
 love of freedom, the love of fuller psychological existence 
 is satisfied. As William Graham Sumner remarked, 
 "Wealth, therefore, in a highly organized civilized society, 
 gives an emancipation from the ills of earthly life which 
 is enormous." 
 
 One of the most insistent movements of the present time 
 is for a revaluation of the motives governing property ac- 
 cumulation. "The community needs service first, regardless 
 of who gets the profits, because its life depends upon the 
 service it gets. ' '^ Before the service motive, property is on 
 the defensive. Property is face to face with the necessity 
 for co-ordinating the profit motive with new motives. At 
 least, it is challenged with the task of controlling the profit 
 
 lEly, "Property and Contract," pp. 308-309. 
 2 H. L. Gantt, "Organizing for Work," p. 5. 
 
198 Capital 
 
 motive with social thoughtfulness. At first, the reaction 
 to such a challenge is that a service motive or constructive 
 motive, or public achievement motive will not work, that a 
 creative motive is inadequate. These substitutes are not, 
 so it is said, rugged, and virile, and tremendous. How- 
 ever, it is conspicuous that motives of creative achievement 
 and public well-being have played a primary part in the 
 motivation of such indispensable economic groups as the 
 inventors and engineers. Among the professional classes, 
 the profit motive is placed under subjection. Surely, then, 
 the proposed substitutes are not as weak and flabby as 
 they might at first have seemed. One of the vital contribu- 
 tions of psychology to economics is the scientific assurance 
 that the substitute motives have true dynamic quality, and 
 do not menace the business game with a milksop mental 
 outlook.^ 
 
 Such a revaluation of motives throws light on the claim 
 that property as now constituted is a great developer of 
 personality. The race for property accumulation develops 
 foresight, self-reliance, initiative, self-respect, and a long 
 list of other virtues of personality. But unquestionably it 
 at the same time encourages certain vices of personality, — 
 such as excessive self-interest, misconception of the primary 
 importance of the public need, and false valuation of all 
 the qualities of life in terms of self -gain. But what of the 
 propertyless man? Surely property is not a developer of 
 personality for him. As a keen observer has remarked, 
 "Thus it has come about that the Society which boasts 
 of its reliance on the freedom of individual self-develop- 
 ment nevertheless allows only a limited proportion of its 
 individual members to possess the freedom. It appeals to 
 the moralizing influence of ownership ; and then denies the 
 possibilities of any real ownership to the main mass of its 
 members. ' '^ The forces of the times demand that property 
 must be less an individualistic influence on personality and 
 more a social influence. Personality is a social product, 
 and a wider distribution of property, combined with a re- 
 
 1 A. E. Zimmern, "Nationality and Government," pp. 259-260. 
 
 2 See Hobhouse, "Property, Its Duties and Rights," p. 184. 
 
Capital 199 
 
 adaptation of more social motives in its accumulation, is 
 the general urging of tlie forces now at work. 
 
 If these considerations are sound, it is proper to define 
 economics as the science of makiag material wealth con- 
 tribute most to human welfare. The function of the in- 
 stitution of property is then to serve human life. If this 
 involves a gradual transformation of motives and ideas be- 
 hind property, then the transformation should be made 
 in the smooth process of economic growth.^ If the self- 
 regarding instincts have to give way to creative and ser- 
 vice instincts somewhat, the adjustment is a part of the 
 evolution of an institution. We may as well face squarely 
 the fact that the present instinctive basis of property is 
 not aU that it should be. That does not mean a drastic, 
 quick, shocking change. Property is an institution. Men 
 have in the past been able fairly well to reshape institu- 
 tions to the facts of human nature when the times have 
 gotten out of joint, and should be able to do so again.^ 
 
 Property a Group of Rights 
 
 Property has been defined as "a bundle of rights." 
 There is no more conspicuous feature of the institution of 
 property than this overwhelming emphasis upon the rights 
 of property.^ "When the American Constitution was es- 
 tablished, and the foundations of the American system of 
 government and property laid, the period was one which 
 teemed with the philosophy of natural rights. European 
 countries, France particularly, were just experiencing the 
 sensation of having thrown off old authorities, traditions 
 and customs. The new freedom was akin to the freedom of 
 the American Eevolutionary group, and it furnished a 
 soil in which there flourished an extreme doctrine of the 
 individualistic rights of all men to life, liberty and the 
 pursuit of happiness. Accordingly property became a set 
 of exclusive rights. The property owner had inalienable 
 rights to do with his property as he pleased, subject only 
 
 1 A. E. Zimmern, "Nationality and Government," p. 174. 
 2D. G. Ritchie, "Natural Eights," p. 277. 
 3 R. T. Ely, "Property and Contract," p. 60. 
 
200 Capital 
 
 to a minimum of restraint from excessively anti-social 
 practices. Property was something to be let alone by 
 society. It had inalienable rights to be let alone. Prop- 
 erty rights were individual rights, and this conception col- 
 ors deeply the whole institution of property down to the 
 present day. 
 
 One weakness in this theory of property rights has be- 
 come very prominent, namely, the implication that "the 
 foundation of society is found, not in functions, but in 
 rights ; that rights are not deducible from the discharge of 
 functions, so that the acquisition of wealth and the enjoy- 
 ment of property are contingent upon the performances of 
 services, but that the individual enters the world equipped 
 with rights to the free disposal of his property and the pur- 
 suit of his economic self-interest, and that these rights are 
 anterior to, and independent of, any service which he may 
 render."^ Rights come first and responsibilities second. 
 Property is thought of primarily as a bundle of rights, 
 but not emphatically as a bundle of duties. And the rights 
 acquire a certain sacredness and awfulness. They com- 
 mand a sort of religious reverence which will not bear 
 analysis. Such rights it seems sacrilege to question. In 
 this atmosphere, it is hard to make a clean-cut mental ap- 
 proach to the problem of property and find just what it is 
 all about. As a matter of fact, the so-called rights are 
 simply rules of the institution ; and if the rules are capable 
 of improvement, then a blind awe of ancient rights should 
 not stand in the way. The rules of the game are being 
 tried out. There is nothing absolute and unapproachable 
 about them. They deserve to be freed from superstition 
 and treated with the same common sense which men use 
 in coping with everyday problems of life. A proper in- 
 fusion of duties, obligations, and responsibilities is indis- 
 pensable, and an unquestioning reverence for rights as 
 rights must give way to a proper spirit of accommodation 
 of the property institution to the needs of the present 
 period. 
 
 One phase of these rights is the right to acquire property. 
 lE. H. Tawney, "Tie Acquisitive Society," p. 20. 
 
Capital 201 
 
 Men have the right to engage in business, make profits, 
 save their income, invest, and accumulate. This right 
 has encouraged the boundless initiative and energy of 
 the business community. It gives a powerful impetus 
 to primary instincts and arouses the ablest men to the 
 most strenuous business endeavors. It has a similar effect 
 upon middle-class shop-keepers and to a large extent upon 
 farm groups. It has however a scant effect upon a sub- 
 stantial proportion of the wage groups for the simple rea- 
 son that the size of the wage does not permit the accumula- 
 tion of any great amount of property. The average wage 
 earner does not hold a faith that some day he will be rich; 
 he expects to remain a wage earner the rest of his days. 
 Workers here and there with extraordinary instinctive and 
 mental endowment, force their way from the bottom to the 
 top, and acquire a large amount of property in the course 
 of a life time. The rank and file of laborers, however, 
 have given up any such aspiration. It will be noticed also 
 that among the business groups, this right to acquire wealth 
 enjoys a high degree of freedom from public interference. 
 A man has the right to acquire wealth by manufacturing 
 luxury automobiles when city populations are in dire need 
 of housing. Men are very commonly engaged in manu- 
 facturing commodities which are the least needed by the 
 great bulk of the population, because it pays better to 
 produce those goods, and they have the right to produce 
 whatever jdelds for them individually the highest net in- 
 come. The Government organization in war time tem- 
 porarily annulled this right and demanded that non-essen- 
 tials should not be made when essentials were needed to 
 win the war. Industries which insisted on producing non- 
 essentials found their coal supply cut off by the govern- 
 ment, or requests for credit refused. And most business 
 men were willing to give up for the time being the right 
 to produce goods which would not help win the war. 
 But during peace times, there is no slogan equivalent to 
 "Win the War." To produce essentials first, and on a 
 quantity basis at minimum prices to the mass of consumers 
 would obviously be the paramount desideratum from a so- 
 
202 Capital 
 
 eial viewpoint. But at the end of the war business men gave 
 a sigh of great relief when the war-time government boards 
 were abolished, and everybody was free again to acquire 
 wealth as he pleased, on the old laissez-faire basis, in what- 
 ever line brought individually the highest net income. The 
 social forces at work to-day are not pressing for an aboli- 
 tion of the right to acquire property, but they are decidedly 
 at work to make peace-time production amenable to some 
 kind of social control more or less, equivalent to the war- 
 time control contained in the slogan "Win the "War." 
 There is a social principle superior to the mechanical play 
 of individualistic rights in the seeking of property. Pri- 
 vate parties assume that it is sound policy to produce what- 
 ever pays best, whereas from a public viewpoint it is 
 sound policy to produce whatever is needed most. As a 
 matter of fact, it often occurs that what pays best is not 
 what is needed most, — hence a shortage in housing or in 
 railroad equipment. The right to acquire property requires, 
 therefore, a degree of social control. 
 
 The right to unlimited income. — A very pertinent ques- 
 tion would be, "How much wealth can a man accumu- 
 late?" In the popular phrase, the answer might well be, 
 "The sky is the limit." After taxes have been paid and 
 costs have been met, his income belongs to him alone, 
 whether it be $3,000,000 a year or $3,000. The property 
 right to income means in terms of everyday action that 
 a man is entitled to all he can get. This unlimited right 
 supplies a perpetual stimulus to the instincts underlying 
 property: they are never satisfied and never reach a limit. 
 No matter how much the individual may acquire, he al- 
 ways has the right to acquire more. At the same time 
 that this right calls forth strenuous business endeavor, 
 it also causes those excessive returns claimed by profit- 
 eers, usurers and over-avaricious landlords. The right 
 to income is a right to good and bad income alike. Even 
 during war time the right to income was not seriously 
 invaded. Government reports disclosed gross profiteer- 
 ing throughout the war in many business circles, and after 
 the armistice, profit figures of 50 per cent., 100 per cent. 
 
Capital 203 
 
 and even thousands of per cent., were frequently reported 
 by government authorities.^ Unless this positive right is 
 balanced by a commensurate sense of social responsibility, 
 it inevitably leads to dangerous excesses. ^ ' ' The heresy 
 which condemns our economic life is this, that business is 
 primarily a means of making wealth for individuals. It 
 involves us in industrial bitterness. The truth which alone 
 can bring decency and happiness is this: that business 
 primarily is an essential social service to the community. ' '^ 
 The right as now exercised has deepened in the minds of 
 groups of people, especially of wage groups, the conviction 
 that employers and property owners are steadily using 
 strong efforts to exact unreasonable returns for individual 
 gain. Unrest and bitterness are greatly stimulated, and 
 laborers tend to reason that hard work on their part does 
 not insure a commensurate return to them, but leads all 
 too often to the property owner reserving for his own 
 fortune the lion's share of the increase. The economic 
 community has drifted to a point where the emphatic 
 demand is that wealth-seeking must be tempered more 
 genuinely with a social purpose. 
 
 The right to security of property and income. — Prop- 
 erty ownership is deeply entrenched behind the accepted 
 social philosophy and the law of the land. What men 
 have the right to acquire, they also have the right to 
 hold. The Federal Constitution provided at the outset 
 that there should be no taking of private property with- 
 out due process of law. It also provided that no State 
 could pass a law impairing the obligation and freedom 
 of contracts. By the decision of the Supreme Court, 
 headed by John Marshall, in the Dartmouth College case 
 of 1819, a corporation which had received a charter from 
 the State could hold the charter indefinitely, and the 
 charter was not subject to repeal by the State. Once 
 a privilege was granted, it was granted in perpetuity. Fol- 
 
 ij. G. Brooks, "Labor's Challenge to the Social Order," pp. 
 75-85. 
 
 2R. T. Ely, "Property and Contract," pp. 369-371. 
 
 3 General Sir Arthur Currie, before C?.nadian Pulp and Paper 
 Assoc'n, 1920, 
 
204. Capital 
 
 lowing the Civil "War, the Fourteenth Amendment to the 
 Constitution was passed guaranteeing to all persons equally 
 the protection of the laws, and when in 1882 the Supreme 
 Court declared a corporation to be a person, the corporate 
 personality was firmly protected in its property holdings 
 by the power of the Federal Government. The net out- 
 come is summed up by a conservative American author- 
 ity, A. T. Hadley, as follows, "The general status of the 
 property owner under the law cannot be changed by the 
 action of the legislature or the executive, or the people 
 of a State voting at the poUs, or all three put together. It 
 cannot be changed without either a consensus of opinion 
 among the judges, which would lead them to retrace 
 their old views, or an amendment of the Constitution of 
 the United States by the slow and cumbersome machin- 
 ery provided for that purpose. The voter was omnipotent 
 — ^within a limited area. He could make what laws he 
 pleased, as long as those laws did not entrench upon 
 property rights. He could elect what ofScers he pleased, 
 as long as those officers did not try to do certain duties 
 confided by the Constitution to the property holders. ' ' ^ 
 Property becomes under these conditions a vested in- 
 terest. — "An interest is vested when it must receive in- 
 demnification, if it is impaired by public action, directly or 
 indirectly. . . . Vested interests are largely property in- 
 terests. ' ' " The rights of vested interests have not always 
 been strictly upheld. The abolition of slavery was a denial 
 of the vested interests of the slaveholder inasmuch as 
 no indemnification was given. The parcels post encroached 
 upon the vested interests of the American express com- 
 panies, and the postal savings banks upon the vested inter- 
 ests of private banking institutions. The prohibition 
 amendment to the Constitution was a sweeping blow at the 
 vested interests in the liquor business. Social necessity in 
 each case took priority over the vested interests. But 
 these are exceptions. The Courts interpret the Constitution 
 
 1 The Independent, April 16, 1908. See also S. P. Orth, "Relation 
 of Government to Property," pp. 7-84. 
 
 2R. T. Ely, "Property and Contract," pp. 755-756. 
 
Capital 205 
 
 in terms whieli safeguard property against confiscation. 
 Any other attitude by the courts would shatter economic 
 confidence and would discourage men from hard business 
 endeavor. In war time, conscription of income was held 
 to be an unwise interference with vested interests. Social 
 progress which impairs the value of property has to re- 
 imburse the property holder. Hence the courts insure 
 a reasonable degree of security to the owners of wealth.^ 
 
 In another form, the right to security amounts to the 
 right of an uninterrupted income. A business cannot 
 continue unless it steadily meets rent, interest and profits 
 charges. "Capital is based upon security of expectations. 
 The investor has confidence that his investment will be 
 returned to him, that promises will be kept. That is the 
 great producing factor in modern industry. " ^ If property 
 is entitled to an assured income, then why should not labor 
 have the same assurance? As Commons declares, "Now 
 capitalism is to blame because it has not offered, as yet, 
 to labor that security of the job which it has offered 
 to the investors in the security of their investinents. Cap- 
 italism is threatened because it has not furnished the 
 working people a similar security to that which it has fur- 
 nished the investors."^ Steady employment, industrial in- 
 surance and a living wage are indispensable to the security 
 of the wage worker. ' ' This need for security is fundamen- 
 tal, and almost the gravest indictment of our civilization is 
 that the mass of mankind is without it."* The property 
 right to security must be matched by a human right to se- 
 curity, for otherwise the one-sided insistence upon prop- 
 erty rights leads the community into deeper and deeper 
 social troubles. 
 
 The right of property to industrial control. — Property 
 carries with it the right of self -management. The owners 
 of capital by tradition and custom have the right to control 
 and direct the business. Labor carries no such inherent 
 right. The labor movement is thus in a large degree a 
 
 iR. T. Ely, "Property and Contract," pp. 755-790. 
 
 2 J. R. Commons, "Trade Unionism and Labor Problems," p. 8. 
 
 sibid., p. 8. 
 
 *R. H. Tawney, "The Acquisitive Society," pp. 72-73. 
 
206 Capital 
 
 determination to give labor the same right as that now 
 claimed by property. A large number of employers have 
 already voluntarily undertaken experiments with various 
 forms of employee representation in an endeavor to work 
 out safe and sane principles and plans for labor's partici- 
 pation in certain problems of management. The labor 
 movement is a flat denial of the exclusive right of prop- 
 erty to hold the power to run the business. The laborer 
 invests his life in the business and feels that this is as 
 good a claim to a voice in the control of the business as 
 the possession of a certain number of shares of stock. 
 The whole force of the labor movement is a demand that 
 the right of industrial control must be shared. 
 
 The right of freedom of contract. — American courts have 
 usually interpreted contract rights as property rights, be- 
 cause private property is commonly acquired through con- 
 tract.^ The common view is that freedom of contract is a 
 province wherein the individual is to be let alone. "His 
 right to contract freely is to yield only to the safety, 
 health, or moral welfare of the public. ' ' ^ But in the eyes 
 of property-owners, the fewer such restraints the better. 
 The maximum of individual freedom of contract and the 
 minimum of social restraint are taken as the accepted ideal. 
 This right of freedom of contract is so firmly entrenched 
 in judicial tradition and in legal statute that virtually all 
 social legislation has to run a gauntlet of the courts before 
 it can win a status of legality. Such social legislation is 
 frequently held up for from 10 to 20 years because at first 
 shock it limits freedom of contract. At the present time 
 a State is unable to pass a law protecting a workman, who 
 desires to join a union, from discrimination at the hands of 
 his employer. The law is declared by the court to impair 
 the freedom of contract of the employer. This guarantee 
 of freedom of contract is also a guarantee of inequalities 
 
 iR. T. Ely, "Property and Contract," pp. 53-54. 
 
 2 See Roscoe Pound, "Liberty of Contract," Yale Law Journal, 
 Vol. XVIII, 454-87. Also see F. J. Goodnow, "Social Reform and the 
 Constitution," Chap. XXXIII, and T. R. Powell, "Collective Bargain- 
 ing before the Supreme Court," Political Science Quarterly, pp. 
 396-429, 
 
Capital 207 
 
 of fortune. The United States Supreme Court asserts, 
 "Wherever the right of private property exists, there must 
 and will be inequalities of fortune." It is "impossible to 
 uphold freedom of contract and the right of private prop- 
 erty without at the same time recognizing as legitimate 
 those inequalities of fortune that are the necessary result 
 of the exercise of those rights." In other words the in- 
 equalities of wealth are woven into the institution of prop- 
 erty, and are inseparable from it. 
 
 The equal right to freedom of contract means the equal 
 right to be let alone by public authority. The insistence 
 upon the individualistic exercise of the right has led to a 
 serious complication since the development of great organi- 
 zations of labor and capital. A contract between an in- 
 dividual immigrant worker and the United States Steel 
 Corporation with its scores of subsidiary companies and a 
 property value of upwards of $2,000,000,000, was not fore- 
 seen by the framers of the constitutional guarantees of 
 freedom of contract. Such a contract can scarcely be con- 
 ceived as one entered into between equals. Before the law, 
 the corporation is an individual person, but in social and 
 industrial fact, it is a colossal aggregation with many times 
 the bargaining power of any individual laborer. The sig- 
 nificance of the labor demand for eoUeetive bargaining is 
 that the labor group desires to wipe out this actual in- 
 equality of bargaining power, and make possible a labor 
 contract between equal groups. Group freedom of contract 
 is quite different in principle and effect from individual- 
 istic freedom of contract and the form in which society 
 will accept group freedom of contract remains to be deter- 
 mined. Group freedom of contract is not guaranteed by th^ 
 law of the land as at present interpreted by the courts. 
 This matter is the center of a huge amount of bitter dis- 
 pute between employers and employees, and is one of the 
 most dynamic spots in the whole institution of property 
 rights. ^ 
 
 iR. T. Ely, "Property and Contract," pp. 561-732. See also 
 Sections I, lif, III and VI of Orth's "Relation of Government to 
 Property." 
 
208 Capital 
 
 The bundle of rights, therefore, which enters into the 
 property institution, is faced to-day with a number of 
 severe challenges. The paramount traits of the social 
 forces in regard to property may be summed up under 
 two headings : first, that property rights must be balanced 
 by property duties and responsibilities; and second, that 
 group rights and social needs shall take precedence over 
 purely individualistic rights wherever the two conflict. At 
 these two points the institution of property is in process of 
 a great institutional evolution, and the transformation in- 
 volved has social and economic consequences of the great- 
 est magnitude. 
 
 The foregoing discussion has been directed to the 
 psychological and legal aspects of the institution of prop- 
 erty ownership. The following discussion is directed to the 
 structural phase, and concerns itself with the corporate 
 form of ownership, since the corporate form of ownership is 
 the main one in the present economic system. 
 
 Ownership as a Corporate Phenomenon 
 
 Ownership through bonds and stocks has largely dis- 
 placed the old personal direct ownership of property and 
 has become the typical form of ownership in modern organ- 
 ized industry. This evolution in ownership was indispen- 
 sable to the development of modern production, commerce 
 and finance. "Without the corporate form of ownership it 
 is inconceivable that the modern economic system could 
 have been constructed. "Although merely an immaterial 
 form, it has nevertheless wielded an economic and social 
 influence greater than any other purely conceptual entity 
 of the last century. The contribution of the corporation 
 to the evolution of the form of modern industry has been 
 no less potent than that of machinery to its technique. ' ' ^ 
 
 Corporation methods allow for a scattering of ownership 
 with a concentration of control. The scattering of owner- 
 ship is carried to remarkable lengths. In a typical large 
 scale enterprise, the owners of securities are scattered 
 
 1 A. Dewing, "The Financial Policy of Corporations," pp. x-xi. 
 
Capital 209 
 
 throughout most of the States of the Union, and through a 
 number of foreign countries. People in Brazil, Japan, 
 California and New York are owners of the securities of the 
 typical large corporation of Pennsylvania or Ohio. Men 
 and women, wage workers and farmers, savings banks and 
 insurance companies, multi-millionaire estates and corpo- 
 ration executives, lawyers and doctors, all and severally own 
 a few or a great many shares of securities, and this grand 
 miscellany in its totality is the ownership of the corporate 
 property and undertaking. At the same time, the execu- 
 tive control and direction of the corporate property is high- 
 ly concentrated. A controlling amount is owned by special- 
 ly interested parties and the votes of the remaining security 
 holders are merely nominal votes. These major interests 
 manage to secure a satisfactory Board of Directors, this 
 Board in turn giving over the administrative tasks of the 
 business to appointed executives. This highly concen- 
 trated control enables men of high initiative and powerful 
 instincts of acquisitiveness, achievement, domination or 
 rivalry to have at their disposal the accumulated savings 
 of masses of people. 
 
 In 1917, there were 345,047 corporations listed on the 
 records of the Bureau of Internal Eevenue, representing 
 a total capitalization of about one hundred billion dollars, 
 approximately one-third bonds and two-thirds stocks. 
 Bonds appear in a variety of forms, but have one basic 
 principle in common, namely, they are secured by a mort- 
 gage on definite property or have prior claims on the gen- 
 eral assets and credit of the corporation. Backed by such 
 a security, the bond is the corporation's promise to pay the 
 investor interest on a certain sum of money for a stated 
 period of time, at the end of which time the corporation 
 promises to pay back the sum originally borrowed. The 
 stockholders have a right to the income or property of the 
 corporation only after the claims of bondholders are sat 
 isfied. As a rule the security behind stocks is secondary 
 and inferior, but the rate of income is commonly higher. 
 People who invest in bonds are usually more interested 
 in the safety of their money than in high income ; whereas 
 
210 Capital 
 
 people who invest in stocks are willing to sacrifice some- 
 thing of safety for the sake of securing large income. 
 
 The corporate form of ownership facilitates the exer- 
 cise of the basic property rights. — The right to acquire 
 property is made easy of exercise for anybody who is able 
 and willing to save money. Bonds run in denominations 
 from $50 to $1000 and stocks from $5 to $100 par value. 
 Partial payment plans enable the investor to buy stock, if 
 he chooses, in essentially the same way that he may buy 
 furniture, — on the installment plan. Savings banks, in- 
 vestment banks, bond houses, stock exchanges, underwrit- 
 ing syndicates, all provide a ready opportunity for invest- 
 ment for both large and small sums. The wool grower in 
 Australia can acquire the property of the Pennsylvania 
 Railroad and the wage worker of Pittsburgh can acquire 
 the property of English iron works. The farmer in Kan- 
 sas can acquire the property of Pennsylvania coal mines, 
 and the bank president of New York City can acquire the 
 property of Brazilian coffee companies. If the would-be 
 investor has the money wherewith to buy, he can have 
 bonds or stocks, and no questions asked. The investment 
 market is organized to attract investors, and corporations 
 vie with each other to draw the funds of investors toward 
 their securities. 
 
 The right to income is likewise facilitated by the corpo- 
 rate form of ownership. The bondholder is entitled to his 
 interest and the stockholder to his dividends. The assur- 
 ance of income stands as one of the primary inducements 
 to investment. Over 160,000 individual stockholders draw 
 income annually from the United States Steel Corpora- 
 tion, and about 140,000 draw income from the Pennsyl- 
 vania Railroad. Income on bonds in the form of in- 
 terest must be paid at all costs; dividends on preferred 
 stock must be paid unless the financial status of the com- 
 pany makes payment unwise; dividends on common stock 
 are paid only in case there is enough left over to make the 
 reward possible. The right to income is not absolute, ex- 
 cept in regard to bonds. Dividends involve more or less 
 of the risks attached to profits. But without the assurance 
 
Capital 211 
 
 of immediate or ultimate dividends money will neither be 
 put in nor kept in stocks. Common stocks carry the possi- 
 bility of unlimited income, and many of the great fortunes 
 owe their success in large measure to skill and luck in 
 managing the risks of the common stock adventures. To a 
 considerable extent, moreover, these investments are not 
 so much an investment in property as in earning power. 
 Good will, intangible assets, earning capacity, etc., are com- 
 mon factors in stock issues, and mean simply that the man 
 who buys them buys the right to an income in the future. 
 If the buyer went to the establishment of the corporation 
 and asked to see his property, no one could show it to him. 
 He would not own machines, or buildings, or raw or fin- 
 ished material. He would own earning capacity, an intan- 
 gible concept, but nevertheless a reality on dividend day. 
 But as a matter of fact the average owner of stock would 
 never think of going to the corporation's plant and asking 
 to see his property. He bought the right to an income 
 and cares little or nothing where it comes from. He bought 
 dividends, not tangible property. So long as dividends are 
 forthcoming, his purchase of the earning power justifies 
 itself. The stock purchaser may anticipate, at the same 
 time, that a rise will occur in the market value of his stock. 
 If he can, by holding it, sell for more than he paid, the dif- 
 ference represents gain. 
 
 The right to security is safeguarded by the courts in ap- 
 plying the State and Federal Law to corporate property. 
 A corporation is a legal person, and no person shall be de- 
 prived of property without due process of law. Banks, 
 Bond Houses, and the Stock Exchanges set out to take 
 reasonable precautions against wild-eat speculations, and 
 endeavor to protect their customers from fraudulent stock 
 flotations. The bonded property of the country is power- 
 fully entrenched behind legal barriers, and property once 
 acquired by the corporation, whether by fair means or un- 
 fair, is entitled to full protection by the law. The right to 
 security has a deep psychological basis. Temperaments 
 among buyers of securities vary immensely. Some buyers 
 want their principal to be absolutely safe, and for buyers 
 
212' Capital 
 
 of their moods, bonds of one sort and another are avail- 
 able. Others are not extreme sticklers for safety, but with 
 a moderate anxiety for safety, they combine an instinc- 
 tive fascination for higher income. For these groups, pre- 
 ferred stocks are the main forms of securities. Others of a 
 speculative bent are v^illing to take a fairly large risk on 
 common stock in the hope that the dividend returns vrill 
 be extraordinary. The range from safety to risk covers all 
 degrees and variations and offers stocks and bonds to satisfy 
 the temperaments, moods or whims of all comers. In these 
 forms, corporate securities enjoy the protection of limited 
 liability^ — that is, in case of the financial failure of the 
 corporation, each shareholder is liable only to the amount 
 of his shares. Moreover, the entire status of the stock- 
 holder is described in a charter of incorporation granted 
 by the State, and the position of the stockholder is thereby 
 definitely recorded in a legal document.^ The net out- 
 come of the corporate system is to give the holder of stocks 
 and bonds a fairly high degree of safety for his principal 
 and a maximum assurance of uninterrupted interest or 
 dividends. 
 
 The right of self-management is obtained in the cor- 
 porate system in a way which makes for high concentra- 
 tion of control. Corporation management is founded upon 
 the inertia of the average stockholder. Theoretically, each 
 shareholder has the right to vote for the directors, but 
 in actual practice, the shareholders are a scattered, dis- 
 united mass, and the majority of them leave the effort 
 of choosing directors and running the business to some- 
 one else. "It is a well-known fact of American finance 
 that, if the majority shares are scattered, a rather small 
 minority of the stock held by an individual shareholder, 
 or a little group of shareholders working together, can con- 
 trol the corporation almost as surely as if they held an 
 absolute majority of all the stock outstanding. . . . The 
 more shareholders there are in a particular corporation the 
 
 iLyon, "Capitalization," pp. 9-12. 
 
 2 L. H. Haney, "Business 0]"ganization and Combination," p. 109, 
 Chapters VI-VII, 
 
Capital 213 
 
 fewer shares can control. . . . From a quarter to a third of 
 the shares of an American corporation will usually assure 
 control."^ The right of owners to self -management of 
 property amounts then in actual practice to throwing the 
 management of the corporation into the hands of active 
 minority interests. By the proper organization of holding 
 companies, interlocking directorates, and other devices, the 
 owners of a few million dollars' worth of stock can control 
 and direct hundreds of millions of dollars of other peoples' 
 stock. This situation is enhanced by virtue of the fact 
 that the bondholder forfeits any active voice in the man- 
 agement of the business. He becomes a creditor of the 
 corporation and his money is treated as a loan. He has 
 no vote for the directors of the business, and can assert his 
 voice only in case the insolvency of the corporation is 
 threatened or actually reached. In the railroads, bonds 
 amount to considerably more than half of the total capi- 
 talization, and hence it follows that the majority hold- 
 ers of the property of railroad corporations have no active 
 voice in railroad management.^ In addition to these ar- 
 rangements, modern corporation policy tends to give to the 
 common stock owners the exclusive right to vote for direc- 
 tors. The preferred shareholders thereby surrender the 
 right of franchise and occupy essentially the position of the 
 bondholders so far as voting is concerned; and the entire 
 direction of the corporation is given over to the common 
 stock interests. "When it is remembered that the common 
 stock represents, primarily, intangible assets, good will, 
 earning capacity, but not tangible property, it is obvious 
 that this arrangement serves to place the real power of 
 management of the whole corporate property in the hands 
 of those who own good will. This arrangement has become 
 so widespread that a recent author declares, "Practically 
 without exception, the common stockholders manage the 
 business and receive the largest share in the profits."^ 
 Consequently the right of self-management exists for 
 
 iLyon, "Capitalization," pp. 9-15. 
 
 2 Dewing, "The Financial Policy of Corporations," pp. 34-134. 
 
 3 Jordan, "Investments," p. 14. 
 
214 Capital 
 
 the great mass of corporate owners only on paper ; in reality 
 it is a dead letter. The scattered security owners are ab- 
 sentee owners, and know nothing and are expected to know 
 nothing of the actual working of the corporation. They 
 own a paper certificate, and receive dividend or interest 
 checks, and care not a whit whether they ever see the 
 corporation so long as the income is forthcoming. Then, 
 too, the owner may not hold the security for any con- 
 siderable period of time. In a single year the common 
 stock of the United States Steel Corporation changed 
 hands so rapidly that nearly 32,000,000 shares were bought 
 and sold. Some buyers hold their securities for years, 
 others for weeks or days or minutes. It is all the same to 
 the corporation, for its policies go on without regard to 
 how fast the mass of scattered shares change hands. The 
 instincts of ownership in this arrangement are quite dif- 
 ferent from the instincts prevailing in the farmer who 
 may both own and till his land, or the small shopkeeper 
 who is both owner and manager of his establishment. 
 Corporate organization has divorced management from the 
 bulk of ownership. 
 
 Ownership becomes under these conditions an extremely 
 impersonal affair. It becomes mainly the right to tuck 
 savings away where they will be fairly safe, where some 
 scantily known interests may manage them, and where they 
 will draw out of the business certain pay checks every 
 three to six months. The duties of ownership are faint. 
 The security holder acknowledges no responsibility for 
 profiteering, monopoly discriminations, unfair competition, 
 long hours, low wages, bad labor conditions, or unsocial 
 business policies. If by any chance he does become inter- 
 ested in these phases of corporation activity, he may wash 
 his hands by selling out, and allowing some other party to 
 draw what seemed to him the tainted dividends, or he 
 may vote for a new President or Governor who promises 
 new laws regulating bad business practices out of corpora- 
 tions. But he would practically never undertake to whip 
 up an interest in the issue among the scattered horde of 
 shareholders. To the security owner, most of the people in- 
 
Capital 215 
 
 volved in the actual business are unknown quantities. The 
 managers of the various phases of the business, the labor- 
 ers in the factory or the mine, the salesmen, the engineers, 
 the accountants, the vice-presidents, — all of these are stran- 
 gers to the shareholders. There is no personal touch be- 
 tween workers and owners, no common understanding, no 
 mutual contact.'^ It is an impersonal relationship, and 
 necessarily so, because of the motives which lead men to 
 put their money in corporate securities and because of their 
 inertia in leaving to minority interests the management of 
 the property.^ 
 
 The entire corporate system is the primary structural part 
 of the modem institution of property. Its results are both 
 good and bad. The unsocial policies of many corporations, 
 the frequent exaltation of profits above considerations of 
 use and service, the manipulations by inside interests, and 
 the apathy of the real owners are the natural outcome of 
 the present form of the corporate organization. The in- 
 stitution works out to such ends. On the other hand the 
 corporate type has accomplished the efficiency of the pres- 
 ent industrial system. It has stimulated initiative, ambi- 
 tion, and aggressiveness ; and has made it possible for lead- 
 ers of great ability to work in industry with the savings 
 of millions of people. It has applied science and invention 
 to the services of production, and has made the economic 
 order what it is to-day. These items of description of the 
 methods and processes of the corporate institution present 
 a picture of the corporation in action. This picture will 
 serve as the basis for a discussion of fundamental business 
 problems in later chapters. 
 
 The fifth classification, namely, the distribution of the 
 national income between wages, rent, interest and profit, is 
 explained through the principles of minimum and surplus. 
 This explanation views the national income as a national 
 stream, a fractional part of which is diverted into each of 
 the channels known as wages, rent, interest and profit. 
 The broad principles of minimum and surplus give a rea- 
 
 1 See Hobhouse, "Property," pp. 22-23. 
 
 2 On this general subject, see also pp. 244-253. 
 
216 Capital 
 
 sonably serviceable explanation of the size of the fraction 
 which goes for each of these purposes. 
 
 The Principle of Minimum 
 
 For the maintenance of the national economic organi- 
 zation, it is necessary that labor, land and capital be com- 
 bined in right proportions. A co-ordination of these 
 elements is necessary in order to secure a balanced in- 
 dustrial system. An excess of land in proportion to labor 
 employed would bring inefficiency and waste ; a shortage of 
 capital in proportion to labor would diminish productive 
 efficiency; a shortage of any element or an excess of any 
 one element brings waste and loss. The industrial system 
 works well just to the extent that the primary economic 
 elements are brought together in the most advantageous 
 relative amounts. The income assigned to each element 
 must, at the very least, be enough to draw out enough of 
 that element to suffice for the balancing of the industrial 
 system. The minimum share of the total national dividend 
 given to labor must be enough to draw an adequate supply 
 of efficient labor into productive employment. The mini- 
 mum share given to owners of land must be enough to 
 draw an adequate supply of productive agricultural soil 
 and of improved land sites for all economic purposes. The 
 minimum share given to capital owners must be enough to 
 draw an adequate supply of capital in the form of mechan- 
 ical equipment, buildings, transportation machinery and 
 the like. The minimum share given to each element must 
 be enough to bring an adequate supply of that element into 
 active economic use. An adequate supply is a supply that 
 balances the economic system in terms of efficiency, pro- 
 ductivity and greatest returns. 
 
 But the minimum return is not uniform for all laborers, 
 all land owners, all capital owners. The minimum wage re- 
 turn varies with different grades and classes of labor, 
 depending upon gradations in standards of living, in effi- 
 ciency of workers, in training and intelligence, and in at- 
 tractiveness of work, severity of work, and type of work. 
 
Capital 217 
 
 In each grade of workers, if a cut in wages is made below 
 the minimum level for that grade, some workers will quit 
 the industry, whereas others will stay on reluctantly at the 
 low figure. The quitting of a number of the workers will 
 deplete the labor force in that industry, and the shortage 
 of labor will unbalance the industrial organization. In 
 other words, a cut of wages below the minimum level for 
 each grade and type of work will not cause all workers 
 to drop out of the industry in unison, — ^unless of course 
 they deal with the wage issue as a union and quit by strik- 
 ing, — but will drive out first a few of the workers who are 
 unable to support their families at the new figure, or who 
 can find better wages at other lines of work, or who for any 
 reason are too dissatisfied with the work to remain in that 
 employment. There is a point beyond which wages can- 
 not fall without reducing the supply of labor so greatly as 
 to destroy the balance of the industrial organization. 
 
 The principle of minimum applies in a similar way to 
 land and capital. A reduction of the share of national 
 income apportioned to land owners below a certain mini- 
 mum point will cause land owners to withdraw their land 
 from use and to abstain from making improvements. The 
 first degree of reduction below the minimum will not per- 
 suade all land owners to follow this course of action at one 
 and the same time, but it will persuade first a group of 
 land owners whose land is so poor in quality or so un- 
 favorable in location or so high in cost of operation that 
 they can no longer afford to put their land in use. The 
 supply of land will become inadequate and the balance of 
 the industrial system will be destroyed. Likewise, a cut 
 in interest or dividends below a certain minimum will 
 persuade a number of property owners to withdraw from 
 industrial activity. Their withdrawal will cause a famine 
 of capital and the industrial system will be thrown out of 
 joint. In brief, there are certain minimum terms of reward 
 which are imperative if enough labor, land and capital 
 are to be brought into economic use. Any drop of income 
 below the minimum will drive out the workers, land own- 
 ers, and eapital Owners who are most easily persuaded to 
 
218 Capital 
 
 go, and will thereby cause a deartli in the supply of that 
 particular element. 
 
 This principle of the minimum applies equally to each 
 separate line of industry and commerce within the nation, 
 and to the economic organization of the whole nation as 
 a unit. If wages of labor in steel mills are reduced below 
 a certain point, a defection of workers will begin in the 
 steel mills, and the men who have quit the steel industry will 
 endeavor to enter other lines of industry where wages 
 are above the minimum acceptable level. If the return on 
 land used in house construction is below a requisite mini- 
 mum, land owners will refuse to build, or will persuade 
 factories to use the land instead of house contractors. If 
 interest and profit in the railroad industry fall below a 
 minimum, people with money to lend or invest will seek 
 to place it in another line of industry where the return is 
 acceptable. Hence the principle of the minimum tends 
 to compel a constant adjustment of the return for land, 
 labor and capital in each branch of industry on the basis 
 of the minimum of return necessary to retain in that 
 branch of industry an adequate and balancing supply of 
 each element. 
 
 But suppose all branches of industry reduced the income 
 of labor, land owners or capital owners at one and the 
 same time. In that case, the disgruntled laborer, of course, 
 could not turn from a low wage industry to a high wage 
 industry, because there would have been a simultaneous, 
 corresponding reduction in all industrial fields. Or sup- 
 pose interest, rent or profits fell below the commonly 
 set minimum for all fields of economic activity. The re- 
 sult would be first of all to drive labor or capital out of 
 the country. Emigration of labor would occur and capital 
 would seek investment in foreign countries. Land could 
 not be exported, but the upkeep of land would not pay, and 
 it would rapidly develop a run-down condition. In short, 
 a certain minimum level of return for each element of the 
 economic organization is imperative if it is to maintain a 
 proper co-ordination and balance. 
 
 It is well to point out that although land and capital 
 
Capital 219 
 
 differ in the respect that land is given by nature and capital 
 is produced by the economic handiwork of man, neverthe- 
 less the two are identical in fundamental respects. Practi- 
 cally all land in use at present has had improvements made 
 upon it so that its original qualities and values as given 
 by nature have been augmented and improved upon by the 
 economic handiwork of man. It is estimated that fully 40 
 per cent, of land values are due to improvements on real 
 estate. Because of this fact, the principles of minimum 
 and surplus apply in substantially identical ways to both 
 land and capital. 
 
 The principle of surplus rests upon the gradations in 
 the expenses of laborers, of land owners, and of capitalists. 
 Millions of laborers live at the poverty line, millions of 
 others at the minimum standard of living line, another 
 group at the minimum of comfort line, and another group 
 above the extravagance line. In each successive group are 
 laborers whose income, in reference to the preceding group, 
 gives them a surplus above the income of the preceding 
 group. Hence laborers receiving a surplus above the liv- 
 ing wage level enter the group living on the comfort level; 
 and a surplus above the comfort level puts laborers onto 
 the extravagance or prosperity level. Because an indi- 
 vidual's expenses are low, or his bargaining power through 
 a labor union is great, or for other reasons, his wage renders 
 him over and above necessary living expense, a surplus. 
 It is the same with land owners. Some land entails an ex- 
 traordinary high cost of tillage and upkeep so that rent 
 is barely enough to meet the cost of maintaining the land 
 for productive uses; for such land, there is no surplus in- 
 come. It is on the margin where costs equal income. But 
 above the base line of this margin exist better grades of. 
 land, soil that is more fertile, building sites more favor- 
 ably situated; real estate whose cost of operation and use 
 is low in proportion to income. For such land, rent sup- 
 plies over and above the minimum income needed to meet 
 costs, a surplus, an excess gain to the owners. In a similar 
 manner, the cost of operation of different units of capital 
 varies widely. Some shops, factories, railroads and stores 
 
220 Capital 
 
 can scarcely make ends meet; they are at the margin 
 where costs just about eat up income. But above these 
 base line business concerns are all sorts of gradations of 
 businesses -which enjoy advantages, economies and efficien- 
 cies such that their costs by no means equal their income. 
 Such businesses have a surplus over and above all expenses, 
 and over and above the minimum income necessary to meet 
 the costs of those low grade businesses at the margin whose 
 costs are so great as to consume income entirely. In each 
 of the elements of economic organization there is a mini- 
 mum payment requisite as an incentive to secure an ade- 
 quate amount of that element. But when this minimum 
 is paid, there are great numbers of workers, of land owners 
 and of capital owners, who, because of superior advantages, 
 low costs, unusual economies and efficiencies, realize a 
 surplus of great or small size. 
 
 The group of economic concepts involved in the mini- 
 mum and surplus are fundamental to any comprehensive 
 interpretation of income distribution. Nothing is more es- 
 sential than to get away from the assumption that a fixed 
 uniformity rigidly prevails in all units of labor, land and 
 capital. The economic facts of the case shatter completely 
 any such assumption. The actual economic conditions 
 consist of gradations and levels of laborers, landlords and 
 capitalists, some at the margin of existence, and above them 
 many grades and levels of laborers, landlords and capital- 
 ists realizing all degrees of surplus. 
 
 The consuming ambition of all groups is to win as large 
 a surplus as possible. The surplus is the source of economic 
 fortune, fame and power. In it is wrapped up the source 
 of satisfaction for great instincts seeking expression in 
 economic achievement. Everywhere men match their wits 
 in a stupendous scramble to exact the lion's share of the 
 surplus for themselves. In every branch of manufacture, 
 transport, agriculture, finance, mining and commerce, all 
 parties, laborers, land owners, and capital ovTners are en- 
 deavoring to raise their bargaining power to the maximum 
 in order to capture the greatest possible amount of the sur- 
 plus. Different parties organize, combine, and plan for 
 
Capital 221 
 
 the purpose of attaining the strategy and power necessary 
 to extract the greatest amount of the surplus. 
 
 The consequence is that the actual shares of the diiSer- 
 ent parties bear no fixed ratio in all industries, or in all 
 years alike. On the contrary the ratio of the shares of income 
 going to laborers, landlords and capital owners the country 
 over varies from year to year and from industry to in- 
 dustry. To illustrate, some variations in the distribution 
 of shares of income in the national industries of mining, 
 manufacturing, railroad and public utility corporations for 
 the years between 1913 and 1919 may be taken. The share 
 of wages was 63.9 per cent, in 1913, but shrank to 54.3 
 per cent, in 1917 and rose to 70.2 per cent, in 1919. More- 
 over, in 1919, "interest and dividends together absorbed 
 hardly more than half of the share of the product that 
 they had in 1913 and 1914." These figures show variations 
 in the division of the total national income for the major 
 industrial departments of the economic organization.^ 
 
 The variations in the ratio of division as between differ- 
 ent lines of industrial pursuits also deserve illustration. 
 In 1916, only 40.6 per cent, of gross railroad revenues went 
 to labor in the form of wages ; in 1918, 54.06 per cent, went 
 to labor and in 1919 and 1920 the percentage was still 
 greater. From income statistics for 1917, it is found that 
 for railroads the great mass of profit is less than 10 per 
 cent, on invested capital; that for banks, the great mass of 
 income falls between 10 and 15 per cent, on invested capi- 
 tal; that for manufacturing, mining and mercantiling, the 
 main portion of profit ranges from 30 to 50 per cent, on 
 invested capital; while for water transportation, the bulk 
 of profits was from 75 to 100 per cent, of invested capital. 
 The variations between different establishments in a single 
 branch of economic life are well illustrated in banking. 
 Out of ten large New York City banks in 1919, one earned 
 35.8 per cent, on capital and surplus, two others earned 
 above 24 per cent., five earned between 18 and 13 per cent, 
 and two earned less than 13 per cent. Such variations 
 would not only be found among banks in general but also 
 
 1 See David Friday's "Profits, Wages and Prices," pp. 124-132. 
 
222 Capital 
 
 among the establishments within any other line of economic 
 activity. The conclusion is obvious that variation rather 
 than uniformity is to be looked for in the division of shares 
 of income, whether for all economic activity over a period of 
 years, or for groups of industries in any one year, or for 
 individual establishments within a single line of industry 
 in any one year.'^ 
 
 Personal inequalities of income and ownership were com- 
 prised in the sixth and seventh classifications of wealth 
 statistics. Certain obvious causes of the inequalities of for- 
 tune have already been pointed out. The whole concep- 
 tion of individualistic property rights has been woven into 
 the institution of property in ways which make inequalities 
 the natural outcome and the corporate structure of owner- 
 ship provides a ready mechanism for the accumulation of 
 wealth and income. But there are other factors which en- 
 ter directly into the inequalities, and the whole set of causes 
 may be considered now in two fundamental groups, — ^first, 
 inequalities due to unequal abilities; second, inequalities 
 due to unequal privileges. 
 
 Men are born into the world with unequal instinctive 
 and mental equipment. Some are dull, unambitious, and 
 slow; others are shrewd, aggressive and quick. Success in 
 acquiring large income and much property goes to those 
 of superior ability, and the successful classes are usually 
 thought of as the well-to-do classes. It takes brains to earn 
 a million dollars. The wage-earner at the other end of the 
 scale has limited imagination, ability, initiative, and sa- 
 gacity. He is poorly educated, and in the day's work has 
 ambition ground out of him. Only in exceptional instances 
 do there appear the men of indomitable instinctive energy 
 who by their own merit force their way from nothing to 
 riches. But it is this exceptional man whose ability is 
 urgently needed for the smooth working of the economic 
 organization and whose genius should be encouraged and 
 evoked by the property institution. It is natural that when 
 
 1 On this whole matter see David Friday's "Prices, Wages and 
 Profits," Chapter III, and Hugh Dalton's "The Inequality of 
 Incomes," Chapter X. 
 
Capital 223 
 
 men of strikingly unequal native ability struggle for the 
 same prize, the man of superior ability should win out. The 
 freedom and rights of property encourage many men of 
 superior gifts to exert their strength to the utmost. The 
 rewards are high and success is a sure claim to social dis- 
 tinction. 
 
 A feature of this situation which is not often contem- 
 plated is the universally accepted conviction that the ability 
 of a wage worker can never be great enough to deserve 
 more than three or four thousand dollars a year. Superior 
 endo'ftfment as a machinist, splendid gifts as a worker, the 
 finest eye and most skilled hand all reach their limit of 
 deserved reward, usually before a $2500 wage is reached, 
 certainly before a $5000 figure is reached. No matter how 
 great his ability as a laborer, he cannot actually earn be- 
 yond certain very narrow limits. It is only ability as a 
 manager or director or property owner which earns un- 
 limited returns. This social maxim has become so axiomatic 
 that it is as natural as the air we breathe. We think noth- 
 ing of it. The financial reward of a million dollar invest- 
 ment is not infrequently greater than the financial reward 
 of a score of the most competent skilled laborers. The prop- 
 erty investment of that amount is entitled to earn any- 
 where from 4 per cent, to 4000 per cent., but the finest 
 ability of a score of laborers commands no such unlimited 
 right of return. This idea is simply a matter of fact 
 principle which everyone takes for granted, and it obvi- 
 ously plays a part in the inequalities of wealth which pre- 
 vail everywhere. Even a second rate managerial ability is 
 usually conceived as deserving a higher reward than the 
 best type of manual dexterity or workmanship. 
 
 Unskilled Ability Earns Less Income than Skilleid 
 
 The ability of women workers earns less than that of 
 men. "It is an economic advantage to be bom a boy 
 rather than a girl."^ Ability exercised in certain occu- 
 pations brings higher returns than ability exercised in 
 others. There are immense variations and many exeep- 
 1 Cannan, "Wealth," p. 202. 
 
224 Capital 
 
 tions, but with the general run of incomes, high ability in- 
 fluences income upwards, whereas low ability influences 
 income downwards. 
 
 These principles apply of course primarily to income 
 from work rather than to income from owning. Income 
 from investment need not be accompanied by any substan- 
 tial exercise of ability or effort on the part of the owner. 
 Inequalities of ability are of importance chiefly in their 
 effects upon incomes for work and effort. Clever manage- 
 ment of property will make it accumulate more rapidly. 
 But such managers can be hired at a salary, and their 
 salaries are a truer measure of ability than is the property 
 income which goes to the owner. 
 
 It should be noted too that these inequalities of ability 
 tend to perpetuate themselves. The children of the un- 
 skilled laborer inherit a family and social environment which 
 tends to hold them to that level. "There are no absolute- 
 ly insurmountable barriers preventing those who are bom 
 into poor surroundings from forcing their way into the 
 best paid professions if they have exceptional ability and 
 grit, and there is nothing to prevent exceptionally inca- 
 pable persons born in good surroundings from falling into 
 the lowest class of workers. But all the same, it is, as every 
 one knows, a great advantage to the ordinary person in 
 the matter of earning his living, to be the child of fairly 
 well-to-do parents, and an enormous disadvantage to be 
 the child of parents belonging to the poorest class. ' ' ^ 
 
 There is a great reserve fund of ability in the lower- 
 paid classes which is never developed. Lack of encourage- 
 ment, of education, of opportunity, leaves enormous re- 
 sources of ability untapped. The inertia of class habitSj 
 the barriers of tradition and custom, the difiSeulties of the 
 struggle upward, — all such factors prevent great dormant 
 capacities from ever being kindled into irresistible ambi- 
 
 1 Space does not permit a fuller analysis of this very important 
 factor in income inequalities. Special references of much value 
 will be found in Cannan's "Wealth," particularly Chapter XII, 
 and Dalton's "The Inequalities of Income," pp. 239-270; Taussig's 
 "Principles of Economics," Chapter 54, Pigou's "Wealth and Wel- 
 fare," and "Watkin's "Growth of Large Fortunes." 
 
Capital 225 
 
 tions to win the highest rewards of economic activity. The 
 degree of success achieved by the present economic system 
 is largely due to the fact that in spite of all such barriers 
 and obstructions the business world does arouse the ener- 
 gies and ambitions of enough men of great ability to win 
 their way from the bottom to the top so that it constantly 
 recruits a reasonable amount of able leadership. 
 
 Inequalities Due to Unequal Privileges 
 
 The chief inequalities of privileges are those arising from 
 inheritance, monopoly powers, and unforeseen chance. 
 
 Inheritance is a primary cause of the more extreme ine- 
 qualities of income and ownership. Some people at birth 
 are heirs to fortunes; others are heirs to nothing at all. 
 Enormous estates are handed down from generation to gen- 
 eration and perpetuate the chasm between the extremes of 
 possessors and non-possessors.^ It has been estimated that 
 "four-fifths of the one hundred and fifty or more fortunes 
 in the United States having incomes of over $1,000,000 a 
 year have been accumulating fop two generations or 
 more."^ In England, where the influence of inheritance 
 has had a longer time to work itself out, "the number of 
 wealthy men at the top is two and a quarter times as great, 
 in proportion to population, . . . as in the United 
 States." 
 
 At the other end of the scale stands the common worker, 
 with practically no belongings except a few articles of 
 furniture and some items of clothing. Probably three out 
 of five of the children of the country are born into prop- 
 ertyless families. Children of these classes inherit only 
 bodies and brains to work with capital owned by others. 
 Nothing is handed down to them in the form of a com- 
 petence to begin life on. They have no assured means of 
 livelihood. Their inheritance points to dependence upon 
 the real property owners of the community.^ 
 
 This contrast of inheritance has come to have some very 
 
 iSee Cannan's "Wealth," pp. 812-184 and Taussig's "Economics," 
 pp. 248-250. 
 
 2 Irving Fisher, American Economic Review, March, 1919, p. 12. 
 ^Hobhouse, "Property, Its Eights and Duties," p. 21. 
 
226 Capital 
 
 serious results. The man who inherits property inherits 
 not merely an assured income; he receives the power of 
 control over the lives of a group of workers. The mind of 
 the worker has come to feel a stinging sense of discourage- 
 ment and injustice in the arrangement. He sees many 
 people living on inherited fortunes without doing any gen- 
 uinely useful work and he sees his own group working hard 
 for a living which in comparison is rude and insecure. 
 From the viewpoint of an outsider, the sense of injustice 
 appears well founded. This outside viewpoint is ad- 
 mirably stated by Bishop Charles Gore of Oxford, as 
 follows : 
 
 ' ' The success of civilization for us must be measured not 
 by the amount and character of its products or material 
 wealth, nor by the degree of well-being which it ren- 
 ders possible for a privileged class, but by the degree in 
 which it enables all its members to feel that they have the 
 chance of making the best of themselves, to feel that an 
 adequate measure of free self-realization is granted them. 
 On this ground then our civilization is open to the most 
 serious indictment. ... In our own civilization we find 
 vast masses of men and women who cannot be reasonably 
 described as having any adequate measure of property for 
 use. They cannot go into life with the security of free 
 men. They cannot, within reasonable limits, control their 
 own destiny. They cannot realize themselves. ' ' 
 
 Out of this situation arises in large measure the discon- 
 tent of the common man. Gross inequalities of fortune are 
 behind unrest. And the labor movement, the reform move- 
 ment, the progressive movement, the movement of all social 
 forces is in the nature of an attack upon the extreme in- 
 equalities which are perpetuated by the established system 
 of inheritance. Persons who acquire fortunes by inheri- 
 tance cannot offer the claim that their fortunes are due to 
 their own superb abilities. These fortunes were earned by 
 the abilities of a generation now dead. The democratic 
 challenge in industry directly relates to these unearned and 
 undemocratic inequalities of property. Inheritance as a 
 part of the institution of property is on the defensive and 
 
Capital 227 
 
 has to seek grounds to justify itself. The principles of 
 inheritance are in a stage of drastic transformation because 
 of the social forces of the times. 
 
 This transformation is the more possible because inheri- 
 tance is not established as an inherent and inalienable 
 right of property. The preponderant judicial opinion 
 makes inheritance a custom or tradition of economic soci- 
 ety which can be modified and altered whenever social 
 needs make new customs and traditions desirable.^ 
 
 The war made so many new large property owners that 
 the importance of the situation is greatly enhanced. It 
 is estimated from income tax returns that the war lifted 
 from twelve to fifteen thousand new members to the mil- 
 lionaire class. Some of these accessions to the millionaire 
 group were due to the rise of price levels which automatic- 
 ally enhanced the price measure of property without actu- 
 ally changing the amount of the property itself. The large 
 fortunes moreover do not stand still. Through dividends, 
 interest and rent they are steadily on the increase. The 
 largest amount of saving is done by the largest property 
 holders, and these savings mean more investments and 
 more income. Their savings are large, not because their 
 consumption is small, but because their income is extraor- 
 dinary. The inequality thereby mounts higher and higher. 
 
 Whatever may be thought of the ability of the recipients 
 of the largest fortunes, at least that ability is great enough 
 to retain the fortunes. A recent estimate places the num- 
 ber of fortunes between $5,000,000 and $10,000,000, hand- 
 ed down during the present generation, at five hundred.^ 
 In the original building of the great fortune, a high degree 
 of genius and unswerving energy is ordinarily the telling . 
 factor. Only the man of force of character and consider- 
 able shrewdness can start with little or no means and pull 
 himself up to a wealthy position. But once the fortune is 
 amassed, and handed down to a succeeding generation, it 
 requires only an indifferent ability to hang onto it. As 
 G. P. "Watkins remarks, "Keeping riches once gained is 
 
 1 Fisher, American Economic Review, March, 1919, p. 12. 
 
 2 H. H. Klein, "Dynastic America and Those Who Own It." 
 
228 Capital 
 
 easier tlian ever before, . . . The ricli by inberitance have 
 a position which they can lose only by a destructive ten- 
 dency amounting almost to madness. ' '^ The inheritor of a 
 fortune "who lacks the ability to manage the fortune, or 
 who desires not to be bothered with the responsibility, 
 can hire a trust company to give expert management of the 
 property. So inequality begets greater inequality, and in- 
 heritance without severe restriction lies prominently at the 
 bottom of the situation.^ 
 
 All of this is not to deny that a substantial amount of 
 inheritance is desirable. It is beneficial to the recipient be- 
 cause it gives him a superior opportunity at the start of 
 life. It makes for the security of himself and his family. 
 It is good for society that inheritance within limits should 
 be preserved. The entire difficulty springs from immoder- 
 ate bequests and the consequent excessive and dangerous in- 
 equalities. The social attack upon inheritance is not upon 
 inheritance itself, but upon the undue concentration of it. 
 The social movement seeks a wider distribution of inheri- 
 tance, — more inheritance by the mass of people and less 
 inheritance by the concentrated handful. As Taussig is 
 careful to remind his readers, "Inheritance, in sum, is 
 an indispensable part of the institution of property."^ 
 
 The principles determining the condition by which in- 
 heritance shall be placed under social control are chiefly 
 psychological. First of all, the limitations on inheritance 
 must be high enough to affect favorably the motives of the 
 various parties concerned. The inheritance tax must be 
 rigid enough so that the people receiving a bequest are not 
 thrown on easy street nor given the feeling that they are 
 freed from the necessity for making good in individual 
 economic service. As Eoss warns, "Not that a son may 
 not inherit enough of his father's wealth to live on, but 
 that no one may inherit a fortune so large as to kill in 
 him all incentive to work and to tempt him into an extrava- 
 
 1 "Growth of Large Fortunes," p. 159. 
 
 2 Dalton, "The Inequality of Incomes," p. 329. 
 
 3 Taussig, "Economics," p. 251. See also Ely, "Property ■and Con- 
 tract," pp. 425-426. 
 
Capital 229 
 
 gance of expenditure and conduct which discourages or 
 corrupts the useful members of society."^ The inheritance 
 taxation must then be severe enough to reduce those glar- 
 ing inequalities which give the ordinary man a sinking of 
 the heart and a bitter sense of the hopelessness of trying to 
 get ahead. This psychological necessity is clearly stated 
 in one of Theodore Roosevelt's messages to Congress. 
 Roosevelt declared that the reduction of the gross contrasts 
 of inherited wealth would "help to promote a measurable 
 equality of opportunity for the people of the generations 
 growing to manhood."^ Inheritance taxation should also 
 be measured by its effects on the men who have the ability 
 to earn great fortunes by strenuous business endeavor. 
 The man who makes a large fortune has the opportunity to 
 use it in the form of public gifts and benefactions which re- 
 flect large personal esteem and prestige upon the donor. 
 If the rich man realizes that unless he does make large 
 public benefactions, his property will in large measure be 
 taken by the State at his death, he is likely to prefer to 
 make the benefactions. "With the anticipation that the 
 State will take a large share of the property which he does 
 not give away before his death, the ordinary man of wealth 
 would be induced to take to heart the claim of Andrew 
 Carnegie that it is a crime for a man to die rich, and 
 that the only human and decent procedure is to bestow the 
 fortune for useful social purposes during the owner's life. 
 Millionaires might thus be inspired to give parks to cities, 
 build art galleries or libraries, endow universities, establish 
 foundations for scientific and medical research, provide 
 hospitals, subsidize deserving philanthropic causes, etc.^ 
 Inheritance taxation should be so regulated as to stimu- 
 late favorably the motives of fortune owners to give wisely 
 and generously for social purposes ; to stimulate the recip- 
 ients of inherited fortunes to work for their own salvation ; 
 and to keep alive the hope of economic success among the 
 masses. 
 
 1 "Principles of Sociology," p. 385. 
 
 2 Sixtieth Congress, Vol. 42, Part 1, pp. 71-72. 
 
 3 See Carnegie's, "The Gospel of Wealth." 
 
230 Capital 
 
 Secondly, the converse of this proposition is that the tax- 
 ation should not be so great as to cause evil psychological 
 effects. If too much of a fortune is taken by the State, 
 men will be discouraged from wanting to make money. A 
 certain amount of inheritance is useful as an inducement 
 or reward for men to throw themselves strenuously into 
 business endeavor. The prospect of handing property 
 down to their children stimulates men to create a compe- 
 tence for themselves and their families. But beyond a 
 certain point the family motive is displaced by other mo- 
 tives. Irving Fisher found that the business man's accu- 
 mulating motives beyond a certain point '*were rather 
 those of power, of self-expression, of hunting big game." 
 Inheritance taxation which would stifle the basic impulses 
 of men of great ability in business would defeat its own 
 purposes. 
 
 The exact tax rates which strike this psychological bal- 
 ance are still a matter of political experiment. In 43 States, 
 inheritance taxes of some sort existed in 1917, with rates 
 ranging for direct heirs from one to fifteen per cent, and 
 for collateral heirs from three to thirty per cent. The 
 Federal Government in 1919 had an inheritance tax on 
 beneficiaries running from one to twenty-five per cent. 
 Most European countries have established substantial in- 
 heritance tax rates. The principle is accepted by most ad- 
 vanced nations, and may be looked upon as established in 
 its fundamental implications. 
 
 Monopoly Privileges a Cause of Inequalities 
 
 Special privileges and monopoly advantages are abun- 
 dant in the economic system. Illustrations would include 
 avenues for inside information in stock speculation, secret 
 knowledge of the sections of future city development as 
 a clue to real estate investment, patent rights, franchises to 
 railways and other public utilities, power to fix monopoly 
 prices, favoritism in the granting of contracts, devices of 
 unfair competition, superior possession or monopoly of 
 raw materials and other resources, superior bargaining 
 power with lesser companies or with labor, tax exemptions, 
 
Capital 231 
 
 trade-union influences, ete.^ Monopoly privileges may exist 
 among labor groups as well as among property groups, and 
 often it occurs that a labor monopoly is matched in an 
 economic struggle, quietly or openly, with property monop- 
 olies. In the general run of cases, these monopoly advan- 
 tages tend to further the inequalities of ownership and 
 income. 
 
 This analysis does not imply that monopoly advantages 
 are indefensible. Most monopoly advantages contain ele- 
 ments of real service to society. In many cases, they are 
 the creation of men of great genius and ability. A patent 
 monopoly, for instance, often arises in this way. A monop- 
 oly advantage is not a sign that a man has fallen without 
 effort into easy street. The men of towering ability create 
 special privileges for their business undertakings where 
 such privileges are necessary. There are good and bad 
 monopoly advantages, and those which are the result of 
 ability and those which are not. The bad privileges are 
 ■ almost invariably strong causes of inequalities of fortune, 
 and the good privileges in no small measure work to the 
 same end, although in the latter cases the inequalities are 
 apt to be a reflection of ability that brought substantial 
 public good. 
 
 John E. Commons gives evidence to indicate that about 
 four-fifths of the millionaire fortunes have been derived 
 from permanent monopoly privileges. The largest of these 
 fortunes are thought to have benefited most thoroughly by 
 special privileges, for it is estimated that "perhaps ninety- 
 five per cent, of the total values represented by these mil- 
 lionaire fortunes is due to those investments classed as land 
 values and natural monopolies and to competitive indus- 
 tries aided by such monopolies. " ^ In the building of these 
 fortunes, personal ability counted primarily, but personal 
 ability consisted of the power to create and the genius to 
 use monopoly advantages. It is in this way that monopoly 
 advantages foster inequalities of possessions. 
 
 A careful and scientific authority, J. W. Jenks, con- 
 
 1 See G Myers's "History of the Great American Fortunes." 
 
 2 "The Distribution of Wealth," p. 252. 
 
232 Capital 
 
 eludes a study of the -winning of great fortunes by a 
 summary which is substantially in line with these opin- 
 ions. He says, "Let me emphasize again what I said be- 
 fore, that it is probably in and through flie exercise of the 
 principle of plunder or the undue exercise of advantage, 
 of gambling or of its allied principle of monopoly, or of 
 special privilege or favor of some kind that many, very 
 many, if not most of the greatest fortunes have been won. ' '^ 
 
 Unforeseen Chance as a Cause of Inequalities 
 
 Luck, circumstance, an unexpected turn of events, acci- 
 dent, and fortuitous change all play an important part in 
 the winning of large fortunes. "Two men earn equal 
 amounts because they are of about equal ability and indus- 
 try and work at the same trade ; they save equal amounts, 
 and invest with what good authorities would consider equal 
 judgment, but the investment of the one turns out for- 
 tunate and that of the other unfortunate. The one becomes 
 rich and the other remains poor."^ Likewise, the varia- 
 tions in the price level affect deeply the value of invest- 
 ments and the purchasing power of fixed incomes. A 
 dollar of permanent investment before the war would in 
 post-war prices have a purchasing power of about fifty 
 cents. With a shrinkage of the dollar in a period of infla- 
 tion there goes a violent fluctuation in the value of all forms 
 of property. A new railroad built through one section of 
 a city increases the real estate values of the neighborhood, 
 a new law passed by the legislature curbs or releases profit- 
 making power, a costly strike or a poor wheat crop swings 
 fortunes up or down as the case may be. Perhaps the 
 greatest factor of chance is the profit system itself. Profit 
 is paid as a reward for risk. The business man takes his 
 chances and in recompense receives a profit. The more 
 risky the business presumably the higher the profit deserves 
 to be. The element of chance is in this way definitely in- 
 corporated in the property institution as an indispensable 
 element, and one deserving of large rewards. 
 
 1 "Great Fortunes, The Winning and Using," p. 41. 
 
 2 Cannan's "Wealth," p. 187. 
 
Capital 233 
 
 The greater the risk, the greater the rightful profit, and 
 in consequence, the greater the inequality of wealth. Ob- 
 viously if the risks and chances in business could be reason- 
 ably and substantially reduced, the inequalities of wealth 
 might be reduced accordingly. It has been proposed that 
 in important business undertakings the Government might 
 underwrite the venture, and by a form of public insurance, 
 reduce the unnecessary risks and chances. The Govern- 
 ment in certain ways has already taken steps in this direc- 
 tion. The Federal Eeserve System has in a very far reach- 
 ing way reduced risks in the field of banking and credit. 
 The Interstate Commerce Commission and Federal legisla- 
 tion guaranteeing minimum returns to railroads have fun- 
 damentally modified the nature of risks in that branch of 
 economic enterprise. Outside of government support, the 
 principle of insurance has been extended over one risk 
 after another in business undertakings. Fire, accident, 
 health, and executive or managerial insurance, — these rep- 
 resent a steady expansion of the insurance principle. 
 "Cannot a similar principle be applied to the risk of in- 
 dustrial loss? If it were possible to guarantee every 
 entrepreneur at least his operating expenses, including de- 
 preciation, the loss would be minimized. ' ' ^ The proposal 
 is in only a beginning stage, but its fundamental principle 
 appears to be essentially sound from an economic point 
 of view. If it is worked out practically in the course of 
 time, the effect upon the inequalities of wealth would be of 
 importance. 
 
 The three main groups of causes of inequalities of privi- 
 lege, namely, inheritance, monopoly, chance, are not static, 
 fixed causes. They are elements in the whole institution 
 of property and under the pressure of the dynamic social 
 and economic movement of the times, they are open to 
 constructive modification. The inequalities of privilege 
 and the inequalities of ability stand side by side as the 
 great factors in maintaining the inequalities of income and 
 ownership. Both unequal ability and unequal privilege 
 stand as inseparable parts of the institution of property. 
 
 1 David Friday, "Profits, Wages and Prices," Chapter XIV. 
 
234 Capital 
 
 There is no widespread desire to eliminate them. But a 
 modification of their essentials so as to secure in the natural 
 course of events a wider diffusion of property, and better 
 distribution of opportunity for ability to show itself is the 
 social demand upon the economic system. 
 
 REFERENCES 
 
 Cannan, E.: Wealth 
 
 PiGOU: Economics of Welfare; Wealth and Welfare 
 
 Dalton, H.: Inequality of Income 
 
 Friday, David: Profits, Wages and Prices 
 
 King, W. I.: Wealth and Income of the People of the United 
 States 
 
 Sydenstricker and King: Population and Income, Journal of 
 Political Economy, Vol. 29, pp. 571-585 
 
 Gerstenberg, C. W. : Materials of Corporation Finance 
 
 Fisher, I.: Nature of Capital and Income; The Purchasing 
 Power of Money, Chapters I-VIII 
 
 Davenport: Value and Distribution; The Economics of Enter- 
 prise 
 
 Carnegie, Andrew: The Gospel of Wealth 
 
 Ely, R. T.: Property and Contract in their Relations to the 
 Distribution of Wealth 
 
 HoBHOUSE and Others: Property 
 
 Ely and Others: The Foundations of National Prosperity 
 
 HoBSON, J. A.: The Economics of Distribution 
 
 Lyon, W. H.: Capitalization 
 
 Orth: Readings on the Relation of Government to Property 
 and Industry 
 
 Groat: Attitude of American Courts in Labor Cases 
 
 Beard, C. A.: An Economic Interpretation of the Constitution 
 of the United States; Economic Origins of Jeifersonian De- 
 mocracy 
 
 GoODNOw: Social Reform and the Constitution 
 
 Marshall, L. C: Readings in Industrial Society, Chapter 14 
 
 Taussig: Principles of Economics, Chapter 54 
 
 Hamilton, W. H.: The Price System and Social Policy, Jour- 
 nal of Political Economy, Vol. 36, p. 31 
 
 Meade, E. S.: Corporation Finance 
 
 Hobson: Work and Wealth 
 
 Clay, Henry: Economics for the General Reader, Chapters 23-25 
 
 Commons, J. R. : Trade Unionism and Labor Problems, Part 5 
 
 Jenks, J. W.: Great Fortunes 
 
 Simpson, K. : Capitalization and Good- Will; Johns Hopkins 
 University Studies, Series XXXIX, No. 1 
 
Capital 235 
 
 Carver, T. N.: Distribution of Wealth 
 
 Federal Commission on Industrial Relations, Vol. I, 1915, Sum- 
 mary Eeport 
 
 Money, L. C: Riches and Poverty 
 
 Friday, David : Journal of Political Economy, Vol. 26, p. 962 ff. 
 
 Cooley: Social Process 
 
 Ritchie, D. G. : Natural Rights . ^ 
 
 Pound, Roscoe: Liberty of Contract, Yale Law Journal, Vol. 
 18, pp. 454-487 
 
 Watkins, G. p.: The Growth of Large Fortunes 
 
 Fisher, I.: American Economic Review, March, 1919 
 
 Myers, G.: History of the Great American Fortunes 
 
 Clark, J. B.: The Distribution of Wealth 
 
 Dickinson, G. Lowes: Justice and Liberty 
 
 Carver, T. N.; Essays on Social Justice 
 
CHAPTER VIII 
 
 MANAGEMENT: ITS TECHNIQUE AND RESPONSIBILITIES 
 
 The economies of a previous period classified the factors 
 of production under three headings, — land, labor, and capi- 
 tal. The economic developments of recent years have 
 brought to the front a fourth fundamental factor, manage- 
 ment. Management exists primarily for the purpose of 
 bringing into balance all of the multitudinous forces which 
 play a part in the success or failure of the modern busi- 
 ness concern. Management is responsible for bringing effi- 
 ciency out of a chaos of scattered elements. Management 
 functions by unifying, correlating, organizing and adminis- 
 tering the sum total of economic factors which comprise a 
 modern business establishment. Land, labor, and capital 
 are, none of them, taken singly, capable of complete self- 
 management, but they rely upon a body of administrators 
 and governors who are especially qualified and competent 
 for the managerial supervision of all the activities of the 
 business concern. The significance of the modern function 
 of management is comprehensively appraised in the follow- 
 ing statement by Louis Brandeis: "The 'coming of the 
 science of management, in this century, marks an advance 
 comparable only to that made by the coming of the machine 
 in the last." 1 ' 
 
 Management has been compelled to develop a technology 
 of its own in order to cope with the almost infinite interre- 
 lations of the present industrial regime. No single human 
 mind could master and interpret the great variety of techv 
 nical problems which underlie modern production. The 
 efficient handling of labor on a large scale, the appropria- 
 tion of the most recent discoveries in all the physical sci- 
 l "Business a Profession," xlviii, pp. 2-3, 
 336 
 
Management: Its Technique 237 
 
 enees, the utilization of fundamental engineering knowl- 
 edge, the co-ordination of all. departments of a business, 
 the adoption of scientific marketing, the maintenance of 
 adequate finances, the adherence to proper legal and social 
 requirements, the infusion of morale into the working and 
 directing force, — these problems in their entirety would 
 baffle the most prodigious and ingenious mind. There is 
 one way, and only one way, by which the vast aggregations 
 of facts, details and problems which enter into a modern 
 business concern can be brought into harmony, and that 
 one way is by an application of the methods of science. 
 
 In some cases, large property owners have proved com- 
 petent to direct and manage their own properties; in most 
 cases, groups of property owners have hired salaried man- 
 agers, whose gifts of character especially fitted them 
 to perform the functions of management. During the 
 last ten years there has developed a marked tendency to 
 turn the problems of management over to specially trained 
 engineers. It is not enough, in more and more instances 
 in modern industry, that a manager should have been born 
 with great ability as an organizer, or with a genius for di- 
 recting large affairs. It is necessary that a manager should 
 be acquainted as an engineer with the technology of man- 
 agement, with the body of scientific principles and practices 
 which most men of ability can acquire best through a spe- 
 cial course of technical training. An observer of the broad 
 industrial situation states the tendency in these words, "It 
 is becoming each year increasingly evident that a large part 
 of the industrial leadership of the country must come from 
 such engineer-managers, who have succeeded the old owner- 
 managers. . . . Engineer-managers who have combined 
 with their knowledge of the material sciences a scientific 
 study of human relations are usually superior to other in- 
 dustrial managers in their approach.'"- 
 
 The problems of management are in great measure a 
 
 reflection of the size of modem business establishments. 
 
 Everybody knows that business combinations and large 
 
 establishments are widespread in the present economic 
 
 1 Sr A, LewisoBn, Atlantic Monthly, Vol. 126, pp. 414-418, 
 
238 Management: Its Technique 
 
 system. This popular impression overlooks, however, the 
 important fact that small business establishments are not 
 by any means a thing of the past. Statistics for 1914 show 
 that in the United States there were in that year no less 
 than 140,971 manufacturing establishments which em- 
 ployed less than six wage earners each. A manufacturing 
 establishment employing not to exceed 100 wage earners 
 would not appeal to the average imagination as a large en- 
 terprise ; but it needs to be remembered that in 1914 there 
 were 262,217 establishments no larger than that. The small 
 establishment is not dead and gone. These smaller estab- 
 lishments comprise 95 per cent, of all manufacturing con- 
 cerns in America. On the other hand, the relatively few 
 large establishments represent such vast aggregations of 
 manufacturing enterprise that they employ the great bulk 
 of the wage earners of the country. The remaining 5 
 per cent, of establishments employ fully 65 per cent, of the 
 wage earners. Another comparison of figures indicates 
 more strikingly the scope of the large business units. The 
 1 per cent, of the establishments of the country which are 
 the largest employ about the same number of wage earn- 
 ers as the 95 per cent, of smallest establishments. More- 
 over, over four-fifths of the annual product comes from 
 plants which individually turn out each year goods valued 
 at more than $100,000. Nearly one-half of the annual 
 product comes from plants whose individual turn-out each 
 year exceeds a value of $1,000,000. Hence, the great bulk 
 of wage earners are employed in establishments which hire 
 hundreds or thousands of workers, and the main portion 
 of the national product is made in establishments whose 
 annual output has to be figured in hundreds of thousands 
 or millions of dollars. The little establishments flourish, 
 and in total numbers of individual plants show impressive 
 figures; but when they are measured by the work which 
 they do, by the workers they employ, by the value of their 
 output, they recede to a minor part in the productive equip- 
 ment of the nation. The major industrial activity of the 
 country is the activity of big business, and for a clear con- 
 ception of the true state of the economic organization, it is 
 
Management: Its Technique 239 
 
 imperative that the facts about the relative size of business 
 establishments should be kept well in mind.^ 
 
 The main trends toward business concentration have 
 been comparatively recent. Industry during the Civil War 
 period was characterized by small establishments for the 
 most part. Since that time, in thirteen leading lines of in- 
 dustry, the number of wage earners in each plant has in- 
 creased seven times over, the value of the output of each 
 plant nineteen times, and the amount of capital thirty-nine 
 times. This industrial evolution in the direction of con- 
 centration began to be eonspicuous during the eighties of 
 the last century. The trust movement came into notoriety 
 during the next decade, and as the trust fell under the 
 ban of the law, the late nineties and the first years of the 
 new century witnessed the development of holding com- 
 panies and consolidations of one sort and another. Com- 
 binations came swiftly during periods of prosperity, but 
 during years of panic or depression they were rarely 
 formed. The great era of consolidation in this country 
 was the fifteen years preceding the depression of 1903. 
 That depression slowed up the combination movement, and 
 from 1903 down to the opening of the European War, 
 the business consolidations were less sensational and less 
 extensive. The war period gave new impetus to combina- 
 tion in many lines. It is essential to remember that the 
 business combinations of the present day are the creation 
 of the last thirty years of economic history, and that most 
 of the fundamental consolidations were pretty definitely 
 determined during the first half of that thirty-year 
 period.^ 
 
 Classification of Types of Management 
 
 There is no one uniform type of management for all 
 establishments. The various sizes and conditions of busi- 
 
 1 See statistical Abstract of the United States, 1919, pp. 190-195. 
 
 2 See A. Dewing's "Financial Policy of Corporations," IV, 33-41 ; 
 Ripley's "Trusts, Pools and Corporations," Introduction; I. Lip- 
 pincott's "Economic Development of the United States," Chapter 
 XXI; C. E. Van Hise's "Concentration and Control," pp. 35-59; 
 J. W. Jenks, "The Trust Problem," Chapter I. 
 
240 Management: Its Technique 
 
 ness concerns have brought into operation widely varjdng 
 types of management. On broad lines of classification, the 
 three outstanding types are the individual, the partnership, 
 and the corporation. 
 
 In the individual type, the owner and the manager are 
 usually one and the same person. The individual carries 
 on the business with his own brains, largely with his own 
 money, and upon his own responsibility. For the most 
 part, this type of management is suited to relatively small 
 enterprises. Agriculture is largely under the individual 
 type of management, and a substantial portion of retail 
 trade is conducted by individual merchants. But in manu- 
 facturing, less than 8 per cent, of the total national product 
 is made under the individual type of management. The 
 individual managers usually have small plants, and the 
 lines of manufacture where the small individual manage- 
 ment survives in largest numbers are such as baking, cloth- 
 ing, printing, dairy products, blacksmithing, and the like. 
 Individual management normally has the advantage of the 
 direct, personal, immediate attention of the man whose 
 whole fortune is at stake. It rests upon highly commendable 
 qualities of character such as thrift, initiative, honesty, re- 
 sponsibility, and by providing an opportunity for men to 
 make good in business in a small way, it often brings men 
 of ability to the attention of larger establishments. Small 
 business is in many ways a training ground and a stepping 
 stone toward promotions into the more difficult managerial 
 positions of larger business units. From an economic 
 point of view, it is of the utmost importance that the big 
 ; business concern should not develop in such a fashion as to 
 block the way for men who desire to set up businesses of 
 their own. The hundreds of thousands of small individual 
 managers deserve as much freedom of opportunity to make 
 good as can possibly be given them, and the practices of 
 big concerns cannot be allowed to choke out reasonable op- 
 portunities for small ones to get ahead by efficiency, fore- 
 sight, and good judgment.^ The small business man in his 
 individual plant has a part to play in economic life which, 
 1 See Woodrow Wilson, "The New Freedom." 
 
Management: Its Technique 241 
 
 in its own way, is just as important as the part played 
 by larger types of management. 
 
 In the partnership type, two or more individuals unite 
 their capital or their ability, or both, and overcome some 
 of the fundamental limitations of individual management. 
 As business becomes complicated, the single individual is 
 apt to find the problems too great to be solved effectively 
 by one mind, and management may often be made more 
 effective by combining the ability and judgment of differ- 
 ent men. At the same time, the single individual is likely 
 to reach a point where his individual capital is inadequate 
 to finance the business, and the associated capital of part- 
 ners aids in solving the problem. The ordinary partner- 
 ship stands in the eyes of the common law as a financial 
 unit. A contract by one of the partners binds all, and in 
 case of insolvency each partner is liable, not merely to 
 the amount which he invested in the business, but to the 
 full amount of his total property. Partnerships appear 
 to be diminishing in importance relative to other types of 
 management. Their chief field is moderate sized mercan- 
 tile and manufacturing enterprises, and the legal and other 
 professions. In 1900, partnerships produced 19 per cent. 
 of the total value of all products, but in 1914 the share of 
 the total produced by partnerships had shrunk to 8.8 per 
 cent. As in the case of individual management, so in 
 the case of partnerships, their function is important even 
 though overshadowed by other types of management, and 
 a fair and open field for the partnership, wherever it 
 manifests the qualities of economic efficiency, is thoroughly 
 desirable. 
 
 The paramount type of economic management is the 
 corporation. By the statistics of 1914, corporations pro- 
 duce 83.2 per cent, of the total national product. A corpora- 
 tion comes into being by a special charter granted by a 
 state. Some of the chief characteristics of the corporation 
 are as follows: (1) the joint stock principle of ownership, 
 under which a scattered number of individuals may invest 
 their money in a unit business undertaking; (2) central- 
 ized management of the capital owned by the scattered in- 
 
242 Management: Its Technique 
 
 vestors, under conditions which tend to bring about reason- 
 able efSciency and proper security; (3) continuity of exist- 
 ence, since if one corporation official resigns or dies, a suc- 
 cessor is promptly chosen, while the life of the corporation 
 goes on unbroken; (4) limited liability of the owners of 
 the corporation capital, in that each investor is liable, in 
 case of insolvency of the corporation, only to the amount 
 of his individual investment; (5) a distinctly corporate 
 identity, in that the corporation acts as a legal person, as 
 a business unit, as an entity separate from its constituent 
 investors and directors. 
 
 The corporate type of management is the effort of busi- 
 ness judgment to cope with the problems of direction and 
 control of an economic system constructed upon a founda- 
 tion of machinery, natural power, and applied science. 
 Individuals found the task of owning the large blocks of 
 mechanical equipment necessary in a modem factory, and 
 the task of supplying adequate financial resources, too great 
 for the shoulders of single business men. It became neces- 
 sary to assemble the savings of many individuals, to bring 
 their money together for a concentrated investment. The 
 savings of armies of small investors could be heaped to- 
 gether, and used to supply the capital for large business 
 undertakings. The corporation supplied a large scale sys- 
 tem of management simultaneously with the large scale 
 production of wealth under the regime of machinery and 
 science. 
 
 As business combinations became greater and greater, sev- 
 eral adaptations of the corporation principle seemed neces- 
 sary to business men. One of the earliest of these was the 
 pooling agreement. Pools are agreements between business 
 concerns, whether corporations or otherwise, to follow some 
 concerted policy of price fixation, or of limitation of out- 
 put, or of consolidation and pro rata sharing of profits, or 
 of division of territory between companies. The agree- 
 ments could not be enforced by law, and hence were very 
 unstable since any member of the pool could withdraw 
 whenever he considered it for his best interests to do so. 
 Pools were of questionable legality, and usually had to be 
 
Management: Its Technique 243 
 
 operated secretly. During the eighties, corporations took 
 up with the principle of the trust as a more stable and 
 solid means of combination. Under the trust, the stock- 
 holders of each company turned their stock over to a small 
 board of trustees, who were empowered to direct the affairs 
 of- the group of companies. Stockholders received in ex- 
 change for their shares of stock, trustees' certificates, on 
 which they drew dividends virtually equivalent to the divi- 
 dends on the former shares of stock. This centralized the 
 management of the constituent corporations effectively, but 
 when the trust method came up for the consideration of 
 the courts, it was declared illegal, and gradually had to be 
 abandoned by the bulk of corporations. 
 
 Business men then looked around for some method of 
 combination among corporations which would stand the 
 analysis of the courts and be within the law, but which 
 would secure the advantages of combination of manage- 
 ment. In some cases, communities of interest were formed, 
 under which business men bought up controlling interests 
 in the corporations which they desired to direct, and with- 
 out any formal organization worked in unison in the man- 
 agement of the various companies. This form, of centrali- 
 zation was at best somewhat loose and intangible, and many 
 corporations found it more desirable to combine by creat- 
 ing holding companies. A holding company was a new and 
 distinct corporation, whose purpose was to own at least a 
 majority interest in a group of corporations which it de- 
 sired to control. The holding company, by its controlling 
 stock ownership, could elect the Boards of Directors of the 
 constituent companies, and definitely, tangibly and decis- 
 ively centralize the management of the entire organization. 
 Each member corporation could retain its subsidiary exist- 
 ence, and have its separate Board of Directors, and its own 
 executive staff, but they in turn would be elected, and 
 governed in their general policies, by the official powers 
 of the central holding corporation. The United States 
 Steel Company is the largest example in American industry 
 of the holding company, and by the decision of the United 
 States Supreme Court on March 1st, 1920, this company 
 
244 Management: Its Technique 
 
 was declared legal, on the ground that "the law does 
 not make mere size an offense." If a holding company 
 used its size and power to restrain trade unreasonably 
 or to exert undue monopoly influences, it would then be- 
 come illegal. Some business men have preferred, in place 
 of such a form of combination, a form by which outright 
 amalgamation could take place. By amalgamation, a new 
 corporation is formed to buy openly and fully a group 
 of companies. The old corporations lose their former iden- 
 tity, and are completely consolidated, in ownership and 
 management, in the new corporation. Closely similar to 
 the amalgamation is the merger. Under the merger, one 
 corporation already in existence buys up one or more other 
 corporations and assimilates the outsiders into its own 
 organization. The corporation which undertakes the mer- 
 ger simply stows away inside itself some separate corpora- 
 tions, and all are merged into a consolidated ownership 
 and management. 
 
 The cardinal economic significance of the variety of 
 forms of corporate combination is that the modern produc- 
 tion process has set up forces which demand a high degree 
 of concentration in the control of economic activity.' The 
 men of business genius who built the great corporations 
 found themselves face to face with the need for an adapta- 
 tion of the corporation principle on a yet larger scale to the 
 demands of modern industry. They experimented with va- 
 rious devices of combination, and by methods of trial and 
 error, adjusting themselves to business legislation and court 
 decisions, they endeavored to solve the economic problems 
 which confronted them. The forces of economic evolution 
 moved in the direction of concentration of ownership and 
 management, and all of the types of corporate combination 
 were illustrations of the efforts of the creative imagination 
 of business leaders to cope with the economic conditions of 
 their generation. 
 
 The Mechanism of Corporation Management 
 
 The corporation has developed a mechanism of manage- 
 ment which in its fundamentals is fairly uniform through- 
 
Management: Its Technique 245 
 
 out corporate industry. In its simplest elements, this 
 mechanism involves a mass of stock owners, who elect a 
 board of directors, who in turn give some attention to the 
 broad policies of the corporation, particularly the financial 
 policies, and who delegate the active management of the 
 corporation to a group of appointed executive ofQcials. 
 These executive officials, in their turn, choose departmental 
 and bureau chiefs, superintendents, bosses, foremen, and 
 laborers, and have charge of the operation of the business. 
 This general set of relations undergoes drastic modifica- 
 tions in the actual conduct of corporate affairs, and it is 
 necessary to study the strategies and peculiarities which 
 have penetrated the institution of corporate management in 
 actual practice in order to have a realistic understanding 
 of the situation. 
 
 The body of stockholders exert very little authority in 
 choosing the Board of Directors. They have the right to 
 vote, but as the day for voting approaches, the stock- 
 holders receive a legal form to be signed and returned to 
 some one actively interested in guiding the election. This 
 legal form is a proxy, giving to the actively interested 
 party the right to cast the votes belonging to the individual 
 shareholder in any way that may be desired. The full 
 bearing of this practice is well indicated in an examination 
 made by the Federal Commission on Industrial Eelations 
 of a corporation lawyer of wide experience, Samuel Unter- 
 meyer. Mr. Untermeyer stated, "Stockholders do not get 
 a 'look in' — the scattered stockholders — as a result of the 
 system. What is the system? The management send out 
 proxies every year, and the proxy is a power of attorney 
 to some one they name. If you are a stockholder, you do 
 not know to whom you are giving your proxy. It does 
 not usually run to the man in control, but to some one 
 nominated by him. You do not know for whom he is 
 going to vote as a director. You send a power of attorney 
 for him to vote for whoever he pleases." Question: "Is 
 it not a fact that the proxy system has become so universal 
 that every country bank or every country corporation 
 almost, large and small, when giving a notice of stock- 
 
246 Management: Its Technique 
 
 holders' meeting, sends attached, and usually a part of 
 the sheet as a notice of that meeting, a proxy?" 
 
 Mr. Untermeyer : ' ' That is the custom now with notices 
 of meeting, the proxy generally goes out."^ 
 
 This system of proxies gives the real authority in manage- 
 ment to inside parties who desire to maintain control of 
 the policies of the corporation. If the inside parties are 
 men of fine integrity and a high sense of responsibility, 
 all goes well, but if they are not, the corporation is open to 
 speculative interests, and all kinds of abusive policies. 
 This situation is due originally to the natural inertia of 
 the mass of stockholders. As was explained by a promi- 
 nent banker and director of a number of large corporations, 
 Mr. Jacob H. Schiif, "I believe that the weakness of the 
 whole system is the human weakness, that stockholders, as 
 long as things go right, do not pay any attention to the 
 management of their property, and that only when things 
 go wrong they come to realize that they are stockholders, 
 and that they should not have permitted their property to 
 be controlled by those who have wrongly or badly managed 
 it." 
 
 It is because of this inertia of the stockholders that it is 
 possible for small minority holdings of stock to dominate 
 the policy of the whole corporation. This fact is expressed 
 by Justice of the Supreme Court, Louis Brandeis, as fol- 
 lows : " As a matter of fact, most stockholders do have very 
 little to do with the management, and in these great cor- 
 porations they have practically nothing to do. ... I 
 think it is true not only of these very large corporations, 
 but of very much smaller corporations in which the stock 
 is listed and widely distributed, that not only a small per- 
 centage of the stock may give control, but that for a long 
 series of years control is held sometimes without the owner- 
 ship of any stock whatsoever, or of practically no more 
 stock than is necessary to qualify directors. Such a wide 
 distribution of the stock dissipates altogether the respon- 
 sibility of stockholders, particularly of those with 5 shares, 
 10 shares, 15 shares, or 50 shares. They recognize that they 
 
 1 "Report of Federal Commission on Industrial Relations," 1915, 
 Vol. 8, pp. 7438, 7466, , . - . 
 
Management: Its Technique 247 
 
 have no influence in a corporation of hundreds of millions 
 of dollars capital. By the distribution of nominal control 
 among ten thousand or a thousand or a hundred thousand 
 stockholders, there is developed a sense of absolute irre- 
 sponsibility on the part of the person who holds that stock. ' '^ 
 And Mr. Untermeyer, on the same subject, states, "Nearly 
 every railroad corporation in this country is controlled 
 with less than 10 per cent, of the stock in the hands of all 
 the officers and the board of directors put together."^ 
 
 What, then, is the background, experience, and outlook of 
 men who commonly hold positions on the boards of directors 
 of large corporations? Broadly speaking, they are men 
 who are intensively acquainted with questions of finance, of 
 investment, of credit, of banking and the like, but not men 
 who are familiar with the technology of production, or with 
 the deep problems of labor administration. The board of 
 directors meets as a whole only a few times during the year, 
 but it appoints an executive committee to meet oftener, and 
 to decide questions which do not demand the attention of 
 the whole board. This executive committee is apt to be 
 primarily a finance committee. As stated by John D. Rocke- 
 feller, Jr., ' ' The directors attend principally to the financial 
 affairs of the corporation, leaving the actual conduct of 
 operations to the officers. ... It is not customary to sub- 
 mit labor policies to a board of directors for action. Con- 
 ference regarding them is often had with the directors or 
 executive committee at the instance of the officers, and 
 suggestions are made to the latter by both these bodies."^ 
 Roger W. Babson explains, in lengthy testimony, that 
 "the financial interests have nothing against labor. . . . 
 But it is indifference with them. Their job is to get 
 dividends . . . when they have earned dividends, they 
 consider their work is done."* Mr. August Belmont, from 
 active experience on many boards of directors, declares, 
 "A director rarely has to do with labor matters in a 
 corporation unless by chance they are brought to his at- 
 
 1 "Federal Commission on Industrial Relations," Vol 8 pp 
 7660-7661. 
 
 2 /6id., p. 7438. 3 /6td., p. 7764. •i/ftid., p. 7455. 
 
248 Management: Its Technique 
 
 tention for the purpose of a decision as to the merits of 
 something that may bring about a strike or something as 
 serious as that. ' ' And in regard to making inquiries in a 
 given corporation about wages, hours, unions, and working 
 conditions, he explains, "As chairman of the board, that 
 is not part of my duty."^ 
 
 Likewise, matters of technology of production, transpor- 
 tation, or processes of manufacture are foreign to the atten- 
 tion of the average director. This separation of functions 
 is candidly stated by Daniel Guggenheim, a corporation 
 figure acquainted with the practices of typical corporations 
 from experience and first-hand observation: "Our busi- 
 ness as regards directors, is somewhat different from al- 
 most all other industrial corporations in this regard: Of 
 the many directors — ^we ihave over 20 — ^with the exception 
 of two or three they are all men familiar with the business, 
 having been brought up in the business, and are technical 
 and practical smelting men."^ This distribution of duties 
 and functions is fundamental in an understanding of cor- 
 poration management. It was the testimony of experienced 
 directors of corporations before the Industrial Commission 
 that most directors confine their attention to questions of 
 dividends, credit, and finance, and this can be done from 
 offices in the big financial centere of the country. It is 
 for this reason that they are so often termed "absentee 
 directors."^ This division of functions has the advantage 
 of keeping production and labor matters in the hands of the 
 officers on the ground, but this very factor may, and often 
 does prove a disadvantage, when the officers in charge at any 
 plant, hold reactionary views about labor, and are stolidly 
 ultra-conservative in treating fundamental production 
 problems.* 
 
 The real center of control is often hard to find. It is 
 not located in the hands of the scattered majority of stock- 
 holders; it is not evenly distributed among the several 
 
 1 "Federal Commission on Industrial Relations," Vol. 8, pp. 7547- 
 7551. 
 ziUd., p. 7561. 
 
 3 See testimony of Jacob Sohiff, ibid., Vol. 8, p. 7523. 
 * On this whole subject see also pages 208-215 of this volume. 
 
Management: Its Technique 249 
 
 directors. Usually there is some dominating interest which 
 openly or quietly exerts the overshadowing influence in the 
 affairs of the corporation. But in not a few cases, a search 
 to locate the real power in the affairs of the corporation 
 would lead the inquirer to conclude that the real governors 
 of the corporation are undiscoverable. Some of the difficul- 
 ties of finding the real center of power will become appar- 
 ent from a review of certain basic factors connected with 
 the organization of corporation finance. The bondholders of 
 the corporation have no right to vote for directors. They 
 are looked upon as having made a loan to the corporation, 
 and in their status as creditors, they have no right to a voice 
 in managing its affairs. With railroads, and some of the 
 more conservative industrial corporations, bond issues may 
 make up a large part, in many cases, the greater part of the 
 total financial resources. During recent years, corporations 
 'have frequently denied voting powers to the preferred 
 stockholders, thus putting them on essentially the same 
 footing as the bond creditors. Voting power is reserved 
 for the holders of common stock, and when it is remembered 
 that this represents usually good will, patents, and intan- 
 gible assets generally, it will be obvious that the power 
 centers in the holders of a controlling fraction of the com- 
 mon stock. The owners of the factory, of the machinery, 
 of the equipment, of the raw material, and of tangible prop- 
 erty generally are the bondholders and the preferred share- 
 holders, but these owners of the real property of the corpora- 
 tion, in an increasing number of cases, have no voting 
 powers. Voting powers are reserved for those who own 
 that part of the capital securities which represent the esti- 
 mated value of trade marks, of patents, of monopoly ad- 
 vantages, and of good wiU generally. To see the full effect 
 of this device, it is necessary to observe that at the time 
 of the promotion and formation of the corporation, it is 
 usual for the banker and promoter to award themselves 
 a substantial block of common stock as a bonus or remunera- 
 tion for their services in setting up the corporation as a 
 going concern. By retaining this common stock, and eon- 
 fining the voting power to the common stock only, they 
 
250 Management: Its Technique 
 
 can readily retain control of the business indefinitely. In 
 many instances, the voting power is given to both the pre- 
 ferred and common share holders, but the amount of com- 
 mon stock issued by the corporation is so large in proportion 
 to the preferred issue that the common retains control of the 
 business.^ 
 
 Another factor in the control of corporate policy is found 
 in the system of reorganizing companies which go through 
 receivership and insolvency. It is estimated that more than 
 one-half of the railroads of this country have at one time 
 and another passed through the hands of receivers, and a 
 remarkably large number of industrial corporations have 
 travelled the same course. Under a receivership, a bank 
 is called in to rehabilitate the finances of the corporation, 
 and commonly a voting trust is established. Under the 
 voting trust, the stockholders of the insolvent corporation 
 assign to a committee of trustees the power to direct the 
 affairs of the corporation, at least until such time as it shall 
 again be on an efficient basis. This committee of trustees 
 is under the control of the bankers who are reconstructing 
 the finances of the corporation. When the voting trust ex- 
 pires, it is natural for the bankers to desire to perpetuate 
 the solvency of the corporation and to make certain that 
 its affairs are not conducted again in such a vpay as to re- 
 peat the bankruptcy. The only way of accomplishing this 
 is to hold an influence over the board of directors of the 
 revived corporation. It wiU be clear, therefore, that both 
 as a result of the influence of bankers in, starting a corpora- 
 tion when it is first promoted, and as a result of their inter- 
 est in perpetuating their influence following receivership 
 and reorganization, the bankers tend to acquire a large con- 
 trol in the affairs of the average corporation.^ 
 
 More than this, corporations deliberately seek for promi- 
 nent bankers to appoint to their boards of directors. The 
 board needs the prestige which the names of the distin- 
 
 1 See A. Dewing's "Financial Policy of Corporations," Volume II, 
 p. 47. 
 
 2 On this matter, see the testimony of Samuel Untermyer and of 
 Jacob H. SchiflF, "Federal Commission on Industrial Relations," 
 Volume 8. 
 
Management: Its Technique 251 
 
 guished bankers can quickly give, and many of the direc- 
 torate positions of bankers exist primarily for the publicity 
 value which they carry. Again, it is important that a cor- 
 poration should be in a position to secure at all times 
 adequate credit to carry on its business, and banks which 
 have representation on the board of directors are supposedly 
 more ready to extend credit to the corporation. Moreover, 
 in the very nature of corporation finance, the stocks or 
 bonds of the corporation are frequently needed as a col- 
 lateral security for loans made from the banks. The stocks 
 lose their value for security purposes unless dividends are 
 kept up. The stock market insists that dividends be forth- 
 coming, and the bankers who are in charge of finances are 
 responsible for the maintenance of dividends. For all these 
 reasons, bankers attain to a pre-eminent position of control 
 or influence in great numbers of corporations. 
 
 The board of directors is likely, therefore, to contain peo- 
 ple who are there simply for good looks' sake as well as 
 those who are there to assert power. Boards of directors 
 contain figureheads, dummies, puppets, and fashion plates, 
 and they know their bosses, their inside interests, their lines 
 of pull. Here and there is a dominating personality. The 
 government of a corporation is not essentially different from 
 the government of a political state. There is what Elihu 
 Eoot has called "the invisible government" in politics, and 
 the same thing exists in business. "What part of the govern- 
 ment of the corporation is visible and what part invisible 
 will vary from company to company, and the invisible gov- 
 ernment may be just as efScient, and as honorable as the 
 visible. It is true as a general rule, however, that human 
 nature runs to questionable policies more easily under con- 
 ditions of secrecy than under conditions of publicity, and 
 this human tendency underlies much of the speculative 
 abuses, and corporation wrongs which have been the theme 
 of muckraking. All of these considerations serve to explain 
 why so many corporations achieve a high reputation for 
 safety of invested capital and for financial efficiency, and 
 why certain other corporations find it possible to abuse their 
 opportunities. 
 
252 Management: Its Technique 
 
 The meehamsm of management below tlie board of direct- 
 ors presents new aspects. The board appoints a president 
 and certain major executive officials, who in turn choose the 
 requisite subordinates and assistants. The president is the 
 great co-ordinator of factors in the business organization, 
 and the main point of contact between the business plant 
 and the board of directors. There are certain basic manage- 
 rial functions which have to be systematized and organized 
 in any business, but the methods of organization are by no 
 means uniform. The basic functions of any active business 
 center around production, finance, accounting and sales, 
 and these functions require on the executive staff a pro- 
 duction manager, a treasurer, a comptroller, and a sales- 
 manager. 
 
 The methods of delegating responsibility, of dividing 
 and subdividing functions, and of fixing authority em- 
 body many variations and adaptations. Until recently, 
 the prevailing method was the "line" or "military" sys- 
 tem of organization. Under this system, business was 
 organized on the basis characteristic of former armies. 
 Each official was in charge of every detail within a certain 
 jurisdiction, and he was obliged to be familiar with all de- 
 tails, and to settle all problems. The foremen and the 
 managers had to be all-around men, and when business 
 grew, and the technology of production, sales, finance and 
 accounting become so immense and so intricate, no one man 
 was capable of mastering all of the details and settling all 
 the problems in his branch of the plant. Feeling a need for 
 expert aid, managers developed a line and staff organiza- 
 tion, under which the superintendents and foremen drew 
 advice and guidance from special sftaffs of engineers, 
 chemists, accountants, and experts of every description. 
 Authority, responsibility and function were still, however, 
 generalized and broad. A further development has been 
 the departmental type of organization, under which special- 
 ized functions are grouped and separate foremen are placed 
 in charge of each type of function. This is a step in the 
 direction of outright functional management under which 
 specialization is carried to an extreme. For example, a 
 
Management: Its Technique 253 
 
 repair boss has charge of all repair work, a route clerk 
 has charge of all planning, a speed boss is responsible 
 for getting the work completed on schedule time, and so 
 on. Most modern businesses conducted on a large scale 
 combine features of different types of organization in an 
 attempt to adapt the desirable qualities of each to their 
 peculiar and particular problems. Large scale production, 
 with its increase of technical complications and intricacies, 
 has led to greater specialization of workmen, foremen and 
 higher officials, and this intensive specialization of func- 
 tions is one of the most important developments in the 
 methods of the internal organization and administration 
 of modern business. 
 
 Technique of Executive Direction 
 
 The chief executives of corporation management would 
 obviously have found the direction of large corporations a 
 mental and physical impossibility unless they could have 
 developed in the meantime a technique for collecting facts, 
 interpreting them, formulating policies and executing them. 
 Of course, the methods of internal organization which have 
 just been described were a part of this new technique. But 
 the individual executive had to have at his disposal a tech- 
 nique which would enable him to bring the immense de- 
 tail of the gigantic business within the scope of his mind, 
 in such a shape that he could think intelligently about the 
 problems to be solved. 
 
 An important part of this technique lies in the science 
 of accountancy. Accountancy transforms all economic fac- 
 tors into the common measuring rod of money, and by 
 means of this common and universal yardstick, develops 
 systematized records which serve as the basis for nearly 
 all important business judgments. Accountancy trans- 
 lates all of the assets, multitudinous in their variety, into 
 a grand total of dollars and cents ; and all of the liabilities 
 likewise into a grand total of dollars and cents. This gives 
 a photograph of the net worth of the corporation, and is 
 an essential feature of virtually all negotiations for invest- 
 ment or commercial credit from banks. Accountancy also 
 
254 Management: Its Technique 
 
 translates all elements of the conduct of the business into 
 terms of money expense and money income for a week, a 
 month or a year, and supplies thereby a profit and loss 
 record which enables executives to determine readily 
 whether the corporation is making profits or running be- 
 hind. These records form the basis for the corporation 
 policy in declaring dividends, surplus profits, and the dis- 
 position of the corporation's net income. The accountancy 
 of costs furnishes the executive with the pecuniary facts 
 bearing on the cost of each unit of production; it appor- 
 tions the relative fractions of cost due to labor, to rent, to 
 raw material, to depreciation of machinery and equipment, 
 and to every factor which enters into the business process. 
 Cost figures are indispensable in the estimation of selling 
 prices, for otherwise the corporation may find to its sorrow 
 that its prices are below expenses of doing business. The 
 extreme importance of cost accounts has led the trade 
 associations which now exist in the great majority of busi- 
 ness lines, to encourage uniform systems of cost accounting 
 among their members. Uniform cost accounting tends to 
 stabilize prices, and to alleviate the evils of cut-throat com- 
 petition. Exact cost accounts make possible intelligent 
 comparisons between different parts of a single corpora- 
 tion's operations, and between the operations of different 
 corporations. They form a basis for discovery of the effi- 
 cient and inefiicient parts of a business, and a necessary 
 guide in formulating policies for the cheapening of the 
 costs of doing business.^ The data of accounting are pri- 
 mary necessities in the directive thinking of executives. 
 
 A facility for collecting the proper facts and for digest- 
 ing the records presented by accountants characterizes 
 great executive ability in the modern large corporation. 
 With the facts in mind, the executive devotes the major 
 part of his mental effort to the formulation of the broad 
 problems of business policy. He is successful to the extent 
 that he can place minor problems on the backs of minor 
 
 1 See A. Marshall's "Industry and Trade," pp. 366-371, also 
 Gerstenberg's "Principles of Business," Chapters XXIX, XXX, and 
 XXXI. 
 
Management: Its Technique 255 
 
 officials, keep routine duties in tlie hands of assistants, 
 maintain adequate sources of information, and free him- 
 self for concentration upon the essential, fundamental 
 issues of the business. Co-ordinate with this executive 
 trait is the ability to preserve throughout the channels of 
 subordinate administration a fluency and openness such 
 that his decisions, his personality, the force of his mind and 
 character shall penetrate to the very perimeter of the busi- 
 ness. The whole structure of management must serve as 
 a conductor for both the technical decision and the human 
 spirit of the man at the top. Studies that have been made 
 of the dominant powers, traits and habits of the greatest 
 modern business executives indicate that the executive 
 ability to direct the largest corporate activities involves 
 great physical vitality, unflagging mental activity, superior 
 judgment in the selection and placing of men, the inspir- 
 ing personality of marked leadership, fearlessness in the 
 face of huge risks, accuracy in forecasting the business 
 conditions of the future, and a genuine statesmanship in 
 making all things fall into their proper places, and all parts 
 of the business fit into the economic and social structure 
 harmoniously. After all is said and done, the technique 
 of administration, and the science of facts and policies, is 
 just about what the psychology of the chief executive makes 
 of it all. His dominating motives, his paramount instincts, 
 his emotional peculiarities, his level and type of intelli- 
 gence, and the whole human force of his original nature 
 will adapt managerial technique in countless ways.^ 
 
 Such a description presents management in its most 
 laudatory phases. It is true to the facts of the case in 
 a great number of instances, but it is not the whole of the 
 picture. For with all of the developments in the technique 
 of administration, with the aid of modern accountancy and 
 the use of modern statistics, with the experience of success- 
 ful executives to draw upon and with the principles of ef- 
 ficient business government carefully worked out, it never- 
 theless remains a startling fact that most production en- 
 
 1 See, for instance, B. C. Forbes's "Men Who Are Making America," 
 and J. G. Frederick, "Business Research and Statistics." 
 
256 Management: ' Its Technique 
 
 gineers, consulting engineers, experts in the science of 
 management, and trained scientific managers agree that the 
 bulk of business to-day is grossly inefficient. This con- 
 viction appears to be held by the conservative, sober 
 minded, reliable engineers of the country. In their judg- 
 ment, the average business would be able to increase its ef- 
 ficiency by from 25 to 50 per cent, by the application of 
 known and tried principles and practices of management. 
 Industry abounds with immense wastes and losses and un- 
 realized efficiency because of the unwillingness of managers 
 to abandon traditional methods of management, and be- 
 cause of their frequent inability to adapt their own psychol- 
 ogy to the necessities of modern managerial technique.^ 
 
 The most authoritative single statement of the facts 
 about the inefficiencies of many parts of business manage- 
 ment is contained in a report presented in 1921 by a Com- 
 mittee on the Elimination of Waste representing the Fed- 
 erated American Engineering Societies. The committee 
 was appointed under the direction of Herbert Hoover, and 
 its investigations were conducted by the aid of a staff 
 of fifty engineers. Their investigations covered directly 
 1125 separate plants, divided between the building industry, 
 men's ready made clothing manufacturing, boot and shoe 
 manufacturing, printing, the metal trades, and textile 
 manufacturing. Four basic causes of waste and ineffi- 
 ciency were found: 
 
 "1. Low production caused by faulty management of 
 materials, plant, equipment and men; 
 
 "2. Interrupted production caused by idle men, idle ma- 
 terials, idle plants, idle equipment; 
 
 "3. Restricted production caused by management or 
 labor ; 
 
 "4. Lost production caused by ill health, physical de- 
 fects and industrial accidents." 
 
 In the judgment of the committee, the waste and inef- 
 ficiency is due overwhelmingly to -the shortcomings of 
 
 iSee B. C. Thompson, "Scientific Management;" H. L. Gantt, 
 "Organizing for Work;" Emerson, "Principles of Efficiency;" F. W. 
 Taylbr, "Principles of Scientific Management." 
 
Management: Its Technique 257 
 
 management. These shortcomings mainly take the form of 
 a failure to utilize and apply tried and proven principles 
 of administration and technique of management already in 
 existence. The conservatism and inertia of management 
 are primary causes. The body of scientific principles al- 
 ready successfully applied in pioneer and progressive 
 plants are available but unused. Some indication of the 
 extent of loss and waste from managerial inefficiency is 
 given by the following detailed findings of the committee : 
 Faulty planning of material caused labor engaged in shoe 
 production to be idle more than 35 per cent, of the time. 
 Faulty planning of work by management caused a loss of 
 one-third during the normal operation of clothing fac- 
 tories. Proper organization of the men's ready-made cloth- 
 ing industry should bring "an increase of 40 per cent, in 
 effectiveness." In the printing plants of New York City, 
 less than one-fifth of the plants had any system of cost ac- 
 counting; the other four-fifths lost money during 1919. 
 The metal trades were operating at about 60 per cent, of 
 normal output, and the value of their increased possible 
 production in normal times would, according to the esti- 
 mate, exceed half a billion dollars. Labor turnover was 
 found to be needlessly high, and few factories were taking 
 advantage of any personnel system to reduce the conse- 
 quent loss. The manufacturing equipment in clothing, 
 printing, and shoe manufacturing is about double the real 
 needs of the country in those lines of production. Sea- 
 sonal employment means that in clothing manufacturing, 
 the worker is idle about 31 per cent, of the year, in shoe 
 making, 35 per cent., in building trades 37 per cent. The 
 above are only a few typical illustrations, but they serve 
 to indicate the enormous waste in economic organization 
 due mainly to the failure of a la;rge proportion of manage- 
 ment to accept and apply the developments in modern 
 technology of production and in the science of human ad- 
 ministration. 
 
 Management is, therefore, neither always efficient nor 
 always wasteful. The progressive, scientific management 
 at its best is a marvel of economy, harmony, and efficiency; 
 
258 Management: Its Technique 
 
 but the traditional Tinscientifie management which still 
 has a strong grip on wide stretches of industry is far from 
 efficient. The directions of evolution are decidedly toward 
 the adoption of the improved and modern methods of pro- 
 duction efficiency. At times the progress made by the bulk 
 of managers is tediously gradual, but the important feature 
 of the situation is the fact that a body of scientific prin- 
 ciples of efficiency is already in existence, that the condi- 
 tions of inefficiency are known and revealed, and that 
 organized effort is being made to bring all management up 
 to the better standards. 
 
 Business Combination and Concentration of 
 Management 
 
 The proportions of the task of modern management are 
 augmented by the very fact of the concentration of busi- 
 ness through corporations, holding companies, trusts, 
 mergers, and amalgamations. The extent of the combina- 
 tion movement was explained in some detail at the be- 
 ginning of this chapter. The present analysis has to do 
 with the reasons for the combination movement, the results 
 of it, and its fundamental implications for the economic 
 and social system. 
 
 Reasons for the Combination Movement 
 
 The paramount force in breaking the bonds of inertia, 
 and driving business organization out upon the untried and 
 adventuresome paths of combination was the menace of cut- 
 throat competition. Toward the latter part of the nine- 
 teenth century, the adage that competition is the life of 
 trade lost its meaning in a great many branches of business, 
 and it was discovered that competition carried to an ex- 
 treme was the death of trade. Corporations engaged in 
 desperate price wars in the determination to take trade away 
 from each other, with the result that an appalling number 
 of failures occurred. In the sugar industry, out of a total 
 of 40 large competing refineries, 18 went into bankruptcy 
 in the three-year period from 1885 to 1887. The inves- 
 tigation of the general movement toward combination in 
 
Management: Its Technique 259 
 
 American industry by a Federal Industrial Commission in 
 1900 led to the conclusion that "among the causes which 
 have led to the formation of industrial combinations, . . . 
 competition, so common, so -vigorous, that nearly all com- 
 peting establishments "were destroyed, was to be given 
 first place." Even where competition did not have so 
 destructive a consequence, it usually forced drastic reduc- 
 tions in profits, and raised the hazards of business to the 
 maximum. The compelling, dynamic force behind the 
 combination movement was the menace of a competition 
 which threatened ruin to hundreds of business corpora- 
 tions. Combination was a life-saving endeavor. It was nOt 
 entered into to satisfy the ambitions of idle dreamers, nor 
 would it have been undertaken on so vast a scale merely 
 in the hope of realizing superior gains. The "driving 
 forces" which budged things, and put the original vitality 
 into the combination movement were the dangers of de- 
 structive, cutthroat competition. Combination was the 
 only available means of self-preservation on a safe and 
 profitable footing.^ 
 
 "When the minds of the leading business organizers be- 
 gan to take account of the details of the situation, it ap- 
 peared to them that combination would not merely perform 
 the life-saving function, but would in addition give to the 
 business organizations distinct advantages in production 
 and trade which would be measured by an imposing increase 
 in profits and dividends. The suppression of damping 
 competition, and the creation of the economies and advan- 
 tages of large scale management were the two prime influ- 
 ences behind the combination movement. Comibination 
 was looked upon as a course of action which would not 
 only save the lives of competitors, but also would bring in 
 rich profits for the combiners. 
 
 The anticipated economies and advantages were various. 
 The number of salesmen could be substantially cut down, 
 because under the combination one salesman could repre- 
 sent the big business unit, approaching prospective buyers 
 
 1 L. H. Haney, "Business Organization and Combination," pp. 
 134-136. 
 
260 Management: Its Technique 
 
 with samples and selling talk, whereas formerly each sepa- 
 rate small company sent out its own salesmen. With 
 many companies anxious to secure the same order, there 
 was much duplication, and endless overlapping of efEort. 
 Advertising expenses could be reduced, because a host of 
 small competing corporations devoted large sums to taking 
 trade away from each other by lavish use of advertising 
 space. Labor unions could be held under restraint more 
 effectually because individual corporations stood almost 
 helpless before the concerted strength of a national union 
 threatening a strike to enforce labor demands. Large pro- 
 ducers could afford full time use of very expensive ma- 
 chinery, the most efficient labor-saving devices, and forms 
 of equipment which it would not pay to use in small plants. 
 
 The large business organization could place itself in a 
 fairly secure and stable position by vertical integration. 
 For example, the International Harvester Company could 
 have not merely plants for the manufacture of farm imple- 
 ments, but also its own coal mines, its own iron and steel 
 plants, and even in some districts, its own railroad equip- 
 ment; or, the United States Steel Corporation could own 
 mines, mills, railroads, and ships. Saving in freight would 
 be effected, because the combination would have plants lo- 
 cated at various points the country over, and could ship to 
 the buyer always from the nearest factory, thereby eliminat- 
 ing the "cross-freights" which prevailed when the scattered 
 plants were under sharp competition. The combination 
 could bring greater pressure to bear in the collection of 
 debts, and would not be obliged to make risky extensions of 
 credit as under the days of severe competition when it was 
 necessary to make shaky credit concessions to buyers in 
 order to curry trade. The concentrated plant could carry 
 a larger variety of lines and grades of goods to satisfy the 
 whims and desires of all classes of customers, and could 
 carry a stock large enough so that orders could be filled 
 immediately, thus avoiding delays provoking to customers. 
 
 Large producers could make full utilization of by-prod- 
 ucts, and in many lines of production, the value of the 
 by-products makes the difference between profit and loss. 
 
Management: Its Technique 261 
 
 Large industrial concerns ■would be able to maintain labora- 
 tories and departments for commercial research to advance 
 the technology of production, and would be able to adopt 
 promptly improvements and discoveries in the processes 
 of manufacture. The big concern could buy in large 
 quantities and secure inside prices and special discounts. 
 It could secure better credit accommodations from the banks, 
 and could afford to employ a superior grade of managers, 
 engineers, efSeiency experts, superintendents and the like. 
 Output could be better regulated to avoid over-production 
 in dull times, and under-production in boom times. Com- 
 bination would give to all the member companies the ad- 
 vantages of the patents, secret processes, trade marks, and 
 brands which formerly had been jealously guarded by each 
 individual company from its rivals. Large business or- 
 ganization would be able to bring to bear at least a partial 
 monopoly advantage in price determination, and would 
 therefore be able to reap profits in excess of any that could 
 be obtained by independent corporations. Net earnings 
 would be materially enhanced by the economies in produc- 
 tion and distribution on the one hand and the influence 
 over prices on the other. 
 
 These advantages of combination would probably never 
 have made the strong appeal to the minds of business men 
 which was necessary to launch the great combination 
 movement had it not been for the fact that certain inter- 
 ested parties, promoters, took it upon themselves to "sell" 
 the combination idea to the bankers, the investing public, 
 the boards of directors, the owners, and all parties con- 
 cerned. It has been repeatedly stated by economic students 
 that all business combinations owe their existence to the 
 constructive imagination and irresistible initiative of some 
 one man, or some very small group of men. Business 
 combinations do not come into being without creative ef- 
 fort on the part of somebody, and in the business world 
 there are certain individuals who specialize in the promo- 
 tion of corporate combinations. Often they are profes- 
 sional promoters whose special life work is conceiving and 
 executing first one business adventure and then another. 
 
262 Management: Its Technique 
 
 The promoter may be a man of successful manufacturing 
 experience, or an engineer, or a railroad executive. He 
 may be actively engaged in a part of the business which 
 he hopes to make a part of the eventual combination, or 
 he may be a total outsider. "Whatever his origin, he per- 
 forms certain vital and indispensable functions. His mind 
 originates and grasps the idea of the possibilities of the 
 new business organization. The promoter is an inventor of 
 a new business plan, of a new corporation project. The 
 promoter has the distinctive psychological makeup which 
 asserts itself in the instinct of constructiveness, and the 
 love of creative, original achievement. He has unbounded 
 originality, a power of vision, a prophetic judgment of the 
 future, and a delight in setting out upon new and moment- 
 ous adventures. Were it not for this type of personality, 
 many of the most significant combinations would never 
 be born. 
 
 But this is only the first stage of the promoter's task. 
 He must acquire a mass of statistical data, of financial 
 evidence, of technical facts about production and mar- 
 keting, and must fully acquaint himself with the basic 
 policies of the branch of industry in which the com- 
 bination is anticipated. From these facts, the promoter 
 is able to explain convincingly the economies and advan- 
 tages that will accrue from the new combination. It is 
 necessary, also, to interest bankers in the project, and to 
 evolve a financial plan for the capitalization of the com- 
 pany, and for the sale of security issues. The bankers 
 undertake the execution of the financial part of the venture 
 usually through the formation of a syndicate of bankers 
 to underwrite the stock issues of the new corporation. The 
 syndicate of bankers thus accepts the responsibility of mar- 
 keting the securities of the undertaking. The promoter 
 has to persuade the owners and controlling powers in the 
 separate companies to sell their properties, and this step 
 is attempted through the securing of options giving the 
 promoting interests the right to buy the properties at 
 stated prices within stated periods of time. The promoter 
 must have available satisfactory estimates of the probable 
 
Management: Its Technique 263 
 
 earnings of the new company, and must be able to point 
 out how and why these will almost surely exceed the col- 
 lective earnings of the separate independent companies. 
 To the owners of companies which have been suffering 
 already from the thrusts of cut-throat competition, the op- 
 portunity to seU and to save their fortunes is most welcome. 
 In other cases, intensive urging and much persuasive power 
 has been necessary, and even coercion must at times be 
 resorted to. 
 
 In order to carry through these difficult achievements, 
 the promoter must be a party who commands the con- 
 fidence of the people whom he is trying, to combine. The 
 promoter's task is "one that requires the very highest intel- 
 ligence, and, as a rule, neutral parties — parties not inter- 
 ested, men of the intelligence and reputations to inspire 
 unlimited confidence on the part of manufacturers, are 
 needed to bring manufacturers together."^ The promoter 
 performs a specialized function of the utmost 'importance, 
 because any number of the most effective business combina- 
 tions could not come about merely as a result of the natural 
 forces of economic life, or of the menace of sharp competi- 
 tion. Someone has to take the initiative in overcoming the 
 jealousies of men who have been desperate rivals for years ; 
 someone has to allay the skepticism which springs up at 
 the suggestion of a new adventure, and to lift men out of 
 the inertia and lethargy which exists everywhere. For this 
 service to the economic community, the promoter exacts 
 a profit, commonly in the form of a bonus of the common 
 stock. His work is extremely precarious, and he is as likely 
 to fail as to succeed. In the successful promotions, the 
 promoter usually charges all that the traffic will bear, and 
 secures an appropriation of common stock which is gen- 
 erous to say the least.^ 
 
 Successes and Failures in Combination 
 
 It is difficult to measure with exactness the extent to 
 
 which the combinations formed under these conditions 
 
 1 Meade, "Corporation Finance, Testimony of Mr. Flint," p. 39. 
 ^IHd., pp. 21, 38, 39. See, also, Dewing's "Corporate Promotions 
 and Eeorganizations," Chapter XX. 
 
264 Management: Its Technique 
 
 have realized the economies and advantages which were 
 claimed for them. In so far as they aimed at the suppres- 
 sion of competition, they of course put an end to competi- 
 tion between the companies which came into the consolida- 
 tions. However, they found themselves face to face with a 
 new competition in which the competing units were bigger. 
 Even at the time of formation, it appears ths^t the majority 
 of the combinations controlled less than 50 per cent, of the 
 production in their respective lines of industry. It was 
 comparatively rare for a combination to control more than 
 75 per cent, of the product. The hopes of optimistic pro- 
 moters and the dreams of corporation executives for a 
 domination of the market and a control of a given branch 
 of industry were scarcely ever fully realized. Many of the 
 combinations which started out with the highest percent- 
 age of control have experienced a marked shrinkage of their 
 percentage in recent years. For instance, during its first 
 years, the American Sugar Refining Company refined from 
 80 to 90 per cent, of the sugar refined in the United States, 
 but by 1921, its percentage of the total output had fallen 
 to about 24 per cent. And the United States Steel Cor- 
 poration, from making 50.1 per cent, of the nation's iron 
 and steel output in 1901 declined to 45.7 per cent, in 1911. 
 And yet, although competition was not suppressed by the 
 large combinations, the more dangerous and destructive 
 phases of competition were brought under restraint and 
 control considerably; and in the new era, laf'ge combina- 
 tions were decidedly better able to protect themselves from 
 the worst features of cut-throat competition. The inef- 
 ficiencies of many over-sized consolidations, the anti-trust 
 decisions of state and federal courts, and the governmental 
 prohibitions of unfair competitive methods, have been 
 causes behind the failure of so many combinations to realize 
 in full their original hopes for the suppression of com- 
 petition. 
 
 The degree of success in so far as the expectation of 
 increased net earnings was concerned met with similar 
 limitations. Individual combinations here and there did 
 earn impressive dividends. The oil, sugar, tobacco and 
 
Management: Its Technique 265 
 
 steel consolidations were famous for their large earnings. 
 The sensational earnings of certain combinations received 
 much publicity, and so gave rise to the popular belief that 
 practically all combinations were gaining luxurious profits. 
 The true facts of the case are carefully summarized by 
 H. R. Seager: "Of the 183 industrial combinations in- 
 vestigated by the Census Bureau in 1900, but 121 had paid 
 dividends. . . . One-third of the total number paid no 
 dividends at all and another one-third paid no dividends 
 to common stock holders. Nor has this showing been 
 greatly improved in the years that have elapsed since 
 1900. An intensive study of the thirty largest trusts 
 which were organized prior to January 1, 1904, shows that, 
 while eight have been phenomenally successful, and seven 
 moderately successful, ten have proved unsuccessful and 
 five have been disastrous failures."^ The combination 
 movement fell far short of its hopes and promises. The 
 anticipated economies too often proved to be illusions, and 
 the advantages of large scale production which had loomed 
 so attractively in the arguments of promoters proved to be 
 offset time and again by even greater handicaps and dis- 
 advantages arising from unwieldiness and overgrowth. The 
 history of the combination movement, in all its ups and 
 downs, teaches pre-eminently one economic lesson of the 
 greatest significance, namely, that the economies and ad- 
 vantages of large scale business tend to disappear after 
 the business unit gets beyond a certain size. A point is 
 reached beyond which the economies and advantages are 
 displaced by wastes, inefflcieneies and disadvantages of the 
 severest sort; The size of maximum advantage and econ- 
 omy varies from industry to industry and from decade to 
 decade, owing to changes in the state of the industrial 
 arts and sciences. 
 
 In a broad way, those industries will bear the largest 
 size of business unit which can most thoroughly substitute 
 mechanical processes for the workmanship of human beings. 
 Industries whose processes can be standardized, in which 
 
 1 "Principles of Economics," 1917, pp. 455-456. See, also, A. S. 
 Dewing, Quarterly Journal of Economies, Vol. 36, pp. 84-102. 
 
266 Management: Its Technique 
 
 automatic and semi-automatic machinery can be utilized, 
 in which mechanical conveying and transporting and hoist- 
 ing can be taken advantage of, and in which the human 
 element can be reduced to a subordinate importance, realize 
 the economies of large scale production. As the mechani- 
 cal technology advances in a branch of industry, and 
 methods of standardization are improved, the way is paved 
 for large units of business organization. To the extent 
 that labor is involved in such highly developed mechani- 
 cal processes, its efficiency is substantially regulated by the 
 necessity for keeping up with the machine. In the meat 
 packing plants, for example, the animal is conveyed by 
 machinery past the worker, and it is necessary for him to 
 perform some narrow, specialized act, completely, while 
 the animal is traveling in front of him. The speed of the 
 carrying machinery thus regulates the speed of the worker. 
 The same is true of the processes of standardized automo- 
 bile manufacture, and in any number of other industrial 
 branches. In lines of production where definite regulation 
 of the worker's speed by the mechanical processes is not so 
 fully possible, it is important to note that even if the 
 worker is inefficient, his labor is a minor part of produc- 
 tion cost. 
 
 However, the possibility of large scale economies is 
 sharply reduced where skill, workmanship, personal in- 
 terest, and individual devotion to duty are a major part 
 of the business process. The large company loses the hu- 
 man touch with the workers. Workers come to think of 
 the executive ofScials often as remote and mysterious 
 powers, interested solely in grinding out maximum profits, 
 and the psychological reaction is sulkiness, indifference to 
 work, disloyalty to the company, and personal inefficiency. 
 Combinations of industry have found it exceedingly dif- 
 ficult to avoid diminishing labor efficiency under increasing 
 industrial size. The human factor has stubbornly resisted 
 efforts at standardization, and the failure of the original 
 promoters of the great combinations to take into account 
 this basic psychological element explains in large measure 
 the repeated disappointments in the efficiency of the com- 
 
Management: Its Technique 267 
 
 binations. Primarily for the reasons that human factors 
 play a dominant part in their processes of production, the 
 cotton manufacturing industry and the men 's and women 's 
 clothing manufacturing industry have not been brought 
 under the regime of concentrated production. 
 
 It is also true that in those branches of industry where 
 standardized mechanical processes can be drawn upon, the 
 independent corporation may secure substantially as great 
 efficiency as the enormous combination. In such indus- 
 tries there is no insurmountable difficulty to the attain- 
 ment of efficiency under the large organization, but, on the 
 other hand, the gigantic organization is not necessary for 
 the attainment of maximum efficiency. Reasonably strong 
 independent companies can install the mechanical equip- 
 ment as well as the huge companies, and can realize in good 
 measure similar economies. Gigantic combination in such 
 lines of industry is not an essential condition of the great- 
 est efficiency. 
 
 The greatest single snag in the way of large scale enter- 
 prise is a psychological one. For one thing, it is next to 
 impossible to find leaders with the instinctive and mental 
 equipment adequate to direct the large undertakings. The 
 captains of industry of one generation must be superseded 
 by new captains in the succeeding generation, and busi- 
 ness organizations suffer from a dearth of the very best 
 managerial ability. The salaries offered range from $15,000 
 to more than $100,000 a year, and the positions carry such 
 power and prestige that they are coveted intensely by 
 the leading men of the country. But there is a limit to 
 the tasks which even the best brains can master, and there 
 is a very narrow limit, very commonly lamented by boards 
 of directors A search of executives, to the supply of the 
 best brains.^ A billion dollar corporation entails problems 
 of administration and control which only the rarest exec- 
 utives can solve effectively. 
 
 The large combinations embody a dozen, or a score, or a 
 
 iSee A. Marshall's "Industry and Trade," pp. 360-364; Stevens's 
 "Industrial Combinations and Trusts," pp. 574-575; Brown's "Selec- 
 tion and Training of Executives," pp. 1-46 and Introduction, 
 
 r 
 
268 Management: Its Technique 
 
 hundred or more separate plants, scattered across the coun- 
 try. Each subsidiary plant must have executive officials 
 of high ability, and it is no small task to inspire a small 
 army of subordinate officials, with whom the president 
 over all is seldom in personal contact. The various sub- 
 ordinates have to be infused with the spirit of the head 
 of the combination, have to understand the application 
 of the broad policies and basic ideas which he desires to 
 have worked out in the several plants, have to be made to 
 feel a keen sense of responsibility and loyalty to the com- 
 bination. "When the managers of the various plants do not 
 have their own money tied up in the property, there is 
 a double difficulty in leading them to devote their best 
 energy and ability to their position. They do not plunge 
 into the task with all their strength as they might if the 
 business were their own. Especially are they apt to as- 
 sign the burdensome, tedious, aggravating parts of the posi- 
 tion to others, and to neglect the drudgeries which might 
 not Seem so onerous if the plant actually belonged to the 
 manager, and all the pride of personal fortune were at 
 stake. In cases of independent corporations, of the small 
 or moderate sized variety, no amount of plugging, no 
 amount of indefatigable, painstaking effort is too great for 
 the taste of the men whose all is at stake in success or fail- 
 ure. The modern president must be able to create morale 
 among his subordinate executives, and in the largest busi- 
 ness organizations, this possibility is strained to the break- 
 ing point. Big business is a question of the best motives 
 of the biggest men in the country. And the problem of 
 bringing forth the best psychological powers of executives, 
 yet not overstraining the human equipment of securing 
 maximum efficiency from the best minds, yCT not subject- 
 ing them to a business unit so great in its scope as to 
 baffle thei. judgment and thwart their personality, is one 
 which largely determines the size to which modem business 
 enterprises can successfully grow. 
 
 The psychological difficulty extends down the line from 
 the topmost executive to the common laborer. Foremen 
 are men subject to strong bonds of habit, and tradition, 
 
Management: Its Technique 269 
 
 and all attempts made by superiors to better their toneh 
 with laborers come up against the recalcitrance and fixity 
 of the foreman 's psychology. In the mind and experience 
 of the laborer, the foreman represents the company, and 
 is the symbol of what the company stands for. In most 
 companies, workers are at the mercy of foremen, bossed 
 by them, paid by them, chosen by them, fired by them, 
 promoted by them, and in the eyes of workers, modern 
 industrial autocracy very widely means simply the petty 
 tyranny and capricious domination of foremen.^ The per- 
 sonal touch between the owner and worker in the small 
 plant is gone, and the large corporation is a great imper- 
 sonality, interpreted to the workers through the medium 
 of petty bosses and foremen. 
 
 The imperfect human relations of large corporations 
 have been prominent forces in the disappointments and fail- 
 ures of large businesses in the past. It is most significant, 
 however that in recent years, and particularly as an out- 
 growth of the World War, pioneer leaders of great corpora- 
 tions have demonstrated the practicability of a new sci- 
 ence of human relations. Many leading corporations have 
 created Departments of Industrial Kelations, the basic pur- 
 pose of which is to organize the human factor in industry. 
 Practical experience has already worked out a body of 
 scientific principles of labor relations and control for the 
 effective treatment of the human industrial problem. This 
 body of principles includes such matters as the inaugura- 
 tion of employees' representation in the form of works coun- 
 cils or shop committees, the adjustment of questions of 
 hours and wages in frank consultation with workers, the 
 systematic stimulation of right incentives and motives in 
 work, the better care of employees through improved light, 
 heat, ventilation, and safety facilities, the development of 
 a spontaneous confidence in company policy by suggestion 
 systems, collective bargaining, medical care, vacations, and 
 insurance aid. This new science of human administration 
 goes far toward overcoming the original handicaps of large 
 
 1 S. Webb, "The Works Manager Today," p. 27. See, also. Whiting 
 Williams, "What's On the Worker's Mind?" Chapters 11-14. 
 
270 Management: Its Technique 
 
 business organizations in dealing with the labor factor. 
 Once the psychology of labor has been brought under ade- 
 quate control, the economies of large scale production need 
 not be confined primarily to industries operating under 
 mechanical and standardized processes, but will be possible 
 in an enlarging degree for industries in which human skill 
 and personal interest are major factors. The very recent 
 developments in the science of industrial relations have a 
 direct bearing, therefore, upon the most efficient size of 
 business units, and upon the possible economies of large 
 consolidations. 
 
 The trials and difficulties of large business lead, more- 
 over, to an analysis of some of their fundamental relations 
 to bankers and financial interests. The intimate relations 
 established between new corporation promotions and the 
 investment bankers and syndicate of underwriters which 
 float the corporation securities; the banking connections of 
 boards of directors which are of aid in the maintenance of 
 adequate credit for working capital purposes; the ties 
 formed between railroads and other corporations and their 
 bankers during periods of receivership and reorganization; 
 and the confinement of the attention of boards of directors 
 very largely to questions of finance, all serve to subordinate 
 nearly all other corporation problems to the uppermost 
 problem of corporation finance. The history of the finan- 
 cial relations of the great American trusts certainly bears 
 out the broad conclusion made by a careful English econo- 
 mist, Alfred Marshall, that "a great part of the railways 
 and the chief manufacturing and mining businesses of 
 America are largely under the control, for good and 
 evil, of a comparatively small number of powerful finan- 
 ciers. ' '^ 
 
 A widely adopted form of this financial influence is found 
 in interlocking directorates. Each one of the members of 
 a bank's board of directors, and its major executive officials 
 may be members of the boards of anywhere from half a 
 dozen to half a hundred corporations. The Clayton Act 
 of 1914 prohibits interlocking directors between corpora- 
 1 "Industry and Trade," p. 540. 
 
Management: Its Technique 271 
 
 tions which, by the nature of their business, are actual 
 or potential competitors, where interlocking directorates 
 might tend to restrain competition unduly. The act is not 
 a sweeping prohibition of all interlocking directorates, 
 but rather a prohibition aimed to thwlart interlocking 
 which would have as its effect the building of monopoly 
 advantages or the unreasonable restraint of competition. 
 Interlocking directorates are still permissible where they 
 do not encroach upon this prohibition, and hence they 
 exist at present on a broad scale, and are important fi- 
 nancial connecting links between corporations and financial 
 houses. There is nothing in this relationship which in- 
 dicates a "money trust," or a conspiracy of bankers to 
 dominate the business of the country, a charge which is 
 often loosely made. The true significance of the relation- 
 ship is simply that "the structure of modern capitalism 
 tends to throw an ever-increasing power into the hands 
 of the men who operate the monetary machinery of in- 
 dustrial communities, the financial class. "^ 
 
 The financial needs of the large consolidation for work- 
 ing capital, raw materials in process of manufacture, pay 
 envelope funds, etc., are largely accommodated by com- 
 mercial borrowing from banks; and the greatest vigilance 
 is necessary on the part of the corporation's overseers to 
 have ample funds available to pay off such loans at the 
 proper periods, or to have the state of the business strong 
 enough to make bankers feel safe in extending loans in- 
 stead of exacting prompt payment. In times of business 
 depression or crisis, with the assets of a corporation de- 
 preciating in value, and a general psychological anxiety 
 thi-oughout the banking community, the corporation must 
 be able to meet promptly its commercial credit obligations 
 in case the banks feel it necessary to liquidate the obliga- 
 tions. Failure to meet the obligations when demanded 
 means a state of insolvency. The constructive aid of affil- 
 iated financiers is of life-saving value at such critical 
 periods, and in numberless instances, a lenient and co-opera- 
 tive attitude on the part of the financial institutions is the 
 
 1 J. A. Hobson, "The Evolution of Modern Capitalism," pp. 235-257. 
 
272 Management: Its Technique 
 
 only factor which makes it possible for the large corpora- 
 tion to "round the corner" of the critical period. More- 
 over, the borrowings of the corporation for purposes of 
 fixed capital, such as buildings, or machinery, entail cer- 
 tain interest charges which have to be met regularly. Fail- 
 ure to meet the interest charges means a state of insolyency. 
 The ultimate source of payments of all credit obligations 
 is the earnings of the corporation. If these earnings 
 are not large enough to meet the payments when due, no 
 matter whose the fault, the corporation is ready for bank- 
 ruptcy. But it happens with any number of corporations 
 and their financial backers that during a period of pros- 
 perity, with profits running high and business booming, 
 the optimism of the times grips the imagination of the 
 corporate overseers, and impels them to over-expansion, 
 over - capitalization, over - borrowing. Time and again, 
 bankers and corporation directors prove victims of their 
 own psychology, and in the great tide of money making 
 and expanding and building of a period of prosperity, they 
 forget the law of business cycles, forget that a little later 
 on will come the return swing of the pendulum, with de- 
 pression, low earnings or actual losses, hard times, tight 
 money, and general liquidation. When the turn does come, 
 the financial overseers of the corporation try often to keep 
 up appearances by paying dividends whether they have 
 been earned or not, and this effort is the paramount im- 
 mediate cause of the bulk of industrial bankruptcies.^ 
 The financial interests unfailingly endeavor to keep the 
 price of securities on the investment market at desired 
 levels, and of course face the problem of maintaining am- 
 ple value in the stocks and bonds serving as collateral se- 
 curity for much of the corporation's commercial credit. 
 Even at best, with all financial interests unselfish, and de- 
 voting intelligent attention to the welfare of the consoli- 
 dation, the financial status of the corporation requires the 
 most painstaking vigilance. Under less favorable mo- 
 tives, with occasional recklessness or selfishness on the part 
 
 1 A. Dewing, "Corporate Promotiona and Reorganizations," pp. 
 546-557. 
 
Management: Its Technique 273 
 
 of dominant financial interests, or with excessive greed for 
 immediate power or profit, the financial status of the busi- 
 ness combination has in numerous instances been deplor- 
 able. In certain cases, large scale fraud in the manipula- 
 tion of securities and speculation where conservatism was 
 sorely needed have ruined corporations, and brought un- 
 told loss to innocent and helpless investors. New England 
 people will not soon forget the manipulations, which the 
 Interstate Commerce Commission so vigorously con- 
 demned, in the affairs of the New York, New Haven and 
 Hartford Railroad.^ 
 
 AH of these financial complications continually present 
 grave problems for the large combinations to solve. Their 
 relations with the financial institutions must in the very 
 nature of the case be fairly intimate. The large consoli- 
 dations in almost every line of industry are constantly 
 drawn into close contact with the investment and com- 
 mercial bankers. The influence of the financiers upon the 
 directorates of modern large corporations is a natural out- 
 come of the structure of corporate institutions.^ 
 
 From all the foregoing facts and considerations, it is 
 obvious that many of the large consolidations have by no 
 means had easy sledding. Disappointments from unreal- 
 ized efficiencies and economies have been frequent, and 
 illusions about rich earnings have been repeatedly ex- 
 ploded. The consolidation movement had its greatest in- 
 nings at a period when the American people were whisked 
 off their feet by a temporary awe of and credulous trust 
 in bigness. The grandeur of size caught the imagination 
 of bankers, of business men, and of the people. It 
 was accepted without proof that if a business could but 
 become big enough, its economies would be almost unlim- 
 ited and its earnings would be wellnigh fabulous. The 
 psychological bubble was pricked by the hardships of 
 costly experience and the disappointments of corporation 
 history. Through all the period of consolidation and con- 
 
 1 See, also, W. Z. Ripley's "Trust Pools and Corporations," pp. 
 23-30. 
 
 2 H. G. Moulton, "Money and Banking," Chapter XI. 
 
274 Management: Its Technique 
 
 centration, those trusts which had to rely for their suc- 
 cess mainly upon the economies and efficiencies of large 
 scale operation have either met with indifferent success or 
 have failed outright. The trusts with glowing records of 
 high dividends and huge profits are usually those which 
 attained a substantial power of monopoly over prices, and 
 which held a position from which they could take unfair 
 advantage of the surviving small competitors. Either this, 
 or they had for a time the leadership of an executive of 
 the rarest ability, one of the towering captains of industry 
 of the last generation in America who had the genius to 
 make a go during their lifetimes of an otherwise scarcely 
 profitable consolidation.^ 
 
 The part which management plays in the whole eco- 
 nomic organization is obviously a leading one. Manage- 
 ment is to-day divorced from ownership. Owners are 
 holders of corporate securities, and need have no direct 
 interest in the properties nor give any personal attention 
 to their care and government. Managers work for a salary 
 primarily, although in places they also are interested as 
 part owners in the business. Directors of banks and cor- 
 porations concern themselves mainly with financial matters, 
 leaving questions of labor, production and technique to 
 the presidents, vice-presidents and engineers of the plants. 
 Profits go, not to the men who manage the business, but 
 mainly to those who own the business. The psychology of 
 management shows that bankers and corporation execu- 
 tives are men usually of rare and great mental and instinc- 
 tive equipment, but that a large proportion of them, or all 
 of them, will be found subject to the sway of customs, tra- 
 ditions, and habits. Optimism gets the better of them 
 during periods of prosperity, and miscalculation leads 
 their businesses into precarious positions repeatedly. Iner- 
 tia and prejudice keep thousands of them from taking up 
 with the latest improvements in machinery and technology 
 of production, and inability or unwillingness to handle the 
 
 1 See A. Dewing's "Corporate Promotions and Reorganizations," 
 pp. 563-568. Also W. S. Stevens's "Industrial Combinations and 
 Trusts," pp. 574-580. 
 
Management: Its Technique 275 
 
 technique of the modern science of management causes ap- 
 palling wastes throughout the economic system. On the 
 other hand, modern corporate management has increased 
 the productivity of the individual worker by making possi- 
 ble the large scale use of machinery. Modern management 
 directs the economic energies of society with a degree of 
 efficiency which surpasses any other form of economic 
 government that men have yet contrived. 
 
 The shortcomings of management indicate primarily the 
 lines of evolution for the future. The recent determination 
 of management to organize human relations in industry 
 is an admirable example of the ability of management to 
 adapt itself to the challenging difficulties of a particular 
 period. The extremes and excesses of managerial policy 
 appear to be coming under control. The tests of business 
 success are now more than ever before seen in the increas- 
 ing attitude that exploitation of labor as a means of reap- 
 ing profits must be a thing of the past; that abuse of in- 
 vestors' money deserves criminal prosecution; and that 
 moderation in the use of monopoly advantages and stability 
 rather than exorbitance of prices is desirable. 
 
 In days gone by, capital was a term which covered both 
 management and ownership. Recent economic evolution 
 has brought out the manager as a distinct and separate 
 factor. The overmastering characteristic of successful 
 management is a threefold responsibility: to the public, 
 courteous service, standard quality of goods, reasonable 
 prices; to the owners, safe-keeping of investments, and 
 moderate profits; to the laborers, living wages, democratic 
 treatment, healthful working conditions, a creative inter- 
 est in work. The day when the responsibility of business 
 was selfishly looked upon as almost an exclusive responsi- 
 bility to owners, — a responsibility to harvest the maxi- 
 mum profits, without fear or favor, — is beginning to pass. 
 The modern manager of the best type recognizes a three- 
 fold responsibility for the positive benefit of laborers, own- 
 ers, and consumers. The test of successful management 
 is the performance of this balanced threefold responsibility. 
 
 The characteristics of the present economic period re- 
 
276 Management: Its Technique 
 
 fleet again and again the problem of the size of the busi- 
 ness organization. The question of big business or little 
 business is one calling for incessant attention. It may 
 safely be declared that the question has not yet been fully 
 decided. And yet, out of the tendencies and developments 
 of the last decade, certain fundamental lessons can clearly 
 be read. The large business unit has come to stay. A re- 
 turn to the old days of laissez-faire competition between 
 little business establishments is unthinkable. A new com- 
 petition has come into activity, — a competition between 
 bigger parties. In the branches of industry where con- 
 solidation has gone far, the biggest combinations operate 
 in the same field with a dozen, or a score, or a hundred in- 
 dependents. But the independents themselves are larger, 
 and the competition which now exists is none the less com- 
 petition because it prevails between larger business units. 
 For a time, the public and the courts seemed inclined 
 to destroy big business merely because of its size. That 
 inclination is on the wane, and in its place has come the 
 more matured inclination to outline the new rules of the 
 game in such a fashion as to give businesses both large and 
 small a chance for a trial of strength on issues of efficiency 
 and economy. The Supreme Court has declared emphati- 
 cally that under the Sherman" Anti-Trust Law of 1890, it 
 will not condemn business merely because it has grown 
 large. If it is not guilty of unfair and destructive competi- 
 tion, if it is not holding its position because of unreasonable 
 restraint of trade or undue monopoly power, if it can 
 remain large or grow larger while still playing the game 
 under the new rules; if it can carry on its large scale 
 enterprise with efficiency under those rules, it may con- 
 tinue in existence, no matter what its size. The size of 
 maximum efficiency will vary with each branch of economic 
 activity, and trial and experiment alone will decide in 
 each case where the point will lie. Where modern business 
 management is recalcitrant, and dodges persistently the 
 rules of fair dealing with competitors, with labor, with 
 owners, with the public, the instruments of public control 
 are not wanting. Regulating commissions, price fixing com- 
 
Management: Its Technique 277 
 
 missions, public service commissions, publicity and investi- 
 gating commissions, are available already, and others can 
 be easily created by a public acquainted with the means of 
 control set up to meet the needs of the country during the 
 period of the World War. The blind fear of monopoly and 
 the blind trust in competition are both giving way to a 
 discovery that there is something useful to the economic 
 community in that degree of monopoly which accompanies 
 large scale business or which takes the form of open co- 
 operation between concerns in a given line of trade; and 
 that there is something dangerous in the form of unbridled 
 competition which is ruinous and deadly for the competi- 
 tors. 
 
 More and more, the modern type of business govern- 
 ment makes room for co-operation in economic activity. 
 Business can still compete, yet in many policies serve the 
 community and itself better by taking counsel and by co- 
 operation which wiU bear the light of publicity. Destruc- 
 tive competition gives way to constructive competition ; and 
 monopoly in restraint of trade gives way to co-operation 
 in the aid of trade. The new standards of competition and 
 the new standards of co-operation are still in the process 
 of development and evolution, but their features are now 
 distinct enough to make clear that a reconstruction of the 
 size and character of business management has been taking 
 place in recent years. The reconstruction of business man- 
 agement along the lines of responsibility to consumers, 
 owners and workers is a cardinal feature of the economic 
 developments of the last generation. 
 
 REFERENCES 
 
 Marshall: Industry and Trade, pp. 140-177, 197-249, 308-394 
 
 Commons, J. R. : Industrial Government 
 
 Brandeis, L. : Business — a Profession 
 
 Jones, E. : The Trust Problem of the United States 
 
 Adams, H. C: Description of Industry, Chapters VII, XIII, XIV 
 
 Clay, H.: Economics for the General Reader, Chapters III, V- 
 
 VIII, XXIII-XXIV 
 Marshall and Lyon: Our Economic Organization, Chapters 
 
 XV-XVIII, XXI-XXV 
 
278 Management: Its Technique 
 
 Marshall, L. C: Readings in Industrial Society, Chapters 
 X-XV 
 
 Bloompield, M.: Management and Men 
 
 Bloomfield, D.: Employment Management 
 
 Federal Commission on Industrial Relations, 1915, Final Report 
 
 Bassett, W. R.: When the Workmen Help You Manage; The 
 Organization of Modern Business 
 
 Veblen, T.: The Vested Interests and the State of the Indus- 
 trial Arts; The Engineers and the Price System 
 
 Wood, C. W. : The Great Change 
 
 LiPPiNCOTT, I.: Economic Development of the United States, 
 Chapters XXI-XXVII 
 
 Baker, R. S.: The New Industrial Unrest 
 
 Gantt, H. L. : Industrial Leadership ; Organizing for Work 
 
 HoxiE, R. F. : Scientific Management and Labor 
 
 Kester, R. B.: Accounting 
 
 Paton and Stevenson: Principles of Accounting 
 
 Brisco, N. a. : Economics of Business 
 
 Copeland, M. T.: Business Statistics 
 
 Duncan, J. C. : Principles of Industrial Management 
 
 Duncan, C. S.: Commercial Research 
 
 Frederick, J. G. : Business Research and Statistics 
 
 Gowin, E. B.: The Executive and His Control of Men 
 
 Jones, E. D.: Administration of Industrial Enterprises; The 
 Business Administrator 
 
 Taylor, F. W. : Scientific Management 
 
 Shaw, A. W.: An Approach to Business Problems 
 
 Thompson, C. B. : Scientific Management 
 
 Veblen, T.: Theory of Business Enterprise, Chapters I-IV, X 
 
 Tipper, H. : The New Business 
 
 Wilson, W. : The New Freedom 
 
 Stevens, W. S. : Industrial Combinations and Trusts 
 
 Haney, L. H.: Business Organization and Combination 
 
 Kimball, D. S.: Principles of Industrial Organization 
 
 Redpield, W. C. : The New Industrial Day 
 
 Scott, W. D.: Increasing Human Efficiency in Business 
 
 Rowntree, B. S.: The Human Factor in Business 
 
 Committee of Federated American Engineering Societies, Waste 
 in Industry 
 
 Lewisohn, S. a. : Atlantic Monthly, Vol. 126, pp. 414-418 
 
CHAPTER IX 
 
 MARKETS— THEIR PRINCIPLES ANT) STRATEGY 
 
 The market is the buying and selling institution of the 
 economic system. Goods and services are not exchanged 
 directly, as a rule, but indirectly by the use of a medium 
 of exchange, i.e., money. In everyday life, the value of 
 goods and services is thought of in terms of money and 
 of price. The amount of money which we exact before part- 
 ing with goods or services, or the amount of money with 
 which we are willing to part in order to obtain the goods or 
 services of some one else is a pecuniary measure of value. 
 In the market, goods or services are worth to us individual- 
 ly the amount of money which we are willing to surrender 
 in order to secure them. Most of the feeling and thinking 
 which goes on in the markets of modern society clusters 
 about prices. Instead of stating that a suit of clothes is 
 worth twenty bushels of wheat, we state that a suit of 
 clothes is worth forty dollars, and that with wheat at two 
 dollars a bushel, twenty bushels of wheat are worth as much 
 as a suit of clothes. All commodities that are bought and 
 sold, — pig iron, bread, diamonds, coal, — pass through the 
 market at a money price. By putting prices on different 
 grades and types of labor, on books, poetry, music or pic- 
 tures, on educational services, on executive ability, or on 
 shoes, corn, furniture and an innumerable mass of things, 
 it is possible to arrive at value comparisons. 
 
 There are two important aspects of the concept of value. 
 On the one hand there is a positive quantity of desirability 
 or appeal in any specific commodity or service taken by 
 itself; on the other hand, there is a comparative element 
 in the degree of desirability found in various commodities 
 or services. The former aspect has often been termed 
 "value in use," and the latter aspect, "value in exchange." 
 
 279 
 
280 Markets — Their Principles and Strategy 
 
 Economic terminology, in describing the former aspect 
 of value, has employed a wide variety of words. Goods 
 have "utility," which is the "power to satisfy human 
 wants." Each good or service arouses a certain "quantity 
 of desire," an "intensity of desire." Each ofEers a certain 
 amount of "gratification," or of "satisfaction." In ex- 
 plaining the comparative aspect of value, economic termi- 
 nology has included such statements as that "value is the 
 power of a good to command other goods in exchange," or 
 that "value is the rate at which a commodity exchanges 
 for others." 
 
 The positive and the relative aspects of value are two 
 different phases of the same thing. Value is not exclusively 
 a relative nor exclusively an absolute concept, — it is both. 
 Marketing institutions are organized around the values of 
 commodities. The market provides a structure of buying 
 and selling, through which values are compared, estimated, 
 crea,ted, diminished. The money unit of measurement 
 translates values into a common language of prices, and 
 thereby makes possible on a gigantic scale the trading be- 
 tween buyers and sellers for the satisfaction of human 
 wants and desires. 
 
 The marketing branch of economic activity has expanded 
 immensely in modern times. The income of the laborer, 
 the business manager, the investor or the professional man 
 is a money income. These people receive payment for 
 their efforts, not in tangible commodities, but in a sum of 
 money with which commodities can be purchased. Even in 
 the agricultural industries, a major part of productive 
 effort is devoted to preparing commodities for sale in the 
 market, and only a small fraction of the farmer's crop is 
 devoted to his personal consumption. He sells it for a 
 sum of money, and, with the money purchases other com- 
 modities to satisfy his wants as a consumer. 
 
 The business of buying and selling has come to occupy 
 more and more of the time and energy of employers and 
 employees; and distribution has come to be a most im- 
 portant factor in the economic system. The impressive 
 fact of the case to-day is that it costs more to market the 
 
Markets — Their Principles and Strategy 281 
 
 average article than to produce it. ' ' It costs more to sell the 
 world's goods than to make them."^ This increasing im- 
 portance of marketing has been strongly noticeable during 
 recent years. One authority estimates that the number of 
 people required to distribute one thousand dollars' worth 
 of goods, has increased over 50 per cent, in the last twenty 
 years.^ Buying and selling are, therefore, of basic im- 
 portance in the range of economic activities, and the laws 
 determining values and prices in the course of the market- 
 ing process deserve careful study. 
 
 Values and prices are not set in a purely arbitrary way 
 by inexorable, fixed economic laws. There is a surprising 
 amount of flexibility, and elasticity in the influences bear- 
 ing upon prices. There is room for an immense amount 
 of human strategy in manipulating the factors which in- 
 fluence prices. But there are certain broad and funda- 
 mental principles which underlie prices and values. These 
 are often termed laws of economics, and the term is cor- 
 rect if it does not mislead one into supposing that the so- 
 called laws are absolute, unwavering, unswerving, leaving 
 little or no room for human cunning, manipulation, and 
 strategy. 
 
 The Cost of Production Theory of Prices 
 
 One economic theory is that prices tend to approximate 
 the cost of production of goods. If prices soar far above 
 the cost of production the profits will be so high that busi- 
 ness men will flock to that branch of activity and by their 
 increased production and increased competition will tend 
 to force prices down to normal levels, i.e., levels approxi- 
 mating the cost of production. If prices fall below the cost 
 of production, men will be losing money and will retire from 
 that branch of business in such numbers that the supply 
 will fall off and under the scarcity of supply, prices will 
 rise to the normal level, i.e., the level approximating the 
 
 1 C. W. Gerstenberg, "Principles of Business," p. 404. See, also, 
 G. B. Diblee, "Laws of Supply and Demand," Chapter VI. Especially 
 p. 62. 
 
 2 J. G. Frederick, "Business Research and Statistics," pp. 102-105. 
 See, aWd, Nystrdm, "EtitonOmiCs df EHtaaling,*^ p. 14. 
 
282 Markets — Their Principles and Strategy 
 
 cost of production. Selling prices cannot long stay below 
 cost of production -without ruining the branch of industry 
 concerned. Selling prices below the cost of production 
 indicate selling at a loss, and loss, unless checked, leads 
 rapidly to bankruptcy. Hence the cost of production sets 
 a minimum level below which prices must not fall for any 
 considerable length of time. 
 
 Above this base line there is room for the play of com- 
 petition among dealers, for monopoly price maintenance, 
 for varied strategy and ingenuity. Profiteers may reap 
 rich harvests from forcing prices for a time well above 
 the base line of cost of production and speculators may 
 take advantage of the play of price movements to effect 
 their speculative gains. 
 
 The cost of production which sets the base line of prices 
 varies greatly between producers. Some producers put 
 their goods out with a low cost, others with a high cost. 
 The difference between the most costly production and 
 the least, is often very marked. A concern which is unfa- 
 vorably located, which has to buy raw materials in small 
 quantities, which has inefficient management, which has 
 constant labor troubles and a wide variety of other diffi- 
 culties, suffers from a high cost of production. Another 
 concern in the same branch of production which is free 
 from such difficulties enjoys low cost of production. This 
 gives rise to an important economic question: which cost 
 of production, the high or the low, establishes the standard 
 for prices? Do the expensive plants, the poorly located 
 and poorly managed plants, set the price standards? Or 
 are the standards set by the efficient, booming, brilliantly 
 handled and fortunately located plants? For certain rea- 
 sons which can be very briefly explained, it is the high 
 cost plants which tend to set the level below which prices 
 must not fall. The plants with highest cost would have 
 to go out of business if prices fell below their cost of pro- 
 duction. They would lose money from prices inadequate 
 to cover their costs and would of necessity close down. 
 But society would then find its supply of goods in that 
 branch of production insufficient. The plants of low pro- 
 
Markets — Their Principles and Strategy 283 
 
 duetion cost cannot supply the entire need and demand 
 of society. The plants of high production cost must be 
 continued in operation if the total supply is to be adequate. 
 The high costs of the latter group of concerns are known 
 as marginal costs. Marginal costs are the costs of those 
 concerns which are just on the margin between life and 
 death. Their costs are so high that they can barely keep go- 
 ing at the prices prevailing. They are the producers who 
 are just able to make both ends meet and no more. They are 
 the ones who can scarcely keep their heads above water. But 
 because what they do produce is indispensable, because so- 
 ciety cannot do without it, these marginal producers have 
 to be paid prices high enough to meet their high costs. 
 Hence it comes about that this high level becomes the gen- 
 eral level for the market. Marginal cost, i.e., the cost for 
 the man who can barely make prices cover his expenses, 
 sets the minimum below which prices must not fall for 
 everybody. Meantime the other producers, with lower 
 costs, find themselves making royal profits, through no 
 fault of their own, but through the necessity on the part 
 of society of keeping the costly producers alive in order 
 to make production adequate to meet society's needs. 
 
 The operation of this principle is well illustrated in the 
 production of coal. Some mines are able to produce coal 
 very cheaply. By virtue of the use of modern mining ma- 
 chinery, of efficient administration of labor, of the nearness 
 of the coal bed to the surface of the ground, of easy trans- 
 portation, and of many other favorable factors, these 
 mines enjoy a very low cost of production. At the other 
 extreme is a group of coal mines whose cost of production 
 is excessively high. They are too small to employ the best 
 machinery, they are bothered with flooding by water, they 
 suffer from restriction of production by labor, their man- 
 agement is inefficient, their transportation facilities are 
 poor, — for a wide variety of reasons it costs this group of 
 mines much more to produce a ton of coal than it costs the 
 highly favored mines. But the coal supply of the coun- 
 try will be inadequate unless these low grade mines are 
 continued in operation. The price of coal must be high 
 
284 Markets — Their Principles and Strategy 
 
 enough to cover their abnormally great cost of production. 
 A price at such a height, however, is much above the costs 
 of the high grade mines. This excess represents for the 
 high grade mines so much profit. The country has to pay 
 a price for coal "which will keep the low grade mines run- 
 ning, or suffer a coal famine. On such a price the high 
 grade mines reap a rich margin of profit. In between these 
 extremes of high grade mines and low grades are numer- 
 ous intermediary grades, all of which secure the price s,et 
 by the cost of production of the low grade mines. The cost 
 of production in the low grade mines is the marginal cost 
 for the coal industry and sets the price of coal for all. 
 
 Price fixing during the war was generally based upon 
 this principle of marginal cost of production. The cost of 
 production of the various grades of producers was arrived 
 at from figures supplied by the Federal Trade Commission. 
 F. W. Taussig, from experience as Chairman of the Price 
 Fixing Commission of the War Industries Board, directing 
 price fixing in such commodities as iron, steel, copper, lum- 
 ber, wool, hides, cotton fabrics, sulphuric acid, nickel alu- 
 minum, brick, cement, etc., stated the principle of price fix- 
 ing as follows: "It was cost of production at the hands 
 of the marginal or bulkline person that usually formed the 
 basis of the prices fixed. ' '^ Producers with low costs would 
 reap large harvests, but they were caught by the excess 
 profits tax. 
 
 Statistical studies of costs and prices indicate that the 
 principle applies about the same in normal times as in 
 war times under price fixing. In fact, the methods used 
 in price fixing were simply the carrying over of normal 
 price principles into the war conditions. A careful study 
 of Federal Trade Commission statistics, made by Kemper 
 Simpson covering book-paper, newsprint, salmon, sugar 
 beets, and coffee, led to the finding that "price approxi- 
 mates bulkline or marginal cost under normal conditions 
 of competition."^ Statistical studies, therefore, from the 
 facts available, tend to bear out the general theory of 
 
 1 Quarterly Journal of Economics, Feb., 1918, p. 240. 
 
 2 lUd., Vol. XXXV, p. 287. 
 
Markets — Their Principles and Strategy 285 
 
 marginal cost as the standard which establishes price 
 levels where a fair degree of competition prevails. But it 
 would be misleading to infer that marginal costs are the 
 only factors influencing prices. They are simply one of 
 the factors and their full bearing can be understood only 
 as they are compared with the other price determining 
 factors which are working simultaneously. 
 
 Supply and Demand 
 
 The price theory of supply and demand is undoubtedly 
 the explanation which most widely appeals to the popular 
 mind. It is very common, indeed, for lawyers, business 
 men, and even economists to attempt an explanation of 
 almost every baffling price problem by a vague and gen- 
 eral reference to supply and demand. The phrase serves 
 as a kind of blanket explanation to cover every confusing, 
 perplexing price question, whereas in reality what is needed 
 is a clarifying analysis of the principles of supply and 
 demand to determine how they work out, and to what 
 extent they work out, in actual practice. 
 
 The broad principle of supply and demand is that price 
 is determined by the relative strength of supply of and 
 demand for any commodity or service. If supply increases 
 in proportion to demand, price falls; if supply decreases 
 in proportion to demand, price rises. Likewise if demand 
 increases or decreases in proportion to supply, price reg- 
 isters the fluctuation. It follows, too, that if a large supply 
 is thrown upon the market, and prices fall, more goods will 
 be consumed because more can be bought at the lower price 
 level. If sellers have on hand a large store of goods which 
 they are determined to get rid of, they may sell the goods 
 by offering them at a lower price. If the owners wish to 
 hold their goods, they may offer them at prices high enough 
 to discourage buyers from taking the goods in any consider- 
 able quantities. On the other hand, if buyers need goods 
 and their demand is urgent, they will pay high prices rather 
 than go without the goods. If consumers want more goods, 
 they must pay higher prices. The value of goods and the 
 prices which serve as an index of value fluctuate in pro- 
 
286 Markets — Their Principles and Strategy 
 
 portion to the fluctuations of demand and supply. The 
 general theory states that the more goods available the less 
 you will pay and the less goods available the more you will 
 pay. "When the price of a certain commodity rises it is an 
 invitation to new producers to enter the field, and as they 
 gradually increase the supply of the commodity, the price 
 is gradually forced down again. When prices fall, they 
 discourage many producers from the field, and as their re- 
 tirement gradually reduces supply, prices are driven up 
 again. Hence a continuous relationship between prices 
 and supply and demand prevails throughout the process 
 of buying and selling. A change in any one of the factors 
 affects the others ; they are interdependent ; they constantly 
 influence each other. By their adjustments and alterations 
 they tend to maintain a proper balance and equilibrium in 
 the great institution of the modern market. 
 
 However, just as in the cost of production theory, there 
 were found to be wide differences between the costs of 
 various producers so in the supply and demand theory, 
 there are wide differences between the demands of various 
 buyers. The demand for a new pair of shoes by a man who 
 already has a half dozen pairs and by a man whose one 
 and only pair is worn out, is a differing demand. The 
 millionaire and the day laborer have differing degrees 
 of demand for food, clothing and everything else. There 
 are buyers for whom every purchase means close pinch- 
 ing, stinting, and painful stretching of every penny to 
 the limit of purchasing power; and there are other 
 buyers for whom purchases of the same goods are easy, 
 involve little or no stinting, and are simply offhand buyings 
 with a real lack of interest in the amount of the price. 
 The same price may be offered by two buyers, one of whom 
 has a most urgent demand for the goods, the other of whom 
 could get along without the goods as well as not. The 
 differing degrees of demand exist everywhere, in all lines 
 of articles and services on the market. Demand is not a 
 uniform, unvarying thing, — the same for everybody, every- 
 where. So the question arises, which kind of demand is 
 the paramount force in settling prices? Is it the demand 
 
, Markets — Their Principles and Strategy 287 
 
 of the buyer who can barely afford to buy the article or 
 the demand of the buyer who can buy with an easy in- 
 difference to the price? 
 
 Just as in the production cost theory of prices it was 
 the marginal producer, the man who could just barely 
 make prices cover expenses, who tended to es.tablish price 
 levels, so in the supply and demand theory of prices, it 
 is the marginal buyer, the man who can just barely afford 
 to buy the article, who tends to establish the price levels. 
 Marginal demand is the real demand force in determining 
 prices. The best point of view from which to grasp the 
 significance of marginal demand is that of the seller him- 
 self as he maps out a selling plan. His mind works through 
 some such process as this : " I want to place 100,000 pieces 
 of this commodity on the market. Suppose I put the price 
 at one dollar per piece. I am afraid that some people would 
 find that price too high. I probably wouldn't sell more 
 than 50,000 pieces. There must be 50,000 more people who 
 would like to buy this thing, but who will say to them- 
 selves, "Well, we can't afford to pay a dollar for that 
 article. "We should like to buy it but at that price we 
 can't quite afford it. Of course it's all right for those 
 who have the money and who want to pay the price, but 
 not for us." Then the seller who is mapping out his sell- 
 ing campaign would reflect further: "I will offer the arti- 
 cle at ninety cents. Will that draw another 50,000 buyers ? 
 I am afraid not. It will draw perhaps 30,000 buyers ad- 
 ditional, but it will not sell the full 100,000 pieces. I must 
 catch the eye of that lower 20,000 In order to sell all that 
 I want to sell. , That group at the bottom of the ladder is 
 the hard group to persuade to buy; and they seem still to 
 think they can't afford to buy, even at 90 cents. Suppose 
 I reduce the price to 80 cents, I believe that price will tempt 
 them to part with their money. I will offer the full hun- 
 dred thousand at 80 cents per piece." 
 
 From many standpoints it seems unfair to the seller to 
 force him to put his price down to the point where he can 
 induce the most unwilling buyers to purchase goods. Thou- 
 sands of buyers would pay more, probably without com- 
 
288 Markets — Their Principles and Strategy 
 
 plaint, but other thousands would not buy at all if the 
 price were any higher. So the most reluctant buyer, the 
 most unwilling consumer, the man of marginal demand, 
 sets the price level for the goods. He is the man at the 
 end of the line, the man who can hardly persuade himself 
 to buy even at the price calculated to catch him. He is 
 the man for whom the question — to buy or not to buy — 
 is a poser, who is tottering on the margin of doubt and 
 skepticism. The price for all has to be set at a level which 
 will catch this marginal group. Of course, if the imaginary 
 seller above wanted to sell 150,000 pieces of the commod- 
 ity, he would fix his price still lower to catch a still lower 
 marginal buyer 
 
 The marginal buyers as we have seen are the men who 
 at the price prevailing, can just barely be persuaded to 
 buy. Each price level, therefore, has its own grade of 
 marginal buyers, each price level has its own fringe of 
 buyers Tdiose demand is a marginal demand. Above this 
 marginal fringe of buyers, there are other buyers who could 
 well afford to pay more. But they do not have to pay more 
 because if prices were raised the marginal fringe of buyers 
 at the lower level would drop out of the market entirely 
 and the sellers would be able to market only a fraction of 
 their goods at the higher prices. The marginal fringe of 
 buyers occupies the strategic position in the demand force 
 and bends prices to their state of mind. Prices must bow 
 to the whims and wishes of the most reluctant buyers. It 
 must not be understood that the marginal fringe of buyers, 
 or any of the buyers above the margin for that matter, are 
 acting usually from careful rational analysis of all factors 
 in the case. They are in large measure the victims of 
 custom, habit, imitation, suggestion, and tradition. Their 
 minds are influenced by social convention, ingenious ad- 
 vertisement, clever salesmanship ; and their decisions are 
 probably more often non-rational than rational. But, by 
 whatever psychological process, good or bad, they reach 
 a decision to buy or not to buy, that decision is the deter- 
 mining force in the price scale. To go behind the mere fact 
 of demand ; to go beneath the fact that the decision to buy 
 
Markets — Their Principles and Strategy/ 289 
 
 has been made and to inquire into the reasons why demand 
 is thus and so; to examine the psychology of the decision 
 to buy, leads to an analysis of social and individual psy- 
 chology and of the market as a social institution. An 
 analysis of this phase of the market problem will be made 
 later in this section.^ 
 
 There are then two conceptions of the origin of prices, — 
 the cost of supply theory and the marginal demand theory. 
 The two theories are not incompatible or contradictory, 
 but are supplementary. The cost of supply theory ac- 
 counts mainly for the minimum below which prices cannot 
 for any length of time be allowed to fall ; and the marginal 
 demand theory laccounts for the maximum above which 
 prices cannot for any length of time be allowed to rise. 
 The two theories account for the upper and lower limits 
 of price levels. If prices fall below the lower limits set 
 by the marginal costs of supply, they cause losses to the 
 marginal producers and drive them out of business. If 
 prices rise above the upper limits set by the marginal 
 group of buyers, the marginal buyers cannot afford to 
 buy and producers cannot dispose of their goods. Mar- 
 ginal cost of supply determines the rock bottom below 
 which prices cannot drop; marginal demand determines 
 the peak above which prices cannot soar. 
 
 But this relation of the two fundamental price theories 
 should not induce anyone to suppose that either marginal 
 cost or marginal demand are absolute and fixed points. 
 Marginal producers and marginal buyers are marginal only 
 in reference to a given price level. A higher price level 
 brings in a new group of marginal producers even worse 
 in the scale of inefficiency and heavy costs. Likewise a 
 lower price level brings in a, group of marginal buyers yet 
 worse off in the scale of ability and willingness to buy. 
 Lower price levels eliminate the old marginal producers 
 and buyers, and bring in new ones at the new levels. Mar- 
 ginal cost under any price level covers the fringe of mar- 
 ginal producers who can just survive under that level. It 
 is their minimum of subsistence price. And marginal de- 
 1 See pp. 34iB-3'64. 
 
290 Markets — Their Principles and Strategy 
 
 mand under any price level covers the fringe of marginal 
 buyers who can just afford to buy at that level. It is their 
 "last straw" price, the utmost they can afford to pay, — any 
 more and they would be out of the market. So changes in 
 price levels bring corresponding changes in the grades of 
 marginal producers and of marginal buyers. And the 
 grades of marginal producers and marginal buyers at each 
 level tend to keep the range of prices of that level within 
 the upper and lower limits which enable the marginal 
 groups to keep going. The marginal groups, on both sides, 
 tend to set the minimum and maximum limits of prices. 
 It very frequently happens that the cost of supply rises 
 to such a point that it threatens to exceed the upper limit 
 set by demand. At such a time, producers who are fa- 
 miliar with the market realize that sooner or later the ex- 
 cessive costs will run prices up so high that marginal buyers 
 will be driven from the market, demand will fall off, and 
 it will be impossible to dispose of the supply at a price 
 adequate to meet the cost of production. In that event, 
 the producer faces the obligation of cheapening production. 
 As a matter of fact, this necessity of cheapening the costs 
 of supply is what compels producers and sellers to exhaust 
 their ingenuity and inventiveness. Costs must be cut. It 
 is an imperative necessity, — ^that or failure. Goods can- 
 not be sold in adequate quantities above certain prices, and 
 costs must be pared down to make those prices possible. 
 Under this compulsion a wide range of economic move- 
 ments has arisen and has played a most important role 
 in economic activity. The chief reason for the movement 
 toward combination in industry was the necessity for elim- 
 inating the excessive costs of cutthroat competition. For 
 the purpose of lowering costs leading producers maintain 
 staffs of scientists, inventors and research experts, whose 
 time and effort are devoted to the discovery of ways of 
 eliminating waste, reducing expense, introducing econo- 
 mies, improving efSciency. New inventions, automatic ma- 
 chinery, standardized production, scientific management, 
 personnel administration, efficiency systems, — all these and 
 other similar efforts are encouraged for the sake of keeping 
 
Markets — Their Principles and Strategy 291 
 
 costs low. Producers are between the upper and lower 
 millstones of costs and prices and are squeezed to death, 
 unless they keep costs at safe levels. Marginal producers 
 are those who find it impossible to benefit from improved 
 and cheapened methods of production as greatly as do 
 their fellow producers. Those who can reduce costs suc- 
 cessfully make profits ; those who cannot, live on the margin 
 and barely make ends meet. 
 
 The devices for holding down the cost of supply are of 
 many kinds. Not a few producers do it by making goods 
 of an inferior quality. From the consumer's viewpoint, 
 this practice is vicious. Producers enter into the practice 
 widely nevertheless in the determination, at all hazards, to 
 cheapen production costs. A very large item in cost of 
 supply is the cost of capital tied up in merchandise. 
 "Small capital, with rapid turnover of goods, is the best 
 means of securing merchandising success," declares an 
 authority on marketing.^ Chain stores are a recent in- 
 novation in marketing and are designed to take particular 
 advantage of quick turnover of capital. It is estimated, 
 for example, that chain drug stores turn their stock over 
 three times as rapidly as independent drug stores, and 
 that chain tobacco stores or grocery stores have fully as 
 high a ratio over independent stores in those fields. By 
 rapid turnover of goods, chain stores make one dollar of capi- 
 tal do the work formerly requiring three dollars, and there- 
 by reduce the costs of marketing materially.^ Approximately 
 25,000 stores are already organized in chain systems.^ 
 
 The reduction of costs to proper levels is in large meas- 
 ure a problem in cost accounting. No storekeeper, whole- 
 saler or manufacturer is in a position to reduce costs until 
 he knows what his costs are. He must know not merely 
 what his general total costs amount to; he most know the 
 unit cost of each process of his business, of each part and 
 each stage. Cost accounting has, until very recent years, 
 been neglected by both manufacturers and distributors. 
 
 1 C. S. Duncan, "Marketing," p. 464. 
 
 2 P. W. Ivey, "Principles of Marketing," pp. 79-80, 236-240. 
 sNystrom, "Economics of Retailing," pp. 216-217. 
 
292 Markets — Their Principles and Strategy 
 
 Investigations by the Federal Trade Commission and by 
 the Harvard Bureau of Business Kesearch before the war 
 disclosed the fact that neither manufacturers nor retailers, 
 on the average, had other than the most primitive con- 
 ception of the cost of doing business. Under the stimulus 
 of these and other agencies, much has been done, to bring 
 about uniform cost accounting methods. Cost accounting 
 shows which phases of the business result in loss and which 
 phases result in profit. It shows the general state of pros- 
 perity of the business. Bankers demand to know in terms 
 of accounting statistics the general state of the business 
 before loans will be extended. The whole price policy of 
 a corporation rests upon proper accounting. In actual 
 business practice, price is not set by considering cost first, 
 but by estimating the demand possible at the price calcu- 
 lated. Then costs must be cut to make the price feasible.^ 
 
 By whatever device costs are cheapened, the strategy of 
 cost control is of primary concern. The entire group of 
 manufacturers, food growers, railroad operators, whole- 
 salers, jobbers, retailers and others who figure in the cost 
 of supply of commodities play a part in the strategy of 
 manipulating costs of selling in such a way as to make a 
 profit. All groups engaged in production and distribution 
 are looking for profits; and profits are measured by the 
 margin or spread between costs and selling prices. The 
 wider the spread between costs and selling prices at each 
 stage of the process, the larger the profit. The safest and 
 most serviceable way of making the spread wide and the 
 profit great is to reduce costs of making and selling 
 goods to the lowest point possible. Into this strategy every 
 manufacturer and every merchantman is pressed to throw 
 his best energy if he is to be thoroughly successful. The 
 tactics of reducing the cost of supply are thus of the utmost 
 self-interest to business men who are anxious for profits 
 and at the same time of the utmost service to consumers 
 who are in need of goods of moderate price. 
 
 To make the significance of a control of cost fully clear, 
 it is necessary to give further illustration of the methods 
 iSee A. W. Shaw, "Approach to Business Problems," p. 252. 
 
Markets — Their Principles and Strategy 293 
 
 involved. The devices for the restriction of costs are of too 
 many varieties to receive detailed description here, but a 
 few prominent examples may be taken up to advantage. 
 The costs of making and marketing a very large number 
 of articles are lowered by undertaking the processes on a 
 large scale. Quantity production commonly means cheap- 
 ened production. If a large enough demand can be found 
 or created to absorb the full product of a large, efficient 
 factory, utilizing automatic machinery and standardized 
 production methods, and operating near maximum capac- 
 ity the year around, the cost of making each unit of prod- 
 uct is substantially lessened. Production policies and 
 market policies are in this respect, as in many others, very 
 closely correlated. 
 
 Another conspicuous development of recent years in the 
 direction of controlling the costs of making and marketing 
 goods has been the tendency to eliminate the middleman in 
 many branches of distribution. Integration in business 
 organization has been one phase of this tendency. The 
 United States Steel Corporation, as an illustration, mines 
 coal and iron for the uses of the company miUs, owns ships 
 and railroads, and in addition to directing the manufacture 
 of steel products, regulates in considerable measure the 
 machinery of distributioii of steel products to steel users. 
 Another phase of the elimination of middlemen has been 
 the policy of direct selling by the producer to the con- 
 sumer. In limited forms, co-operative agencies of distri- 
 bution have sprung up to eliminate the middleman, and on 
 a surprisingly large scale the mail order business has 
 worked in the same direction. In some lines of commod- 
 ities the effo-rt has been to drive out the wholesaler, and 
 to enable the manufacturer or producer to deal directly 
 with the retailer. In other commodities, the effort has been 
 to drive out the retailer as well. This whole tendency to 
 attack the middleman has arisen partly from the impres- 
 sion among consumers that many middlemen are gougers 
 and profiteers and partly from the desire of producers to 
 meet the needs of the market for reduced costs of distri- 
 bution. Those who have been engaged in the elimination 
 
294 Markets — Their Principles and Strategy 
 
 of the middleman have, however, very commonly made the 
 discovery that the functions which the old middleman per- 
 formed were indispensable functions, and that once the 
 old middleman is eliminated, new marketing machinery has 
 to be created to perform those functions. The result is 
 that whereas there has been a movement in many lines 
 to drive out the middleman, the substitutes newly created 
 to perform the same functions have themselves been so 
 expensive that marketing, on the whole, has not become 
 less expensive. 
 
 A more significant tendency in the direction of con- 
 trolling costs has been the effort of middlemen to perform 
 the essential functions of marketing more efficiently, intel- 
 ligently and economically. The keeping of standardized cost 
 accounts has worked in the direction of better planning and 
 more efficient organization of distributive channels. Plans 
 for reducing the cost of delivery from retailer to consumer, 
 for safer and cheaper storage of goods, for proper insur- 
 ance, for careful control of rent and interest charges in 
 the business, for scientific advertising, for scientific sales 
 management, — plans along these and many other lines 
 seek to perform the same indispensable functions of mar- 
 keting in a more scientific and efficient manner. They 
 are sounder economic developments than the illusion about 
 eliminating the middleraan outright. 
 
 It is well at this point to emphasize the fact that the 
 attempts of producers and distributors to hold costs down 
 are not usually guided by pure reason, unfettered by bias, 
 prejudice or inertia. On the contrary, the producers and 
 distributors all along the line are hampered by countless 
 traditions, customs, and habits. Manufacturers, whole- 
 salers and retailers are alike reluctant to break away from 
 the business methods of their fathers, and habit, instinct, 
 and unconscious social conservatism play just about the 
 same dominating role here as in any other social structure. 
 Any number of manufacturers in the garment trades were 
 unwilling to introduce new machinery which would greatly 
 cheapen the cost of manufacturing clothing until mini- 
 mum wage laws forced them to do so in order to reduce 
 
Markets — Their Principles and Strategy 295 
 
 costs to a point which would make profits possible at the 
 new wage levels. They were content to go along under 
 sweatshop conditions until they were virtually compelled 
 to adopt improved methods. The coal industry exemplifies 
 in numerous ways the damaging force of tradition and 
 inertia as deterrents to the adoption of advanced and 
 scientific methods of coal production and distribution. En- 
 gineers are practically agreed that more than 100,000 
 workers are employed annually in coal mining that would 
 be unnecessary under a proper management of the indus- 
 try. Engineers also point out that although American 
 mines use machinery to a much larger extent than most 
 foreign mines, nevertheless about one-half the annual coal 
 production of American mines is still dug out without 
 the aid of modern mining machinery. Moreover, in typi- 
 cal mines, fully 85 per cent, of the labor cost of getting 
 out a ton of coal is devoted to the cost of shovelling 
 coal by hand. Modern machinery could do the same 
 shovelling at about one-fifth of the present cost, but mine 
 operators fail to take advantage of it.^ These illustra- 
 tions suggest the force of tradition, conservatism and habit 
 in the determination of production costs. The marketing 
 institutions of the country are held back by these uncon- 
 scious factors in shaping the policies of business men. The 
 general run of business men are often slow to admit the 
 advantages of advances in efficient means of making and 
 marketing goods, because of the binding force of the time- 
 honored practices of the past. Hence the spread of new 
 inventions is often slow, and the adoption of improved 
 methods of management comes only as a very gradual 
 breaking away from hard and fixed habits. 
 
 To summarize the theory of prices from the supply side, 
 the cost of production in all its stages from the raw prod- 
 ucts of the earth to the finished goods of the consumer 
 contributes toward establishing that minimum below which 
 prices cannot for any length of time be allowed to fall. 
 A fall below the cost minimum would drive out of business 
 
 1 A. J. Mason, American Economic 'Review Sup., March, 1921, 
 pp. 107-109. 
 
296 Markets — Their Principles and Strategy 
 
 the producers whose costs are highest, the producers at the 
 margin, and would therefore reduce the supply accord- 
 ingly. But when costs for everybody can be considerably 
 reduced, then it is possible for prices to be lowered ac- 
 cordingly, without killing marginal producers. At lower 
 costs and lower prices a greater supply is likely to be 
 thrown on the market, more people can afford to enjoy 
 the consumption of the goods affected, and a new rela- 
 tionship between marginal cost and marginal demand is 
 set up. 
 
 The Analysis and Creation of Demand 
 
 The purposes of an analysis of demand are not merely 
 to understand the facts of demand as they exist at any one 
 point of time, but also to understand the means by which 
 changes in demand take place. It is necessary to know 
 what present demand is in order that business men and 
 consumers may adapt themselves to it and comply with 
 its conditions. But the demand of the present is the product 
 of history, it is the result of innumerable changes in human 
 institutions and social psychology in the past, and it is 
 steadily in a process of evolution and transformation. By 
 devices of one sort and another, demand can be deliberately 
 created in one direction and destroyed in another. Demand 
 is not a fixed and inexorable state of mind, but for each 
 commodity on the market, demand has a history and a 
 future, and is always a changing, moving force. 
 
 The complete analysis of demand would be a compre- 
 hensive task, and the chief factors in it cannot here be 
 treated at any length. However, the central feature of 
 such an analysis may be given in a condensed form. Some 
 goods, — such necessities as food and clothing, — have a uni- 
 versal demand among all classes of people, but different 
 classes of people will desire different grades and brands 
 of food and different qualities and styles of clothes. Other 
 commodities, particularly luxuries and comforts, cater to 
 particular groups and classes of consumers. M. T. Cope- 
 land describes the task of demand analysis among social 
 classes as follows, "Some of the considerations to be 
 
Markets — Their Principles and Strategy 297 
 
 taken into account in this analysis are whetlier the product 
 is for individual or family use, the age and sex of the users, 
 rural or urban demand, the occupation of the users, racial 
 influences, living conditions such as home ownership, the 
 influence of climatic conditions, provincialisms in demand 
 such £is the demand for left-hand plows in some districts, 
 or the 'yokel' trade in clothing, and the influence of cus- 
 tom."^ Demand analysis is considered as of the utmost 
 importance by the successful merchants and dealers whose 
 special economic function is buying and selling. The force 
 of custom in the buying habits of each class or group of 
 prospective customers, and the prevailing peculiarities, 
 notions and eccentricities will need attention. The geo- 
 graphical location of classes and the distribution of popu- 
 lation, the history of the demand for each individual com- 
 modity, the purchasing power and the amount of income of 
 prospective buyers, the standards of living, the buying 
 motives, — all of these factors along with many others re- 
 quire careful analysis from anyone who plans to put goods 
 on the market intelligently and profitably.^ Once the cold 
 facts of demand are understood, the merchant is in a 
 position to adapt his buying and selling to its terms. He 
 is equipped with information which should enable him 
 to modify his business policies in ways which insure that 
 they will fit the needs of the case. 
 
 But the modern producer of goods to sell, and the mod- 
 ern wholesaler or retailer, makes a further use of demand 
 analysis. He views demand as something which can be 
 altered by deliberate manipulation. If there are goods 
 which he wants to sell, and he finds no interest among the 
 people, no demand from the public, he sets out to create 
 a demand. Demand is not something to be accepted as 
 in all respects inevitable, but as something to be shaped, 
 guided, and controlled. Some of the main policies for de- 
 mand control will be treated under the following heads: 
 (1) plant policy, (2) style of product, (3) service features, 
 (4) advertising, (5) sales management. 
 
 1 "Marketing Problems," pp. 3-5. 
 
 2 Duncan, "Marketing," Chapter XIV. 
 
298 Markets — Their Principles and Strategy 
 
 Plant Policy 
 
 The policy of locating the plant near the chief market 
 centers for any particular commodity as a means of holding 
 a conspicuous place in the eyes of buyers is frequent. The 
 decision to locate a store on Fifth Avenue or on a back 
 street is important. Whether to keep the sales department 
 and the production plant in the same locality, or to sepa- 
 rate them for purposes of sales strategy is often a vital 
 issue. The type of plant to erect for purposes of showing 
 off to visitors is a matter of concern. The use of the most 
 modern machinery may, when it becomes widespread knowl- 
 edge, stimulate demand. In brief, the location of the plant, 
 and its whole process of production, has definite relations 
 to the strategy of creating demand. 
 
 Style of Product 
 
 The manufacturer, and often the retailer, have to decide 
 whether to offer a certain commodity in bulk or in pack- 
 ages. The fineness of quality must be decided upon. The 
 color and shape and style of the commodity will all influ- 
 ence demand. "Whether to emphasize beauty of construc- 
 tion or durability will be a problem. Size of commodity 
 units, methods of wrapping, standardization of quality and 
 appearance, form of brand or trade mark, — these are but 
 a few of the considerations which enter into demand crea- 
 tion for the product. The satisfaction which consumers 
 find in the use of an article, and the appeal which it makes 
 to their minds or to their whims, determine whether they 
 will want to buy again and whether they will advise their 
 friends and neighbors to buy. A distinct tendency in 
 recent years has been to prepare articles in attractive pack- 
 ages, cans, containers or wrappings. Even though some 
 addition is made to the price, the public appears willing 
 to pay the extra amount for the satisfaction of having 
 goods in sanitary condition, or of standardized quality, 
 or of attractive appearance. 
 
 Service Features 
 
 "The service which properly should accompany a sale 
 is frequently of larger psychological importance to a eus- 
 
Markets — Their Principles and Strategy 299 
 
 tomer thaii the merchandise itself. ' '^ A popular feature of 
 department stores is the service accommodations in the form 
 of rest rooms, writing facilities, musical entertainment, and 
 restaurant accommodations. When a person buys an electric 
 washing machine, or an automobile, or a gas range, it is 
 of the utmost importance that the buyer shall not merely 
 receive the article, but that he shall be shown how to 
 operate it, that services shall always be readily available 
 for repairs, that if at any time the buyer experiences 
 trouble in using the article, the services of the seller or 
 manufacturer shall be available to aid him in correcting 
 the difficulty. The courtesy of the company in render- 
 ing such services, and its ability to make the customer 
 feel that he has been excellently and helpfully treated 
 throughout the transaction have results measured in the 
 good will of the customers and an increased demand for the 
 article. 
 
 Advertising 
 
 What a buyer wants is largely a matter of his psychol- 
 ogy, and advertising is a policy of creating wants and de- 
 sires by the application of psychological principles to the 
 ways of the market. "Psychology, the modern world has 
 learnt, is the chief factor in salesmanship. . . . How to 
 create a market . . . how to emphasize points of difference 
 or superiority between one's own goods and those of com- 
 petitors, how to create new vogues — ^those are the difficul- 
 ties that need the greatest ingenuity to overcome."^ The 
 annual expenditure of the United States for advertising 
 is put at about $1,300,000,000. This gigantic expense is 
 held by business men to be worth while because it creates 
 demand and sells goods which could not otherwise be dis- 
 posed of at so profitable a selling price. The strategy of 
 creating demand has developed a technique of its own, 
 also a body of economic and psychological principles. And 
 so great have become the intricacies of the technique and 
 
 1 J. G. Frederick, "The Great Game of Business," p. 78. 
 
 2 C. F. Higham, "Scientific Distribution," pp. 42-105. 
 
300 Markets — Their Principles and Strategy 
 
 the principles, that advertising, at its best, requires special- 
 ists and experts in that field. Large corporations usually 
 maintain advertising departments, and the economic com- 
 munity is flooded with special companies virhich devote 
 their energies exclusively to the handling of advertising 
 for business concerns who have something to sell. 
 
 Advertising psychology involves an appeal to the domi- 
 nant human instincts. As explained by H. L. Holling- 
 worth, "From the point of view of the advertiser, the im- 
 portant thing is if an appeal can but touch off one of these 
 instinct mechanisms it is sure of at once possessing atten- 
 tion, power, interest, imagery, association and memory 
 value, and is extremely likely to set up strong response. 
 And the more universal the instinct, the greater the like- 
 lihood of its effectiveness. . . . Twenty years ago adver- 
 j tisements failed to recognize the specific character of in- 
 stincts; appeals tended to be of a vague, generalized sort 
 which in our day would pass unobserved by a busy public. 
 But the present practice is more and more to recognize 
 the specific instinct as a basis of appeal, and to concen- 
 trate the appeal strongly on a single instinct rather than 
 to distribute it among many."^ Advertising attempts to 
 guide the instinct wants of men along desired channels by 
 observing the psychological laws of catching and holding 
 attention, of the association of ideas, of attracting and sus- 
 taining interest, of imagery and sense stimulus, of habit, 
 imitation, sympathy and suggestion. The greater part of 
 advertising does not present a chain of reasoning, a mass of 
 logic, or a fund of evidence and proof. It works upon the 
 instinctive and emotional nature of people by the process 
 of suggestion. This view of human nature is a primary 
 faith in the mind of the advertising expert. "While tradi- 
 tion regarded man as wholly logical, the modern concep- 
 tion, as already intimated, makes him largely a creature of 
 suggestion. Man has been called the reasoning animal, but 
 he could with greater truthfulness be called the creature 
 of suggestion. He is reasonable, but he is to a greater ex- 
 
 1 H. L. Hollingworth, "Advertising and Selling," pp. 239-240. 
 gee, also, pp. 284-285. 
 
Markets — Their Principles and Strategy 301 
 
 tent suggestible."^ By properly putting certain pictures 
 and statements about a commodity before the eyes of the 
 public, and by repeating the picture, or a catch phrase or 
 a selling point hundreds and thousands of times, the ad- 
 vertiser is able to crystallize in the mind of the buying 
 public a spontaneous desire to buy. The new want has 
 the force of demand in the market, and is a genuine 
 influence in determining price factors and the relation- 
 ships of supply and demand. 
 
 The media for creating this new demand are various. 
 Newspapers, magazines, house organs, company bulletins, 
 circular letters, electric signs, billboards, posters, street- 
 car cards, window displays, catalogs, souvenirs, — such are 
 some of the main channels for circulating the advertis- 
 ing appeal. Each medium has special advantages for 
 certain forms of advertising and certain forms of goods. 
 The relative advantage of each form and the relative 
 effectiveness of different kinds of advertising copy are 
 not left to mere guesswork, but in the larger advertising 
 adventures they are determined by carefully arranged 
 experiments, psychological tests, and devices for measure- 
 ment of the amount of buying power created. Quantity 
 measurement of psychological results is relied upon. 
 
 The broad social effects of advertising are two-sided. 
 Many of the wants created by advertisers divert purchas- 
 ing power toward goods which are of high use and service 
 to consumers. But it is equally true that not infrequently 
 advertising is used to catch the desire of the masses of peo- 
 ple, and to lead them to pour their purchasing power 
 into showy packages, gilded baubles, and inferior commod- 
 ities. Under the spell of advertising new wants spring up 
 without the consumer's realizing whence they came or why. 
 The housewife who, because of advertising, has been won 
 over to the practice of buying household supplies in pack- 
 ages, usually secures a better quality of goods than when 
 she bought in bulk. But "if she buys standardized goods 
 
 1 Walter D. Scott, "The Theory and Practice of Advertising," 
 Chapters IV and XIV. 
 
 See, also, Scott, "Influencing Men in Business," 
 
302 Markets — Their Principles and Strategy 
 
 in standardized packages, she will usually pay from 50 to 
 100 per cent, more than she would if she bought in bulk 
 and did her own inspecting and selecting."^ It is true, 
 too, that although here and there advertising has caused 
 lavish and wasteful expenditure, nevertheless "advertise- 
 ments have made household words of the names and trade 
 marks of all the best commodities. ' ' And it is noteworthy 
 that "the theme upon which all advertising harps is ex- 
 cellence in some shape or form, serviceableness, or good 
 design, or comfort, or utility or beauty."^ The policy 
 of advertising has raised the general standards of consump- 
 tion in terms of cleanliness, quality, sanitary features, and 
 artistic appearance. Hence, although there is both whole- 
 some advertising and vulgar advertising, the preponderant 
 effect of a decade of intensive advertising is in the direc- 
 tion of higher standards of demand and a more versatile, 
 though often extravagant, consumption. The most hopeful 
 means of eliminating vulgar and unsocial demand is not 
 to eliminate advertising, but to raise the standards of ad- 
 vertising, morally, socially and artistically. Fortunately, 
 the most powerful advertising concerns in the country are 
 exerting their influence steadily toward that goal. 
 
 Sales Management 
 
 The conditions of the market require that a corporation 
 carefully organize the selling end of its activities with a 
 view to bringing together all of the factors which affect 
 sales and demand into a single, smoothly working unit. 
 The typical modem corporation maintains a sales depart- 
 ment, which helps to correlate production with sales, and 
 integrates all of the separate parts of sales strategy into 
 a scientific selling organization. A major function of any 
 sales department is to make people want to buy goods. 
 To this end, the sales manager and all those under him 
 take the aggressive in a campaign to create an adequate 
 demand. The measure of success for sales management is 
 the volume of sales. Sales come about, not by waiting for 
 
 1 T. N. Carver, "Principles of Political Economy," p. 205. 
 2C. F. Higham, "Scientific Distribution," pp. 54-61. 
 
Markets — Their Principles and Strategy 303 
 
 consumers to hunt out the stores and factories and to 
 go in search for goods, but by going out into the market 
 and hunting out consumers, and persuading them to buy 
 the goods. No sales manager would in normal times think 
 that he had begun to perform his duty if he pursued a 
 policy of watchful waiting for custom.ers to come to him to 
 buy. It is his duty to put the suggestion into the minds 
 of possible buyers, to bring to bear on them the full force 
 of the personality of trained salesmen, in short, to create 
 sales. 
 
 There are salesmen of raw material to manufacturers 
 of manufactured material to dealers, jobbers, wholesalers 
 of machinery to producers; of finished goods to retailers 
 and of retailers' stocks to final consumers. More and 
 more, good salesmanship all along the line is being consid- 
 ered an indispensable economic factor. More care is being 
 paid to the selection of salesmen, and scientific tests and 
 intelligence tests are being extended as a means of selecting 
 men who have the most native ability in persuading peo- 
 ple. Psychological qualities of persistence, force of per- 
 sonality, initiative, alertness, sociability, and aggressiveness 
 are at a premium in salesmanship. Native aptitude for 
 selling is not however all that the salesman needs. He 
 must receive also a training in the technique of selling. 
 Large corporations maintain training schools in which 
 they drill and educate their salesmen in the science of gen- 
 eral selling principles and in the art of selling the particu- 
 lar commodity or service of that corporation. From time 
 to time, salesmen are brought together in conventions, and 
 are inspired and instructed by lectures, charts, pictures 
 and conferences. In addition to training salesmen, mod- 
 ern corporations surround them with incentives to maxi- 
 mum selling effort by the use of prizes, bonuses, quotas, and 
 contests. Instincts of rivalry, display, or pugnacity are 
 strongly aroused; financial incentives are vigorously en- 
 couraged ; the desire for power and successful achievement 
 is sustained by the ever-present expectancy that when a 
 salesman makes good consistently, he will receive promo- 
 tions and salary increases. In most lines of salesmanship, 
 
304 Markets — Their Principles and Strategy 
 
 the financial rewards of hard and successful work are con- 
 monly higher and quicker than are the rewards for work 
 requiring a similar length of apprenticeship in other 
 branches of business. 
 
 The crucial test of salesmanship is the interview with a 
 prospective buyer. The salesman's task is to create de- 
 mand in the potential buyer, and to convert that demand 
 into an actual sale. "The creative type of salesman . . . 
 is often told that the customer is not interested and does 
 not see the need for the goods. The creative salesman 
 then helps to educate the prospect to appreciate how he can 
 profit by accepting the offering made."^ He attempts to 
 approach his prospect often by indirect conversation, about 
 sports if the buyer is a lover of sports, or about a hobby 
 perhaps which he knows of in the buyer's make-up. He 
 endeavors to observe the favorite convictions of the buyer 
 and to utilize them in talking up the goods which he has 
 to sell. The habits, notions, whims, prejudices and eccen- 
 tricities of the prospect are sought for by the tactful 
 salesman, and played upon in the interest of making the 
 sale. A leading authority on salesmanship advises, "The 
 principal qualification of salesmanship is ability to close. 
 , . . Watch for the point when the resistance of your pros- 
 pect ceases. This is commonly called the 'psychological 
 moment'." Also the instructions read in such phrases as: 
 "Subtly make the prospect feel," "Become politely impa- 
 tient," throw out "a delicate question," and take the order 
 for granted.^ The sales department has justified itself 
 if, by all the arts of salesmanship, it can sell the goods to 
 buyers. That means arousing demand where none existed 
 before, or redirecting demand into new channels, or adapt- 
 ing new goods to old demands. Good salesmanship sells 
 more goods than would be absorbed without aggressive 
 creation of demand in these ways, and affects in the most 
 profound manner the meaning of demand in the supply 
 and demand equation. Demand is not something which 
 comes to him who waits ; demand must be coaxed and sug- 
 
 ij. G. Frederick, "Modern Sales Management," pp. 262-268. 
 2 JUd., pp. 262-268. 
 
Markets — Their Principles and Strategy 305 
 
 gested and argued and cajoled into being. It must be 
 manufactured by the wit and genius of men born with 
 the gift of persuasion. Only by that road is high business 
 success nowadays attained.^ 
 
 Guidance of the Ratio Between Supply and Demand 
 
 It has already been emphasized that neither supply nor 
 demand is an absolutely fixed and unalterable factor, but 
 that each is subject to manipulation, strategy, habit, cus- 
 tom, prejudice, and scientific guidance. It follows that 
 the relationships between supply and demand are simi- 
 larly subject to the tactics of ingenious guidance, and to the 
 ties of blind tradition. From the beginning of produc- 
 tion to the end of consumption, this process of adjustment 
 is under way. As the English economist, Alfred Marshall, 
 remarks, ' ' Production and marketing are parts of the single 
 process of adjustment of supply to demand."^ 
 
 This adjustment requires that producers and distribu- 
 tors should forecast intelligently the possible demand. The 
 bulk of goods are produced before the producers know 
 for a certainty what consumers will pay for them. In other 
 words, the bulk of production is based upon a scientific 
 estimate as to what the demand is most likely to be. As 
 Marshall says, "The constructive trader . . . aims high, 
 and sees far; he is constantly forecasting future develop- 
 ments of demand. ' ' ^ Smaller concerns are more apt to 
 have their eyes glued to immediate contracts of sale, and 
 to produce without a long-range view of the market. Such 
 a branch of production as agriculture has a large element 
 of climate and weather in the factors which determine its 
 volume of production. But in such a branch of produc- 
 tion, the middlemen, who buy the grain from the farmers, 
 the speculators and the trade boards, calculate ahead and 
 adjust the price in a way which relates the present or ex- 
 pected crop supply to an estimated demand long in the 
 future. 
 
 1 See H. D. Kitaon, "The Mind of the Buyer." 
 
 2 "Industry and Trade," p. 181. 
 ilUd., p. 47. 
 
306 Markets — Their Principles and Strategy 
 
 The control of supply may take place, and very frequent- 
 ly does, through the common opinion of separate business 
 men in any line of industry who have access to a com- 
 mon stock of market information. The community of in- 
 terest which prevails among producers and distributors 
 of shoes or clothing or wheat and the influence of fairly 
 uniform market news upon their individual judgment, 
 commonly leads to an unconscious uniformity, or near 
 uniformity, of opinion as to what the future demand will 
 be and what the supply should be to meet that demand. 
 Uniformity of business policy in gauging the amount that 
 should be produced may thus be arrived at without mo- 
 nopolistic action or coUusion among the major concerns in 
 a given line of industry. As one authority explains, "It 
 must be made clear that control of supply is and remains 
 a very different thing from monopoly, which is only an ex- 
 treme form of it. Some measure of control is necessary 
 in every form of production ; but control of supply to this 
 degree is not always a conscious effort, it is more often 
 an automatic and unconscious effort amongst a whole 
 group, the stimulus to which is received by each individ- 
 ual of the group separately and distinctly from the fluctua- 
 tions of price in his own particular section of the mar- 
 ket."^ 
 
 The great stabilizer of adjustments between production 
 and marketing, between supply and demand, is adequate 
 market news. Crop reports, production statistics, interna- 
 tional trade and production figures, — these are some of the 
 more immediate kinds of market news. But in the larger 
 sense of the word, all news is market news. Every politi- 
 cal event, every religious event, every educational event 
 sets in motion waves of demand, be they large or small, 
 which affect market relations. Every item of news in a 
 newspaper from the first page to the last is market news, 
 and significant for all those whose livelihood and fortune 
 depends upon successful adjustments between supply and 
 demand. A number of Government Bureaus are engaged 
 constantly in supplying proper market news. The Bureau 
 iDiblee, "The Laws of Supply and Demand," p. 144. 
 
Markets — Their Principles and Strategy 307 
 
 of Crop Estimates gathers statistics on the staple crops, 
 corn, cotton, wheat and oats. The Bureau of Markets 
 develops reports on other food products. The Bureau of 
 Foreign and Domestic Commerce gives statistics bearing 
 on international markets. The United States Geological 
 Survey presents data having to do with mineral supplies. 
 An International Agricultural Institute, with headquarters 
 in Italy, gathers facts on world agricultural production.^ 
 Private agencies collect statistics on all phases of the mar- 
 ket, and sell the facts or give them to the market com- 
 munity. All of these facilities for trade information are 
 helpful in giving all parties in the market the same knowl- 
 edge of facts. The Federal Reserve Board publishes regu- 
 lar bulletins dealing with finance, production and trade. 
 The Federal Government announces in 1921 that a greater 
 unification of government news agencies is under way, and 
 the projected centralization of market news facilities will 
 undoubtedly work in the direction of greater harmony in 
 adjusting supply to demand. 
 
 But all such news would be of little avail were it not 
 for the facilities of modern communication. Market news 
 travels around the world by wireless or cable, and per- 
 meates every nook and cranny of a modern country by 
 virtue of the telephone and telegraph, and of the mail 
 system. "Adequate overseas communication is as impor- 
 tant as ships and foreign banks to successful trade. "^ 
 Nothing would reduce the whole market institution to col- 
 lapse or chaos quicker than a destruction of modern elec- 
 tric communication. Napoleon's military dictum that 
 "Time is everything" applies with equal force to market 
 news. Telephone, telegraph, wireless, cable, and post of- 
 fice are the controlling factors in the dissemination of mar- 
 ket intelligence. Traders and producers buy and sell in 
 the produce exchanges and the speculative centers with 
 startling rapidity because of the flashes of news with 
 which electricity supplies them. This quick and univer- 
 
 1 See, also, Annals of the Americam Academy of Political and 
 Social Science, Vol. 94, pp. 100-160. 
 
 2 Duncan, "Marketing," p. 215, 
 
308 Markets — Their Principles and Strategy/ 
 
 sal access to important market news enables all business 
 men to base their business policies upon common knowl- 
 edge. Hence market news tends to organize and stabilize 
 the market along uniform and common channels. 
 
 In the guidance of the relations between demand and 
 supply, modern speculation plays a highly important part. 
 The speculators are large scale buyers of products, who 
 make their purchases because they have estimated thalj 
 demand some time in the future will enable them to sell 
 at a profit. The speculative community feeds out the total 
 supply gradually and by- small degrees, for if the whole 
 supply of a commodity, wheat for instance, were thrust 
 upon the market instantaneously, consumers could not take 
 up the supply. Gambling, whether on the market or else- 
 where, is not to be defended.^ But speculation, which 
 "tends to increase the supply of things where and when 
 they are likely to be most wanted, and to check the supply 
 of things where and when they are likely to be in less ur- 
 gent demand," is of the utmost service in keeping the 
 adjustments of supply and demand gradual and smooth.^ 
 Speculation which interprets market news as only shrewd 
 and brilliant experts can interpret it, and buys and sells 
 the country's or the world's supply of a commodity at 
 times and prices which maintain a steady flow of goods 
 toward the consumers who want and need them, is a 
 force for equilibrium and poise in the market. Speculation 
 connotes in the popular mind hazard and risk on a gigantic 
 scale. It is true that speculation entails enormous risks, 
 but the risks are not created by speculation. The risks 
 exist already. The risks of adjusting local, national and 
 world supply in any commodity to local, national, and 
 world demand, exist from the very nature of the circum- 
 stances.^ Speculation concentrates the risks of that adjust- 
 
 1 In August, 1921, Congress passed a law regulating speculation 
 and the exchanges. The law restricts gambling features of dealing 
 in futures, restricts false market information, and aims to prevent 
 market manipulation. 
 
 2 A. Marshall, "Industry and Trade," p. 253. 
 
 3 H. C. Emery, "Speculation in the United States," p. 141. "Specu- 
 lation consists in assuming the inevitable economic risks of changes 
 in value." 
 
Markets — Their Principles and Strategy 309 
 
 ment, but it does not create them. Take away speculation, 
 and the risks would still exist. But they would be scat- 
 tered, broadcasted among hundreds of thousands and mil- 
 lions of people who have not the genius to shoulder the 
 risks effectively. The speculator concentrates on his 
 shoulders the natural risks of production and marketing, 
 and is able to handle the risks efficiently because of his 
 superlative genius for absorbing and interpreting market 
 news, and of making forecasts, with scientific accuracy and 
 on a gigantic scale, of the future market needs of the con- 
 sumers of the world. The less difficult adjustments can be 
 made by the interpretation of market news which the ordi- 
 nary man in the market is able to make, and remarkable 
 uniformity of action and judgment is arrived at in this 
 commonplace way. But the greater and more intricate 
 adjustments between supply and demand can be made 
 smoothly only by men who are able to assimilate the vast 
 amount of data on world markets and who are willing 
 to shoulder the concentrated risks of speculation in the 
 hope of making large profits. 
 
 Guidance of the ratio between supply and demand 
 would be impossible under the highly specialized system 
 of modern production except for the storage facilities which 
 have developed in recent years. Goods cannot be used as 
 fast as they are produced. Huge quantities are produced 
 long distances from the final consumers, and facilities must 
 be available to store the goods until gradually they can 
 be shipped out to buyers scattered everywhere. Food sup- 
 plies, such as meats, fruits or vegetables, would perish be- 
 fore they could be consumed were it not for modem re- 
 frigeration and cold storage. Grain elevators are indis- 
 pensable for storing the grain crop of the country until 
 it is ready for the mills. Chicago alone has grain elevators 
 with a capacity of about 45,000,000 bushels. Seasonal in- 
 dustries require warehouse and storage facilities to carry 
 their goods over from periods of surplus production to 
 periods of consumption. The coal industry has a long 
 period of unemployment each year primarily because stor- 
 age facilities are inadequate, and if consumers fail to buy 
 
310 Marhets — Their Principles and Strategy 
 
 their winter supply during the summer months, the mines 
 must close down during the period of slack buying. There 
 are no facilities as yet for adequate storage of surplus 
 production until the winter demand gains headway. Ware- 
 houses for general merchandise, cotton warehouses, wool 
 warehouses, tobacco warehouses, cold storage, and stock 
 rooms are all of indispensable service in the adjustment of 
 supply gradually and smootlaly to demand. Storage facili- 
 ties enable the men in the market to level out the supply 
 over a period long enough to make possible a proper adapta- 
 tion to demand. Storage is as fundamental in modem mar- 
 ket organization as transportation or communication. It 
 performs a necessary function in the great institution of 
 buying and selling, and is indissolubly related with the 
 other parts of the market mechanism. 
 
 The various agencies in guiding the ratio between supply 
 and demand do not always act under free and easy com- 
 petition between man and man. In fact, perfect freedom 
 of competition is the exceptional rather than the typical 
 fact in the market organization. In almost every branch 
 of buying and selling, large or small elements of monop- 
 olistic control creep in. Superior access to choice bits 
 of market information may give insiders an advantage. 
 Occupation of strategic centers in an industry, such as 
 refrigeration in perishable products, may give the occupant 
 disproportionate influence over market conditions. In each 
 branch of industry, there is usually a single trader or pro- 
 ducer, or small group of them, who, by dint of the struggles 
 of the past, and their historic position in the industry, or 
 for other reasons, loom up as major factors in that in- 
 dustry. "As their position is so responsible, their con- 
 trol of supply is less automatic than with small traders, 
 and becomes a conscious estimating of market tendencies. 
 They become the brains of the trade and to a large extent 
 they fix the initial prices in any market, thereby exercising 
 considerable influence."^ The trade associations in many 
 branches of industry furnish an opportunity for collusion, 
 among certain parties, who can then exert an undue in- 
 iDiblee, "Laws of Supply and Demand," pp. 145-146, 
 
Markets — Their Principles and Strategy 311 
 
 fluence upon price adjustments in that trade. Then, of 
 course, there exists here and there, a fairly full-fledged 
 monopoly, under which men hoard foodstuffs in order to 
 curtail supply and force prices up, or corner a commodity, 
 or restrict output, or discriminate unfairly against out- 
 siders. In many forms and degrees, monopolistic control 
 tends to find some place in the market organization. Hence 
 it is illusory to base a study of the market upon the funda- 
 mental assumption of free competition. Imperfect com- 
 petition is the rule, and freedom from any sign or degree 
 of monopolistic interest is the exception. 
 
 Variations from the General Principles of the Market 
 
 The principles of market organization which have been 
 outlined are not invariable quantities. They do not explain 
 all market phenomena, and not infrequently market ten- 
 dencies appear which seem to indicate directly the opposite 
 of the general ruling principles. Generally, a rising price 
 will induce fewer purchases, but when the rumor is extant 
 that the early increases in price are a sign that prices may 
 rise still higher and probably remain there for some time 
 thereafter, the effect of the rising price is likely to be an 
 increased demand and larger immediate purchases. Buyers 
 calculate that they would do better to buy quickly, even 
 though the price has ascended, than wait in vain until 
 prices have gone still higher. To take another type of case, 
 retailers often find that buyers refuse to buy goods which 
 are priced low, because they have the fear that low price 
 means poor quality. Low price does not tend to in- 
 crease demand when buyers acquire the notion that the 
 low price is the sign of an article which is not worth buy- 
 ing at any price. In accord with the same market psychol- 
 ogy, a sharp slump in prices is apt to bring what is known 
 as a glut in the market. Stocks of goods cannot then be 
 sold at any price. Virtually no buying takes place, and the 
 market is dead. This glut occurs in spite of lowered prices. 
 Commodities may waste and decay, crops may rot on the 
 ground, for no price, however small it may be, will arouse 
 effective demand among potential buyers. Another type 
 
312 Markets — Their Principles and Strategy 
 
 of exception to the general working of market principles 
 is the well-known fact that many articles, especially new 
 ones, must be put on the market at a fairly high price or 
 there wiU be practically no demand at all. Certain brands 
 of tea and tobacco, for example, are reported to have been 
 tried out in the market at moderate prices and to have met 
 with a negligible demand. Thereafter the same grade of 
 commodity, when given a fancy name and a trade brand, 
 and advertised as an aristocratic commodity, and when 
 tagged with a high price, has aroused a large demand and 
 brought a large volume of sales. 
 
 Still another type of exception, and one which has the 
 greatest social importance, is found in the fact that in- 
 creased demand for a commodity may temporarily increase 
 price, but in the long run, decrease price. This takes place 
 when increased demand evokes large scale production, and 
 large scale production cheapens production costs. Ameri- 
 can industry has been particularly ingenious in developing 
 quantity production at low unit cost. The chains of five 
 and ten cent stores over the country give numerous ex- 
 amples of articles which formerly sold at fifty cents or 
 more, but which are now sold within the ten cent maximum 
 because the stores can order them in such vast quantities 
 that they can be produced cheaply by means of automatic 
 machinery.^ But none of these types of exceptions occurs 
 on so vast a scale as the exceptions found in the state of 
 consumers' demand during the various stages of business 
 cycles. During a period of prosperity, with prices rising, 
 people engage in what seems at times an orgy of extrava- 
 gant buying. A kind of social craze gets possession of men's 
 minds, and there is a sort of herd mania to buy, buy, buy. 
 People who can least afford expensive goods often become 
 the extremists in the movement, and common laborers be- 
 come notorious for lavish expenditure for silks and satins, 
 fancy food and fancy clothes. Eising prices are no de- 
 terrent. The gregarious mood buys anyhow. After such 
 a storm of buying has spent itself, there is wont to occur 
 what is termed often a "consumers' strike." Prices fall, 
 xA. Marshall, "Industry and Trade," pp. 185-186. 
 
Markets — Their Principles and Strategy 313 
 
 but people refuse to buy. The mass movement swings from 
 one extreme to another. Demand shrinks in spite of falling 
 prices. It is in the air. A herd impulse toward economy, 
 stinting, thrift holds sway. Neither the era of extrava- 
 gance nor the era of stinting is a rational phenomenon. 
 The only clue to it is the gregarious instinct and the so- 
 cial psychology which received treatment in the first sec- 
 tion of this volume. 
 
 The exceptions to the principles normally dominant in 
 market processes are, primarily, temporary exceptions. 
 They are occasional diversions, for the time being, from the 
 worn and beaten paths of market laws. The fundamental 
 principles of market organization are long run principles 
 and pivotal principles. This explanation is necessary in 
 order that students may have clearly in mind the pro- 
 portions and relations between the fundamental market 
 principles and the seeming exceptions to them. 
 
 The Mechanism of the Market 
 
 The market is an institution which involves not merely 
 an underlying social psychology and a set of operating 
 principles, but also a mechanism of purchase and sale. 
 
 Some features of this mechanism have already been 
 described and interpreted. Transportation, communica- 
 tion, storage, credit and banking, — each of these is an in- 
 dispensable part of the grand clockwork of the market 
 mechanism. Take any one of these integral parts of the 
 market mechanism away, and the whole construction would 
 lie motionless and helpless. These particular parts of the 
 market mechanism are explained elsewhere in this volume 
 and there is up need to enter into further detailed descrip- 
 tion of these parts of the mechanism at this point. 
 
 Market Mechanism Geographically Considered 
 
 Other parts of the market mechanism need, however, to 
 be considered, and first of aU, the mechanism may be looked 
 at from a geographical viewpoint. From one geographical 
 Standpoint, it is useful to realize that there are local markets, 
 primary markets, and terminal markets. Ldcal markets 
 
314 Markets — Their Principles and Strategy 
 
 are illustrated by the loeal buying agencies for farm 
 products. Local stores buy part of the local product and 
 sell it for local consumption. Local commission merchants 
 or representatives of large dealers from central markets, 
 buy the bulk of the produce and transport it where desired. 
 The price paid the producer will be gauged ordinarily by 
 the dealer's calculations based upon the price procurable 
 in a primary market, with proper allowances for shipping 
 cost and dealer's profit. The large meat packers estimate 
 the price at which meat can be sold to dealers and con- 
 sumers, and then figure the price which they can afford to 
 offer stock raisers in each local market for their meat ani- 
 mals.^ Local cotton prices paid to growers are largely 
 calculated from prevailing prices on the Liverpool cotton 
 market. In such commodities, the producer must look out 
 for his costs as best he can. Price determination starts 
 from a calculation of what the goods can be sold for in the 
 big markets, and local prices in such lines "are often de- 
 termined by deductions from the central market price. "^ 
 Local prices of other commodities, of coal for example, 
 are primarily determined by starting with the cost of 
 production, and adding a certain profit. Small and in- 
 dependent producers are apt to be in a position where 
 they have to accept whatever price is set by large dealers. 
 Their local prices are largely determined for them by out- 
 siders over whom they have scant control' and whose rea- 
 sons for price offerings they cannot hope to understand. 
 
 Primary markets are the concentration points for buyers 
 and sellers in each particular line of goods. Chicago is a 
 center of food products. "Wool markets head up in New 
 York, Boston, Philadelphia, Portland and San Francisco, 
 but not in Chicago. Iron and steel concentrate in such 
 cities as Pittsburgh and Birmingham. Each branch of 
 goods has its unique central markets where large dealers, 
 wholesalers, jobbers, speculators come together and buy 
 and sell in large lots. Each branch of goods has a history 
 
 1 G. E. Putnam, Journal of Political Economy, Vol. XXIX, pp. 297, 
 663-675. 
 2 Duncan, "Marketing," p. 230. 
 
Markets — Their Principles and Strategy 315 
 
 of its own in developing its individual market centers, and 
 a set of traditions, customs, habits, and folkways clusters 
 around the processes of each center. 
 
 The terminal markets likewise vary for each separate 
 type of goods, but ordinarily are located near the sea- 
 board or national border. They are the great buying cen- 
 ters for international traders. They have developed in cer- 
 tain great trading centers through a considerable period 
 of history, and can be understood in each case only in light 
 of this historical background. 
 
 The economics of market geography should also be looked 
 at from the viewpoint of retailers, and thought of in terms 
 of city, suburban and country districts. The great depart- 
 ment stores, chain stores, and individual stores concen- 
 trate in the larger cities of the country. The great centers 
 where the consumers' purchasing power is spent lie in the 
 shopping districts of such cities as Boston, New York, 
 Philadelphia, or Chicago. Fancy styles and wide va- 
 rieties for selection are prominent features of the shopping 
 sections of the city centers. In the suburban districts and 
 the rural districts, more relative prominence goes to con- 
 sideration of serviceability of goods and stability of styles. 
 Different occupational conditions in the various sections 
 affect the kinds and quantities of goods demanded. Age 
 and sex of population in various trade regions affect the 
 standards of consumption. 
 
 Market Mechanism Functionally Considered 
 
 The market mechanism should also be considered from a 
 functional standpoint.^ Varying types of market organiza- 
 tion have come into being to perform certain needed func- 
 tions. Wholesalers, jobbers, commission men, brokers, re- 
 tailers perform functions of indispensable value, and play 
 necessary parts in the whole market mechanism. Market- 
 ing functions are likewise performed by bankers, transpor- 
 tation companies, storage companies or insurance concerns, 
 but we are here concerned particularly with interpreting 
 
 1 See A. W. Shaw, "Some Problems in Market Distribution." 
 
316 Markets — Their Principles and Strategy 
 
 the meehanism of those groups popularly known as "the 
 middlemen." 
 
 Middlemen are those people who perform buying and sell- 
 ing functions in the process of getting goods from pro- 
 ducers to consumers. They are specialists in purchasing 
 goods from producers or owners, and in distributing them 
 toward the consumer. The bridge between producers and 
 consumers is often a long one, and the risks of crossing it 
 are many. Middlemen take the risks and control goods 
 in the journey from maker to user, for the purpose of mak- 
 ing a profit. A wholesaler buys large lots of commodities, 
 usually from a variety of producers. He collects goods 
 from scattered sources, and in turn sells them to other 
 middlemen nearer to consumers. A producer of grocery 
 products may have no facilities for getting his products 
 into the hands of hundreds of thousands of retailers the 
 country over. The wholesaler, however, has built up an 
 organization for that specific purpose, and so when he buys 
 the grocery products from the producer and distributes 
 them to the multitudinous retail stores of the country 
 through a trained sales force, he helps the producer to land 
 his goods in the final market, and he helps the consumer 
 to procure the goods produced by the remote and unknown 
 manufacturer. Because of his middle position, the whole- 
 saler is in a position to analyze carefully the output and 
 capacity of producers, and the wants and demands of con- 
 sumers. He is in control of the mechanism which harmo- 
 nizes makers and users of goods. A typical retail grocery 
 store, carrying in the neighborhood of 1000 brands of 
 goods, stands in need of a wholesale dealer who carries, 
 through a single office, orders for practically any of the 
 thousand different brands. The wholesaler buys these 
 many brands from scores and hundreds of producers, as- 
 sembles them, develops suitable storage facilities, sorts, 
 grades or packs them, and provides a suitable selling ma- 
 chinery for placing them in the hands of the retailers of 
 the country. 
 
 Although this in general states the' ordinary mechanism 
 of getting goods from producers to consumers, there are 
 
Markets — Their Principles and Strategy 317 
 
 several important variations. Many manufacturers prefer 
 to ignore outside middlemen entirely and to dispose of their 
 goods direct to the retailers. Some manufacturers establish 
 their own retail stores, and dispose of part or all of their 
 products through these company-controlled stores. A few 
 manufacturers attempt to eliminate both wholesaler and 
 retailer and sell direct to the consumer. Some retailers, 
 such as department stores, prefer commonly to buy direct 
 from the manufacturer in large lots. The mechanism varies 
 widely with each separate line of goods. For instance, it 
 is estimated that about 75 per cent, of all furniture is sold 
 by the manufacturer direct to the retailer, whereas about 
 90 per cent, of groceries go through the wholesalers' chan- 
 nels."^ Each branch of industry has a distributive mechan- 
 ism with many individual peculiarities which have grown 
 up over a considerable period of history, and these peculi- 
 arities of each branch are just as important to note as the 
 fundamental common characteristics of the market mech- 
 anism in general. 
 
 Within recent years, new mechanisms for retailing have 
 grown into prominence. Department stores, chain stores, 
 and mail order stores are the chief types of these new re- 
 tailers. The economies of busdng goods in large lots direct 
 from manufacturers give these new type retailers some- 
 thing of an advantage in competition with ordinary retail- 
 ers. The use of extensive advertising, of standardized 
 goods, of rapid turnover, and of scientific principles of 
 management has enabled these new types of retail mech- 
 anism to win a secure footing in the competitive field. 
 
 In the gap between producers and consumers, the mech- 
 anism of organized exchanges has come to be of vital im- 
 portance. Produce exchanges provide open trading places 
 for perishable provisions such as vegetables, fruits, butter, 
 eggs or poultry. Grain exchanges provide similar trading 
 opportunities for corn, oats, wheat, rye, hay and the like. 
 Special exchanges are maintained for cotton and for coffee 
 and for sugar. To these exchanges come special buyers and 
 
 1 See, for further illustration, Nystrom, "Economics of Retail- 
 ing," pp. 36-40. 
 
318 Markets — Their Principles and Strategy 
 
 traders who are experts in market information, and who 
 buy and sell largely on the basis of their scientific or per- 
 sonal guesses as to what the future prices will be. The 
 conditions of the exchange are regulated and supervised, 
 and buyers and sellers of large quantities of products can 
 come together to match their best judgments on the ques- 
 tion of the future course of prices. Because the dealers on 
 the exchanges are specialists and experts, they bring to 
 bear in the most intelligent way the forces of supply and 
 demand, and the prices prevailing on the exchanges are or- 
 dinarily the best indicators of the shrewdest judgment of 
 competent minds on the future relations between supply 
 and demand. The risk that the judgment of traders will 
 turn out to be wrong introduces a strong speculative ele- 
 ment into their activities, but this very speculative element 
 tends to steady prices by concentrating the risks of the 
 market in the hands of those most able to interpret them 
 and to bear their responsibilities and dangers.^ 
 
 Price Movements in Various Stages of the Market 
 Process 
 
 The prices of the market are unstable matters, and their 
 fluctuations occur in different degrees and at different 
 speeds in the various parts of the market mechanism. Retail 
 prices fluctuate more slowly and less violently than whole- 
 sale prices. During a period of prosperity, wholesale prices 
 rise earlier and faster and higher than retail prices; and 
 during a period of depression and falling prices, wholesale 
 prices fall earlier, and faster, and lower than retail prices. 
 Moreover, prices of raw materials and of producers' goods 
 in the wholesale market tend to fluctuate more sharply than 
 do the prices of consumers' goods. In general, the reason 
 for these broad differences in price movements is found in 
 the fact that producers and wholesalers are more sensitive 
 to changing conditions of supply and demand, are more 
 immediately in touch with market information, and are 
 quick to act in line with that information; whereas con- 
 sumers are slow to realize changed conditions of supply and 
 1 See S. S. Huebner, "Annals," XXXVIII, No. 2, pp. 321-341. 
 
Markets — Their Principles and Strategy 319 
 
 demand, and are influenced in the prices which they are 
 willing to pay more by custom, habit, and inertia. A 
 further explanation is found in the fact that a retailer's 
 stock of goods, if bought just before a fall in prices on the 
 ■wholesale market, must be sold at a price which will allow 
 him a profit. The retailer must figure on the basis, not of 
 what he could buy the goods for now at the fallen whole- 
 sale prices, but on the basis of what he paid for them at the 
 high level previously prevailing. This one-stage remove 
 from the wholesaler makes it natural that the retailer's 
 prices should follow rather than lead those of the whole- 
 saler.^ This tendency of retail prices to lag behind whole- 
 sale prices has been clearly illustrated in the price fall of 
 1920-1921. Official reports of the Federal Government 
 have made it evident tha,t in any number of lines of com- 
 modities, retail prices were still high, weeks and months 
 after wholesale prices had suffered a sharp decline. Such 
 lagging movements of retail prices usually furnish the oc- 
 casion for accusations that retailers are deliberately taking 
 advantage of consumers, and sustaining prices at unreason- 
 able levels for purposes of profit-making. 
 
 Price Policies 
 
 The entire discussion of the institution of market values 
 and prices up to this point carries firmly the inference that 
 all of the factors in that institution are capable of a highly 
 significant degree of guidance and control. However fun- 
 damental the principles of supply and demand may be, 
 nevertheless there is large room within them for ingenuity, 
 strategy and manipulation between buyers and sellers. 
 Hence a realistic study of market prices must give care- 
 ful attention to price policies. Price policies represent the 
 sagacity and shrewdness of the men in the market in their 
 attempts to make profitable adjustments of prices within 
 the limits set by the broad principles of price and value. 
 
 Prices are often thought of as amounts set by laws of 
 supply and demand. While it is true that within limits, 
 prices are set by supply and demand, it is equally true that 
 iW. C. Mitchell, "Business Cycles," pp. 93-134. 
 
320 Markets — Their Principles and Strategy 
 
 ■within limits price policies can bring about new quantities 
 of supply or of demand. Price policies originated by a 
 shrewd man of the market are capable of changing pro- 
 foundly the amount of goods which people will demand. 
 It is imperative therefore, for a balanced view of market- 
 ing institutions, to observe some of the ways in which de- 
 liberately created price policies can and do transform fun- 
 damental supply and demand relationships. Supply and 
 demand determine prices, and, conversely, price policies de- 
 termine supply and demand. 
 
 Price policies may be classified on the basis of their 
 relation to that price level in any branch of goods which 
 is termed the market level. The market level is what the 
 name implies, the prevailing price average in any branch 
 of goods, the general price which obtains throughout the 
 greater part of the market. To the extent that some de- 
 gree of real competition still operates in a particular kind 
 of goods, the general market price for those goods will tend 
 to keep close to their marginal cost of production. It will 
 be remembered that marginal cost of production is the 
 cost which prevails among that fringe of producers of any 
 line of goods whose costs are highest. To the extent that 
 genuine competition asserts itself, it tends to force prices 
 down constantly to a level just about even with the costs 
 of those producers for whom production is so expensive 
 that they can scarcely make ends meet and can scarcely 
 afford to operate their plants. Any further reduction of 
 prices would force them to produce at a loss, and so drive 
 them out of business, and reduce the supply of goods to 
 that amount. But in the modem business organization, 
 perfect competition throughout the market is a rare phe- 
 nomenon. To the extent that privilege, monopoly advan- 
 tage, unfair or imperfect competition, characterize a branch 
 of business, the prevailing market price wiU fail to be driven 
 down to the marginal cost of production. The "normal 
 price" of orthodox economic theory is the price even with 
 the marginal cost of production, and hence "normal price" 
 assumes a fairly full degree of free competition. Inas- 
 much as the day of full and free competition is practically 
 
Markets — Their Principles and Strategy 321 
 
 past, and the new order obtains in which each branch of the 
 market is governed by partial competition and partial 
 monopoly advantages, it is clear that so-called "normal 
 price" has become virtually a myth of free competition 
 theorists. The ordinary market price of the present order 
 is under the influence of association, combination, agree- 
 ment, monopoly, privilege, and co-operation, and so varies 
 somewhat from "normal price," and tends commonly to 
 be somewhat above it. 
 
 A business man in the market looks around him and ob- 
 serves that the going price, the prevailing price for his line 
 of goods, is at a certain level. He can formulate his own 
 price policy along either of three different pathways. 
 First, he can try to put his goods on the market at a price 
 somewhat below the market level; second, he can offer 
 them at the market level; third, he can attempt to dispose 
 of them at a price somewhat above the market level. The 
 deliberate adoption of either of these price policies will 
 have marked consequences upon the basic conditions of 
 supply and demand. 
 
 Below the Market Level 
 
 A new manufacturer entering a branch of business in 
 which the market is already weU occupied will find difficulty 
 as a new-comer in disposing of the full product of his plant. 
 As a means of persuading buyers to break old habits and 
 sever old connections, he may offer to sell at a lower price. 
 His great selling argument will be that his product is just as 
 good as that which sells for more, but the price is cheaper. 
 He appeals to the business judgment of buyers to buy high 
 grade goods at a reduced price. This argument is an effort 
 to undermine the confidence of buyers in a standard brand 
 of product with which they have been made familiar in the 
 past through advertising, salesmanship, or experience. 
 The new article must break down the old wall of buying 
 habits by its appeal of lower price. It is frequent for 
 manufacturers who desire to invade established lines of 
 specialties which are well known in the market by trade 
 marks and brands, to put their new goods, similar in use. 
 
322 MarJcets — Their Principles and Strategy/ 
 
 and purpose, up against the established lines at low prices. 
 The handicap ■which the new goods have because they lack 
 the reputation of the trade-marked brands is overcome by 
 underselling the regular lines of goods. Many middlemen 
 nowadays buy goods in bulk from producers, and put 
 special brands of their own on the goods, and then sell the 
 goods at shaded prices. They are able in this' way to build 
 up a good will for the new articles, through the use of 
 dealers' trade marks, at the same time that they initiate 
 the goods into the regular market by offering them at low- 
 ered prices. 
 
 Other manufacturers invade an established market by 
 offering a grade of goods which is cheaper to make because 
 it leaves off all frills and fancy work, and which appeals to 
 a class of customers who care more for utility than for looks. 
 The plainly made goods can be sold at lower prices than old 
 lines in the market, and hence can draw into the market new 
 groups of consumers who will buy goods of plain style pro- 
 vided only the goods wiU give them the service which they 
 desire. Illustrations would be found in the marketing of 
 cheaper grades of furniture, and of low priced automobiles. 
 The policy of many retail stores, particularly department 
 stores, of dealing in "seconds," is an application of the 
 same general policy. Silk shirts or silk stockings with 
 slight imperfections are offered as just as good to wear as 
 perfect articles, and a great deal cheaper. 
 
 It happens from time to time that manufacturers of long 
 experience decide to expand their sales by adopting a new 
 policy of a price scale below the general market level. The 
 business man who assumes this change of policy has to 
 calculate as carefully as possible the elasticity of the de- 
 mand for his particular kind of product. For some com- 
 modities, such for example as staple foods, lowered prices 
 may increase demand somewhat, but there is a close limit 
 to the amount of food which people can eat, and demand 
 might not extend greatly in response to lowered prices. For 
 other commodities, lowered prices might extend demand 
 enormously. However, even in these branches of goods, a 
 point would be reached at which demand elasticity would 
 
Markets — Their Principles and Strategy 323 
 
 come to a halt. Below that point lowered prices would not 
 call forth a commensurate amount of demand. It is a dif- 
 ficult problem to ascertain for each different commodity 
 where this point lies. Demand elasticity is a fundamental 
 consideration with producers who lower prices for the sake 
 of evoking an increased volume of sales. 
 
 Another variation of the lowered price policy, and a 
 highly significant one, appears in the price policies of many 
 sections of the retail market. Bach retailer in any given 
 community is anxious to draw as much trade to himself as 
 possible, and often the most fruitful means of attracting 
 trade is some form of "cut price" policy. Chain stores 
 and department stores are often able to sell some standard 
 article, or a substitute article, at a cut price, and where the 
 policy can be carried out, it is held to be good publicity. 
 Bargain sales, bankruptcy sales, fire sales, etc., offer fre- 
 quent supplies of goods at sharply reduced prices. Many 
 retailers make it a practice to single out some two or three 
 commodities to be advertised for sale at bargain prices. 
 These "leaders" attract the consumer to the stores, and 
 while the consumer is in the presence of a wide variety of 
 other goods, he is tempted to buy things which he had not 
 contemplated buying when he came to the store. As a rule, 
 of course, what the retailer loses by the cut price on the 
 "leaders," he has to make up at some other point in his 
 business. Hence the seeming immediate advantage which 
 the buyer of the cut price article has, does not reflect a 
 general social gain to all consumers. The cut price policies 
 in the hands of large retail stores, department stores, or 
 chain stores are capable of being used, and not infre- 
 quently are used, to drive small competitors out of busi- 
 ness. 
 
 As a means of combating the vicious effects of cut 
 price retailing when misused, producers of standardized, 
 trade marked goods have widely attempted what is known 
 as "the price maintenance" policy. Under this policy, re- 
 tailers are required to sell goods at standard prices. If a 
 retailer obstinately cuts prices, the producer can thereafter 
 refuse to sell the retailer a further supply of the brand of 
 
324 Markets — Their Principles and Strategy 
 
 goods. This tacit ultimatum which the producer holds out 
 to the retailer has for the most part proved adequate to 
 coerce retailers into oifering the goods to consumers at the 
 standard prices. Although the policy in some respects 
 subjects the retailers to an arbitrary control at the hands 
 of producers, yet at the same time, the retailers are usually 
 assured of a standard price which is high enough to allow 
 for a reasonable rate of profit, and they are relieved of the 
 fear that some powerful retailer in the community may at 
 any moment destroy the trade of the mass of retailers by 
 drawing all purchases of a particular brand of article unto 
 himself, through a vigorously advertised cut price policy. 
 The cut price policy when applied to standardized goods, is 
 capable of serving as a ruthless measure of cutthroat com- 
 petition, and the recent development of price maintenance 
 is a move in the direction of regularizing and stabilizing 
 the retail market.^ Price cutting results in temporary leaps 
 of demand here and there, but price maintenance acts in 
 the direction of an even, organized, steady demand.^ 
 
 A further policy of selling at prices below the general 
 market level appears in the custom of buying at inside 
 prices. This policy occurs most conspicuously in the pur- 
 chases made by retailers from dealers and producers. Re- 
 tailers who can buy in large quantities often demand that 
 the producers shall quote them a special price below the 
 general level. Some manufacturers and dealers graduate 
 their selling prices according to the quantities bought; 
 others give special inside prices to large quantity buyers 
 adapted to the advantages of each particular case. Sales- 
 men often find it necessary to split their commissions with 
 buyers in order to effect sales. Some buyers are quoted 
 
 1 See Nystrom, "Economics of Retailing," Chapter XV. 
 
 2 The United States Supreme Court, in the case of Colgate and 
 Company, decided that it was legal to refuse to sell goods to retailers 
 who would not resell at standard prices. In January, 1922, the 
 Court decided the price maintenance policy of the Beech Nut Pack- 
 ing Company unfair and illegal because it aimed to spy upon cut- 
 rate dealers, to coerce jobbers as well as retailers, and to make a 
 list of "undesirables" to be denied future supplies of goods. The 
 decision was by a flve-to-four vote, and the lines of difference be- 
 tween fair and unfair price maintenance are indistinct. 
 
Markets — Their Principles and Strategy 325 
 
 the regular price, but are given a bonus of extra goods, 
 a form of concession which is the equivalent of an outright 
 price reduction. Concessions in the form of liberal dis- 
 count terms are used to discriminate in favor of certain 
 buyers. All such price discrimination tends to handicap 
 the small, independent retailer, and to give the edge of ad- 
 vantage to the retailers who can buy on a large scale. It 
 is a potential weapon for unfair competition, and because 
 of the possible secrecy in dealing at inside prices, it is a 
 difficult weapon to subject to adequate public control. 
 The forms of public control are as yet indistinct, but the 
 market conditions created by inside price policies are such 
 as to make it important that ways and means be devised 
 for a proper safeguard against their misuse in unfair com- 
 petition. A careful authority has stated: "As matters 
 now stand, the inside-price problem is the most disturbing 
 element in business. More of the evils of unfair trade 
 can be traced to this as a cause than to any other single 
 item."^ 
 
 At the Market Level 
 
 The very fact that there is a general market level pre- 
 supposes that a substantial body of buying and selling 
 is done at that level. Business men who sell at the market 
 level cannot attract trade by arguing that their goods are 
 cheaper than the goods of their competitors. The incentive 
 of cheapness cannot be appealed to. Hence it becomes 
 necessary to build up a large demand by appealing a great 
 deal to non-financial incentives. Just as it has been found 
 that wage workers yield to other incentives than purely 
 financial ones, so it is apparent that consumers are stim- 
 ulated to buy through other incentives than cheapness. 
 The superior quality of the goods, the artistic appearance 
 of packages, the suggestive force of good advertising, the 
 personal selling power of trained salesmanship, — all of 
 these factors aid in building up trade for dealers who are 
 selling at the market level. Good will is capable of de- 
 
 iNyatrom, "Economics of Retailing," p. 299. 
 
326 Markets — Their Principles and Strategy 
 
 velopment by many other means than cheap prices. Ser- 
 vice, courtesy, efficiency, promptness are non-finaucial 
 pathways of creating market reputation, and increasing 
 sales for specially adept dealers. Competitors who wish to 
 increase their sales, but who seU at the market level, rely 
 therefore upon a demand induced by non-financial services 
 and strategies. 
 
 Above the Market Level 
 
 It is a frequent policy nowadays to offer goods at prices 
 which are conspicuously high. When this policy is adopted, 
 the reliance upon a demand created by non-financial tactics 
 is carried to an extreme. Goods priced above the market 
 level ordinarily require heavy advertising, careful sales- 
 manship, and the use of brands and trademarks. People 
 who can be induced to buy expensive brands are wont to 
 pride themselves often on the fact that they secure peculiar 
 excellence and extraordinary service. They enjoy con- 
 spicuous extravagance, and often secure satisfaction from 
 wearing expensive clothes or consuming expensive ftod 
 simply because their friends and rivals will know that the 
 things are expensive. Superior price is a suggestion that 
 the goods are bought by superior people, and the instincts 
 of display, rivalry and self-assertion are particularly vul- 
 nerable to appeals of that sort. Consumers' demand is 
 created for the benefit of dealers who carry luxuriant goods 
 at luxuriant prices, and who boast of the reputation of sell- 
 ing only at top-notch prices. Of course, different classes 
 of people are limited by their various incomes in the ex- 
 tent to which they can succumb to the incentives to con- 
 spicuous extravagance. However, of late, particularly 
 favored members of the groups dependent upon wage in- 
 comes have taken to imitating the more well-to-do classes, 
 and many of them have become notorious for their lavish 
 expenditure on high priced brands of clothes, furniture, 
 foods and the like. The type of appeal which brings about 
 this situation rests substantially upon the use of trade 
 brands. There is no other means by which to single out a 
 particular dealer's goods from the general run of goods, 
 
Markets — Their Principles and Strategy 327 
 
 and attract unusual, permanent attention to them. The 
 tactics of creating demand for high priced goods by the use 
 of advertised brands is mainly a matter of understanding 
 social psychology. Dealers who can cultivate shrewdly the 
 instinctive demands of people who are heavily susceptible 
 to psychological traits of display, prestige, imitation, ri- 
 valry, pride, vanity, ostentation, and suggestion hold a 
 clue to the building of a market for their wares at prices 
 well above the general market level. 
 
 Business Combinations and High Price Policies 
 
 The extremes of the form of price policy just enumer- 
 ated usually appear among the specialties, and only the 
 milder forms usually among the staple necessaries of life. 
 But among both classes of commodities, and, in fact, 
 throughout the market organization from end to end, there 
 is a tendency to the development of forms of trade combina- 
 tion and association which are frequently connected with 
 high price policies. Monopolies are supposedly the most 
 guilty perpetrators of price exactions above a reasonable 
 market level. An examination of some of the price aspects 
 of business combinations, trade associations, and monopo- 
 lies is closely concerned therefore with the whole problem 
 of price strategy and marketing institutions. 
 
 The concentration of industrial and trade control in re- 
 cent years is explained more fully in the chapter on Man- 
 agement. It is important at this point to consider the 
 movement toward business combination primarily from 
 the standpoint of its influences on price policies and market- 
 ing functions. The modern market is neither freely com- 
 petitive nor completely monopolistic. Whichever of the 
 hundreds of separate branches of industry and trade may 
 be chosen for investigation, it is quickly found that there is 
 both an element of competition and an element of monopoly. 
 Partial competition and partial monopoly characterize 
 virtually all fields of trade. Monopoly, therefore, is always 
 a question of degree. The extent to which competition re- 
 mains and the forms which it takes vary strikingly from 
 industry to industry. One hundred per cent, monopoly 
 
328 Markets — Their Principles and Strategy 
 
 and one hundred per cent, competition are equally hard to 
 find. It is always a question of more or less, and the pro- 
 portions vary from month to month and year to year in 
 each field of trade. The nearest approach to full monopoly 
 occurs in such fields of natural monopoly as railroads, pat- 
 ented articles, and municipal water, gas or electricity sup- 
 ply. But even in these branches of natural monopoly, 
 there are limits to monopolistic power, and if these limits 
 do not always appear in terms of potential competition, 
 they then present themselves in terms of public regula- 
 tion.^ After a detailed examination of many forms of 
 business, C. R. VanHise draws the broad conclusion : ' ' The 
 foregoing description of the situation cannot but convince 
 any man who will look the facts in the face that the blind 
 faith that prices are adequately controlled by competition 
 in the United States is no longer justified, if indeed it ever 
 was justified. Unrestrained competition does not as a 
 matter of fact exist for many articles, except to a very 
 limited degree at the present time. Everywhere there is 
 restraint of trade by agreement or combination, either law- 
 ful or unlawful." A comprehensive view of the new eco- 
 nomic situation is given by Woodrow Wilson as follows: 
 ' ' There is one great basic fact which underlies all the ques- 
 tions that are discussed on the political platform at the 
 present moment. That singular fact is that nothing is done 
 in this country as it was done twenty years ago. "We are in 
 the presence of a new organization of society. We have 
 changed our economic conditions absolutely from top to 
 bottom. ' ' 
 
 Monopoly in all forms and degrees is typically char- 
 acterized by a control over prices, and this price control is 
 made possible by control of supply. "A partial monopoly 
 exists," says Carver, "whenever an organization exercises 
 sufficient control over the supply of anything to enable it to 
 fix its prices, even with a narrow zone, independently of 
 competition."^ Concentrated business estimates the price 
 
 lA. Marshall, "Industry and Trade," pp. 394-402. 
 
 2 Carver, "Principles of Political Economy," p. 291. See, also, 
 Ely, "Outlines of Economics," pp. 200-201 ; Haney, "Business Organi- 
 zafeon and Combination," p. 141. 
 
Markets — Their Principles and Strategy 329 
 
 at which a certain quantity of goods can be sold to yield 
 the highest net profit, and proceeds to produce or contract 
 for only that limited supply Large businesses, like small 
 businesses, aim ordinarily to charge "all that the traffic 
 will bear." But large businesses are in a position usually 
 to heighten the figure which "the traffic will bear" by re- 
 fusing to sell the supply which it controls except at its fixed 
 price. If the monopoly uses discretion in setting its price, 
 and avoids overdoing the price-raising policy, it will or- 
 dinarily be successful in selling its goods at the increased 
 figure. In weak monopoly organizations the limits within 
 which monopoly price can be held up are especially narrow. 
 In some of the stronger monopolies, price exactions for 
 short periods of time can often be pushed up surprisingly 
 high. The degree of price control will vary widely from in- 
 dustry to industry, and the variation is in fairly close pro- 
 portion to the degree of control over supply. 
 
 Theoretically, monopoly, complete or partial, should be 
 able to elevate prices, and in the popular mind, monopoly 
 suggests profiteering prices more vividly than anything 
 else. It is a moot question therefore: Has monopoly, as a 
 matter of historical fact, actually raised prices? The an- 
 swer has to be two-sided : some monopolies have taken full 
 advantage of their price fixing powers and have reaped 
 exorbitant harvests; some have effected large savings and 
 economies in production, and have thereby made possible 
 reductions in consumers' prices without themselves suffer- 
 ing inroads upon profits. Some concrete evidence on the 
 issue is available in the studies of J. W. Jenks, based largely 
 upon the findings of the United States Industrial Com- 
 mission,^ and of subsequent government records on indus- 
 try. His reports show the margin between costs and selling 
 prices both before and after monopoly powers existed. 
 This spread indicates whether the public was given full 
 advantage of economies of business combination, and 
 whether prices were maintained for any length of time at 
 
 i"The Trust Problem," Chapter VII. Published, 1900; Revised, 
 1912. 
 
330 Markets — Their Principles and Strategy 
 
 monopoly levels. The following extracts and digests from 
 his conclusions are highly valuable: 
 
 1. Sugar Monopoly. — "The sugar combination has be- 
 yond question had the power of determining for itself, 
 within considerable limits, what the price of sugar should 
 be, low or high, with or without competitors. ... On the 
 whole, the chart seems to make it perfectly evident that the 
 sugar combination has raised the price of refined sugar be- 
 yond the rates in vogue during the period of active com- 
 petition before the formation of the Sugar Trust, and the 
 two competitive periods during its existence." 
 
 "Prom the time of the organization of the Trust in 1887, 
 for twelve or thirteen years the Trust kept the margin high 
 for more than three-quarters of the time. Since that 
 period, the margin, it will be noted has steadily remained 
 considerably higher than during the period of most vig- 
 orous competition in the few years preceding the organ- 
 ization of the Trust, and during the two periods of vigor- 
 ous competition since that time. . . . Although they have 
 made excellent profits during the last few years, the mar- 
 gin certainly during the last three or four years can hardly 
 be said to be abnormal." However, in relation to the gen- 
 eral price level of all commodities, sugar prices are not 
 higher. Prices of other commodities from 1900 to 1914 
 show a greater increase than do sugar prices. "The total 
 result seems to indicate that if the sugar combination in 
 the United States has had any direct influence upon the 
 price of sugar, it has been rather to reduce that price than 
 to increase it." 
 
 2. Petroleum. — "The Standard Oil Trust was formed 
 in 1882. From that time on for a period of eight or nine 
 years, there was only a slight decrease in the margin." 
 From 1892 to 1894, the margin fell considerably lower, and 
 up to 1916, the prevailing margin was not up to the low 
 point of 1894. "Taking the period as a whole, . . . from 
 1900 to date (1916) it will be seen that this great combina- 
 tion, as practically all of the others, seems not to have 
 raised the price of its chief product to an amount that cor- 
 responds to the rise in the price of general commodities." 
 
Markets— Their Principles and Strategy 331 
 
 These facts of themselves do not adequately tell the story 
 of monopoly in petroleum. The dividends paid on the out- 
 standing capital stock were in the neighborhood of 30 to 
 48 per cent, annually, and the charges brought against the 
 Standard Oil Company which resulted in its dissolution by 
 a decision of the Supreme Court in 1911 mentioned "enor- 
 mous and unreasonable profits." The Bureau of Corpora- 
 tions in an investigation in 1904 and 1905 found that "The 
 Standard discriminates greatly in fixing prices in different 
 sections and in different towns, charging extortionate 
 prices where there is no competition and cutting prices 
 sharply where competition is active. . . . The profits of 
 the Standard Oil Company, particularly on its domestic 
 business, are altogether excessive, and they have been 
 higher during recent years than formerly. The real source 
 of the Standard's power is not found in the rendering of 
 superior service to the public, but in the long continued 
 use of unfair methods of competition. ' ' After the dissolu- 
 tion. Standard Oil oil stock quickly rose more than three 
 hundred points, indicating the faith that the dissolution 
 Would not impair the industry's power to earn large 
 profits. Federal Trade Commission reports indicate that 
 oil profits during and after the war were highly liberal. 
 
 3. Steel. — The United States Steel Corporation was 
 formed in 1901. According to Jenks, "After the formation 
 of the United States Steel Corporation ... a new policy 
 seems to have been adopted — that of seeking good profits, 
 but not extraordinary ones. . . . The effect of the United 
 States Steel Corporation seems to have been primarily to 
 steady prices and to maintain more nearly a rate of prices 
 of the finished product dependent upon the costs of the 
 leading raw materials so far as that can be readily deter- 
 mined." Steel prices have not moreover risen as much in 
 the period 1900-1914 as the prices of commodities in gen- 
 eral. In spite of these facts, a study of earnings and prices 
 of the Steel Corporation seems to warrant the brief conclu- 
 sion stated by Van Hise, "Excessive prices; these have 
 resulted in enormous earnings. ' ' ^ The war years brought 
 1 "Concentration and Control," p. J40, 
 
332 Markets — Their Principles and Strategy 
 
 generous profits to the steel eombination. The Federal 
 Trade Commission found that the profits of the United 
 S-tates Steel Corporation rose from about $77,000,000 in 
 1912 to over $478,000,000 in 1917. 
 
 These brief comments indicate a wide variety of effects 
 of business combinations on prices and profits. In many 
 cases, the lines of industry in which a high degree of com- 
 bination has prevailed, have maintained prices lower rela- 
 tively than the average prices of all commodities. Never- 
 theless, the predominant fact has been liberal profits, often 
 excessive profits, made possible in large degree by the ability 
 of leading corporations to influence prices. Jenks con- 
 cludes that "The result has been to establish fairly gener- 
 ally the business policy of not attempting to secure any- 
 thing like a complete monopoly of the market, but rather 
 for the combination to fix its prices at such a rate that it 
 may secure under normal conditions substantial profits 
 while its competitors are still able to live and prosper."^ 
 Court decisions have generally confirmed the charges of 
 unwarranted price policies and industrial investigating 
 commissions have reported to the same effect. Economists 
 for the most part take a stand essentially similar to that of 
 J. A. Hobson when he declares, "But a trust is always 
 able to charge prices in excess of competitive prices, and 
 it is generally its interest to do so,"^ and that of R. T. Ely, 
 when he writes, "The conclusion which we reach then is 
 that monopoly prices are generally higher than competi- 
 tive prices. . . . The higher the average of well-being, and 
 the more readily they spend money, the higher will be 
 that price which will yield the largest net returns. We 
 have these conditions meeting in the United States. We 
 have a high average of well-being, and a great readiness 
 in the expenditure of money, and consequently we have 
 a high monopoly price. "^ Large combinations of capital 
 
 1 "The Trust Problem," p. 178. 
 
 2 "Involution of Modern Capitalism," p. 160. 
 
 3 Ely, "Monopolies and Trusts," 136-137. See, also, Taussig, 
 "Principles of Economics," Vol. II, pp. 112-113; J. B. Clark and 
 J. M. Clark, "Control of Trusts," 12-13; Van Hise, "Concentration 
 and Control," p. 84; Jenks and Hammond, "Great American Issues," 
 
Markets — Their Principles and Strategy 333 
 
 have been exceedingly reluctant to pass on to consumers 
 the full benefit of economies and efficiencies of production. 
 Experience has taught monopolies, partial or otherwise, 
 the expediency of exercising monopoly influences over 
 prices within much narrower limits than were attempted 
 during the period of first formation of great business 
 combinations. 
 
 Business combinations have developed, moreover, a prac- 
 tical method of adapting price policies to all classes, grades 
 and varieties of consumers. Each grade of consumer is 
 offered a grade of commodity particularly calculated to 
 stimulate demand in that level of consumers. In almost 
 all kinds of commodities, some people want the very best, 
 some want the best, some want a good grade, some want 
 "seconds." Some want fancy style, some want utility, 
 some want certain combinations of the two. The price 
 which each grade of consumer can be persuaded to pay 
 for the most attractive grade of goods is a matter for 
 painstaking calculation. Instead of using the advantage 
 of its great influence in determining a single price, the 
 partial monopoly frequently gives its attention to work- 
 ing out a set of prices to cover the demands of varieties of 
 consumers. Instead of a uniform monopoly price, a scale 
 of monopoly prices takes the field, each catering to a special 
 class of buyers, and figured on the basis of "all the traffic 
 will bear ' ' for Ihat class. Often the so-called superior grade 
 of goods is only something of about the same quality, 
 dressed up in a finer appearing package, and bearing an 
 aristocratic brand. The superfine article must radiate a 
 certain atmosphere of exclusiveness in order to appeal to 
 exclusive people, and must exhibit an elite style in order to 
 arouse buyers of fastidious tastes. "With the quality and 
 style of the various grades of goods nicely calculated, prices 
 are attached which should attract enough buyers to absorb 
 the quantity offered by the business combination. More- 
 over, corporations have sometimes attempted to formulate 
 
 p. 167; Haney, "Business Organization," p. 137; Macrosty, "Trust 
 Movement in British Industry," pp. 335-337; E. Jones, "Trust Prob- 
 lem in tiie United States," Chapter XI. 
 
334 Markets — Their Principles and Strategy 
 
 price policies which would take advantage of the fact that 
 some buyers can afford to pay more for the same article 
 than others can. This principle found its greatest accept- 
 ance probably in the rebates of railroads. The railroads, 
 before drastic regulation took effect, made it a common 
 practice to charge different shippers different freight rates 
 for the same railroad service.^ The price policy may thus 
 easily become what each individual will bear, or what a 
 group of individuals of a certain grade will bear, instead 
 of what the general traffic will bear. This gradation of 
 prices to suit gradations of buyers is an innovation accom- 
 panying large scale business, and is primarily attributable 
 to the discovery by the monopolist or semi-monopolist that 
 only by such a device can he reap the largest net gains. 
 
 Monopoly Price and What the Traffic Will Bear 
 
 The monopoly price for each grade of goods, or the 
 monopoly price for all the articles in an ungraded indus- 
 try, is the outcome of an elaborate mathematical calcula- 
 tion. A large quantity of goods selling at a moderate price 
 may yield more net profit than a small quantity of goods 
 selling at a high price. Monopoly price is not the highest 
 price at which some goods can be sold, but is- the price which 
 will sell that quantity of goods yielding the largest net 
 profit. Assume a commodity which costs one dollar to pro- 
 duce. If the selling price is made $1.50, the total sales may 
 be 1000 articles. The net gain would therefore be $500. 
 But assume the price is put at $1.40, and that at this lower 
 price the volume of sales is 1500. Obviously the net gain 
 at the lower monopoly price is $600. This illustration will 
 suggest the fact that a multitude of combinations can be 
 figured out, and that some one combination of selling price 
 and volume of sales will yield the maximum net revenue. 
 Generally speaking, large business combinations prefer to 
 lean toward as small a volume of sales as possible at as large 
 a price as possible, in so far as that is not inconsistent with 
 the maximum net gain for the industry. Enormous pro- 
 
 1 Refer to A. Marshall, "Industry and Trade," pp. 415-417, for 
 further explanation. See, also, Ely, "Monopolies and Trusts," pp. 
 108-118, 
 
Markets — Their Principles and Strategy 335 
 
 duction at the lowest possible prices is not sought after so 
 much as limited' production at prices high enough to yield 
 liberal net profits. This fact has been the basis for the 
 repeated accusation brought by production engineers that 
 "if we could harvest more dollars by producing fewer 
 goods, we produced the fewer goods. "^ To the extent that 
 this policy is in vogue, it brings a private net gain at the 
 expense of a net social loss. It is scientific restriction of 
 production which yields maximum business profits but 
 which furnishes society with too few goods at too high 
 prices. Hence, to charge what the traffic will bear is a 
 policy which is capable of bringing either social good or 
 harm, according as it is applied. 
 
 Monopolies and the Steadying of Prices 
 
 A frequent price achievement under large scale business 
 is the steadying of prices. For example, from 1901 to 1916, 
 the United States Steel Corporation maintained the price of 
 steel rails steadily at $28 a ton. Other large corporations 
 make it a policy to raise prices somewhat more slowly than 
 the general market rise during a period of increasing prices, 
 and to lower prices less swiftly and less sharply in a period 
 of falling prices. Industrial combinations which own and 
 control their own sources of raw materials, such as coal or 
 iron mines, are particularly able to steady their selling 
 prices because they are in a position to regulate their costs 
 of production more evenly. Some semi-monopolistic cor- 
 porations, however, have an unsteadying effect on prices. 
 For instance, from time to time a newly formed combina- 
 tion seeks to esta!blish itself in the good graces of buyers by 
 starting out with a price below the market level. After a 
 certain amount of good will is built up, the combination 
 stealthily elevates its prices to all that the traffic will bear. 
 In the course of the transition, the other producers and 
 dealers in the field are face to face with anything but a 
 steadying influence. Another class of big combinations has 
 been found to fi[x their prices so extremely high that the 
 
 1 H. L. Gantt, "Organizing for Worlt," p. 24. See, also, Van Hise, 
 "Concentration and Control," p. 85, and Jenks, "The Trust Problem," 
 p. 63. 
 
336 Markets — Their Principles and Strategy 
 
 exorbitant profits have invited competitors to enter the field. 
 Then has ensued a price war and cutthroat competition, all 
 of which has caused prices to go down from the former 
 great heights to a point equal to the cost of production, and 
 even for a time below the cost of production. It is safe to 
 state, however, that this condition of violent price fluctua- 
 tions occurred principally in the early years of experience 
 of business combinations, and that the experience thus 
 dearly bought has persuaded many business leaders to avoid 
 extremes of monopoly price likely to invite new competitors 
 to engage in bitter price wars. On the whole, therefore, the 
 later periods of large scale business have been marked by 
 an endeavor to exert a steadying influence on price levels, 
 and to avert violent fluctuations. 
 
 Price Discrimination 
 
 The price policies of monopolies and of partial monopo- 
 lies have often been gauged with a view to destroying com- 
 petitors. One of the most notorious and destructive forms 
 of price discrimination has been local price cutting. Using 
 this device, a large business combination seeks to drive out 
 of business its competitors in a given locality by putting the 
 local selling price extremely low, even below the cost of 
 production. The combination makes up for its loss in the 
 competitive locality by charging a higher price for its com- 
 modities throughout the rest of the country. After the local 
 competitor has been driven out of business by the ruinously 
 low local prices, the monopoly comes into control of the 
 local market, and can then boost the local prices to all that 
 the traffic will bear, without fear of opposition. The his- 
 tory of the American Tobacco Company and of the Stand- 
 ard Oil Company is replete with illustrations of these 
 death-dealing price attacks on local competitors. A careful 
 survey of the policies of the country's greatest monopolies 
 led Louis Brandeis, now a Justice of the Supreme Court, to 
 declare in 1913, "Americans should be under no illusions 
 as to the value or effect of price cutting. It has been the 
 most potent weapon of monopoly — a means of killing the 
 small rivalto which the great trusts have resorted most 
 
Markets — Their Principles and Strategy 337 
 
 frequently." Price cutting is now declared illegal when 
 the purpose of it, whether avowed or concealed, is to sub- 
 stantially lessen competition or tend to create a monopoly. 
 There are other devices that have been widely practiced 
 which have the common purpose of crushing small competi- 
 tors. The operation of bogus "independent" concerns, in 
 reality branches of a concentrated corporation, enables the 
 large concern to camouflage its real purpose of killing com- 
 petitors. The cutting of prices below costs on certain 
 "leaders" or "fighting brands" often is an effective way of 
 driving rivals out of business, particularly when the rival 
 is largely dependent upon that particular brand of com- 
 modity for his profits and when it is only an incidental 
 brand in the trafflc of the big combination. Other large 
 concerns have found it exceedingly destructive of competi- 
 tion to insist that dealers who wish to buy certain articles 
 will not be allowed to buy the desired articles unless they 
 also buy certain other articles for which the large producers 
 wish to force a market. Some producers will not sell to 
 dealers unless they agree to sell only that line of article, 
 and no other. Rebates from regular prices are sometimes 
 offered to dealers for pushing with special vigor the brands 
 of one producer to the exclusion of those of his rivals. The 
 attitude of the law and the courts toward these and other 
 similar practices of price discrimination has generally been 
 to consider them devices of unfair competition. The Clay- 
 ton Anti-Trust Act of 1914, legislating with regard to the 
 most menacing of these forms of price discrimination, laid 
 down a broad test for determining what is fair and what 
 unfair. It condemned price discriminations "where the 
 effect of such discrimination may be to substantially lessen 
 competition, or tend to create a monopoly in any line of 
 commerce. ' '^ 
 
 Mechanism for Exertion of Monopoly Influences on 
 Price Policies 
 
 The business mechanism for exerting monopoly price in- 
 fluences varies widely. In some lines of commerce, definite 
 
 1 See Section 2 of the Act. Also W. H. S. Stevens, "Unfair Com- 
 petition," Political Science Quarterly, pp. 282, 460. 
 
338 Markets — Their Principles and Strategy 
 
 centralization of management occurs, and trusts, corpora- 
 tions, holding companies, mergers, and amalgamations take 
 the place of former separated establishments. The common 
 principle in such business concentration is a definite cen- 
 tralization of management. Plants and companies which 
 formerly were independent and sovereign become branches 
 of a centralized management. Price policies in such com- 
 panies are formed by the central management, and the con- 
 stituent companies and plants direct their price policies in 
 compliance with the uniform policies laid down by the cen- 
 tral management. There is another great class of price 
 agreements in the nature of understandings entered into 
 between independent companies. Bach branch of industry, 
 each line of commerce, each field of production, almost 
 without exception, has a business association of some sort. 
 These associations serve a great many purposes, some of 
 them constructive and some tending toward the fixing of 
 excessive prices and the undue restraint of trade. The 
 history of price agreements shows many forms of under- 
 standing or bargaining entered into for the purpose of put- 
 ting prices up to all that the traffic would bear. The ' ' Gary 
 dinners" which maintained tacit understanding among 
 steel producers as to what prices would be charged; "any 
 number of dinner and luncheon clubs and reunions and 
 general understandings, winks, and telephone messages,"^ 
 mutual understandings between anthracite coal operators 
 or big meat packers as to the distribution of business and 
 price quotations, joint action among dealers in building 
 supplies to charge contractors exorbitant prices for cement 
 or brick, common price terms among wholesale grocers or 
 among druggists, — in these and other ways, price agree- 
 ments have been maintained at different times and in dif- 
 fering degrees in most lines of economic activity. Agree- 
 ments in the form of pools were at one time widespread. 
 Pools involved definite agreements either to divide the prod- 
 uct into quotas for each producer who belonged to the pool, 
 
 1 Samuel Untermyer, "Hearings Before Senate Interstate Commerce 
 Committee," V, p. 214. 
 
Markets — Their Principles and Strategy 339 
 
 or to divide the quantity each producer was to sell or the, 
 territory in which he was to sell, or to put all profits of all 
 companies into a common fund to be shared ultimately by 
 the several companies on an agreed pro rata plan, or any 
 combination of these policies. These agreements of one sort 
 and another have run a harsh gauntlet of laws and court 
 decisions, and have been generally condemned in so far as 
 they result in undue restraint of trade, or unfair and un- 
 reasonable prices. 
 
 Trade associations have, however, found it possible to 
 render most important services without as a usual thing 
 indulging in illegal price practices. They provide for an 
 exchange of information about the basic facts of production 
 costs, market conditions, trade statistics, credit ratings, 
 standardization of qualities and grades, freight and traffic 
 matters, labor policies, trade legislation, insurance rates. 
 Trade associations were encouraged during the War as a 
 medium by which government agencies could direct indus- 
 try effectively toward meeting war time conditions. They 
 furnished a definite organization through which the "War 
 Administration could communicate its wishes to the hun- 
 dreds of thousands of individual companies the country 
 over. The advantages of co-operation became so apparent 
 that trade associations did not wane after the "War, but 
 grew in strength and membership. The cooperative efforts 
 of trade associations to supply information on production 
 costs have led to greater uniformity in prices in many eases. 
 The trade information is often kept strictly in the hands of 
 members, with the result that although there may not be 
 collusion or definite agreement on price policies, there is 
 created a fairly uniform price control. Bach man acts upon 
 the same exclusive information as the other members of his 
 trade association, and the uniform price action resulting has 
 substantially the same effect in many cases as though it 
 were the outcome of collusion among traders. The legal 
 status of such trade association policies is not yet clearly 
 determined. It would appear reasonable and possible to 
 retain the constructive services and co-operative features of 
 
340 Markets — Their Principles and Strategy 
 
 trade associations and to discard wliatever undue monopoly 
 influences attempt to assert themselves.^ 
 
 Limits to Monopoly Influence on Prices 
 
 Efforts to maintain monopoly prices are subject to cer- 
 tain limits and restrictions of a very important nature. 
 Economic and political forces combine to put checks upon 
 monopoly ambitions after they have passed certain limits. 
 
 1. Limit in demand. A monopoly in a necessity of life 
 may at times drive prices to extraordinary heights because 
 people cannot do without, no matter what the price. The 
 era of specialized manufacture has brought into the market 
 so many articles which were at one time luxuries or com- 
 forts, but have become by custom and habit virtual necessi- 
 ties that monopoly in these lines can count upon a fairly 
 stubborn and insistent demand. 
 
 2. Limit in potential competition. If a monopoly 
 pushes the prices of goods so high that profits are great, 
 competitors will probably be drawn into the field. The new 
 competitors will then engage in a price war with the old 
 business combination, and after a time, the combination 
 may buy out, or crush the competitor, or the competitor 
 may survive, and continually harass the original combina- 
 tion with its competitive prices. Although potential com- 
 petition is existent and may possibly enter the actual field 
 at any time, nevertheless prospective competitors are likely 
 to think twice before sinking their time and money in many 
 lines of business, realizing full well the ruthless attitude of 
 many big companies toward venturesome competitors. 
 Inertia, too, works against a ready entrance of competitors 
 
 1 See special reports of "Federal Trade Commission in 1921 on 
 Trade Associations and Open Price Associations." Also J. B. Davies, 
 Commissioner of Corporations, 1915, "Trust Laws and Unfair Com- 
 petition," Chapter XI. The legal status of the open competition and 
 open price policies of trade associations is still indistinct. In De- 
 cember, 1921, the Supreme Court decided the American Hardware 
 Manufacturers' Association contrary to the Sherman Act, because by 
 the exchange of information on prices, production volume and costs, 
 sales, etc., the Association served to restrict competition and to 
 raise prices by concerted action. This was a five-to-four decision, 
 and leaves some doubt as to what such associations may and jnay 
 not do. 
 
Markets — Their Principles and Strategy 341 
 
 into lines of business -where prices and profits are liigh. 
 Hence, although potential competition serves to keep mo- 
 nopoly efforts within certain limits, those limits are highly- 
 variable and indefinite. 
 
 3. Limit in possible substitution. If the price of beef 
 runs too high, people can eat mutton or pork. If gas rates 
 are put too high, electricity is likely to come in. If the 
 price of one form of article becomes exorbitant, buyers can 
 pass it by and purchase substitutes. Monopolists who 
 experiment vsith prices face the imminent danger of losing 
 trade altogether by driving buyers to use articles which 
 will give practically an equivalent of satisfaction and 
 utility.^ 
 
 4. Limit in public control. When trusts and all forms 
 of big business first made their appearance, the country 
 was naturally bewildered to know how to handle the new 
 phenomena. While legislatures were experimenting with 
 various types of laws, and courts were maturing judicial 
 viewpoints, it was possible for monopolies to take advan- 
 tage of the situation; and indulge in practices of unfair 
 competition, price discrimination, and price boosting which 
 have later come under the ban of the law. The Sherman 
 Anti-trust Act of 1890 has been interpreted as disap- 
 proving any conspiracy or monopoly in undue and un- 
 reasonable restraint of trade. After the law had been 
 on the statute books for twenty years, the Supreme Court 
 read into the act "the rule of reason," by which it inter- 
 preted the Act to prohibit, not all restraint of trade, nor all 
 monopoly, but only those interferences with trade and 
 prices which were undue and unreasonable. There have 
 been people who have continually charged that virtually all 
 big business is bad business and dangerous business, and 
 ought to be dissolved; and simultaneously there have been 
 people who have steadfastly maintained that big business 
 is the natural institutional evolution of this day and age, 
 and that its economies and advantages can be retained while 
 
 I'See J. A. Hobson, "Evolution of Modern Capitalism," pp. 230- 
 235; J. B. Clark and J. M. Clark, "The Control of Trusts," pp. 28, 
 123-127, 
 
342 Markets — Their Principles and Strategy 
 
 its evils and dangers can be regulated out of existence. 
 The general philosophy of both groups has been in evidence 
 in recent judicial decisions and government legislation. 
 The most notable pieces of concrete legislation by the Fed- 
 eral Government have been the Federal Trade Commission 
 Act and the Clayton Anti-trust Act, both passed in 1914. 
 The Federal Trade Commission investigates trade practices, 
 orders offenders to refrain from methods of unfair compe- 
 tition, publishes facts as to costs, prices and profits for 
 various lines of industry and trade, enforces the provisions 
 of the Clayton Act, keeps informed as to the extent to which 
 companies carry out the decrees of courts under the Sher- 
 man Act, and investigates combinations for foreign trade. 
 Chiefly, the weapon which the Federal Trade Commission 
 wields is investigation and publicity of the facts of business, 
 and co-operation with business men in the direction of com- 
 pliance with federal law without expensive litigation in the 
 courts. 
 
 The Clayton Act forbids monopolistic price discrimina- 
 tions, new holding company formations, and interlocking 
 directorates. The last two provisions are especially aimed 
 at big business as such, and rest on the assumption that size 
 itself is a menace. For the most part, outside of these two 
 provisions, both the Clayton Act and the Federal Trade 
 Commission Act aim not to destroy big business, but to 
 make sure that the practices and price policies of business, 
 whether large or small, shall be fair, and reasonable, and 
 socially beneficial. They aim to make destructive compe- 
 tition impossible, to put under the ban of the law the modes 
 of warfare between business units of all sizes, which are 
 predatory and vicious. And simultaneously they tend to 
 preserve a large field for concentration of business, for 
 moderate monopoly influences and advantages, for construc- 
 tive co-operation and for competition which leads to the 
 survival of the most efiScient. The possibility of public 
 control serves therefore as a limit to monopoly excesses and 
 to unfair price policies.^ 
 
 1 See E. Jones, "Trust Problem in the United States," Chapters 
 14-15. 
 
Markets — Their Principles and Strategy 343 
 
 Natural monopolies, such as railroads, waterpower re- 
 sources, gas and electric service, are so thoroughly asso- 
 ciated with the public need that they have generally come 
 within the scope of a more rigid form of public control. 
 The Interstate Commerce Commission very closely super- 
 vises the pecuniary policies of railroads. There has been 
 powerful agitation of late to declare the coal industries and 
 the meat industries public utilities and to subject them to a 
 public control somewhat similar to that already exercised 
 over the railroads.^ Public Service Commissions are com- 
 mon devices for the regulation of lighting, heating, and 
 municipal transportation services, and assert authority in 
 varying degrees over rates or prices in the industries under 
 their jurisdiction. Industrial concentration in the basic 
 industries is already leading many careful students to raise 
 the question whether concentration is socially safe except as 
 it is subjected to a substantial measure of public regulation 
 and control. The maturing of opinion upon this issue will 
 undoubtedly hinge largely upon the manner in which con- 
 centrated business orders its policies, with regard to prices 
 and all matters tinged with a public import, during the 
 next few years. Unless the device of publicity and prohibi- 
 tion of unfair competition as now administered by the 
 Federal Trade Commission serves to maintain a policy of 
 price moderation and to eliminate the grosser eases of profi- 
 teering, the next degree of public control will be demanded 
 by the public, namely outright government regulation sim- 
 ilar to that exercised through the Interstate Commerce 
 Commission or the Public Service Commissions. 
 
 The record of profiteering, as reported by various govern- 
 ment authorities, especially during the first years of the 
 War and during the months closely following the armistice, 
 has left grave doubts in the public mind as to the willing- 
 ness of big business concerns to moderate their price and 
 profit policies within satisfactory bounds. Moreover, the 
 
 iThe Packers' Control Bill, passed by Congress in August, 1921, 
 established regulation of the meat packers to be administered under 
 the Secretary of Agriculture. The law provides for uniform ac- 
 counting by the packers, for publicity of the packers' affairs, and 
 for definite powers of the Federal Trade Commission to investigate 
 the industry. 
 
344 Markets — Their Principles and Strategy/ 
 
 experience of the government with price fixing during the 
 war had a sufficient degree of success to make it fairly clear 
 that at any time when the step seems desirable, the govern- 
 ment can effectively create the governmental machinery 
 suited to price fixing in times of peace. The War demon- 
 strated that price fixing is not an economic impossibility. 
 Once price fixing has been proved possible of achievement, 
 it is always ready at hand as a device to be called into being 
 to correct price abuses which creep into private business 
 combinations. Comparisons made by the War Industries 
 Board indicated that the average prices for controlled arti- 
 cles increased during 1917-1918 much less than did the 
 prices of uncontrolled articles.^ Although the methods of 
 price fixing were not uniform between all bureaus and de- 
 partments, nevertheless in the main they adhered with 
 reasonable closeness to the objective laid down by President 
 "Wilson on July 12, 1917, namely, that the fixed price should 
 be sufficient to ' ' sustain the industries concerned in a high 
 state of efficiency, provide a living for those who conduct 
 them, enable them to pay good wages and make possible 
 expansions of their enterprises." Price fixing in time of 
 peace would be handicapped by lacking the equivalent of 
 the high spirit of patriotic co-operation from business men 
 which prevailed during the war emergency, and hence is not 
 likely to be resorted to during peace times except as the 
 need is urgent. The possibility of price fixing hangs as a 
 kind of tacit ultimatum to monopolists who might like to 
 boost prices unduly, and hence serves as an important limit 
 to monopoly price policies.^ 
 
 Relation Between Price Policies and Supply and Demand 
 
 It is obvious at this stage of the analysis that supply and 
 demand allow considerable leeway for human ingenuity and 
 strategy. Over broad periods of time, and in the long run, 
 
 1 "War Industries Board, Fluctuations of Controlled and Uncon- 
 trolled Prices," p. 8. 
 
 2 See "Carnegie Studies : Prices and Price Control During the 
 World War," and American Economic Review Sup., March, 1919, 
 
 -pp. 233-276; F. W. Taussig, Quarterly Journal of Economics, Feb., 
 1919, p. 238. 
 
Markets — Their Principles and Strategy 345 
 
 supply and demand operate as general tendencies and 
 fundamental forces. But they are not hard and fast, nor 
 absolutely binding laws which determine prices to a nicety. 
 "Within the limits of their fundamental tendencies there lies 
 ample room for policies of manipulation and control. De- 
 mand can be expanded or contracted by deliberate action 
 on the part of business men and supply can be curtailed, 
 hoarded, or multiplied as business judgment dictates. Price 
 policies at, or above, or below the market level, can be ap- 
 plied in ways which alter both supply and demand. From 
 practical observation of business practices the country over, 
 the Comptroller of the Currency, D. R. Crissinger, declared 
 in April, 1921: "Manufacturers, jobbers, wholesalers, re- 
 tailers, laborers — are all in some sort of combination to 
 frustrate this fundamental law of economics (i.e., supply 
 and demand). Each is out to "get his" first. . . . These 
 combinations — gentlemen's agreements, or what not — have 
 gotten prices of things to the point where there is no rela- 
 tion between cost of raw materials and cost of production ; 
 no relation between cost of production and cost to the con- 
 sumer; in short, where there is no relation between value 
 and selling price." Due allowance must of course be made 
 for the sweeping character of so emphatic a declaration. 
 A conservative judgment on the same general subject may 
 well be quoted, from the pen of a highly respected Ameri- 
 can economist, F. "W. Taussig: "The response of demand 
 to new conditions of supply and price is very uncertain. 
 The penumbra is wide. "Within it there is much room for 
 fluctuation of opinions and therefore of price, for the influ- 
 ence of an aggressive operator or a commanding firm and 
 for indeterminate phenomena. . . . There is no telling 
 what immediate response there will be to an offer of larger 
 supply or to a decline in the day's or week's quotation. A 
 heavy sale by a big operator and a lower price accepted by 
 him may easily mean not that more will be bought by 
 others, but that buyers will be scared off and that price 
 wUl fall still further. 
 
 "The market may react in all sorts of ways to changes 
 in offers and bids and going prices. The outcome/ depends 
 
346 Markets — Their Principles and Strategy 
 
 on men's hopes and fears and guesses, and momentary 
 states of mind. The nervy man may make money by coolly 
 watching his more sensitive fellows and playing on their 
 frailties. 
 
 "Often lower price does not lead to an increase in the 
 quantity that can be disposed of in a market. Neither does 
 it necessarily lessen the quantity that will be offered there. 
 On the contrary, it will repeatedly happen that as price 
 falls, less is demanded, not more ; and that not less is offered 
 for sale, but actually more. A decline in price, so far from 
 tending always to bring its own remedy through tempting 
 people to buy more, sometimes intensifies itself through 
 inducing people to sell still more." A further indication 
 of the flexibility which the general market principles must 
 contain is seen in the following words by H. C. Emery, 
 made as a result of extended investigations by the United 
 States Tariff Commission: "The price paid by the con- 
 sumer and the price received by the producer seem to have 
 very little direct relation. ' ' ^ 
 
 The Science of Spending Money 
 
 Economics has often been defined as the science which 
 deals with the wealth-getting and wealth-using activities of 
 human beings, but the emphasis of economic analysis has 
 been overwhelmingly on the wealth-getting activities, and 
 very slightly on the wealth-using activities. The War at- 
 tracted the attention of students to the problem of wealth 
 using, especially by its urgent requirements for thrift and 
 saving, for elimination of waste and extravagance, for dis- 
 tinguishing between essential and non-essential wants, for 
 patriotic guidance in numberless ways of consumers' 
 choices. It was made unmistakably clear that in time of 
 war consumers' choices were not their individual busi- 
 ness merely, but were vitally the business of the nation. 
 National efficiency depended upon wise consumption; and 
 at great cost the government set out to educate people on 
 matters of good consumption and bad consumption from 
 the standpoint of helping to win the war. Hence the war 
 
 1 Quarterly Journal of Econormcs, May, 1921, pp. 396-410. 
 
Markets — Their Principles and Strategy 347 
 
 Hecessities broke the time-worn tradition of economies tliat 
 what a person wants to spend his money for is his own 
 affair, and established the principle that it is the nation's 
 affair. Unwise spending during war time would rapidly 
 weaken the military efficiency of the nation. Indeed, to 
 some who have considered the problem in its broadest 
 aspects, it appears that unwise spending has definite cause 
 and effect connections with national progress or decay. This 
 is the view of T. N. Carver: "The importance of the eon- 
 sumption of wealth is further emphasized by the considera- 
 tion that as many and as dire calamities have overtaken 
 nations and peoples because of their irrational habits of 
 consumption as because of inefficient systems of production, 
 exchange or distribution. ... A few are already begin- 
 ning to discover that consumption is more important than 
 production, exchange or distribution, — possibly more im- 
 portant than all three combined."^ 
 
 The ultimate destination of economic activity is the 
 spending of income for purposes which satisfy the spender. 
 Goods are produced as a means toward the end of consump- 
 tion, and the test of the worthwhileness of any kind of pro- 
 duction is to a large extent the effect which the consumption 
 of the goods must have upon individual health, character, 
 and personality, and upon national strength, efficiency and 
 prosperity. The economic foundations of a country are 
 laid in the ways in which consumers decide to spend their 
 income. "We need to turn consumption," remarks Alfred 
 Marshall, "into paths that strengthen the consumer and 
 call forth the best qualities of those who provide for con- 
 sumption." Economies can scarcely dare, in the face of 
 such a challenge, to take the position that if individuals 
 choose to spend their earnings foolishly, wastefully, or 
 viciously, the effects are their own lookout and concern no 
 one but themselves. Economics is obliged to address its 
 study, therefore, to such questions as : What are the causes 
 for the various types of demand? Why do wants change? 
 What are the effects of different ways of spending income ? 
 Why are the urgent wants of some denied the means of 
 
 1 "Principles of Political Economy," pp. 11, 455. 
 
348 Markets — Their Principles and Strategy 
 
 satisfaction while the trivial wants of others are satisfied 
 in full ? "What are the forces which shape the standards of 
 consumption?^ 
 
 Probably the most useful viewpoint from which to study 
 consumer's wants is the psychological viewpoint. Demand 
 in its multitudinous shapes and forms is fundamentally 
 a psychological fact. Wants, choices, satisfactions, grat- 
 ifications, desires all spring from human nature, and all 
 are matters of individual and social psychology.^ 
 
 Bach consumer differs in his human equipment from all 
 other consumers. His original instinctive mechanism is dis- 
 tinct, his experiences in developing his original nature are 
 unique, and in his beliefs, wishes, convictions and whims, 
 there is no one else quite like him. He has eccentricities, 
 peculiarities, and idiosyneracies. He has an element of 
 originality and individuality in his likes and dislikes. His 
 preferences bear the stamp of his personality. He has an 
 individual psychology. 
 
 However, the surprising feature of the consumer's psy- 
 chology is the extent to which it owes its origin and direc- 
 tion to his social relations. The gradual building of the 
 individual's wants and beliefs by the processes of social 
 psychology is the paramount characteristic of consumers' 
 demand. This process in its broadest aspects is splendidly 
 stated by John Dewey as follows : ' ' Mother and nurse, father 
 and older children, determine what experiences the child 
 shall have ; they constantly instruct him as to the meaning 
 of what he does and undergoes. The conceptions that are 
 socially current and important become the child's principles 
 of interpretation and estimation long before he attains to 
 personal and deliberate control of conduct. Things come 
 to him clothed in language, not in physical nakedness, and 
 this garb of communication makes him a sharer in the 
 beliefs of those about him. These beliefs coming to him as 
 so many facts form his mind ; they furnish the centers about 
 
 1 See J. M. Clark, "Economics and Modern Psychology," Journal 
 of Political Economy, Volume 26, pp. 1, 136; C. H. Coo'ley, "Social 
 Process," p. 298; J. Dewey, "Creative Intelligence," pp. 312-313, 350- 
 352. 
 
 2 B. M. Anderson, Jr., "Value of Money," p. 570. 
 
Markets — Their Principles and Strategy 349 
 
 ■which his own personal experiences and perceptions are 
 ordered."^ The consumer does not form his individual 
 canons of taste and style with a free and independent mind, 
 nor by his purely original and detached judgment. The 
 social heritage of tastes, styles, wants and demands form 
 his mind, and unless the individual over-asserts his individ- 
 uality to the extent of becoming a freak or fanatic, he thinks 
 and plans and acts in spending his income in fairly close 
 conformity with the established standards of his day and 
 age. This social heritage of standards and canons is care- 
 fully analyzed by William Graham Sumner in his profound 
 study of the folkways and the mores of society. The 
 mores are defined as "the ways of doing things which are 
 current in a society to satisfy human needs and desires, 
 together with the faiths, notions, codes, and standards of 
 well living which inhere in those ways." And Sumner 
 strongly asserts : ' ' The most important fact about the mores 
 is their dominion over the individual. Arising, he knows 
 not whence or how, they meet his opening mind in earliest 
 childhood, give him his outfit of ideas, faiths, and tastes, 
 and lead him into prescribed mental processes. They bring 
 to him codes of action, standards, and rules of ethics. They 
 have a model of the man-as-he-should-be to which they mold 
 him, in spite of himself and without his knowledge. " ^ 
 
 It is very easy to exaggerate the element of social psy- 
 chology and to underrate the element of individual psychol- 
 ogy in the shaping of consumers' tastes. As a safeguard 
 against inferring an untrue balance between the two, it is 
 important to give careful consideration to the following 
 statement by C. H. Cooley: "The ordinary man is a con- 
 former; he lives in the institution and accepts its estab- 
 lished valuations, though not without impressing some 
 degree of individuality upon them. In this way we get 
 our ideas and practices regarding religion, marriage, dress 
 and so on. So in pecuniary matters one accepts in a gen- 
 eral way the current values, but has a certain individuality 
 in his choices which makes him to some extent a special 
 
 1 "Reconstruction of Philosophy," p. 93. 
 
 2 "Folkways," pp. 59, 173-174. 
 
350 Markets — Their Principles and Strategy 
 
 factor in the market. There is no absolute conformity; we 
 do everything a little differently from anyone else ; but this 
 does not prevent our being controlled, in a broad way, by 
 the prevailing institutions. This is what the usual economic 
 analysis ignores, or perhaps omits as beyond its proper 
 range. 
 
 "Along with this we have the phenomenon of non-con- 
 formity. Individuals of special natural endowment, or 
 unusual situation, or both, depart widely from the type, 
 and initiate new tendencies. ... " ^ 
 
 These cardinal principles of modern social psychology 
 reveal the fallacy of considering the average consumer 
 primarily as an independent individual, actuated by one 
 m.otive only, — ^the money motive. Economics has too often 
 over-simplified the consumer's psychology. Consumer's 
 demand is fashioned by a host of influences other than the 
 highness or lowness of price. It is not enough, in explain- 
 ing demand, to state that if price is increased, demand will 
 diminish, and if price is decreased, demand will enlarge. A 
 varying price scale, it is true, does have its effects on 
 demand, but demand is a creature of all the forces and 
 influences which bear upon social and individual psychol- 
 ogy. The whole instinctive nature of man figures in his 
 wants and demands, and the reasons for spending his money 
 as he does are as broad as human nature. Consumers' 
 motives are not dollar motives alone, but all the motives of 
 life. The science of spending money is then the science of 
 the motives which direct the spending of money, and inas- 
 much as virtually all activities and enjoyments in modern 
 society require the payment of a money price, the science 
 of spending money becomes in the deepest sense an economic 
 study of the values and standards of the civilization of 
 a certain day and age. 
 
 The motives of consumers in spending their income are 
 directed and organized by the institutions in which con- 
 sumers live and work, and institutions are historical prod- 
 ucts. Marketing institutions have developed from rude 
 beginnings into the complicated affairs of to-day, and vary 
 
 1 "Social Process," p. 300. 
 
Markets — Their Principles and Strategy 351 
 
 from country to country in important "ways because of the 
 varying historical backgrounds of modern countries. Un- 
 thinkingly we absorb the spirit and ideas and customs of 
 our own generation, as these are filtered into our characters 
 through the several stages of life by our contact with 
 institutions, religious, educational, family, political, artistic, 
 pecuniary, or otherwise. No matter what past stage in 
 the development of any of these institutions we might pick 
 out for observation, we would find, along with its admirable 
 characteristics, a countless horde of institutional standards 
 and values which now seem ridiculous, wasteful, humorous, 
 evil, or absurd. At some time past, however, these insti- 
 tutional values and canons of taste set the mold for social 
 motives in spending money, and directed the channels of 
 disbursement for the people who were born and brought 
 up under those institutional conditions. This institutional 
 influence on the social psychology of spending money is 
 recognized by A. T. Hadley in the assertion that "With 
 most men custom regulates their economic action more 
 potently than any calculation of utility which they are 
 able to make." And he adds, "It is not merely that people 
 want things which hurt them or which fail to do them the 
 maximum good . . . but that they buy things without 
 knowing whether they want them or not." 
 
 Now, a very large part of the customs and traditions 
 built up through the processes of history are serviceable, 
 efficient, and sound; but not all of them. Institutions are 
 replete with influences of decay, dissipation and destruction. 
 And the social psychology which is interwoven with social 
 institutions is replete with wants and desires which, if grat- 
 ified, lead to mental, moral and physical weakness. In 
 marketing institutions, the exercise of critical judgment, 
 of shrewd reasoning, of mental strategy takes place prin- 
 cipally on the part of sellers, and to a much less degree, 
 on the part of buyers. The managers of distribution, the 
 wholesalers and retailers and speculators, usually devote a 
 high degree of intelligence to the art of selling goods at a 
 profit ; but the buyers, the consumers of the goods, are more 
 distinctly the victims of the customs, habits, and traditions 
 
352 Markets — Their Principles and Strategy 
 
 which have surrounded them from youth up. Consequently, 
 the spending of money is a department of economic interest 
 which is peculiarly subject to instinctive nature, and 
 which is influenced greatly by the unconscious social forces 
 coming from institutions. For these reasons, the spend- 
 ing of money has been referred to as one of "the backward 
 arts." Money is spent for objects as a matter of course, 
 because fashion, reputability, prestige, or the moral code 
 calls for that sort of expenditure, and consumers are as a 
 rule reluctant to submit many of their items of disburse- 
 ment to critical judgment, or to decide freely and inde- 
 pendently whether the fashion, the code, the canon of 
 taste and the standard of reputability are good or bad. 
 
 These abstract generalizations will be made clearer if 
 some concrete illustrations are presented. When slavery 
 was the established institution, supported by churrh and 
 state, consumers, as a matter of course, spent part of their 
 income in the purchase of slaves to perform household 
 service. At the time, the social mind of slave owners 
 considered the spending of income on slave servants the 
 right and respectable thing to do. Later judgment has 
 decreed that spending money for such a purpose was sub- 
 versive of the nation's vitality and character. Again, a 
 short time ago, it was the right of any man or woman to 
 spend as much of his or her income as might be desired 
 in the consumption of alcoholic beverages, and the indi- 
 vidual consumer might consume alcohol in any form which 
 he pleased, and as much of it as he pleased. As a result 
 of much agitation, propaganda, and education, the pre- 
 ponderant opinion of the nation declared for a prohibition 
 of that form of spending income, and by a constitutional 
 amendment, made it illegal to traffic in that kind of goods, 
 on the ground that the consumption of alcohol was bad for 
 the nation 's morals, was harmful to the health of the people, 
 and was a social menace. By this change of institutional 
 arrangement, consumers have been forced to divert some- 
 thing like $2,000,000,000 of purchasing power into new 
 channels. To take another illustration, those responsible 
 for the Americanization movement in this country are 
 
Markets — Their Principles and Strategy 353 
 
 anxious to educate foreigners in our midst to spend their 
 money in maintaining an American standard of living. 
 Americans learn, therefore, with a feeling of alarm that 
 one-half of all immigrants who come to this country later 
 return to their home countries, and take with them on an 
 average $2000 of spending power; Immigrants cannot be 
 Americanized if they will not spend their money for educa- 
 tion for themselves and their children, if they will not spend 
 their money for the American standard of food, or clothing, 
 or sanitation, or housing. Americanization has as one of 
 its objects the inculcation of American spending habits 
 into foreigners. It is a matter of •concern that immi- 
 grants refuse to spend for things which Americans con- 
 sider essentials of life, and that they insist to so large a 
 degree, upon saving their spending power for the days of 
 return to their home country. Yet the social psychology 
 of immigrants is intimately wrapped up with our economic, 
 religious, political and educational treatment of them, and 
 their spending standards are a direct outgrowth of the 
 traditions and the institutions of their home countries. 
 
 A notable institutional transformation of the last decade 
 has been the widespread adoption of the eight hour day. 
 This transformation involved the addition of from two to 
 four hours of leisure time in the daily life of the working 
 man. This has created a grave problem in consumption. 
 The new leisure period, used wisely, is capable of develop- 
 ing a healthier, better educated, more versatile, more artis- 
 tic citizenship. But it gives at the same time an oppor- 
 tunity for the expenditure of income in riotous living, in 
 showy extravagance, in vicious pleasures, and in unedifying 
 idleness. Some pioneer business concerns have undertaken 
 various expedients for guiding the leisure enjoyments of 
 their employees along wholesome channels. Night schools, 
 library facilities, community enterprises, athletic programs, 
 moving pictures, are a few of the devices devoted to the 
 guidance of spending power during leisure time into con- 
 structive channels. By a vicious use of leisure time, the 
 economic efficiency of the worker is undermined and it is 
 of real concern to employers and to society at large that 
 
354 Markets — Their Principles and Strategy 
 
 consumption during leisure time shall result in betterment, 
 not degradation. A great many employers have found 
 that the temptations to their workers to spend money for 
 luncheons of pie and candy and unsubstantial foods are too 
 great, and accordingly have installed company restaurants 
 to provide wholesome food at reasonable prices. These 
 illustrations are only suggestive of a general conviction 
 among employers that it is not the consumer's own bus- 
 iness alone, whether he shall spend his income wisely or 
 foolishly. Workers need to be educated and inspired if 
 they are to devote the proper amount of spending power 
 to insurance, to the savings bank fund, to investment in 
 stocks or bonds. Consumption is not a place for unrestricted 
 individualism, and although the traditions of laissez faire 
 have been stronger in consumption than in any other branch 
 of economic interest, even there they are crumbling. "When, 
 during a period of high prosperity, a craze develops for 
 spending money, much of it borrowed money, for high 
 priced automobiles, it becomes the duty of the credit insti- 
 tutions of the country to curtail borrowed spending power 
 for such a purpose. The right to spend one's income as 
 one pleases is no longer an unlimited right, but is amenable 
 to institutional control and guidance. 
 
 Some questions of spending income have come to hold an 
 international importance. Notable in this connection is 
 the cost of naval and -military armament. It is everybody's 
 business how much each nation spends for armament, yet 
 no one nation dares to stop the consumption of battleships 
 and munitions unless all stop. The American people have 
 been shocked to learn at the end of the World War that 
 about ninety per cent, of their enormous national tax 
 burden goes to the payment of war obligations. Yet as 
 a nation, they cannot safely refrain from armament con- 
 sumption, except as there is a change in international polit- 
 ical institutions. Expenditure of income is guided by insti- 
 tutional arrangements. 
 
 Pecuniary expenditure needs also to be studied against 
 the background of national history. Whether a people 
 shall, in their food consumption, be heavy eaters of meat, 
 
Markets — Their Principles and Strategy 355 
 
 or of rice, or of tlie grains; whether the preferred bread 
 shall be of wheat, corn or rye; whether patented forms of 
 breakfast cereals shall be in vogue ; whether the prevailing 
 national drink shall be tea, coffee, or beer; these and many 
 similar questions vary immensely from country to country, 
 and from generation to generation, and the variations are 
 beset with countless customs, traditions and folkways. No 
 one could hope to comprehend the standards of fashion 
 among American women without tracing the traditional 
 American esteem for Parisian styles. The models of Amer- 
 ican furniture, and the art of spending money for the 
 proper styles of furniture, cannot be understood apart from 
 the periods of English history. Queen Anne, Queen Mary, 
 etc. The extent to which inadequate expenditure for school 
 facilities forces children to attend on part-time programs, 
 and the degree to which a country begrudges its scientists 
 and educators an adequate income, is plainly a matter of 
 social psychology and of institutional development. The 
 economic waste of spending huge sums to maintain in each 
 community an excessive number of overlapping denomina- 
 tional churches, and of maintaining so many idle buildings 
 for so large a part of each week, cannot be understood 
 apart from the denominational history of churches and 
 the psychology of religious beliefs, for these forbid the 
 immense economies possible through proper church fed- 
 eration. The difficulties of the Interehurch World Move- 
 ment, one of the greatest efforts in modern times to guide 
 the spending power of the nation into humanitarian chan- 
 nels, are in no small measure traceable to the tenacious 
 denominationalism of churches. All of these matters pre- 
 sent problems in the "wealth-using activities" of men; 
 all are problems in the art of spending incomes; all lead 
 back to social psychology and social history. 
 
 The primary social unit for spending money is the family, 
 and the spending of the bulk of the family income, i.e., for 
 family food and clothing, is undertaken by the housewife. 
 It has been estimated that about 75 per cent, of the house- 
 hold purchases are made by women. The spending of the 
 family income involves the selection of the most wholesome 
 
356 Markets — Their Principles and Strategy 
 
 and health-giving foods for children and for adults; the 
 choice of shoes, hats, and clothing with a proper regard to 
 the most wear for the money spent and to the proper styles 
 and fashions; the decision between varieties of knick-knacks, 
 of playthings, of patent medicines, of care of children, of 
 mechanical appliances for the home, of endless goods and 
 services. About each of these fields for decision in spend- 
 ing the family income, there exists a heritage of rule-of- 
 thumb notions handed down by grandparents as to what 
 cuts of meat a person ought to buy, and the kinds of work 
 the housewife ought never to hire done. There is con- 
 stantly buzzing in the housewife 's ears the catch phrases of 
 clever advertisers who are anxious to lead the family in- 
 come toward the purchase of soap because "It Floats," or 
 of pickles or beans because there are "57 Varieties," or 
 of patent medicine because of its color. To go near a 
 modern store is to be led into a series of temptations to 
 buy this, that and the other thing, and to be forgetful 
 at the moment that a little later, looking backward, the 
 buyer is likely to feel remorseful for yielding to the temp- 
 tations. 
 
 The whole buying process is likely to be still further con- 
 fused by virtue of the fact that the spender of the family 
 income has no family budget by which to apportion scien- 
 tifically the items of expenditure. The disbursement is 
 therefore in danger of rivalling in recklessness the expen- 
 diture of a political legislature, with appropriation often 
 added to appropriation by guesswork, haphazard, moodi- 
 ness, personal eccentricity, community fad, and emergency 
 desire. Unlike the business man, the woman, who is the 
 business manager of the family establishment, is not accus- 
 tomed to the methods of cost accounting, which are indis- 
 pensable to the intelligent direction of any modern business, 
 large or small. The average woman, therefore, has to learn 
 the art of spending the family income by the expensive 
 method of trial and error. Probably upwards of $30,- 
 000,000,000 of family expenditure is thus carried on an- 
 nually by the method of ' ' fumbling through. ' ' All of this 
 state of affairs is not due to any incompetency on the part 
 
Markets — Their Principles and Strategy 357 
 
 of the family business managers, but ratber is due to the 
 traditions, customs, and modeyof living which appear in 
 the present day family institution. Any marked recon- 
 struction in the family economy must necessarily wait upon 
 the evolutionary changes in the household folkways. The 
 efforts at such a reconstruction are just now in that stage 
 where women's curiosity is aroused over such sciences as 
 dietetics, hygiene, child psychology, household economy, 
 and domestic science; but as yet a hearty acceptance of 
 these sciences which throw light on higher standards of 
 family consumption is cheeked by an intuitive feeling that 
 such studies are merely the hobbies of impractical theorists. 
 A forward-looking appreciation of the situation is made 
 in a most sympathetic spirit by C. H. Cooley in these 
 words: "It is plain also that in any plan of reform of 
 values through demand, the mind of women must have a 
 great part. In so far as this mind seems at present to fluc- 
 tuate between conventionalism and anarchy, the cause, 
 perhaps, is that it lacks the guidance and discipline that 
 might come from the better organization of women as a 
 social group. . . . The critical question here is, will 
 women, under conditions of freedom, develop a group con- 
 sciousness of their own, with high ideals of each function, 
 and power to discipline the less responsible of their sex ? It 
 is hard to see how modern civilization can dispense with 
 something of this kind." The gradual development in 
 neighborhood psychology of certain standards of household 
 economy, and the institutional developraent of new methods 
 of spending efficiently, do not seem at all , impracticable, and 
 it is not unlikely that a gradual evolution of a kind of pro- 
 fessional pride in the management of family income will 
 be realized. An indication of the profound economic and 
 social significance of such a development is clear in the 
 following words of Royal Meeker, whose direction of the 
 cost of living studies among thousands of families for the 
 United States Department of Labor has given him an un- 
 usual knowledge of the facts: "The workers of America 
 are obliged to live on a diet too restricted and monotonous 
 for the maintenance of as high a degree of efficiency and 
 
358 Markets — Their Principles and Strategy 
 
 health as ought to be maintained as a reasonable minimum. 
 I am of the opinion that the most efficacious remedy is not 
 higher wages, but rather improved systems for distributing 
 and marketing foodstuffs, and the education of house- 
 keepers in the art of keeping house, with emphasis on diets. 
 Housekeeping is not exactly a lost art. It is one of the 
 arts that has not yet been completely found. "^ 
 
 The economies of consumption leads also to an analysis of 
 the stratification of society into classes. Every one is aware 
 of the existence of certain clearly defined levels of income 
 and spending power in modern society, and these have been 
 statistically outlined in the chapter on Ownership. The 
 sharpest contrast between classes is obvious when the ex- 
 tremely rich and the extremely poor are put side by side. 
 In between these extremes are all gradations, — unskilled 
 workers, skilled workers, teachers, lawyers, doctors, engi- 
 neers, executives, financiers, and a fairly wealthy leisure 
 class. "Our standard of decency in expenditure ... is 
 set by the usage of those next above us in reputability ; 
 until, in this way, especially in any community where class 
 distinctions are somewhat vague, all canons of reputability 
 and decency, and all standards of consumption are traced 
 back by insensible gradations to the usages and habits of 
 thought of the highest social and pecuniary class — ^the 
 Avealthy leisure class. ' ' ^ The classes with the lesser incomes 
 make up the mass of the population, but their standards of 
 taste, style, and pleasure are derived, directly or indirectly, 
 from the classes with the greater incomes. The population 
 at the base of the pyramid draws its customs and ideals of 
 spending money from the group at the apex of the pyramid. 
 Hence, the people of large incomes as a class exercise an 
 influence upon styles and standards of living altogether out 
 of proportion to their numerical importance. They are the 
 models among consumers, envied by the other social classes, 
 and to as large an extent as possible, imitated by other 
 social classes. "What they buy, everybody wants to buy; 
 
 I "What is the American Standard of Living?" Monthly Labor Re- 
 view, Vol. IX, p. 5. See, also, on this whole problem, "The Backward 
 Art of Spending Money," by W. C. Mitchell. 
 
 2T. Veblen, "Theory of the Leisure Class," p. 104. 
 
Markets — Their Principles and Strategy 359 
 
 what they consider taboo, everybody inclines to consider 
 taboo. 
 
 The pathways of entrance to this class are open to all 
 coiners. The inheritance of fortune places not a few people 
 there, but there are constant accessions of successful busi- 
 ness and professional men and women who have worked 
 their way from the bottom to the top, from speculators 
 whom luck has favored, from small tradespeople who have, 
 by a lifetime of work and saving, made the necessary prop- 
 erty accumulation. Thousands of accessions have occurred 
 among those who are rather loosely and often inaccurately 
 called the "war-made millionaires." But it takes a genera- 
 tion or so for newcomers to become assimilated into all the 
 manners and conventions of the most influential class. 
 There is usually a difference, obvious enough and many 
 times humorous, between the nouveau riche and those 
 "bom to the purple." The latter class inherit not merely 
 the income proper to the class, but also the bringing up in 
 a home and community environment which assures that 
 from youth up, their breeding will make it natural and 
 easy for them to embody the virtues, traditions, forms, 
 canons and standards of the class. A historical examina- 
 tion of the origins of a goodly portion of these class stand- 
 ards of consumption would lead back to the institutions of 
 Europe, — ^the Europe of courts, estates, barons, counts, and 
 kings. It is not easy for interlopers to orient themselves 
 overnight in this historical background, and to behave 
 gracefully in the midst of the new class psychology. The 
 parvenu is notoriously clumsy and absurd in his attempts 
 to adapt himself to the ways of the class, and not infre- 
 quently makes a ludicrous botch of the attempt. It is neces- 
 sary then to conceive of this class which more than any 
 other sets the canons of consumption as an institution in 
 itself, with class traditions and class psychology, with a con- 
 tinuity unbroken from generation to generation, with a 
 class self-consciousness and a distinctive group self-asser- 
 tiveness. 
 
 The motives in the consumption of all goods, whether by 
 the most well-to-do or the less well-to-do, are guided by two 
 
360 Markets — Their Principles and Strategy 
 
 aspects of the goods. On the one hand, there must be a 
 certain base line of plain food value to satisfy primitive 
 hunger; a certain minimum of warmth-giving quality or 
 body-covering quality in all forms of clothing; a certain 
 indispensable protection from the elements in all forms of 
 housing; a certain serviceability in all forms of furniture; 
 a certain minimum of plain, simply utility to sustain life 
 and satisfy the imperative human wants. But on the other 
 hand, all consumption except the rarest and crudest, re- 
 quires in the food, clothing, housing, furniture and the like, 
 a substantial element of style, fashion, culture and taste. 
 This element in all consumption is in part of course a con- 
 cession to the artistic cravings of the human spirit, but in 
 ordinary life it is probably much more an expression of the 
 profound human bent to ape the standards of consump- 
 tion which command prestige and admiration. Goods are 
 bought, then, partly for the service which they will give to 
 the user, but also for the extent to which they will give the 
 satisfaction that comes from being in style. As incomes 
 increase, the search for elements of style and prestige be- 
 comes greater and greater, until the upper limits of lavish 
 display of wealth are reached. When the charge is made 
 that what troubles people is not so much the high cost of 
 living as the cost of high living, what is really implied is 
 that people are spending their incomes for the style, showi- 
 ness, display of goods more than for their direct service- 
 ability. 
 
 Style and display follow standards which hold sway 
 among the most well-to-do. And among the most well-to- 
 do, those who constitute the so-called leisure class really set 
 the pace for consumption standards. To a very large de- 
 gree, the standards which prevail there refer to extraordi- 
 nary luxury, to impressive expensiveness, to costly leisure, 
 to a rapid fluctuation of vogues, modes and styles. The 
 extravagance of the poor, the race to "keep up" with one's 
 set, the desperate determination to buy those things which 
 are expected of one in one's position, the prudence of an 
 ever-growing proportion of the higher income classes in 
 refraining from having children lest the extra expense 
 
Markets — Their Principles and Strategy 361 
 
 might require the giving up of the most flattering standard 
 of living, — all this has to be studied as a part of the insti- 
 tution of social classes. The instincts expressed in display, 
 prestige, social approval, distinction, and reputation, are 
 the driving human forces behind all such spending stand- 
 ards ; and the tendencies toward imitation, habit formation, 
 suggestibility, and crowd-mindedness are the directing in- 
 fluences in these phases of consumers' behavior.^ 
 
 In the face of these psychological forces, the frugal vir- 
 tues make discouraging headway. As Thorndike remarks, 
 "There are working against thrift, the very strong original 
 tendencies toward gratifying the gross sensory appetites, 
 and toward display, mastery and approval." Thrift can- 
 not be made to appeal to the imagination of the masses 
 forcibly except as they are tempted to imitate thrift on the 
 part of the classes which command prestige. Precisely be- 
 cause "the habit of aping the expenditure of those better 
 off than ourselves is pathetically general,"^ it is true that 
 the formation of new habits of aping the economy and 
 thrift of those better off than ourselves is the only broad 
 road to successful thrift. Hence, the admonition of Thorn- 
 dike is thoroughly constructive: "Thrift should then be 
 begun with the rich, important, able, and popular. So 
 long as it is advocated as the virtue of the poor and lowly, 
 the young and struggling, the propaganda will be largely 
 self-destructive. ... If the world as a whole is to be effi- 
 cient, its mighty ones must distinguish sharply between 
 expense for efficiency and expense for display, and leave the 
 latter to peacocks, monkeys, the feeble-minded and women 
 who have to make themselves salable."^ The institution 
 of social classes, therefore, controls frugality as well as 
 extragavance. Genuine thrift among the masses must wait 
 until conspicuous thrift and saving are as prominent among 
 the classes of greatest income as conspicuous luxury and 
 waste often are at the present day. 
 
 iSee Cooley, "Social Process," pp. 303-334; Carver, "Principles of 
 Political Economy," pp. 48-49; Sumner, "Folkways," pp. 45-47. 
 
 2 Hartley Withers, Armals of the American Academy, Vol. 87, p. 
 231. 
 
 3 E. L. Thorndike, "Psychological Notes on the Motives for Thrift," 
 Armals of the American Academy, Vol. 87, pp. 213-218. 
 
362 Markets — Their Principles and Strategy 
 
 Technology for Guidance of Consumption 
 
 There are three main methods in vogue for the control 
 and shaping of consumers' demands and expenditures, — 
 private business agencies, consumers' co-operative agencies, 
 and political agencies. 
 
 The first of these, private business agencies, has already 
 been discussed at length in the section on demand creation, 
 advertising, and salesmanship. Business men do not trust 
 to consumers to buy what they please, but at no small ex- 
 pense they carry on advertising and selling campaigns to 
 control the channels in which consumers shall spend their 
 incomes. 
 
 The second agency, consumers' co-operative adventures, 
 are the outcome of the feeling of the individual consumer 
 that he is utterly helpless. He buys what he finds in the 
 stores, pays the price which he has to, and comes away 
 with the feeling that he is at the mercy of some market 
 juggernaut. Consumers' leagues and co-operative stores 
 have been undertaken, but as yet have not been applied on 
 nearly so wide a scale as they have in a number of Euro- 
 pean countries. Consumers' co-operative efforts have demon- 
 strated their efficacy and are strongly significant as an in- 
 dication of the feeling of protest in the minds of large 
 numbers of consumers, and of the desire to assert their in- 
 dividual wants by a collective agency. 
 
 The third agency, political and legislative control, is 
 highly important. A recent writer on political science has 
 observed, "Polities is becoming the chief method by which 
 the consumer enforces his interests upon the industrial 
 system. . . . Business, then, must look forward to increas- 
 ing control in the interests of those who buy. Processes 
 will be inspected, and regulated by law, some industries will 
 be operated directly by the government."^ One of the 
 foremost political interferences with consumers' expendi- 
 ture is the method of taxation. Inheritance taxes, income 
 taxes, excess profits taxes tend to divert a considerable 
 share of large incomes into public uses, and consumption 
 
 iW. Lippman, "Drift and Mastery," pp. 71, 75. 
 
Markets — Their Principles and Strategy 363 
 
 taxes, indirect taxes, tariffs and imposts tend to appro- 
 priate relatively larger shares of the incomes of the mass 
 of people to public uses. A great number of bureaus, main- 
 tained by federal, state, and municipal authorities, are 
 devoted to education of people to wise use of income. Public 
 Health Bureaus, Cost of Living Commissions, Children's 
 Departments, "Welfare Committees, Marketing Bureaus, 
 and other like bodies, are engaged in publicity, propaganda, 
 and organizing activity for the purpose of improving con- 
 sumers' demand. Municipal parks, playgrounds, beaches 
 and libraries are created to make it easy for people to spend 
 their income for leisure enjoyments in as wholesome a man- 
 ner as possible. Legislation is common to prevent people 
 who by nature are easily gullible, from falling the victims 
 of wild-cafc adventures in stock speculation and of swindlers 
 of every sort. Laws are on the statute books against the 
 spending of money in gambling, lotteries, and games of 
 chance. In various forms there has come into being a body 
 of political agencies to encourage the intelligent and bene- 
 ficial spending of money, and to discourage or to forbid 
 foolish and harmful spending. 
 
 Consumers' demand, when viewed from all these points 
 of view, is not a settled and finished fact, immune from 
 criticism, and entitled to unbridled laissez faire. The using 
 of wealth is the end and aim of the producing of wealth, 
 and if it is used badly, its production to begin with was a 
 waste and a futility. All too widespread has been the 
 assumption that anybody was justified in making poor 
 goods, or goods which could only bring harm to the con- 
 sumer, provided he was clever enough to find buyers; and 
 that if the buyers were foolish or ignorant enough to buy 
 such goods, it was their own fault, and they deserved to 
 suffer the consequences. Nobody was supposed to be his 
 brother's keeper in any affair which touched the spending 
 of his brother's income. Maximum production has been 
 extolled as the supreme virtue without much concern as to 
 what it was that was to be produced. Hence much pro- 
 duction has been of a sort that degraded men in the con- 
 suming. It is encouraging therefore that the tendency is 
 
364 Markets — Their Principles and Strategy 
 
 appearing positively to treat the spending of income as a 
 province wherein the methods of scientific analysis apply. 
 Only by knowing why consumers behave as they do, and by 
 understanding how their behavior can be redirected advan- 
 tageously, can the modern economic community acquire an 
 intelligent self-control. 
 
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 Stevens: Unfair Competition 
 
 Federal Trade Commission Report on Meat-Packing Industry, 
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 Anderson, B. M., Jr.: Social Value; The Value of Money 
 
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 CooLEY, C. H.; Journal of Political Economy, Vol. 26, p. 366 ff. 
 
 LiTMAN, S.: Price Control during World War 
 
 Carver, T. N.: Principles of Political Economy 
 
 Mitchell, W. C: The Backward Art of Spending Money 
 
 Copeland: Marketing Problems 
 
 Duncan: Marketing, Its Problems and Methods 
 
 Ivey: Principles of Marketing 
 
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Markets — Their Principles and Strategy 365 
 
 Simpson, Kemper: Price Theories, Quarterly Journal of Eco- 
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 HiGHAM, C. F.: Scientific Distribution 
 
 Putnam, G. E. : Journal of Political Economy, Vol. 29, p. 297 ff. 
 
 Veblen, T.: Theory of the Leisure Class 
 
 Cherington: Elements of Marketing 
 
 CooLEY, C. H.: Social Process 
 
 Tipper and others: Principles of Advertising 
 
 Whitehead, H.: Principles of Salesmanship 
 
 Ivey, p. W.: Elements of Retail Salesmanship 
 
 KiTSON, H. D.: The Mind of the Buyer 
 
 Weld, L. D. H. : The Marketing of Farm Products 
 
 Macklin, T.: Efficient Marketing for Agriculture 
 
 Shaw, A. W.: Some Problems in Market Distribution 
 
 Douglas, Paul and Dorothy, and Joslyn, C. S.: What Can a 
 Man Afford? American Economic Review, Sup. 2, Decem- 
 ber, 1921 
 
 Friday, David: An Extension of Value Theory, Quarterly Jour- 
 nal of Economics, Vol. 36 ff., 197-220 
 
CHAPTER X 
 
 MONEY AND CREDIT: THEIR SERVICES AND DANGERS 
 
 The universal unit of measurement for the elements of 
 the economic order is money. The language of business 
 is always dollars and cents. Labor works for a money 
 wage, capital invests money for a money return, manage- 
 ment assembles all the factors of production in terms of 
 money costs and money gains, the market buys and sells at 
 a money price, finance is the institution of money itself. 
 Every business element has to be translated into terms of 
 dollars and cents before business men can calculate about 
 profit or loss. The various steps and particles of the eco- 
 nomic system must have a money price tag placed upon 
 them before they can play a part in economic life. By 
 thus reducing economic elements to a common language the 
 money unit of measure serves as a great unifying and or- 
 ganizing factor in economics. 
 
 A price system exists when all economic services, com- 
 modities, or transactions are measured in value by some 
 medium of exchange. The assortment of specialized serv- 
 ices, tasks and functions has become so vast and intricate 
 only because each separate item could be brought within 
 the comprehensive price regime. In most modem coun- 
 tries, these units of money price are such as the dollar, the 
 pound sterling, the franc, the mark, etc. In an economic 
 system based upon money prices, all economic activity has 
 to be reduced to a price term. This fact makes possible the 
 minute subdivision of labor, the division of tasks, the use of 
 machinery on a large scale and the consequent increase of 
 production. 
 
 Note — The purpose of this section is not to give a technical ac- 
 count of the detailed processes of banking and exchange, but to 
 describe some of the main elements in the structure of money and 
 credit institutions. The subject involves many intricacies and much 
 detailed analysis, and it is difficult to sort out those central and 
 
 366 
 
Money and Credit 367 
 
 The far-reaching consequences can best be understood 
 only after the chief money instruments are clearly in mind, 
 and their functions are understood. 
 
 The precious metals have been important money mate- 
 rials in the development of modern price systems, and the 
 most important of the metals has been gold. In the United 
 States at present, 23.22 grains of pure gold enter into the 
 dollar. For coinage purposes, a copper alloy is used, so 
 that the actual dollar contains 25.8 grains of gold nine- 
 tenths fine. An act of Congress definitely establishes that 
 amount of gold as the content of the dollar. Likewise any- 
 one holding a dollar in any form of money holds the equal 
 of 23.22 grains of pure gold. If a person has the raw gold 
 he can take it to the United States Government and have it 
 converted into gold coins. This free coinage insures that 
 the ratio between the value of the gold as raw metal and 
 the value as money coin shall remain constant. Free coin- 
 age exists for gold alone and for no other metal in this 
 country, and this exclusive right of gold is the factor which 
 establishes gold as the single standard of value in our price 
 system. 
 
 The advanced economic systems of the present time are 
 organized under a price system upon the principle of the 
 single standard. A century ago, only one country, Eng- 
 land, had adopted the single standard, but within the 
 century the new principle has received wide acceptance. 
 
 The alternative was bimetallism, in which gold and silver 
 usually were the standard metals. The reason for the gen- 
 eral abandonment of the bimetallic standard appears in the 
 experience, for example, of the United States. The Ameri- 
 can bimetallic system began by establishing free coinage of 
 both silver and gold at the ratio of 15 to 1. That is to say, 
 one ounce of gold would be coined into the same amount of 
 
 basic elements which give a subBtantially true and accurate descrip- 
 tion, a description which is brief yet adequate to enable the student 
 to grasp the important problems of finance. The effort has been 
 made, however, and it is hoped that the account of the financial in- 
 stitution will be, in spite of the unavoidable condensation and 
 brevity, sufiiciently comprehensive to give the student his financial 
 bearings in his economic thinking. 
 
368 Money and Credit 
 
 money as fifteen ounces of silver. But gold proved to be 
 worth more for other purposes than in coins, with the result 
 that very little gold was brought to the mints for coinage 
 purposes. The ratio was therefore changed to 16 to 1/ but 
 under the new ratio it was found that it paid the holders 
 of gold to coin their metal whereas it did not pay the hold- 
 ers of silver. Silver was worth more as bullion in the open 
 market than in coins, and hence very little silver found its 
 way to the mints. The coinage ratio between the two metals 
 could not be made to correspond with the actual market 
 ratio. "Wherever the bimetallic standard is tried, this diffi- 
 culty gives rise to what is known in economics as Greshajn 's 
 law, namely, that when the market ratio of the bullion of 
 the two metals does not correspond with the nominal ratio 
 of coinage, the metal overvalued at the mint will tend to 
 drive the other from circulation. The free coinage of silver 
 was abandoned in the United States in 1873. Two subse- 
 quent acts of Congress, the Bland Allison act of 1878 and 
 the Sherman Act of 1890, authorized the coinage of a lim- 
 ited amount of silver under certain restrictions. The 
 United States has, by Act of Congress, been definitely under 
 the single gold standard since 1900.^ 
 
 Gold is therefore the standard of value in the price sys- 
 tem. A bushel of wheat is compared in value with a pound 
 of tea by comparing the amounts of gold for which each 
 will exchange. The money price is the index of the eco- 
 nomic value of any service or commodity or piece of prop- 
 erty in relation to all other services, commodities and 
 properties. The value of anything and everything is meas- 
 ured by comparison with the standard gold dollar, and this 
 standard is the universal unit of economic measurement 
 throughout the price system. 
 
 Subsidiary Metallic Money 
 
 There is a subsidiary or token metallic money which cir- 
 culates and performs the services of purchase and sale, and 
 
 1 16 to 1 is approximate; the exact ratio is 15.988 to 1. 
 
 2 Except for certain special legislation permitting limited coinage 
 of silver, the United States has been on a gold basis since 1873. 
 Bimetallism is now mainly a matter of historical interest. 
 
' Money and Credit 369 
 
 wHcli is accepted in payment because it is redeemable in 
 gold. We have in the United States, for example, the silver 
 dollar, the half-dollar, the quarter, the dime, the nickel and 
 the one-cent piece. None of these coins contains actual 
 raw silver, nickel, or copper equal in value to the figure 
 stamped on the face of the coin. If the coins were melted 
 and the bullion sold in the metal market, the selling price 
 would be only a fraction of the face value which they are 
 given in the coin. Yet they circulate freely, the reason 
 being that they are redeemable in gold at their full face 
 value and that they are legal tender up to certain amounts. 
 
 Those forms of money are legal tender which the law 
 requires people to accept in payment of debts. Gold is 
 legal tender in any amount, but the subsidiary coins in only 
 limited amounts. An exception must be made of silver dol- 
 lars, which are legal tender in any amount, except when 
 otherwise stipulated in a contract. The smaller silver coins 
 are legal tender to the amount of ten dollars, and nickels 
 and pennies to the amount of twenty-five cents. The metal 
 coins must be accepted in payment of contracts or debts to 
 these amounts. 
 
 The inconvenience of carrying heavy and bulky coins is 
 obviated by the use of various forms of government paper 
 money. In popular knowledge, this paper money is simply 
 the dollar bill, the five-dollar bill, and bills of other 
 amounts. However, the paper bills have different origins. 
 Some are gold certificates, with a dollar of gold reserve in 
 Government vaults for every dollar of paper. Some are 
 silver certificates, with a silver dollar in reserve in Govern- 
 ment vaults for each paper dollar in circulation. The 
 paper money is redeemable in metal coin on demand, and 
 is legal tender in the same way as the respective coin. 
 
 We have also as paper money government notes which 
 are not backed by a metal reserve equal to the full face 
 value of the notes. The partial reserve is practicable be- 
 cause only a fraction of the paper bills will be presented 
 for redemption at any one time. Legally, the full issue of 
 paper money is convertible into specie, but this legal pro- 
 vision is made only because in actual practice the Govern- 
 
370 Money and Credit 
 
 ment is called upon to redeem only a small amount at a 
 time. Treasury Notes of 1890, redeemable in gold coin, and 
 the so-called greenbacks issued during the Civil War, re- 
 deemable likewise in gold coin are paper money issues of 
 this partial reserve type.^ 
 
 A third type of paper money is sometimes resorted to, 
 namely fiat or inconvertible money. Government paper 
 money of this type has no reserve of metal, not even a par- 
 tial reserve. It is not redeemable in any standard of value. 
 The United States at present has no fiat money in circula- 
 tion. The greenbacks when first issued were fiat paper 
 money, and the fact that they were not redeemable caused 
 their purchasing power to depreciate far below their face 
 value. "When they were made redeemable in 1879, their 
 purchasing power rose to the par of the face value. Most 
 Governments are disposed to avoid fiat paper except in ease 
 of war emergency. Germany floated huge inconvertible 
 paper issues during and following the World War. The 
 war inflation in England 's currency has undermined the re- 
 lation between her paper money and gold reserves, and has 
 left her, for a time, at least, on an inconvertible basis. The 
 Eussian Bolshevik Government in 1920 had already issued 
 in Russian money an equivalent of eighty billion dollars in 
 irredeemable paper money. Continental Europe at the end 
 of the war was, in general, using money which could not be 
 redeemed in the gold standard. The situation would ap- 
 pear, however, to be temporary and Europe appears likely 
 to attempt to get back to a redeemable standard gradually 
 and ultimately. The fiat principle does not commend it- 
 self as safe and acceptable to the modern capitalistic eco- 
 nomic systems. 
 
 In the United States to-day, therefore, all forms of money 
 issued by 'the Government refer to gold ultimately as the 
 standard of value. The money forms have general accept- 
 ability in price transactions. Also they are legal tender 
 by Government authority and are backed ultimately by 
 gold reserves. Obviously the value of the gold in the dollar 
 
 1 See pp. 406-411 for forms of paper money under Federal Reserve 
 Banking System. 
 
Money and Credit 371 
 
 thus stands as the unit standard of value for the measure- 
 ment, of all price relations, and directly or indirectly, 
 through the various subsidiary and paper money instru- 
 ments, the money medium of the price system is main- 
 tained. 
 
 Although these forms of money establish a standard of 
 value for the price system as a -whole, nevertheless they 
 constitute only a very small part of the actual medium of 
 exchange. About nine-tenths of all business transactions 
 take place without the circulation of any of these money 
 instruments. The great bulk of business is done by credit 
 instruments. Credit allows people to secure goods now and 
 to pay for them later on. It means essentially the same 
 process as borrowing. A seller trusts a buyer for payment 
 in the future. Or a buyer pays a seller immediately with 
 money borrowed from a bank to be repaid later. The va- 
 rious instruments for the application of the principle of 
 credit serve the huge majority of all price transactions. 
 In the forepart of the last century, credit was of small 
 importance, but to-day it is of dominating importance 
 throughout the price system. The credit system is a recent 
 creation and has come about in response to the pressing 
 needs of the highly specialized economic system resting 
 upon machinery and applied science.^ 
 
 Banking institutions have developed as agencies for the 
 handling of credit and money instruments. The paramount 
 attention of commercial banks is devoted to the operation 
 of the credit system. Not all banks are commercial banks. 
 Some are investment banks, some are savings banks, some 
 are trust companies, etc. But the banks of central im- 
 portance in the conduct of credit operations are the com- 
 mercial banks, and hence the following description of the 
 relation of commercial banks to credit control should be 
 understood as a description at the outset of the pivotal part 
 of credit institutions. This does not mean that all commer- 
 cial credit passes through the hands of bankers, but inas- 
 
 iSee Scott, "Money and Banking," 1916, pp. 92-94; also Laughlin, 
 "Credit of Nations," pp. 8-12, and Chapter II; and H. G, Moulton, 
 "Financial Organization of Society," Chapter IX, 
 
372 Money and Credit 
 
 much as most commercial credit does involve banking opera- 
 tions, it will be clearer and more accurate to study commer- 
 cial credit in connection with commercial banks, and 
 incidental forms of commercial credit which do not involve 
 banking can be noted adequately in passing. 
 
 Commercial credit may be classified in three major forms, 
 namely, open accounts, promises to pay, and orders to pay.^ 
 
 Open accounts are often called book accounts, and take 
 place with or without banking activities. An example of 
 open accounts carried on without the direct aid of a bank 
 is the very familiar process of "charging" goods bought 
 from a grocery store. The grocer keeps on his books a 
 record of all goods bought by each customer, and at regular 
 intervals, probably every month, balances up the total price 
 of the goods bought and the total amount of payments made 
 by the customer during the month. The balance owing the 
 grocer is then paid, possibly in money, more often in the 
 form of a check drawn on the customer's banking account. 
 If checks are used, then a process of open accounts with a 
 bank is involved. The customer pays most of his bills, 
 grocery and otherwise, by checks, and at the same time he 
 is constantly receiving checks from people who owe him in 
 settlement of their debts. These checks which he receives 
 from others he deposits from time to time at the bank. The 
 books of the bank make a record of all that the man de- 
 posits and all that he draws out, and from time to time the 
 bank gives him notice of the balance. A large part of the 
 purchases of retail dealers from jobbers are financed by 
 book credit. The jobber carries the retailer's account on 
 his books for a certain period of time. This open account 
 is in the nature of a loan to the retailer for the period in- 
 volved and is a common form of credit. 
 
 Promises to pay take many forms, such as promissory 
 notes, bank notes, or government notes. The government 
 paper money already described is in the nature of a promise 
 by the Government to pay on demand gold or other stand- 
 ard money. Banks are allowed to issue notes for cireula- 
 
 1 Scott, "Money and Banking," p. 95; Moulton, "Financial Organi- 
 zation," p. 163. 
 
Money and Credit 373 
 
 tion, which are similar promises to pay to the bearer on 
 demand a certain sum of money. A promissory note is a 
 person's signed legal promise to pay at some future date a 
 certain sum to another party. Most promissory notes are 
 settled eventually not by the passing of specie or Govern- 
 ment paper money, but by further credit devices. For 
 instance, a check is drawn in payment, and the person re- 
 ceiving payment deposits the check at the bank, where it is 
 recorded in the regular process of accounting by the bank. 
 The third form of commercial credit, the order to pay, is 
 commonly known among business men as the bill of ex- 
 change or draft. Suppose a wholesale merchant sells to a 
 retailer $10,000 worth of shoes. The retailer cannot pay 
 cash, — in fact he cannot paj^ for the shoes until he has in 
 turn sold them to his customers. The wholesaler must wait 
 for his payment until the retailer has had a chance to sell 
 a large part of the shoes. To take care of the deferred pay- 
 ment, the wholesaler writes out an order to the retailer to 
 pay to him ten thousand dollars at the end of a stated 
 period, perhaps three months. This order to pay is a credit 
 instrument. The principle and method involved have very 
 wide applications in business. The variety of applications 
 will be explained more fully later in the section on banking. 
 
 Banking and Commercial Credit 
 
 Production, wholesaling, retailing, transportation, all are 
 directly dependent upon borrowing in some form for their 
 activities. The commercial credit operations of banks pro- 
 vide such loans for borrowers, and this is the paramount 
 function of modern banks. 
 
 This assertion that banks exist primarily for the purpose 
 of lending money does not square with a widespread popu- 
 lar notion of banking. The popular conception often seems 
 to be thab a bank is a place to put money for safe keeping, 
 perhaps to draw a small rate of interest. A bank is thought 
 of as a place where anybody's surplus cash can be de- 
 posited. Bank deposits are thought of as money put into a 
 bank. It is true that this storing of money is an important 
 function of banks, but under the modern price and credit 
 
374 Money and Credit 
 
 system, a new function has developed which overshadows 
 the old in importance. Under the new function, a bank 
 deposit is not necessarily money which a customer has put 
 into the bank, but is a borrowing from the bank. At first 
 thought, it seems paradoxical to consider a loan made by 
 the bank as a deposit in the bank. The apparent contra- 
 diction gives rise to real difficulty in understanding the 
 great service which banks render to the business community 
 through deposit currency, i.e., loans.^ 
 
 The loan involves a sum drawn out of the bank for a 
 period of time and a sum put into the bank at the end of 
 the stated period of time. The loan always involves the 
 assurance that at a specified date the borrower will return 
 the amount of the loan to the bank. Hence, immediately 
 and during the period of the loan, the amount of the loan 
 is assigned to the borrower, but at maturity the amount of 
 the loan is something coming into the bank. The loan in- 
 volves a promise to pay into the bank at the date of ma- 
 turity the sum specified. This assured payment into the 
 bank is therefore rated as a deposit. The bank always has 
 as much coming in as the amount of loans put out with 
 borrowers.^ Hence loan deposits are on the one hand what 
 is due the borrowers to be supplied by the banks and on the 
 other hand what is due the banks from the borrowers when 
 the loans are paid up. 
 
 As explained in the Federal Reserve Bulletin, "The 
 naive idea that a bank deposit normally originates by the 
 bank's customer making a deposit of cash in the bank does 
 not reveal the substance of the situation in countries like 
 the United States, with a highly developed system of bank 
 credit and its utilization through the form of the deposit 
 account. The most usual form in which bank deposits orig- 
 inate is by borrowers going to a bank to seek accommodation 
 and offering their notes for discount, the bank making the 
 loan sought by the customer by opening a credit or "de- 
 posit" on its books in the borrowers' favor. Normally, 
 
 1 See I. Fisher, "Purchasing Power of Money," pp. 32-47. 
 
 2 Also the bank has interest, or discount, on the principal of the 
 loan. 
 
Money and Credit 375 
 
 therefore, what are called deposits, increase as loans and 
 discounts do; in other words, as borrowings from banks 
 increase."^ 
 
 Deposit currency is the chief creation of commercial 
 banking and a clear conception of its workings is essential 
 at the outset. Deposit currency has come in recent years 
 to make up about nine-tenths of the actual currency circu- 
 lation of the country. 
 
 Deposit currency is a substitute for the old forms of 
 money. The new form has come into being because it has 
 been found more convenient for business men to use. It is 
 created in the following manner: A bank has to begin 
 with a certain amount of money as a foundation. The 
 capital stock represents money paid in, the bank building 
 has a real estate money value, a number of people in the 
 community have left money with the bank for safe keeping. 
 Suppose the total of all such resources amounts to $1,000,- 
 000. Whatisthelendingpower of thebank? Is it $1,000,- 
 000? As a matter of fact, its lending power is much more 
 than that amount. The total amount which the bank can 
 lend exceeds many times over the total amount of cash and 
 money which the bank possesses. This, too, seems paradox- 
 ical, for it will be asked, how can a bank lend that which it 
 does not have? If the total funds owned by the bank are 
 only $1,000,000 how can it lend more than that amount? 
 The device of deposit currency accomplishes the task. 
 
 A deposit loan is a loan which gives the borrower a right 
 to draw actual money from the bank, with the tacit expec- 
 tation and understanding that as a matter of real practice, 
 the borrower will not assert the right and will not draw the 
 actual money out. Instead of asking for the actual money, 
 the borrower will use the loan by writing checks. To make 
 the transaction concrete, a definite example may be as- 
 sumed. Suppose the Baldwin Locomotive Company, the 
 New York Central Kailroad. and the Bethlehem Steel Com- 
 pany each borrows $1,000,000 from the National City Bank 
 of New York City. The total loan made by the National 
 City Bank would be $3,000,000. Assume that the New 
 1 September 1, 1919, p. 815. 
 
376 Money and Credit 
 
 York Central orders $1,000,000 worth of locomotives to be 
 made by the Baldwin Locomotive Company, and that the 
 latter buys $1,000,000 worth of steel for its needs from 
 the Bethlehem Steel Company, and the steel company buys 
 $1,000,000 worth of raw metal for its needs. How are 
 the accounts settled? The railroad company may write a 
 cheek on the National City Bank ordering the bank to pay 
 the amount of the $1,000,000 loan to the locomotive manu- 
 facturers. The bank thereupon transfers on its records 
 that sum to the account of the Baldwin Locomotive Com- 
 pany. Meantime the Baldwin Locomotive Company meets 
 its debt to the steel company by writing a check on the 
 National City Bank for the amount of $1,000,000, and on 
 the records of the bank that amount is transferred to the 
 name of the Baldwin Company. In the same way, the Beth- 
 lehem Steel Company meets its debt by writing a check on 
 the bank, as a result of which its loan of $1,000,000 is put 
 on the account of the corporation with which it is doing 
 business. The paramount feature to notice is that money 
 has not been passing around directly through the hands of 
 the three big corporations. They did not see, or want, or 
 ask for gold or silver, or dollar bills. These money forms 
 did not actively enter into the transaction. Nor need the 
 bank have had in its vaults $3,000,000 to back up the trans- 
 action. A fraction of that amount in actual money would 
 be all that was necessary. The deposit loan would be car- 
 ried by transferring the "right to draw money" from the 
 name of one corporation to the other. The actual money 
 would never be touched. By the use of checks, the bor- 
 rowers could direct the bank to transfer the right to the 
 money to other parties, and the banks could record the 
 transfer as a matter of book accounting. The actual money 
 would not be moved. 
 
 It is natural to wonder, then, what would happen if the 
 various borrowers should all go to the bank at once and 
 demand actual money. The bank has given them one and 
 all a right to claim actual money, and yet the bank does not 
 possess anything like the full amount itself. "What would 
 happen if all these borrowers should ask for gold and silver 
 
Money and Credit 377 
 
 and dollar bills? The answer is that the whole banking 
 and credit system is built upon the tacit understanding that 
 the borrowers will transact their business by check and will 
 never really draw the actual money called for in the loan. 
 This broad understanding is the very foundation of com- 
 mercial banking, and the custom of banking and commerce 
 has become so firmly established that the understanding is 
 as much a dead certainty as any fact in economic life. At 
 any one time, only a few borrowers will ask for actual 
 money. The great mass of loans are in the form of a paper 
 statement, and the use of the amount mentioned in the loan 
 is made by checks instead of by the actual passing of 
 money. The deep confidence that all borrowers will not 
 ask for actual money at once makes possible the carrying 
 of loans by the bank much above the actual cash resources 
 of the bank. 
 
 In the foregoing discussion, the general principles have 
 been mentioned, but no statistical estimate has been made 
 of the possible ratio between cash resources of all the banks 
 of the country and the deposit loans as a total. The cur- 
 rency statistics of the country indicate that the cash re- 
 sources of the whole banking community may be as small 
 as about one-twentieth of the deposit currency. The lend- 
 ing power of the whole banking community is at the maxi- 
 mum about twenty times as great as its cash resources. Of 
 course, the lending power is not always used to the maxi- 
 mum. This deposit currency is credit, and by this agency 
 the countless transactions of the business community go 
 forward, and the price system functions.^ 
 
 There are then two major forms of deposits: First, 
 funds actually put into the bank by customers, and, second, 
 funds borrowed from the bank by customers ; of these two, 
 the borrowed funds constitute the great bulk. Both types 
 of deposits are handled for the most part by cheeks. Checks 
 are quicker, handier, easier. They can specify any odd 
 amount of dollars and cents, as, for example, $1756.79, with- 
 
 1 For the country as a whole, the percentage of cash reserve to 
 total deposits varied from 11.7 in 1913 to 6.6 in 1919. See E. W, 
 Kenunerer, "High Prices and De'flation," p. 28. 
 
378 Money and Credit 
 
 out the nuisance of counting out that amount of money. 
 They can be duplicated if lost, and they can be made pay- 
 able to particular persons. In the United States, checks are 
 used in making over 90 per cent, of all payments. They 
 simplify the vast array of price transactions, and facilitate 
 business exchanges to the amount annually of about $250,- 
 000,000,000. They are the natural instruments for the 
 working of the deposit loan system of credit payments. 
 
 This explanation of deposit currency has been made thus 
 far primarily from the standpoint of the banker, but for 
 fuller clearness an explanation should be made also from 
 the point of view of the customer of the bank. "When the 
 business man or the corporation carries a deposit with the 
 bank, — a deposit of the type which involves not a loan but 
 the placing of funds in the bank's keeping, — the fund is 
 used to meet a wide variety of bills and expenses in the 
 business. The business man may desire to pay a dozen 
 different concerns for raw material bought from them; he 
 may desire to pay a score of bills incurred for working 
 capital; he may desire to meet his regular payroll for 
 labor ; and he may pay them one by one by means of checks. 
 At the same time, the business man has payments coming 
 to him from those who owe him money. He is constantly 
 receiving checks from other business men in settlement of 
 their debts to him. As these come in, he turns them over 
 to his bank to be recorded on his account. The bank serves 
 as a kind of clearing office for the two streams of payments, 
 the payments going out and the payments coming in. At 
 certain intervals, the bank supplies reports of the amounts 
 of each, and gives a record of the balance. The scores of 
 business men being paid by the customer and the scores of 
 others who are paying him what they owe him, are using 
 for the most part checks based on bank deposits (or other 
 credit instruments, such as drafts, bills of exchange, accept- 
 ances, etc., which will be explained later). Actual money 
 is not being passed from hand to hand. Credit instruments 
 enable the banker to adjust the accounts of the business 
 man by recording the balance of receipts over expenditures. 
 The checks show who would be entitled to the actual cash if 
 
Money and Credit 379 
 
 a showdown were demanded, and the bank were to be called 
 upon to pay up with the money itself, and these check 
 records make possible a book account in the bank showing 
 what the customer has paid out by writing checks and what 
 he has received by cashing checks received from others. 
 The process of accounting and of balancing the two streams 
 of payments without the actual circulation of money itself, 
 economizes the use of money, makes the system of price 
 transactions easier and simpler, and points to the bank as 
 an indispensable servant of business men. 
 
 The question arises, therefore. How is the bank paid for 
 rendering such services? The banker has to make a profit, 
 and since the major part of his work is in the form of 
 handling deposit currency, he must be able to make the 
 substance of his profit from that process. For clearness, 
 the profit from the two types of deposits may be considered 
 separately. First, deposits which involve the actual placing 
 of funds in the keeping of the bank may be considered. 
 The bank may pay a small rate of interest to the customer 
 for the sake of having the funds in its control, and then 
 may lend the funds out to someone else at a higher rate of 
 interest. The margin between the two rates of interest 
 would be the margin for profit. But the funds may be 
 placed with the bank for safe keeping and for convenience 
 without any interest being paid to the customer. In the 
 latter case, it is natural to wonder whether the bank can 
 lend these funds out in the same way. The practice of 
 banking allows the banks to lend not all but a considerable 
 proportion of the funds, the practice being made safe and 
 feasible because the bank knows that it will not be called 
 upon by all of its customers to refund the deposits at any 
 one time. Moreover, the bank can and does aim to arrange 
 the length of time of its loans and the dates of maturity in 
 such a way that a steady stream of loans will be maturing 
 at known periods during the year. This arrangement, com- 
 bined with the assurance that the customers will not come 
 together on the same day and announce that one and all 
 want their money out, makes it safe for the bank to lend 
 out a large proportion of the amounts placed in its keeping 
 
380 Money and Credit 
 
 by customers. In transactions with such, deposit accounts, 
 the bank may or may not be obliged to pay any interest for 
 the deposits, but does on the other hand receive the current 
 rate of interest for lending out the funds. So whether the 
 bank has to pay a low interest rate for the deposits or re- 
 ceives them free for safe keeping, it makes its profit by 
 means of lending the funds out again at as good an interest 
 rate as can be secured. By this means, the bank makes a 
 profit while rendering a real service to the customers who 
 have placed the money in deposit and to the customers who 
 have borrowed from the funds thus deposited. 
 
 However, if this were the only means of profit, the banks 
 would not be highly profitable institutions. They have a 
 further source of profits in the loan deposits, because the 
 amount which can be loaned is well above the cash assets 
 which the bank possesses. The bank is a "manufactory of 
 credit" in that it creates loans above and beyond the 
 amount of its actual money resources, and this manufac- 
 tured credit, this loan deposit currency, brings a rate of 
 interest to the bank, thereby furnishing income toward the 
 profits of the bank. To quote David Friday, ""What has 
 happened is that the bank has loaned out to people who 
 have left those loans with the bank as demand deposits a 
 large amount of credit in excess of its capital and surplus 
 and deposits made by real savers. . . . The unique power 
 which the banking institution has is this ability to manu- 
 facture credit, sell the right of its use to individuals, and 
 yet be assured that the credit shall remain upon deposit 
 with the bank and not be drawn out in such manner as to 
 subject the bank to depletion of its cash reserves."^ More- 
 over, such deposits as are not needed to meet immediate 
 obligations can be invested in securities of railroads, public 
 utilities, Government bonds, etc., to draw an investment in- 
 come. Principally from these devices, the banks manage to 
 make a substantial profit in their enterprise. The national 
 banks of the United States, for instance, during the eight 
 years ending June 30, 1916, made net earnings of about 9 
 per cent, on their combined capital and surplus. 
 
 ID. Friday, "Profits, Wages and Prices," pp. 213-214. 
 
Money and Credit 381 
 
 Forms of Loans 
 
 The methods by which banks loan credit assume a wide 
 variety. One important form is single-name promissory 
 notes of individuals or corporations. The borrower is 
 granted a loan because the bank has confidence in his ability 
 to pay back the amount when it comes due or in his char- 
 acter and integrity. No definite property is pledged as 
 security, but the business prosperity of the borrower must 
 be clearly assured. This business prosperity is ascertained 
 by inquiries in the business neighborhood about the state of 
 the borrower's business, by consultation of the records of 
 commercial agencies, such as Dun's and Bradstreet's, indi- 
 cating whether the borrower's credit rating is sound, by 
 personal interviews with the would-be borrower, by requir- 
 ing the borrower to make a detailed financial statement 
 showing resources and liabilities, and by making sure that 
 the borrower's quick assets are at least double his current 
 liabilities. The last criterion is of special significance, be- 
 cause the quick assets include assets which could quickly be 
 converted into money for payment of the loan when due. 
 Such quick assets include cash on hand or in banks, bills 
 and accounts receivable, merchandise and raw materials 
 that are salable. These assets shouM be at least double all 
 current liabilities of the borrower up to the date of ma- 
 turity of the loan. The bank thereby has adequate assur- 
 ance that the borrower will have full ability to pay when 
 the time comes. Honesty and ability on the borrower's part 
 are the fundamental considerations which determine 
 whether the bank will consider a loan safe. Funds raised 
 by the loan are used principally for working capital pur- 
 poses, such as the purchase of raw materials or of com- 
 modities to be used in production processes or distribution 
 processes. 
 
 A second form of loan, also of wide importance, is two- 
 name paper. This paper covers indorsed notes and trade 
 acceptances. Examples might be found in the retail mer- 
 chant who buys goods from a wholesale house, and being 
 unable to muster payment for the goods until he has had 
 
382 Money and Credit 
 
 time to retail them out to his customers, gives a promise to 
 pay at the end of a certain period. The wholesaler, how- 
 ever, does not want to wait for his money, so he takes the 
 promise to pay to his banker, indorses it, and secures from 
 the banker immediate payment. The note of the retailer 
 contains two names, his own and the wholesaler's, and this 
 two-name paper provides two parties responsible for the 
 payment of the note when due. The bank holds the note 
 until it comes due, thereby granting credit or what 
 amounts to the same thing, making a loan which finances 
 the trade deal. A trade acceptance differs from an in- 
 dorsed note in that the acceptance is an order written by 
 the seller to the buyer requiring payment, whereas the 
 indorsed note is a promise to pay written by the buyer to 
 the seller. When the buyer receives the order to pay, he 
 writes "Accepted" across its face, and returns it to the 
 seller. The seller then holds a completed trade acceptance 
 which he may present at his bank, and if the acceptance 
 meets with the banker's approval, he receives payment at 
 once. Hence the seller does not have to wait for his pay- 
 ment ; the bank does the waiting, and thereby serves to loan 
 the amount to finance the transaction. These forms of 
 commercial paper arise from actual commercial transac- 
 tions for agricultural, industrial, or business purposes. 
 Commercial paper has been estimated as comprising some- 
 thing like one-fourth of all bank credit.^ It provides a 
 most important service in commercial transactions by mak- 
 ing it possible for buyers and sellers to finance their activi- 
 ties in forms which supply adequate safety for bank credit 
 support. 
 
 Other forms of loans are distinguished by other types of 
 security. Some loans are secured by mortgages on real 
 estate property, some by promissory notes which the bor- 
 rower has in his possession awaiting payment by people in 
 debt to him, some by collateral in the shape of stocks and 
 bonds. If, for any reason, the loan made by the bank on 
 such security is not paid at maturity, the bank can take the 
 real estate, or the collateral notes, stocks, or bonds, and use 
 iB. M. Anderson, "The Value of Money," p. 512. 
 
Money and Credit 383 
 
 the proceeds from them to supply paj^nent of the loan. 
 Still other forms of security for loans are bills of lading or 
 ■warehouse receipts. These instruments give title to actual 
 goods in process of shipment, or in storage, and the goods 
 themselves are the real security behind the loans. 
 
 Moreover, commercial banks use a considerable part of 
 their funds for investment purposes. The facts of the case 
 at this point suggest how misleading is a frequent concep- 
 tion of commercial banks, namely, that the overwhelming 
 bulk of their work is devoted to purely commercial credit. 
 "Excluding real estate loans, more than one-half of bank- 
 credit represents either ownership , of bonds (with some 
 stock) or else advances on stocks and bonds. "^ Commercial 
 banking is vitally dependent therefore upon investment 
 loans, that is, long-time credit devoted to the financing of 
 the fixed capital requirements of corporations. Purchase 
 of stocks and bonds, or loans to others who use the credit 
 toward such purchase of stocks and bonds is in the nature 
 of investment credit. Stock exchange speculation relies in 
 a very large degree upon funds derived from banks. How- 
 ever, stocks are a minor part of direct bank investments, 
 the bulk of such investment loans being made in bonds, 
 either corporation bonds or government bonds. Investment 
 credit prefers bonds over stocks because of the more con- 
 servative character of bonds.^ 
 
 A different classification of loans shows time loans and 
 demand loans. Time loans run for such periods as thirty, 
 sixty, or ninety days, or more. Demand loans may take the 
 form of call loans, in which case they are used for stock 
 market speculation ; or they may take the form of demand 
 credits in which it is understood that the loan will be al- 
 lowed to run indefinitely, provided only that it remains 
 safe in all respects. The length of time loans, and the dates 
 of maturity, are arranged in such a manner that a certain 
 amount of loans is maturing all of the time. This insures 
 a constant stream of incoming payments for the bank be- 
 
 1 Anderson, Itid., p. 512. 
 
 2 For explanation of relative security of bonds and stocks, see pp. 
 209-211. 
 
384 Money and Credit 
 
 cause of the creditors who have to pay off their debts. By- 
 scattering the dates of maturity of time loans fairly evenly 
 throughout the year, the bank has money coming in regu- 
 larly. As loans mature, the payments on them form the 
 basis for new loans. 
 
 Discount 
 
 "When a bank collects interest on the loan at the time 
 when the loan is made, the interest is deducted from the 
 amount of the loan in advance, and this deducted interest 
 is known as discount. Discount then differs from interest 
 in that interest is collected at the expiration of a loan, 
 whereas discount is deduction of the amount of the interest 
 at the making of the loan at the outset. The discount 
 enables the banker to make some profit on the transaction, 
 and pays him for the service of creating the loan credit. 
 The borrower is willing to pay the discount because he 
 recognizes that the banker is rendering him a real service 
 in enabling him to carry on his business. 
 
 The Network of Financial Institutions 
 
 Commercial banks are the most important of the finan- 
 cial institutions, but there are other types of financial in- 
 stitutions of vital importance, and the various types supple- 
 ment each other in a multitude of ways. In their entirety, 
 the financial institutions of all sorts constitute an immense 
 financial network, interdependent and interrelated, and 
 unify the financial services required in modern specialized 
 industry operated under the price system. 
 
 Investment banking institutions play a very important 
 r61e in the whole financial system, their advent being a 
 practical necessity under the regime of corporate industry. 
 Investment bankers serve as middlemen between corpora- 
 tions issuing securities and investors seeking to purchase 
 securities. Investment bankers have thus far been keenly 
 jealous of their reputations for dealing only in securities 
 which are safe and reliable. They have shunned specula- 
 tive securities, and have confined their services to the better 
 type of stocks and bonds. Most corporations invite the aid 
 of investment bankers in selling their securities to the invest- 
 
Money and Credit 385 
 
 ing public, and most investors are glad of tlie expert advice 
 and assistance of the investment bankers in directing them 
 in placing their money safely, wisely and profitably. 
 
 One function of investment banking is careful analysis 
 of the soundness and reliability of the corporation whose 
 securities are seeking the investment market. This analysis 
 is possible only at the hands of experts. It includes a very 
 elaborate survey and investigation of legal factors, such as 
 taxation provisions, degree of regulation of the corporation 
 by state or federal governmental commissions, laws affect- 
 ing the business, etc. ; of engineering factors, such as pro- 
 ductive equipment, efficiency of management, nature of 
 material, etc. ; of financial technique, such as fair price to 
 be charged for the securities, rates of income, dates of 
 maturity, means of registration, etc. ; of general economic 
 factors, such as stability of demand for the corporation's 
 products or services, advertising policy of the company, 
 amount of competition, market conditions, labor policy, 
 etc.; and finally, of the psychological element, such as the 
 public taste, confidence in the leading men in the enter- 
 prise, mood of the investing public, and general acquaint- 
 ance with the line of business. The isolated investor has 
 neither the technical skill and intelligence requisite for 
 such an investigation and analysis, nor the money or the 
 time to carry it out. 
 
 The mass of investors are thus absolutely dependent upon 
 the judgment of the investment bankers. They are helpless 
 in their remoteness from the true facts of corporation 
 finance, and in their incapacity to analyze and understand 
 the factors which make an investment safe and sound. The 
 average small investor buys bonds with blind confidence in 
 the opinion of investment bankers whom he has never seen. 
 This reacts upon the bankers as an inducement to build up 
 a reputation for great sagacity and reliability in passing 
 upon stock and bond issues. The bankers cover their 
 chances of mailing an error by stating that the information 
 given in connection with a bond issue is not guaranteed but 
 comes from what they consider to be reliable sources. If 
 the investment bankers are careless or selfish or inadequate 
 
386 Money and Credit 
 
 there may happen a calamity such as hefell the New York, 
 New Haven and Hartford Eailroad a few years back. 
 Moreover, the chances for depredations by occasional dis- 
 honest investment dealers are not properly under control 
 under present conditions. The cardinal fact in this invest- 
 ment situation is the helplessness of the average individual 
 investor, and his dependence upon investment bankers for 
 such safety as may exist for his invested funds. Hence, 
 the psychological factor of good will is of utmost impor- 
 tance to the investment banker. "In this light," as A. S. 
 Dewing points out, "good will is perhaps a more valuable 
 asset to his business than to that of any other merchant, 
 and ordinarily he protects his reputation at all hazards, 
 even though it involves him temporarily in heavy losses."^ 
 In these services, the investment bankers serve as a kind 
 of balance wheel between the optimistic psychology of the 
 promoters of corporations and the credulous psychology of 
 investors. The promoters of new corporate enterprises are 
 usually characterized by the tendency to over-emphasize 
 the bright side of their new projects. A splendid trust in 
 the future earning power of the new corporation enables 
 them to spread a contagious enthusiasm broadcast, and 
 their spontaneous optimism often leads them to excessive 
 confidence in new adventures. Moreover, the mass of in- 
 vestors are all too easily enthused by fine hopes, and the 
 promise of big dividends has almost magic effects in per- 
 suading many people to sink their money in securities. A 
 large part of the investing public is surprisingly gullible, 
 and the investment banker saves the investor from the fate 
 to which his own credulity would often lead him, by stand- 
 ing as a conservative buffer between the promoter of the 
 corporation and the prospective buyers of the stock. How 
 important this service of the investment banker is appears 
 from the fact, as stated by Dewing, that "it is probably not 
 an exaggeration to state that upwards of ten enterprises are 
 rejected by every investment banker for every one that 
 is accepted."^ 
 
 1 A. Dewing, "Financial Policy of Corporations," II, p. 28, 
 
 2 Hid., II, p. 30. 
 
Money and Credit 387 
 
 After the investment banker has decided to act as the 
 merchant to sell the securities of a corporation to investors, 
 he proceeds to map out a selling plan. He seldom under- 
 takes the sole responsibility for marketing the securities. 
 On the contrary, he organizes an underwriting syndicate of 
 bankers to market the securities by their associated efforts. 
 This group of bankers takes the securities from the corpora- 
 tion at a certain price in the expectation of selling them 
 to the buying public at a higher price. If this expectation 
 proves well founded, the sales take place all right, if not, 
 the syndicate suffers a loss. The syndicate takes the risk, 
 in other words, of marketing the bonds or stocks. The 
 existence of this risk is the main reason for forming the 
 syndicate. The group action serves to distribute the risk 
 among a number of bankers. No one investment firm is 
 overloaded with financial responsibility, and the action as 
 a group serves to make the whole transaction for the mar- 
 keting of the securities surer and safer for all parties con- 
 cerned. In the larger and more important transactions, the 
 number of underwriters may run as high as more than one 
 hundred.^ 
 
 The profits of the investment bankers may be of two 
 sorts, commissions on the sales, or bonuses of common stock. 
 The commissions on sales arise from the margin between 
 the price paid the corporation for the securities and the 
 price charged investors. For instance, if the bankers buy 
 securities at 96 and sell at 98, the margin of two gives the 
 banker's commission. At the same time, the syndicate may 
 be given blocks of common stock which represent not pres- 
 ent tangible property, but have value because of the pros- 
 pect that the earning capacity of the new corporations will 
 be great enough to pay dividends on the common stock in 
 the near future. The profits in some cases have been enor- 
 mous. The promotion and underwriting of the United 
 States Steel Corporation with its various subsidiaries re- 
 sulted in the award of about one-seventh of the total capital 
 stock of the Steel Corporation for promoting and under- 
 
 1 Brandeis, "Other People's Money and How the Bankers Use It," 
 p. 43. 
 
388 Money and Credit 
 
 writing services, or a total of more than $150,000,000. But 
 there have been frequent losses of large sums among under- 
 writers. "Their profits through successful syndicates are 
 often almost, if not entirely canceled by losses from unsuc- 
 cessful underwritings. ' '^ The risks involved, of course, war- 
 rant substantial profits, although in a number of cases the 
 profits have seemed to be exorbitant and unearned. In 
 general, the profession of investment banking is looked 
 upon as being generously lucrative. 
 
 Investment banking involves, besides analysis and under- 
 writing, the actual disposal of the securities to the buying 
 public. A large part of the securities are marketed through 
 large distributing houses, retail banking houses, bond 
 houses, and local retail merchants. Bond salesmanship is 
 one of the highest types of salesmanship and necessitates 
 an unusual grade of personality, ability and enthusiasm 
 among the salesmen. These distributors of one sort and 
 another all rely mainly upon personal solicitation to sell the 
 stocks or bojids. There is, therefore, a very elaborate ma- 
 chinery for the analysis, underwriting and marketing of 
 investment securities, a machinery which facilitates the 
 merging of the funds of widely scattered investors into the 
 hands of corporations to be used for purposes of business 
 organization and activity. 
 
 The corporation securities considered thus far have been 
 high grade securities, where risk is reduced to a minimum 
 for investors, where money is reasonably safe, where income 
 is reasonably sure. But there is another class of corporate 
 securities quite the opposite in character, and very large 
 and very important, where the risks are so high that they 
 are properly termed speculative securities. These specula- 
 tive, or low grade securities, take the form of stocks, vir- 
 tually never of bonds. Most business, at the outset, is faced 
 with great hazards. Most corporations have to prove them- 
 selves before investment bankers will back their securities. 
 At their best, with the most careful management and the 
 most cautious planning, new corporations are experiments 
 
 1 Dewing, "Financial Policy of Corporations," II, pp. 125-127, 148- 
 151. 
 
Money and Credit 389 
 
 whose chances of failure are large ; and at their worst, they 
 are reckless or fraudulent schemes to exploit a gullible 
 public. 
 
 The downright frauds take a toll of hundreds of millions 
 of dollars annually from the innocent public. Patent medi- 
 cine fakes, fictitious schemes sold through the mails, 
 swindles advertised in newspapers, Ponzi adventures, and 
 their like are very common and fleece the credulous public 
 of immense sums every year. Certain ingenious concerns 
 have compiled lists of those people who in the past have 
 snapped most easily for the bait of swindlers, and for a fee 
 they provide so-called "sucker lists" to the leaders of new 
 schemes of fraudulent exploitation. This record of the 
 individuals of the country whose instinctive equipment 
 makes them practically unable to say " No ! " to new glitter- 
 ing promises of immense profit is a real asset in selling the 
 new securities. The people on these lists are those who are 
 incapable of guiding their future action by past experi- 
 ence; their psychology makes them easy marks time and 
 again for clever swindlers. 
 
 Many low grade securities are not frauds, but are so 
 highly speculative that the chances are strong for an ulti- 
 mate collapse of the new company and the consequent loss 
 of the money sunk in the scheme. New oil companies and 
 new mining adventures are typical of these extremely haz- 
 ardous undertakings. 
 
 In an effort to check the marketing of all such low grade 
 securities, most states have passed laws, commonly called 
 "blue sky laws." The laws have not proved effective to a 
 satisfactory degree and there is still urgent need of pro- 
 tecting the innocent public from blind credulity, and re- 
 straining the fraudulent or reckless promoters from gross 
 exploitation. 
 
 Two extremes of financial securities have thus far been 
 presented, first, the thoroughly high grade ; second, the dis- 
 tinctly low grade. There is a vast body of intermediate 
 stocks, neither ultra-speculative nor completely conserva- 
 tive, which also have to find a market. This body of securi- 
 ties is represented in the bulk of preferred stocks offered 
 
390 Money and Credit 
 
 for sale and the more cautious common stocks. Some of 
 these securities are sold direct by corporations to their la- 
 borers. For example, the United States Steel Corporation 
 reports approximately 50,000 shares of stock sold to the 
 workers in the steel plants. Some are sold direct to general 
 investors. A very large proportion is sold through the 
 stock exchanges. 
 
 The stock exchange is a market-place for corporation 
 securities, including bonds, preferred stocks and common 
 stocks. A large number of the bond issues which are sold 
 through bond houses are also listed on the exchanges, but 
 the actual sales through the exchanges are probably not 
 more than one-tenth of the sales through investment 
 bankers. The New York Stock Exchange is a voluntary 
 association of not to exceed 1,100 members. Membership 
 has to be purchased, and in recent years the price given for 
 membership has run as high as upwards of $100,000. The 
 Exchange maintains a "Committee on Stock Lists," whose 
 duty it is to require evidence from the corporation apply- 
 ing to have its stocks or bonds traded in on the floor of the 
 Exchange, to prove the financial, legal, commercial, and 
 technical status of the concern. The Committee is a safe- 
 guard against fraudulent securities and over-speculative 
 securities. The Committee is not so exhaustive or so careful 
 in its analysis of the applying corporation as the investment 
 bankers are in selecting the security issues which they will 
 deal in, but the Committee does carry the analysis far 
 enough to eliminate the more dangerous corporate securi- 
 ties from the privileges of the Exchange. There is also the 
 Consolidated Exchange, which at first dealt almost entirely 
 in mining securities, but which has broadened its activities, 
 and now deals in a great many issues which are at the same 
 time listed on the New York Stock Exchange. Finally 
 there is the New York Curb Exchange, until recently held in 
 the open street, which deals in a great many security issues 
 which are too speculative to win admission to the Stock 
 Exchange. It also provides a sale for the securities of many 
 small corporations. The exchanges provide a market-place 
 for the securities of different grades, and facilitate the buy- 
 
Money and Credit 391 
 
 vag and selling of investors and speculators on a grand 
 scale. 
 
 The memberships of the Stock Exchange make possible 
 the functions of brokers, that is, of buying and selling not 
 for the member's own account only, but for the account of 
 anybody who has money to place. Brokers to deal through 
 the various types of exchanges have built up a system 
 of large scale operations. The brokers serve as agents 
 for customers, and work for a commission. Their duties 
 are to buy when the customer says buy and sell when he 
 says sell, meantime supplying him with much expert in- 
 formation and advice on the value and probable income of 
 the securities in the future. The larger brokerage houses 
 maintain branches in the large cities of the country and 
 are in constant communication with the branches by an 
 elaborate telegraph system. 
 
 In the year 1918, the volume of transactions on the New 
 York Stock Exchange alone was 144,118,469 shares. That 
 number of shares changed hands between buyers and 
 sellers. The total par value of all securities listed on the 
 New York Stock Exchange in 1918 was approximately 
 $40,000,000,000.1 "On the floor of the New York Stock 
 Exchange We have dealings in excess of 25 billions for 
 1909. This is nearly as large as the figure we have as- 
 signed. ... to total retail trade of the country, and it may 
 well exceed the retail trade in fact."^ 
 
 A large proportion o£ these stock and bond transactions 
 is conducted by means of borrowed money and checks, in 
 other words, by means of bank credit. The common form 
 of bank credit to finance speculative deals is call loans, 
 that is, loans which the banks can require to be repaid at a 
 day's notice. The call loan is used by the broker to provide 
 nine-tenths of the purchase price of the stock, the other 
 tenth being provided in cash by the customer. This form 
 of buying and selling is known as trading on margins. 
 Bank credit is extended, moreover, in vast amounts, to cor- 
 porations to provide them with capital needs, and is.se- 
 
 1 Jordan, "Investments," pp. 258-259. 
 
 2 B. M. Anderson, "Value of Money," p. 250. 
 
392 Money and Credit 
 
 cured by stock and bond collateral. Also, banks directly 
 invest in the neighborhood of 20 to 30 per cent, of their 
 funds in stocks and bonds, and these investments constitute 
 for the most part long-time loans. Bank loans for invest- 
 ment or speculative purposes thus comprise an astonish- 
 ingly large proportion of the credit extensions of commer- 
 cial banks. The conclusion has been drawn by Moulton 
 that, "It is enough that we may safely conclude that 
 around 50 per cent, of all loans of national and state banks 
 and trust companies is devoted to investment uses, and 
 that, including direct investments, in the neighborhood of 
 two-thirds of all the credit extended by commercial banks 
 goes for fixed rather than for working capital. ' '^ 
 
 In one way and another, the market facilities for stocks 
 and bonds supplied by the exchanges are of the greatest 
 importance in the organization of the price system, and are 
 indispensable for a system of economic enterprise in which 
 corporation securities play a primary part. The exchanges 
 make possible a place where the holder of securities can 
 virtually always find an immediate sale for his holdings. 
 The would-be buyer can find offerings of securities to suit 
 every whim or taste, from the ultra-risky to the ultra-safe. 
 People having funds for short periods available for use can 
 place them in remunerative securities for the limited 
 period. The constant bidding and asking of prices be- 
 tween buyers and sellers places a constant valuation upon 
 the securities of any corporation, a valuation which takes 
 fully into account the prospective earning capacity of the 
 corporation. In brief, the services of stock exchanges may 
 be summed up as follows : First, they make it possible for 
 anybody to convert his savings into shares of property 
 which yield income ; second, they insure that shares of cor- 
 porate property shall always be marketable, that whenever 
 the holder wants to sell, he may find a buyer; third, they 
 provide a means whereby those who are willing to take the 
 speculative risks of industry may compare their forecasts 
 of industrial and commercial values, and of the future 
 
 ^Journal of Political Economy, Vol. 26, p. 658. See also B. M. 
 Anderson, "Value of Money," Chapters 13 and 19. 
 
Money and Credit 393 
 
 earning power of corporations, and by their competitive 
 and composite judgment adjust property prices to property 
 earning power ; they make possible bank credit based upon 
 material which can be quickly converted into money, that 
 is, based upon collateral security in the form of stocks and 
 bonds. 
 
 Savings Banks 
 
 Another form of financial institution is found in savings 
 banks. These banks exist for the purpose of collecting sav- 
 ings in smaU amounts. People who can lay aside only a 
 few dollars at a time find in savings banks a place for the 
 safe keeping of their money and at the same time are able 
 to draw a small rate of interest. The banks make profits 
 by lending out the bulk of the deposits thus made, at 
 higher rates of interest. The loans must be very con- 
 servative, and the type of loans which can be made is 
 restricted by law to the safest and best. In 1920, the 
 savings banks of the United States had over 11,000,000 
 depositors with a total of deposits of more than $6,500,- 
 000,000. This vast fund of savings, averaging for each 
 individual depositor less than $700, is aggregated by the 
 savings banks, and the lump sums derived from the'^assem- 
 bled mass of petty accounts are used to finance the fixed 
 and working capital requirements of industry to a huge 
 total amount. The function of the savings banks for the 
 depositors consists of holding their savings in safe keeping 
 at a small interest rate; their function for industry and 
 commerce at large consists in bringing together a scattered 
 mass of individual small sums into a total fund of capital 
 available for investment and commercial credit. The sav- 
 ings banks pool the savings of millions of small investors 
 and thus make their savings available for large scale credit 
 operations such as are necessary in the conduct of modern 
 corporations. 
 
 An essentially similar function is performed by insur- 
 ance houses, although they are not commonly thought of 
 primarily as savings bank institutions. However, the pre- 
 miums paid into the insurance companies build up large 
 
394 Money and Credit 
 
 funds whicli must not be allowed to lie idle. The insurance 
 companies use the funds derived from premium payments 
 for investments and loans. The total amount of life insur- 
 ance assets utilized in this way in 1917 was nearly $6,000,- 
 000,000. The money paid in by millions of scattered policy 
 holders is thus collected into lump sums, and converted into 
 real estate holdings, mortgages, bonds, high grade stocks, 
 policy loans, and short-time loans to business concerns. 
 Insurance concerns are usually under careful government 
 supervision and are required to be highly cautious in plac- 
 ing loans and investments. Their responsibility to their 
 policy holders is of the utmost importance, and their ser- 
 vices to industry and commerce generally in the form of 
 credit creations facilitate greatly the activities of eco- 
 nomic life. 
 
 Trust Companies 
 
 The complicated interrelations of modern finance led 
 during the last generation to the organization of trust com- 
 panies. Their functions are various. One function is to 
 act as trustee of the mortgages or collateral pledged as 
 security when bonds are issued. This trusteeship requires 
 an oversight of the value of the properties pledged as bond 
 security, and a responsibility for observing that the terms 
 of the bond are lived up to by the corporations concerned. 
 This function therefore serves to protect the rights and 
 interests of investors who could not personally take charge 
 of such matters. A second function is that of transfer 
 agent. When one form of stock is substituted in a cor- 
 poration for another form, when one form is replaced by 
 new forms of securities, the trust company acts as agent to 
 call in the old certificates and pass out the new ones. It is 
 also transfer agent in recording the transfer of stocks and 
 bonds from one owner to another. The trust company 
 stands between the corporation and the owners of its se- 
 curities, with the responsibility for an independent and 
 reliable record of all such transfers of securities. A third 
 function is registration of securities to prevent overissue. 
 The trust company, by registering the total of all stock 
 
Money and Credit 395 
 
 actually issued, can make sure that this total does not 
 exceed the amount authorized. As registrar, the chief ser- 
 vice of the trust company is to prevent the corporation 
 from issuing securities above the maximum authorized. 
 Fourth, in ease of default of interest on bonds, or of insol- 
 vency, or reorganization or amalgamation of properties, it 
 becomes important to have a reliable agent who can hold 
 stocks and bonds and other property claims in trust pend- 
 ing the readjustment of property. The trust company is 
 the logical agent for this service. Finally, trust companies 
 act as fiscal agents for private corporations and for educa- 
 tional and social institutions of many sorts. The fiscal 
 duties may be the supervision of interest and dividend pay- 
 ments, the custody of securities, a careful scrutiny of the 
 property and business of corporations whose securities are 
 in custody for the purpose of making sure that efficiency 
 and stability are maintained, and a general charge of the 
 care and protection of property interests for their clients. 
 These services are all indispensable under a corporate 
 property regime, and the trust companies therefore are 
 an indispensable institution in the corporate financial 
 system. 
 
 There are other highly important services of trust com- 
 panies in addition to their services to corporate industry. 
 The handling of estates has come to involve so many tech- 
 nical and legal problems that it requires the constant guid- 
 ance of experienced and skillful experts. Trust companies 
 act as administrators, executors, guardians, trustees, 
 assignees, custodians of properties, etc. They offer services 
 for the making of wills, and for executing them in due 
 time. Holders of property who do not wish to be bothered 
 with managing it, or who do not feel themselves competent 
 to manage it, can voluntarily turn the property over to the 
 care and control of a trust company, thus receiving all of 
 the benefits of property ownership with few of the worries 
 and responsibilities of managing it. The expert guidance 
 and control supplied by trust companies is of imperative 
 importance for the safe and wise use of vast amounts of 
 property. Trust companies ma^ also engage in the prac- 
 
396 Money and Credit 
 
 tices of commercial and investment credit.^ In a wide va- 
 riety of ways, they supply essential functions in the opera- 
 tion of the highly technical economic system of modern times. 
 
 Foreign Investment Banking 
 
 The exchanges provide facilities which are taken advan- 
 tage of in the buying of domestic securities, but offerings of 
 foreign securities require other marketing facilities. Before 
 the World War, European nations were well advanced in 
 facilities for the safe investment of their funds in the 
 securities of countries all over the world. The foreign in- 
 vestments of Great Britain alone amounted to nearly $20,- 
 000,000,000 before the war. European nations before the 
 war held upwards of $6,000,000,000 worth of the securities 
 of American corporations. The savings of Europeans each 
 year gravitated toward the corporation stocks and bonds of 
 foreign countries, with the result that the industry and 
 commerce of non-European countries were in a very con- 
 siderable degree owned by Europeans. The development 
 and economic progress of outside countries depended upon 
 capital funds from the more highly developed industrial 
 countries of Europe. Each country had financial institu- 
 tions which connected investors at home with securities 
 abroad in ways which were reasonably safe and profitable. 
 For example, the investors of Great Britain had access to 
 British investment trusts which served as a medium and 
 agent between home investors and foreign corporations. 
 These trusts were able to make some analysis of the cor- 
 porations seeking a market for their securities in Great 
 Britain, and were able to diversify investments in such 
 ways as to minimize the risks of foreign investments within 
 safe limits. 
 
 1 In fact, most trust companies now have a large part of their 
 operations in the form of straight commercial banking and of invest- 
 ment banking. Trust companies may become members of the Federal 
 Eeserve System; and commercial banks which are members of the 
 system, may by special permission of the Federal Reserve Board, 
 engage in the special trustee activities of trust companies. Trust 
 companies also, in many instances, combine with their commercial 
 banking activities, the activities of saving banks. Some trust com- 
 panies are such in name only and do almost wholly pommercial and 
 savings banking. 
 
Money and Credit 397 
 
 Before the war, the United States bought only a negli- 
 gible amount of foreign securities. Her home savings were 
 not enough to buy all of the securities of her home corpora- 
 tions. American corporations often relied upon European 
 investment bankers and trusts to float their securities in 
 European market circles. As stated, American securities 
 owned abroad were nearly $6,000,000,000. The war changed 
 the relationship so that now these securities have largely 
 returned to the hands of American investors, and, what is 
 more impressive, Americans hold upwards of $4,000,000,000 
 of European securities. In addition to these security hold- 
 ings, the United States Government has loaned to the Euro- 
 pean countries about $11,000,000,000, and a floating in- 
 debtedness to Americans for unsettled export accounts has 
 run up to over $3,000,000,000. This situation involves an 
 annual interest owing the United States of about $600,- 
 000,000. These relations make of the United States a 
 creditor nation.^ The fuller implications of this creditor 
 status will be gone into later, but at this point it is im- 
 portant to understand that the net effect upon the financial 
 institutions of the United States is to encourage a continued 
 and increasing investment of American funds in the indus- 
 trial securities of those European countries which are 
 debtors to the United States. 
 
 Investment trusts therefore become a necessity in this 
 country. Under the Edge law, passed by Congress since 
 the war, banking institutions are authorized to associate 
 themselves for the purpose of making available to Ameri- 
 can investors securities which will provide funds for com- 
 merce and industry for foreign countries. Several such 
 associations among large bankers have already been formed, 
 and although the future of their activities is uncertain, it 
 appears hopeful that the new investment trusts for for- 
 eign corporation securities will have indispensable func- 
 
 1 See Annual Report of United States Treasury, 1920, pp. 73-92 ; 
 Federal Reserve Bulletin, Nov., 1921 ; Moulton and Bass, "America 
 and the Balance Sheet of Europe," pp. 19-27 ; Friedman, "Inter- 
 national Finance and Its Reorganization"; "Annals of the American 
 Academy," March, 1921 ; B. M. Anderson, Jr., Chase National Bank 
 Economic Bulletin, Oct. 5, 1920. 
 
398 Money and Credit 
 
 tions in the placing of American savings and in the financ- 
 ing of foreign industry and trade.^ 
 
 Other Financial Organizations 
 
 Several other credit and money organizations enter into 
 the processes of the financial system. Commercial paper 
 houses operate by selling notes and bills of exchange of 
 business men to bankers. They serve as brokers, and busi- 
 ness men find it advantageous to patronize them because 
 of rates more favorable than banker's rates, or because a 
 business firm wants more credit than its bank desires to 
 handle, or because a firm desires to treat its borrowing 
 power with its bank as a reserve for emergency needs. 
 Discount companies operate by purchasing accounts receiv- 
 able from business men, thereby supplying business men 
 who have sold goods on credit with immediate money for 
 their business needs. The discount company waits for the 
 accounts to mature, and thereby serves both the buyer and 
 the seller of the goods. Such companies, in turn, borrow 
 heavily from the commercial banks to obtain the funds 
 which they supply to business men, by discounting their 
 accounts receivable. A large part of the accounts receiv- 
 able discounted in this way are automobile accounts. The 
 automobiles of the country are bought, in the majority of 
 cases, on credit. The automobile corporations are not them- 
 selves able to wait for the accounts to be paid, and hence 
 secure immediate money by discounting the promises to pay 
 of the buyers of cars with discount houses or automobile 
 banks. 
 
 Agricultural credit has in the past been subject fre- 
 quently to very high rates of interest. The credit has been 
 secured largely from country commercial banks, cattle loan 
 companies, private individuals, store keepers in the com- 
 munity, the manufacturers of farm machinery, and farm 
 mortgage companies. Since 1916, agricultural credit has 
 been facilitated by a Federal Farm Loan System, which 
 
 iMoulton, "Financial Organization of Society"; J. M. Keynes, 
 "Economic Consequencea of the Peace"; F. A. Vanderlip, "What 
 Happened to Europe"; P. M. Warburg, Political Science Quarterly, 
 Pecember, 1020. See also pp. 423-426 of this volume. 
 
Money and Credit 399 
 
 provides for Federal encouragement and supervision of 
 Federal Land Banks, Farm Loan Associations, and Joint 
 Stock Land Banks. 
 
 The basic principle of this system of farm credits is that 
 farmers may borrow money by giving, as a security, mort- 
 gages on land values, and that the farm banking institu- 
 tions may use this mortgage security as the basis of bond 
 issues to be sold to general investors. The sale of such bond 
 issues supplies the banks with funds which can be used in 
 the financing of further farm loans based in turn on their 
 proper security of land mortgages. Thus the farm banks 
 obtain a large part of their loanable resources by issuing 
 bonds based upon farm mortgages in their possession. 
 Other resources are obtained by the sale of capital stock to 
 private investors and to the United States Government. 
 Farmers secure their credit by mortgaging their land to the 
 banks as security for the loans. The machinery of this 
 farm credit system consists, first of all, of a supervisory 
 body, known as the Federal Farm Loan Board. This board 
 divides the country into twelve districts, and establishes a 
 Federal Land Bank in each district. Each of these twelve 
 district land banks may in turn establish branches in its 
 own district. The amount of loans of these land banks in 
 1920 was about $350,000,000. Loans of these Federal Land 
 Banks are made through Farm Loan Associations, com- 
 posed of farm owners, who own shares of the capital stock 
 of the land bank. Rates of interest are not to exceed six 
 per cent, and loans may run from five to forty years. In 
 1920 there were approximately four thousand Farm Loan 
 Associations in operation, principally in western and south- 
 western states. There are also established, under supervi- 
 sion of the Federal Farm Loan Board, what are known as 
 Joint Stock Land Banks, which are private corporations, 
 and which cannot have any of their stock owned by the 
 United States Government. These banks are subject to the 
 maximum interest rate of six per cent, and they may, sub- 
 ject to certain limitations, loan any amount they wish and 
 for any purpose. In 1920, there were twenty-five active 
 banks of this type, with mortgaged loans amounting to 
 
400 Money and Credit 
 
 approximately $79,000,000. By this machinery, long-term 
 rural credits are facilitated, but short-term credits are not 
 materially aided. Moreover, the loans of the land banks 
 are aimed to aid persons who are already owners of some 
 amount of land more than to aid tenants of farms. The 
 system needs a much wider extension than at present, but 
 it is a move in the direction of supplying farmers with 
 credit at reasonable rates of interest when and where needed. 
 
 In addition to all of the previously mentioned credit in- 
 stitutions, there are numerous pawnbrokers who furnish 
 credit, usually in small amounts; there are so-called loan 
 sharks who make loans to people who are in pressing need 
 of small sums, at rates of interest running as high as 200 
 and 300 per cent. ; there are co-operative banks established 
 by credit members and others established by labor unions, 
 the latter being illustrated by the recent banks organized 
 by the Railroad Brotherhoods; there are Morris Plan 
 Banks, which extend credit for consumers' needs; and there 
 are building and loan associations with a membership of 
 more than 4,000,000 and total assets of about $2,000,000- 
 000 which serve to finance home buying and to care for the 
 savings of members and investors. 
 
 This array of financial institutions, ranging all the way 
 from commercial banks to building and loan associations, 
 constitutes a vast mass of credit and money organizations, a 
 varied and scattered horde of different types of concerns, 
 each serving special needs and performing in its own par- 
 ticular way useful and indispensable functions. But in 
 their entirety they are bound together in one harmonious, 
 unified, interrelated price system. The two striking aspects 
 of the whole financial system are first the immense variety 
 and the wide range of different types, and, second, the 
 unity of financial organization which is attained out of the 
 multiplicity of forms and tjT)es. The means whereby unity 
 is achieved deserve description at some length. 
 
 The Interdependence of Financial Institutions 
 
 The multitudinous types of financial organizations are all 
 cogs in a single financial wheel. They are interrelated and 
 interdependent, and function as a financial clockwork. 
 
Money and Credit 401 
 
 It has already been stated that the commercial banks 
 hold the position of dominating importance in the financial 
 structure, and it is therefore proper to consider the ma- 
 chinery by which the commercial banks within each local 
 community and between communities are enabled to func- 
 tion in co-operation and harmony with each other. In any 
 city of considerable size, the main banks are organized in 
 clearing houses. The principle of the clearing house is in 
 essence that the member banks shall settle the balances of 
 debit and credit among themselves by a process of cancella- 
 tion. In a single city, the banks are not acting each inde- 
 pendently of all the others, but are constantly doing 
 business with each other. If there are twenty important 
 commercial banks in a given city, the depositors of each 
 bank are drawing checks on their accounts and sending the 
 checks to depositors in the other banks as a means of paying 
 bills to business men who keep their deposits with those 
 other banks. Suppose a business man who does his banking 
 with bank No. 1 is engaged in business deals which involve 
 the payment of bills to and the receiving of money from 
 fifty other men. Suppose the fifty other men have banking 
 done, not by bank No. 1, but by the other nineteen banks in 
 the city. Checks are passing back and forth through the 
 various banks, to and from the various business men, with 
 the result that the deposits of each business man vary from 
 day to day. The cheek amounts to an order to the business 
 man's banker to transfer a certain amount of funds to 
 another man's banker to be put to the deposit account of 
 the second business man in that bank. Hundreds of checks 
 call for hundreds of transfers of funds from bank to bank, 
 involving millions of dollars. The clearing house is a simple 
 and convenient means of effecting such transfers by means 
 of cancelling the accounts of the various banks in the clear- 
 ing association. Bach bank sends to the central clearing 
 house its cheeks on other banks, representing the amount 
 owed io it by other banks. The other banks bring to 
 the clearing house the checks on the bank first mentioned, 
 representing the amount owed iy it to other banks. The 
 
402 Money and Credit 
 
 totals are set over against each other, and balances are 
 ascertained. The balances only are paid. 
 
 The methods of paying such balances vary greatly, in- 
 cluding direct transfer of cash, clearing-house certificates 
 based upon cash deposits by each member bank with the 
 clearing house, drafts by small banks upon banks in large 
 centers, and adjusting banks' balances vi^ith the regional 
 Federal Reserve Banks. Since the entry of the Federal 
 Reserve System of banking, balances can be settled by each 
 bank's depositing funds -with the Federal Reserve Bank of 
 the district and thereafter ordering the bookkeepers of the 
 Federal Reserve Bank to transfer on their books the bal- 
 ances involved in the inter-bank clearings. A system of 
 book accounting then increases or diminishes the deposits 
 of each bank and thereby, without the handling of actual 
 money, even the balances are adjusted by merely making 
 the proper entries on the books of the Federal Reserve 
 Bank. 
 
 A considerable percentage of the banks in a city are not 
 members of the clearing-house association, due to the cost 
 or to the fact that they are not wanted. These non- 
 member banks clear their accounts by using one of the 
 member banks as agent. In smaller communities, local 
 clearings between banks are made by each bank 's sending a 
 messenger to the other banks to present the check accounts, 
 and thereby to secure a cancellation of a part of the count 
 and a payment of the balance. The bulk of clearings, how- 
 ever, are made through the big banks organized in clearing 
 houses. The largest clearings are in New York, where the 
 average daily clearance runs above $300,000,000. 
 
 The consideration thus far has been devoted to interbank 
 clearings within a town or city. It is equally important to 
 effect clearings between banks scattered all over the coun- 
 try. The Federal Reserve System supplies a means for 
 carrs^ing out these clearings between the banks of different 
 communities. Twelve Federal Reserve Districts are marked 
 out, with a Federal Reserve Bank in each district. Bach 
 of these reserve banks acts as a clearing agent for the banks 
 within its district. For example, if a bank in Buffalo re- 
 
Money and Credit 403 
 
 eeives from one of its customers a deposit of cheeks, some 
 of them made out on a bank in Albany, some on a bank in 
 Rochester, and some on a bank in Poughkeepsie, the Buffalo 
 bank may send the cheeks direct to the Federal Reserve 
 Bank of that district, located in New York City. The Fed- 
 eral Reserve Bank in turn makes the collections from the 
 banks in Albany, Rochester and Poughkeepsie. At the 
 same time, the three latter banks may have sent checks 
 drawn on the Buffalo bank to be collected through the Fed- 
 eral Reserve Bank. The reserve bank, by a process of 
 book accounting, may offset the debits and credits of the 
 various banks, and the balances may be adjusted by book 
 entries transferring deposits which the member banks carry 
 with the reserve bank. This system practically does away 
 with the shipment of specie from bank to bank, and effects 
 clearance between banks by the use of cheeks and book 
 accounting. 
 
 The clearings between banks in the twelve separate re- 
 serve districts are effected in a similar way. A bank in one 
 district desiring to collect a check drawn on a bank in an- 
 other district sends it to the reserve bank in its own district, 
 which forwards the cheek to the reserve bank in the other 
 district, which in turn collects from the specified bank 
 within its jurisdiction. Each of the twelve Federal Re- 
 serve Banks ascertains daily the total of all its credit de- 
 mands upon the other reserve banks and wires the amount 
 to the Federal Reserve Board at Washington, D. C. This 
 central organization at Washington holds a ' ' gold clearance 
 fund," consisting of actual deposits of gold or gold certifi- 
 cates from the twelve reserve banks. The central board 
 therefore lines up the claims of each of the twelve reserve 
 banks against the others, and after arriving at the balances 
 due to or from each bank, pays the balance by making an 
 entry on its books increasing or diminishing the gold de- 
 posits of each bank. This gold clearance fund is not ac- 
 tually handled in each case ; there is simply a record made 
 on the books of the central board signifying that a part of 
 the gold deposits of one reserve bank is transferred to the 
 account of another. This system of clearance involves a 
 
404 Money and Credit 
 
 minimum of money shipments, and accomplishes the ser- 
 vices of clearance by the use of checks and book accounting.^ 
 The principle of clearance of interbank accounts has the 
 most far-reaching and inclusive applications throughout the 
 banking system. It unifies the financial services of the 30,- 
 000 commercial banks of the country, and facilitates the 
 use of credit in the bulk of trade and industrial transac- 
 tions. It provides the machinery for an adequate enforce- 
 ment of the solid interdependence of financial institutions 
 and simplifies the almost infinite interrelations of tens of 
 thousands of banks in a most economical and reliable way. 
 
 The Federal Reserve System 
 
 Banking in the United States is supervised by what is 
 known as the Federal Reserve System. The unification and 
 the eiJectiveness in almost every way, of the banks of the 
 country, are directly related to the Federal Reserve System. 
 
 The Federal Reserve System was established by an Act 
 of Congress in 1913, and has been subject to a number of 
 subsequent modifications and improvements. The system 
 provides for twelve banking districts in the United States, 
 the boundaries of the various districts being set by com- 
 mercial and industrial reasons rather than by geographical 
 ones. Each district has a city containing a Federal Reserve 
 Bank. The twelve reserve cities, the financial centers of 
 their respective districts, are as follows : Boston, New York, 
 Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. 
 Louis, Minneapolis, Kansas City, Dallas, San Francisco. 
 
 An impressive feature of the organization of the twelve 
 Federal Reserve Banks is the extent to which they are 
 owned and directed, not by government ofBcials, but by the 
 member banks of the districts. Each member bank is re- 
 quired to purchase a minimum amount of the capital stock 
 of the reserve bank of the district. Hence, the capital stock 
 of the Federal Reserve Banks is owned by the member 
 banks of the respective districts. The board of directors of 
 each Federal Reserve Bank consists of nine members, six of 
 
 1 See E. W. Kemmerer, "The A B C of the Federal Reserve Sys- 
 tem," Chapter VIII. . 
 
Money and Credit 405 
 
 whom are chosen by the member banks, and three of whom 
 are chosen by the Federal Eeserve Board at Washington. 
 Hence the dominant power in the board of directors of each 
 reserve bank is not with the three appointees of the Gov- 
 ernment, but with the six representatives selected by the 
 member banks. The central board, known as the Federal 
 Reserve Board, consists of seven members, including the 
 Secretary of the Treasury and the Comptroller of the Cur- 
 rency as ex-ofBcio members, and five men selected by the 
 President of the United States. There is also a Federal 
 Advisory Council, consisting of one representative from 
 each of the twelve reserve banks, to keep in advisory touch 
 with the Federal Reserve Board. These items constitute 
 the main framework of the Federal Reserve System. 
 Hence, the organization provides for a substantial amount 
 of unification of control, but this is not carried to the 6x- 
 treme of government paternalism. The co-operative unity 
 of the twelve reserve banks enlists the concerted interest of 
 the constituent parts of the system as much as possible. 
 
 The principles and policies of the system cannot here be 
 presented in all their elaborate detail, but the basic features 
 can be given in a condensed form which ought to make a 
 clear picture of the primary functions and purposes. This 
 condensed description will be given under the following 
 heads: centralization, note issue, deposit currency, re- 
 serves, clearings, panics. 
 
 Centralization 
 
 Prior to the Federal Reserve System, the banks of the 
 United States, about 30,000 in number, were for the most 
 part, independent concerns, each working for itself and by 
 itself, with little co-operation or teamwork. The thousands 
 of banks were extremely decentralized, their reserves were 
 scattered widely, their interrelations were limited, and each 
 bank was largely dependent upon its own resources, and 
 those alone, in time of need or of panic. The Federal Re- 
 serve System set up a machinery which tended to increase 
 co-operation between banks, to bring about co-operation 
 in the use of their resources, to enable strong banks to tide 
 
406 Money and Credit 
 
 deserving weak banks over crises, and to centralize gener- 
 ally the functions and powers of the banking world. 
 
 Note Issue 
 
 It had long been a practice for national banks to issue 
 notes secured by Government bonds, for the purpose of 
 providing a circulating medium to perform the work of 
 money instruments in the business world. Bank notes, in 
 popular knowledge, are simply five dollar bills, and bills 
 of higher denominations, which pass from hand to hand 
 in everyday buying and selling. In times of business 
 prosperity and expansion more of these bank notes are 
 needed. More money is needed to produce and market more 
 goods. Prior to the Federal Reserve System, before the 
 bank could issue additional bank notes to meet the new 
 trade needs, it had to purchase an equal par value of United 
 States Bonds as security for the notes. If the price of 
 bonds on the market was high, it might not be profitable 
 for the bank to purchase them as a basis for the note issue. 
 It so happened that often when trade needs called for new 
 note issues the prices of Government bonds were high, and 
 the result was that just when the trade needs were most 
 urgent the banks might be most heavily discouraged from 
 buying bonds as a basis for new note issues. Therefore the 
 note issues did not expand and contract with trade needs, 
 and the resulting inelasticity of hand-to-hand money was a 
 most distressing embarrassment for the commercial and 
 industrial life of the country. 
 
 The Federal Reserve System did not abolish the old na- 
 tional bank notes which remained in existence in 1913, nor 
 did it forbid further issues of them, but it provided means 
 making possible their gradual elimination from the mone- 
 tary supply if the banks desire such an elimination. A new 
 bank note currency of two sorts was created, — Federal Re- 
 serve Bank Notes and Federal Reserve Notes. The former 
 were in most essential respects similar to the old national 
 bank notes, being secured by purchases of Government 
 bonds or short-time obligations of the United States Gov- 
 ernment. Provision is made whereby the new bank notes 
 
Money and Credit 407 
 
 can be gradually substituted for the old national bank notes. 
 Early in 1920, the old national bank notes still outstanding 
 amounted to about $725,00p,000. In the seven years of the 
 Federal Reserve's operation, only about $32,000,000 of the 
 old bank notes had been retired, — a condition which vfould 
 indicate that the old bank notes are likely to remain in 
 circulation for some time to come. The total volume of the 
 new Federal Reserve Bank notes on January 18, 1922, was 
 $84,878,000. Hence the combined total of old and new bank 
 notes outstanding was approximately $800,000,000. 
 
 If the Federal Reserve System had provided no other 
 form of note issue than this, it would not have solved the 
 problem of elasticity of circulating currency to fit the trade 
 needs of the country. The system did provide a further 
 form, known as Federal Reserve notes, and these notes are 
 directly calculated to supply the needed element of elas- 
 ticity in the currency system. The Federal Reserve notes 
 are issued against commercial credit instruments primarily, 
 but are possible also against gold and gold certificates. 
 Commercial credit instruments are the fundamental reli- 
 ance for assets to back up the notes. Such commercial 
 credit instruments include promissory notes or bills of 
 exchange or bankers' acceptances which represent strictly 
 commercial, industrial, or agricultural transactions, but 
 exclude credit instruments to be used for speculative pur- 
 poses. Assets for these notes also include credit instruments 
 created for the purpose of trading in the securities of the 
 United States Government, a provision widely utilized 
 in floating the war loans. 
 
 The method of putting out these notes is, in its main 
 essentials, as follows : Any member bank which finds that 
 some of its customers desire actual paper money when they 
 borrow from the bank instead of a deposit loan upon which 
 to draw checks, will send some promissory notes, or bills of 
 exchange, or banker's acceptances to the Federal Reserve 
 Bank of its district. This reserve bank will rediscount the 
 credit instruments thus received, — that is, will pay the 
 member bank the amount of the credit paper less a rate of 
 interest deducted in advance. The form of payment will 
 
408 Money and Credit 
 
 be Federal Reserve notes. These notes are simply the 
 paper bills which everybody freely uses in everyday pur- 
 chases, and the member bank can pass them out at the 
 cashier's window in making change, or in cashing checks. 
 It can lend them out to borrowers from the bank, drawing 
 on them the prevailing rate of interest. A loan of this sort 
 differs from a deposit loan in that the borrower takes away 
 with him a roll of paper bills instead of a mere entry on 
 the bank 's books entitling him to write checks to the amount 
 of the loan. The bank makes a profit because it secures 
 interest on the paper bill money supply. The circulating 
 currency of the community is increased, and hence the 
 expanded trade needs of the community 'are taken care of. 
 The commercial paper which the Federal Reserve Bank 
 discounted has to be deposited with a Federal Reserve 
 agent who lias in his keeping a supply of paper notes ready 
 to turn over to the reserve bank when the proper commer- 
 cial paper is presented to him. This Federal Reserve agent 
 represents the United States Government, since he is one 
 of the men on the board of directors of the reserve bank 
 who is appointed by the Federal Reserve Board in Wash- 
 ington. He is directly a Government agent. A further 
 requirement must meantime have been met by the Federal 
 Reserve Banli, namely, it must keep a gold reserve of not 
 loss than 40 per cent, as a security behind the notes. The 
 total outstanding notes on December 23, 1920, were $3,404,- 
 931,000 and on January 25, 1922, $2,184,001,000. The pro- 
 cess of this note issue from beginning to end can be sum- 
 marized as follows : First, an actual commercial, industrial, 
 or agricultural transaction, or purchase of Government se- 
 curities; second, a credit instrument, such as a promissory 
 note, bill of exchange, or banker's acceptance; third, the 
 credit instrument from the local bank rediscounted through 
 the Federal Reserve Bank of its district ; fourth, the credit 
 instrument deposited with a Federal Reserve agent as the 
 basis of note issues and simultaneously a pledge by the 
 Federal Reserve Bank of a gold reserve equal to 40 per 
 cent, of the note issue ; fifth, the notes turned over by the 
 agent to the reserve bank and by it passed on to the member 
 
Money and Credit 409 
 
 bank where tlie credit instrument originated; finally, the 
 notes passed out by the local member bank to its customers 
 in the loans and other financial relations of that bank, so 
 that the notes finally become actual circulating medium. 
 The whole process provides an elastic note issue because 
 the starting point of the increased note supply is increased 
 commercial, agricultural, and industrial activity with its 
 accompanying commercial paper, and the finishing point is 
 more paper money in circulation to take care of more busi- 
 ness activity. 
 
 In actual banking practise, it is very common to deviate 
 from the course which has just been outlined. Banks get 
 the notes first and borrow afterward. The notes are charged 
 against their accounts and sent to them at their request, 
 and it is only when their reserve balance is going to average 
 below the required amount during the period, that they 
 borrow to replenish the account, which may have been 
 drawn down by payment of checks against the bank, or 
 through the clearing house, or by demands for currency. 
 
 When business activity decreases, the note issue tends to 
 be retired in proportionate amounts. The member bank 
 receives the paper notes back from its customers in the 
 daily round of duties. The paper money is used to pay 
 wages, to meet bills at the grocery store and the dry goods 
 store, to pay for farm machinery, to settle personal ac- 
 counts and in a wide variety of daily business dealings. 
 The various parties concerned put their money on hand on 
 deposit with their bank, in other words, the paper notes 
 float back to the bank which holds their accounts. The 
 local bank can use the paper notes then in meeting its pay- 
 ments to the Federal Reserve Bank, and the Federal Ee- 
 serve Bank can retire the notes as they come in. It is to 
 the interest of the local bank to return the notes to its 
 Federal Reserve Bank because the local bank is forbidden 
 to count such notes as legal reserve. If the paper notes 
 go to other banks than the one which first passed them 
 out, the other banks find it to their interest for the same 
 reason to use them in payment of their obligations to their 
 F^eral Rbserv'e Bank. This cdntractibn of nOtte issues is 
 
410 Money and Credit 
 
 described in a report on Federal Eeserve Notes and Cur- 
 rency Expansion made by the Governor of the Federal 
 Reserve Board in 1919. The report states that the Federal 
 Reserve notes "are issued only as a need for them de- 
 velops, and as they become redundant in any locality they 
 are returned to the Treasury at Washington, or to a Fed- 
 eral Reserve Bank for redemption. Thus there cannot 
 at any time be more Federal Reserve notes in circulation 
 than the needs of the country at the present level of prices 
 require, and as the need abates the volume of notes out- 
 standing will be correspondingly reduced through re- 
 demption." 
 
 It will be remembered that gold and gold certificates may 
 also serve as the basis for such note issues. If banks had 
 gold, it was policy during the war especially, to encourage 
 member banks to meet their obligations to reserve banks 
 in gold. Hence gold and gold certificates have been con- 
 centrated in the vaults of the reserve banks, where they 
 serve as the basis for note issues up to the value of the 
 gold. The credit expansion of war times to meet the needs 
 of increased trade and production was thereby made pos- 
 sible, because the gold concentrated in the reserve banks 
 stood as the basis for continued notes outstanding. Most 
 of the gold and gold certificates gravitated into the reserve 
 vaults of the reserve banks and have been almost entirely 
 withdrawn from active circulation. As stated in the Fed- 
 eral Reserve Bulletin of August 1, 1919, "Federal Reserve 
 notes have practically displaced gold certificates in circu- 
 lation, the latter being drawn into the banks and used as 
 reserves, while a corresponding amount of reserve notes 
 have been issued to take their place as media of exchange." 
 
 In popular usage, the various forms of bank note issues 
 are considered as money. The various forms of money in 
 existence in the United States would, then, be gold, silver 
 and other metallic money; Government paper money, such 
 as gold or silver certificates ; Treasury notes ; United States 
 notes; National Bank notes; Federal Reserve Bank notes; 
 and Federal Reserve notes. The grand total of all these 
 forms of money in the United States in 1920 was approxi- 
 
Money and Credit 411 
 
 mately $8,000,000,000. This sum is the general stock of 
 money in the United States. But not all of this is in cir- 
 culation. Something like one-third of the amount is held 
 in the United States Treasury and in the banks as assets and 
 reserves; the remaining proportion, roughly estimated at 
 two-thirds, is in actual circulation. This circulating money 
 passes from hand to hand many times during the year. 
 The rate of turnover of the money supply is not constant 
 from year to year, but studies by Irving Fisher and others 
 indicate a rate of turnover ranging near to twenty. In 
 other words, the average dollar changes hands in the course 
 of a year about twenty times.^ 
 
 Deposit Currency 
 
 It is apparent that money provides a medium of ex- 
 change for an enormous volume of trade. Taken by itself, 
 the volume is enormous, and yet, in relation to the total 
 volume of trade of the country, it is small. The estimates 
 made by Fisher indicate that the total volume of trade is 
 from twenty to thirty times as great as the fraction which 
 is conducted by the use of money as a medium of exchange. 
 "What, then, is the medium of exchange for this huge bal- 
 ance of trade? The answer is, deposit currency.^ The 
 deposit loans and accompanying checks supply the medium 
 of exchange for the overwhelming preponderance of business 
 deals. Consequently, important as an adequate supply of 
 money may be in all economic life, there is a vastly greater 
 use made of deposit currency as a medium of exchange. 
 
 Prior to the Federal Reserve System, the banks were 
 unable to adapt deposit currency to trade needs. Their 
 organization was so decentralized, their reserves were so 
 scattered, and their individualistic power was so accentu- 
 ated that deposit currency was often lacking to meet trade 
 
 iKemmerer, "A B C of Federal Reserve System," p. 57; Fisher, 
 "Purchasing Power of Money," p. 290; Anderson, "Value of Money," 
 Chapters 12 and 19 ; I. Fisher, American Economic Review, 7 : 934. 
 
 2 See I. Fisher, American Economic Review, 7 : 935. It should be 
 noted that the rate of turnover of deposit currency is two to three 
 times, as great as for money; e.g., Fisher estimates for 1916 that 
 money changed hands about 24 times in the year, and deposit cur- 
 rency 60.2 times. 
 
412 Money and Credit 
 
 needs in time of prosperity. No unified control existed to 
 check extremes of speculation, and no adequate concerted 
 policy prevailed in time of financial crisis to tide weak 
 companies over periods of danger. The deposit currency 
 was deficient in elasticity, with the result that farmers 
 and business men suffered from sharp swings of the in- 
 terest rate, and from inability to secure loans when they 
 were most needed, and banks suffered from the extreme 
 risks of their individualistic attempts to shoulder the re- 
 sponsibilities of large loan deposits in times of emergency. 
 The Federal Reserve System has changed the face of things 
 in a very substantial way. The key to elasticity under the 
 Federal Reserve System lies, first of all, in the method of 
 centralizing and mobilizing reserves.^ 
 
 Reserves 
 
 Under the old banking system, banks in large cities had 
 to carry a money reserve of 25 per cent., banks in medium- 
 sized cities a reserve of 25 per cent., and banks in country 
 towns a reserve of 15 per cent. Under the Federal Re- 
 serve System, the reserve requirements for each class of 
 banks is reduced to 13, 10, and 7 per cent, respectively 
 against demand deposits, and to 3 per cent, for all classes 
 alike against time deposits. 
 
 Moreover, the Federal Reserve System provides that the 
 full legal reserve of each member bank shall be kept in the 
 Federal Reserve Bank of its district. This new reserve 
 requirement has therefore greatly increased the loaning 
 power of the banks. Their capacity to carry loan deposits 
 increased immensely when the minimum reserve require- 
 ments were cut by the new law. Bach Federal Reserve 
 Bank is required to hold a minimum reserve of 35 per cent, 
 against all of its deposits. This reserve requirement should 
 be clearly distinguished from the reserve requirements of 
 the member banks. The reserve requirements of the twelve 
 reserve banks and of member banks are two distinct and 
 separate things. 
 
 These reserve ratios in reserve banks and in member 
 
 iKemmerer, "A B C of Federal Reserve System," pp. 17-18, 64-65. 
 
Money and Credit 413 
 
 banks combine in such a way as to make the total reserves 
 necessary for the banking system as a whole less than these 
 ratios, taken by themselves, would indicate. For instance, 
 in the case of banks of the large cities whose reserve re- 
 quirement is 13 per cent, against demand deposits and 3 
 per cent, against time deposits, the Federal Reserve Banks 
 holding these reserves are required legally to hold only 35 
 per cent, against deposits of bankers' reserve balances. 
 Thirty-five per cent, of 13 per cent, is 4.55 per cent, legal 
 cash reserve. By the same calculation, the reserves kept by 
 Federal Reserve Banks for the banks of middle-class cities 
 against demand deposits is 35 per cent, of the 10 per cent, 
 requirement, and for country banks 35 per cent, of the 7 
 per cent, requirement. Hence for the banking system as a 
 whole, the reserves necessary amount to only three to five 
 per cent, of total deposits. As a matter of safety, this pos- 
 sible limit is not actually reached. A margin above the 
 extreme possible minimum is adhered to as a margin of 
 safety.^ 
 
 With this arrangement of reserves, the member banks 
 are in a position not merely to expand their loans more 
 than ever before, but to make their loans elastic enough to 
 accommodate trade needs under virtually all normal con- 
 ditions. If the commercial bank in any community is faced 
 with a high demand for loans, and finds that with its pres- 
 ent resources its limit of loans has been reached, it has 
 ready at hand a means of solving the problem. One re- 
 course is to borrow funds from the Federal Reserve Bank 
 of the district, giving collateral security. The reserve bank 
 extends the loan for a short period, not to exceed fifteen 
 days, and the only permissible collateral is such notes, 
 drafts, bills of exchange, or banker's acceptances as are 
 eligible for rediscount or for purchase by Federal Reserve 
 Banks, and bonds or notes of the United States Govern- 
 ment. 
 
 Another recourse is to rediscount commercial paper with 
 
 1 See Moulton, "Financial Organization of Society," p. 483 ; Kem- 
 merer, American Economic Review, June, 1918, Vol. 8, pp. 260-261 ; 
 H. L. Keed, American Economic Review, June, 1918, Vol. 8, pp. 270- 
 282; Kemmerer, "High Prices and Deflation," pp. 14-30. 
 
414 Money and Credit 
 
 the Federal Reserve Bank of the district. By this recourse, 
 the cominercial bank which wishes to secure increased loan- 
 ing power sends some commercial paper from its files, such 
 as promissory notes, bills of exchange, acceptances, etc., to 
 the reserve bank, where the paper is discounted, and the 
 amount remaining after the discount is deducted becomes a 
 deposit in the reserve bank to the account of the member 
 bank. If the member bank were now able to make loans 
 only up to the amount of this new deposit, its loaning power 
 would be increased, but not to any large degree. What 
 happens is that the new deposit which exists with the re- 
 serve bank is counted as so much new reserve for new loans. 
 The new reserve will serve as the basis of loans, if the bank 
 is in the middle class of cities, to ten times the sum of the 
 reserve. The new reserve is counted as a basis for new 
 loans just as fully as though it were a new deposit of gold 
 with the reserve bank. The reserve banks always stand 
 ready to rediscount suitable commercial paper for member 
 banks. The recourse is always open to the member bank. 
 In time of emergency, it can always turn to the reserve 
 bank, rediscount some of its commercial paper, and use the 
 deposit of commercial paper as a reserve for loans to its 
 customers several times that amount. The power to expand 
 loans to meet trade needs is consequently elastic. 
 
 Although this practice is available as an emergency re- 
 course, ordinarily only a small part of such borrowings by 
 member banks actually are used to increase the amount of 
 their reserve balances. As the borrowing device has worked 
 out in actual practise, such borrowings are in very large 
 measure taken in the form of Federal Reserve note issues. 
 
 But, it may well be asked, is there no limit to the loans 
 which the reserve banks can make in this way? If all com- 
 mercial banks in a particular district come to the reserve 
 bank at one and the same time and ask for collateral loans 
 or rediscount loans, will not the Reserve Bank find its own 
 lending power overdrawn? In that event, and the event 
 has often occurred, the reserve bank has an immediate and 
 sure recourse in the system of mobilizing reserves. As has 
 been before stated, the reserve banks are required to keep a 
 
Money and Credit 415 
 
 cash reserve of 35 per cent, against deposits. If any one 
 reserve bank finds that its loans to member banks are be- 
 coming so great as to exceed that ratio, it can turn to the 
 Federal Reserve Board at Washington, and through it bor- 
 row additional reserves from some of the other reserve 
 banks of the country. Some of the other reserve banks of 
 the twelve will have an excess of reserves, and will be called 
 upon to lend from their surplus of reserves. This possi- 
 bility of one reserve bank's being carried over a period of 
 heavy loans by a temporary grant of reserves from another 
 reserve bank which at the time is in a period of light loans 
 enables all of the reserve banks to co-operate to a most 
 beneficial degree. This mobilization of reserves between 
 districts makes possible the fullest possible utilization of 
 the total reserves of the banking system, and enables the 
 banks in each district to carry on their operations with the 
 assurance that they are not dependent upon their own indi- 
 vidual resources, but have back of them the combined bank- 
 ing resources of the nation. 
 
 In case all the reserve banks should find their loans be- 
 coming excessive for their reserves, the law provides that 
 temporarily the 35 per cent, minimum requirement may be 
 waived. However, before this extreme stage would be 
 likely to arrive, the reserve banks would be able to put a 
 check on further loans by raising the discount or interest 
 rate. This increase of money rates would make borrowing 
 so expensive for the customers of the banks that they would 
 be discouraged from making any further additional loans 
 than might be absolutely necessary. The provisions of the 
 law thus equip the reserve banks to restrain the speculative 
 and business loans of the country after a danger point has 
 been approached. 
 
 Clearance and Other Functions 
 
 The process of clearance and collection of cheeks has al- 
 ready been described, and it should be clearer now, with a 
 more detailed picture of the various phases of the Federal 
 Reserve System in mind. The reserve banks, moreover, are 
 not confined to dealings with member banks. They may 
 
416 Money and Credit 
 
 buy in the open market eligible bills of exchange, bankers' 
 acceptances and government securities. Also, reserve banks 
 are more and more to become the places of deposit for 
 funds of the United States Treasury Department. 
 
 Out of the whole machinery of the Federal Eeserve Sys- 
 tem, no part arises of more dominating importance than 
 the elasticity of deposit currency. Not only can deposits 
 be expanded to meet unusual trade needs, but after the 
 trade needs have been met the loans become paid up, and a 
 due contraction of the deposit currency takes place. Elas- 
 ticity involves both expansion and contraction, and the two 
 ideals are achieved in a way which is an incalculable ad- 
 vance over banking methods before 1913. The Federal 
 Reserve System enables the banks of the country to perform 
 the functions and services which economic activities de- 
 mand, and the law which established the system is one of 
 the most constructive pieces of financial statesmanship that 
 have ever been placed on American statute books. ■ 
 
 International Banking and Credit 
 
 International commerce has come to be of fundamental 
 importance to the economic prosperity of nations, and in- 
 ternational banking has developed credit facilities for the 
 making of international payments. The estimate has been 
 made that ' ' the manufacturing capacity of the country has 
 reached a point about 20 per cent, in excess of domestic 
 requirements, and on the finding of profitable markets for 
 this surplus production depend not only the particular in- 
 dustries involved, but the general business condition of the 
 entire country."^ Prior to the World "War, the financing 
 of America's foreign trade was largely dependent upon 
 European bankers, but with the colossal financial shake-up 
 which the war brought, American traders have been put in 
 a position which requires that American bankers provide 
 the financial machinery for the trade of their own country. 
 A transition from domestic banking to international bank- 
 ing by American banks has been one of the notable conse- 
 quences of the war and post-war periods. 
 
 I Gr. E. Eobferts, EdOMimic WorU, April 16, 1921. 
 
Money and Credit 417 
 
 The Principles of Foreign Exchange 
 
 Under the normal peace time conditions of trade before 
 the war, the trade between the Great Powers was financed 
 upon the basis of the existence of the gold standard of 
 money and credit. The currency in circulation in the eco- 
 nomic systems of the Great Powers reflected the stable con- 
 fidence of the economic community that forms of money 
 and credit were convertible into gold. That confidence was 
 wrecked by the large issues of paper money, inconvertible 
 into gold, in the European countries, and by the large 
 shipments of European gold to America in settlement of 
 Europe's new accounts as the debtor of America. The 
 point should be clear, however, that the principles of for- 
 eign exchange commonly assume that the gold standard is 
 in operation, and that other forms of money are convertible 
 into that metal. 
 
 The exchange mechanism centers around the payment 
 for exports and imports between countries by offsetting the 
 bank deposits of one country against the bank deposits of 
 another, and settling only the balances by shipments of 
 gold. The balances which cannot be offset and cancelled 
 are, in proportion to the total amount of the accounts, com- 
 paratively small, and hence the actual shipments of gold 
 between countries in normal times are likewise compara- 
 tively small. 
 
 The bank deposits which are cancelled internationally in 
 this fashion are primarily in the nature of bills of ex- 
 change. To put the process clearly, a very simple illustra- 
 tion may be assumed. Two Americans and two Englishmen 
 are engaged in international trade. One American buys 
 $1,000,000 worth of goods from one of the Englishmen ; the 
 other American sells $1,000,000 worth of goods to the other 
 Englishman. Then one American owes $1,000,000 abroad, 
 the other American is owed $1,000,000 from abroad. Each 
 account is carried in the form of a bill of exchange. That 
 is, each seller writes an order to the buyer, or on the buyer's 
 bank, if arrangement has been made by the buyer to pay 
 thiB amount to the seller. These bills of exchange are th© 
 
4^18 Money and Credit 
 
 paper evidences that ■within a certain period the stated 
 sums of money will be paid by the buyers of the goods. 
 Who is to wait for the payment to be made? Must the 
 seller wait one, two, or three months? The fact of the case 
 is that the seller can have his bank wait until the date of 
 payment, and can himself obtain from his bank immediate 
 money if he so desires. Suppose the two bills of exchange 
 for $1,000,000 each come to the same bank. One represents 
 money owing by Americans to foreign concerns, the other 
 money owing to America by foreign concerns. The Ameri- 
 can bank can then collect $1,000,000 from one American 
 trader, and pay $1,000,000 to the other American trader. 
 Meantime, an English bank can do the same "with the Eng- 
 lish side of the transaction. No gold will need to be 
 shipped. The bills of exchange can be cancelled against 
 each other by the banks of the two countries, and by the 
 system of credit instruments the international transactions 
 are completed without the passing of gold back and forth. 
 
 The illustration, of course, oversimplifies the matter., 
 There are hundreds of importers and exporters in both 
 countries, and they are yearly drawing thousands of bills 
 of exchange on each other. These bills of exchange pass 
 into the hands of the banks and are bought Land sold be- 
 tween banks. There is an open market in banking circles 
 for the bills of exchange, and the law of demand and supply 
 operates in the sales made practically the same as in the 
 sales of commodities in wholesale markets. This fluid con- 
 dition of the market makes possible a steady matching of 
 bills due to foreigners and bills due from foreigners, and a 
 ready cancellation of the great bulk of the accounts without 
 the direct shipment of gold between countries. 
 
 But normal exchange is built upon the assumption that 
 gold is available at any time, and that balances will be ad- 
 justed by gold shipments. The relation of gold to exchange 
 is affected by the differing units of money in various coun- 
 tries. England's unit of money is the pound sterling, 
 which contains the same amount of gold as $4.8665 of 
 American money. To put the fact the other way around, 
 the English pound sterling contains 4.8665 times as much 
 gold as does the American dollar. This ratio is called the 
 
Money and Credit 419 
 
 par of exchange between the two countries. The French 
 money unit, the franc, contains less gold than the American 
 dollar. The dollar has 5.18 times as much gold as the franc, 
 and this ratio is the par of exchange with France. The 
 par of exchange with various countries is therefore the 
 ratio between the amounts of gold contained in their re- 
 spective money units. 
 
 But the exchange is above or below par a great deal of 
 the time, and the fluctuations in normal times reflect the 
 demand for and supply of bills of exchange. If New York 
 has been shipping huge exports abroad, it will also have 
 been drawing a huge supply of bills of exchange on foreign 
 buyers. This huge supply of bills, thrown onto the New 
 York exchange market, will affect the relations between 
 the demand and supply of bills, and the price of exchange 
 will fall. Supply and demand shape the price of bills of 
 exchange in much the same way as they shape the price of 
 wheat or any tangible commodity in the market. If there 
 is a large supply of wheat in the country, the price paid 
 tends to fall. In the same way, if there is a large supply 
 of bills of exchange in the New York market, the price 
 offered by those bankers who buy such bills will tend to 
 fall. The rate of exchange will drop perhaps to $4,865, or 
 even to $4,845. But it would not drop below the latter 
 point because it would be cheaper for buyers to pay for 
 goods by actual shipment of gold than to use bills of ex- 
 change at so low a price. The margin between $4,845 and 
 $4,865 represents the cost of shipment of gold between 
 countries. It remains true, conversely, that if the supply 
 of bills of exchange is scarce in the New York market rela- 
 tive to demand, the price will tend to be bid up above par, 
 but not above $4,885, because beyond this point it would 
 pay to ship actual gold between countries.^ When the 
 price of exchange moves either way beyond these limits, or 
 the "gold points," as they are called, the fluctuations tend 
 to be checked by virtue of the fact that it will pay to ship 
 
 1 The figures for the gold points are given here ag approximations. 
 It is obvious that they change as. the cost of shipping gold between 
 countries changes. 
 
420 Money and Credit 
 
 gold between countries. This imminent possibility of gold 
 shipment serves to redress the balance of the exchanges and 
 keep them within a fairly close margin of the par of ex- 
 change. 
 
 The international bankers of one country organize the 
 flow of bills of exchange and the clearance of international 
 deposit accounts by themselves maintaining deposit ac- 
 counts with correspondent banks in foreign countries. The 
 making of payments through bills of exchange is conducted 
 by the process of transferring deposit accounts back and 
 forth between home banks and their correspondent banks 
 of deposit abroad. For example, a New York furniture 
 exporter ships $1,000,000 worth of furniture to a London 
 buyer. The London buyer has his deposit account with a 
 London bank. This London bank in turn has a deposit 
 account with a correspondent back in New York. The 
 London buyer transfers $1,000,000 of his bank deposits to 
 the account of the London bank, and the latter in turn 
 transfers $1,000,000 of its deposits with its correspondent 
 bank in New York to the account of the New York furni- 
 ture dealer who shipped the goods. This method of trans- 
 ferring bank deposits from party to party and bank to 
 bank between countries is essentially the same in principle 
 as the method of clearings between banks within a country 
 in its domestic credit transactions. 
 
 It remains to be observed that if the discrepancy be- 
 tween the demand and supply for bills of exchange should 
 remain for any considerable time at a point so great as to 
 cause large international shipments of gold, the shift in 
 gold reserves between countries will so affect interest rates 
 and price levels in the countries concerned as to bring the 
 financial and trade relations gradually back to normal, and 
 to bring the rate of exchange back approximately to par. 
 
 The supply of bills of exchange in the United States 
 dravni on foreign countries arises not only from the expor- 
 tation of goods, but also from sales of American stocks and 
 bonds to foreign buyers, from loans extended by foreign 
 bankers to American bankers, and from international ser- 
 vices rendered by Americans, such as providing foreign 
 
Money and Credit 421 
 
 travelers in America with funds, rendering legal services 
 to foreign concerns, etc. All such international transac- 
 tions give rise to a flow of payments from abroad to Ameri- 
 can creditors. A demand for bills of exchange, that is, for 
 a means of providing an outflow of payments from Amer- 
 ica, arises from essentially the converse of these various 
 dealings between nations. Before the war, America's ex- 
 ports considerably exceeded her imports, and this excess 
 represented so much payment due Americans above Ameri- 
 can payments due foreigners. This excess value was, how- 
 ever, offset by the other factors which affect the supply and 
 demand for credit settlements, because Americans had to 
 meet heavy interest and dividend payments on the $6,000,- 
 000,000 of American stocks and bonds held by foreign in- 
 vestors; they had to pay premiums on insurance held by 
 foreign companies; they had to pay interest to bankers 
 making loans in America; they had to pay freight bills to 
 foreign ship owners who largely carried American goods; 
 and they had to meet the expenses of the numerous Ameri- 
 cans traveling abroad. The foreign payments for Amer- 
 ica's huge exports were therefore made partially by goods, 
 but also, and to a substantial degree, by numerous other 
 forms growing out of a wide variety of services and 
 dealings. To quote P. "W. Taussig, "During the quarter 
 century preceding the great war, we had a large excess of 
 merchandise exports. That excess enabled us to meet some 
 heavy obligations of our own toward foreign countries. 
 Through it we were able to pay the expenses of our tourists 
 in Europe, freight charges on our imports and exports car- 
 ried in foreign vessels, to meet accruing interest and divi- 
 dends on external holdings of our securities, to remit the 
 sums which foreigners newly arrived in this country were 
 sending to friends and relatives in their home countries."^ 
 All this describes the normal conditions before the war. 
 Since 1914, the conditions of credit, trade and exchange 
 have immensely changed. Soon after the outbreak of war 
 in Europe in 1914, the exchange rate for British sterling 
 soared as high as $7.00. After the first shock to commerce 
 
 1 Economic World, Vol. 21, p. 811. 
 
422 Money and Credit 
 
 and credit was past, orders for war materials came from 
 Europe in such large amounts that a vast supply of bills of 
 exchange were thrown upon the American market, and this 
 supply caused the price of exchange to decline far below 
 par. "When the decline had reached $4.48, the British Gov- 
 ernment interfered with the normal operation of the ex- 
 change mechanism, and by various devices arbitrarily 
 maintained the exchange rate at a minimum point of ' 
 $4,765. Other European countries followed suit. This 
 "pegging" of the exchanges, as it is termed, lasted until 
 about four months after the armistice was signed. The 
 European governments then released the exchange rates to 
 the working of natural forces, with the result that rates 
 declined violently. In 1920 the rate of exchange in the 
 pound sterling fell as low as $3.18, rose again to about 
 $4.00, and in February, 1922, W'as ranging close to $4.30. 
 The decline in the exchanges of other leading European 
 currencies has been on an even greater scale. One of the 
 greatest declinations has occurred in the German mark, 
 which fell from a par of about 24 cents per mark before the 
 war to about one-third of a cent per mark in the fall of 
 1921. 
 
 The depreciation of exchange has led Europe to make 
 huge shipments of gold to the United States. The immense 
 volume of gold importations has swollen the reserves of the 
 banks in this country, and these swollen reserves have been 
 the basis for the tremendous credit expansion in America 
 since the beginning of the war. 
 
 "Gold has practically disappeared from the channels of 
 trade of nearly all important European countries and in 
 its place we find a group of heterogeneous paper currencies, 
 which have been issued frequently in such volume that 
 many of them lack any semblance of stability of value. "^ 
 The huge issues of paper money, inconvertible into gold, in 
 European countries have caused the values to depreciate 
 far below normal standards. The purchasing power of 
 these countries has diminished as a direct consequence of 
 war financing in which the convertible gold standard was 
 iH. A. E. Chandler, Economic World, May 21, 1921. 
 
Money and Credit 423 
 
 abandoned, and paper money flooded the European cur- 
 rency supplies. The reason for the great decline in the 
 rate of foreign exchange on American markets lies in the 
 extraordinary fall in the purchasing power of the foreign 
 currencies. The general theory which accounts for the low 
 rates of exchange may be stated as follows: the valuation 
 in one country of the money of a foreign country will de- 
 pend upon the relative purchasing power of the currencies 
 of the two countries. The theory is to the effect that the 
 primary reason for the wide divergence of foreign ex- 
 changes from their gold parity is found in the relative 
 depreciation of currencies in different countries, or, to put 
 the same idea in another way, in the relative domestic pur- 
 chasing power of the currencies of different countries.^ 
 After a careful statistical survey of the fluctuations in 
 purchasing power of the currencies of various countries in 
 comparison with the fluctuations in exchange rates, the 
 Federal Reserve Board has lent its authority to the sound- 
 ness of the theory. The pre-war conditions of exchange are 
 clearly subject to a drastic alteration in the light of de- 
 velopments occcisioned by the war. The new economic con- 
 ditions amend the principle that exchange wiU not be able to 
 fluctuate to any serious degree beyond the so-called "gold 
 points," and the new conditions force the thinking of eco- 
 nomic students on the subject onto a new plane. 
 
 The international financial relationship of the United 
 States has been transformed by the war. Before the war, 
 this country was a debtor nation, owing to Europe through 
 investments held abroad and through loans approximately 
 $6,000,000,000. Today this country is a creditor nation, 
 and a creditor on a grand scale. The United States bought 
 back in the neighborhood of $5,000,000,000 worth of the 
 American securities which were formerly owned abroad, 
 and extended government loans to Europeans to the amount 
 of about $11,000,000,000 and private loans on trade ship- 
 ments of about $3,500,000,000. In the meantime, the ex- 
 port trade of the United States has been so greatly in excess 
 of her import trade that an enormous trade balance of 
 
 1 See G. Cassel, Federal Reserve Bulletin, December, 1920, p. 1278. 
 
424 Money and Credit 
 
 exports over imports has been built up in the last seven 
 years, amounting all told to more than $17,000,000,000. 
 The United States is heavily a creditor nation ; her exports 
 greatly exceed her imports; the rates of foreign exchange 
 have departed violently from their normal standards; the 
 United States alone of the great economic powers has come 
 through the war with her gold standard intact ; all in all, 
 the international financial relations of the United States 
 are profoundly transformed. 
 
 The new financial status of the United States has made it 
 necessary for American banks to finance with their own 
 resources the great bulk of America's foreign trade. Prior 
 to the war, London was the center of the world's interna- 
 tional banking. Years of banking history had firmly en- 
 trenched London banks in the confidence of the business 
 men of the world. New York as a center of international 
 banking was distinctly subordinate to the great world 
 center, London. The new financial status of the United 
 States has practically forced American banks to develop 
 for themselves international credit facilities on the large 
 scale necessary to accommodate America's enormous post- 
 war foreign trade. 
 
 Under the pre-war status, the amount of payment which 
 Americans made to foreigners annually, in the form of 
 interest on securities and loans held abroad, in the form of 
 expenditures of American tourists abroad, immigrant funds 
 sent home, freights, insurance and the like, came to about 
 $500,000,000. America was able to make this payment by 
 the excess of her exports over imports. Under the post-war 
 status, foreign countries are obliged to remit to the United 
 States annually about $600,000,000, because of interest due 
 on foreign securities and loans held in America. At pres- 
 ent, Europe cannot pay these sums by exports to the United 
 States. Europe is so strongly in need of goods from the 
 United States that European imports from the United 
 States considerably exceed exports to the United States. 
 Consequently, the creditor relationship of the United States 
 tends constantly to become greater. 
 
 A variety of banking developments have taken place in 
 an atteimpt to equip American trade to meet the new pbsi- 
 
Money and Credit 425 
 
 tion. Under the Federal Eeserve Law the Federal Reserve 
 Bank of New York has entered into mutual relations to act 
 as correspondents or agencies, with the banks of numerous 
 foreign countries. Also, national banks which are mem- 
 bers of the Federal Reserve System may, under the 
 supervision of the Federal Reserve Board, establish 
 branches abroad. Under this provision, the National City 
 Bank of New York City has established more than forty 
 foreign branches, distributed among the strategic commer- 
 cial centers of the world. Another extension of foreign 
 banking facilities has taken the form of creating and ex- 
 panding correspondent relations with foreign banks, and 
 the banking relations thus formed provide Americans with 
 banking service in virtually every important foreign com- 
 mercial and financial center. At the same time, a number 
 of banks have expanded their foreign departments greatly 
 and their representatives are increasingly spending their time 
 abroad in personal study of international credit problems. 
 
 American banks are able to undertake these new finan- 
 cial responsibilities because of the new provisions of the 
 Federal Reserve Act. The new reserve act authorized an 
 acceptance market in American banks, and the result is 
 that bills of exchange can be drawn in dollars on American 
 banks. In 1920, about $5,000,000,000 worth of acceptances 
 were dealt in by American bankers, most of them drawn in 
 connection with foreign trade. The acceptances handled 
 by American national banks are limited to periods not to 
 exceed six months, and such foreign trade as can be financed 
 by short-term credits has been facilitated by the new 
 American acceptance market fostered under the Federal 
 Reserve System. This new market is slow in development, 
 but promises to expand gradually and to attain a steadily 
 increasing importance. 
 
 In addition to these expanded banking facilities, two 
 types of foreign credit corporation have been authorized 
 under the Edge Act, and hold large promise for the future 
 of American banking. One type undertakes the extension 
 of foreign credits by the use of acceptances, and their 
 services are broader than those of the merely national com- 
 
426 Money and Credit 
 
 mereial banks because they are allowed to handle ac- 
 ceptances running for periods longer than six months, 
 usually about one-year periods. The acceptances, for long 
 and short periods, of all types of banking institutions are 
 included in the estimated total of $5,000,000,000 for the 
 year 1920. International conditions are such that even 
 these long-term credits are not adequate to finance the 
 needed trade between America and foreign countries. So 
 large a number of business houses abroad are under the 
 obligation of recovering from their wartime prostration 
 that they cannot pay for goods bought from America for 
 several years to come. Nevertheless, if these industries 
 abroad are to get onto their feet, they must have American 
 supplies, and the second type of foreign financing corpora- 
 tion is devoted to supplying the long-time loans requisite 
 for the revival of such foreign industries. The process of 
 credit extension has already been partially described under 
 the section dealing with foreign investment trusts. The 
 American institutions are authorized to make loans to for- 
 eign concerns, using the stocks and bonds of these corpora- 
 tions as collateral for the loans ; and, in turn, the American 
 institutions are authorized to issue their own securities for 
 the investment of the American public. The two types of 
 foreign financing have brought into being more than a 
 score of American banking corporations. They are under 
 the supervision of the Federal Reserve System, and offer 
 large services to American foreign trade in the future. 
 Owing to the unstable political and financial conditions of 
 Europe, the longtime risks of the second type of foreign 
 credit have discouraged bankers from organizing such de- 
 benture credit institutions. As European conditions be- 
 come stabilized, there is good reason to anticipate their 
 gradual promotion among American bankers. 
 
 In addition to all these private efforts under government 
 incorporation and supervision to cope with America's finan- 
 cial needs, there exists the War Finance Corporation, em- 
 powered to assist exporters with credit derived from 
 government resources. This credit has been used to facil- 
 itate the international shipment of agricultural products, 
 
Money and Credit 427 
 
 and is an important supplement to the other agencies of 
 international credit. 
 
 The problem of financing foreign trade is by no means 
 solved. Old habits, traditions and prejudices are still 
 powerful and often discouraging, but the will and deter- 
 mination to undertake the responsibility of providing 
 American credit for American trade is certainly apparent, 
 and with the mind of American bankers turned in that 
 direction there is strong reason to feel confident that the 
 new financial status of the United States will be wisely 
 established. 
 
 The Dangers of the Credit System 
 
 ' ' Credit is so delicate a thing that it is dangerous to talk 
 about it." This statement by the wartime president^ of 
 America 's largest bank suggests that at the very time when 
 the credit system is performing the indispensable functions 
 which have been described up to this point, it also is loaded 
 with possibilities of danger, and even of disaster. 
 
 Business Cycles 
 
 Business depression and financial panic are imminent 
 possibilities in the modern price system. The normal state 
 of economic life is not an even flow of economic activity, 
 but a stage of transition from prosperity to depression or 
 from depression to prosperity. Depression automatically 
 sets at work forces which breed gradual prosperity cul- 
 minating in a crisis, or even in a panic; and the crisis in 
 turn automatically sets at work forces which put the eco- 
 nomic system through the experiences of depression. The 
 pendulum swings from one extreme to another on the aver- 
 age every seven to ten years, and the economic history of 
 America is replete with these periodic fluctuations. Eco- 
 nomic life is never static; it is always dynamic, always in 
 process from one stage to another. The business cycle is a 
 paramount feaiture of all economic calculation. 
 
 The cycles of business are not planned by conspirators, 
 but are inherent phenomena in the natural processes of the 
 
 1 F. A. Vanderlip, "What Happened to Europe," p. 98. 
 
428 Money and Credit 
 
 credit system. Prosperity cannot continue for more than a 
 few years at a time because of factors inherent in the credit 
 system, factors which the dominating business leaders have 
 up to date found no way of controlling adequately. As 
 business comes into a state of high prosperity, the costs 
 increase faster than the income. Briefly this process takes 
 place as follows: Concerns resort to the use of old equip- 
 ment, out-of-date machinery, and badly located plants in 
 order to fill big orders, and all such manufacturing methods 
 involve extraordinary costs per unit of product. Wages 
 tend to rise unusually high, and the efficiency of labor falls 
 off. Prices of raw materials rise faster and higher than 
 prices of finished products, and interest and discount rates 
 ascend on a like scale. The efficiency of management tends 
 to decline because of the rush and confusion of overloaded 
 business. The expanded business rests very largely upon 
 borrowed funds, and as the loans increase they approach a 
 point where they threaten to exceed the legitimate ratio to 
 bank reserves. A tension in the money market arises, in- 
 terest rates gradually increase costs, and a general credit 
 stringency prevails. Under these influences, profits suffer a 
 reversal. The costs advancing disproportionately eat up the 
 margin between total cost and selling price and in numerous 
 industries the very prosperity which originally brought fine 
 profits evolves conditions which in the end bring drastic 
 profit reductions. But the security behind the large loans 
 upon which business depends is faith in the ability of busi- 
 ness to earn large profits. The threatened reduction of 
 profits therefore undermines that element of business con- 
 fidence which is the basis of credit. This condition over- 
 takes specially unfortunate business concerns first. The 
 creditors which have supplied them with loans become 
 alarmed and fearful lest their money cannot be repaid un- 
 less it is called in at the earliest opportunity. Creditors, 
 for the same reason, deem it unsafe to renew old loans or to 
 make new ones. Without extensions of credit, the most 
 unfortunate industries face a crisis. With the news of 
 their jeopardy, the feeling of nervousness and lack of con- 
 fidence spreads to other businesses, and a general process 
 
Money and Credit 429 
 
 of squeezing debtors takes place. The crisis has been 
 reached, the apex of prosperity, and the forces which 
 brought it about were natural, inherent forces which 
 evolved their dangerous consequences as a matter of the 
 due and normal course of events. 
 
 The crisis has, in years past, frequently plunged into 
 panic. Bankruptcies, failures, financial disasters have oc- 
 curred on every hand. It is widely hoped that the Federal 
 Eeserve System has brought credit under sufficient control 
 to avert the outright panic. By the processes already de- 
 scribed of mobilizing the reserves of all the banks to come 
 ■ to the rescue of those most hard pressed, bank failures are 
 reduced to a minimum. By the processes of loaning and re- 
 discounting between reserve banks and member banks, the 
 banks are able for the most part to rescue business concerns 
 at the crucial moment and avoid the extreme calamity of 
 bankruptcy. By the processes of raising the interest and 
 discount rates on the loans to member banks for some time 
 before the anticipated crisis, the reserve banks can dis- 
 courage unwise and speculative loans, and prevent the 
 forces of crisis from securing too complete a grip on the 
 economic order. The Federal Reserve System is looked ' 
 upon generally as being "panic-proof." But it is not 
 looked upon as having the power or the capacity to prevent 
 the fluctuations which lead from prosperity to crisis, and 
 the ensuing depression. 
 
 The period of depression is a time of recovery and read- 
 justment. Business failures increase, unemployment is 
 widespread, and consumers out of work have a reduced 
 purchasing power and a reduced demand for commodities. 
 People are wary of investment in new enterprises, and the 
 value of securities reaches a low level. Prices of all com- 
 modities tend to fall, interest rates to decline, and wholesale 
 and raw material prices tend to drop more than other 
 prices. Laborers who can get work increase their efficiency 
 in the hope that thereby they will win the favor of their 
 employers and will not be laid off. The costs of doing busi- 
 ness decrease. The stocks of goods piled up during pros- 
 perity are gradually sold out. The consumers' strike passes, 
 
430 Money and Credit 
 
 new production is required, bargain prices in stocks and 
 bonds invite people to snap them up and investment re- 
 vives, business begins to pick up, expansion recurs, and 
 gradually economic life emerges from the depression to the 
 first stages of a new era of prosperity. The cycles continue, 
 from stage to stage, from transition to transition, normally, 
 naturally, persistently.^ 
 
 The most recent industrial crisis occurred in its severest 
 aspects during 1920 and 1921. The armistice was followed 
 by an outburst of prosperity accompanied by all those un- 
 dermining forces which evolve an industrial crisis. Costs 
 of production increased, wages went up, efficiency dropped, 
 and profits exhibited a marked decline. Prices had risen 
 greatly, having reached in such commodities as clothing and 
 house furnishings a level of 353 and 331 per cent, respec- 
 tively above the level of 1913, and in the wholesale market 
 building materials having risen as high as 341 per cent, 
 over 1913. These extraordinary prices started a general 
 refusal of consumers to buy these commodities, and the re- 
 fusal thus begun spread broadcast until a general "con- 
 sumers' strike" was in effect in 1920. The expansion of 
 bank deposits reached a maximum, and in 1920 the Federal 
 Reserve took steps to discourage further loans by increasing 
 the discount rate. Unemployment became widespread, 
 manufacturers shut down or ran at fractional capacity, and 
 a general depression prevailed throughout 1920, continuing 
 into 1921. The depression was accentuated by interna- 
 tional conditions. The amount of the reparations payment 
 to be made by Germany still remained uncertain in 1921, 
 and exports fell off decidedly, owing to unsettled economic 
 conditions abroad and to limited international credit facili- 
 ties.^ 
 
 The business crisis and depression brings in its course no 
 small amount of human distress and economic waste. Pro- 
 duction of all the comforts and luxuries of life is dras- 
 tically cut, and millions of men face the prospect of months 
 without income, with all that such a situation means in 
 terms of anxiety, poverty, and privation. A psychology of 
 
 iSee W. C. Mitchell, "Business Cycles," especially pp. 475-599. 
 2 David Friday, Review of Revieios, February, 1921, pp. 170-172. 
 
Money and Credit 431 
 
 fear saturates the men in the business world, and the morale 
 of workers is dissipated by loss of jobs. Probably no other 
 loss in modem economic life, except the loss from war, 
 compares with the loss accruing from the extremes of busi- 
 ness cycles. To the country as a whole, a depression is the 
 cause of almost incalculable waste and of enormous human 
 suffering. It brings no substantial good, except as it is 
 necessary in dissoMng the peak of prosperity and spinning 
 the credit system through another cycle. No one hopes to 
 eliminate completely business cycles under the credit system 
 of modem industry. They are part and parcel of the eco- 
 nomic order under the modern price system. But there is 
 every right to expect that the extremes of the cycles eani 
 be substantially alleviated. The Federal Reserve System i 
 saved the country from a full-fledged panic in the crisis of 
 1920, and thereby eradicated from the period of business 
 crisis the most painful excesses. No reason is apparent 
 why the sufferings of the business cycle cannot be reduced 
 materially. It would be foolhardy to attempt to eliminate 
 cycles altogether. But it would be equally foolhardy to 
 flinch from the plain necessity to stabilize business much 
 beyond the present point. Indeed, no one should be blind 
 to the fact that the price system is a tremendous challenge 
 to the chief operators of the industrial, commercial and 
 financial system, — a challenge that industry must be sta- 
 bilized more thoroughly. There is still room for transi- 
 tional eras, for action and reaction, for a dynamic economic 
 life with seasonal and periodic fluctuations between better 
 and worse, but the great responsibility of the future is to 
 eliminate the grossly wasteful and deplorable consequences 
 of crises and depressions. To stabilize business is one of 
 the pressing problems of the immediate future, and its mag- 
 nitude and importance cannot be overstressed. 
 
 Important proposals which will figure in this. evolution 
 toward more stable business cannot be discussed in detail 
 here, but some of the chief proposals may well be men- 
 tioned briefly. The centralization of the banking system 
 under the Federal Reserve Banks, with all the methods for 
 mobilizing reserves, securing elasticity of credit, and regu- 
 
432 Money and Credit 
 
 lating the volume of business loans by manipulating tbe 
 interest and discount rate, has raised to the maximum our 
 immunity from downright panics. The Federal Reserve 
 System also does much to tide businesses over the tightest 
 pinches of the crisis and even co-operates with them in a 
 process of reorganization of their broken down financial 
 structure. Secondly, it has been proposed that government 
 and railway purchases and improvements be so distrib- 
 uted as to provide employment and business orders when 
 the period of contraction in private corporate industry 
 threatens. Public buildings, highways, and enterprise of 
 all sorts could be used as a kind of balance wheel to sta- 
 bilize the transitional eras in business. Some private con- 
 cerns already announce the possibility of carrying on the 
 construction of new buildings and the expansion of plant 
 during times when normal production tends to decline, and 
 point out the distinct advantage of profiting by the low 
 prices of building materials prevailing usually during a 
 period of depression. Thirdly, the progress in personnel 
 administration made by pioneer concerns during and since 
 the war, and the scientific application of psychological 
 principles to production, promises a way of stabilizing 
 efficiency and labor costs so that during a period of pros- 
 perity they will not encroach upon prices and profits too 
 rapidly. During the crisis and depression of 1920, it be- 
 came known that, although most corporations had suffered 
 from unusually high wages and a drastic slump in labor 
 efficiency, nevertheless there were a substantial number of 
 corporations which had reduced unit labor costs by the use 
 of scientific and psychological methods of labor administra- 
 tion. If the principles already demonstrated by these 
 pioneer corporations can be generally adopted, the new 
 control of labor cost and production efficiency will do much 
 to stabilize prosperity in economic life. Fourthly, the war 
 has more than ever linked America financially and com- 
 mercially with foreign countries. "With the evolution of 
 banking facilities to supply proper credit for foreign trade, 
 and with government encouragement and greater private 
 interest in organizing foreign markets, there is in process 
 
Money and Credit 433 
 
 of growth a new stabilizing factor in the form of foreign - 
 trade. Foreign markets offer an outlet for an excess of 
 production above domestic needs, and, rightly controlled, 
 promise to alleviate the market restrictions of domestic 
 trade. America is therefore taking strides in the direction 
 of a greater stabilization of business to the extent that she 
 accepts the opportunity in international commerce which 
 the war has thrust upon her. In the fifth place, the infinite 
 interrelations of modern business call for the light shed by 
 national and international economic statistics. In the past 
 the collection of statistical information on all branches of 
 production, commerce and credit has been decentralized 
 and scattered, with the result that the calculations and 
 anticipations of business men have been made partially in 
 the dark. The first cure for over-production during a 
 period of prosperity would be to make known to all pro- 
 ducers just how much of each commodity has been and is 
 being produced. The Department of Commerce of the 
 Federal Government has announced plans for co-ordination 
 and centralization of statistical service for business men. 
 The Federal Reserve Board, through its regular bulletins, 
 has already taken important steps in the direction of more 
 adequate financial and industrial data. Adequate statistics 
 may serve as economic barometers in the calculations of 
 business men and should lead to accurate economic fore- 
 casting. 
 
 Finally, the proposal to stabilize price levels deserves 
 most serious consideration. A recent writer, referring to 
 the price changes with the last business cycle, declares : 
 ' ' The United States has maintained the gold standard with- 
 out serious limitation and has reorganized its banking sys- 
 tem on approved lines. Nevertheless we have had price 
 fluctuations almost as violent as those of the greenback 
 period. These fluctuations have caused unmerited suffering 
 to millions of families and have heaped unearned riches 
 upon thousands. They have caused wasteful struggles, en- 
 couraged extravagance among some, and created the class 
 of "new poor." They have promoted speculation and re- 
 duced the efficiency of management and labor. "We are 
 
434 Money and Credit 
 
 poorer in goods, more quarrelsome in spirit, less ready to 
 work because of these fluctuations. All this has happened 
 and is irretrievable. But within a few years fresh changes 
 may happen just as evil in their consequences. This 
 wretched record and this wretched prospect are a grave 
 indictment of our present form of economic organization. ' '^ 
 The frequent changes in the price level have deep effects 
 upon the purchasing power of the income of many classes 
 of people. Rising prices, with a rising cost of living, bring 
 a struggle among wage earners to have their wages raised 
 in order to keep pace with increased prices ; and as soon as 
 the peak is reached, and prices begin to fall, employers 
 commence to cut wages correspondingly, and wage earners 
 suspiciously and distrustfully fight the cutting process. 
 The upward and downward swings of the price level serve 
 as most aggravating causes of the industrial unrest which 
 everybody abhors. Incomes derived from conservative in- 
 vestments were practically cut in two by the sharp decline 
 in the purchasing power of the dollar during the war and 
 after. Fixed salaries likewise suffered a severe dwindling 
 ' in their purchasing power, insurance policies depreciated 
 in value, pensions were halved in purchasing power. In a 
 period of declining prices, numerous classes suffer in like 
 degree. Rising prices virtually confiscate a considerable 
 part of the value of fixed incomes, salaries, etc., and of 
 property investment. For the protection of conservative 
 property interests and for the proper conservation of the 
 life and welfare of labor, it is of the utmost importance 
 that a greater stabilization of prices be attained. 
 
 A plan very thoughtfully advocated at present is that 
 known as ' ' stabilizing the dollar. ' ' The plan is chiefly fos- 
 tered by Irving Fisher of Yale University, and has come to 
 hold the serious attention of a large number of careful and 
 prominent economists and bankers. It rests in large meas- 
 ure upon the quantity theory of prices. In its simplest 
 terms, the quantity theory states that prices equal the quan- 
 tity of money times its velocity of circulation plus the 
 
 1 W. C. Mitchell, American Economic Review, March, 1920, Sup- 
 plement, p. 155; See also American Economic Review, Supplement, 
 March, 1922. 
 
Money and Credit 435 
 
 quantity of credit (for the most part, bank deposits) times ; 
 its velocity of circulation, divided by the number of units 
 of trade. The velocity of circulation refers to the number 
 of times which a dollar changes hands. The rate of turn- 
 over of money and credit affects the influence of a given 
 amount of money and credit on prices. A large volume of 
 money and credit instruments, passing rapidly between 
 buyers and sellers and producers and consumers has 
 direct effects on price levels. The rate of circulation varies 
 greatly from time to time, but statistics at present indicate 
 that the rate of turnover for money ranges in the neighbor- 
 hood of twenty times a year, and of credit forty to sixty a 
 year. The quantity of the medium of exchange in its en- 
 tirety, multiplied by the rate of its passing from hand to 
 hand, fundamentally determines price levels, so the theory 
 runs. 
 
 The influence of the volume of medium of exchange, 
 moreover, depends upon its standard of value, which is 
 gold. Paper money or deposit currency is redeemable in 
 gold and hence represents the same standard of value as 
 gold. This standard of value arises from the intrinsic 
 worth of the 23.22 grains of pure gold in each dollar. The 
 proposal to "stabilize the dollar" is to change the amount 
 of gold in the dollar according as prices tend to go up or 
 down. Price levels can be measured by index numbers, 
 arrived at by statistical averages of prices from time to 
 time. To quote Irving Fisher: "In short, then, our rule 
 or criterion of adjustment is simply this : for every one per 
 cent, of deviation of the index number above or below par 
 found at any adjustment date, we then increase or decrease 
 the dollar's weight by one per cent." If it be objected that 
 confusion would result from coining gold dollars of varying 
 weights, the explanation is given that the gold would not be 
 coined, but would remain in bullion form, and would be a 
 redemption^ fund for all outstanding paper money and 
 credit instruments. As a matter of fact, practically all 
 gold coin is now retired from circulation and used as re- 
 
 1 For a clear explanation of the full technical details of this im- 
 portant plan see "Stabilizing the Dollar," by Irving Fisher. 
 
436 Money and Credit 
 
 serves against outstanding forms of currency. Under the 
 plan to stabilize the dollar, the amount of gold by weight 
 for each dollar would be adjusted by keeping the gold in 
 bullion form. 
 
 A sharp controversy over the practicability of this plan 
 has raged between different schools of economists and be- 
 tween bankers. The proposal is of immense importance to 
 the whole price system, and deserves a thoroughly scientific 
 analysis, based upon full and complete statistics of finance, 
 and a most constructive consideration of the economic prin- 
 ciples involved.^ 
 
 The quantity theory of money offers a partial explana- 
 tion of the changes in price levels, but there are sharp price 
 changes which can scarcely be attributed to changes in the 
 quantity of money. For instance, from 1915 to 1917, there 
 was a general price increase in the United States of 85 per 
 r^ent., caused largely by the heavy demand for American 
 goods in Europe to enable those countries to carry on the 
 war. As this extraordinary demand led to higher prices, 
 there was a need for an increase in the circulating medium, 
 and this increase of money came, but as a sequel to the 
 price increase rather than its cause. During the years when 
 America was in the war, price increases were substantially 
 checked by virtue of the price-fixing restrictions of the 
 various war boards. From the armistice until the peak of 
 high prices in 1920, the price level rose sharply by a gain 
 of more than 60 points. The only exception to this general 
 rise of prices appeared in the first two or three months 
 following the armistice, when a slight slump in prices oc- 
 curred. The causes of the general increase in prices follow- 
 ing the war were chiefly the foreign demand for goods to 
 replace the stocks of goods depleted during the war, and to 
 provide equipment for reconstruction, and, secondly, the 
 growing inefficiency of labor with consequent mounting of 
 labor costs. The rising tide of prices was turned when a 
 psychological transformation took place in the buying pub- 
 
 1 For a statement of criticism of the theory, see Laughlin's "Money 
 and Prices"; B. M. Anderson, "The Value of Money," and David 
 Friday, "Profits, Wages and Prices"; B. M. Anderson, Economic 
 World, Aug. 7, 1920. 
 
Money and Credit 437 
 
 lie and the so-called buyers' strike began. The consumers' 
 strike, a general effort at thrift and economy, a general 
 waiting for prices to come down, dragged the price level 
 down substantially during late 1920 and throughout 1921. 
 During all these shifts of price levels, there were corre- 
 sponding changes in the volume of money and credit in 
 circulation and in the rate of turnover, but it is next to 
 impossible to ascertain conclusively in each case whether 
 the high prices caused more currency to come into circula- 
 tion or the increased circulation caused higher prices. 
 
 The quantity theory undoubtedly explains many price 
 movements, but does not satisfactorily account for all up 
 and down alterations. Changes in the demand for goods, 
 either at home or abroad; changes in the psychology of 
 consumers ; changes in the psychology of laborers, measured 
 in labor inefficiency; changes in governmental restrictions 
 on prices, — ^these and other factors exercise determining in- 
 fluences over prices, and should be included m. any inter- 
 pretation of prices which is comprehensive.^ 
 
 The Dominant Influence of Financial Institutions 
 
 If any of the institutions of economic society can be said 
 to be dominant in the active direction and control of all 
 phases of the economic structure, they would be the finan- 
 cial institutions. All modem business activity is dependent 
 upon borrowed funds and currency issues for its main- 
 tenance, and loans and money are organized, directed and 
 restricted by financial institutions. Investment bankers 
 select certain corporations whose securities they put on the 
 market, and reject others. The reasons are those which are 
 good and sufficient in the eyes of the bankers. If the 
 bankers decide to withhold their aid in marketing a con- 
 cern's securities, this refusal may make impossible the 
 existence of the concern. This dominant position of in- 
 vestment bankers is enhanced by the large degree of com- 
 bination which exists between bankers. The accusation has 
 
 1 See David Friday, "Profits, Wages and Prices," Chapters VIII 
 and IX; also G. R. Davies, Journal of Political Economy, XXIX, 
 pp. 213-222. 
 
438 Money and Credit 
 
 been made by some authorities that this combination amounts 
 to a money trust. In 1912 a Government Investigating Com- 
 mittee made a very elaborate investigation of the charges. 
 They arrived at the conclusion that the combinations of 
 bankers held a financial power which was a menace to free 
 competition and which jeopardized the rightful business 
 interests of corporations frowned upon for any reason by 
 the money power, but the Committee admitted that there 
 was no evidence that this immense power had actually been 
 used in an unjustifiable manner. The appearance of a new- 
 comer among industries may mean the threat of severe 
 competition against an old concern financed through a 
 powerful group of investment bankers. As a means of self- 
 protection, the old concern may attempt to scotch the new- 
 comer before it is hatched by persuading the bankers to 
 decline to market its securities. This is a theoretical possi- 
 bility, but the Committee found no conclusive evidence that 
 the power had actually been so used. These charges of one 
 sort and another have never been well enough established 
 by evidence to convince those who were not easily amenable 
 to criticism of financial interests generally. Certainly the 
 power to give life to favored industries is there, and the 
 power to take life away from unwelcome industries is there, 
 and probably from time to time the power is exercised in 
 questionable ways. But the investment bankers enjoy 
 widely the reputation of basing their judgment upon funda- 
 mental considerations of safety and security, and to the 
 extent that these considerations predominate, the bankers 
 are rendering the public an indispensable service in pro- 
 viding expert analysis of investments and a medium for the 
 placing of money where it will bring income to the owner. 
 The making of commercial loans likewise carries a domi- 
 nating influence over business houses. A threat to withhold 
 future loans for working capital is sufficient to force a 
 business into the adoption of almost any policy of reorgani- 
 zation, retrenchment, expansion, or what not, which the 
 bankers may desire. The charge of combination between 
 commercial bankers has rarely been made. The money 
 trust is a term applied mainly to investment bankers. Tlie 
 
Money and Credit 439 
 
 co-operative efforts of commercial banks through clearing 
 houses, bankers' associations, and the Federal Reserve Sys- 
 tem lead ordinarily to constructive co-operation and are 
 remarkably free from dangerous and objectionable discrimi- 
 nation. During the post-war crisis and depression, com- 
 mercial and investment bankers co-operated in scores of 
 eases to tide enterprises which were hard hit over a period 
 of reorganization and recuperation. The co-operative ef- 
 forts of credit bankers saved scores of business houses from 
 bankruptcy, and enabled them to get on their feet again. 
 In no previous crisis and depression have the bankers co- 
 operated in such constructive ways to avert outright dis- 
 asters among suffering corporations. 
 
 Yet the bankers are not free from grave sins of omission. 
 Farm credits have not been available promptly and at the 
 most favorable rates, and the marketing of crops has suf- 
 fered from restricted credit facilities so greatly as to cause 
 huge losses to farming populations.^ The bankers, more- 
 over, have not facilitated the building of homes by a ready 
 supply of credit at moderate rates of interest. Interest 
 rates on call money have been at times exorbitant, and 
 during the period of recovery from the business depression 
 after the war not a few bankers were sharply accused by 
 bank officials of exacting unreasonable terms for helping 
 prostrated industries to struggle to their feet. Small busi- 
 nesses which might prove harmful competitors to old estab- 
 lished companies, such as the big steel combinations, the 
 packing houses, the mines, or the railroads, and which 
 might by this competition weaken the values of the securi- 
 ties of these big companies on the Wall Street Stock Ex- 
 change or in the investment market, have been too often 
 frozen out of existence, so it is charged, by the organized 
 bankers. 
 
 A prominent feature of this domination by bankers is 
 found in the system of interlocking directorates. At the 
 time of the Pujo Investigation in 1912, it was found that 
 eighteen of the largest financial institutions were affiliated 
 
 1 See Federal Reserve Bulletin, September, 1921, p. 1030; also, 
 "Proceedings National Conference on Agriculture," Jan.-Feb., 1922. 
 
440 Money and Credit 
 
 by interlocking directorates with each other and with a 
 vast collection of industries of all sorts. In all, they held 
 "764 directorships in 134 corporations having total re- 
 sources or capitalization of $25,325,000,000." Banks are 
 glad to have some of their executives on the boards of direc- 
 tors of the corporations which they are helping to finance 
 because it enables the banks to secure inside information 
 steadily on the management of the corporations, and to 
 make sure that the interests of investors are amply pro- 
 tected. Corporations are usually glad to have prominent 
 bankers on their boards of directors. The interlocking di- 
 rectorates establish a real community of interest between 
 bankers and business men, and concentrate this community 
 of interest in high degree. No adequate evidence has been 
 produced to show radical abuse of the power created by this 
 immense financial concentration. It is equally true that no 
 adequate evidence has been produced to disprove the abuse 
 of the power. As the Pujo Committee declared, "the data 
 have not been available." The only fact which is com- 
 pletely established is that the financial power is enormously 
 concentrated, and at any time might be used in dangerous 
 ways. The sense of business ethics and the spirit of social 
 obligation which prevails among the leading bankers is the 
 only real safeguard against the unwise exercise of their 
 financial power. Government supervision has been at- 
 tempted, for instance, through the Clayton Act, forbidding 
 interlocking directorates between banks, but it is doubtful 
 if the new prohibition has materially dissolved the com- 
 munity of interest in big banking and big business. The 
 influence of the Federal Eeserve System upon the social 
 use of financial power rests largely upon the high sense of 
 social responsibility in the minds of bankers themselves. 
 The Federal Reserve System cannot be much better than 
 the level of economic responsibility in the spirits of the 
 most powerful bankers. The only genuine guarantee that 
 the huge financial power will be exercised properly is the 
 code of honor among leading financiers, and the psychology 
 of the most influential bankers. It is true, then, that the 
 institutions of modern banks and corporations tend to 
 
Money and Credit 441 
 
 throw a concentrated power into the hands of the men who 
 control the financial machinery of the country. But it is 
 equally true that the power thus created has been in the 
 main applied to industry with a substantial regard for the 
 protection of investors, the growth of business, and the 
 social needs of the country. Undoubtedly the future will 
 see a greater development of the sense of social obligation 
 among the financiers, and will see credit and money organ- 
 ized in ways which will insure larger economic service to 
 the country. 
 
 Psychological Foundations of the Credit System 
 
 The central functions of the credit system depend at 
 every point upon psychological factors, and it is indispen- 
 sable for an adequate conception of financial institutions to 
 consider the intangible mental and emotional elements 
 which are everywhere exerting the profoundest influences. 
 The phase of psychological forces which is most conspicuous 
 in financial phenomena is commonly called business confi- 
 dence. Anyone who might start out in search for a pivotal 
 psychological fact about which swings the great wheel of 
 all economic and financial activity would need to direct his 
 search toward the confidence of the average business man 
 that property will be safe, that debts will be paid, that 
 loans can be made, that investors will be protected. A con- 
 fidence of this sort is not a tangible thing ; it exists only in 
 the minds of men. But take away this confidence in each 
 man's mind that other men wiU behave in certain ways, and 
 one has taken away the very heart of that mutual and tacit 
 understanding which is the starting point of business calcu- 
 lations. As one writer has declared, ' ' The greatest instru- 
 ment of production — ^the thing that really produces modem 
 wealth — is not physical things, is not labor, is not manage- 
 ment; it is confidence in the future, it is a credit system 
 based on the expectation of industrial continuity — an ex- 
 pectation that debts will be paid. ' "• 
 
 A large element in business confidence is the rational 
 calculation of the business community. A knowledge of 
 
 1 J. R. Commons, "Trade Unionism and Labor Problems," p. 8. 
 
442 Money and Credit 
 
 the technique of credit, money and banking gives an under- 
 standing of the manner in which men customarily use the 
 technique and the results in terms of gain or loss. An ade- 
 quate fund of information on the statistics of trade and 
 finance in general and of those individual concerns in par- 
 ticular "with whom each business man has business con- 
 tracts is a necessary foundation for all confident expecta- 
 tions of safe and profitable business dealings. A cool, 
 analytical judgment of the honesty, ability and eccentrici- 
 ties of business associates and business rivals is requisite 
 for intelligent confidence in the outcome of relations with 
 them. Bankers must constantly attempt to know accurately 
 the amount of trust which borrowers deserve and sellers 
 must estimate accurately the buyers whom they can trust 
 to pay on time. The present and future value of stocks 
 and bonds must be measured by technical analysis and such 
 measurements become the basis for the confidence of in- 
 vestors who desire to place their money in securities and for 
 the confidence of bankers who desire to make loans with the 
 stocks and bonds as collateral security. "Without a real 
 degree of faith in the successful outcome of business adven- 
 tures, practically no adventures would be undertaken. It 
 is the feeling of assurance that business afEairs will run in 
 certain channels, and that business men will behave in 
 certain ways, which makes possible at the outset the busi- 
 ness undertakings, great and small, of the whole price 
 system. And this feeling of assurance, this strong con- 
 fidence in the safety of investments, the profitability of 
 enterprise, and the repayment of loans originates in large 
 measure from the rational powers of bankers and business 
 men. It is critical analysis which convinces financiers of 
 all descriptions that they have a reasonable hope of success 
 in their undertakings. When critical analysis indicates 
 that the institutions of finance and industry are nearing a 
 depression, business confidence weakens seriously; and 
 when it indicates an approaching period of high prosperity 
 business confidence becomes irresistible. 
 
 Critical reasoning and analytical judgment are not, how- 
 ever, the only elements in business confidence, and indeed 
 
Money and Credit 443 
 
 even the best judgment of business men is subject to pro- 
 found influences from instinctive forces of which their 
 minds are but vaguely conscious. Probably no instinctive 
 forces are more influential in swaying the most careful and 
 sagacious judgments of financiers and business men than 
 those centering about the instinct of the herd and the emo- 
 tions and impulses of crowd behavior. Shortly before the 
 outbreak of the World War in 1914, the cry went up from 
 financial circles that a panic was imminent because of cer- 
 tain economic policies of the National Government. Presi- 
 dent Wilson declared that in actual fact no extreme depres- 
 sion of business existed, but, he explained, certain financial 
 interests, by their doleful warnings and prophesies, were 
 bringing about a "psychological panic." Even though it 
 be granted that business was not satisfactorily prosperous 
 at the time, it was obvious that there was a large element 
 of truth in the phrase "a psychological panic." In other 
 words, the pessimism of financial leaders, when spread 
 broadcast, was capable of making the mass of financiers 
 think that things were worse than they really were, and of 
 disseminating a panicky feeling throughout the groups inti- 
 mately connected with the financiers. The herd instinct 
 expressed itself among the financial groups in ways which 
 are familiar under such terms as contagion, suggestion, or 
 imitation. The greatest financiers are primary centers of 
 suggestion. Hence, the warnings and counsels of these 
 towering figures spread a feeling of firmness, or uneasiness, 
 as the case may be, through the financial community. Very 
 wealthy men, presidents of leading banks or industrial cor- 
 porations, government officials, experts on the statistics of 
 finance or trade, exercise a contagious influence over the 
 judgments of the financial crowd. When they feel pessi- 
 mistic, the bulk of financiers follow suit; when they feel 
 optimistic, that is the clue for the rest to foUow. In the 
 life of the herd, leadership is a central force, and in the 
 life of the financial community financial leadership deter- 
 mines the tone of credit, the degree of confidence, the degree 
 of faith or fear for the future which predominates. 
 
 The mental life of the financial crowd is particularly 
 
444 Money and Credit 
 
 susceptible to the emotion of fear. The terrific, driving 
 energy of fear, its primitive intensity and its domination of 
 the whole human being when excited to its higher pitches, 
 find a fuU expression in the minds of financiers as a group. 
 Nowhere is this power of fear over the administrators of 
 the credit system more apparent than in the waves of busi- 
 ness depression and prosperity, in the mental attitudes 
 associated with business cycles. The imminence of depres- 
 sion strikes the fear of loss or even of bankruptcy into the 
 hearts of business men with great force. Each man strives 
 to save himself by retrenchment, or liquidation, or rush 
 sales, or shutdowns, or other recourses, and the very fact 
 that each man is told that everyone else is in the same state 
 of fear raises the fear and pessimism of everyone to the 
 greatest heights. When the instinctive storm has spent 
 itself, and the group mind of the financial community has 
 cleared itself of the sharp excesses of fear, other instinctive 
 energies come into play, and exert powerful influences over 
 the financial mind. In prosperous periods, the instincts of 
 acquisitiveness, achievement, power, or constructiveness see 
 almost boundless opportunities for successful expression. 
 Bankers supply business men with the credit adequate for 
 huge expansion projects, for vast extensions of business, 
 for speculative undertakings, until great numbers of them 
 are carried away by their splendid optimism to all sorts of 
 economic excesses. Their minds become intoxicated by 
 their emotions, and irrational mental judgments lead them 
 into the danger zones of economic life. It is not meant to 
 imply that these psychological phenomena are unaccom- 
 panied by strenuous use of the rational faculties, nor that 
 they have no foundation in the facts of economic produc- 
 tion and trade. The significance of the account here given 
 is that the facts of trade and the rule of reason are subject 
 to profound instinctive and emotional influences at every 
 turn of financial experience. No other explanation can ac- 
 count for the excessive rush, for the fear stampede, carried 
 often to unnecessary extremes, toward liquidation on the 
 part of the administrators of the credit system during the 
 period of depression. No other explanation can account 
 
Money and Credit 445 
 
 for the extraordinary credulity of these same men in 
 periods of great prosperity in giving themselves up to over- 
 expansion, ruinous borrowing and excessive risk-taking. 
 The conclusion is therefore warranted that the irrational 
 influences upon business confidence are no less important 
 and powerful than the rational influences.^ 
 
 The keenly felt need for sound foundations of business 
 confidence has effected among the banking and credit fra- 
 ternity extraordinarily high standards of probity, integrity, 
 reliability and honesty. It is among the leaders of banking 
 that we find the most emphatic insistence upon a high code 
 of business morality. Prominent bankers are men whose 
 reputations for absolute honesty in all dealings are unques- 
 tioned. They judge the acceptability of clients desiring to 
 borrow money in very large measure by the right of the 
 clients to a name for unimpeachable integrity. To have 
 one's word "as good as gold;" to abide unfailingly by 
 both the spirit and the letter of contracts; to pay debts 
 promptly and undertake no obligations which cannot be 
 met with a certainty; to represent all factors in business 
 dealings fairly and truthfully; to be dependable and reli- 
 able under all financial responsibilities, — these are some of 
 the articles of conduct which the administrators of the 
 credit system lay down as minimum and irreducible stand- 
 ards. These standards are plainly indispensable for the 
 maintenance of a sound business confidence, and sound 
 'business confidence is plainly indispensable for the main- 
 tenance of the psychological bonds which unite all the ele- 
 
 1 An excellent illustration of these psychological influences is 
 given by W. P. G. Harding. In the course of testimony before a 
 Congressional Committee in August, 1921, he was quoted as saying, 
 in regard to the contemporary financial depression: "The Federal 
 Reserve Board did not create this financial depression. It saw it 
 coming, and got ready to protect things, and people ought to be 
 grateful it did so. Now all we need is cessation of pessimism, which 
 marks bad times as foolish optimism marks good times. We all 
 know now everybody was going crazy in the boom during the Fall 
 of 1919. . . . All we've got to do is to get out of everlasting pessi- 
 mism and quit saying everything is going to the dogs. Why, a man 
 has to put up a good, cheerful face if he wants credit. You can't 
 talk to the banker like you do to the tax assessor." 
 
446 Money and Credit 
 
 ments of money, credit, investment and banking into the 
 price system of the present economic order. 
 
 The functions of business confidence should be further 
 clarified by a study of the psychological factors involved 
 in saving, thrift, and provision for the future. The first 
 prerequisite to saving money instead of spending it is the 
 confidence that the savings will not be lost, stolen, dissi- 
 pated or confiscated. If the man who is thrifty can put his 
 savings into insurance policies, savings banks, or stocks and 
 bonds, with the reasonable assurance that his savings will 
 be secure, there is obtained the condition which encourages 
 economy and provision for the future. Financial confi- 
 dence in the security of savings is thus the beginning of 
 thrift. 
 
 Thrift is, in turn, indispensable in building up the 
 gigantic accumulations of capital which characterize the 
 corporation of to-day, and which are the tangible sources 
 of money and credit transactions. Perhaps the most strik- 
 ing feature of the psychology of saving is the fact that a 
 more equal distribution of income would gravely menace 
 the thrift of the country. As J. M. Keynes states, "The 
 new rich of the nineteenth century were not brought up to 
 large expenditures, and preferred the power which invest- 
 ment gave- them to the pleasures of immediate consumption. 
 In fact, it was precisely the inequality of the distribution 
 of wealth which made possible those vast accumulations of 
 fixed wealth and of capital improvements which distin- 
 guished that age from all others. . . . The immense accu- 
 mulations of fi^ed capital which, to the great benefit of 
 mankind, were built up during the half century before the 
 war, could never have come about in a society where wealth 
 was divided equitably.'"- The mass of men find the temp- 
 tations to satisfy their instincts by immediate consumption 
 so forceful and irresistible that their savings are relatively 
 slight. Of course, working classes with low incomes would 
 be obliged to starve some of their most urgent instincts if 
 they undertook to save in any considerable amounts. Their 
 Incomes are often too limited to permit of any material 
 1 "The Economic Consequences of the Peace," pp. 18-19. 
 
Money and Credit 447 
 
 saving except by excessive self-stinting on the necessaries 
 of life. But when working-class incomes rise above the 
 line of minimum subsistence, there is no assurance that a 
 proper share of the income will be saved. As a usual mat- 
 ter, the worker lives up to his income. Any increase in the 
 share of wealth distributed to the working classes must, 
 therefore, be surrounded with education in thrift, with 
 facilities for placing savings where they will be safe and 
 will draw some interest. In short, a more equitable distri- 
 bution of wealth would necessitate a constructive move to 
 insure that enough wealth would be saved to guarantee 
 adequate capital accumulation in the future. 
 
 The paramount motive to saving among the classes with 
 low income is the parental motive. Alfred Marshall has 
 made clear "that men labor and save chiefly for the sake 
 of their families."^ But not even family foresight can 
 make large savings from small income. It is estimated that 
 the total savings of the working classes amount to barely 
 one-tenth of the full volume of savings of the country. 
 Higher interest rates cannot be expected materially to in- 
 crease the savings of these low income classes, because the 
 instinctive pressure for immediate gratification of urgent 
 wants eats up the great bulk of their income.^ 
 
 Saving among the so-called middle classes is prompted 
 by a variety of psychological forces. Family provision for 
 the future is an important motive to middle-class thrift. 
 The accumulation of that amount of wealth which will put 
 a person into the higher social circles, with accompanying 
 prestige and display, is another powerful motive to middle- 
 class saving. Middle-class professional and business men 
 are accustomed to save and reinvest in their professional 
 or business interests, and these "men on the make" thereby 
 associate with saving all those instincts which underlie their 
 basic ambitions in life. Interest rates are usually minor 
 considerations in middle-class saving. "It is probably safe 
 to say that if they cannot get a higher rate of interest they 
 
 1 "Principles of Economics," p. 228. 
 
 2 A. B. Wolfe, Quarterly Journal of Economios, Vol. XXXV, p. 23t 
 
448 Money and Credit 
 
 will taue a low, without greatly reducing their savings."^ 
 Saving by either the low income classes or the middle 
 classes usually entails considerable sacrifice, some actual 
 abstinence, often real privation. The saving of both these 
 classes has lately come to attract the attention of bankers, 
 economists and public leaders generally, and the doctrine 
 has been widely preached that saving is a virtue of the 
 finest sort, and that extravagant spending for immediate 
 consumption is vicious and dangerous for general economic 
 progress. Thrift therefore is preached almost as a religion 
 and is associated with emotions of patriotism. Undoubt- 
 edly, it is of the utmost importance to coach these classes to 
 the maximum of saving consistent with the reasonable en- 
 joyment of immediate necessities and comforts, and the 
 folk psychology of the future will need to be carefully 
 developed in ways which will build up habits, customs, 
 ideals and institutions favorable to thrift among the masses 
 of people. 
 
 In the matter of saving, the force of imitation very com- 
 monly works to an undesired end. People of low incomes 
 delight to imitate many of the forms of expenditure of the 
 well-to-do. The people of financial prestige, with automo- 
 biles, silks, Victrolas, vacations, etc., set a pace which en- 
 courages imitation, and in the face of the desire of the 
 common man to imitate the expenditures of the well-to-do, 
 the preaching of thrift as a religious virtue and economic 
 necessity has often discouraging effects. This is especially 
 true because it is felt that saving among the well-to-do does 
 not require sacrifice or abstinence. To all appearances 
 they still enjoy huge immediate consumption, and their 
 saving can scarcely be made to look like a deliberate virtue. 
 "The higher income classes — say of over $50,000 — save 
 mechanically, with little or no sacrifice of present wants. ' '- 
 The savings of these classes are made in large measure re- 
 gardless of interest rates. But the fact remains that the 
 savings of these classes are made, and are enormous in their 
 totals. Their larger savings are not due commonly to any 
 
 1 A. B. Wolfe, Quarterly Journal of Economics, Vol. XXXV, p. 23. 
 ZlUd., p. 23. 
 
Money and Credit 449 
 
 superior virtues of thrift, but to the ease of saving out of 
 a large income. With the development of the modern 
 financial system, corporate industry has come to distrust 
 the adequacy of any of these sources of saving. All told, 
 they would not provide the needed capital accumulation. 
 Corporations rely upon two other sources for capital, — 
 namely, undistributed profits and bank loans. To quote 
 T. S. Adams, "A large part of the annual harvest of thrift, 
 perhaps the largest part, consists of profits earned by busi- 
 ness concerns and turned immediately back into business 
 or reinvestment in related kinds of productive activity."^ 
 To take an illustration, in the slightly more than fifty years 
 of existence of Armour and Company, total earnings of 
 about $140,000,000 have been turned back into the business, 
 whereas only about $30,000,000 have been paid out in divi- 
 dends. Over 90 per cent, of the present net worth of 
 Armour and Company has come from the reinvestment of 
 this surplus, the small balance has come from cash and 
 stockholders' savings. Not all companies have gone as far 
 with the practice as this particular company, but it is 
 nevertheless a commonly accepted business policy of the 
 present day, and a main reliance of corporations in secur- 
 ing capital.^ Because of this policy, the conclusion is 
 drawn by David Friday that "other things being equal, 
 capital accumulation is likely to be largest when the share 
 which goes to profits is large. The organization of our 
 industry under the corporate form and the principles of 
 financial management which dominate the corporate insti- 
 tution inevitably work to that end. ' '^ 
 
 The other source of capital accumulation, banl loans for 
 fixed capital, overlaps in many ways the sources which have 
 already been mentioned, but in a substantial degree repre- 
 sents a distinctly additional source of capital funds. The 
 estimates made by H. G. Moulton indicate that in the year 
 1916 the amount of bank loans used for these purposes was 
 about $9,000,000,000.* The steady flow of capital savings 
 
 1 American Economic Review Supplement, March, 1915, p. 239. 
 
 2 See A. S. Johnson, New Republic, Volume 23, pp. 279-281. 
 s "Profits, Wages and Prices," p. 97. 
 
 i Journal of Political Economy, Vol. 26, pp. 638-663. 
 
450 Money and Credit 
 
 is therefore not dependent merely npon the voluntary thrift 
 of individuals, but rests largely upon organized capital 
 accumulation by corporations and banks directly. Any 
 development of economic life in the direction of a wider 
 diffusion of income must safeguard itself against the danger 
 of reducing the annual fund of savings. Individual 
 economy, even under the present system of highly unequal 
 incomes, is not adequate to provide enough savings. The 
 psychology of thrift must be definitely expanded, and the 
 motives to saving must be thoroughly encouraged and sus- 
 tained by new traditions, habits and policies of the financial 
 institutions themselves. Such a psychological development 
 must be looked for mainly outside of the acquisitive in- 
 stincts and the interest rate. A recent writer declares his 
 general experience in the following words: "That savings 
 are prompted in practically all cases by reasons other than 
 the rate of interest is the general belief of bankers.^ 
 
 The fact that the foundations of the institutions of credit 
 and finance cannot be understood apart from their psycho- 
 logical aspects needs no further details of explanation. 
 Both the functions and the dangers of the credit system 
 trace their origins back to the instinctive and rational ten- 
 dencies of business men. The great rational faculties of 
 successful financiers; the omnipresent irrational and semi- 
 rational influences upon the mind of the financial com- 
 munity; the standards of honor which are held up by the 
 administrators of the credit system; the organization of 
 incentives to capital saving, investment and accumulation, — 
 these factors shape the construction of business confidence, 
 and the psychological foundations of the price system. 
 
 1 L. D. Woodworth, Economic World, Jan. 22, 1921, p. 118. 
 
Money and Credit 451 
 
 REFERENCES 
 
 Hamilton, W. H.: Current Economic Problems, parts 5 and 6 
 
 Anderson: The Value of Money 
 
 MouLTON, H. G.: The Financial Organization of Society; Money 
 and Banking; Commercial Banking and Capital Formation, 
 Journal Political Economy, Vol. 26, pp. 484, 638, 705, 849 
 
 Marshall and Lyon: Our Economic Organization, Chapters 
 18-20 
 
 Mead, E. S.: Corporation Finance 
 
 Jordan: Investments; Annals of the American Academy of 
 Political Science, The New American Thrift, Vol. 87 
 
 Brandeis: Other People's Money and How the Bankers Use It 
 
 Clay, H. : Economics for the General Reader, Chapters 9-11 
 
 Dewing: Financial Policy of Corporations 
 
 Anderson, B. M., Jr. : Effects of the War on Money, Credit and 
 Banking, Bulletins of the Chase National Bank, 1920 flf. 
 
 Burton: Crises and Depressions 
 
 Fisher, I.: Stabilizing the Dollar; Purchasing Power of Money 
 
 Hawtrey, R. G.: Currency and Credit 
 
 Kemmerer, E. W.: The A B C of the Federal Reserve System 
 
 Willis, H. P.: The Federal Reserve; American Banking 
 
 Escher: Foreign Exchange Explained 
 
 York: Foreign Exchange 
 
 KiRKBRiDE and Sterrett : Modern Trust Company 
 
 Chamberlain: Principles of Bond Investment 
 
 Taylor: The Credit System 
 
 Wolff: Co-operative Credit in the United States 
 
 Withers, Hartley: War-Time Financial Problems; Interna- 
 tional Finance; Meaning of Money 
 
 Hollander: War Borrowing 
 
 Laughlin, J. H.: Banking Progress; Money and Prices 
 
 Holdsworth, J. T.: Money and Banking 
 
 Scott, W. A.: Money and Banking 
 
 White, H.: Money and Banking 
 
 FiSKE, A. K.: The Modern Bank 
 
 Pratt, S. S.: Work of Wall Street 
 
 Conant, C. S.: Wall Street and the Country 
 
 Jones, E. D.: Economic Crises 
 
 Review of Economic Statistics, Sept., 1920, inclusive Jan., 1921 
 
 Lagerquist, W. E.: Investment Analysis 
 
 Bagehot, Walter: Lombard Street 
 
 Kemmerer, E. W.: High Prices and Deflation; Money and Credit 
 Instruments in Relation to General Prices 
 
 Mill, John S. : Political Economy 
 
 Taussig, F. M.: German Reparation Payments, American Eco- 
 nomic Review, Dec, 1919, p. 33 
 
452 Money and Credit 
 
 ViNER, J.: Who Paid for the War? — Journal of Political 
 Economy, Jan., 1920, p. 46 
 
 Miller, A. C. : Federal Reserve System. American Economic 
 Review, June, 1920, p. 181 
 
 Stewart, W. W.: Index of Production, American Economic 
 Review, March, 1921, pp. 68 fF. 
 
 Wolman: Theory of Production, American Economic Review, 
 March, 1921, pp. 37-56 
 
 Sprague, O. M. W.: Discount Policy of Federal Reserve Banks, 
 American Economic Review, March, 1921, pp. 16-30 
 
 Monthly Bulletins of Federal Reserve System 
 
 Mitchell, W. C: Price Fluctuations, American Economic Re- 
 view, Supl., March, 1920, p. 155 
 
 Davies, G. R.: Price Theories, Journal of Political Economy, 
 Vol. 29, pp. 213-222 
 
 Keynes, J. M. : Economic Consequence of the Peace, pp. 15-25 
 
 Wolfe, A. B.: Interest Theories, Quarterly Journal of Eco- 
 nomics, Vol. 35, pp. 23 ff. 
 
 WooDWORTH, L. D.: Psychology of Saving, Economic World, 
 Jan. 22, 1921, pp. 117-119 
 
 Taussig, F. M. : Indeterminate Price, Quarterly Journal of Eco- 
 nomics, May, 1921, pp. 396 ff. 
 
 Proceedings National Conference on Unemployment of 1921; 
 of American Economic Association, December, 1921 ; Ameri- 
 can Statistical Association, December, 1921 ; National Con- 
 ference on Agriculture, Jan.-Peb., 1922 
 
 Annals of the American Academy of Political and Social Science, 
 Jan., 1922 
 
 Vanderlip, p. a.: What Next in Europe? 
 
 Friedman, E.: International Finance and Its Reorganization 
 
PART III 
 ECONOMIC ADAPTATION 
 
 CHAPTER XI 
 
 PUBLIC CONTROL 
 
 Economic problems form part of the subject-matter of 
 economic science, and questions of progress, of improve- 
 ment, of reconstruction, command painstaking thought. 
 All problems of economic improvement are fundamentally 
 two-sided; on the one hand, they necessitate the alteration 
 of institutions the better to fit human nature; and on the 
 other hand, they necessitate the discipline and education of 
 human nature the better to fit institutions. The solution 
 of economic problems requires a blending of human nature 
 and economic institutions. Economic progress involves 
 always the basic element of adaptation between two prime 
 factors, men and institutions. W. B. Hocking refers to 
 man as "the only animal that deliberately undertakes, 
 while reshaping his outer world, to reshape himself also." 
 The human equipment needs discipline and guidance in 
 ways which are not degrading or weakening, and needs 
 opportunities for expression in ways which represent a ful- 
 filment of the primary human instincts and desires, and 
 which are safe for society. At the same time, institutions 
 need to be made to function in such ways that human 
 nature will be neither outraged nor pampered, but will be 
 evoked, expressed and satisfied within social bounds. 
 
 Every student comes to economic discussions with certain 
 first principles which give him his orientation for economic 
 thinking. It is these first principles, these elementary con- 
 ceptions mostly born of family and social traditions, which 
 
 453 
 
454 Public Control 
 
 need scientific examination. As Justice Holmes profoundly 
 observes, "To have doubted one's first principles is the 
 mark of a civilized man. ' ' The first principles of the pro- 
 gressive and of the conservative differ deeply, and in no 
 way more fundamentally thai! in this respect : the conserva- 
 tive-minded thinker inclines to give present-day institutions 
 the benefit of all doubts and to assume that liberals or 
 radicals, mild or extreme, need discipline to make them 
 conform; whereas the progressive thinker inclines to give 
 human nature the benefit of all doubts and to assume that 
 conservatives or reactionaries need to be forced to reshape 
 institutions so that human nature can be freer to follow 
 its own bent. Conservatives tend to believe that human 
 nature is wrong when it is unruly or dissatisfied; progres- 
 sives tend to believe that laws, organizations, systems, in- 
 stitutions, lare wrong when men become impatient with 
 them. One wishes to reshape human nature by new dis- 
 ciplines ; the other to reshape institutions by reconstruction. 
 Economic adaptation between these two factors may, of 
 counse, come about in many ways, — by mere chance, by 
 blind drifting, by coercion, by pacifistic surrender, by co- 
 operation, by rebellion, by intelligent planning. The eco- 
 nomic order is to-day so stupendous in its proportions that 
 individual thinkers all too often look upon the course of 
 adaptation with a fatalistic despair, and resign themselves 
 to the inevitability and inescapability of economic evolu- 
 tion with an optimistic delusion that all will turn out for 
 the best some day anyhow. Such attitudes lie behind the 
 frequent blunders and futilities in modem economic ad- 
 justments. Economic thinking worthy of the name must 
 come within the scope of the points of view and mental 
 processes which are insisted upon by the reconstructed 
 philosophy of recent years, — it must be devoted to creative 
 adaptation. Adaptation which is safe and trustworthy is 
 an act of will, based upon an intelligent analysis of facts. 
 It comes from "creative intelligence." To effect a decent 
 balance in reshaping human conduct and in reshaping eco- 
 nomic institutions calls for the most elaborate scientific 
 investigations to ascertain facts and methods, for experi- 
 
Public Control 455 
 
 mentation with alternative courses of economic policy, for 
 unlimited research by private experts and public commis- 
 sions, for the invention of theories and hypotheses to be 
 tried out and proved or disproved, for the creation of new 
 principles of human behavior, for the discovery of new 
 ideas bearing upon pressing economic problems. Adapta- 
 tion which is sound and wise has to be wrought out by the 
 deliberate effort of creative minds. Adaptation involves a 
 technique of inquiry, research, experimentation, scientific 
 guessing, reflection, observation, analysis, diagnosis, infer- 
 ence, hypothesis, testing, and verification. In modern so- 
 ciety there are specialists and experts, responsible leaders, 
 who are adepts in the use of this technique, or should be, 
 and upon them naturally falls the burden of formulating 
 the lines of economic adjustment in their broadest and 
 deepest aspects. But any over-reaching in the direction of 
 specialization, on the assumption that one class in society 
 should do all the planning, and another class all the hand- 
 work and none of the planning, would be dangerous. In 
 his own individual way and within the limit of his powers, 
 every man deserves the responsibility of planning, suggest- 
 ing, imagining, and few indeed are the members of society 
 who, under proper encouragement, lack that spark of curi- 
 osity which seeks satisfaction in ideas, plans, and sugges- 
 tions. The caliber of the average individual will be meas- 
 ured by the degree to which the latent powers of his human 
 equipment are called into creative use. If he is a thing 
 accustomed to act always under orders, a being whose 
 thinking is done by specialists only, his human equipment 
 is bankrupt in regard to those qualities of personality 
 which can arise only from self-expression and self-asser- 
 tion. So in his individual manner each person in economic 
 society must be somewhat creative and original and curious 
 if he is to be the best possible member of society. 
 
 If the mass of individuals are to have originality and 
 creative ability, each individual must be encouraged to 
 make wise new adaptations to his immediate environment 
 every day of his life. Obedience and unquestioning con- 
 formity is not the first law of life, but rather the first law 
 
456 Public Control 
 
 of life is individual creative adaptation. The man must 
 be free and able to plan improvements in the system under 
 which he moves and works, and he must be constrained to 
 that measure of self-control and self-direction which is 
 necessary to keep him in tune with his immediate universe. 
 The words of John Dewey on this matter are deeply sug- 
 gestive: "The best guarantee of collective efficiency and 
 power is liberation and use of the diversity of individual 
 capacities in initiative, planning, foresight, vigor and en- 
 durance. Personality must be educated, and personality 
 cannot be educated by confining its operations to technical 
 and specialized things, or to the less important relation- 
 ships of life. Full education comes only when there is a 
 responsible share on the part of each person, in proportion 
 to capacity, in shaping the aims and policies of the social 
 groups to which he belongs. This fact fixes the significance 
 of democracy. . . . Human nature is developed only when 
 its elements take part in directing things which are com- 
 mon, things for the sake of which men and women form 
 groups — families, industrial companies, governments, 
 churches, scientific associations and so on. . . . When the 
 liberating of human capacity operates as a socially creative 
 force . . . making a living, economically speaking, will be 
 at one with making a life that is worth living."^ 
 
 As soon as the average person comes face to face with 
 this attitude toward economic problems, he naturally in- 
 quires: What is your solution? What is the remedy for 
 the difficulties of the economic order? What is your 
 answer to the multitude of economic questions which arise 
 on every hand ? This kind of inquiry is usual and natural. 
 Men are in search of an ultimate solution for the whole 
 thing. They suppose that of course each man ought to 
 have a theory about the way out of aU troubles. Then he 
 could say to everybody, Now if only you would adopt this 
 scheme, all would be well. If only you would put this 
 solution into practice, nothing else would be necessary. 
 And the only trouble with such ultimate solutions is that 
 people simply do not adopt them. Just that is the futility 
 1 "Eeconstruction of Philosophy," pp. 209-211. 
 
Public Control 457 
 
 of these single ultimate remedies based upon an "if only." 
 They assume a human behavior -which is contrary to fact. 
 It might as well be put bluntly and boldly that there is no 
 one simple solution, and those people who pretend to have 
 one are obliged to live in an imaginary world where every- 
 thing would be all right if only people would not do the 
 things which people do and if only men would behave in 
 those ways in which they won't behave. Realists who are 
 willing to deal with actual human nature and actual insti- 
 tutions find that we are confronted with a great bundle of 
 economic problems, and bundles within the bundle, and 
 bundles within the bundles. Bach requires investigation, 
 inference, experimentation and creative imagination. 
 Problems of co-ordination and correlation between all the 
 bundles of problems will come to the front. The world of 
 economic problems is teeming with infinite diversity, pecu- 
 liarity, individuality, variety, and the realistic mind seeks 
 to adapt each to each and each to all. This attitude always 
 is a disappointment to many minds, because it gives no 
 rock of ages to step foot upon, but instead makes every 
 man an explorer, a pathfinder, a trail blazer, a discoverer. 
 If it has less certitude, it at least has infinitely more prac- 
 ticality. The specific implications of this attitude are so 
 ably stated by Dewey that it is well to quote him again: 
 "Just what response does this social arrangement, political 
 or economic, evoke, and what effect does it have upon the 
 disposition of those who engage in it? Does it release ca- 
 pacity? If so, how vddely? Among a few, with a corre- 
 sponding depression in others, or in an extensive and 
 equitable way? Is the capacity which is set free also di- 
 rected in some coherent way, so that it becomes a power, 
 or are its manifestations spasmodic and capricious? Since 
 responses are of an indefinite diversity of mind, these in- 
 quiries have to be detailed and specific. Are men's senses 
 rendered more delicately sensitive and appreciative, or are 
 they blunted and dulled by this and that form of social 
 organization? Are their minds trained so that the hands 
 are more deft and cunning? Is curiosity awakened or 
 blunted? What is its quality : Is it merely esthetic, dwell- 
 
458 Public Control 
 
 ing on the forms and surfaces of things, or is it also an 
 intellectual searching into their meaning? . . . What is 
 needed is specific inquiries into a multitude of specific 
 structures and interactions. ' '^ 
 
 A convenient classification for the purpose of helping in 
 understanding the main directions of economic adaptation 
 will be made under the three headings: Public Control, 
 Radicalism, Economic Democracy. 
 
 Public Control 
 
 The major economic problems, almost -without exception, 
 exhibit phases which refer to some form or degree of gov- 
 ernment control, and the major policies of modern govern- 
 ment almost without exception exhibit phases which refer 
 to economic conditions. So politics abounds with economics 
 and economics abounds with politics. The extent to which 
 government should interfere in business is often a matter 
 of bitter debate, and each separate problem has to be dis- 
 posed of on its own merits. Those economists who are not 
 averse to a liberal measure of governmental control look 
 upon government policies not primarily as an interference 
 with business conditions, but rather as a means of smooth- 
 ing out troubles and injuries arising from unrestrained 
 business adventures, and as a means of aiding and guiding 
 business toward higher standards. The function of govern- 
 ment is not to meddle and intrude where it is not needed, 
 but is to co-operate and constrain and direct and recon- 
 struct where economic conditions fail to right themselves. 
 Eeferring to this positive responsibility of government, a 
 thoughtful political scientist has commented, "The most 
 striking change in the political organization of the last half 
 century is the rapidity with which, by the sheer pressure 
 of events, the state has been driven to assume a positive 
 character. . . . And, in the main, it is reasonably clear 
 that political good is to-day for the most part defined in 
 economic terms. "^ 
 
 Since the World War, the people of the United States 
 
 1 "Reconstruction of Philosophy," pp. 197-198. 
 
 2 H. J. Laski, "Authority in the Modern State." pp. 81, 98. 
 
Public Control 459 
 
 have undergone a marked reaction away from tlie extreme 
 forms of government control of economic affairs. The reac- 
 tion is well defined in a catch phrase which has won wide 
 currency, — less government in business and more business 
 in government. The war emergency brought the basic 
 economic activities of the country under close government 
 supervision. The Federal Government assumed control of 
 the economic life of the nation through a vast administra- 
 tive machinery : The Food Administration to conserve the 
 supply of foods, restrain prices, and distribute the supply 
 where most needed; the Fuel Administration to control 
 prices of fuel, and regulate priorities in its use; the Rail- 
 road Administration to operate, co-ordinate and unify the 
 transportation facilities of the country; the President's 
 Mediation Commission, the National "War Labor Board, the 
 War Labor Policies Board, and other special boards, to 
 arbitrate labor disputes, establish industrial standards, 
 adjust wages, and secure maximum labor efficiency; the 
 United States Shipping Board and the Emergency Fleet 
 Corporation to construct ships rapidly, control ships seized 
 from the enemy, and to mobilize and direct shipping forces 
 of the nation; the War Trade Board and the War Trade 
 Council to regulate exports and imports, and to apprehend 
 efforts at trading with the enemy; the War Finance Cor- 
 poration and Capital Issues Committee to conserve the 
 credit resources of the country for industries essential to 
 winning the war; the War Industries Board to organize 
 the industrial resources of the country for essential war 
 purposes ; and other special boards to handle war publicity) 
 stimulate science and invention, investigate and control 
 enemy aliens and their property, construct aircraft, and 
 direct war-risk insurance. Most of the war boards made 
 large use of the practice of licensing corporations as a 
 means of controlling their conduct. Price-fixing, household 
 thrift; priorities, and other means of enforcing war poli- 
 cies brought the great bulk of the economic life of the 
 country under the War Administration. 
 
 The extreme extent of this war control placed the busi- 
 ness of the country in a position where its freedoni ot 
 
460 Public Control 
 
 initiative and its independent judgment were drastically 
 curbed. Although the business interests were as a rule 
 patriotic and willing to submit to superior direction while 
 submission was necessary to win the war, nevertheless the 
 surrender of their freedom to conduct their private busi- 
 nesses was not a pleasant experience, and the minute the 
 war was over business men were straining at the leash for 
 escape from the rigid restraints of war days. The Presi- 
 dent reflected the predominating sentiment of the country 
 when, shortly after the armistice was signed, he declared in 
 a message to Congress, "While the war lasted ... we put 
 every material energy of the country in harness to draw 
 the common load and make of us one team in the accom- 
 plishment of a great task. But the moment we knew the 
 armistice to have been signed we took the harness off." 
 The war brought the most comprehensive organization of 
 economic life that Americans had ever witnessed, and the 
 restraint and subordination which it involved were repug- 
 nant to the American spirit of free initiative and inde- 
 pendence of action. The American people knew, in no 
 doubtful mind, that they did not desire so far-reaching and 
 inclusive regulation of their economic life. On the whole, 
 the American people were relieved at the prospect of being 
 able to scrap the war organization and to return to a gen- 
 erous degree of individualism in their business pursuits.^ 
 The paramount form of government control is familiar 
 under the name of government regulation. Regulation has 
 been carried furthest in those branches of economic activity 
 which are in the nature of public utilities. During the 
 last fifteen to twenty years, a group of city, state, and 
 federal commissions have grown up to regulate rates and , 
 services for public utility corporations. Such corporations 
 include the telegraph, the telephone, water, light, gas, street 
 railways, and steam railroad companies. The railroads 
 have been subject to a great deal of scattered regulation 
 by the separate states, but of late the supremacy of the 
 federal commission over all interstate carriers has been 
 
 1 W. F. Willoughby, "Government Organization in War Time and 
 After." 
 
Public Control 461 
 
 definitely established. The other classes of public utility 
 corporations have for the most part been subjected merely 
 to state and municipal regulating commissions. These 
 commissions have been indispensable in order to protect the 
 public from unreasonable or unfair rates, and from inferior 
 and inadequate service. Commission regulation of these 
 corporations has come to be accepted as a necessary public 
 policy, and the rulings of the commissions have as a gen- 
 eral rule been tempered with a commendable fairness and 
 reasonableness. 
 
 The principle of regulation has been most fully devel- 
 oped in the great interstate railroad systems of the country. 
 Eailroad transportation is the largest single industry in 
 the country in regard to capital invested, labor employed, 
 and public importance. The railroads are a key industry 
 of the country, and transportation is an indispensable aid 
 in the conduct of practically every important business. 
 
 The railroads early developed abuses in the level of rates 
 charged, in unfair practices such as rebates, and in the 
 quality of the service rendered, and in 1887 Congress 
 created the Interstate Commerce Commission. From that 
 year until the present time the Commission has functioned, 
 and its powers and duties have been defined, enlarged and 
 strengthened by several subsequent acts of legislation. 
 The latest law of fundamental significance in railroad regu- 
 lation is the Bsch-Cummins railroad law passed in 1920. 
 This act terminated the period of government operation 
 which had been entered upon in^ 1917 as a war measure, 
 and marked out greater powers than had ever before been 
 placed in the hands of federal regulating bodies. The main 
 features of the regulatory machinery and its powers and 
 functions may be given in very brief and condensed form 
 as follows: Regulatory power is vested in an Interstate 
 Commerce Commission of eleven members, each drawing 
 an annual salary of $12,000, appointment being made by 
 the President with the consent of the Senate. Terms of 
 office are seven years. The Commission is directed by the * 
 Eseh-Cummins law to fix railroad rates at a level which 
 will make possible the payment of five and one-half per 
 
462 Public Control 
 
 cent, dividends on the aggregate value of the carriers' 
 property for the two years immediately following the ter- 
 mination of war control on March 1, 1920. Roads which 
 earn in excess of slk per cent, are required to divide the 
 excess equally with the Government. This provision for 
 division of the excess above six per cent, is a permanent 
 provision, and is not limited merely to the two-year period 
 just mentioned. The railroads' share of the excess goes 
 into a reserve fund of the railroad, and can only be drawn 
 upon for the meeting of dividend, rent and interest charges, 
 and for that purpose only to the extent of meeting charges 
 up to six per cent, of the value of the railroad's property. 
 The Government's share of the excess above six per cent, 
 goes to a contingent fund, to be drawn upon to extend 
 necessary credits to railroad companies or to purchase 
 equipment to be leased to them. The Commission is di- 
 rected by the law to follow as a permanent principle in 
 rate-fixing the obligation to "prescribe just and reasonable 
 rates," so that the carriers as a whole will, "under honest, 
 efficient and economical management and reasonable ex- 
 penditures for maintenance of way, structures and equip- 
 ment, earn an aggregate annual net railway operating 
 income equal, as nearly as may be, to a fair return upon 
 the aggregate value of the railway property." The Com- 
 mission is to publish from time to time ' ' what percentage of 
 such aggregate property value constitutes a fair return 
 thereon. ' ' The five and one-half per cent, mentioned above 
 is given as the rate of fair return for the first two years 
 following the abandonment of war control of the roads. 
 Prior to the Eseh-Cummins law the Commission had power 
 to fix maximum rates, but the new law gave it power also 
 to fix minimum rates. This provision enables the Commis- 
 sion to prevent the stronger roads from engaging in forms 
 of "rate-cutting" which amount to "cut-throat competi- 
 tion." These rate-fixing powers are equivalent to what 
 would be price-fixing powers in the ordinary line of in- 
 dustry. 
 
 The Commission, moreover, has supervision over the is- 
 isuance of stocks and bonds by railroads, its approval being 
 
PubLic Control 463 
 
 necessary before new issues can be made. The guiding 
 criterion for the Commission in passing upon proposed 
 security issues is whether the new securities are "reason- 
 ably necessary and appropriate" for giving proper trans- 
 portation service to the public. Another provision refers 
 to combinations of railroad companies, and permits com- 
 binations by methods constantly subject to the Commis- 
 sion's approval, provided such combinations are brought 
 about "under a lease or by the purchase of stock, or in 
 any other manner not involving the consolidation of such 
 carriers into a single system for ownership and operation. ' ' 
 As soon as practicable, the Commission is directed to pre- 
 pare a nationwide plan for the consolidation "of the rail- 
 way properties of the United States into a limited number 
 of systems," and consolidations of railway corporations in 
 ownership and operation are permitted under the discre- 
 tion of the Commission. Such railroad combinations and 
 consolidations are specifically exempted from all previ- 
 ously enacted laws for the regulation and control of trusts. 
 This general provision of the Act looks toward a unifica- 
 tion and co-ordination of the railway lines of the country, 
 and is an outgrowth of the lessons learned in railway 
 operation during the war period when unification and co- 
 ordination of the lines were of the utmost importance. A 
 further set of provisions empowers the Commission to re- 
 quire of the carriers during normal times the proper 
 amount and quality of service to insure that the transpor- 
 tation needs of the nation are reasonably met, and during 
 times of stress or emergency to redistribute railroad equip- 
 ment and service in any way necessary to meet the demands 
 of the emergency period. Complete control of all railroad 
 operations would fall to the Commission in ease the emer- 
 gency were war or the imminent threat of war. A branch 
 of this general class of provisions empowers the Commis- 
 sion to require the joint use of terminals by various roads, 
 and to apply priorities and preferences in the use of rail- 
 road equipment when desirable. Old roads cannot be 
 abandoned nor new ones constructed without the approval 
 of the Commission. These powers constitute in their en- 
 
464 Public Control 
 
 tirety a eompreliensive control over virtually all vital parts 
 of the railroad business, and by thus regulating rates, ser- 
 vice, finance, construction, competition, consolidation and 
 dividends, the Interstate Commerce Commission assumes a 
 position of the greatest importance in guaranteeing that 
 the transportation facilities of the country shall render the 
 public reasonable service under reasonable terms. 
 
 One group of provisions in the Bsch-Cummins railroad 
 bill establishes regulatory machinery for the adjustment of 
 disputes, grievances and relations between the railroad 
 companies and their employees. The railroads and la- 
 borers may by mutual agreement set up Boards of Labor 
 Adjustment to settle all disputes regarding "grievances, 
 rules or working conditions." These voluntary Adjust- 
 ment Boards are supplemented by a Railroad Labor Board, 
 composed of nine members, three each representing em- 
 ployers, employees and the public. The powers of this 
 national board authorize it to proceed to investigate any 
 railroad disputes which are not being adequately taken care 
 of by the voluntarily formed Adjustment Boards. Beyond 
 this, the Railroad Labor Board has exclusive jurisdiction 
 over the final settlement in all wage disputes. The powers 
 of the Railroad Labor Board thus comprehend not merely 
 the disputes about "grievances, rules, and working condi- 
 tions," but about wages as well. The Board has power to 
 enter upon an investigation of any dispute which threatens 
 to interrupt the operation of the roads, and to make an 
 award in settlement of the dispute. The Board relies upon 
 publicity and public opinion for the enforcement of its 
 decisions. In the early history of the bill, a definite anti- 
 strike clause was proposed, enabling the Board to enforce 
 all of its decisions, and giving it power to impose fine or 
 imprisonment upon employers or employees who might fail 
 to obey decisions. This proposed clause was bitterly fought 
 by labor leaders, and by some public authorities, so that as 
 finally arranged in conference the law excluded the anti- 
 strike clause and relied upon public opinion for enforce- 
 ment of decisions. Investigation of disputes is compulsory, 
 and regardless of whether employees or employers so desire. 
 
Public Control 465 
 
 the Board is tinder obligation to make an award and give 
 the terms of the award wide enough publicity to create an 
 informed public opinion on the case. 
 
 The Railroad Labor Board and the Interstate Commerce 
 Commission therefore together hold firm control over every 
 important phase of railroad operation. Through these 
 agencies public regulation of the greatest public utility of 
 the nation is made thorough and far-reaching. The major 
 owners of railroad securities and the executives of the roads 
 were very eager to recover the lines from the hands of the 
 government, and to resume private operation. Private 
 operation under such drastic regulation places private 
 initiative and competition on a new plane. Competition of 
 service is much talked about, and competition in efficiency 
 and economy is approved of. But even these forms of com- 
 petition are subject to intimate regulation on the part of 
 the Commission. The condition of the railroads since the 
 enactment of the Esch-Cummins law has not been fully 
 satisfactory, and weighty difficulties have appeared in 
 securing adequate railroad credits, in effecting adequate 
 economies in operation, and in working out satisfactory 
 adjustment of labor relations. Not a few authorities feel 
 that eventually the present form of drastic regulation will 
 lead to outright government ownership and operation. 
 Perhaps one of the strongest forces tending in the direc- 
 tion of government operation is the force of menacing labor 
 relations. The roads and their employees apparently are 
 unable to find any basis of common understanding, and a 
 state of distrust and suspicion prevails vndely. Rumors of 
 strikes and threats of strikes are constantly being heard, 
 and unless the roads can find ways of adjustment of trou- 
 bles with labor the possibility of government operation is 
 not a light one. 
 
 The personnel of the Interstate Commerce Commission 
 and of the Railroad Labor Board and Adjustment Boards 
 has a steady influence upon the success of regulation. For- 
 tunately the appointments made are of a nature to com- 
 mand a reasonable amount of public confidence. Probably 
 a weightier factor in the success of regulation exists in the 
 
466 Public Control 
 
 motives and psychology which prevails among both the rail 
 executives and the rail laborers. Their reactions and atti- 
 tudes and motives determine fundamentally the effect of 
 regulation upon railroad service to the public. On the 
 labor side, it should be observed that labor union leaders 
 give evidence of a profounder respect for the vital needs of 
 the public than they were willing to during the days of 
 1916 when the persistent threat to strike led to the Adam- 
 son Act regulating hours of labor. The laborers, however, 
 feel a continual suspicion of the owners and executives, 
 believing that they are utterly unwilling to grant the la- 
 borers adequate wages, adequate union representation, and 
 adequate working conditions. This suspicion prevents a 
 sound morale among the army of railroad workers, and as 
 long as it persists in its present unhealthy degree the trials 
 of those who are responsible for regulation wiU be heavy, 
 and the service of transportation will be below its possi- 
 bilities. On the part of the railroad presidents and execu- 
 tives, it is probably accurate to state that the sense of 
 public responsibility has materially increased in recent 
 years. For the most part they admit the inevitability and 
 necessity of thorough regulation, and are disposed as a 
 rule to give reasonable co-operation to the regulators. In 
 this respect, the "public be damned" attitude is mainly a 
 thing of the past, and a "public be served and pleased" 
 attitude is more in evidence. The low salaries paid to rail- 
 road executives, in comparison with those paid to the 
 largest industrial executives, has led as responsible a rail- 
 road official as Daniel WiUard to remind the country that 
 under such salary scales the best executive ability will not 
 in future years be attracted to railroad positions. Such a 
 drift of the best executive ability of the country toward 
 the higher paid industrial positions would leave the man- 
 agement of the railroads to second-rate ability. In the 
 course of time, such a tendency would severely handicap 
 the transportation service of the country. 
 
 The development of motives among great railroad execu- 
 tives is splendidly suggested by a remark by Otto H. Eahn 
 on the railroad career of one of the greatest figures in 
 
Public Control 467 
 
 American railroad history, Edward H. Harriman: "His 
 career was the embodiment of unfettered individualism. 
 For better or for worse — personally I believe for better 
 unless we go too far and too fast — the people appear deter- 
 mined to put limitations and restraints upon the exercise 
 of economic power, just as in former days they put limits 
 and restraints upon the absolutism of rulers. Therefore, I 
 believe there will be no successor to Mr. Harriman; there 
 will be no other career like his." The ability of great men 
 to harness their capacities in a co-operative enterprise as 
 enthusiastically and energetically as they formerly did in 
 individualistic effort lies at the base of all questions of 
 success in the new era of complete regulation of railway 
 enterprise. 
 
 Regulation of banking has been described in detail under 
 the chapter having to do with MONEY AND CREDIT. 
 At this stage it is enough to point out that the Federal Re- 
 serve System establishes a machinery for the regulation of 
 banking practice, but that this regulation goes to no such 
 extreme as does the regulation of the railroads. The man- 
 ner of selection of the directors of the Federal Reserve 
 Banks gives to the bankers themselves the real power in 
 selecting the dominant portion of the boards of directors. 
 Banking regulation does not come merely from the top 
 down, but fundamentally organizes the bankers themselves 
 in a co-operative treatment of banking problems. There is 
 less government dictation and more self-discipline in the 
 Federal Reserve Board. A question which promises to 
 become of increasing public interest relates to the powers 
 of the Federal Reserve System in stabilizing business con- 
 ditions and averting the extremes of business cycles. 
 Many students believe that a proper regulation of discount 
 and interest rates would restrain business from excessive 
 expansion in times of prosperity, thereby avoiding ex- 
 tremes of depression, and would encourage recovery by 
 offerings of credit at low rates during dull business periods. 
 This issue is the center of much thought and discussion, 
 and a decision in favor of strong powers of this sort in the 
 hands of the Federal Board would have deep consequences 
 
468 Public Control 
 
 for the business community. The traditions of individual- 
 ism in banking are against the move, whereas those -who are 
 not afraid that co-operation and control in this way would 
 be paternalistic are more inclined to be favorable. 
 
 General Regulation of Business 
 
 The general regulatory machinery for ordinary business 
 activity exists mainly in the Federal Trade Commission 
 and in the judiciary. The basic laws establishing definite 
 control are the Sherman Anti-trust Law of 1890 and the 
 Federal Trade Commission and Clayton Acts of 1914. 
 Outside of these statutory laws, the courts have dealt with 
 business practices to a considerable extent under the prin- 
 ciples of the common law. 
 
 The Sherman Act of 1890 decreed that ' ' Every contract, 
 combination in the form of trust or otherwise, or con- 
 spiracy, in restraint of trade or commerce among the several 
 States, or with foreign nations, is hereby declared to be 
 illegal" and that "Every person who shall monopolize, or 
 attempt to monopolize, or combine or conspire with any 
 other person or persons, to monopolize any part of 
 the trade or commerce among the several States, or with 
 foreign nations, shall be deemed guilty of a misdemeanor." 
 The gist of the act concerned itself with combination to 
 restrain trade or to form monopoly. For more than a 
 decade following the enactment of the law, the interpreta- 
 tions placed upon it by the courts made it of slight effect 
 upon business combinations, and few cases were brought to 
 trial. In 1904 and 1905, the court made a severe applica- 
 tion of the law in cases involving the Addyston Pipe Com- 
 pany and the Northern Securities Company, the court 
 holding that these companies had the effect of a restraint 
 upon competition and trade between the States. In 1911, 
 the court ordered the dissolution of two of the most power- 
 ful trusts ever formed, the Standard Oil Company and the 
 American Tobacco Company, on the ground that these com- 
 binations caused undue and unreasonable restraint of 
 trade. These decisions constituted epoch-marking interpre- 
 tations of the Sherman Act by drawing a line of difference 
 
Public Control 469 
 
 between reasonable and unreasonable, or due and undue 
 restraint of trade. Previously it had been assumed that 
 aU restraint of trade was illegal, but these decisions pointed 
 out that a standard of reason must be applied in each sepa- 
 rate ease to the acts of a business combination. In any- 
 new case presented to the court, it became therefore neces- 
 sary for the court to determine as a matter of commercial 
 fact whether the acts of the business combination under 
 question were reasonable or unreasonable restraint of trade. 
 The looseness of this "rule of reason" left business men 
 with the feeling that they were conducting their business 
 under a regime of great uncertainty. Business men could 
 not make intelligent guesses as to what the court's notion 
 of reasonable restraint might be. 
 
 One very important question had to do with the issue of 
 whether mere size itself, if great enough, might be declared 
 monopolistic and unreasonable restraint of trade. The 
 Supreme Court gave its opinion on that issue in 1915 in a 
 decision favorable to the United States Steel Corporation, 
 where it was declared: "We dismiss once and for all the 
 question of the mere volume or bigness of business. The 
 question before us is not how much business was done, or 
 how large the company that did it. The vital question is : 
 ' How was the business, whether big or little, done ? Was 
 it, in the test of the Supreme Court, done without prejudic- 
 ing the public interests by unduly restricting or unduly 
 obstructing trade! The question is one of undue restric- 
 tion or obstruction, and not one of volume of trade." In a 
 subsequent decision on the same corporation, rendered 
 March 1, 1920, the Supreme Court found the steel cor- 
 poration not guilty of unreasonable restraint of competi- 
 tion and trade. The government attorneys who were 
 prosecuting the corporation were unable to find any inde- 
 pendent steel companies who were of the opinion that the 
 trade practices or price policies of the company were 
 unfair, and not a single independent company wanted to 
 testify against the United States Steel Corporation. The 
 Court re-emphasized: "The law does not make mere size 
 an offense, or the existence of unexerted power an offense." 
 
470 Public Control 
 
 The emphatic ring of these court opinions is somewhat 
 "weakened, and a measure of doubt raised, by a decision in 
 1920 dissolving a holding company known as the Reading 
 Company. The court based its opinion upon the charge 
 that the company had secured "dominating control" of 
 certain railroad and coal properties not by "superior and 
 enterprising management," but by "deliberate calculated 
 purchase for control," and held "that such power, so ob- 
 tained, regardless of the use made of it, constitutes a 
 menace to and an undue restraint upon interstate com- 
 merce within the meaning of the anti-trust act, has been 
 frequently held by this court." 
 
 The laws of 1914 were the Federal Trade Commission 
 Act and the Clayton Act. The most significant feature of 
 these enactments is the creation of a commission to investi- 
 gate trade practices and competition policies and to apply 
 the principles of government control of business in a flex- 
 ible and constructive manner. The Commission is em- 
 powered to prevent unfair competition among business 
 concerns, and in case the corporation fails to obey the Com- 
 mission's order, it may appeal to a Federal circuit court 
 of appeals for an enforcing order. It may conduct investi- 
 gations from time to time into the "organization, business 
 conduct, practices and management" of corporations, and 
 may require corporations to submit reports covering infor- 
 mation about their business, and to maintain uniform cost 
 accounting systems, open to the scrutiny of the Commis- 
 sion. The Commission, moreover, is authorized to inform 
 itself as to whether corporations obey the decrees of the 
 court under the anti-trust acts, and to report the facts to 
 the Attorney-General. It shall also make investigations to 
 discover violations of the anti-trust acts, and shall make 
 recommendations for the reform of any corporations found 
 to be violating the law, "in order that the corporation may 
 thereafter maintain its organization, management, and 
 conduct of business in accordance with law." The Com- 
 mission may utilize the power of publicity as a means of 
 controlling the policies of corporations. It may make in- 
 vestigations of foreign trade, and may seek out information 
 
Public Control 471 
 
 in foreign countries bearing upon trade combinations of 
 the United States. It is an administrative body for the 
 application of the provisions contained in the Clayton Act. 
 The Commission has cleared the air for business men a 
 great deal by drawing up and publishing lists of fair and 
 unfair practices of competition, so that business men may 
 know with some definiteness what they will, and what they 
 will not, be prosecuted for. 
 
 The Clayton Act proceeds to define two of the most ob- 
 jectionable forms of unfair competition, namely, price dis- 
 criminations and "tying arrangements," i.e., such arrange- 
 ments as requiring merchants to bind themselves to sell 
 at certain prices or to buy exclusively from certain deal- 
 ers. These types of competition are specifically branded 
 as unfair and illegal, and it is the duty of the Federal 
 Trade Commission to prevent business concerns from in- 
 dulging in them. In addition, the Commission is given a 
 blanket authority to prevent any and all forms of unfair 
 competition. Also, the act forbids the formation of holding 
 companies or of interlocking directorates where the result 
 may be to substantially lessen competition or to restrain 
 trade or to tend to create a monopoly, and it is the duty of 
 the Federal Trade Commission to see that these provisions 
 are enforced. The acts of 1914 are a broad constructive 
 move in the direction of guiding business instead of merely 
 punishing it; of making clear what is legal and what is 
 not; and of co-operating with business toward the end of 
 securing business methods which are sound public policy 
 and in accord with the law. 
 
 The fundamental purposes in the government attitude 
 toward business combination and business methods have 
 not always been clear and definite. One general purpose 
 has been to maintain and safeguard competitive methods 
 in business. The decrees of the courts have often defined 
 their purpose as being to "restore competitive conditions," 
 and the laws that have been passed have 'announced their 
 objective as the prevention of restraints upon competition. 
 But the competition which is to be preserved is not a com- 
 pletely independent and unguided competition; rather, it 
 
472 Public Control 
 
 is a competition wliic-h is required to keep within certain 
 bounds of "fairness." It is a competition, moreover, 
 which may be subject to some restraint and suppression by 
 business combinations, provided only that such restraint is 
 not, in the view of the court, "unreasonable." And the 
 new competition allows for a substantial measure of co- 
 operation between competing business units. The vast 
 extension of organizations such as trade associations is a 
 move in the nature of co-operation between the several 
 business units in the various lines of trade; Co-operation 
 is the life of trade. "Only by co-operation can the enor- 
 mous wastes of competition be avoided." Co-operation is 
 not the antithesis of competition, but the supplement, and 
 an invaluable supplement, in the successful organization of 
 modern industry and trade. The element of co-operation 
 is encouraged by the government in the railroads of the 
 country, under the supervision of the Interstate Commerce 
 Commission. It needs to be more definitely approved for 
 industry and trade in general ; and clear definitions are in 
 need of formulation, of fair and unfair, reasonable and 
 unreasonable co-operation. Co-operation has been estab- 
 lished by the terms of the "Webb Act for corporations 
 entering into foreign trade, and under the terms of the 
 Edge Act for banking companies engaged in the handling 
 of investments and credits for the financing of foreign 
 trade. Misguided co-operation would of course lead to 
 forms of monopoly which would be undesirable. In both 
 the coal industry and the meat packing industry it has of 
 late been seriously proposed to add to existing provisions 
 for government regulation to the end that competition and 
 co-operation in those industries may be properly balanced. 
 The purpose of government control as at present applied 
 deserves to recognize the importance of properly blending 
 the principles of competition and co-operation in economic 
 organization. 
 
 In the past, a primary purpose of anti-trust legislation 
 and administration frequently has been the prevention of 
 business from growing too large. The popular philosophy 
 of business at the time of the enactment of the Sherman 
 
Public Control 473 
 
 Act in 1890 found big business dangerous and menacing 
 because of its very bigness. The provisions of the Clayton 
 Act against holding companies and interlocking direc- 
 torates are a tribute to the same fear of large industrial 
 and commercial power. The Supreme Court has in some 
 recent decisions declared that mere size is not in itself ille- 
 gal, but doubt as to what is definitely meant by such a 
 declaration is raised by such a judicial attitude as was taken 
 in 1914 by a Federal district court in decreeing the disso- 
 lution of the International Harvester Company. In part, 
 that decision stated, ' ' There is no limit under the American 
 law to which a business may not independently grow, and 
 even a combination of two or more businesses, if it does not 
 unreasonably restrain trade, is not illegal; but it is the 
 combination which unreasonably restrains trade that is 
 illegal, and if the parties in controversy have 80 or 85 per 
 cent, of the American business, and by the combination of 
 the companies all competition is eliminated between the 
 constituent parts of the combination, then it is in restraint 
 of trade within the meaning of the statute, under all of 
 the decisions. ' ' This comes close to declaring that the com- 
 pany unreasonably restrains trade because of its very big- 
 ness, in that it controls over 80 per cent, of the business. 
 Does size itself constitute unreasonable restraint ? In the 
 decision of the Supreme Court in 1920 dissolving the Read- 
 ing Company, it was the "dominating control" of the 
 company, even though it were in the form of "unexerted 
 power" which figured largely in the logic of the decision. 
 The doubtful attitude toward bigness is further revealed 
 in a statement by the chairman of the Federal Trade Com- 
 mission made in 1918 as follows, "The principal unsettled 
 question remaining appears to be whether a monopolistic 
 combination with the power to crush its competitors is not 
 against public policy and contrary to the law, even though 
 it were not shown to have exerted that power." And the 
 chairman explains his personal conviction that "In ordi- 
 nary industry and trade, however, the maximum social ad- 
 vantage is not in concentration and unitary organization, 
 but rather in the competition of numerous efficient private 
 
474 Public Control 
 
 enterprises."* It at least seems certain that in any cases 
 ■where combination is allowed to attain so great a size as to 
 amount to private monopoly, rigid government control 
 similar to that provided by the Interstate Commerce Com- 
 mission will be applied. 
 
 The history of efforts at business control for more than 
 thirty years teaches emphatically that large business estab- 
 lishments are inevitable in the present economic period. 
 Business units of sufficient size to realize the economies of 
 large scale operation are a natural outcome of the economic 
 system based upon modem mechanics, science, and tech- 
 nology. Economic evolution and social progress alike ac- 
 knowledge a place for the large-scale business establish- 
 ment. Decrees of dissolution made by the courts have 
 proved in large measure futile. Communities of interest, 
 holdings of stock in various corporations by friendly par- 
 ties, secret understandings and concert of policy spring up 
 in one way and another. It often has been doubted whether 
 "the mere dissolution of industrial combinations accom- 
 plishes anything."^ The words of VanHise seem thor- 
 oughly justified, "Concentration and co-operation in indus- 
 try in order to secure efficiency are a world-wide movement. 
 The United States cannot resist it." As fast as one form 
 of combination has been attacked by the courts, another 
 form has been invented. The pool gave way to the trust, 
 the trust to the holding company, and the holding company 
 often to the amalgamation, the merger or the community of 
 interest. Control of business methods, of forms of co- 
 operation and competition, and condemnation of evil busi- 
 ness practices have met with a reasonable measure of 
 success; but when the attack has been upon mere size be- 
 cause of the dangers of size, it has happened that "Not- 
 withstanding all the law against agreements in restraint of 
 trade, the present generation has seen the greatest move- 
 ment toward consolidation which is recorded in economic 
 
 1 W. B. ColVer, "American Problems of Reconstruction," edited 
 by E. M. Friedman, Chapter X. 
 
 2 See A. A. Yoimg, Journal of Political Economy, pp. 204-219 
 430-431. 
 
Public Control 475 
 
 history."^ It is of significance that Great Britain has 
 during and since the war given direct governmental en- 
 couragement to the organization of business on a compre- 
 hensive and adequate scale. The trouble with the attitude 
 of the past has been fundamentally that people were unable 
 to discern the psychological forces which were working in 
 the direction of large business organizations. The develop- 
 ment of the resources of the American continent, the possi- 
 bilities in the utilization of modern inventions and scientific 
 discoveries, the economies and advantages to be realized by 
 big undertakings, the seats of economic power that could 
 be occupied by those who succeeded in large business or- 
 ganization, the achievements which would be a tribute to 
 mammoth creative ability, — all these were considerations 
 which fired the imaginations of men of genius. The last 
 generation has been endowed with not a few men of rare 
 and extraordinary capacities, and the opportunities in the 
 economic world which stretched out before them set loose 
 their unparalleled energies. Men in whom the master in- 
 stincts of domination, constructiveness, possession, fame, 
 power, and thought were of extreme force were stimulated 
 to their highest endeavors by the challenge of economic 
 circumstances. People and governments made the mistake 
 of supposing that this titanic psychological energy could 
 be suppressed or abolished by the enactment of a law or a 
 paper dissolution by the courts. Great human energies 
 were operating in full force, and when they were balked at 
 one point, they found an outlet at other points. The human 
 energies of men could not be suppressed; they could, how- 
 ever, be disciplined. They could be guided, directed, and 
 brought into the service of the economic needs of the com- 
 munity. And, of late, the effort of business control along 
 these lines is a truer recognition of the psychology of busi- 
 ness combination, and for that reason has a sounder promise 
 of success. 
 
 The possibility of making over the forms of expression 
 which will give satisfaction to the instincts of great cap- 
 
 1 Bruce Wyman, "Control of the Market," p. 142. 
 
476 Public Control 
 
 tains of industry is difficult to measure. New standards of 
 business honor, new standards of business ethics, new 
 standards of business success gradually turn the emphasis 
 away from mere money-getting or individualistic attain- 
 ment toward economic statesmanship and constructive 
 public achievement. There is much reason for believing 
 that the following statement of the late George W. Perkins 
 is a fair description of the movement of the times : ' ' The 
 individualistic period in which we have been living . . . 
 quickly brought great fortunes to individuals. Money- 
 making has been the one all-absorbing occupation in this 
 country for the last forty years. ... On the whole, the 
 individualistic age has not been a success, either for the 
 individual, for the community in which he has lived, or for 
 the nation. This period is passing away. ... To my mind 
 there is nothing in the signs of the times so certain as this. 
 I believe the sooner the man of the future understands this, 
 accepts it, and prepares to shape his own course accord- 
 ingly, the more successful his career will be, the better off 
 his country will be, and the happier he and every one else 
 will be. . , . Our only decoration — ^the almighty dollar — 
 is not as highly prized as it used to be. The man of excep- 
 tional ability, of more than ordinary talent, will hereafter 
 look for his rewards, for his honors, not in one direction 
 but in two — first and foremost in some public work accom- 
 plished, and second in wealth acquired. ... In my judg- 
 ment the fashion of acquiring wealth simply for the sake 
 of possessing it has about reached its greatest height, and 
 the fashion of performing public service for the sake of its 
 performance is coming into vogue. "^ To the degree that 
 this revaluation and rediseipline of motives takes place, the 
 economic organization of the country will increase the 
 measure of human well-being which prevails, and private 
 initiative in public achievement will characterize American 
 business life. 
 
 1 E. M. Friedman, "American Problems of Reconstruction," pp. 
 50-51. 
 
Public Control 477 
 
 Governmental Control of Labor 
 
 Labor is so vital a part of productive organization that 
 the influence of government control over it becomes of 
 importance. Government control of the laborers of the 
 railroads has already been described in some of its phases. 
 Compulsory investigation of disputes, trusting to public 
 opinion for enforcements of decisions is the established 
 mode of procedure in the railroads. The State of Kansas 
 has attracted much attention by the formation of a State 
 Court of Industrial Relations, to settle labor disputes in 
 all industries of vital public concern, with powers not 
 merely of compulsory investigation, but also of compulsory 
 acceptance of the decision. Both the railroad method and 
 the Kansas method arouse the bitter antagonism of organ- 
 ized labor, because it is felt that the element of compulsion 
 will prove to be an entering wedge for forcing men to work 
 against their will and for involuntary servitude. The 
 fundamental principle in both cases is the uninterrupted 
 operation of businesses which are of indispensable and vital 
 public service. The psychology of labor caused Congress 
 to eliminate a specific anti-strike clause from the Esch- 
 Cummins railroad bill, and has deterred other states from 
 following widely the precedent of compulsion set by the 
 Kansas law. The psychology of labor also underlay a re- 
 port made by a special industrial commission appointed by 
 President Wilson in 1919 for the purpose of working out 
 an industrial reconstruction program. The commission 
 contained seventeen members, persons of experience and 
 eminence in the country ; and great importance attaches to 
 their belief that the wide application of compulsion in the 
 settlement of industrial disputes is inexpedient and unwise, 
 with the parties to industry in their present mood; and 
 that the best mode of maintaining industrial peace and 
 co-operation lies in the direction of a nationwide organiza- 
 tion of arbitration and mediation machinery, with regional 
 divisions, exercising the right of investigation and publicity 
 in industrial disputes, but not clothed with compulsory 
 powers to forbid strikes. In the big me^t packing Indus- 
 
478 Public Control 
 
 tries, the government established during the war a method 
 of federal control of labor relations under the direction of 
 a federal judge, Judge Alschuler. The powers of the fed- 
 eral judge were extended following the war until the au- 
 tumn of 1921, and the Secretaries of Commerce, of Labor, 
 and of Agriculture, then approved the termination of this 
 federal control upon the understanding that the meat 
 packers would establish forms of employee represen- 
 tation and joint conference between employers and em- 
 ployees for the adjustment of industrial relations. Govern- 
 ment control, moreover, has frequently taken the form of 
 injunctions, in such forms as court orders forbidding la- 
 borers to strike, or to picket, or to boycott, or to engage in 
 some other practice held to be objectionable. The element 
 of compulsion in the injunction serves to stimulate extreme 
 bitterness on the part of laborers, and they feel almost 
 universally that the injunction deprives them of their free- 
 dom and rights as American citizens and workingmen. 
 The injunction is a measure which ought to be used only in 
 the last resort, as a means of providing indispensable busi- 
 ness service to the public or of protecting just rights of 
 employers. Organized labor secured, as a means of pro- 
 tecting itself from court restrictions, the insertion in the 
 Clajrton Act of a clause which stated that "the labor of a 
 human being is not a commodity or article of commerce," 
 and that labor organizations are lawful under the anti- 
 trust acts, and may not be restrained from "lawfully 
 carrying out the legitimate objects thereof." Labor 
 unions entertained the hope that this section of the Clayton 
 Act would give them a new status of immunity from inter- 
 ference by the courts, but subsequent judicial decisions 
 indicate that the Clayton Act did not materially alter or 
 improve the status of labor organizations. The act em- 
 powers them merely to lawfully carry out legitimate 
 objects, and it remains for the courts to give their own 
 interpretation to the words lawful and legitimate. The 
 act seems in no substantial degree to have mitigated the 
 power of the courts, through injunctions or decisions, to 
 control the practices of labor organizations. 
 
Public Control 479 
 
 Experience therefore indicates that the situation of the 
 present day calls for the minimum of government compul- 
 sion which is necessary to protect vital interests of the 
 public, and for the creation under government auspices of 
 machinery for nationwide voluntary arbitration and con- 
 ciliation. The arbitrary suppression of the mass aspira- 
 tions of laborers by undue government control would be 
 fraught with dangerous psychological results. Where labor 
 unrest reflects grievances, and where the instincts of 
 groups of workers are aroused, a policy of suppression can 
 have no other effect than to stimulate unnecessary radi- 
 calism, to bring about a balked industrial morale, to stimu- 
 late sulkiness, sabotage, and restriction of production, to 
 weaken the ties of Americanism and to make easy the work 
 of agitators. The psychology of the mass of workers re- 
 quires not merely a closing of certain channels of human 
 expression which society deems dangerous, but also the 
 opening of other channels for the satisfactory expression 
 of the powerful human impulses of labor. When bad ex- 
 pressions of basic labor instincts have to be stifled, good 
 expressions for the same instinctive energies need to be 
 created. 
 
 Reform 
 
 In a general way, reform refers to those efforts to im- 
 prove human affairs which take their initiative from leaders 
 and authorities who are desirous of helping the mass of 
 their fellowmen. Reform is not primarily a democratic 
 method because it does not exact responsible effort and 
 alert self-expression from the people who are to benefit 
 most by it. Reform extends a helping hand from the top 
 down more than it builds a self-earned and self-created 
 improvement through the democratic organization of people 
 from the bottom up. Society abounds with social students, 
 public-spirited citizens, altruistic business men, or political 
 leaders anxious to serve their fellowmen, who are con- 
 tinually busy effecting reforms for the good of society. 
 
 Most reform efforts of the present day are directed 
 toward economic conditions, and a great proportion of 
 
480 Public Control 
 
 them seek their ends by the medium of political legislation. 
 Labor legislation is a leading type of reform, and numerous 
 organizations exist for the furtherance of such legislation, 
 conspicuous among which is the American Association for 
 Labor Legislation. Labor reforms include laws establish- 
 ing minimum wages; prohibiting child labor; protecting 
 women in industry ; assuring workmen 's compensation and 
 insurance, accident prevention ; fire protection and sanitary 
 working conditions; regulating hours of labor and night 
 work; maintaining factory inspection; requiring proper 
 working conditions; supplying adequate housing; restrict- 
 ing the immigration of alien labor ; organizing Americani- 
 zation ; creating industrial commissions ; providing employ- 
 ment agencies; and endeavoring to help the worker by 
 every device conceivable to the mind of a reformer. 
 
 There are numerous societies and associations whose 
 function is to spread publicity in favor of some reform, or 
 to bring pressure to bear on legislators, or to bring direct 
 help to people in trouble. These societies include such 
 different agencies as the Consumers' League, the Federal 
 Council of the Churches of Christ in America, the Ameri- 
 can Child Hygiene Association, the American Home Eco- 
 nomics Association, the Child Welfare League of America, 
 the League for Industrial Democracy, the Industrial Y. M. 
 C. A., the National Conference of Social "Work, the Na- 
 tional Women's Trade Union League, the Russell Sage 
 Foundation and other foundations, or bureaus of indus- 
 trial, social and economic research. Almost every field of 
 economies has its set of leagues and societies devoted to 
 reform. 
 
 The work of reformers is of genuine service, for it pre- 
 vents in large measure low standards of human treatment 
 in the economic world, it alleviates suffering, and it arouses 
 a dormant public to face industrial wrongs and provide 
 remedies. The body of welfare legislation, of uplift work, 
 and of reform organization has raised the level of comfort 
 and happiness in the nation and deserves high recognition. 
 It is important, however, to note the limits within which 
 most reforms take effect. Eef orm is not a unified compre- 
 
Public Control 481 
 
 hensive program, but is a bundle of particularistic pro- 
 grams, each sponsored by certain groups of individuals 
 who devote their energies to the accomplishment of mis- 
 cellaneous or single reform acts. In the meantime, the 
 economic institutions remain fundamentally unchanged, 
 and in their normal functioning result in a fairly steady 
 output of the troubles, distresses, injuries and wrongs 
 which reformers can only lighten or alleviate. A great deal 
 of reform seeks to extend the helping hand, but does not 
 reshape the institutions of the economic order in such ways 
 as to insure the institutional elimination of the difficulties. 
 Reform is often subject to the defects common to all wel- 
 fare work. It is in the nature of public benevolence rather 
 than of self-expression. As long as the status, powers and 
 rights of the various classes in economic organization re- 
 main substantially unchanged, the reform movement neces- 
 sarily works near the surface of things. It is useful and 
 indispensable, but faces certain limits of effectiveness. 
 
 Moreover, it is true of a large class of reforms that they 
 rest upon an inadequate view of social psychology. This 
 class of reform aims to give pleasure, safety, comfort, and 
 happiness to social groups. Trouble is to be abolished, 
 danger and risk is to be eliminated, war and struggle to be 
 ended, minimums of food and luxuries to be guaranteed, 
 poverty to be wiped out, fear, oppression and autocracy to 
 be destroyed. The new age that this type of reform looks 
 forward to is one of contentment, harmlessness, leisure, 
 gentleness, kindness, and security. All of this is to be a 
 gift, coming from reform leagues and societies, or from 
 acts of legislation. But such a state of peace and piety and 
 plenty offers no satisfaction to many of the basic instincts 
 of human nature. Men and women do not want gifts of 
 pleasure; they want opportunities to win economic and 
 social advance by the assertion of their own human powers. 
 Men and women need a cause which they can be devoted to, 
 and through loyalty to the cause, through struggle for the 
 cause, through self-sacrifice and heroism and hazard for the 
 cause, they desire to win and create their own betterment. 
 The victories and rewards which come from self-assertion 
 
482 Public Control 
 
 are real. Men need challenges to invent new social and 
 economic principles and measures, and need opportunities 
 to hew out progress by the strokes of their own hands. The 
 society often portrayed by a certain class of reformers is a 
 complacent haven of refuge, but men cannot live the strenu- 
 ous life in such a society, and anything short of the strenu- 
 ous life cannot satisfy the deepest instincts of human 
 nature. Reform movements of this kind largely ignore the 
 fundamental human cravings for zest, risk, responsibility, 
 self-achievement, group loyalty, resourcefulness, sacrifice, 
 domination, power, struggle, conquest. Of course the 
 sounder reform movements avoid the mistaken social psy- 
 chology of ease and comfort, but it is important that the 
 bulk of reform effort should rest upon a correct interpreta- 
 tion of human nature. Reform in the deepest sense of the 
 word should mean not merely a gift from society to needy 
 groups, but an organization of opportunity for self-achieve- 
 ment, and for group advancement by the creative effort of 
 all members of the group. 
 
 The spirit of reform is a splendid reflection of the 
 genuine feeling of human kindness, and the harvest of such 
 a spirit certainly commands admiration. Not a few groups 
 in society are deficient in the virile instincts and the powers 
 of self-assertion and achievement, and the protecting care 
 of society over them is an indication of a high state of 
 civilization. There is no disparagement of the inner value 
 of reforms as a whole, in pointing out some of the limits 
 under which certain classes of reform have worked in the 
 past or in indicating the misleading notions of human 
 nature which underlie certain reform movements. The gist 
 of these remarks is that a reconstruction of reform pro- 
 grams that would reckon more positively with the limits of 
 reform effort and that would incorporate the scientific prin- 
 ciples of modern social psychology would greatly increase 
 their power and usefulness. 
 
 Public Opinion and Public Control 
 
 References have been made to the power of public 
 opinion as a means of effecting fair business practices under 
 
Public Control 483 
 
 the administration of the Federal Trade Commission and as 
 a means of enforcing decisions bearing upon labor disputes. 
 Public opinion is commonly thought of as an opinion 
 which is right. Pitiless publicity is often suggested as a 
 measure for bringing about adequate remedies of economic 
 wrongs and troubles. And it is ordinarily observed that 
 an economic policy cannot long endure or a method of 
 government control prove effective unless it can secure the 
 support of public opinion. It is appropriate, therefore, to 
 give some analysis to the function and behavior of public 
 opinion in economic matters. 
 
 First of all, public opinion is scarcely competent to pass 
 upon technical economic issues. On matters of business 
 ethics or of labor grievances, public opinion is swayed pri- 
 marily by head 'lineo, and only very remotely by the body 
 of technical facts which bear upon the issue. For instance, 
 a federal judge who would dissolve a corporation on the 
 basis of what he had read about it in the newspapers, or an 
 arbitrator who would decide a wage dispute from his 
 knowledge of the press headlines, would be obviously dere- 
 lict in his duties because he would be acting without any- 
 thing like adequate evidence. Yet the judge or the arbi- 
 trator would be acting upon exactly the same evidence as 
 serves to form public, opinion. The broad spirit of public 
 opinion as it might relate to the rightness or wrongness of 
 profiteering or of a certain standard of living as a basis for 
 wage adjustments, would have real value, but the deter- 
 mination in any particular ease of what per cent, of profit 
 is profiteering would rest upon a technical analysis of 
 capitalization, invested capital and other matters of fact, 
 and the determination of a living wage, or what wage would 
 assure the proper standard of living would rest upon a tech- 
 nical analysis of statistics of prices and cost of living, of 
 family budgets, and similar facts. Clearly, the determina- 
 tion and analysis and interpretation of such evidence is 
 beyond the competence of public opinion. 
 
 From another standpoint, public opinion is not allowed 
 to form itself freely, without bias or misbalanced informa- 
 tion. The Federal Trade Commission gave publicity to its 
 
484 Public Control 
 
 findings about the profits of the meat packers, hoping that 
 public opinion would eliminate profiteering. The meat 
 packers countered by running expensive advertising in the 
 newspapers and spreading broadcast pamphlets to inform 
 the public that their profit amounted only to a small frac- 
 tion of one cent out of every dollar of sales. As a result, 
 the publicity of the Federal Trade Commission was neu- 
 tralized and public opinion was confused and inefEective. 
 Business concerns or labor organizations which have in- 
 terests at stake conceive it to be their right and duty to use 
 every effort to shape public opinion in the direction which 
 they desire. Hence there has developed the modern art of 
 propaganda. People who once doubted the power of propa- 
 ganda had those doubts removed during the war by the 
 obvious effects of war propaganda. Since the war, nearly 
 every large corporation has a publicity ofiieial whose duty 
 it is to spread broadcast information of a nature to win the 
 good will of the public ; and labor organizations from time 
 to time have announced the appropriation of huge sums to 
 be devoted to arousing a sympathetic public opinion. 
 Publicity in such cases is a refined name for propaganda. 
 The public stands between a cross-fire of propaganda, and 
 it would be amazing if the perfectly human public did not 
 reflect this situation in its opinion on important matters. 
 Propaganda takes advantage of every known device of irra- 
 tional appeal, of unconscious suggestion, of instinct excita- 
 tion, and the value of public opinion as a help in settling 
 baffling problems has to be discounted to the extent that 
 propaganda is misleading. 
 
 Public opinion as an arbiter of disputes between labor 
 and capital is subject to aU these limitations in degrees 
 which vary from case to case. Doubtless in most labor 
 disputes the superior power of propaganda lies with em- 
 ployers. Often employers carry large advertisements in 
 the daily press during a time of strike, to arouse public 
 opinion in their behalf. More important than this, the 
 whole social philosophy and economic background of newe- 
 paper managers and editors tends to make them uncon- 
 sciously the allies in sympathy and reasoning with em- 
 
Public Control 485 
 
 ployers and naturally their headlines and editorials tend to 
 reflect their fundamental and unconscious bias. Charges 
 are often made that newspapers are intimidated by busi- 
 ness men who patronize their advertising' columns into pub- 
 lishing only news favorable to their interests, but such 
 charges are rarely proved by concrete evidence. Beyond 
 these considerations lies the fact that in the very nature of 
 public psychology the primary concern of the public is un- 
 interrupted operation of business. The public wants peace 
 and quiet, order and smoothness. The public as a rule 
 would rather have industrial peace at almost any price 
 than arouse itself to a study of troublesome conditions and 
 to a careful act of industrial reconstruction. The public 
 wants to be let alone ; hence it is ordinarily the ally of the 
 status quo in industry. Labor comes with the sword and 
 attacks the status quo. Most labor demands are for a 
 change. Labor is on the aggressive and just as in interna- 
 tional warfare the nation which starts the trouble alienates 
 the sympathy of neutrals, so ia industrial disputes, the 
 group which starts the dispute and takes the initiative 
 tends to alienate the sympathy of neutral public opinion. 
 Neutral opinion usually sympathizes with whomever is on 
 the defensive and turns against whomever is on the offen- 
 sive. In most industrial disputes, capital is on the defen- 
 sive and labor on the offensive. It results therefore that 
 the weight of public opinion tends to the maintenance of 
 things as they are. It is marked more by a leaning toward 
 habit, custom and inertia than toward newness of thinking, 
 alteration of conditions, and change of policy. From 
 labor's standpoint, the public wants peace more than jus- 
 tice, and industrial quiet more than the active righting of 
 industrial wrongs. These limits to the value of public 
 opinion in industrial disputes need to be recognized when 
 opinion is assigned the role of arbiter between labor and 
 capital. 
 
 This account of the ease should not be allowed to belittle 
 unduly the true importance of public opinion in the role 
 which it is competent to play. The public is the injured 
 party in industrial struggles and its determination to pro- 
 
486 Public Control 
 
 tect itself from unjust interruption of business service de- 
 serves right of way. The ideas in the mind of the common 
 man deserve deep respect, and there is no intention here to 
 repudiate public opinion as a useful force in the control of 
 modern business. But the limits of public opinion need to 
 be taken into account ; its natural lethargy and inertia rec- 
 ognized; its vulnerability to the skilled presentation of 
 propaganda understood; and its unconscious social and 
 economic bias properly measured. Public opinion on eco- 
 nomic issues needs constant education and leadership, 
 needs to be aroused by responsible authorities and informed 
 by agencies which are interested in true publicity rather 
 than mere propaganda. The estimate of public opinion 
 by Viscount James Bryee in his work on Modern Democ- 
 racies states the matter in admirable proportions: "The 
 value of public opinion depends on the extent to which it 
 is created by that small number of thinking men who pos- 
 sess knowledge and the gift of initiative, and on the extent 
 to which the larger body, who have no initiative but a 
 shrewd judgment, co-operate in diffusing sound and tem- 
 perate views through the community, influencing that still 
 larger mass who, deficient in knowledge and in active in- 
 terest, follow the lead given to them. . . . Two dangers 
 threaten ... all modern democracies. One is the ten- 
 dency to allow self-interest to grasp the machinery of gov- 
 ernment and turn that machinery to its ignoble ends. The 
 other is the irresponsible power wielded by those who sup- 
 ply the people with the materials they need for judging 
 men and measures. That dissemination by the printed 
 word of untruths and fallacies and incitements to violence 
 which we have learned to call propaganda has become a 
 more potent influence among the masses in large countries 
 than the demagogue ever was in the small peoples of former 
 days. To combat these dangers more insight and sym- 
 pathy, as well as more energy and patriotism, are needed 
 than the so-called upper and educated classes have hitherto 
 displayed. ' '^ 
 
 1 Pp. 456-457, 459-460. See Chapters XV and LXVII. 
 
CHAPTEE XII 
 
 ECONOMIC RADICALISM 
 
 There exists in every economic organization a group of 
 people who, because of certain characteristics which are 
 more or less common to them, come to be looked upon by the 
 rest of the economic organization as "radicals." Some of 
 the most noticeable characteristics of the members of rad- 
 ical groups may be outlined briefly as follows: (1) The 
 evils and faults of society look bigger to them than to the 
 average person; wrongs tower into outrages, economic de- 
 fects cry out with indecencies, and the troubles and wants 
 of the less fortunate classes of society loom up into atro- 
 cious evils and glaring crimes against humanity. (2) 
 Kadicals as a rule are more impatient for correction of 
 economic faults than the average person. Delay is in their 
 eyes criminal procrastination, and the faults of society re- 
 quire quick and effective action. (3) Eadicals as a group 
 place great stress upon the right of freedom of thought, 
 freedom of the press, freedom of speech, and freedom of 
 agitation. The vocabulary of radicalism emphasizes and 
 re-emphasizes the word freedom from first to last, — a per- 
 fectly natural rationalization of their burning desire to be 
 immune from restraint in preaching and spreading the 
 doctrines of radicalism. (4) Radicals demand changes 
 which are more drastic and overhauling than appeal to the 
 ordinary man. They look upon mild reforms and ordinary 
 reconstruction as mere patchwork; what they want is a 
 transformation of society, a remaking of fundamentals, a 
 complete remodeling of economic structure. (5) Radicals 
 give every appearance of feelings of bitterness and hate 
 toward classes who stand in their way. They dwell upon 
 pictures of the class war, and the class struggle, and antici- 
 pate the destruction of a class of oppressors. For the mass 
 
 487 
 
488 Economic Badicalism 
 
 of people, for the labor groups especially, they evince 
 genuine love and sympathy, and this is all the stronger 
 reason why they show hatred of oppressors. (6) They 
 look forward to an organization of economic society in 
 which group action shall predominate, and collective and 
 co-operative institutions shall supersede private business. 
 Political groups and non-political co-operative groups com- 
 pose the anticipated structure of their rebuilt economic 
 society. (7) Radicals place great faith in the willingness 
 of the individual under the radical regime to subordinate 
 self-motives to social motives, and to abandon desires for 
 selfish acquisition or aggrandizement in order to make way 
 for motives of public service and the common good. It is 
 foretold that under the radical regime public-spiritedness 
 will be paramount. 
 
 These characteristics of radicals naturally set off the 
 people who hold them as unique and queer, and as dif- 
 ferent and dangerous. Some people feel that the only ade- 
 quate treatment for such specimens of humanity is to jail 
 them, lynch them, shoot them, or deport them. There come 
 from time to time waves of popular feeling when this atti- 
 tude takes possession of nearly the whole of society. Such 
 an outburst of public feeling came during the years imme- 
 diately following the World War. Even during these waves 
 of feeling, however, there are certain groups which take 
 the stand that radical doctrines are after all not harmful 
 if they are treated intelligently, and that if radicalism is 
 empty and has no basis in fact, it will die a natural death, 
 or will draw an insignificant band of followers, while 
 if it has any basis in fact, society can quietly and in an 
 orderly manner correct the wrongs, and thereby draw the 
 sting out of radicalism. In ordinary times, the group of 
 people who act upon this interpretation of the radical 
 movement are usually the predominant group. 
 
 There are distinguishable shades or degrees of radical- 
 ism. Some are moderate and patient, and although they 
 believe in drastic changes, they are willing to take time in 
 reaching them. Economic evolution is their principle of 
 action. Others speak of evolutionary revolution, indicating 
 
Economic Radicalism 489 
 
 that they want revolutionary changes in economic struc- 
 ture, and although they will proceed by law and order to 
 secure the changes, yet at the same time they will hurry up 
 the process of evolution, and speed the day of drastic trans- 
 formation with all their might and main. Others plan for 
 a great upheaval, for a bloodless revolution, for the seizure 
 of all things by the emancipated classes and the surrender 
 of the oppressors. And stiU others deliberately calculate 
 on force and violence as the means of overthrow of the 
 capitalist power and the rule of the working classes every- 
 where. 
 
 Radicalism has not merely its various shades and degrees, 
 but also its various parties, or schools of thought. Radical- 
 ism is about synonymous to most people with socialism, 
 but socialism and radicalism have so many divisions and 
 parties that it is difficult to give the common essence of 
 them all. The case is somewhat as in religion, where a 
 great number of denominations, factions and groups ap- 
 pear, and the interpretation of religion made by each is 
 different from that made by any other. Hence, it is more 
 illuminating than a definition to state that all branches of 
 radicalism partake in some shade and degree of the main 
 characteristics of radicalism which were drawn up at the 
 beginning of this section. Some of the main branches and 
 their main individual peculiarities will be listed below. 
 
 1. State socialism looks toward state ownership and oper- 
 ation of the main industries of the country by a political 
 government which has eliminated the capitalist classes from 
 power. The German experiments in state ownership and 
 operation before the World War were state capitalism 
 rather than state socialism in the strict sense of the term. 
 State capitalism is often considered by socialists as a step- 
 ping-stone toward state socialism. It is state socialism 
 which is dominant in the American Socialist Party. The 
 Non-Partisan League of North Dakota exhibited the initial 
 stages of state socialism, with state-owned grain elevators, 
 state banks, and the like.^ 
 
 1 Its leading officers were recalled by vote of the state electorate 
 in the fall of 1921. 
 
490 Economic Radicalism 
 
 2. Guild socialism proposes a dual organization of pol- 
 itics and industry, under which each branch of industry 
 would govern its own productive activity through the or- 
 ganization of its workers, while co-ordination of the various 
 branches of industry would be accomplished through the 
 control of the democratic state. The workers would elect 
 committees and councils to assume the leadership in pro- 
 duction, and each branch of industry would thus put the 
 control and operation of its own production in the hands 
 of its workers. The state, representing more particularly 
 consumers, would be a mediating and harmonizing agency, 
 to effect proper adjustments between the several producers' 
 organizations, and to protect the interests of society as a 
 whole. The proposed Plumb plan for operation of the 
 American railroads comes the nearest to the principles 
 of Guild socialism of any project that is well known to 
 this country, but the main stronghold of Guild socialism 
 is among certain influential intellectual groups of Great 
 Britain. 
 
 3. Marxian Socialism refers to socialistic schemes based 
 upon the doctrines of a German economist of the nine- 
 teenth century, Karl Marx. The essence of Marx's social- 
 istic principles was that the chief forces in the shaping of 
 economic and social policies are economic and materialistic 
 forces. Economic forces would in the long run be the 
 undoing of capitalism itself, for concentration in industry 
 would steadily grow greater and greater, and this would 
 ever more sharply divide workers from capitalists. A class 
 feeling would grow sharper and sharper, the greediness of 
 the big capitalists would bring increasing misery to the 
 workers, and the class war would eventuate. In the class 
 war the workers would unite and strip the capitalist ex- 
 ploiters of their property and decree that land and capital 
 should be owned in common. 
 
 4. Parliamentary socialism refers to socialism which 
 aspires to gradual progress by securing the passage of re- 
 form laws through parliaments, congresses, and legisla- 
 tures. The Fabian socialists of England are the prominent 
 representatives of this type of socialism, although almost 
 
Economic Badicalism 491 
 
 every type of socialism contains some degree of parliamen- 
 tary tactics. 
 
 5. Syndicalism is a branch of socialism -whicli exalts 
 the organization of the producers in each line of industry 
 as the supreme form of economic institution. Instead of 
 using parliamentary tactics as a means to attaining power, 
 syndicalists would use trade union tactics. Syndicalists 
 believe in using trade unions as agencies of direct action 
 by industrial methods. Direct action includes sabotage, 
 i.e., spoiling machinery or product as a means of revenge 
 upon employers; boycotts and labels; and most important 
 of all, strikes. The day is looked forward to when the 
 workers in one big union will declare the General Strike 
 against the whole capitalist structure, and with the over- 
 turn of capitalism will win control of all industry. The 
 center of syndicalism is in French labor circles, but a 
 group of American syndicalists have sprung up inde- 
 pendently, under the title of the Industrial Workers of the 
 World. Their strength as a direct organization dwindled 
 greatly in America during and following the war, but men 
 imbued with their doctrines penetrated the organizations 
 of ordinary trade unions in a great many cases, although 
 the extent of this penetration is practically impossible to 
 estimate with any degree of accuracy. 
 
 6. Communism is a form of socialism which pools the 
 earnings and ownings of people, and divides the common 
 fund on some such basis as, for example, to each according 
 to his needs. 
 
 7. The Soviet is the name given to the form of political 
 machinery wliich has been established in the Eussian 
 socialistic experiment. The socialism which has been tried 
 out in Russia has been a peculiar combination of some of 
 the main principles of Karl Marx, of communism among 
 peasants and workers, of opportunistic tactics to meet mil- 
 itary and industrial crises, and of the dictatorship of a 
 small minority of the proletariat over the bulk of the pop- 
 ulation. Bolshevism is the creed of the political party 
 which is in power, and has the same relation to the Soviet 
 as the political party in power in a democratic state has 
 
492 Economic Radicalism 
 
 to the general political organization of democracy. The 
 effort to install communism proved incompatible "with the 
 human nature of the Russian peasants and workmen, and 
 the leaders of the Bolshevist party have given up the 
 attempt to establish communism as a part of their social- 
 istic undertaking. They have returned to a mixture of 
 government operation of some enterprises, of government 
 control of others, of co-operative producers' societies, and 
 of leasing of industries to individuals to be conducted as 
 under capitalism by private initiative and ability. The 
 Russian experiment has been marked by periods of violence 
 and bloodshed which have outlawed it in the sympathies 
 of the onlooking world, and its administrative inefficiencies 
 and economic demoralization have alienated the public 
 opinion of all democratic countries. 
 
 Economic Analysis of Socialistic Proposals 
 
 It should be realized that radicalism and socialism are 
 problems that call for painstaking scientific analysis, rather 
 than mere emotional excitement and impassioned vituper- 
 ation. Large numbers of people are accustomed to dwell 
 upon these particular problems with a great deal of mental 
 heat, but very little mental light. Nothing is more common 
 than for people who are too lazy to think to condemn all 
 proposals for advance and improvement as radical, as if 
 blindly placing that label upon a vaguely conceived project 
 were the end of the whole matter. A study of economics 
 ought above all things else to teach a person to discriminate 
 between proposed changes on their merits, and to be im- 
 mune from the capricious tendency of many people to 
 brand every project as "red" which they do not feel 
 inclined to think about. Vehement denunciation is not a 
 substitute for intelligent analysis of radical proposals. 
 
 The analysis of socialistic proposals may be divided into 
 two main parts, institutional and psychological. One basic 
 institutional difficulty in all socialistic proposals is the diffi- 
 culty of preserving economic efficiency under the enormous 
 administrative machinery of the socialistic organization. 
 In previous pages attention was given to the question of 
 
Economic Radicalism 4931 
 
 the most efficient size of business combinations in various 
 lines of industry and commerce. It was observed that ia 
 nearly all branches of economic activity there is a limit to 
 the size of business unit which can attain maximum effi- 
 ciency. This limit exists even in lines of industry where 
 standardized mechanical processes predominate, but it is 
 especially narrow in lines of industry where the human 
 element predominates. Every increase in size beyond the 
 point of maximum efficiency results in diminishing effi- 
 ciency. The law of diminishing returns operates in spite 
 of all that leaders of great genius can do, and after a cer- 
 tain point of expansion is reached, the task of organizing 
 the personnel of big enterprises, and of stimulating ade- 
 quate incentives and motives to efficiency and exertion 
 becomes too great. Socialistic proposals usually ignore 
 this basic economic difficulty, which is established in the 
 very nature of modern technical industry and modem 
 administration of large groups of workers; and optimisti- 
 cally take it for granted that the socialistic administration 
 of industry, which would involve economic consolidation 
 and concentration far beyond anything yet known in pri- 
 vate business concentration, would be immune from the 
 difficulties of overwhelming size. 
 
 A second institutional difficulty under socialistic projects 
 is the difficulty of economic discipline. Under almost every 
 form of political administration yet experimented with, 
 the spirit of the political agents has made political admin- 
 istration a byword for indifference, slacking, and the desire 
 to get something for nothing. No form of discipline has 
 proved workable in political large scale organization which 
 would secure the same attention to duty and performance 
 of responsibility as is attainable under the moderate sized 
 private business. The capacity to hold men to their tasks, 
 to bend their energies effectively toward productive work, 
 and to fasten their motives and instincts and thoughts 
 adequately upon the handling of their jobs is exercised 
 none too satisfactorily in the moderate sized private bus- 
 iness, where the size of the business permits direct super- 
 vision of labor and where the unyielding exactions of wor^ 
 
494 Economic Badiccdism 
 
 done for pay received can be enforced. Referring partic- 
 ularly to Guild socialism, but using words which apply 
 equally to all socialistic programs, Alfred Marshall aptly 
 writes, "In the present economic system, discipline is en- 
 forced in great measure automatically 'by an unseen 
 hand.' It is often rather harsh; and its severity calls for 
 frequent mitigation of human effort. But if automatic 
 discipline is removed, an all-pervading authority must be 
 invoked to cheek abuse in small matters as well as in large. 
 Unless Guild organization develops some notion, of which 
 it at present seems to have made no forecast, it may prob- 
 ably drift into chaos, from which relief can be found only 
 in a military despotism."^ "With the abandonment of the 
 traditions, customs and habits which now attend upon the 
 workers ' attitude toward dismissal, promotion, and efficiency, 
 a new technique would have to be created, and a new 
 habituation of labor psychology developed, and none of 
 the writings of socialists up to date give anything like 
 satisfactory assurance that the transformation of institu- 
 tional discipline would avoid the chaos of which Marshall 
 speaks. 
 
 A third institutional difficulty in socialistic enterprise 
 has to do with the problems of leadership. The history of 
 politics indicates that the qualities of character which 
 make a man popular with the mass of voters are not always 
 the same qualities of character which make a man an effi- 
 cient executive and administrator. The glad hand, genial- 
 ity, the broad smile, spectacular achievement, pull with 
 the political machine, and similar qualities play a great 
 part in the popular election of mayors, legislators, gover- 
 nors, and even of presidents. The expert, the technical 
 specialist, the qualified executive, the trained administrator 
 finds it next to impossible to compete in elections with the 
 "man of the people." Private business has the virtue of 
 bringing men of great executive ability into positions of 
 responsibility and power, and there is no assurance that 
 the socialist democracy of economic control and operation 
 would secure the same qualifications in leadership. Human 
 I "Industry and Trade," p. 600, 
 
Economic Radicalism 495 
 
 nature in politics is not such, as to make one hopeful of 
 the economic leadership of the socialistic order.^ 
 
 A fourth institutional difficulty concerns itself with the 
 apathy of the average man. In their enthusiasm the 
 socialists assume that the average man is on his tiptoes, 
 straining at the leash, ready to plunge into the responsi- 
 bilities of socialistic economic democracy. They picture 
 the common worker as a human being who will spring into 
 activity as soon as socialistic democracy is declared, and 
 who will be on duty at all times, alert and eager, taking 
 a man's part in the conduct of economic affairs. But the 
 average worker is an indifferent individual, and it is exceed- 
 ingly difficult to maintain for any length of time his aroused 
 interest in political and economic problems. Interest and 
 action require exertion of mind and body, and the ordinary 
 individual, after the first snatch of novelty is past, falls 
 into an easy-going inertia. The direct primary has been 
 a disappointment to most of its sponsors because voters 
 proved too indifferent to bother going to the polls to use 
 it. The ordinary town caucus is attended by only a hand- 
 ful of men, and delegates to a nominating convention enjoy 
 the trip and are proud of the experience, but are relieved 
 to have the pain of thinking out a compromise candidate 
 left to a handful of inside politicians. Votes on vital eco- 
 nomic questions under the socialistic plan would surely be 
 cast by an active minority ; elections of leaders would bring 
 tedium and boredom ; attendance at meetings would become 
 a routine aggravation ; and the tactics of controlling polit- 
 ical interests in the economic commonwealth would perme- 
 ate the system. The present intellectual equipment and 
 training of millions of workers, their lack of experience 
 in responsible economic citizenship, their unsteady interest 
 in vital economic and political issues make a dubious pros- 
 pect of the economic society of socialism. The load of 
 intelligent responsibility which socialistic programs en- 
 trust to the masses of workers is a bad institutional ar- 
 rangement. 
 
 1 See Graham Wallas, "Human Nature in Polities." 
 
496 Economic Badicalism 
 
 The paramount psychological difficulty of the socialistic 
 commonwealth is one of incentives and motives. The mo- 
 tives which could be counted upon in the average worker 
 are in doubt. Socialists contend that the feeling of being 
 a part of the co-operative commonwealth would stimulate 
 loyalty and workmanship, and that by placing the premium 
 upon social unity rather than individual aggrandizement, 
 the selfish private motives of capitalism would drop out 
 of use, and public-spiritedness would be realized. Such 
 an analysis of human nature cannot be looked upon as 
 other than a convenient rationalization inspired by the 
 hopes and dreams of the analyst. It is the conclusion of 
 buoyant optimism rather than that of careful observation 
 of human psychology. The mating over of motives and 
 the changing of forms of instinct expression is a gradual 
 process at the best, and involves the slow accumulation of 
 folk- ways, customs, traditions, habits and institutions. The 
 usual socialist doctrine takes the quick adoption of new 
 motives and incentives for granted, but this is the very 
 difficulty which lies at the heart of the socialist issue. The 
 motives of men of rare ability, of the potential leaders of 
 the economic order come under the same consideration as 
 the motives of the rank and file. The gradual accommoda- 
 tion of leaders under the capitalist system to the social 
 requirements of the last decade or two has taken the form 
 of some degree of adoption of service motives and of publie- 
 mindedness, but there is scant evidence for the hope that 
 the sweeping abolition of motives of private acquisition, 
 would result in the facile installation of motives of public 
 achievement and public service. 
 
 The easy optimism of socialistic psychology is quickly 
 apparent in the following utterance by Bertrand Russell: 
 "The world that we must seek is a world in which the 
 creative spirit is alive, in which life is an adventure full 
 of joy and hope, based rather upon the impulse to con- 
 struct than upon the desire to retain what we possess or 
 to seize what is possessed by others. It must be a world 
 in which affection has free play, in which love is purged 
 of the instinct for domination, in which cruelty and envy 
 
Economic Radicalism, 497 
 
 have been dispelled by happiness and the unfettered devel- 
 opment of all the instincts that buUd up life and fill it 
 with mental delights. Such a world is possible; it waits 
 only for men to wish to create it. ' '^ 
 
 The socialistic institutions that are proposed place such 
 a heavy burden of responsibility upon the human nature 
 of the average man as grossly to overstrain his mental 
 capacities. The account of inequalities of intelligence and 
 of all instinctive equipment, which was given in previous 
 pages, indicates the incapacity of the average man for 
 the heavy responsibilities of the socialistic state. The 
 further assumption that the bulk of men will want to 
 shoulder their responsibilities, that they will be purged of 
 pernicious instinctive tendencies and filled with idealistic 
 and creative tendencies overrates human nature. Just as 
 many classes of reform underrate the strain that can be put 
 upon human nature, so socialistic projects overrate the 
 strain that human nature will bear. It may be that some 
 form of economic democracy can be developed which will 
 adapt the institutions of industry to the strain which 
 human nature will bear efficiently. Such an adaptation 
 of men to institutions and of institutions to men is the 
 guiding principle of economic democracy and an analysis 
 of the principle wiU be undertaken in the final chapter of 
 this volume. 
 
 In this whole analysis of socialistic proposals it would 
 be blind prejudice to deny that a goodly number of bril- 
 liant minds are to be found among the leaders of radical 
 thought. Some people who are not anxious to be strictly 
 honest in their thinking sweep aside all radical thinkers 
 as being in the category of intellectual inferiority. But 
 no matter how much one may disagree with the conclusions 
 of thinkers of opposite opinions, nothing is gained by mak- 
 ing light of their incisive comments on the workings of 
 the industrial order or of their painstaking research and 
 investigation. Brilliance of intellect is not missing in 
 the radical groups. As a matter of fact, difference of opin- 
 ion becomes sharp only when there is some degree of bril- 
 1 Bertrand Russell, "Proposed Roads to Freedom," p. 212. 
 
498 Economic Radicalism 
 
 liant observation and inference on both sides. Socialism 
 would not have aroused such bitter and desperate denun- 
 ciation had not a number of its generalizations disclosed 
 vulnerable sore spots in the existing industrial order. 
 Those people who want most to smite socialism usually do 
 the least, for the simple reason that their emotional reac- 
 tions are so strong that they lose the power to have respect 
 for integrity of mind and incisive comment wherever they 
 may be found. Vehement opposition is not, as a rule, intel- 
 ligent opposition. To give due regard to the mental power 
 of socialistic thinkers is not to take the stand that we must 
 admit they are right just because they may be mentally 
 brilliant. The whole force of these remarks is that effective 
 analysis of radical programs must always endeavor to 
 estimate the weight of an idea at its actual value. 
 
CHAPTER XIII 
 
 ECONOMIC DEMOCKACY 
 
 Economic democracy is a comprehensive term and varied 
 definitions are given to it from time to time. The two 
 most common versions of the term refer to democratic 
 control over industry exercised through the medium of the 
 political government, and to democratic control exercised 
 through the medium of some special form of organization 
 within industry itself. 
 
 The first version of economic democracy would make the 
 term cover practically all of the matters which have been 
 already discussed under the section on Public Control. 
 The American Government is a democracy, and when dem- 
 ocratic government controls and regulates economic affairs, 
 the process is certainly in the nature of economic democ- 
 racy. This form of economic democracy would include 
 government ownership and operation of industries, and 
 would, for instance, include the Post Office or the Panama 
 Canal as typical illustrations of economic democracy. Cer- 
 tain observers are disposed to term such instances of 
 government authority as state socialism, whereas others 
 are disposed to term them state capitalism. 
 
 The dispute over terms is non-essential. The inclusion 
 of public control or of government ownership and opera- 
 tion under economic democracy may be allowed as legit- 
 imate. It is not intended to analyze this form of economic 
 democracy at this point, for the simple reason that most 
 of what has been said under Public Control and under 
 Radicalism applies to economic democracy of this type. 
 The mechanism of public control provides for a moderate 
 assertion of democratic power through the agencies of the 
 State, and the same mechanism expanded provides for the 
 assertion of democratic power which establishes state own- 
 
 499 
 
500 Economic Democracy 
 
 ership and operation. Moreover, although the form of 
 democracy under a capitalistic state and a socialistic state 
 would differ profoundly; nevertheless, in either case, state 
 ownership and operation of industry is subject to the same 
 institutional and psychological difficulties as were discussed 
 under Radicalism. Consequently, the discussion contained 
 in the foregoing sections on Economic Adaptation have a 
 direct bearing on the problems of economic democracy 
 attained through the framework of political democracy. 
 
 The discussion of this section has to do primarily with 
 the second form of economic democracy, namely, that at- 
 tained through the direct organization of industry itself 
 on a democratic principle. Democracy is a loosely used 
 watch word to cover a host of economic programs, and it 
 is the general impression that as soon as a program of 
 action has been labelled "Democracy," its success is pre- 
 destined. Not a few economic thinkers voice the opinion 
 that political democracy is already won in most modem 
 countries and that economic democracy is the next great 
 human step forward. Assuming that political democracy 
 is practically an unqualified success, they assume that to 
 inaugurate the same structure of government for industry 
 will assure similar happy results in that department of 
 modern life. Such an attitude is uncritically optimistic. 
 It trusts credulously in some obscure magic of "Democ- 
 racy" to set industry at rights, and grossly overrates the 
 power of a form of organization to escape from or to over- 
 come the grave defects of human nature in the people who 
 live within the organization and through whom it func- 
 tions. As a preparation, therefore, for a careful and crit- 
 ical analysis of economic democracy, it is desirable to have 
 a correct view of the present status of political democracy. 
 Probably the best account for this purpose is that given 
 by James Bryce in his work on Modern Democracies. 
 The general scope and portent of his conclusions are ad- 
 mirably summarized in the following quotation: "I may 
 here . . . sum up in a few propositions certain broad con- 
 clusions which may be drawn from a review of modem 
 popular governments. They are stated subject to certain 
 
Economic Democracy 501 
 
 exceptions, already mentioned, in the ease of particular 
 countries. . . . 
 
 ' ' Democracy has belied the prophesies both of its friends 
 and of its enemies. It has failed to give some benefits 
 which the former expected, it has escaped some of the evils 
 which the latter feared. If the optimistic overvalued its 
 moral influence, the pessimists undervalued its practical 
 aptitudes. It has reproduced most of the evils which have 
 belonged to other forms of government, though in different 
 forms, and the few it has added are less serious than 
 those evils of the older governments which it has escaped. 
 
 "I. It has maintained public order while securing the 
 liberty of the individual citizen. 
 
 "II. It has given a civil administration as efficient as 
 other forms of government have provided. 
 
 "III. Its legislation has been more generally directed 
 to the welfare of the poorer classes than has been that of 
 other governments. 
 
 ' ' IV. It has not been inconstant or ungrateful. 
 
 "V. It has not weai;ened patriotism or courage. 
 
 ' ' VI. It has been often wasteful and usually extravagant. 
 
 "VII. It has not produced general contentment in 
 each nation. 
 
 "VIII. It has done little to improve international rela- 
 tions and insure peace, has not diminshed class selfishness 
 (witness Australia and New Zealand), has not fostered 
 a cosmopolitan humanitarianism nor mitigated the dislike 
 of men of a different color. 
 
 "IX. It has not extinguished corruption and the malign 
 influences wealth can exert upon government. 
 
 "X. It has not removed the fear of revolutions. 
 
 "XI. It has not enlisted in the service of the State a 
 sufficient number of the most honest and capable citizens. 
 
 "XII. Nevertheless it has, taken all in all, given better 
 practical results than either the Rule of One Man or the 
 Rule of a Class, for it has at least extinguished many of 
 the evils by which they were defaced. . . . 
 
 "In 1914 there were signs of decline in some countries 
 where decline was hardly to have been expected, and of 
 
502 Economic Democracy 
 
 improvement in other countries, but nothing to indicate 
 in any country either a wish to abandon democracy or the 
 slightest prospect that anything would be gained thereby. 
 Disappointment is expressed, complaints are made, but 
 no permanent substitute has been suggested. . . . Within 
 the century and a half of its existence in the modem world 
 free government has passed through many phases, and seems 
 now to stand like the traveller who, on the verge of a 
 great forest, sees many paths diverging into its recesses 
 and knows not whither one or other will lead him. ' '^ 
 
 The two most important forms of economic democracy 
 which command deep interest at the present time are works 
 councils and labor unions. The works councils are organ- 
 izations of workers which are formed, usually, at the 
 initiative of employers and in which powers are granted 
 to laborers by the voluntary action of employers. Labor 
 unions, on the other hand_, are organizations of workers 
 which are formed at the initiative of workers themselves 
 and in which powers are won usually as grudging conces- 
 sions from employers. 
 
 Works Councils 
 
 The essential structure of the dominant types of works 
 council is fairly simple. The workers in a plant elect 
 representatives who confer with representatives of the 
 management. Nominating and balloting procedure takes 
 place in much the same way as in a political organization. 
 The representatives who are elected organize as a body, 
 with a chairman and other ofScers, and establish the nec- 
 essary committees and subcommittees to deal with special 
 problems. The workers' representatives constitute the 
 works council or shop committee and meet the representa- 
 tives of the management in joint conference for the dis- 
 cussion of industrial problems for the adjustment of griev- 
 ances, and for general collective bargaining. 
 
 These works councils confine their attention to those 
 phases of industrial problems which directly affect the 
 welfare of labor. Such problems include, for the general 
 iBryce, "Modern Democracies," Vol. II, pp. 562-563, 597-598. 
 
Economic Democracy 503 
 
 run of plants, hours of labor, wage scales, methods of pay- 
 ment and piece rates. A large proportion, but not all, 
 works councils deal with social and recreational activities, 
 mutual benefit, charity and relief, welfare work, housing, 
 co-operative stores, medical care, insurance, education, 
 Americanization, rest rooms, lunch rooms, prizes, work- 
 ing conditions, accident prevention, factory sanitation, and 
 hygiene of the workers. A smaller proportion of the works 
 councils deal with shop discipline, review of discharge, 
 promotion, hiring, and transfer. Only a few councils deal 
 with the technical improvement of ^production or with the 
 problems of production management. None are allowed 
 to concern themselves with those phases of management 
 centering around finance, capitalization, or matters which 
 are not directly of importance in the life of the worker. 
 
 The power and authority of works councils vary from 
 company to company. In some cases, if workers and man- 
 agement fail to agree on an issue, it is referred to arbitra- 
 tion, but in most cases it is referred to high officials of 
 the company or to the board of directors. Eepresentatives 
 of both workers and management vote on questions and in 
 the overwhelming bulk of cases it is assumed, as a matter 
 of course, that the voting power is equal. This assumption 
 gives rise to the theory that works councils give workers a 
 share in the management. In all ordinary events, the 
 workers do participate in the management of the affairs 
 which affect them. It should not, however, be overloo^ked 
 that with most plans, in the last analysis the company has 
 ultimate authority in its own hands. Boards of directors 
 do not surrender their ultimate authority in the event of 
 a showdown, but in the everyday administration of works 
 councils, a spirit of give and take and of sharing in man- 
 agement is maintained, and the ultimate location of author- 
 ity is ignored as much as possible. In fact the success of 
 collective dealing through works councils depends upon 
 the thoroughness with which all questions as to the relative 
 power of the two parties, labor and management, can be 
 relegated to the background. Collective bargaining through 
 works councils succeeds only in so far as fairness is sub- 
 
504 Economic Democracy 
 
 stituted for force in industrial relations. If the manage- 
 ment convinces labor at the outset that every principle 
 and every detail of the council plan are treated on the part 
 of the company with perfect justice, cajidor and honesty, 
 the plan is in a fair way toward success. But if the man- 
 agement hedges, misrepresents, or threatens, the plan is 
 almost sure to collapse.^ 
 
 Obviously, therefore, the installation of the machinery 
 of industrial democracy merely creates an opportunity for 
 the spirit of the management to evoke a favorable response 
 from labor. The mechanism of organization itself does not 
 insure at all that industrial democracy will be attained. 
 The importance of a good plan of industrial democracy 
 does not consist in any power of the plan as a plan to secure 
 industrial democracy; the importance of the plan consists 
 merely in the fact that it provides a channel for the spirit 
 of management to call out the spirit of labor. Of course, 
 it is equally necessary that the spirit of labor shall be 
 honest and fair, and that labor shall genuinely respond to 
 the responsibilities and powers conferred upon it by the 
 works council plan. But in most plans of this sort the 
 dynamic genius and inspiration behind the plans comes 
 from management, and unless management firmly takes the 
 initiative in establishing a basis of confidence and fairness 
 the plan will fail. For instance, the International Har- 
 vester Company has works councils in twenty-four of its 
 plants, and the success of the councils varies considerably 
 over these plants. The degree of success varies, it is found, 
 in direct ratio to the efficiency and spirit of the local man- 
 agement at each plant in applying the system to that par- 
 ticular plant. Moreover, it is necessary to have not merely 
 the local superintendents and executives imbued with the 
 proper attitude and understanding, but also the bosses, 
 sub-bosses and foremen. To this end, many companies have 
 established training schools for bosses and foremen, to ac- 
 quaint them with the purpose of the works council plan, 
 with its technique and with the new spirit which it is 
 
 1 See address by L. W. Wallace, President of Society of Industrial 
 Engineers, Proceedings of 1919. 
 
Economic Democracy 505 
 
 necessary for them to evince if tlie plan is to be a success. 
 Finally, workers themselves have to be educated to under- 
 stand the significance of the democratic policy, and have to 
 receive correct and adequate information about the affairs 
 of the company to allay suspicion and establish confidence. 
 Industrial democracy involves a technical organization, but 
 it also involves, — and this is imperative, — a basic spirit of 
 fairness and justice on the part of both labor and capital. 
 
 Labor Unions 
 
 The structure of labor unions has many variations. 
 Numerous structural types of unionism have developed, 
 and an observation of these types is the most useful means 
 of studying labor union structure. The bulk of labor 
 unions in the United States are of the "craft type," i.e., 
 they are organized on the basis of the occupation or craft 
 of the workers. For each distinct type of occupation there 
 is a distinct trade union organization. These craft unions 
 become federated in city, state, regional and national feder- 
 ations. The federal groupings aim to effect a certain degree 
 of concerted thought and policy, but in fundamental poli- 
 cies and powers each constituent craft national retains 
 its individual sovereignty and right of self-determination. 
 A different and growing type of labor union is organized on 
 the basis of a given industry. The coal miners' unions are 
 the most impressive illustrations of industrial unions, and 
 include in their scope men of all crafts, occupations and 
 trades, and men of all degrees of skill or lack of skill. A 
 minor type of unionism organizes aU the workers of a 
 single geographical division, regardless of crafts or indus- 
 tries, into a single labor union. The craft, federation, in- 
 dustrial, and geographical bases of union organization give 
 rise therefore to the main structural types of labor organi- 
 zation in American industry. 
 
 These structural types provide in various ways for the 
 election of leaders by a popular vote among the members. 
 Local units send delegates to city or district or national or 
 international units. The methods of balloting, the powers 
 of members and of leaders, the administrative mechanism, 
 
506 Economic Democracy 
 
 all show immense variations from industry to industry. 
 The essence of the democratic structure of all types and 
 forms is that the rank and file of unionists have the power 
 to elect officers and thereby to express their opinions on the 
 policies and methods of labor organization. Until recent 
 years the local units of union organization were the domi- 
 nant factors in the labor unions of this country, and they 
 jealously safeguarded their local rights of self-determina- 
 tion in regard to fundamental policies. Eecent years have 
 witnessed a powerful movement toward centralization of 
 union authority and influence in the hands of the national 
 organizations. The weakness of labor in local collective 
 bargaining and its strength in national collective bargain- 
 ing, and the advantages of nationally administered bene- 
 ficiary and strike funds have given this centralizing move- 
 ment a steady impetus. The locals have found it necessary 
 to preserve and augment their industrial power by a policy 
 of uniting on a national scale. Conspicuous forms of con- 
 trol now commonly exercised by national over constituent 
 local organizations are found in the "national regulation 
 of admission requirements, the national control of strikes, 
 and the adoption of national working rules. "^ The center 
 of the brains of the labor union movement and of the real 
 power of leadership exists among the leaders of the na- 
 tional organizations, and the federations of national 
 organizations. 
 
 The source of labor union success is not the type of struc- 
 ture which allows a mass labor election, but is rather the 
 aggressive spirit of the leaders themselves. Labor unionism 
 is still in a militant stage and the militant type of leader 
 tends to come to the front to cope with the challenge. 
 Leaders feel it necessary to be domineering often, to 
 manipulate the rank and file, to ride rough-shod over mass 
 suggestions which obstruct efficiency, and to take action 
 and get results, meantime bringing the rank and file along 
 as best they can. Labor unions can get nowhere in the 
 present industrial struggle by debating society tactics and 
 
 1 G. E. Barnett, Quarterly Journal of Economics, XXVII, pp. 
 455-491, 
 
Economic Dem,ocracy 507 
 
 by constant referendums to find out the will of members. 
 As often as not, members have no will, and even when they 
 do have, it is likely to be misinformed, shortsighted or 
 suicidal. This does not mean that leaders are irrespon- 
 sible individuals, and contemptuous of the rank and file; 
 but it does mean that they face the imperative need for 
 efficiency in dealing with employers and that the condi- 
 tions of efficiency are a concentration of power and initia- 
 tive in the hands of leaders and a willingness on the part 
 of the rank and file to support their leaders as long as their 
 policies get results in terms of better wages, hours and 
 working conditions. Hence, labor union organization is 
 democratic in the sense that a great deal of dictatorial 
 authority rests with officers and leaders in the determina- 
 tion of immediate strategy, and that this authority is sub- 
 ject to the ultimate satisfaction of the rank and file. If the 
 dictatorial and aggressive methods of one leader fail to get 
 results, a new leader will be chosen and wiU be commis- 
 sioned to use his large powers to win the desired results. 
 Successful unionism therefore rests upon successful leader- 
 ship and successful leadership rests upon results in terms 
 of gains to the workers, attained by the aggressive genius 
 of union officials.^ 
 
 In addition to the structural types of unionism, there are 
 certain types which are classified on the basis of the func- 
 tions which they perform, and of the purposes and methods 
 of their activity.^ The dominant type, classified on this 
 basis, is business unionism, so named because the unionists 
 look upon their activities from a business point of view. 
 They devote their energies to practical material gains, ordi- 
 narily through the use of collective bargaining. Their ob- 
 jective is "more, more, more, now." To raise wages, 
 shorten hours, and improve working conditions are tan- 
 gible, direct, positive objectives, and the union organiza- 
 tions of this type conceive the function of unionism to be 
 to attain these objectives in a practical, business-like way. 
 
 1 R. F. Hoxie, "Trade Unionism in the United States," Chapter 
 VII. 
 
 2 Ibid., Chapters II-III. 
 
508 Economic Democracy 
 
 A second type is friendly or uplift unionism, — a type 
 which inclines to be idealistic, philosophical and co-opera- 
 tive. It, too, uses collective bargaining, but mainly for such 
 benevolent purposes as mutual insurance, profit sharing, 
 friendly benefits, welfare work and social and humani- 
 tarian improvement. Most employers who profess to be- 
 lieve in the right of laborers to organize into unions have 
 in mind a unionism of this friendly or uplift type. People 
 who believe in labor unions "as such" contemplate welfare 
 unions whose efforts are directed toward a co-operative 
 humanitarianism rather than toward a militant demand 
 for practical, business-like gains for labor. 
 
 Radical unionism is a third type, and as the name sug- 
 gests, applies to unions professing socialistic or revolu- 
 tionary purposes. The most aggressive unions of this type 
 have been those associated with the Industrial Workers of 
 the World. The I. W. W. was conspicuous before the war, 
 but many of the leaders of the movement were vigorously 
 suppressed or were deported during the war period, and 
 the formal organization of the I. W. W. was greatly weak- 
 ened. Their ideas, however, were carried over in not a few 
 cases to unions of the business type, or of the predatory 
 type, by agitators or leaders who sought to spread their 
 philosophy of unionism by "boring from within." It 
 seems certain that the extent of this kind of penetration of 
 old unions with I. W. W. ideas is considerably exaggerated 
 in the popular mind. 
 
 A form of radical unionism which has more far-reaching 
 significance is contained in such union organizations as the 
 United Mine Workers of America, the Railroad Brother- 
 hoods, and the Amalgamated Garment Workers of Amer- 
 ica. The United Mine Workers are pressing for the 
 nationalization of the mines along a quasi-socialistic direc- 
 tion and the Railroad Brotherhoods, by urging the adop- 
 tion of the Plumb Plan for railroad operation, committed 
 their union organizations to a policy which was essentially 
 in the nature of guild socialism. The purposes of the 
 Amalgamated Garment Workers may be set forth in the 
 following quotation: "An analysis of the strategy of the 
 
'Economic Democracy 509 
 
 new unionism will discover in it two fundamental objec- 
 tives to which all other policies are subordinated. The 
 first is to organize all the workers in the industry; the 
 second is to develop them, through their daily struggles, 
 into a class-conscious labor army, able and ready to assume 
 control of industry. . . . Their whole tendency is in the 
 direction of training the workers for assuming control of 
 production, and of accepting the social and economic re- 
 sponsibility which such control involves."^ To this end, 
 the garment unions look forward to the abolition of the 
 capit-alistic system. Radical unionism has increased in 
 strength in recent years, and particularly so in such basic 
 industries as coal, transportation and clothing. 
 
 A fourth type has been designated predatory unionism. 
 The most recent exposure of predatory unionism has been 
 in the building trades of large cities. In New York City, 
 a notorious labor leader by the name of Brindell exercised 
 dictatorial and unscrupulous powers for the sake of exact- 
 ing fees, bribes and blackmail from both laborers and em- 
 ployers. Such unions hold up all parties to industry by 
 fair means or foul whenever they see an opportunity to 
 reap a selfish gain. In its extreme forms, predatory 
 unionism adopts guerilla tactics, and by ruthless, secret, 
 violent strategy strives to exact the last pound of flesh 
 which the industrial body will bear. 
 
 The great bulk of labor unionism seeks its ends by means 
 of collective bargaining. The nature of collective bargain- 
 ing differs greatly between the ordinary works council and 
 the bulk of labor unions in that the former depends for 
 success upon the voluntary good will of the employer and 
 the spirit of co-operation between labor and capital, 
 whereas the latter depends upon the power of the labor 
 union to win recognition from the employer and upon the 
 relative bargaining might of labor and capital. Most of 
 the success of works councils comes from the fact that 
 employers co-operate with the councils wholeheartedly ; and 
 most of the abuses and excesses of labor unions come from 
 the fact that employers dislike to co-operate with labor 
 
 iBudish and Soule, "The New Unionism," pp. 12, 194-195, 204. 
 
510 ''Economic Democracy 
 
 unions, and usually consent to deal -with them only when 
 forced to do so. Works councils perform their responsi- 
 bilities in an atmosphere of friendly co-operation; labor 
 unions perform their responsibilities in an atmosphere of 
 hostility, suspicion, and threats. 
 
 The consequence is that labor unions are characterized 
 by widespread policies and deeds which are highly objec- 
 tionable from the standpoint of the best interests not merely 
 of employers and the public, but of laborers themselves. 
 The objectionable tactics of organized labor arise largely 
 from the fact that labor unions have to fight every inch of 
 the way for industrial control and have to fight then 'for 
 self-preservation to perpetuate what has been won. Labor 
 resorts to the closed shop in response to basic human in- 
 stincts demanding self-protection, because the open shop 
 has so often meant in actual practice a free opportunity 
 for employers to discriminate against union members and 
 to cripple union organization. Union rules and regulations 
 which restrict production seem aimed oftdn to secure the 
 maximum of pay for the mmimum of work, and in this 
 respect they reciprocate the endeavor of any number of 
 employers to secure the maximum of work from labor for 
 the minimum of pay. If one were to draw up a list of the 
 faults, vices and abuses of the bulk of labor unions and 
 were to trace the causes of each item on the list, he would 
 find them largely in the unhealthy spirit of distrust and 
 antagonism which is widespread in American industry. 
 The penetrating observations of Felix Frankfurter, from 
 experience on President Wilson's Mediation Commission 
 and as chairman of the National War Labor Policies Board, 
 are of sound practical value : ' ' The unions must still fight 
 for their life instead of being a recognized social instru- 
 ment tested by their contributions to the community as a 
 whole. Not until they are generously and frankly recog- 
 nized as having a rightful place in our national life will 
 the leaders of labor have time and energy to give to the 
 solution of the difSeult social and industrial problems with 
 which organized labor should concern itself. ... If the 
 fighting spirit imposed by capital upon labor were with- 
 
Economic Democracy 511 
 
 drawn, then we could proceed to tlie question which this 
 conference raises, namely: How shall we release the ener- 
 gies of the masses of the people who are workers so that 
 our civilization shall not only remove the sores and injus- 
 tices which infest it but shall be something fit and ade- 
 quate for democracy?" 
 
 The deepest difficulties in insuring that labor unions are 
 made over into safe and trustworthy instruments of indus- 
 trial democracy are psychological difficulties. The power- 
 ful instincts in employers of self-assertion, domination and 
 freedom of action are thwarted by the demands of labor 
 unions for group self-assertion in deciding industrial 
 issues. Habits, traditions and customs have constituted a 
 steady psychological influence on the business man to make 
 him feel that there is one and only one way to manage 
 business efficiently and that is to run it as he pleases, free 
 from outside restraint ; labor unions challenge this accumu- 
 lation of precepts and habits in business, and it is inev- 
 itable and natural for the business man to resist the 
 upheaval of those business principles which he has come to 
 believe are axiomatic. But the greatest psychological force 
 in shaping the attitude of the business man toward labor 
 unions is fear. The business man has a right to fear that 
 if he concedes an inch to labor unions they will take a mile. 
 He has no assurance that if he attempts to co-operate vsdth 
 labor in a constructive way he may not find himself soon 
 at the mercy of predatory unionism. It is this universal 
 fear that labor unions will cling to their abuses and faults 
 if employers do freely and frankly admit them to a share 
 of industrial control which primarily accounts for the 
 fighting attitude of hostility and resistance to the tactics 
 of labor unions. These psychological obstacles to the ad- 
 vance of unionism are at the heart of the problem. As a 
 matter of fact, it would doubtless be disastrous for em- 
 ployers generally to turn over full powers to labor unions 
 suddenly. What would happen, however, if employers 
 approached unions in the same manner as the more pro- 
 gressive, of them have approached works councils is not so 
 diaWeaTlicining a cWjeciture. The methbd Of appiroach in 
 
512 Economic Democracy 
 
 that ease is a deliberate and painstaking effort by the em- 
 ployer to establish frank co-operation, to give honest infor- 
 mation about the financial affairs of the company, to 
 educate foremen, bosses and superintendents to perform 
 intelligently their parts under the works council system, 
 and to create mutual confidence by every word and every 
 move. The contrast between the method of approach to 
 works councils and to labor unions is extreme, and the 
 success of the constructive and co-operative method in 
 keeping works councils reasonably free from the abuses 
 frequent in labor unions is a ground for the hope that the 
 same constructive and co-operative method applied to 
 labor unions would go far toward removing those abuses 
 as they now exist in unionism. 
 
 William Howard Taft, joint chairman during the war of 
 the National War Labor Board and since appointed Chief 
 Justice of the United States Supreme Court, has summar- 
 ized the situation in words which express both sound public 
 policy and sound economic principles: "Organization of 
 labor has become a recognized institution in all the civilized 
 countries of the world. It has come to stay; it is full of 
 usefulness and is necessary to the laborer. It shows serious 
 defects at times and in some unions. . . . These are evils 
 that as the unions grow in wise and intelligent leadership 
 we may well hope are being well minimized. . . . Whether 
 we will or not, the group system is here to stay, and every 
 man interested in public affairs must recognize that it has 
 to be dealt with as a condition, to be favored in such a way 
 as to minimize its abuses and to increase its utility."^ 
 
 The foregoing account of the institutional and psycho- 
 logical relations between employers and employees would be 
 incomplete at a most important point if the responsibility 
 of labor unions, especially of their leaders, in the circum- 
 stances were not pointed out. The militant attitude of 
 labor union leaders may be quite natural under the pre- 
 vailing conditions, but there will certainly be no escape 
 from industrial antagonism until unionism accepts a more 
 constructive attitude toward problems of production. 
 
 iD. Bloomfleld, "Problems of Labor," pp. 212-214. 
 
Economic Democracy 513 
 
 Unionism inherits a tradition of aggressiveness and mili- 
 tancy and the tradition is extremely tenacious; but unless 
 the tradition can be altered sufficiently to make a place in 
 trade union principles for a recognition of the basic eco- 
 nomic fact that labor organizations can safely be trusted 
 with power only when they evince a willingness and a 
 capacity to promote, encourage and organize greater pro- 
 ductive efficiency, then labor can scarcely hope for business 
 recognition or public support. The reconstruction of 
 labor union organization and strategy on principles condu- 
 cive to labor efficiency and to maximum production is a 
 sine qua non of evolving sound industrial democracy from 
 present trade union structure. 
 
 In large measure, such a reconstruction of unionism can 
 come only as an act of will on the part of unionists, espe- 
 cially of their leaders. They must make up their minds 
 and exercise their powers of volition before an adequate 
 reconstruction can occur. But the psychological process 
 can scarcely be hoped for if it is to come merely as an act 
 of will. The irrational and blindly instinctive forces which 
 tend to stifle such a deliberate change of mental outlook 
 are enormous, and, it must be admitted, they are likely to 
 prevail under the present state of affairs. Only rarely can 
 men, especially masses of men, rise above their institutional 
 surroundings and deliberately resolve upon a new spirit 
 and a new attitude toward their responsibilities. The level 
 of the behavior of the crowd cannot rise much above the 
 level of its institutional environment. Industrial institu- 
 tions which invoke pernicious human tendencies and which 
 stimulate dangerous expressions of the primary human in- 
 stincts cannot be counteracted by the mere logical or ra- 
 tional powers of the crowd mind. On the other hand, 
 institutional arrangements which help men to a co-opera- 
 tive attitude, to self-control, to constructive effort have the 
 most salutary influences upon the beliefs which they put 
 into action. Hence to invent by gradual experiment and 
 by intelligent trial and error the type of industrial insti- 
 tutions best fitted to help the better and hinder the more 
 pernicious expressions of the great human instinctive 
 
514 Economic Democracy 
 
 energies, is a paramount task for all those who desire to 
 share in hastening the progress of industrial democracy.^ 
 
 A crucial point in industrial institutions is the issue of 
 the proper basis of collective bargaining. The great slogan 
 of labor is that "labor is entitled to collective bargaining 
 through representatives of its own choice." The objection 
 raised by employers is that such a principle enables labor 
 to be represented by leaders of the national union who are 
 not employees of the particular plant where they are rep- 
 resenting labor in collective bargaining. Employers have 
 favored the works council because in every case the repre- 
 sentatives of the workers at any single plant are themselves 
 workers at that plant. Being employed at the plant, the 
 works council representatives presumably know from direct 
 experience something about the problems involved in pro- 
 duction and in labor administration, and have a strong 
 spirit of responsibility to their immediate constituents with 
 whom they mingle constantly in the day's work. If an 
 employer accepts the labor union principle of collective 
 bargaining, he is likely to have to deal, not with a workman 
 in his own plant, but with a leader from a national union's 
 headquarters. From the employers' standpoint this union 
 representative is an outsider and a meddler, and knows 
 little or nothing of the particular problems of an individual 
 plant. To have an outsider interfering in the management 
 of his business impresses the employer as an absurd dicta- 
 tion by an outsider as to how he shall run his business. 
 Hence, th^ progressive employer accepts the general prin- 
 ciple of collective bargaining through representatives of 
 labor's own choice, with the proviso that those representa- 
 tives shall be persons actually working in the plant which 
 they presume to represent. 
 
 From the labor unions' viewpoint, this policy of em- 
 ployers is looked upon as a subterfuge. No one dictates to 
 the employer that his agent in collective bargaining shall 
 be actually employed in the plant. If the corporation is a 
 large one, comprising a dozen or a score or more of plants, 
 the company centralizes its part in collective bargaining in 
 i See James Bryoe, "Modern DemocracieB," Vol. I, g. 10. 
 
Economic Democracy 515 
 
 the hands of some executive at the main office, who of 
 course cannot be employed in each one of the separate 
 plants of the company. Labor reasons that it should pos- 
 sess a similar prerogative of centralizing its part in collec- 
 tive bargaining. Moreover, labor finds that it is no light 
 task to match labor's brains against the best brains that 
 management can produce. Suppose, argues labor, two men 
 in ordinary life have a dispute and bring their case into a 
 court. Suppose one man hires a brilliant lawyer, a man 
 of great talent and ability, and the other man hires only a 
 mediocre lawyer, a man of slight talent and weak ability. 
 The chances are all in favor of a decision for the man who 
 is ably represented. So in industrial relations, manage- 
 ment is represented by brilliant men, by the best experts 
 that management can procure ; labor, in order to be repre- 
 sented on equal terms, must have expert bargainers, men 
 experienced in all the strategy of bargaining, the best 
 brains that labor can procure. The detached individual 
 plant is likely not to have any workman on the job who is 
 fully equal mentally to the task; hence there is need of a 
 man trained and practiced in the art of bargaining, a man 
 direct from national union headquarters. 
 
 In President Wilson's first industrial conference, ap- 
 pointed to deal with the problems of post-war industrial 
 reconstruction, the committee was composed of prominent 
 authorities representing labor, capital and the public. The 
 attention of all groups was riveted to this problem of 
 whether or not labor is entitled to representatives of its 
 own choice in collective bargaining. In the final vote, the 
 public group and the labor group voted in favor of the 
 unqualified right of labor to representatives of its own 
 choice.^ A minority of the capital group voted with labor 
 and the public, but inasmuch as the system of voting in 
 force at the conference provided that the adoption of any 
 
 1 The full text of the resolution is as follows : "The right of wa^e 
 earners to organize without discrimination, to bargain collectively, 
 to be represented by representatives of their own choosing in nego- 
 tiations and adjustments with employers in respect to wages, hours 
 of labor, and relations and conditions of employment Is recognized." 
 
516 Economic Democracy 
 
 measure required a majority vote in each of the three 
 groups, the resolution was lost. Thereupon the conference 
 broke up. 
 
 In a discussion of the broader principles of industrial 
 democracy, it is important to consider the question of the 
 relation in practice between works councils and labor 
 unions. Are the two supplementary, or do works councils 
 tend to eliminate labor unions entirely? The consensus of 
 opinion among employers using works councils is to the 
 effect that they have nothing against the union and are not 
 aiming to destroy it or eliminate it. They are willing that 
 labor unions should exist, and will allow workers who are 
 union members to sit on the works councils as representa- 
 tives of the workers of the plant. They contend that there 
 is no valid reason why the union should not supplement 
 the works council. With rare exceptions, they decline to 
 enter into collective bargaining with the union, or to give 
 it official recognition, claiming that one collective bargain- 
 ing agency is enough and that this is supplied through the 
 works council. Hence, the real meaning of the assertion by 
 employers that they believe in a union supplementing the 
 works council is that they believe in that particular type of 
 union which is classified as friendly or uplift unionism. 
 The welfare, humanitarian and social features of such a 
 unionism may, in the judgment of employers, supplement 
 the efforts of the works council. Theoretically, this divi- 
 sion of supplementary functions appears sound and plau- 
 sible. It should be carefully noted, however, that the works 
 councils themselves undertake such a comprehensive pro- 
 gram that when they get through there is little left for 
 supplementing. The works councils undertake welfare 
 work, humanitarian measures, social features, and virtually 
 all forms of friendly and uplift activity. Moreover, the 
 works councils do this usually on company time and at 
 company expense. In the face of this condition, a union 
 which could not gain recognition, which could not bargain 
 for better wages, hours or working conditions, which could 
 only undertake friendly and uplift work, would be an 
 anomaly. It could not collect dues for performing humani- 
 
Economic Democracy 517 
 
 tarian duties whicli the works councils perform largely at 
 company expense and it would gradually dwindle in power 
 and influence. In theory, the two may be termed supple- 
 mentary, but in actual life the works council when effi- 
 ciently handled covers the ground so thoroughly that there 
 is nothing essential left for the union to do. Hence, as a 
 matter of plain industrial fact, the efficiently handled 
 works council tends to be exclusive of the labor union. The 
 course of contemporary events indicates that the works 
 councils are in fairly exclusive control of collective bar- 
 gaining in most companies where the councils are employed 
 and the trade unions in fairly exclusive control of collec- 
 tive bargaining in most other cases where any form of 
 collective dealing is in vogue, with occasional exceptional 
 eases where the two stand in some supplementary rela- 
 tionship. 
 
 All lines of thought on these issues of industrial democ- 
 racy lead back to the great fact that the war and post-war 
 period set loose a new flood of human energy in the direc- 
 tion of more control by labor over its own life in industry. 
 Before the war the emphasis in industrial thinking was 
 upon less poverty, better wages, shorter hours and better 
 working conditions. To-day the emphasis is upon labor's 
 right and ability to participate in the government of in- 
 dustry. The former demands have not been abandoned, 
 but they have been co-ordinated with a greater demand 
 that with better wages, hours and working conditions must 
 come a new degree of labor control over industrial matters 
 which deeply affect the life and welfare of labor. Some 
 application of the principle of self-determination to the 
 laborer's position in industry is looked upon as the pre- 
 requisite of any serious industrial democracy. Whether 
 the instrument be a labor union or a works council, the 
 worker feels impelled toward a new status as one of the 
 controlling influences in the management of industry. The 
 concise interpretation of Sidney "Webb, expressed in 1920, 
 sums up the situation in both America and Great Britain : 
 "The new ideas which are to-day taking root in the trade 
 union world center round the aspiration of the organiza- 
 
518 Economic Democracy 
 
 tions of manual workers to take part — some would urge the 
 predominant part, a few might say the sole part — in. the 
 control and direction of the industries in which they gain 
 their livelihood."^ 
 
 This being the plain fact of the case, it is imperative to 
 realize that beneath the movement for control lies a truly 
 enormous psychological force. Some of the deepest in- 
 stinctive energies of millions of human beings are seeking 
 for an opportunity of expression. At this particular stage 
 of industrial progress an outburst of powerful forces of 
 human nature has appeared pointing toward some form of 
 democratic control of economic life. It would be psycho- 
 logically unsound and economically disastrous to give such 
 untrained Tiuman energies free reign. But it is both sound 
 and necessary to provide helpful channels of expression for 
 such human forces, to accustom instinctive energies to self- 
 restraint and self-control, to subject them to adequate 
 working discipline, to repress vicious and pernicious forms 
 of expression, to educate and enlighten and inform men to 
 understand themselves and others in order that the nervous 
 breakdowns and the psychic revolts of a period of indus- 
 trial transition may be healthfully averted, and to raise the 
 level of intelligence among the rank and file of laborers so 
 that they may be enabled to make the right adaptations 
 between human nature and economic institutions. The 
 reshaping simultaneously of men and institutions is the 
 secure pathway toward industrial democracy. 
 
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Economic Democracy 519 
 
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INDEX 
 
 Ability, unrealized, 223-225 
 
 Abnormal psychology, 63—66 
 
 Acceptances, bank, 426 
 
 Accidents, industrial, 141—143 
 
 Accounting, 253—255 
 
 Adams, T. S., 448 
 
 Adaptation, economic, 453—520 ; 
 
 human, to economic environment, 
 
 52-69 
 Advertising, 299-305, 356 
 Americanization, 161—162 
 Anderson, B. M., Jr., 348, 382-384, 
 
 391-392, 436 
 Automatic machinery, 78—80; effect 
 
 on labor, 99-104 
 
 Banks, 366 flF.; agricultural, 398- 
 400; commercial, 371-384; cor- 
 porations and, 271—274; federal 
 reserve, 404-427; foreign invest- 
 ment, 396-398; functions, 373- 
 380; international, 416-427; in- 
 vestment, 384-389; reserves, 377; 
 savings, 393-394; trust com- 
 panies, 394-396 
 
 Bargaining. See Collective bar- 
 gaining 
 
 Bassett, W. R., 10 
 
 Bimetallism, 368 
 
 Bloomfield, D., 512 
 
 Bonds, 210-211; foreign, 396-398; 
 investment banking, 384-389 
 
 Brandeis, Louis, 90, 236, 387 
 
 Bryce, James, 486, 501, 514 
 
 Business combinations. See Com- 
 bination 
 
 Cannon, W. B., 59-60, 66 
 
 Capital, 175—234; production and, 
 
 73 
 Carver, T. N., 55-56, 101 
 Chance, inequalities due to, 232—234 
 Cheeks, 375-380 
 Chemistry, economic applications, 
 
 83-87 
 
 Class feeling, workers', 101-102 
 Clayton Act, 340-344, 440, 468-478 
 Clearance, bank, 401-404, 415^16 
 Collective bargaining, 129—135, 505— 
 
 518 
 Combination, business, 242—244, 
 258-276; price policies of, 327- 
 336 
 Commons, J. R., 56, 159-163, 205, 
 
 231, 441 
 Competition, 256-277, 327-330, 345 ; 
 
 public control and, 453—486 
 Concentiatiou, business, 242—244, 
 
 258-276, 327-336, 453-486 
 Conservation, 19 
 Consumption, control of, 296-363; 
 
 description of, 189-193 
 Contract, freedom of, 206-208 
 Control. See Public control 
 Cooley, C. H., 97, 102, 109, 193, 349, 
 
 357, 361 
 Co-operation, economic, 274-277 ; 
 
 consumers', 362 
 Copeland, M. T., 297 
 Corporation, characteristics of, 208— 
 225; extent of, 241-242; manage- 
 ment of, 244—253; securities of, 
 384-393 
 Cost of production, price theory, 
 
 281-285 
 Credit, 366 ff.; commercial, 371— 
 384 ; dangers of, 427—450 ; foreign, 
 416-427; forms of, 372-373; in- 
 vestment, 384-389; psychology of, 
 441-450; rural, 398-400 
 Curiosity, psychology of, 32-37 
 Custom, wages and, 133—135 
 Cycles, business, 427-450 ; control of, 
 431-437 
 
 Demand, creation of, 296—363 
 Demand and supply, price theory, 
 
 285-315, 344-363; wage theory, 
 
 118, 160 
 
 521 
 
522 
 
 Index 
 
 Democracy, economic, 129-135, 138- 
 
 141, 268-270, 499-518 
 Deposits, banli, 374-380, 411-412 
 Dewey, Jolin, 35, 90, 349, 456-458 
 Dewing, A., 208, 213, 250, 263, 272, 
 
 274, 386 
 Discount, 384 
 
 Discipline, adaptation by, 54-56 
 Distribution, wealtlx and income, 
 
 177-187, 236-277 
 Drury, H. B., 80, 114 
 Duncan, C. S., 291, 297, 309, 314 
 
 Economics, defined, 1-2, 69, 199; 
 meclianical and scientific basis of, 
 72-98 
 
 Edge Act, 425-426 
 
 Electricity, significance of, 74—76, 
 88-90 
 
 Elimination, adaptation by, 56—57 
 
 Ely, E. T., 184, 194, 197, 199, 203- 
 207, 332 
 
 Emery, H. C, 308, 346 
 
 Engineering, industrial, 93—98 
 
 Environment, economic, 52—69 ; 
 worker and, 141—149 
 
 Eugenics, 167-170 
 
 Exchange, domestic, 401—404; for- 
 eign, 417-427 
 
 Executive, technique of, 253—258 
 
 Pairchild, H. P., 160 
 
 Farm credits, 398-400 
 
 Fatigue, 99-115 
 
 Fear, 24-26, 108-109, 141-143, 444 
 
 Federal Reserve System, centraliza- 
 tion under, 405—406 ; clearance, 
 415-416; cycles, 430-432; de- 
 posit currency, 411—416; foreign 
 banking, 425—428; note issue, 
 406—411; organization of, 404; 
 reserves, 412 
 
 Fetter, F. A., 168 
 
 Finance, 366-450 
 
 Fisher, Irving, 227, 374, 434 
 
 Flight and fear. See Fear 
 
 Foreign, credit balance, 417—418 ; 
 exchange, 417—427; investment, 
 396-398 
 
 Freud, S., 58, 61, 64 
 
 Friday, David, 73, 136-138, 180-187, 
 221-222, 430, 436-437, 449 
 
 Functions, economic, 72-452 
 
 Geology, economic applications, 87— 
 88 
 
 Gold, standard, 368-371 
 
 Gompers, Samuel, 149 
 
 Government control, 453 ff. ; war- 
 time, 458-460 
 
 Gregarious instinct, 21—23 
 
 Habit, 41-43, 133-135, 296-363 
 
 Hadley, A. T., 204, 351 
 
 Haney, L. H., 212, 259 
 
 Health, workers', 142-144 
 
 Hobson, J. A., 115, 180, 189, 271, 
 
 332 341 
 Hollander, J., 123, 124 
 HoUingworth, H. L., 300 
 Hoover, Herbert, 9 
 Hours of work, 110—115 
 Housing instinct, 29 
 Hoxie, R. F., 102, 155-157, 507 
 Human nature, organization of, 39— 
 
 51 
 Hunting, instinct of, 29 
 
 Imitation, 43—46 
 
 Immigration, 157—164 
 
 Incentives, 93-97, 127-129; non- 
 financial, 144—149 
 
 Income, analysis of, 187—232; an- 
 nual, 178-179; distribution of, 
 177-187 
 
 Inequality, pyschological, 48—51; of 
 income, 183-187, 222-232 
 
 Inheritance, 225-230 
 
 Instinctive tendencies, adaptation 
 of, 52 ft., 453-520; definitions, 
 1—7 ; discipline, 54—56 ; elimina- 
 tion, 56—57; property and, 195— 
 199; rationalization, 60—63; re- 
 Volt, 63-68; sublimation, 57-61 
 
 Instincts, economic expression of, 
 8-38 
 
 Institutions, economic, 72 £F. ; finan- 
 cial, 384-403, 437-441; of prop- 
 erty, 193-232 
 
 Insurance, 232-234 
 
 Intelligence, 32-37; of labor, 149- 
 157; tests, 48-51 
 
 Interest, 183—185; effect on saving, 
 192, 447, 450 
 
 Interlocking directorates, 440 
 
 Interpretation of facts of wealth, 
 187-199 
 
Index 
 
 523 
 
 Interstate Commerce CommiBsion, 
 461-467 
 
 Inventors, 93-97 
 
 Investment banking, 384^389; for- 
 eign, 396-398 
 
 James, W., 29, 34, 59 
 
 Jenks, J. W., 159, 232, 329-333 
 
 Job, the laborer's, 104—110 
 
 Kemmerer, E. W., 377, 404 
 Kelley, R. W., 147 
 Kindness, psychology of, 17-18 
 King, W. I., 73, 135, 168, 180-187 
 Kitson, H. D., 144, 146 
 Knoeppel, C. E., 144-145 
 
 Labor, democracy and, 487—498; 
 environment, 141—149 ; function, 
 99-104; government control, 477- 
 479; mind of, 149-157; part in 
 production, 99 ff. ; power of, 138— 
 141; public opinion, 482-486; 
 skilled vs. unskilled, 158-159; 
 unions, 505—518; wages, 116—138 
 
 Lwissez faire, 276, 363 
 
 Laski, H. J., 458 
 
 Lippmann, W., 12, 58, 362 
 
 Loans, bank, 373, 380; forms of, 
 381-384 
 
 McDougal, W., 2, 6, 21, 24, 42, 44, 
 
 167, 171 
 Machinery, 72-98 
 Management, eflSeiency of, 149-150; 
 
 finance and, 437—441 ; power of, 
 
 205-215; technique and responsi- 
 bility of, 236-277 
 Marginal theory, 281-315 
 Markets, definition, 279; mechanism 
 
 of, 313—318; principles and 
 
 strategy, 279-364 
 Marshall, Alfred, 96, 254, 267, 270, 
 
 305, 308, 328, 347, 447, 494 
 Mechanical factor, 72 ff . ; automatic, 
 
 77-80; labor and, 99-104 
 Meeker, Royal, 122, 192 
 Mental activity, disposition to, 32— 
 
 38 
 Migration, psychology of, 29—30 
 Minimum, principle of, 216-222 
 Mitchell, W. C, 358, 430, 434 
 Money, definition, 366; forms, 367- 
 
 372; gold and, 367-368; spending 
 
 of, 346-361 
 
 Monopoly, and income inequality, 
 230-234; and prices, 327-363 
 
 Monotony, 99-104 
 
 Motives, 1-71; consumers', 346-363; 
 progress, 93-97, 127-129; prop- 
 erty and, 195-232 
 
 National viewpoint, 171 
 Notes, Federal Reserve, 406—411 
 
 Ogburn, W. F., 122 
 
 Opinion, public, power of, 482—486 
 
 Orth, S. P., 204 
 
 Ownership, income for, 181—185; in- 
 stitution of, 175 £f., 208-216; 
 labor view of, 151—152 
 
 Parental instinct, 16—18 
 
 Parker, C. H., 58, 65, 79 
 
 Parmelee, M., 28, 35, 42, 44, 123 
 
 Patten, S. N., 31, 165-166 
 
 Pigou, A. C, 189 
 
 Play, psychology, 30-31 
 
 Population, 19-21 ; economic phases, 
 164-171; immigration and, 157- 
 164 
 
 Possession, psychology of, 10—13, 
 97, 195-198 
 
 Pound, Roscoe, 206 
 
 Poverty, 116-130 
 
 Power, natural, 74-77; of labor, 
 138-141 
 
 Price, fixing of, 343-346; policies 
 of, 305-363 ; stabilization of, 433- 
 437; system of, 76-77, 366; theo- 
 ries of, 281-315 
 
 Production, 72-171; national vol- 
 ume, 187-189. See also Cost of 
 production 
 
 Profit sharing, 128 
 
 Progress, economic, 453-458 
 
 Property, a group of rights, 199— 
 208. See Capital 
 
 Psychology, economic, 1—71; and 
 consumption, 346—363; of credit, 
 441-451; of radicalism, 492-498; 
 of reform, 479-482; of selling, 
 295-363; of unionism, 511-513 
 
 Public, control, 453-482; opinion, 
 482-486 
 
 Publicity, 483-486 
 
 Pugnacity, psychology of, 26-28 
 
 Quantity theory of prices, 434-436 
 
524 
 
 Index 
 
 Radicalism, 487—492; analysis of, 
 
 492-498; forms of, 489-492; in 
 
 unions, 508-509 
 Eailroads, labor control, 135, 464— 
 
 465; regulation of, 461-467 
 Rationalization, 60—63 ; by labor, 
 
 149-157 
 Reform, 479-482 
 Regulation, general, 468—479; of 
 
 railroads, 461-467 
 Rent, 182-183, 215-222 
 Revolt, psychology of, 63-69 
 Rights of property, 199—214 
 Rivalry, psychology of, 26—28 
 Rockefeller, J. D., Jr., 9, 12 
 Roosevelt, T. R., 16, 47, 171, 229 
 Root, Elihu, 251 
 Ross, E. A., 158, 194, 228 
 Rural credit, 398-400 
 Russell, Bertrand, 167 
 
 Safety, from accident, 141—143 
 Sales' policy, 287, 290, 296-363 
 Savings, amount of, 73-74, 180- 
 
 181; banks, 393-394; principles 
 
 of, 346-363; psychology of, 189- 
 
 193, 446-450 
 Science, applied, 72 ff. ; of economic 
 
 organization, 90—94; of progress, 
 
 455-457 
 Seager, H. R., 265 
 Self-assertion, psychology of, 13-15; 
 
 of labor, 138-141 
 Sex instinct, 20-21, 52-69 
 Sherman Anti-Trust Law, 276, 340- 
 
 344, 468-476 
 Size, business, 236-239 
 Slichter, S. H., 100, 107, 108 
 Socialism, 487 ff. ; analysis of, 492- 
 
 498; forms of, 489-492 
 Southard, E. E., 68 
 Speculation, 308-310; stock ex- 
 change, 388-393 
 Stabilization of business, 430—437 
 Standard of living, 120-127, 340- 
 
 363 
 Standardization, 265-267 
 Statistics, aid to management, 253— 
 
 255; marketing, 305-308; wealth, 
 
 175-234 
 Stock exchange, 389-393 
 Stocks, 208-216 
 Storage, marketing and, 309—311 
 
 Style of product, 298 
 Sublimation, psychology of, 57—61, 
 
 502-505 
 Submissiveness, psychology of, 15— 
 
 16 
 Suggestion, psychology of, 43-46 
 Supply and demand, price theory, 
 
 285-315, 344-363; wage theory, 
 
 118, 160 
 Surplus, principle of, 215—222 
 Sympathy, psychology of, 43—46 
 
 Taft, W. H., 512 
 
 Taussig, F. W., 95, 228, 284, 345 
 
 Taxation, 229-230, 350-360 
 
 Taylor, F. W., 91, 99 
 
 Tead, 0., 20, 147 
 
 Technology, economic, 72-98; and 
 
 labor, 99-104 
 Tendencies. See Instinctive tend- 
 
 6I1C16S 
 
 Thorndike, E. L., 17, 28, 32, 39, 42, 
 
 55, 361 
 Thought, psychology of, 32-37, 48- 
 
 51; of labor, 149-157 
 Transportation, technology of, 80- 
 
 83; regulation, 461-467 
 Trotter, W., 22, 33, 45, 65 
 Trust companies, 394—396 
 Turnover, labor, 104-110, 160 
 Types of management, 239—244 
 
 Unemployment, 103-110, 160; busi- 
 ness cycles and, 430—437 
 
 Unions, analysis of, 505—518; bar- 
 gaining power, 129-133, 138-141 
 
 Value, definition, 279-281; of 
 money, 434-437; theory of, 282- 
 296 
 
 Vanderlip, F. A., 427 
 
 Van Hise, C. H., 331-332 
 
 Wages, 116-138; factors in, 120- 
 138; immigration and, 159—160; 
 incentives, 93-97, 127-129; in- 
 crease, 135—138; share in national 
 income, 182-183, 223; theories of, 
 116—120. See also Demand and 
 supply 
 Wallas, Graham, 17, 32, 64, 495 
 War Finance Corporation, 426-427 
 
Index 
 
 525 
 
 Wealth, analysis of, 187-232; defi- 
 nition, 175-177, 187-189; meas- 
 urement of, 177-187 
 
 Webb, S., 269 
 
 Welfare work, 128-129, 141-149 
 
 Wilson, Woodrow, 126, 344, 443, 477, 
 510, 515 
 
 Wolfe, A. B., 447-448 
 
 Work, hours of, 110-116. See Labor 
 
 Worker, mind of, 149-157 
 Workmanship, psychology of, 8—10, 
 
 95-97, 103 
 Works councils, 502-505 
 
 Yerkes, E. M., 94 
 
 Zimmern, A. E., 199